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
Video updates
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.
13 Comments
Good analysis. Demand is not going to suddenly drop. I think a lot of people would like to reduce their carbon footprint (myself included). However, there are little in the way of incentives. I have an natural gas furnace and water heater. I’m not spending $’000 to reduce my footprint with no incentive to move to the expensive alternatives (e.g. heat pumps, etc.). My neighbourhood prohibits the use of solar or wind power on my property so that’s not an option. I can buy an EV but that’s another cost without an incentive when I don’t need to replace my existing ICE vehicle. Where is the investment in upgrading the electricity grid to accommodate more use of electricity? Gov’ts are contributing to this inflation by forcing up fossil fuel prices before there are good alternatives or infrastructure in place.
Its really a matter of time. My rather harsh criticism is directed at “leaders” who are politically motivated to appear as doing the right thing – rather than creating a plan that could realistically carry us towards a cleaner environment. As a long time athlete – I can tell you that if I have a goal of winning a bike race, and I am not in shape for a race today – its probably best not to sign up for a race next month. Sure, I could try and unrealistically train 12 hours a day while dieting on 500 calories a day to lose the 20 lbs of bodyfat I gained in my leisure until I finally collapse with little progress to show for it. Perhaps – instead- it would be better to target a race a year from now and structure a program that will gradually prepare me by the goal.
Trudeau and Biden are not known as intellectuals. They are salesmen. Actors – real feel-good fellows. They need to appease idealistic voters to keep their jobs. Voters who have no concept of how big and long a project it is going to be to bring emissions down to anywhere near their targets. What you are witnessing is the result of (to continue my analogy) that athlete who just collapsed and injured himself because he was too dumb to follow sensible, attainable steps towards the goal. Not sure if this is a good analogy–but its all I could think of.
Agreed and I like the analogy. We get platitudes of aggressive goals and lots of politically correct words but no concrete plans or actions that people can use.
Many O&G stocks are overbought and this is getting to be a crowded play. I’m thinking about taking some profits in this sector as my holdings definitely look overbought. Hopefully I can get back in at lower prices. I could be wrong but it wouldn’t be the first time. Taking profits never seems like a bad thing to do. I got into the sector late so my profits are only 50+%.
As a FYI to Brian and others….There are multiple grants available to upgrade to a heat pump. Here in BC we have a total of $9000 available which includes $5000 from Federal sources. In the interests of reducing my personal carbon footprint I am proceeding with such a move. I never thought I would need AC here in Vancouver, but after our recent ‘heat dome’ event I was convinced. Fortunately we have one of the lowest electricity rates in North America plus it is totally renewable ( hydro ).
Thanks for the info on heat pumps. I’ll check again on grants & incentives here in ON. I hadn’t seen anything recently but Ontario hasn’t been great on incentives for years now.
Hi Keith,
Your arguments are persuasive, but oil producers (eg. XEG) look very oversold after a somewhat parabolic move. How does one follow your advice and create a position at this time?
I think you mean overbought (not oversold) Paul–but I get what you mean. Absolutely correct in your assessment re the sector is overbought – XEG might have another 0.50-1.00 left before it hits some real resistance. And that might cause pullback. My view is that because the underlying commodity (crude) has broken out, (although it too is overbought to a certain extent)- you should eventually get follow through by the producers – and breakouts. Also- you can consider stocks that are not so overbought within that sector.
I notice today that the Russell 2000 has broken major support. Could this be predicting a drop in the S&P next?
Hard to believe we have leaders this stupid
IWM broke by its first day–as did SPX break 4600 yesterday. Now we count a few more days (minimum 3) – as I noted in my blog a week or so ago–4600 must hold – and watch it for a few days before determining that last pullback is worth buying. We followed our own rules and didn’t buy –glad we didn’t, expect that if rally back above 4600 is not seen in next few days SPX is looking at testing its 200 day which sits near 4450–hence my call for about 4400 in that blog if 4600 can’t hold. Same goes for the small caps-although they are likely to outperform on a relative basis simply because they are not holding the overpriced big names that make up 30% of the SPX (tech, growth).
