It has been a long wait for 'peak oilers,' whose passionate belief is that the world will run out of oil in coming years, sending prices through the roof.
This splinter religion came into being in 1956 when M. King Hubbert produced some simple supply/demand charts showing that US reserves of Texas tea would dry up by 1965-70, forcing a heavy reliance on imports with which we have become all too familiar. This was later expanded globally, implying that Western civilization would come to a grinding halt.
It all seemed very prescient, when in 1973 OPEC raised prices from $3/barrel to $12 in the wake of the Yom Kippur war, and the resulting boycott caused enormous lines at American gas stations. It happened again in 1979 with the fall of the Shah of Iran, taking crude from $12 to $40. Then Saudi overproduction kicked in big time, bring 20 years of falling prices, all the way down to $8. At the 1998 low, oil was selling for less than the barrel that contained it.
Then came China and the commodities boom, which suddenly sent the value of all things 'hard' skyward. Virtually overnight, the Middle Kingdom became the world's largest marginal consumer of not only oil, but all energy sources. By 2008, peak oilers had the second coming in sight, with prices soaring to $150/barrel.
Enter the Great Recession. The real damage this caused was not the temporary collapse of prices down to $28/barrel and the wiping out of many industry participants. It was the two year freeze on the financing of new exploration and development, a byproduct of the Wall Street crash. BP's Gulf oil spill didn't help matters either. These events have combined to create a bubble in the energy pipeline, the implications of which we may only just now be seeing.
Now the Middle East is blowing up. With populations exploding, per capita incomes plunging, and a religion that mires them in the 14th century, this sort of viral, grass roots revolution could have, and should have happened any time over the last 40 years. It took cell phones, social media, and the Internet to provide the spark. At first, the world didn't care, as Egypt and Tunisia produce little oil, and are non-factors in the global economy.
Then came Libya, an entirely different kettle of fish. Having dealt with the Libyan government myself since 1968 when Muammar Khadafi overthrew the government and kicked me out of the country, I can only say this couldn't happen to a nicer guy. I missed the Pan Am flight he blew up over Lockerbie, Scotland by a week and lost a few friends. Justice finally came when he was dragged out of a storm drain and shot at close range.
The revolution there raised broader, far more concerning questions. If it can happen in Libya, why not in Saudi Arabia, where the government is still essentially tribal in nature and will not be winning any prizes for their human rights record anytime soon. Women are still not allowed to drive. Take their 12 million barrels/day off the market, even for a few days, and the geopolitical implications are large.
Which brings me back to peak oil. After a quiet, long term downsizing, the US now only imports 2 million barrels a day from the Middle East. Canada is now our largest foreign supplier, followed by Mexico and Venezuela. But oil is a globally traded commodity, and if you prick the supply line in one place we all have to pay. Remove Saudi Arabia from the picture, and the results could be catastrophic, for China first, but for ourselves as well.
Even without these Armageddon scenarios, we are still facing a huge
problem. World oil production today is 83-84 million barrels/day. There is probably another 5 million barrels/day in reserve. By 2015, an additional 3 million barrels/ day in will come on stream that was financed prior to the Wall Street melt down. After that, new supplies become very problematic.
Even if the US can keep its own demand relatively flat through modest economic growth, conservation, new efficiencies, alternatives, and switching to natural gas, China promises to eat up all of this increase. That's when the sushi hits the fan. I think oil could hit $300/barrel by 2020, or $225 in today's prices. If you are wondering why I have become so cautious about investing lately, this is a major reason why.
Which leads us all to the bigger question of how do we make a buck out of all of this? Brent crude, which trades in Europe, is already at $110/barrel, an $11/barrel premium to our own West Texas intermediate. Prices here have stayed low because of a shortage of storage facilities. My buddies in the field also tell me there is some elaborate conspiracy to keep West Texas artificially low, because the prices for Middle Eastern imports are priced off of that highly manipulated benchmark. It is far more likely that West Texas trades up to Brent than the other way around.
I missed the window to get in last week at $85/barrel. But if you believe it's going substantially higher, it is not too late to get involved with long term portfolios. For a start, do not buy the oil ETF (USO). The tracking error caused by the contango will kill you, assuring that you will take all of the risk but get few of the benefits.
Individual oil major stocks that I have been recommending, like ExxonMobil (XOM), BP (BP), and ConocoPhillips (COP) are great vehicles. A simple alternative is to pick up the double long oil majors ETF (DIG). These guys have massive supplies in the pipeline that are about to be revalued by higher prices. So are independents like Occidental Petroleum (OXY). You can throw oil service companies into the mix as well through the ETF (OIH).
As (OXY) founder, Dr. Armand Hammer, told me when I was a kid, 'Keep your eye on oil, because everything stems from that.' Some 40 years later, and I think the old man is still right.
