There is a popular axiom in commodity markets that says the cure for high prices is high prices. The opposite is also true, and more relevant today. The cure for low commodity prices is low prices. In the oil market, low prices are already beginning to cure low prices. How? Drilling activity is plummeting as seen in my oil rig count chart. At oil prices below $50 per barrel, some U.S. oil wells aren’t profitable so companies are slashing capital budgets and reining in drilling activity. Lower investment and drilling should ultimately lead to lower supply and higher prices. … [Read more...]
Inappropriate Monetary Policy
Yesterday, the Bureau of Economic Analysis released its final estimate of third quarter GDP growth. Growth for the third quarter came in at a blistering 5%. That is the best quarter of economic growth in over a decade. It should now be evident to even Yellen & Co., that the Fed’s monetary policy is absurdly inappropriate. Interest rates should not still be at zero, nor should they have been held there for so long into the recovery. The last time we had nominal GDP growth this good, short-term interest rates were over 5%. By holding interest rates at zero for the entire recovery and … [Read more...]
What Oil Price Correction?
Below is a chart of the price of oil denominated in rubles. In Russia, a cratering currency has resulted in higher, not lower, oil prices for consumers and producers. … [Read more...]
The Most Powerful Fiscal Stimulus
The mainstream press and their liberal Keynesian allies in academia (that means you Princeton & Berkeley) have made a sport out of roasting the Republican led Congress for reining in government spending. Lower government spending, we are told, kills growth at best and crashes the economy at worst. It is a remarkable feat to argue that bigger government leads to stronger growth when centuries of evidence prove otherwise. Those economies where the share of government is smallest most often are the fastest growing. Viewed through the lens of Washington insiders, the gridlock and … [Read more...]
The Party’s Over
A few years ago the Bank of England (BOE) used the chart below to explain the impact of money printing on the economy and financial markets. According to the BOE’s graph, there are two phases to quantitative easing, an impact phase and an adjustment phase. During the impact phase, there is a party on Wall Street. Asset prices soar far above what the underlying fundamentals would seem to support. The bonuses pile up and the liquor flows freely. Then, during the adjustment phase, economic activity and inflation pick up, but asset prices take it in the neck (red line). With the Federal … [Read more...]
The China Factor
With much of the investment world focused on geopolitical events in Europe and the Middle East and how much or how little money the Fed and the European Central Bank are going to print, China seems to have fallen off of the radar. It shouldn’t. China is a major player in the global economy. It is the world’s second largest economy and the world’s fastest growing large economy. China sucks up a majority of the world’s resources. It is the largest consumer of aluminum, copper, cotton, and coal just to name a few. If the Chinese economy craters, the world will feel the pain and if it … [Read more...]
The Economy’s Weak Link
One of the reasons this business cycle recovery has been one of the weakest on record is that it hasn’t been firing on all cylinders. The weak link among the cyclical sectors of the economy has been residential fixed investment. While there has been some recovery from the dark days of the financial crisis, adjusted for inflation, residential investment is no higher than it was 20 years ago. Non-residential fixed investment, which is made up of business investment in factories, equipment and intellectual property has already hit a new high. With the housing market looking more like it is … [Read more...]
Bluefish!
Owen caught this beauty just outside of Newport harbor. … [Read more...]
World in Crisis: Oil Shrugs and Heads below $100
Imagine only 10 years ago, before most Americans had heard of “hydro-fracking” or “horizontal drilling.” Imagine what a war in Iraq (the eighth largest oil producer) and skirmishes on the border of Russia (the third largest oil producer) would have meant to the price of oil? Prices would have skyrocketed. But today, in the face of instability in some of the world’s most vital oil producing regions, the price of oil is headed down. As you can see in the chart below, on July 31 the price of WTI crude dropped below $100 a barrel for the first time since May, and is now at levels not seen since … [Read more...]
Mutual Funds of the Future
"Never pick a stock again," proclaims the headline of a recent article by Money. The California Public Employees Retirement System is considering making cuts to its allocation of active managers. Meanwhile, robo-advisors are hawking a “new” model of investment management centered around broad based index ETFs (I’ll have more on robo-advisors in a future post). The financial press and many more in the finance industry are hailing index based ETFs as the savior of the investing masses. Is this the real deal? Are we finally seeing a secular shift in the money management business or is … [Read more...]
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