Hall of Fame Ignorance & Stupidity Awards
“Subprime is contained” – Ben Bernanke, February 2007
“I will hurt the shorts, and that is my goal.” – Dick Fuld, April 2008
“Inflation is transitory” – Jay Powell, June 2021
“We decided (the government will) take on that debt to prevent Canadians from having to do it.” Justin Trudeau 2021
The recent addition to the Hall of Fame Ignorance & Stupidity category would have to be the politically motivated capping of energy production. While bad for consumers, this has been, and will likely continue to be a boon to investors. Allow me to explain:
Hats off to Justin Trudeau and Joe Biden for determining that they would cap oil production in the name of pie-in-the-sky ESG (Environment, Social, Governance) ideology with incredibly inept timing. As the world struggles with a soaring energy crises, Canada is prepared to limit the growth of our energy sector – one of the country’s largest industries “to help the world hold the global average temperature increase” says our slow witted Prime Minister Justin Trudeau. Meanwhile, Forgetful-Joe Biden was lobbying OPEC members and other countries around the world to urgently turn on the taps and pump out much more crude. Less than 24 hours later, Biden was on stage at the conference in Glasgow, imploring the world to meet ambitious emissions reduction targets. Um, OK.
You can’t fix stupid. But you can profit by it.
Today’s blog covers WHY the incredible short sightedness of NA “leaders”, amongst other important factors, incentivizes us to hold oil as a significant component of the ValueTrend Platforms – as it has been since 2020 when it traded 50% below current prices. Yeah, that’s a double, for mathematically challenged liberal arts students like Trudeau. I believe we have at least another 20% more to go on oil prices. Perhaps more. Here’s why:
Potential black swan upside
A black swan event that may impact crude oil prices to the upside just appeared in the sky over the weekend. A massive volcanic eruption and tsunami hit Tonga and the Pacific. The Tonga volcanic eruption has launched an enormous amount of ash into the atmosphere. Historically, such eruptions have an impact on the climate that can increase energy consumption. – Mount Pinatubo (1991) and St. Helens (1980) point to an impact on global temperatures for up to two years. I’ve circled those periods on the historic oil chart below (courtesy macrotrends.net). In the days and weeks to come – we must keep an eye on possible implications of this latest eruption. After a near $2T – partially ESG driven decrease in oil & gas exploration, new development levels are at multi-decade lows. We’re already dealing with supply chain issues. Any significant impacts on the demand side – from a a weather event like this Vulcanic eruption – could trigger a super-spike in oil as speculators rush into the trade. This happened in 2008. The price of crude reached $US145 in July 2008. Some have argued that sharp rise in oil prices in 2007-2008 contributed to the Great Recession and stock market crash. Food for thought….
Oil is a good investment during rising inflation
“The Street expects inflation to fall globally in 2022. Keep in mind, the year-over-year comparable inflation numbers will be higher next year (relative to the 2020 comparisons we have had the past 12 months). However, even with this base effects impact, a plunge in inflation across almost every country is unlikely. In our view, this speaks to the Street under-estimating the probability that inflation remains sticky. Also, the fact that inflation is a global phenomenon should tame the dollar (keep it weak) as many other central banks will be forced to be even more hawkish than the Fed.” – Larry McDonald, BearTraps
Below is the Trading Economics 2021 inflation chart with 2022 forecast. Note they suggest continued 7% CPI for first part of 2022.
Bottomline: As inflation picks up, it starts to ooze around more and more parts of the economy and is very tough to control. Right now, commodities and value stocks are telling us that a few rate hikes are not going to solve the inflation problem.
A nice chart
The WTIC chart below shows a clear uptrend, and a blow through overhead resistance. So, the technical check out.
The argument against oil
OK, so you know that I am a fan of oil. In essence –
- Justin and Joe have limited supply at the very time of a supply chain rut and an increase in demand. Perfectly creating the demand they wish to reverse.
- Meanwhile, we have increasing usage through commercial and consumer demand.
- Then there’s the possibility of Vulcanic action adding to the upside pressure on prices.
- And finally, the desire by the now-aware street to hedge inflation. WHADDA YA MEAN ITS NO LONGER TRANSITORY?
But -there is always risk. Let me examine where I see such risk for ValueTrend’s bullish oil outlook:
If you are a regular reader of this blog – you know this: I have been harping on holding some oil since the fall of 2020 when oil was $40. Everyone hated oil back then. Now its a love fest. My how things change. So – is the game over for oil now that even the least informed retail investors and their equally short sighted retail Investment Advisors are on the trade? The contrarian in me does keep an eye on this stuff. Sentiment does appear to be getting overly optimistic.
Below is the Sentimentrader.com Crude Oil “optix” (which is a combined study of many sentiment indicators surrounding a sector or commodity). Note that when the blue optix line stays overly bullish (top horizontal line) for a long period, it eventually signals a decline. Note the low optix level during summer of 2020 when I was pounding the table on oil ($40).
So – the high optix level does suggest oil is becoming overbought, now that retail investors and their less informed Advisors are onboard at $80. Should we be selling into that enthusiasm?
I don’t think so – just yet. First, the optix can remain overbought for many months at a time. Next, the trend is up (see the WTIC chart I posted above). Trend trumps all. A sentiment indicator gives a heads-up. It doesn’t provide immediate timing signals. Finally – there are fundamental factors – such as inflation, supply/demand and other factors discussed above, that can drive commodities (including crude oil) higher for an extended period. Much like the 1970’s.
According to BearTraps: “ESG pressures have pulled $1T+ of investments out of oil / gas without a mathematically sustainable replacement – new discoveries are at the lowest level since 1946.”
In other words, the environmentally WOKE remain asleep. Justin and Joe are doing the exactly wrong thing at exactly the wrong time. The beauty is, this is the RIGHT thing for us, as energy investors!!
Stanley Druckenmiller’s Recent Take on Inflation
“Historically once inflation reaches this level it becomes embedded in wages and corporate behavior such that it only falls in a recession. This occurs after the Fed tightens financial conditions materially. The Fed’s belief that inflation will come back down to target from 6.8% in the next couple of years while unemployment goes to 3.5% as Fed Funds are raised to 1.5% has no historical precedent. Indeed, the great inflation that occurred in the late 70s was subsequent to (then-chairman of the Federal Reserve) Arthur Burns having a 5% Fed Funds rate in 1975 accompanied by a 6.7% inflation rate. So I am skeptical that inflation will behave as the Fed expects with the policy they are suggesting the next couple of years.” – Stan Druckenmiller
In the past 2 weeks I have posted a video on the Canadian dollar and on the current rotation occurring in North American markets. You can visit these videos here.