Monday, May 9, 2011

A Wider View

Let us take a 25 year view. One generation or so. Let us put ourselves right in the middle, here, in 2011.

12.5 years ago Oil was going down like a rock in a pond, Nasdaq was screaming to the stars, everybody had a job and everybody expected to get rich by buying a house, leasing a Mercedes, and starting a dot.com. You were nobody without an MBA from a prestigious institution (unless you were a Billionaire... even self made multi-Millionaires - doctors, lawyers, small business owners - were second class citizens).

Over the next 5 years, until 2005 or so, the stock market tanked, then rebounded, and the housing market went ballistic. While on very few people's radar screen Oil was making its way higher. Not alarming at first - until it crossed the magical $50 line and Goldman's Murti called for a super spike - maybe as high as $105. A little known brokerage firm in Boca Raton, FL, with yours truly's name on the door tried to tell this story to the individual investor. We made a good living peddling the story... but most people thought I was out of my freaking tree (this is 2000, mind you... many of my old staff read here regularly... most of them thought I was out of my freaking tree, too. It was a hard sell. The Euro was in the crapper, Oil was, too, and the US$ was ascendent. Then came Ken Deffeyes' book "Hubbert's Peak" which gave us some cover, but not enough to make sales.)

From 2005 - 2008 the battle was on. The Fed tried to expand credit, destroyed the financial system, and Oil took flight from $50 to nearly $150. The fight raged between the Cornucopian's and the Cassandra's. The price collapse in late 2008 and 2009 gave the Cassandra's the upper hand, only to be TKO'd by $100 plus Oil in 2011.  Over the 2005-2011 housing crashed, banks crashed, precious metals flew, Oil seesawed ever higher (average yearly price, that is), and the U.S. worker earnings crumbled.

Pretty much what the Cassandra's were saying would happen in a fractional reserve banking system given the end of Oil supply growth. Not exactly, and not in line with the more vocal fringe doomers... but close enough for government work.

With me so far?

Oil and the housing crash were coincidental... sort of... for the most part. Oil's price rise certainly put a crimp on extending the housing bubble, but these were 2, very independent events.

Taking that into consideration, I think the end of steady growth in the supply of Oil has had a tremendously negative effect on the U.S. economy over the past 6 years. It is very likely (to me a near certainty, but you never know) the next 12.5 years will see a dramatic decline in the supply of Oil to the industrial West, and the U.S. in particular. Perhaps within 15 - 20 years Oil exports, and therefor imports, will cease altogether.

Looking back on what happened to the U.S. economy when Oil supplies ceased growing and comparing that scenario to one in which Oil supplies are cut by 50% or 60% (imports into the U.S. cease other than those from Canada) is going to take some amount of abstract thinking.... and a willingness to refuse to suffer a failure of imagination.

Markets will tell you all you really need to know IF you pay attention and do not take in only the data that supports your prejudices.  Silver and Gold seemed to be predicting some type of currency crisis... yet homesteads, livestock, gardening equipment, "prepper" gear... were all going begging. There is no doubt in my mind that the world's currency system will absolutely, positively blow up at some point... but that point is likely quite a few years out;  and you will be able to know when it is real - when consumer goods are in short supply and family farms have become quite dear, the currency crisis is upon us.

That this will unfold at some point I have little doubt... that it will happen in the near future is almost completely up to the politics of the MENA - something that is difficult, if not impossible, to call AND profit from.

-to be continued...

P.S. I pick up my bee hives tomorrow morning. I am very excited about this new addition to the farm.

29 comments:

russell1200 said...

With Greece being very close to bailing on the Euro, and Hillary jawboning the Chinese about trade deficits (and by implication thier skewing of exchange rates) it looks possible that the currency blow up is occuring right now.

The investment landscape is so precarious that people are rushing to buy governement bonds as a safe haven. I don't think they are stupid, I just think there is no place for them to put their money unless they want to bid gold up to $5000.

Greg T. Jeffers said...

Russell:

If you think that is true, sell short TLT and go long precious metals.

For my money, long energy service, drillers, and producers, and short Australia $$.

This is no place for academics - making calls that eventually pan out is not all that hard when compared to making calls AND THEN PROFITING from them.

"A broken clock is correct twice a day."

Anonymous said...

Well oil is back on the rise. Big Surprise. Apparently, some if not much of its fall was attributed to automated selling computers.

The next week will be telling if not the next couple of days.

Anonymous said...

Greg- what is your understanding of the huge global derivative bomb- something like $1.6 Quadrillion?

A lot of heavyweights ie Jim Sinclair, Nicole Foss & Rick Ackerman, feel that this is an accident waiting to happen and will cause a violent deflation of the global credit mountain with everything but cash or short-term treasuries being sucked in.

Any thoughts on this?

Thanks, Marshall

Anonymous said...

