Juggling Dynamite

“Philadelphia Federal Reserve President Charles Plosser is “very worried” about the potential for unintended consequences of the Fed’s massive quantitative easing program. Plosser told CNBC that the U.S. was still suffering from “lasting effects” of the recession and “may never return” to its previous growth rates – and warned that policy should not bet on growth returning to previous rates, saying it could be “many, many years”. Here is a direct video link.

Waiting for speculative fevers to break in financial markets can feel like running up a steep hill in the dark. You know the peak is ahead, you know the downhill stretch with feel like heaven on the other side, but you have no idea how much further you have to endure to successfully stay on course and conquer the summit. It is a mental test that the majority of our peers and other market participants fail miserably every 5 year cycle, as they race confidently ahead near market tops only to fall many years behind in the mean reversion on the other side of every peak.

Yesterday in a moment of rare candor, Dallas Fed President Richard Fisher noted concern over what he called the “eye-popping levels” of some stock market metrics today that have not been seen since the “dot-com boom of the late 90’s”. Ah yes 1999, I remember it well, the euphoria was practically unanimous. The analysts, business leaders and finance types all agreed: computers had revolutionized the global economy and a “brilliant” interventionist Fed under Maestro Greenspan, had abolished the business cycle and would never let stocks and high yield bond prices go down again… It was a heady time indeed. Precisely why it set up for the second most spectacular capital drubbing in market history (second only to the crash of 1929).

And yet, if one imagined that two 50%+ capital wipe outs in just the past 14 years since 2000 might still be in memory, you’d be wrong. Today’s bulls are stampeding more confidently than in 2000 or 2007. As shown in the chart below, bearish sentiment is now at the lowest levels recorded in more than 25 years. Bears today are practically extinct.

Either the bulls are right and this time is different at long last, or the mean reversion on the other side of this spectacular summit in asset prices is likely to bring generational investment opportunity to those brave souls who can retain mental strength, stay liquid, avoid the madness of the crowd and achieve their just rewards on the other side of the summit once more.

The Russian government collects 52% of its revenue from oil and gas taxes, and about 50% of the population are heavily dependent on government transfer payments for their sustenance. Under Putin, the Russian economy has not diversified but remains a nation dependent on petroleum exports.

The trouble is that oil prices above $100 a barrel are considered necessary in order to sustain Russia’s current income needs, and looking forward, a triple-digit-price for oil is suspect. As shown in the chart below, WTI was $12 a barrel in 1999 before the credit bubble boom began, and long term secular support remains in the $55 area, some 50% below current levels.

As Tom Friedman reminded this week: Putin is long oil, but short history: Why Putin doesn’t respect us”

“Putin is now fighting human nature among his own young people and his neighbors — who both want more E.U. and less Putinism. To put it in market terms, Putin is long oil and short history. He has made himself steadily richer and Russia steadily more reliant on natural resources rather than its human ones. History will not be kind to him — especially if energy prices ever collapse.

The cyclical downtrend in the US dollar–starting from the Tech bust in 2000 all the way to the credit/commodities bubble bust in 2008-11–bestowed an embarrassment of oil riches on the Russian government(and other commodity-focused exporters). But times are changing and the price of hydro-carbons appears garishly high today amid a secular backdrop of still weak global demand following the credit bubble bust; the prospects of a strengthening US dollar as QE-belief retreats and Emerging Markets implode; a slowly spreading clamp down on what has been rampant commodity price-fixing by large financial intermediaries the past few years; and against all naysayers–the rise of alternative energy in a hundred different forms. See It’s Time to Drive Russia Bankrupt–Again, for some interesting historical insights on how the strong dollar policy of the 1990’s helped to speed Soviet Russia’s collapse in 1991.

And one more game changer…technological innovation finds inspiration in high fuel prices, pollution and climate change. The cars of the future don’t run on petrol. They charge on solar panels, and they look like this. This technology is already here. Driving one proves an epiphany for even the most committed skeptics.

See another glowing car review here: Tesla will have a 35K car that can go a 1000 miles on a single charge by 2020