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
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...
- Regime Change: The Effect of Trump's Victory on Stock Prices
A Soaring Market On January 20 2017 Donald Trump will be sworn in as the new president of the United States. On the stock market his victory has triggered a lot of advance cheer already: the Dow Jones Industrial Average rose by a sizable 7.80 percent between the election and the turn of the year. Two big winners: the DJIA and Donald Trump - click to enlarge. Many investors are now wondering what effect the change in government will have on stock prices in the new...
- Donald and the Dollar
No Country Can be Made Great by Devaluation John Connally, President Nixon’s Secretary of the Treasury, once remarked to the consternation of Europe’s financial elites over America’s inflationary monetary policy, that the dollar “is our currency, but your problem.” Times have certainly changed and it now appears that the dollar has become an American problem. Richard Nixon and his treasury secretary John Connally. The latter is today mainly remembered for his...