Juggling Dynamite

Promised cuts enabled OPEC to talk up oil prices over the past few months (intended to boost the value of their planned Aramaco IPO in 2018), but the downside is that higher prices encourage higher production and ultimately a round trip back to lower prices.  U.S. oil production is growing again as shale comes out of hibernation faster than OPEC had hoped.  See US Shale’s Great Reawakening:

It was always going to be a matter of when and not if OPEC would have to start grappling with the return of shale, and it looks like that time had already come even before it started supporting oil prices again. The big question is to what degree will the group and its members comply with what they said they’ll do, and how much extra boost that will give to the U.S. shale oil industry.

Financial analysts who are diligent in their measurements, and independent (as opposed to those who are mandated to perpetually flog financial products), are able to recognize and anticipate financial trends, risks and opportunities. Mean reversion is the immutable law. The hard part is that turns take time, and people generally have short attention spans and limited patience. The financial industry and media make a fortune preying on this deficit of human nature. The urge for activity is great, even though risk is a good game played slow.

Gary Shilling is one of the very few economists/analysts that I read (he publishes a monthly subscription letter called Insight here). Like the rest of us, Shilling cannot see the future, but I find his work detailed and useful. For those who don’t have a subscription, this latest interview is longer than most, and covers many worthwhile points.

In 1981, Shilling proclaimed that the bond market was on the precipice of “the bond rally of a lifetime.” That was a long time ago. Back then, Ronald Reagan was in the early innings of his first term. Paul Volcker was only two years into his war against rampant inflation. The 30-year Treasury bond yield was an unbelievable 15.2%. Today, it’s 3%. Since Shilling’s “rally of a lifetime” call, the long bond has outperformed the S&P 500 by 5.5 times.  Here is a direct video link.

Machines will continue to bring manufacturing closer to where the products are consumed, while also eroding human jobs and wages in these areas. Major deflationary force in the world.

Number of robots in Amazon warehouses:

2016: 45,000
2015: 30K
2014: 15K
2013: 1K

—@JonErlichman #NRF17 #WEF17 pic.twitter.com/TxZs3ybR4g

— Vala Afshar (@ValaAfshar) January 16, 2017