Hidden in Shadow: Hydrocarbon Man

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Today in Profit Watch, we cast our eye back over familiar territory: The oil market.

For a year, we’ve tabled the possibility of an oil price spike in a ‘danger zone’ building around January 2020.

For the moment, neither the market nor readers care either way. But I’m sticking to my guns on this.

There’s now US$13 trillion in negative-yielding debt around the world.

Any hint of inflation getting out of hand would send a massive shudder throughout the globe. 

Perhaps I’m too obsessed with the past…

I’m currently reading a biography of the former Fed chairman Alan Greenspan.

His tenure ran from 1987-2006. Before that, he was an esteemed and richly paid economic forecaster.

Greenspan inherited the Fed role from a man whose claim to fame was taming the wild inflationary years of the 1970s.

Greenspan was preoccupied with ensuring his legacy didn’t include going back to those dark days.

He was feted — for a while — for being part of the decline in interest rates and inflation expectations that happened on his watch.

In hindsight, he got credit (fame, money, status) for something he largely didn’t deserve. He handed his successor — Ben Bernanke — an economy about to fry in monetary acid.

If you read about history often enough, you begin to see that there are those who make it into power at the right time and those who don’t.

Their personal failings or successes often have little to do with the broader economic success. Historical trends and cycles usually trump it all.

For example, it didn’t matter one bit whether John McCain or Barack Obama inherited the US Presidency from George W. Bush.

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The American economy was toast regardless. The political response was destined to be the same either way: A financial bailout.

Today, Trump cruises on momentum he didn’t earn — but takes the credit for it anyway. 

Low rates and QE forever…

But it’s interesting to note that the mindset of the entire financial world has now flipped from the Greenspan years. Those years are now a distant memory.

In those times, academics and central banks worried about the consequences of lowering the cash rate. They feared the inflationary demon could be unleashed.

And American politicians worried that ‘bond vigilantes’ would punish big federal deficits with higher interest rates.

Today, the situation is inverted. The cash rate in America barely went up before it’s due to head down again.

Government debt pours into the markers, to be gobbled up by pension funds and insurers.

There appears to be no concern that the Trump administration now has a deal in place to raise the US debt limit again until 2021. Nobody worries about consumer inflation anymore.

This may all be fine.

But it seems a very one-sided view now. There are often large profits finding a crack or asymmetric bet on the other side of something like this.

That brings us full circle.

I say the only thing big enough to scare bond markets around the world is the price of oil — if it gets out of hand. That’s why I keep watching it.

The glory of the 1960s

Oil is no longer seen as the wonder it once was.

Historian Daniel Yergin describes the high standard of living brought on by oil as the ‘Hydrocarbon Man’ years of America’s ascent.

He could drive to work and back to his house in the suburbs. He could fly. His food came from an agricultural system built around highways and long-haul transportation. Hydrocarbon Man could use plastics for everything.

Time turns.

Oil is now despised as a filthy fossil fuel that no self-respecting middle-class Westerner would want to associate with. That’s in either their retirement fund or their choice of consumption.

Snow leopards and panda bears are considered hostage to every barrel that comes out of the ground.

Most major oil companies can expect to add an endless stream of litigation to their list of upcoming expenses.

Here’s the problem: Hydrocarbons still underpin the entire economy.  The world consumes an astonishing 100 million barrels every single day.

The hubris of the French President is a good reminder of this. He probably thought he would be feted for his green credentials when he increased the tax on diesel.

Instead he turned his country into a riot zone. Someone forgot to remind him the average working stiff still has to drive to work.

The ‘yellow vests’ of France are a warning not to take a low cost of energy for granted.

This sorry fool might keep carping on about it, only to see nothing change each day.

But one day, perhaps, you might be grateful you gave it some thought.

My boss, Bill Bonner, says quite rightly that the only ideas worth money in the markets are those that are new or contrarian…or they are fully priced in and therefore useless. 

The world is priced for low inflation.

Oil is the only thing big enough to change this equation. So watch oil. If it doesn’t move up, you’ve lost nothing.

If it moves up a lot, watch out. We could find out very fast that Hydrocarbon Man is still here. It’s you and me.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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