Krugman: “Sticky Wages I Win, Flexible Wages You Lose”

Submitted by Robert Murphy via Mises Canada,

The fun thing about Paul Krugman is that you often can use his own charts against him. For a recent example, consider the issue of “sticky wages.” One of the typical complaints against a hardline “the market always clears” position is to say that, for whatever reason, employers are reluctant to actually reduce nominal wage rates. Therefore – the interventionist argument goes – the normal mechanisms of market recovery to a drop in demand don’t work if the new market-clearing wage rate is lower than before. This leads to involuntary unemployment because the market is simply stuck. Therefore, we need the State to come in and run budget deficits to boost Aggregate Demand.

In a recent post, Krugman thought he laid down a trump card making this point, with the following commentary and chart:

But there’s a lot of denial out there. Recently David Glasner deconstructed a WSJ op-ed calling for a return to the gold standard, which was as out of touch as you might expect. But what got me was the approving citation of Robert Mundell from 1971 (!) declaring that the Keynesian model was irrelevant to modern economies because it assumed pessimistic expectations and rigid wages. Right: no pessimism out there these days. And no sticky wages; oh, wait:

 

Spain Nominal Wage Adjustment

 

I mean, seriously, at this point even long-time skeptics about short-run wage and price stickiness are coming around in the face of overwhelming evidence.

Now look more closely at that chart Krugman posted. In case it’s not obvious, Krugman’s point is that the distribution of wage changes in 2011/12 shows a big spike at 0%. In contrast, the changes in 07/08 looked more like a bell curve. Therefore, the obvious implication is that the wage changes that “should” have been negative got piled up at the 0% mark, because those employers were reluctant (for whatever reason) to actually reduce nominal wages; instead they merely kept wages constant.

Now that we understand the claim Krugman is making, we have to ask, Is this really decisive when it comes to the issue of allowing labor markets to clear on their own? If we assume (as Krugman himself seems to be doing) that the red wage distribution “should” have been like the blue one, only shifted to the left, then the presence of the 0% boundary looks as if it bulked up the distribution of changes by about 13 percentage points or so, higher than what it “should” have been at the 0% mark. Just eyeballing the chart, from 2011-12 in Spain more than half of the labor force saw an increase in their nominal wages, and there were still about 20 percent or so who saw a reduction in nominal wages. (Since the people who saw no change represented about 28 percent, that means the other two groups have to add up to 72 percent.)

Indeed, the chart shows that around 5 percent or so of the labor force saw a one-year drop in wages between 5 and 10 percent. That’s a pretty big drop, for 5 percent of the labor force, when we’re talking about “sticky wages.”

All in all, Krugman’s chart about Spain suggests to me that there’s nothing inherent in market economies per se that prevents nominal wages from falling. In practice, at best the case of Spain shows that 13 percent (or so) of the labor market had its wage adjustments significantly hampered by this psychological barrier.

That means we can now go back to Krugman and spit this in his face, right? Ha ha, innocent reader, if you thought that, it shows you don’t know Krugman. For example, when Chicago’s Casey Mulligan wrote a critique of the (New) Keynesian position, in which Mulligan assumed sticky wages and prices were central to their case, Krugman responded in a post entitled “Why Casey Can’t Read”:

If he had read anything — anything at all — that Keynesians have written about policy at the zero lower bound, he would have learned that there is no reason to expect falling wages and prices to raise employment — in fact, quite the contrary in the face of a debt overhang.

 

If Mulligan wants to argue that point, fine — but he presents as “the New Keynesian position” something that is just what he imagines, on casual reflection (or, again, maybe after talking to some guy in a bar) to be the New Keynesian position.

 

OK, so from now on I’ll assert that the Chicago position on unemployment is that we can cure it by sacrificing goats.

This would be a great analogy, if Casey Mulligan had posted graphs of goat sacrifices in Australia in a discussion of why they didn’t get hurt so bad in the crash.

