At Times, it Pays to Raise Your Head and Look Around

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.

Credit Pumpers

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



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  24 comments for “At Times, it Pays to Raise Your Head and Look Around

  1. walter map says:

    The great hope of the US economic recovery has been a flop

    “For the most part, American businesses figured out how to make do with the equipment they had, and they incredibly managed to squeeze out higher profit margins even as their equipment continued to get older.”

    http://www.businessinsider.com/capex-stagnant-2015-12?

    Even with cheap money, U.S. industry hasn’t invested in plants and equipment.

    It’s one of many clear signs that the U.S. economy is getting liquidated. The whole point of having a cash cow is to simply extract profit from it before it is obsoleted. One doesn’t invest in operations one intends to discontinue.

    Contrary to popular business opinion, Wall St. is not the U.S. economy. It’s the parasite on the U.S. economy.

    • Jerry Bear says:

      They were able to squeeze out more profits through massive exploitation of their workers. It is much safer to make your employees work harder for less pay and fewer benefits than to shortchange your machinery too much. The statement that they may be planning to “liquidate” the American industrial base I find rather alarming. This would mean “liquidating” the American middle class and working class. I can’t see that leading to anything but disaster, especially in a population as feisty and well armed as ours is. The elite seem to be as contemptuous of the American people as the nobles of pre-revolutionary France were contemptuous of the common people. Let us hope our “nobles” are not as equally blind to the lessons of history as their predecessors were.

      • night-train says:

        “Let us hope our “nobles” are not as equally blind to the lessons of history as their predecessors were.” Or not. Let’s start 2016 with a “Guillotine Extravaganza”. Netflix could stream it and we rabble could watch from our banker-owned cottages. The middle class has been so badly abused by the elites, I am beginning to think more than their money should be taken. Besides being a country of many guns, we are also a nation of many power tools. So lets get building America. Guillotines!

        Happy New Year!

        • Toddy says:

          It’s also a nation of vastly über educated people with almost no ability to understand what is going in. Unlike France of the revolution age, I highly doubt you’ll ever get one in the USA.

          Unless you pull a Yeltsin, and take people’s TV away. Then maybe, you can do it.

        • Toddy says:

          Oops. I means UNDER educated. Not über.

  2. JJ says:

    Conversely, the U.S. has made its own moves against the Saudis(+world) by dumping cheap credit (Dollars) upon the world….of course the world is angry.

    It’s a Tit-for-Tat…..until the current account deficit of Saudi make their debt skyrocket. What is their break even for government spending, $60-85/barrel? How lon will the Saudis keep their USD peg….?

    I honestly feel that a $1/gallon tax tax would assis in U.S. self reliance…and give some stability. Remember the Patriot Tax of 2002? Want to assist in global warming? Want to prevent deflation?

    • Ensign Nemo says:

      Pennsylvania already has a combined gasoline tax of 73.7 cents per gallon: 18.4 cpg federal taxes pus 55.3 cpg state taxes.

      The last gas station I drove past was selling 87 octane at 2.129 cents per gallon, so taxes are already more than a third of the price of a tank of gas.

      I see no evidence that this makes us more stable or self-reliant than Ohio or New Jersey or Maryland, and I’m pretty sure that the warm weather lately was caused by El Nino rather than Harrisburg. Deflation is pretty tame because most of our young people leave for less sclerotic states where jobs are less scarce. Pittsburgh (Allegheny County) has the second oldest population in the USA. No people, no jobs, no money, low rents because demand is flat or even declining.

      http://www.forbes.com/sites/joelkotkin/2014/10/30/aging-america-the-u-s-cities-going-gray-the-fastest/

  3. Yoshua says:

    Saudi Arabia is today surrounded by a sectarian war between Shia and Sunni Muslims. The war in Iraq, Syria and Yemen has the potential to spread into Saudi Arabia and rise the Shia population (who happens to live in the oil rich region) against the House of Saud.

    The U.S is providing arms and protection to the House of Saud. I just can’t see that Saudi Arabia would start a war against the U.S fracking industry and Wall street under these conditions.

    • Jerry Bear says:

      I was in that area. The Saudis oppress the hell out of the local Farsi speaking Shia population. The Shias I met were quite reasonable. But the religious bigotry of the Saudi Wahabi religious establishment knows no bounds. They are the primary reason why the Middle East is in such chaos and violence.

  4. Nicko says:

    Saudi still has over $640 billion in reserves to draw on, time to panic, but not an unmanageable disaster.

  5. Paulo says:

    Got your pitchfork sharpened, yet? Only the EBT cards are keeping the wheels on the social bus.

  6. Jonas R. says:

    When looking at any analysis about the oil industry, I’m always stunned to see the writer review the field through narrow lenses of pure politics or economics. I say it is wise to look at the field of science and technological breakthroughs as well. For example, Fracking was one such break through that changed the market. Those in the know had a valuable head start on the whole market.

