New York, New York
- Tommy Wilkerson
Again, we quote our old friend.
Mr. Market has been puttin' the hurtin' on gold bulls. Yesterday however, he went after the gold shorts. Gold rose $42...proportionally equal to a move of more than 600 points on the Dow.
But today our sympathies go to the roughnecks, truck drivers and barmaids of Beeville, Texas and Watford, North Dakota. They were in high cotton a few months ago. Now...the hurtin' is on 'em.
Oil rose $2 yesterday, to $69 - but it's still a loss of nearly a third from its most recent high. Outside of the shale oil fields, this big drop is widely seen as good news. Consumers fill their tanks and have a few bucks left over -- money that can be used to buy things. According to the current and conventional delusions of the economic profession, this leads to jobs, growth, price inflation, and a cure for erectile dysfunction.
But, dear reader, was there ever, in the history of the world, a hurtin' that stayed put? That's the trouble with it; it moves around. In today's Diary...we look more closely at the subject of hurtin' generally...and the effect of lower oil prices, specifically. In passing we observe that the secret to investing success is buy what is hurtin' when it is hurtin' most...and to sell what ain't.
It came out over the weekend that OPEC is deliberating adding to the suffering of US oil producers. The oil price is being held down by the cartel in order to weaken its North American competitors. Fracking costs more than pumping straight. Middle Eastern oil comes as readily up from the sand as water from a hand-dug well. That's why the Saudis are the world's low cost producers. And the more they pump, the lower prices go, and the harder it is to make a good living in South Texas. Mideast oil is still profitable, even with oil as low as $67 a barrel. American producers, on the other hand, are in danger of going broke.
Still, you may say, low priced energy is going to revive the US consumer economy, no matter who pumps it. Besides, the profits tend to go to the same place no matter where they are earned. Arabs, Asians, Americans, Europeans - they all take their dollars and do about the same thing; they buy more US stocks and bonds.
Either way, the profits end up in the US capital markets. But at lower oil prices, there are fewer profits. The difference is available for consumers to spend elsewhere. This increases 'demand,' with all of its alleged magical properties.
Of course, some of what US consumers want to buy is made outside the US. Over time, a lot of the money leaks abroad...where it too is used to buy US capital assets.
But wait. Low oil prices also squeeze out capital investment in the energy sector. Who wants to drill a new well with the price falling? Who wants to put in solar panels? Who wants to buy a new Prius or Tesla?
And then, after the small, marginal wild-cat producers are out of business...and after alternative energy producers have fallen asleep...after the bulls are broke and the shorts are counting their money...won't the trap be set for an upside explosion?
Fixing oil prices has the same sort of unintended, but fully predictable, consequences as fixing interest rates. Consumers catch a break, temporarily. But capital investment goes down. And output declines.
Rather than let the invisible hand guide the economy towards an outcome that is better for everyone, the heavy hand of the feds whacks it hard...
Gold is hurtin'. Oil is hurtin'. Russia in hurtin'. Greece is hurtin'. Our back is hurtin' from lifting those poles.
Eventually, the pain will go away. But the hurtin' might also get worse before the hurtin' moves on.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.