In summary:

(1) Krugman can’t believe the idiots who try to reject the Keynesian policy prescriptions by denying that there are sticky wages and prices. Just open your eyes, guys! Wages are clearly sticky and so the classical solutions fail; that’s why we need bigger government deficits.

 

(2) Krugman can’t believe the idiots who try to reject the Keynesian policy prescriptions by looking at the empirical relevance of sticky wages and prices. Try reading what the Keynesians are actually writing, you liars! If wages fell it would exacerbate nominal debt burdens; that’s why we need bigger government deficits.

 

(3) The empirical evidence for the need for bigger government deficits is overwhelming at this point. The Keynesian model came through this crisis with flying colors. Anyone who denies that is a knave or fool.

*  *  *




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“Why Anyone Believes Printing Money Will Leave Us Better Off Is Beyond Me”

From a tactical point of view, Saxobank's CIO Steen Jakobsen lives in a very simple world:

 

''A great deal of intelligence can be invested in ignorance when the need for illusion is deep” — Saul Bellow
 
Just back from four cruel weeks of travelling: Bucharest, London, Sydney, Melbourne, Lisboa, Porto, Madrid, and Zürich. Housing bubbles everywhere to be seen, and all denied by local policymakers and economists. 
 
The big selloff in 2015 will come from housing and housing-related investments as the marginal cost of capital rises through regulation and through “margin calls” on banks as their profit-to-GDP ratios grow too high for the economy to function properly. The dividend society is here and the true manifestation of Japanisation is not a future event but a thing we are living in right now…
 
Core trading view
 
Ten-year bond yields (US) will continue lower into the second quarter of 2015. I see acceleration to the downside, mainly in the US where 10-year yields could hit 2.00% and bottom out at 1.5% by Q2 as GDP comes off (relative to “lift off” consensus).
  • European factors: Lower than anticipated growth in Germany (China rebalancing, lower US current account deficit and EZ overall); the impact of the Russian crisis is only beginning to impact the real economy, and of course there is the deflation (which the European Central Bank promised us would never happen…).
  • US factors: Energy sector moving towards default and closing down capacity, subtracting 0.3-0.5% from GDP, plus a lackluster housing market (despite record low mortgage rates), plus contraction in monetary aggregate…
  • Chinese factors: Despite reserve requirement ratio cuts, the economy is already at 5.0% in real terms and without reform in health care(why people save money), competition (anti-corruption) and deeper capital markets (sort of happening), the marginal change will continue to be negative. 
  • Emerging markets factors: A strong US dollar is the last thing emerging markets need. It’s a de facto tightening of monetary policy at a time when “export markets” continue to weaken. 
The world is barely surviving at an average yield of 1.5-2.0% . Markets forget that we have two drivers of growth: the US and emerging markets. EM are under pressure as we end 2014, forced into the defensive by a lack of reforms but also a much stronger US Dollar. This means the “mean-reversion” trade is for 2015 is for a weaker US dollar to rebalance towards EM growth as the path of least resistance.
 
I have no doubt that EM will become a major buy sometimes in Q2 when world is off the concept of an ever-stronger US dollar based on a growth lift-off that is never coming.
 
EEM (iShares MSCI EMG) vs. S&P 500 — S&P lead by 11%+ (reversal in 2015?)
IShares MSCI Emerging Markets
Source: Yahoo! Finance
 
The never-ending illusion of “lift off” for the US economy
 
Again, the revised data for US GDP shows Real Personal Consumption expenditures increased 2.2% in the third quarter — a much better (the only reliable) indicator of growth as inventories, investment and trade generally add up to zero over a full year. In other words, where RPCE goes, so does the US economy. Too see why this is, please see the composition of GDP in the US here:
 
US GDP composition
Source: Federal Reserve Economic Data
 
US growth has been 2% (plus or minus) since the financial crisis started, this year it will be 2%… and next year? Two percent is nowhere close to the 3-4% expected by the markets building on “surveys” and feel-good factors. Trust me, as someone who spent too much time travelling this year, the world is worse off, not better.
 
