The Next Bear Phase

[DeepState]

1. Probably got a bit side tracked there,

2. but for the US consumer on the street it is definately an ongoing higher expense than in the past, no matter which way it is viewed, to which I was mainly alluding to originally. Energy/oil independance does not appear to have flowed through to the bowser in lower prices so essentially means zip to the consumer?

3. Bearing in mind that that very independance is predicated on a continued oil price above something like $90 (I recall) because it's so expensive to extract?

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Hi Uncle

1. Yeah. Let's keep it focused to real world issues.


Oil price hikes have been implicated in just about every major recession since Yom Kippur, so I hear where you are coming from in a big picture sense.

2. If you are talking is truly historic terms, that extend beyond 15 years, no doubt about it. My reason for raising this is perhaps the timeframe which I believe is relevant for statements about oil prices holding back growth is somewhat shorter. As an indication, we could look at the period since 2006 where crude and gasoline stayed flat in real terms. Or we could look at the post acute phase of GFC. Neither of these timeframes would indicate that rising oil prices held back economic growth because oil and gasoline prices basically did not rise over that period in real terms.

FYI, here is a chart showing nominal WTI and nominal GDP for the US for the last 15 years. Crack spreads are missing for translation to Gasoline, but WTI is light. It shows that GDP grew fine anyway despite rising oil prices and that, in line with prior statements, is recovering to beyond take-off speeds despite where oil/pump is trading today.




Furthermore, the PCE basket has only 3.5% of total expenditure in the form of gasoline and related goods. In other words, material changes in oil prices like +/- 10% do not impact total consumption very much at all. In my view, it is very difficult to make a case that static real oil prices since 2006 or 2010 posed much of a headwind to GDP recovery via the consumer channel via pump prices. It would also be hard to make that argument over the last 15 years.

3. The additional production would include elements of the cost curve that are high. It also includes shale gas which does not immediately translate to a reduced oil price. I guess the point of query still relates to whether oil prices have held back GDP growth in the last decade and a bit when oil prices did shoot up a lot or are preventing it from recovering. Personally, I'm not seeing much evidence of it. Nonetheless, that one phrase of yours prompted me to have a look.

 

[Smurf1976]

Energy/oil independance does not appear to have flowed through to the bowser in lower prices so essentially means zip to the consumer? Bearing in mind that that very independance is predicated on a continued oil price above something like $90 (I recall) because it's so expensive to extract?

I very much doubt that the US will become self sufficient in oil anytime soon. If they do, it will almost certainly be due to a combination of technology moving away from internal combustion engines combined with a substantial collapse of underlying transportation demand as such.

https://images.angelpub.com/2014/24/24895/eia-tight-oil-6-10.png

 

[DeepState]

It's actually very relevant -

"The step after that is to normalize the Fed funds rate."

It's already "normalized" - they simply cant revert to any "normal" rate without the whole lot "recessionizing" again, more so companies with record debt.

There has been a structural degradation in the fed rate for several decades now in order to continually juice & goose the economy - this is the new norm?

You will also notice that nearly every time the Fed finally acted on rates it was too late and a recession ensued?

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Good stuff. More FYI:

No argument that pulling back from this level of stimulus is going to be hard and must proceed carefully. First tick up in Fed Funds rate is expected in late 2015. That's just a tickle. The longer term equilibrium rate is expected to be 4%. No-one is saying that rates need to get there in any hurry. That said, with inflation moving closer to the 2% target and unemployment getting down to the NAIRU of about 5.5%, the current picture points directly to returning monetary policy to a more conventional stance.

Cash on corporate balance sheets are also extraordinarily high and now being channeled out via buy backs, dividend reinvestment etc. At the same time, there are other firms with a lot of debt. They will have some years to get themselves in order.

On the Fed rate, it should be acknowledged that the structural down trend has a reason. From the mid 1970s, inflation expectations went bananas due to developments in the Middle East and the Fed policy at the time was not inflation targeting. It took Volcker to start sorting that out in 1980 and it takes years/decade for credibility in that policy to take hold given the history. In the mid 1980s and late 1980s, there was an inflation scare (as if to illustrate the importance of maintaining credibility) and the Plaza Accord. Since then, monetary policy has looked pretty normal until the GFC....which is thoroughly abnormal and absolutely meant to juice and goose the economy.

Monetary policy is a lagging indicator. But they do not possess much forecasting power either.

 

[DeepState]

Am I the only one who has spotted that the real oil price is basically a wedge?

My explanation - maximum price the economy can support without falling in a heap isn't rising to the extent that production costs are rising. The two lines are about to cross - then what?

The cost of production won't likely drop, indeed it seems that the shale "boom" is already petering out to some extent because prices haven't risen quickly enough to sustain it. So either we get higher prices that are sustained, someone decides to take a financial hit and accepts minimal returns from oil field development, or we get less production of oil. Suffice to say that should this latter scenario occur, well then it's likely to be the single biggest "tipping point" that you or I will live through since it would signal what many have long predicted - an all time peak and decline in production is upon us.

My thought is that we're probably not at the point of a peak in production yet, but that we are likely at the point of a peak in consumption in "developed" countries.

*The developed countries, in general, use oil far less efficiently at the margin than do developing countries.

*Real incomes in developed countries are, in general, not going up to any great extent whereas they are rising rapidly in some large, lesser developed regions.

In short, China and others will be able to outbid American motorists and other large volume / low value consumers for an increasing share of the available oil. If you have a growing economy and a small, efficient engine and are using that oil to produce an income then that's one thing. Completely different if your real income is declining and you've got a V8 that you drive for pleasure. The latter will decline in order to make way for more of the former.

