When Disney built the California Adventure addition to Disneyland, they added a ride called the Twilight Zone Tower of Terror.
After a long wait, you are taken to the top of the hotel and allowed to drop straight down repeatedly until you finally reach the ground. The swiftness of the drops and the wonderful imagery make this tower quite terrifying.
Investors in the US stock market have worked their way into their own tower of terror.
Oil prices declined to near $46 per barrel of WTI crude on 20 Jan, 2015. The decline has been steep with only minor recoil. Gasoline prices, as measured by the RBOB futures contract, have fallen from $3.12 to below $1.30 in that same period.
At the end of 2014, the oil terror started to greatly affect the US stock market. Rather than looking at the massively stimulative impact on the economy of drastically lower gasoline and home heating bills, experts have chosen to view energy-producing states and their high-paying oil-boom jobs disappearing as more important.
Secondly, the ever-sophisticated macroeconomists have chosen to fret about future world economic growth and view the oil ‘tower of terror’ as a ‘canary in the coal mine’.
We have argued that when the globally synchronised trade unwinds, the biggest beneficiaries of the period from 2000-11, would get hit the hardest.
This was everything from China to emerging markets to commodities and commodity-exporting nations. We are also unsurprised by all the uncertainty this adds to the mix in the stock market and the likelihood it could have a meaningful correction in 2015.
But the corrective process could be the intermission between the risk you wanted to take from 2000 to 2011 and the risk you want to take from 2015 to 2025.
From 2000-11, the most profitable investments surrounded meeting the highly capital-intensive needs of 400-500 million new middle- class citizens in emerging market nations. We believe the best risk to take in the next 10 years is in the US via the 86 million Americans aged 19 to 37, the echo-boomers or, more affectionately, Millennials.
The oil drop is a huge blessing to echoboomers. Gas at the pump is approaching $2 or less per gallon. The economic cocooning by folks between 25 and 35 could be broken by the extra money left at the end of each month when credit card bills prove smaller because of lower gasoline prices.
Second, lower oil prices and lower commodity prices mean lower inflation and lower interest rates. Recent statistics show the average mortgage is 15% of gross household income while rent has been averaging 30%. Cheap gas makes long commutes affordable and contributes to the economics of home buying. Buying a home is the most compelling it has been in 30 years.
Third, the oil price plunge is a global problem. The US stock market can be easily broken down into primarily US-based revenue and foreign-dominated revenue (unless you invest in the S&P 500 passive index). Buying a home looks more attractive than investing in stock markets or US-based multinationals getting negatively impacted by China’s slowdown and earnings growth inhibited by the strong dollar.
Wise people who disagree with us argue that today’s 25- to 35-year-olds will not marry like past generations, have three kids, overcome student loans and move out of dense urban areas. We believe the financial meltdown has pushed these historical activities back five years but not stopped them.
Even as the Tower of Terror stops abruptly on the way down, so might the transition to the winners of 2015-25. We like to own shares of primarily domestic revenue firms, which will directly or indirectly benefit from a dramatically better and different composition of the US economy. The new economy will be driven by the next great demographic juggernaut, the Millennials.