I meet frustration, lack of access to credit and near-desperation when the question concerns asset allocation, but… 2015 looks like a year of change. The Federal Open Market Committee will definitely continue to sell the “pipe dream” of normalisation, while the Bank of Japan is done and toast. 
 
Why anyone believes printing money will leave Japan better off is a mystery to me. Compare the FX policies of Switzerland and Japan: One has an ever-rising currency (Switzerland) which forces its “Mittelstand” (small and medium-sized enterprises) to be flexible, productive and acquisitive; the other (Japan) has tried to intervene in its currency in order to avoid changes and reforms.
 
Japan

 

On offer from Tokyo: smoke, mirrors and currency intervention. Photo: iStock
 
No, if there is any reality left in the world the market will realize — by its mistaken support for long USDJPY positions — that productivity gains and competitive edges are driven by the “need” to change… not from isolation but from cause and effect (but that’s also a 2015 story).
 
In closing I have very little positions — the stock market is on a mission to kill the shorts (which will probably succeed), the FX market believes in Santa Japan and the ECB continues to do nothing but talk… but for now it’s enough to sell the product, which is risk-on at all costs.
 
The correction will be deeper and deeper as the market is dislocated through zero interest rates and an investing crowd that is rewarded for throwing all conservative risk rules overboard in a year where we again have double digit gains on… low interest rates.
 
Let’s hope the ECB plays ball for the market to buy some more time; for now we are playing musical chairs, and when the music stops, more than one chair will be missing…
 
Positions
 
  • 75% of risk is long fixed income (mainly US FI).
  • 10% risk in equities, mainly mining plays (Alcoa & Fortescue); looking to add VALE and others in sector on inflation expectations hitting rock bottom in Q1.
  • 5% long silver, bought on sell-off.
  • 5% natural gas, preparing for a long and cold winter.
  • 5% upside optionality in EUR c USD p.
 
How bad are things? Well, let me give you my starting slide from a presentation done in November:
 

How bad is it?

Source: Saxo Bank

 




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Crude Carnage Goes Contagious As Brevan Howard Liquidates Underperforming Commodity Fund

The entire commodity complex is seeing major contagion-like price declines in early trading. WTI Crude is back below $65 for the first time since May 2010 – now down 16% since the initial leaks of OPEC’s decision last Wednesday. Gold and Silver are getting whacked and copper has plunged below 300 – back at its lowest since June 2010. The news over the weekend that Brevan Howard is liquidating its $630 million commodity hedge fund following recent poor performance is also likely not helping as what looked like late-Friday margin call liquidations are extending notably this evening.

 

 

 

As The Wall Street Journal reports,

Brevan Howard Asset Management LLP plans to close its commodity hedge fund following recent poor performance, according to two people familiar with the matter.

 

The fund, managed by Stephane Nicolas, has $630 million in assets. It lost 4.2% last year and is down 4.3% this year to the end of October, according to performance data reviewed by The Wall Street Journal.

 

It is not clear what Mr. Nicolas’s role might be following the commodity fund’s closure, a person familiar with the matter said. Attempts to reach Mr. Nicolas were unsuccessful.

 

Brevan Howard is among Europe’s largest hedge fund managers with about $37 billion in assets.

*  *  *




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The Environment: Depleting Resources

Submitted by Adam Taggart via Peak Prosperity,

When we wander over to the third E in this story – the Environment – we note two things: both the increasing demand of exponentially more resources being extracted from the ground and exponentially more waste being put back into various ecosystems.

Because we are trying to assess here whether we can justify ever-increasing amounts of money and debt, for now let's just concern ourselves with the resources we take from the natural world to support our global economy.

Oil is not the only essential resource that is fast becoming more expensive to produce, harder to find, or both. In fact, we see an alarming number of examples depletion of critical resources that almost exactly mirror the oil story.

First we went after the easy and or high quality stuff, then the progressively trickier, deeper and or more dilute stuff.

The bottom line is this: we, as a species, all over the globe, have already mined the richest ores, found the easiest energy sources, and farmed the richest soils that our Environment has to offer.