'He who lives upon hope will die fasting,' said Benjamin Franklin.
Often while searching for a piece of data through Google, I stumble across something else which is far more interesting. That is how I found the table below of international savings rates.
Why should you care? Because countries with high savings rates tend to have strong economies and great stock markets, since there is plenty of excess cash available to pour into investments. Those with low savings rates suffer from weak economies and poor stock markets, because of a shortage of available capital. When the American savings rate dropped below zero in the latter part of the last decade, it set off emergency alarms for me that a collapse of the financial markets was on the horizon.
During the last four decades, I have watched Japan's savings rates plunge from 16% to 2.8%, and you know the result for markets there. When it approaches zero, that will be the time to short the JGB's, the yen, and the Nikkei stock index. The only country that doesn't fit this analysis is Australia, with a mere 2.5% savings rate, but boasts a positively virile stock market and currency. The resource boom there is skewing things towards under saving and over consumption.
By the way, the outlook for the US, with its still miserable 3.9% savings rate, does not look great when considering this benchmark. Don't expect a runaway bull market anywhere savings rates are low and falling. What are savings rates telling us are the best countries in which to invest? China, 38%, India, 34.7%, and Turkey, 19.5%.
Australia? 2.5%
Japan? 2.8%
USA? 3.9%
Brazil? 6.8%
Britain? 7.0%
Germany? 11.7%
Ireland? 12.3%
Switzerland? 14.3%
Turkey? 19.5%
India? 34.7%
China? 38%
In their century long coverage of exotic places, cultures, and practices, National Geographic Magazine inadvertently sheds light on broad global trends that deeply affect the rest of us. Plus, the pictures are great. A recent issue celebrated the approach of the world's population to 7 billion, and the implications therein.
Long time readers of this letter know that demographic issues will be one of the most important drivers of all asset prices for the rest of our lives. The magazine expects that population will reach 9 billion by 2045, the earliest date that I have seen so far. Can the planet take the strain? Early religious leaders often cast Armageddon and Revelations in terms of an exploding population exhausting all resources, leaving the living to envy the dead. They may not be far wrong.
A number of developments have postponed the final day of reckoning, including the development of antibiotics, the green revolution, DDT, and birth control pills. Since 1952, life expectancy in India has expanded from 38 years to 64. In China, it has ratcheted up from 41 years to 73. These miracles of modern science explain how our population has soared from 3 billion in a mere 40 years.
The education of the masses may be our only salvation. Leave a married woman at home, and she has eight kids, as our great grandparents did, half of which died. Educate her, and she goes out and gets a job to raise her family's standard of living, limiting her child bearing to one or two. This is known as the ?demographic transition.?
While it occurred over four generations in the developed world, it is happening today in a single generation in much of Asia and Latin America. As a result, fertility around the world is crashing. The US is hovering at just below the replacement rate of 2.1 children per family, thanks to immigration. But China has plummeted to 1.5, Europe is at 1.4, and South Korea has plunged as low as 1.15.
Population pressures are expected to lead to increasing civil strife and resource wars. Some attribute the genocide in Rwanda in 1999, which killed 800,000, as the bloody result of overpopulation.
The conspiracy theorists will love this one. Buried deep in the bowels of the 2,000 page health care bill was a new requirement for gold dealers to file Form 1099's for all retail sales by individuals over $600. Specifically, the measure can be found in section 9006 of the Patient Protection and Affordability Act of 2010.
For foreign readers unencumbered by such concerns, Internal Revenue Service Form 1099's are required to report miscellaneous income associated with services rendered by independent contractors and self-employed individuals. The IRS has long despised the barbaric relic (GLD) as an ideal medium to make invisible large transactions. Did you ever wonder what happened to $500, $1,000, $5,000, and $10,000 bills?
Although the Federal Reserve claims on their website that they were withdrawn because of lack of use, the word at the time was that they disappeared to clamp down on money laundering operations by the mafia. In fact, the goal was to flush out income from the rest of us. Dan Lundgren, a republican from California's 3rd congressional district, a rural gerrymander east of Sacramento that includes the gold bearing Sierras, has introduced legislation to repeal the requirement, claiming that it places an unaffordable burden on small business.
Even the IRS is doubtful that it can initially deal with the tidal wave of paper that the measure would create. Currency trivia question of the day: whose picture was engraved on the $10,000 bill? You guessed it, Salmon P. Chase, Abraham Lincoln's Secretary of the Treasury.
Ever Wonder Where The $10,000 Bill Went?
Traders were taken aback this morning when the Department of Labor announced a 50,000 drop in weekly jobless claims to 352,000. The street had been expecting a decline of only 19,000. It was the lowest report in almost three years, and the sharpest weekly decline in seven years.
I tell people that, if stranded on a desert island, this is the one weekly report I would want to call the direction of the economy. So I am up every Thursday morning at 5:30 am PST like an eager beaver awaiting the announcement with baited breath.
