We believe this is one of those times.
By Bill Bonner, Chairman, Bonner & Partners:
“Another bad day for oil,” says Investor’s Business Daily. U.S. crude oil fell below $37 a barrel. The Dow fell 116 points. Neither of these events is significant. We report them merely to warm up. It is the last day of 2015; we look for a good way to “wrap up” the fast-departing year.
Myth or Reality?
“What if we’re wrong?” we’ve been asking. As we proved yesterday, we err as much as anyone. But we spend more time than most trying to understand the “big picture.” And we hope to be slightly more right than wrong at least about that.
But even this could be a trap. What if there is no “big picture”? What if it is just something we imagine… a vision created in our own brain… a myth, not a reality?
Some of the world’s most successful investors maintain that trying to see the big picture is a waste of time. Peter Lynch, for instance. Lynch ran Fidelity’s Magellan Fund for 13 years and made returns of 2,639% over that time. He liked to say that if you spent 13 minutes a year on economics, you wasted 10 minutes.
“We can never know what is going on” goes the argument. So, we’re better off investing our energy into researching individual stocks.
But pity the poor Japanese investor in 1989, his head down, adding the numbers carefully: “Don’t bother me with this big picture stuff,” he says to his customers. “I’m doing stock analysis.” Here we are, 26 years later, and he’s still analyzing… and waiting to get even.
Or imagine the Jewish shoemaker in Hamburg in 1935. “A cobbler sticks to his last,” he might have said, hunching over a pair of riding boots.
Or imagine the white farmer in Rhodesia after it became Zimbabwe. “We’re not going anywhere,” he might have said to his family.
There are times when it pays to raise your head and look around. Right or wrong, we believe this is one of those times. And when we open our eyes, we see some weird, wonderful, and worrying things.
Take the oil industry, for example. There are two main ways to compete in the business world – on price or quality. If you are in the oil business, you have limited choice. You compete on price, because the quality – after refining – is much the same.
The world’s low-cost producer of oil is Saudi Arabia. It aims to sell as much oil as possible, largely because it has little else going for it. Nobody buys a Saudi perfume. Nobody drives a Saudi automobile. Nobody goes to Riyadh for world-class financial services.
The Saudi product is oil. Its strategic goal is to protect its market share. It does so by occasionally flooding the world with cheap crude to squeeze its competitors’ profit margins. According to the news reports, that is what it has tried to do recently – aiming to keep U.S.-fracked oil off the global market.
The problem, from a big picture perspective, is that the world’s low-cost energy producer ran into the world’s low-cost money producer.
Ah… there, we have the makings of trouble.
The Fed’s cheap money regime financed the U.S. oil industry. With low-cost, readily available funding, frackers were able to greatly increase U.S. output. Now, they pose a substantial challenge to the Saudis.
But wait… now coming into focus is an even bigger picture. For half a century, cheap oil – abundantly and conveniently under the dry ground – has made the Saudi elite rich. They sold it all over the world, using the proceeds to build their wealth overseas and reinforce their power at home. They paid off political leaders, raised armies to protect themselves from foreigners, and hired police to torture their opponents at home.
Cheap credit – gushing up like an overflowing septic system – has done much the same thing for America’s money elite, too.
The U.S. has the world’s reserve currency; it is the world’s low-cost producer. But the product is not something stamped out in the mills of the Monongahela or honed in the machine shops of Chicago.
The middle class gets no part of this business. Instead, America’s credit pumpers are an elite bunch. They, too, sell their wares all over the globe, using their gains much like the Saudis – to buy politicians, control the flow of wealth and maintain their own power.
Who are the biggest lobbyists in Washington? The banks, of course. And what is their strategic goal? To protect their market share. More to come… in 2016. By Bill Bonner, Chairman, Bonner & Partners
What might be some of the moves in energy that would push markets and policy debates in unexpected directions? Read… 5 Possible Market-Moving Surprises In Energy For 2016