We have taken several hundreds of millions of years of natural ore body, fossil energy deposition, aquifer accumulation, soil creation, and animal population growth — and largely burned through them in the few years since oil was discovered. It is safe to say that in human terms, once these are gone, man, they’re gone.

So, if we are getting less and less net energy for our efforts, and the other basic resources we need to support exponential economic growth are requiring a lot more energy to extract because they are depleting, then does it make sense to keep piling up exponentially more money and debt? Isn't it just common sense to observe that money and debt have to exist in some sort of relationship and proportion to primary and secondary wealth?

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available — now– to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at http://www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course — the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.




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Stocks Have Been More Overvalued Only ONCE in the Last 100 Years

Stocks today are overvalued by any reasonable valuation metric.

 

If you look at the CAPE (cyclical adjusted price to earnings) the market is registers a reading of 27(anything over 15 is overvalued). We’re now as overvalued as we were in 2007. The only times in history that the market has been more overvalued was during the 1929 bubble and the Tech bubble.

 

Please note that both occasions were “bubbles” that were followed by massive collapses in stock prices.

 

Source: http://www.multpl.com/shiller-pe/

 

Then there is total stock market cap to GDP, a metric that Warren Buffett’s calls tge “single best measure” of stock market value.

Today this metric stands at roughly 130%. It’s the highest reading since the DOTCOM bubble (which was 153%). Put another way, stocks are even more overvalued than they were in 2007 and have only been more overvalued during the Tech Bubble: the single biggest stock market bubble in 100 years.

 

Source: Advisorperspectives.com

 

1)   Investor sentiment is back to super bullish autumn 2007 levels.

2)   Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).

3)   Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).

4)   Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).

5)   Margin debt (money borrowed to buy stocks) is near record highs.

 

In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.

 

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

 

You can pick up a FREE copy at:

http://www.phoenixcapitalmarketing.com/roundtwo.html

 

Best Regards

Phoenix Capital Research

 

 

 

 




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The Imploding Energy Sector Is Responsible For A Third Of S&P 500 Capex

We have previously discussed the implications that tumbling crude oil prices will have not only on some of the most levered companies with exposure to Brent prices, namely the vast majority of the US energy space with outstanding junk bonds which, as we explained before, should WTI drop to $60, it would “Trigger A Broader HY Market Default Cycle” (based on a Deutsche Bank analysis) leading to pain across the entire credit market (and in the process impairing the stock-buyback machinery which companies aggressively use to artificially boost their stock price), as well as on oil-exporting nations, whose economies are assured to grind to a halt leading to broad social unrest or worse, and lastly, on global asset liquidity, which is set to contract even more now that for the first time in over a decade, the net flow of Petrodollars will be an outflow (as explained in How The Petrodollar Quietly Died, And Nobody Noticed).

And while much has been said about the “benefits” the US economy is poised to reap as a result of the plunge in gas prices, which has been compared to a major tax cut (whatever happened to the core Keynesian tenet that “deflation” is the worst thing that can possibly happen) on the US consumer, almost nothing has been said about the adverse impact on US GDP as a result of tumbling fixed investment spending and CapEx.

The reason, clearly, is that the collapse in new investment will more than offset the boost from incremental household spending.

Here are the facts, per Deutsche Bank:

US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total. We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex. 35% of S&P EPS from investment and commodity spend, 15-20% US

 

 

In short, while nobody knows just how many tens of billions in US economic “growth”, i.e., GDP, will be eliminated now that energy companies are not only not investing in growth spending or even maintenance, being forced to shut down unprofitable drilling operations and entering spending hibernation territory, the guaranteed outcome is that US GDP is set to slide as the CapEx cliff resulting from Brent prices dropping below the $75/bbl red line under which shale is broadly no longer profitable will offset any GDP benefit unleashed from the “supposed” increase in consumer spending (supposed because according to the latest NRF numbers, Thanksgiving spending was not only well below last year (with the average consumer spending $380.95 over Thanksgiving compared to $407.02 a year ago) but below even our worst case forecasts. So just where are all those external benefits to US retailers as a result of crashing gas prices?