    Another advance might be the adoption of electric vehicles. For that, better batteries are needed. How many people know that our current thin film lithium batteries are 20x below theoretical power levels? Or that research into new technologies has exponentially increased since about the first iPhone? The literature is finally reporting credible, cheap breakthroughs that could enter production in 2016. We may have become cynical after a decade of over hyped promises, but new technology had finally arrived. Look into organic cathode cells, 24M, Sodium magnesium or aluminum ion tech to see what I mean.

    As the cost function for electric vehicles with even just 2X cheaper batteries already outcompete gasoline cars, oil price need never rise again. All it would take is public realization that the era of exploding mists of stinky Fossil ooze in complicated metal cylinders is over.

    Just like the old gas lighting industry, we appear to have been conditioned by decades of hype to ignore advances. Alternating current took the world by storm; there ALREADY exists now similar battery tech that promises to do the same.

    • night-train says:

      Jonas, I agree with much of your comment. One point that I would like to take issue with is that hydraulic fracturing is a recent technological advance. It has been around for quite some time. The difference maker for the oil industry was high oil prices coinciding with truckloads of really cheap money. That money and a whole lot of hype allowed the O&G industry to drill massive numbers of wells of the never-to-pay-out type, and return to the money sources time and again for more. Mal-investment, I believe is the term.

      • harvey merriam says:

        The technology that made hydraulic fracturing suddenly revolutionary was directional drilling. Oil-bearing structures tend to be thin and flat. Directional drilling goes down to the level of the structure and then turns to drill along it, where in the past it would have taken a whole row of vertical holes to exploit the same structure.

        • night-train says:

          Harvey, oil traps are a concept from conventional petroleum reservoirs and they may be large complex geologic structures, small simple structures, like a simple fault trap, or many types in between. And directional drilling has contributed significantly in more efficient exploitation of these resources. It too, is long available technology. Started my career in the mid 70s and it had been around a long time then.

          I believe you are thinking of horizontal drilling which was perfected in the late 80’s. Oil shale is, geologically, fine grained, petroliferous, thin bedded sedimentary rock, which in conventional petroleum systems is the source rock for a reservoir rock. That reservoir rock being a more porous and permeable rock in which the P&P result from intergranular, interconnected pore spaces and/or fractures. In a shale oil “reservoir”, traditional trapping mechanisms are unnecessary, as the oil was formed in place with little, if any migration. Horizontal drilling is effective in recovering the resource, although expensive. And in “sweet spots” vertical wells are sometimes effective and more economical as well.

    • harvey merriam says:

      Electric vehicles still need power to charge their batteries.

      • josap says:

        Solar panels on the garage roof could do the job. There would still be times you need to plug into the grid, but in many places solar panels would do 80% of the recharging.

    • lastmanstanding says:

      It always amazes me how all tech junkies just continue to think that more tech, advanced “tech” will save the day and the future. Your dreaming, wake up.

      Bottom line brother, how in the hell do you get more tech… MORE FREAKIN ENERGY EXPENDED. Oil, natural gas, coal, hydro…Coal…that is usually one that you electric car folks ignore completely. You know, the wonderful free hook up to coal generated electricity at your “green” place of work. (paid for by taxpayers)

      Batteries for Christ sakes…batteries are one of the worst things on the earth to get rid of.

      Talk about a narrow view.

    • Jerry Bear says:

      Nothing is technologically harder than creating an improved battery. But you are right, they are working on it. Lithium is a good choice because it is the lightest metal and has very small atoms, so of metal has a lot of electrons. An even more promising technology is super capacitors, which are approaching the storage capacity of good batteries. They are light, strong and can be recharged very rapidly, far faster than batteries. Interesting……..

      • d says:

        Lithium batteries are a problem as country’s like iran try to buy or collect volumes of them and extract the lithium to use in their illegal clandestine Nuclear weapons program.

        On of the issues around MH 370, is that it was allegedly carry a very and unusually large (Many tons) cargo of Lithium iron batteries.

        I and various other people want MH 370 found as we want to know where all those tons of lithium actually are.

  7. James J Falls says:

    Very interesting web site and comments.

  8. d says:

    Everybody keeps saying, the Saudis, are targeting, American shale producers.

    That’s a loosing game for Saudi. Shale will simply turn the rigs on, and off, every time it becomes profitable to do so, = low oil price for a very long time

    There is an elephant in the room. IRAN.

    Saudi dint start this, until it became evident, that iran would soon be legally returning to the global oil markets.

    Is perhaps, US shale, convenient collateral damage, and a useful smokescreen, for the real Saudi objective?

  9. Cae says:

    Most opec nations are in debt and need revenue to pay it. Hence they sell more when the price falls. Because they have no other revenue source. Couple this with new tech and decreasing demand and you’ve got falling prices ….for a while.

    • Jonathan says:

      Well, if you can’t produce anything else than oil other than religious stupidity, you just have no choice left but to bite the bullet.

      Not to mention these one trick oil ponies almost always succumb to the temptation of easy oil money and spend well outside their means.

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