Price rises modestly in nominal terms, production remains roughly flat at best, China imports more oil, countries like the US cut consumption effectively making way for the likes of China. That's pretty much where we've been recently, the only thing that's changing is that the slightly rising price and slightly rising production seems likely to give way to a faster increase in the price and flatter production, thus accelerating the trend of declining consumption in some countries.

Hi Smurf

Awesome post. Wanted to add my own thoughts, largely in support of your position.

This is the IEA forecast for oil demand. It shows Americas flat and Asia rising. Broadly in-line with your view:




US crude oil production from the US EIA. US oil production peaks before too many years pass:




US oil consumption from light vehicles declines and energy mix increasingly turns to gas for power load. The oil consumption for light vehicles needs care:




Emissions standards in the US are tightening right up. So it is probably not correct to imagine that there will necessarily be less cars and less mile travelled just by looking at oil consumption dropping:




You can expect to see electric cars and hybrids becoming more prevalent too as the abundant gas resources in the US get channeled into electricity and then cars that use it.

 

[DeepState]

After rising for decades, total vehicle use in the U.S. ”” the collective miles people drive ”” peaked in August 2007. It then dropped sharply during the GFC and has largely plateaued since, even though the economy is recovering and the population growing. The Federal Highway Administration reported vehicle miles travelled during the first half of 2013 were down slightly, continuing the trend.

Miles travelled links very closely to employment. You got a job, you need to get to it. The plateau was actually a surprisingly robust outcome given declines in employment that occurred. Even the unemployed still need to drive. As employment, which now is past it's pre GFC peak, picks up further, we can expect the miles travelled to resume its upward path.

 

[Smurf1976]

A thread titled "The Next Bear Phase" has turned into a thread about oil resources.

I see that as rather telling in itself about the oil situation. Opinions vary as to future production rates but I doubt that anyone here is expecting a return of actually cheap oil anytime soon. Regardless of the timing of an actual peak, a shift has already occurred.

As for hybrid cars etc, yes they are a workaround of sorts to a constrained oil supply. But they're not as cheap as oil at $20 per barrel like we used to have (and still would if not for the geological reality).

 

[brty]

I think it is no coincidence that oil's price is high when numbers like this come out....

U.S. May car sales jump to 1.6 million, beating expectations

from here....

http://www.reuters.com/article/2014/06/03/us-autos-sales-usa-idUSKBN0EE18L20140603

It also puts the electric and hybrid car numbers in the graph above into perspective. In the last 3 years only 200k units, yet all LV at a rate of 16.8m/a.

 

[Uncle Festivus]

Fed note to all holiday work experience students at market trading desks as follows -

Do not let Dow go below blue line. Please use provided funds as necessary. Thank you - The Fed/PPT/Presidents Working Party.

 

[Uncle Festivus]

Slow golf clap for The Fed/PPT/Presidents Working Party - well done for the woody! Still didn't get you elected though.

But then......

What could go wrong? Let’s begin by analyzing last week’s hollow Halloween rally:

1. On Friday, Oct. 31, five stocks were primarily responsible for Dow’s advance. The previous day, Visa V, +2.58% had accounted for around 123 points of the 221-point rally. Take away Visa and the rally was a lot less impressive.

2. Friday’s surge was prompted by the Bank of Japan, which promised more stimuli (I’m guessing they are on QE 35, but who’s counting?) Since March 2000, the Nikkei 225 has tumbled from 20,000 to 16,000, so maybe more stimuli from the BOJ is needed (just kidding).

3. On Friday, there were no plus-1000 ticks on the NYSE Tick, which tells you that the rally was another head-fake without institutional involvement. Typically, you will see at least four or five plus-1000 ticks on bullish days.

4. In addition, volume was low, especially for the last day of the month.

5. Moreover, the S&P 500 SPX, +0.46% that day did not rise above its overnight high, which is generally a sign of domestic weakness. During the day, it did not take out the previous all-time high. If this were a true bull market, breadth, volume, and institutional presence would have been a lot stronger.

6. Only five out of 20 stocks led the transports. If this were a broad-based rally, more of the transports would have participated.

http://www.marketwatch.com/story/th...-is-for-suckers-2014-11-05?link=mw_home_kiosk

 

[Uncle Festivus]

Another record for margin debt, another 1000 points for the Dow.....

It’s not just margin debt that hit a record high. Investor net worth, which is the inverse, or investor cash and credit balances less total margin debt, just dropped to ($227 ) billion, a new record low, meaning not only is the amount of investors leverage at an all time high, but investor net worth is also at an all time low.

Why? Because there is one more thing that is at record highs. As we showed a few days ago, complacency has also never been higher now that market participants enter what Deutsche Bank dubbed the Mania phase of the market cycle.

 

[Uncle Festivus]

Looks like the market got it's way after the hissy fit 'correction' - way to bully your local central bank, deliberately tank the market?

But then again, there was never to be any rate hike, probably not in the near future either - the system is broken and only a fully fledged recession will fix it?

Now the idiot's are ramping again in a self fulfilling surge higher, despite the deteriorating fundamentals.

I think a lot of the smaller sheeples were taken out with the flash crash and rehearsal 'correction' in August, leaving only the hedge and bigger manipulators, sorry, dealers to make this market.

Humans never learn. It's gonna be ugly......

 

[Wysiwyg]

Looks like the market got it's way after the hissy fit 'correction' - way to bully your local central bank, deliberately tank the market?

The wind has certainly changed for the time being. It seems to me illogical to sell out of the share market so desperately on a possible small interest rate rise. Other data is forming that is yet to manifest to us not privy.