Rhetorical questions aside, the real question is just how much will said GDP slide ultimately be? Sadly, this too will be one question the BEA will never answer, as instead the upcoming GDP plunge will be blamed once again on inclement weather as opposed to actually analyzing what is truly happening as America’s transformation to an oil-producing (and maybe exporting) powerhouse, is so rudely interrupted.

The only good news: the resulting surge in America’s trade deficit as the US is forced to import more crude in the coming months, will provide just the catalyst for the Fed to return to the game and resume monetizing the US budget deficit, which is poised to commence rising once again.




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Retail Disaster: Holiday Sales Crater by 11%, Online Spend Declines: NRF Blames Shopping Fiasco On “Stronger Economy”

Last year was bad. This year is an outright disaster.

As we reported earlier using ShopperTrak data, the first two days of the holiday shopping season were already showing a -0.5% decline across bricks-and-mortar stores, following a “cash for clunkers”-like jump in early promotions which pulled demand forward with little follow through in the remaining shopping days. However, not even we predicted the shocker just released from the National Retail Federation, the traditionally cheery industry organization, which just reported absolutely abysmal numbers: sales during the four-day Thanksgiving holiday period crashed by a whopping 11% from $57.4 billion to $50.9 billion, confirming what everyone but the Fed knows by now: the US middle class is being obliterated, and that key driver of 70% of US economic growth is in the worst shape it has been since the Lehman collapse, courtesy of 6 years of Fed’s ruinous central planning. 

Demonstrating the sad state of America’s “economic dynamo”, shoppers spent an average only $380.95, down 6.4% from $407.02 a year earlier. In fact, as the NRF charts below demonstrate, there was a decline across virtually every tracked spending category (source):

As the WSJ reports, NRF’s CEO Matt Shay attributed the drop to a combination of factors, including the fact that retailers moved promotions earlier this year in attempt to get people out sooner and avoid what happened last year when people didn’t finish their shopping because of bad weather.

Also did we mention the NRF is perpetually cheery and always desperate to put a metric ton of lipstick on a pig? Well, hold on to your hats folks:

He also attributed the declines to better online offerings and an improving economy where “people don’t feel the same psychological need to rush out and get the great deal that weekend, particularly if they expected to be more deals,” he said.

And there you have it: a 11% collapse in retail spending has just been spun as super bullish for the US economy, whereby US consumers aren’t spending because the economy is simply too strong, and the only reason they don’t spend is because they will spend much more later. Or something.

Apparently the plunge in Americans who even care about bargains is also an indication of an economic resurgence:

The retail trade group said the number of people who went shopping over the four-day weekend declined by 5.2% to 134 million, from 141 million last year.

Finally, what we said earlier about a surge in online sales, well forget it – it was a lie based on the now traditional skewed perspectives from a few self-servcing industry organizations:

Despite many retailers offering the same discounts on the Web as they offered in stores, the Internet didn’t attract more shoppers or more spending than last year. Online sales accounted for 42% of sales racked up over the four-day period, the same percentage as last year, though up from 26% in 2006, the trade group said.

In fact, it was worse: “Shoppers spent an average $159.55 online, down 10.2% from $177.67 last year.”

But the propaganda piece de resistance is without doubt the following:

“A highly competitive environment, early promotions and the ability to shop 24/7 online all contributed to the shift witnessed this weekend,” Mr. Shay said.

So to summarize: holiday sales plunged, and Americans refused to shop because the economy is stronger than ever and because Americans have the option of shopping whenever.

Goebbels approves.




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Ex Cop: Everyone Behaves Better When They’re on Video

Darren Wilson, the police officer who fatally shot teenager
Michael Brown, announced his
resignation
following threats against him and the Ferguson
police department.  

Conflicting accounts and lack of evidence makes night of August
9, 2014 difficult to understand. 