And yes–this is why I put “leaders” in parenthesis. Trudeau and Biden are salesmen. Actors and portrayers. Neither of them are known as intellectual giants. Quite the opposite. Lets go Brandon, is the call in the USA–all confidence has been lost in his leadership. At least the Americans can see their fool for what he is. Canadians too, although our voting system allows a guy with only 30% confidence to take control. Joe and Justin (especially Justin) are clueless re economic principles (check his quote re debt I put at top of blog–unbelievable). Watch Trudeau or his “finance minister” (who is also a liberal arts graduate with no background in finance–unbelievable!) in parliament – watch either of them when they are asked anything to do with hard facts and numbers. They change the subject. Math and economic principles are not their strengths. But that doesn’t matter. Its the sizzle, without the steak.
They are there to provide meaningless banter to win the votes of equally ill-informed ESG ideologists who have no clue – like Joe and Justin- of how to accomplish the lofty goals. But they don’t need to know how to do it. Their job is to sell the fantasy that they can accomplish the impossible of meeting their goals with no actual insight of the logistics behind the time needed to making such a change.
Unfortunately, the average Canadian wants sizzle and feel good aspirational policies that drive negative outcomes but that is fine as long as it does not effect them directly. As a person that once voted for Paul Martin, I always ask my Trudeau friends what does our current PM need to do for you to NOT support him? I always get a blank stare.
Yes it is amazing how the current PM has gotten away with never directly answering questions in parliament (watch any questioning period with Pierre Poilievre). In fact, it is amazingly distressing to witness how little he actually understands about economics when you watch those questioning periods. And its amazing how he has been re-elected despite 2 ethics convictions and numerous “near convictions” (only PM in history to have been so charged!), how he breaks promises (too numerous to list!), acts a fool (Indian costumes etc), has demonstrated racial prejudice (at least 2 x he unapologetically wore blackface- who does this? This is not the 1890’s- inexcusable!). He has even assaulted women while labeling himself a “feminist” (the groping of journalist Rose Knight AND the elbowing of MP Ruth Ellen Brosseau in parliament). He spends taxpayer money on himself (https://www.valuetrend.ca/the-canadian-revolution/ ) in a way that no Canadian PM has ever done…. He truly has the ability to do what he wants, when he wants – all with little opposition. I too know some Liberals’, and they choose to ignore all of these facts – they vote Liberal just because they always have. They pay no attention to the fact that this government is not traditional Liberal – which used to be center-driven. This guy is no centralist Liberal- he is as close to a Putin style leadership (who is immensely popular in his country and claims he leads a democracy) as I have ever seen. As a believer in freedom from tyranny, I find this distressing.
As a lifetime Liberal, I hate to say this, but the facts are clear as you’ve detailed Keith. It is a shame that people voted once again for the “party they believe in” vs. the right leader for the job. Our current PM is a poor representation of our country and what’s most unfortunate, is that he is failing to uphold what our country stands for and its values. For the first time that I can remember, Canada is being seen as a country people DON’T want to come to due to our PM’s antics. Perhaps Cdns realize they’ve made a mistake in re-electing him given the following: https://chng.it/2fMbcFMdph. I am worried for our country’s future and am hoping we will come together and elect a leader who cares about our country has much as his own personal interests.
Yes its interesting – you are not the only Liberal I have spoken to who has been dismayed by this un-Liberal Liberal. Liberal used to mean inclusive, open to ideas, aka liberal minded. Now it means “do as I say” totalitarianism (just ask Jody Raybould), it means divisionary segregation, polarization and tribalism and intolerance. Remember the days when you would see a politician open to discussing different views? The good old days!
FYI I voted for Chretien in the day. He was an intelligent mane who lead a fiscally conservative, logical Liberal platform with Paul Martin at his side. Those days are gone, sadly. Now we have a feeble minded god-king who has no concept of what he is actually doing.