Investing in Carriages When They Are Making Cars

Since we are thinking of long term issues with your investments, we thought that a little history lesson would be useful. At the beginning of the 20th century there were both horses and cars on the road. But, anyone who invested heavily in making carriages instead of “horseless” carriages lost their money. We believe that investors looking to the future need to consider which of today’s investments will be tomorrow’s carriages and which will be the cars. In this regard, a recent article published by Bloomberg is instructive.

Investing in a World with Big Problems Coming

Bloomberg writes that the world might have a Bigger Problem Than a Potential Recession. Their argument is that governments, markets, and investors across the globe are being shortsighted. They are focusing on next quarter’s or next year’s profits when there are factors in the works that could change the economy and investing forever. They discuss a recent OECD report.

The latest outlook and policy prescriptions from the Paris-based group mark a step beyond its repeated warnings about threats to growth from U.S.-China tensions, weak investment and trade flows. Those remain, but it also flags more systemic challenges from climate change, technology and the fact that the trade war is just part of a bigger shift in the global order.

For OECD Chief Economist Laurence Boone, the worry is that the world could continue to suffer in the decades to come if authorities offer short-term fiscal and monetary fixes as the only response.

They say that global growth will decline. But, the decline will be worse in some countries than others.

There are many issues that require basic, structural, changes and governments are focusing on short term stimulus measures such as the Trump tax cut. These measures generally make things worse in the long run and benefit only a few in the short term. We noted the fact that much of the tax cut benefit has gone into stock buybacks which have propped up stock prices but not helped anything over the long term.

Investing a World of Climate Change Chaos

The article touches on historic fires in Western Australia and Venice amid a heat wave in Europe that reached into the Arctic. They note that many of the effects of a warming world cannot be forecast but that we seem to be getting a taste of them already. The economic costs of fires California, Australia, and the normally-humid jungle of Colombia may be substantial. All of the resources that go into fighting fires, fixing flood damage, and dealing with other “natural” disasters takes away from funds needed for infrastructure and other necessary functions of government. Our concern is that Trump’s trade war is only the first retrenchment that will be seen across the globe.

Asia is signing a trade pact that was originally supported by the USA. In all likelihood, this pact will help Asian economies to the detriment of the countries in the West who have excluded themselves (USA).

Safe Investments in an Uncertain World

If you buy the argument that changes are in store and they will hurt your investments, what do you do? Our first thought is that trade will shrink as countries adopt protective measures. That means you need to look locally for companies that are not dependent on foreign sales. These are the same sorts of investments that would be appropriate for a permanent trade war. In addition, if market become more volatile, the sorts of investments we mention in our article about investing without losing any money would be appropriate. No matter how all of this works out, the best stocks to invest in will change as conditions warrant.

As a result of the U.S. oil shale fracking boom and a lagging world economy the price of crude oil has fallen substantially. Reuters reports that oil is near an 11-year-low due to excess supply. Reuters reports the story.

Oil fell to around $37 a barrel on Monday, trading within sight of an 11-year low, pressured by excess supply that has led to prices more than halving since the downturn began in mid-2014.
U.S. crude was trading above global benchmark Brent, having earlier in December risen to a premium for the first time in about a year following the lifting of a 40-year-old ban on most U.S. crude exports.

“We expect both prices to rise next year,” said Eugen Weinberg, an analyst at Commerzbank. “A short-term slide can’t be excluded, due to persisting over-supplies, negative sentiment and stronger downside momentum.”

Figures from the Organization of the Petroleum Exporting Countries imply a glut of more than 2 million barrels per day, equal to over 2 percent of world demand. Oversupply is expected to persist into the earlier part of next year.

The problem for those pulling oil from share formation via fracking is keeping costs low and production high while staying in business until the price of oil goes up.

Surviving Low Prices

To a certain degree the problem for those drillers who are fracking oil formations is that no good deed goes unpunished! Although the world economy is slowing it is substantially higher U.S. oil production and persistently high OPEC production that is helping keep prices down. The fracking operations that are staying alive are using every possible efficiency they know to stay in the game until prices come back up.

Bloomberg Business reports that many U.S. operators are running out of survival tricks as OPEC refuses to cut production in a costly game of chicken.

In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50 percent price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well.

Those efforts, to the surprise of many observers, largely succeeded. As of this month, U.S. oil output remained within 4 percent of a 43-year high.

The problem? Oil’s no longer at $50. It now trades near $35.

For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes, a senior upstream analyst for Wood Mackenzie Ltd. in Houston.

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers. It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great.

There is still oil to be drilled out of shale formations for a long, long time. Those companies that survive should do well into the indefinite future. And those who do not make the cut this next year will go out of business. Companies with substantial cash reserves will likely to better and those with a lot of debt will get bought out or simply go bankrupt. Do your homework before investing in this market sector.

Risk versus Profit in Fracking Shale Formations PPT