Key insights
- The author expresses concern about the potential for an oil shock-induced recession, exacerbated by high US debt levels and limited fiscal stimulus options. They draw parallels to Japan's 1989 market peak, suggesting that a sustained market recovery is not guaranteed. The high oil prices, coupled with geopolitical tensions and a richly valued S&P 500, create a bearish outlook for US equities.
Everyone is tracking the missiles. Nobody is tracking the gas pump.
Oil spiked before every major US recession post WW2. Not always the only cause but always part of the picture. We are sitting at that threshold right now and the war is weeks old not months.
The part that actually keeps me up at night though is that the US has no room to catch the fall this time. Debt at 122% of GDP. Interest eating 20% of all federal revenue already. In 2008 when they needed to stimulate, debt was around 35%. They could throw money at the problem. That option is basically gone now.
And yeah US produces more domestic oil than it used to. Doesn’t matter. Oil is priced globally. Your gas station charges the same whether the barrel came from Texas or Iran. The supply shock hits the same.
So you’ve got oil shock inflation, a government that literally cannot stimulate, and an S&P 500 still priced near all time highs.
I keep coming back to Japan 1989. Not saying the US becomes Japan. But Japan proves that “markets always recover eventually” is not a law of nature. It’s a feature of specific conditions. Those conditions don’t last forever.
Are people just not pricing any of this in or am I missing something?