My mistake. Let me clarify-

Nicole Foss and Robert Prechter see cash and short-term UST as the survivors of a derivative/credit meltdown.

Sinclair and Ackerman feel that gold- not cash- will survive and thrive in a derivative/credit meltdown.

Marshall

Greg T. Jeffers said...

That the derivatives market will one day bring the system down is a reasonable speculation; that the system will one day bring down the the derivative market is also a reasonable speculation... the ultimate chicken or egg scenario.

Whether cash or gold is the winner in a deflationary unwind is somewhat up for debate... I say "somewhat" because i believe cash would win in that circumstance in almost every circumstance that I can see, with the exception of a constitutional crisis/political crisis - and that, too, will likely see the light of day at some unfortunate point.

More soon.

Greg T. Jeffers said...

If you look upthread at my first comment about actually profiting from "calls"... it is SOOOOO much harder than making predictions... you don't lose money making wrong predictions - and you don't feel the pain of being whipsawed, having to cover or close, only to have the market eventually go your way.

I do this for a living... this is NOT academic for me.

Anonymous said...

Don't worry the housing market is coming back guys. Fannie and Freddie are turning the corner. They only need 9+ billion for the first quarter, Only 28% of homeowners are underwater and home prices are only falling 3% per quarter. Don't forget that 22 billion we spent giving tax credits to home buyers. Things are looking up.

Dextred

Anonymous said...

Greg- thanks for the very helpful reply.

Best
Marshall

tweell said...

The problem with precious metals has already been demonstrated by FDR - the government can and has taken them away. That's the reason I prefer junk silver (old US coins), as they are much more difficult to confiscate.
The additional problem with predicting a US$ currency crash is that the real backing of the dollar isn't our economy, it's our military. As long as we dominate militarily, our money will be good.

Anonymous said...

I like PM because they can be my asset without being anybody else’s liability. During inflation its value will generally march up, and during deflation they don’t default. About the only time I think they will collapse is during a bout of worldwide hyperinflation where everyone is scrambling to eat and even then once the panic is over their value will come back. During a localized hyperinflation people outside the affected currency still bid on them.

Best,
Dan

Anonymous said...

There is a lot of straight line estimating going on out there. It seems to me that the declines will be decaying exponentials rather than straight lines. The largest exporters need to sell oil to buy food, so their internal demand will have to be tempered by the market price of oil as well. Their people will no longer get $0.60 per gallon gas either. Exports are more likely to taper off than take a straight nosedive to zero.

Also, we should look at internal supply. US production is up 10%, and ethanol has added another 900,000 bbls/day since the crash. There may be a lot more $100/bbl oil in the ground in the US than we think. Of the 3,000,000 bbl/per day decrease in imports, 1.3MM is compensated by internal production and 1.7 through "conservation".

Heating oil and propane will go out of style in the next year or two as their prices exceed the price of electricity. That gets us another 2 to 3MM bbl/day. I'm becoming more optimistic about the rate of decline and substitution of fuels.

Regards,

Coal Guy

Anonymous said...

Coal Guy,

I agree with your view point here. I have been telling people that they need food as bad as we need the oil. The only caveat is that the people will experience a large inflationary bump with the rise in energy cost, possibly leading to a revolution. Not to mention with some many young people in the Muslim nations I expect some massive changes anyways.

Dextred

PioneerPreppy said...

Just interested CG. What type of electricity are you referring to that manages to escape being tethered to Nat Gas price? Coal fired? Alternative? I am not saying you are wrong but I always figured each of these were pretty much attached together in the long run.

Stephen B. said...

PP,

I would say that electricity is *somewhat* decoupled from the price of oil and natural gas. Oil only generates a few percent of the electricity in this country so oil won't push power prices up much. Natural gas does generate a good deal of power in this country, but I think it's still only like 20 to 25 percent so when the inevitable NG price increase comes, it won't have the 100 percent effect that rising heating oil prices have on heating oil customers.

Of course, this depends on the regional price of electricity as well. Heating oil is mainly a Northeast thing, but that (this) area of the country already has some of the highest electric rates too. About the only thing that really makes electric make sense for heating is heat pumps, especially ground source HPs. Of course, the latter are a significant $$$ outlay, and only if one has the yard space to accommodate the buried water/well lines.

Coal? Well, good question there.

PioneerPreppy said...

Stephen, That was why I asked.

Coal plants are about the furthest from being attached to oil IMO and then like any other commodity it still is ultimately. Nuke maybe more decoupled I guess but Nat gas plants are about the only ones not under constant attack and there are several "experts" out there that claim coal supplies are falling fast as well. Alternatives like wind and solar still use more actual petroleum products than they end up producing in energy overall.

I do agree that there is more than likely alot of oil we could get in the US. But will the anti-drillers be over ruled in time to help?

