Analysts on every financial news network are screaming about how the lower oil and gas prices will spur on the U.S. consumer and lead to a stronger economy. It is true that total retail sales rose 0.7 percent in November, beating analysts' expectations of 0.4 percent.  And the Thomson-Reuters University of Michigan survey of consumers saw its December 2014 “preliminary index of consumer sentiment” soaring to 93.8–well above last month's 88.8 reading. Yet, despite this, global markets are throwing off many deflationary signals that should not be ignored.     

The first important market signal is the dramatic decline in oil prices.  Since peaking at just over $100 a barrel this summer, prices have since fallen by 45 percent. In fact, the last time we have seen a decline nearing this magnitude was during the financial crisis of 2008.  If this one data point existed in a vacuum, it may be easy enough to attribute it to just an increase in the oil supply. 

If happening in isolation, a surge in the supply of oil would lead to less spending at the pump and be a boost to the consumer. However, that is not what is occurring today.  First off, years' worth of QE and ZIRP have caused massive economic imbalances to occur. Capital spending by the energy industry accounted for 33% of all capital spending in the last few years. States where fracking is prevalent have accounted for all the job growth in the nation. This would never be feasible if oil prices weren't drive into bubble territory in the first place.

After all, the Fed's manipulation of interest rates has left investors chasing all kinds of yield traps; such as encouraging investments in Master Limited Partnerships in the oil fracking industry. The cost to extract shale oil and transport it to a refinery capable of processing it is very high. Therefore, the price per barrel needs to be higher than $65 per barrel just to approach feasibility.