The impact will not be as great as the headline number suggests. Nearly half of the figure represents a take back of the 24,000 increase in claims for the previous week. But there is no doubt that it represents an upside surprise for the economy. And you have to put this in the context of a long steady stream of modestly positive economic data that has been printing since the summer.
The release was only able to elicit a small double digit response from the stock market. That?s because we are now up nine out of eleven days, taking the S&P 500 up 4.5% on the year, a far more blistering performance than many expected. That takes us right up to the level of 1,312, which many analysts predicted would be the high for the year.
Break this on substantial volume, and we could reach my own upside limit of 1,370. If you believe that we are trading to the top of a 300 point range from 1,070 to 1,370, as I do, then there is not a lot you want to do here when you are 81% into that move, unless you want to day trade.
At this point, I would like to refer you to my October 30, 2011 piece, ?The Stock Market?s Dream Scenario? by clicking here. Since then, two of my three predicted ?black swans? have occurred, progress on the European sovereign debt problem and the first interest rate cut by the People?s Bank of China in three years. The third, a multi trillion dollars budget and tax compromise in Washington, was dead on arrival. But hey, calling two out of three black swans is not bad!
Arriving on Schedule
Many of you have asked for this year?s strategy luncheon calendar so you can make advance travel arrangements, so here it is. This is understandable, since the Orlando luncheon saw visitors from Brazil and Australia, the Los Angeles one had subscribers from Alaska thawing out, and at the London event the distinctive accent of Johannesburg was heard.
This year I am going into the cruise business, holding a seminar in the penthouse suite of the Cunard transatlantic liner, Queen Mary II, en route from New York to Southampton, England. The gathering will be held as we sail over the wreck of the Titanic just to keep us all humble. I promise the captain will be British, not Italian! The events in bold are already listed in the store at www.madhedgefundtrader.com under ?LUNCHEONS?. The rest will be posted in coming months. There are still a couple of Beverly Hills tickets left, so if you want to come, get a move on.
January 23 Beverly Hills
January 27 Las Vegas
February 9 Houston
February 10 Orlando
April 20 San Francisco
May 3 Phoenix
June 11 Beverly Hills
June 29 Chicago
July 5 New York
July 6-13 Queen Mary II Cruise
New York to Southampton
July 16 London
July 17 Frankfurt
October 26 San Francisco
November 8 Orlando
January 3, 2013 Chicago
Let me tell you about the real January effect. Many pension and retirement funds only reshuffle weightings between different asset classes once a year, mostly in January. That has created a temporary surge of stock buying and bond selling that exhausts itself by the middle of the month. After that, the market sells off. During the second half of January in 2009, the S&P 500 dropped by 3.5%, in 2010 it plunged 5.9%, and in 2011 it pared back 0.54%.
Will history repeat itself a fourth time? The global economy is facing certain slowdowns in Europe, China, and India. The bull run in equities is rapidly approaching the advanced age of four months, long in the tooth by recent standards. I am betting that it will, but will keep my short positions small until I?m sure. The next bad headline from Europe will be the trigger.
Is the Bull Market Now a Senior Citizen?
I have been warning readers away from the agriculture space for the past few months, and on Thursday you found out why.
More than 90% of the street was positioned for a bullish report, expecting that the last summer?s blistering drought and ongoing dryness in South American would lead to inevitable shortages.
Instead, the US Department of Agriculture dropped a bombshell, predicting in its closely watched crop report that there would be copious oversupplies of every major grain for 2012. Prices utterly collapsed, with corn (CORN) closing limit down on the day.
This is not the first time this has happened. Over the past year, the USDA has lost, and then later found, 100,000 million bushels of corn, twice, sending prices gyrating each time, and putting traders through a meat grinder. Conspiracy theorists suspect political manipulation, insider trading, or just shear incompetence. Budget cuts are a more likely cause. The less money the government agency has to spend, the more volatile and less reliable its numbers are becoming. This is a major reason why I avoid the sector like a plague going into these reports.
I?ll tell you what happens from here. After a few weeks or months, these new developments will get digested by the marketplace. A few bodies will float to the surface, as overleverage by small traders reaps its grim harvest. Liquidation of their positions will give us our final low.
Then the long term bull market in food will resume its inexorable climb, and the grains will begin a slow grind up. The bottom line is that the world is making people faster than the food to feed them. Of the 2 billion souls who will join the global population over the next 40 years, half will come from countries unable to grow enough of their own food, primarily in the Middle East. It is just a matter of time before the weather turns hostile once again. There is the ever present tailwind of global warming. And who knows? The next USDA crop report could surprise to the downside, sending prices soaring.
I think this year you?re going to have six years? worth of movement in the commodities markets,? said Mark Fisher of hedge fund MBF Clearing Corp.
