Must Read – Thoughts of a Speculator: Vol. 1 Chapter 2 & 4
The following are two short chapters from my first volume of my newsletter, Thoughts of a Speculator. Chapter 2 covers oil and the history lesson many Americans forgot from the 1970s-80s boom and bust and how the Feds artificially low rates have caused a scary amount of debt in the U.S. shale markets that cant generate profits in this oil market. Will history repeat itself except this time with 10x the debt levels and an economy that cant handle another round of iliquidity?
Chapter 4 discusses how its better to be early in purchasing gold than late. With this article almost being prophetic with the EU situation that took place in summer 2015 and the the Chinese stock market collapse, is it a bad time to purchase the gold commodity that everyone seems to hate? Remember the more people that hate it should make us love it.
Vol.1 – Chapter 2: Turn Of The Oil Tide?
The question seems more prominent now than ever: do investors ever learn from what history has to show? In regards to oil— they should.
A brief history lesson from yours truly. In 1973, the Organization of Petroleum Exporting Countries (OPEC for short) had implemented an embargo against Israel and any of its supporters, i.e. United States, following the brief Yom Kippur War. As expected, oil rose dramatically, starting from $3.50 in 1972 to $11.25 in 1974 (inflation adjusted in 2015 dollars—$19.75/72 to $51.30/74). Consumers felt the impact almost immediately with oil becoming scarce. The decoupling of the dollar from the gold standard in 1971 did not help consumer prices either.
The 1970s oil embargo was harsh and unfavorable times, that is, if one wasn’t in the oil service business.
As the basic investor understands, if there are high prices in a sector, then there are consequently higher profit margins to be made. Thus, the speculators and entrepreneurs seized the opportunity to enter the oil business. Texas and North Dakota and Oklahoma all became booming cities. Employment in capital intensive businesses grew just as fast as state tax revenues did. Investors in oil futures and oil producers laughed all the way to the bank— passing the mile long line of individuals trying to get their gasoline ration from the pump.
This is what was seen; but intelligent investors are keen on noticing what isn’t seen. And that is, those high prices will be the cure for high prices.
Intelligent investors made the observation that the oil embargo would be temporary— making prices artificially high. They also understood that higher prices during a period of double digit inflation would limit consumers from using more than the bare minimum required of oil. They also knew that the artificially high prices attracted marginal wells and production of oil to come online, increasing the supply. Thus as demand decreased and supply increased, intelligent investors ignored euphoria in the oil sector and set up for the big short. In 1985, the U.S. oil industry flatlined. Prices went into free fall. The once booming oil states shut down. Banks and investors that lent to these oil companies turned from laughing to crying. Defaults ensued in the oil services. But for the consumer these were grand times of cheap and plentiful oil.
One can assume that in 2007-14 many investors either forgot about the 1970s-’80s or were not even born yet. The prior seems more likely.
Investors know that fancy technology (fracking) and cheap money (0% rates) mix as well as coke and whiskey.
Thus those same oil states are booming just as before. Tax revenues are up from the employment and business. And stock market speculators were thriving. It doesn’t help that this time yield starved investors and a tidal wave of $4.3 trillion dollars, courtesy of the Fed’s printing press, and 0% rates are pushing junk bonds to unjustifiable levels (from 2012, oil producer debts have increased over 55%).
Just as before, the second half of 2014 and 2015 is plagued by a crashing oil price. The reasons? Many.
Pension funds and insurance companies and investor portfolios are littered with toxic debts.
The likely outcome? Dire. •
Vol.1 – Chapter 4: Better Early Than Late
As investable assets go— gold seems to have lost its luster since 2012. The argument goes as followed: gold collects no interest and generates no utility. And with the self proclaimed recovery of the global economies and stable fiscal policies (not this newsletters viewpoint), than gold doesn’t even have use in todays modern portfolio.
Why, then, should someone hold onto such a useless metal one may ask. A very daring question; especially since all of humanity is only seven years past the 2008 financial crisis. But are things really as safe as CNBC and the mainstream says? Further examination is in order.
U.S. GDP has hovered around 2% (1.5% adjusted for inflation) since the 08 crisis. QE1 wasn’t enough. QE2 mirrored the same results. The open ended QE3, only to be boosted into QE4 months later, still didn’t yield much growth. That is, of course, unless the growth the Fed wanted to create was in the student loan, auto loan, junk bond, corporate and government debt markets. If so than the QE program was a massive success.
Continuing forward with analyzing this great recovery, the European Union (EU) is a basket case itself. Greece is bankrupt (and will stay that way) and Spain is carrying a roughly 30% unemployment rate. To be said simply, Germans don’t seem to like the Greeks and the Greeks don’t seem to like the Germans. The chance of Greece abandoning the EURO and EU? Likely. Will global banks have the situation contained as they boast? Unlikely.
Japanese bonds are yielding nothing (which is still better than the negative 0.75 bonds the Swedes offer) and the nation is over 250% in debt-to-GDP. There are more diapers being sold to seniors than to newborns and the Bank of Japan (BOJ) continues to keep the printing press running at all times. The worlds third largest economy should not hold that rank for long.
China has slowing growth, a housing bubble like no other, a scary shadow-banking sector, and the government has slashed interest rates 3 times in the last 6 months to get a fiscal stimulus going. With stock ballooning and the Chinese disregarding the history lesson learned of day traders created in Americas great ‘dotcom’ bubble, things are getting to euphoric – which almost always precedes a bear market. The worlds largest economy (as of December 2014) has many problems of its own— can they afford to keep buying U.S. debt?
What, then, can investors expect in the long run. Contrary to mainstream words, a record high stock market does not signal strength in an economy. So one can expect equity valuations to fall appropriately. One can also expect once rates rise that poor unemployed students will begin missing payments on debt. Subprime auto loan recipients will also begin defaulting due to the higher borrowing costs. The yield starved investors that trample over one another will turn away from riskier assets, fearing they are the ones holding the next loan to be defaulted on. Will the Fed move for QE5? Probably. But will our creditors accept this again thinking it will “only be temporary”, just as QE1 was?
When Lehman Brothers (one of the worlds largest investment banks) defaulted in 2008, gold passed $1,000/oz. With many dangerous catalysts at play globally, an investor would rather be early in purchasing some insurance i.e. gold and silver, than late.
China and Russia are buying gold at record amounts. They must be on to something, right? •
Contrarian and Austrian - Value Investing Ideas - Anti-Government Philosophy - Author.