Nobody Knows Anything
PARIS – What do we know now? We consult the gods… and the dead. On Tuesday, the Dow eked out a 52-point gain, to the relief of investors [ed. note: that was wiped out and then some on Wednesday].
But crude oil continued its historic slide. As of yesterday’s close, a barrel of U.S. crude oil changed hands for just over $31 a barrel. That is a 71% drop from the $107 price tag at the peak of the oil market about 18 months ago.
Crude oil storage tanks… bursting at the seams.
Photo via proteuspetroleum.com
There is so much oil inventory that storage tanks are bursting at the seams. And oil shippers are collecting near-record daily rates, as their tankers are used for storage, as well as for transport.
If inventory holders become forced sellers, as some analysts predict, prices could hit $10 a barrel before this bear market is over. Then inventories will be drained, and today’s lack of investment in new output will send the price up again.
As Bonner & Partners researcher Nick Rokke notes, market prices do not revert to the mean – especially in the commodities sector. Instead, they go to the mean and keep on going. One extreme leads to another equal and opposite extreme…
In our view, the big drop in oil prices is one of the many unforeseen consequences of Fed policy. There are other factors at play, too. But by encouraging U.S. oil producers to borrow at ultra-low interest rates, the Fed exaggerated the usual boom-bust cycle of the commodity markets.#
Cheap credit made it possible to overinvest in production… which made it possible to overproduce… which caused prices to collapse. Others have a different explanation. They believe the low oil price illustrates the foolishness of the “Peak Oil” hypothesis.
They don’t believe in limits that naturally drive up prices. They believe $30 oil proves the Prometheus-like genius of mankind – which is always able to find new sources of energy… always able to overcome the limits (even the gods can’t stop us)… and always able to overcome the problems we make for ourselves. Who’s right?
As scriptwriter William Goldman famously said about predicting the winners and losers in Hollywood:
“Nobody knows anything. Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out, it’s a guess and, if you’re lucky, an educated one.”
Famous scriptwriter William Goldman: “Nobody knows anything”.
Nobody knows anything in the financial world either. At least, that is what the old-timers say. The young guys know what is going on. The old guys know they don’t.
Even economic wunderkind Larry Summers – a man who has all the answers all the time – says as much:
“The Economist reports that, looking across all major countries over the past several decades, there were 220 instances in which a year of positive growth was followed by one of contraction. Not once did International Monetary Fund forecasts anticipate the recession in the April of the growth year.”
Bloomberg columnist Barry Ritholtz recently reminded us of a well-known market forecaster who was spectacularly wrong: Joe Granville. Joe famously called the top of the stock market in 1981. His subscribers received the following alert by way of a phone call or answering machine message:
“This is a Granville Early Warning. Sell everything. Market top has been reached. Go short on stocks having sharpest advances since April.”
And his subscribers listened. The Dow plunged 6% on record volume following Granville’s call, wiping out hundreds of billions of dollars in investor wealth. But within a few years, most of those subscribers were kicking themselves…they probably wanted to kick Joe, too.
Joe Granville at the height of his fame in the early 1980s – his famous “sell everything” call of 1981 turned out to be a spectacular error – he missed the transition from secular bear to secular bull market.
Photo credit: United Press International
One year later, a secular bull market began in U.S. stocks. And investors who rode it out until the top 18 years later made cumulative gains of 1,412% (excluding dividends). Granville was one of the great, colorful showmen of the newsletter trade. After he died, in 2013, Forbes magazine’s Peter Brimelow remembered:
“In Tucson once, Granville began by walking across a swimming pool on a plank hidden just below the surface, then telling the assembled multitude, “And now you know!”…
In Minneapolis, when asked how he could keep close to the market while traveling so much, he dropped his tuxedo pants to reveal boxer shorts printed with stock quotations that he successively identified, finally pointed to his crotch with the delighted cry of “And here’s Hughes Tool.” [Hughes Tool Company was a well-known Wall Street stock. It is now part of Baker Hughes International.]”
Granville was at the height of his fame when he made his uber bearish 1981 call. He had enjoyed a string of prescient calls in the 1970s. His market timing advice was taken seriously by many serious people. And his photo appeared on the front page of the New York Times – perhaps the only time in history a financial newsletter writer got his picture on the front page.
In 1981, Joe was approaching 60. He was not exactly an “old-timer,” but he was old enough to know better. Specifically, he was old enough to know that he didn’t know everything. But not only did he completely miss the start of the bull market in 1982, he also ignored it and denied it for the rest of his life.
The result? Catastrophic losses. Our old friend Mark Hulbert, of Hulbert’s Financial Digest, had Granville at the bottom of his 25-year ranking, with “average losses of more than 20% a year on an annualized basis.”
Missing a bull market is no sin, we observed a few days ago. But betting against the biggest bull market in U.S. history turned out to be a bad career move for Granville…and a bad financial move for his followers.
And so it goes on – from young to old… from know-it-all to know-nothing… from boom to bust… from bull market to bear market… from greed to fear and back again. All we know is that markets generally do a better job of predicting the future than individual guesswork.
The Russel 2000 small cap index, which has been the leader of the rally out of the 2009 low. Right now it is leading the downturn, having broken well below the August “warning shot” low (see also Frank Roellinger’s late December column about the “sweet spot to go short” in this context). What is the market telling us now? Probably nothing good, although it is by now so oversold it seems overdue for at least a short term rebound – click to enlarge.
The 1929 Crash, for example, told us there was trouble ahead. The U.S. economy needed a correction. But how could the markets have known that presidents Hoover and Roosevelt would turn it into a long, drawn-out depression?
The great crashes of 2000 and 2008 were both warnings. But each time, the Fed came back strong with new policies to drive up stocks again. And now… Can the markets predict what monetary experiment Yellen & Co. will undertake next?
Last week’s selloff in stocks was telling us something. But what? We cup our ear… we bend down… we listen carefully… as the market whispers softly. We can barely make out what it is trying to say. It is so faint…like a voice from beyond… from Heaven…
“Is that you, Joe?”
“Get out…” says a feeble voice.
Tune in tomorrow for more on market whispers… the Oregon Standoff… and more!
Charts by: BarChart, StockCharts
Chart and image captions by PT
The above Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.at the Diary of a Rogue Economist, written for
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- US Economy - Curious Pattern in ISM Readings
Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output. Pepsi factory in Baltimore, 1956 Photo via pinterest.com Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
- A Convocation of Interventionists, Part 2
Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there. Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images We should preface the following with a Mises quote, as the...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- How is Real Wealth Created?
An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least. Groping in the dark, Yellen-style Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- A Convocation of Interventionists – Part 1
Modern Economics - It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context. Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes). When...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- John Maynard Keynes’ General Theory Eighty Years Later
The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money. The mere fact that the book is lauded by TIME magazine on the cover should give everyone...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...