Anonymous said...

I have been thinking the same thing. The ME can’t feed its self so oil for food is a given; and since we’re the food exporter that is all to the good for us. Oil for medicines is a given too but I reckon Chindia will mostly get that business.

On natural gas, it is a handy transportation fuel and I can get a conversion kit for my car that makes it dual fuel CNG/gasoline for about $1K. At parity with $4.00 gasoline NG would be around $32.00 DTH (from memory, 1 DTH=8 gal)

Best,
Dan

Donal Lang said...

Dan; the US is a food exporter because of cheap oil (and yes, its still cheap really) and gov't subsidies to agriculture. The surplus will disappear very fast, kind of an Export Land model for food. Also the cost of bulk transport for exports will kill the trade.

Greg; on the wider point you made of backing your calls with your own money and making the trade, I agree with you. I have been good at calling the long term trends but rubbish at seeing the detail, so I stay out of your game. To me, what we have now is like a runaway car speeding into the woods, I can see its going to wreck, but I wouldn't want to bet on which tree it'll hit first!

Its like gold; is it a bubble because its moved so high so fast, and has no real use, or will China and the M.E. swap dollars for gold and it'll keep going higher for evermore. And when do you know when to get out?

Bon Chance!!

Anonymous said...

Stephen and PP,

Consider the chevy volt and nissan leaf. Electricity and oil may be more coupled then you think. As the price of oil increases the number of people driving these kinds of vehicles and natural gas too. As the demand shifts from one energy source to another it will quickly escalate the price of those other energy sources.

Electricity is already near capacity. If you remember the rolling brown outs along the west coast in the early part of the millennium? How about the blackout in the north east in 2003? It wont take much increase in demand to push them over the tipping point.

Anonymous said...

Stephen and PP,

I agree coal is the most disconnected energy source. But it suffers from another problem. Its dirty and a huge source of green house gases. It is target numero uno of the cap and tax crowd.

I don't even want to speculate how the cap and tax crowd could effect the price of coal driven energy. They seemed to be more silent lately. How long until that changes?

Anonymous said...

As for oil for food. The middle east is in real trouble. Huge populations living in a region that can not possibly support them.

As oil prices rise shipping food across the planet becomes less feasible (talk about food inflation). As the price of oil rises the amount of food production decreases and the cost of that food increases.

Food production is going to become a much more localized industry as the price of oil rises.

And those in regions that cannot possibly support the population will fight bloody wars, migrate, or perish.

Anonymous said...

Donal,

You can live without cheap oil in the ME but you can't live without food.

Dextred

Anonymous said...

I would just like to mention that the current claims of US conservatives that we could easily be energy independent are total BS. These claims are just more wishful thinking and political ideology from that group.

The US mainland is the most drilled-up piece of real estate in the world. And don't forget the 400+ Appalachian mountains that have been subject to mountaintop removal in the quest for coal.

Environmentalists have had little or no influence on US domestic energy production.

Marshall

Anonymous said...

Ultimately, they're all coupled. NG will eventually approach parity with oil and so will coal as they also become feedstocks for transport fuel. It may not happen here, but I'd bet the Russians, with their huge bubble of gas, are looking seriously at it. As the world market's price goes, so will ours.

NG is about $24 /BOE and coal is at about $17. The present premium for transport fuel is around 400%. That will not last.

At the present rate structure in Massachusetts, with electricity at about $0.135 per kWh, space heaters hit parity with heating oil at about $4.50 per gallon. That assumes your oil furnace is 80% efficient. Heat pumps do much better, but there is capital cost to amortize.

So, why did I say that I was optimistic, after writing this? Because all of this stretches out the timeline, which is what we're looking for to prevent disaster.

Ultimately, nuclear power is going to have to shoulder more of the burden. Notice how quiet the left is about Japan's disaster? They KNOW there is no alternative.

Regards,

Coal Guy

Anonymous said...

Nobody's mentioned hydroelectric yet. Could be quite viable for some parts of the country...all you need is water and gravity.


http://kdrv.com/news/local/212065

Anonymous said...

Can we post here yet? Anyway, thought Coal Guy might be interested in this. Probably a bunch of rubbish but then again who knows:

http://peakoil.com/production/peak-coal-this-year/

PioneerPreppy said...

I saw that peak coal article as well.

Didn't want to post since half our last discussion got erased by blogger :(

How are the new bees doing Greg?

Anonymous said...

Its been awhile since we've heard anything from Greg. I wonder how his bees are doing? Has he seen this?

http://smallbusiness.aol.com/2010/06/30/are-cell-phones-killing-off-bees/

ChrisInGa

PioneerPreppy said...

Well he dropped a comment on my blog not two days ago so he was alive then.

More than likely overwhelmed with the new bees and all the spring activities. I know I am but it's raining here atm :(