Bringing clarity to police incidents like theses has
become former Seattle officer Steve Ward’s life work, creating
cost effective wearable body cameras for officers.

“Ex Cop: Everyone Behaves Better When They’re on Video,”
produced by Paul Detrick and Will Neff. About 5:45
minutes. 

Original release date was March 25, 2014, original text
below. 

Civilians shoot and upload police encounters to the Internet
everyday using tiny cameras on their cell phones and other mobile
devices. In fact it may be easier than ever to keep the police
accountable with the technology we all carry around in our pockets.
But police are looking to keep civilians accountable too by wearing
cameras of their own. Reason TV sat down with former Seattle Police
officer Steve Ward, who left the force to start Vievu, a company
that makes body cameras for police officers.

“Everyone behaves better when they’re on video,” says Ward. “I
realized that dash cams only capture about five percent of what a
cop does. And I wanted to catch 100 percent of what a cop
does.”

The cameras are small, light, and clip to the clothing of a
police officer’s uniform. They turn on with a large switch on the
front of the camera and have a green circle that surrounds the lens
so that civilians know that the camera is recording.

But once the data is recorded, what stops an officer from
editing or manipulating the video? Ward says his cameras contain
software that stops officers from doing anything nefarious with it,
“Our software platform stops officers from altering, deleting,
copying, editing, uploading to YouTube, any of the videos that the
cops take.”

While body cameras present the strong benefit of keeping police
accountable, they also present a risk of invading civilians’
privacy. But in a
policy brief from October 2013
, the American Civil Liberties
Union argued that depending on how the body cameras were
implemented, the privacy concerns could be dealt with.

Although we generally take a dim view of the proliferation of
surveillance cameras in American life, police on-body cameras are
different because of their potential to serve as a check against
the abuse of power by police officers. Historically, there was no
documentary evidence of most encounters between police officers and
the public, and due to the volatile nature of those encounters,
this often resulted in radically divergent accounts of incidents.
Cameras have the potential to be a win-win, helping protect the
public against police misconduct, and at the same time helping
protect police against false accusations of abuse.

In 2013, The
New York Times
 reported that the city of Rialto, Calif.,
was able to cut down on complaints against officers by 88 percent
over the previous year when it gave its officers body cameras.
 Use of force by officers fell by almost 60 percent.

Approximately 5:42.

Produced by Paul Detrick. Edited by Detrick and William Neff.
Shot by Alex Manning.

View this article.

from Hit & Run http://reason.com/blog/2014/11/30/ex-cop-everyone-behaves-better-when-they
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“Panic Selling” Saudi Stocks Crash Into Bear Market Following OPEC Decision

It's not just Shale oil stocks in the US that are hurting. Following the OPEC decision to not cut production and squeeze US producers, Saudi Arabia's major stock market index has tumbled into a bear market, giving up all the year's gains. As one analyst noted, "investors are afraid if oil stays where it is, it will negatively impact the government revenues, thus creating potential headwinds on government spending." Dubai stocks – our long-time favorite bubble index – has also been hammered, down over 7% intraday at its worst

 

 

As Bloomberg reports,

Saudi Arabian stocks plunged into a bear market after OPEC took no action to stem a slump in oil, triggering a rout in Middle Eastern equities.

 

The Tadawul All Share Index (SASEIDX) retreated as much as 6.3 percent, the most since March 2011, before settling 4.8 percent lower at the close in Riyadh.

 

 

“Investors don’t like the potential macro backdrop if oil continues to slide, which is being reflected in the markets,” Ali Khan, chief executive officer of London-based BGR Asset Management LLP, said by e-mail. “Investors are afraid if oil stays where it is, it will negatively impact the government revenues, thus creating potential headwinds on government spending.”

 

 

“It’s mostly panic selling today,” Tariq Qaqish, head of asset management at Dubai-based Al Mal Capital PSC, said by phone. “Investors are worried about a possible slowdown in government spending, which would affect corporate earnings going forward.”

*  *  *

But apart from that, low oil prices are unequivocally good…right?




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