But there was one thing pretty much everyone agreed on: U.S. oil production was in permanent, terminal decline. U.S. oil fields pumped 5 million barrels of crude a day in 2008, half as much as in 1970 and the lowest rate since the 1940s. Experts disagreed about how far and how fast production would decline, but pretty much no mainstream forecaster expected a change in direction.
That consensus turns out to have been totally, hilariously wrong. U.S. oil production has increased by more than 50 percent since 2008 and is now near a three-decade high. The U.S. is on track to surpass Saudi Arabia as the world’s top producer of crude oil; add in ethanol and other liquid fuels, and the U.S.is already on top.
It isn’t just that experts didn’t see the shale boom coming. It’s that they underestimated its impact at virtually every turn. First, they didn’t think natural gas could be produced from shale (it could). Then they thought production would fall quickly if natural gas prices dropped (they did, and it didn’t). They thought the techniques that worked for gas couldn’t be applied to oil (they could). They thought shale couldn’t reverse the overall decline in U.S. oil production (it did). And they thought rising U.S. oil production wouldn’t be enough to affect global oil prices (it was).
Now, oil prices are cratering, falling below $55 a barrel from more than $100 earlier this year. And so, the usual lineup of experts — the same ones, in many cases, who’ve been wrong so many times in the past — are offering predictions for what plunging prices will mean for the U.S. oil boom. Here’s my prediction: They’ll be wrong this time, too.
It isn’t surprising that experts aren’t good at predicting prices. Global oil markets are a function of countless variables — geopolitics, economics, technology, geology — each with its own inherent uncertainty. And even if you get those estimates right, you never know when a war in the Middle East or an oil boom in North Dakota will suddenly turn the whole formula on its head.
Oh, right, and geology: It’s easy to forget, but just a few years ago people were fretting about “peak oil,” the idea that global oil production had reached its maximum capacity and was doomed to start falling. The shale boom pushed those fears out of the mainstream, but the underlying questions remain. The shale boom is still young, and it was unclear how long it could last even when prices were higher. The U.S. government’s official production forecasts are subject to an almost comical level of uncertainty, and independent researchers have called even those estimates into question. The government didn’t see the boom coming, after all; there’s no guarantee it will see the end coming, either.
DYI Comment: Oil prices are well known for their UNpredictable volatility in the short term, longer term due to dwindling reserves energy prices are in a secular bull market. Technologies such as fracking will extend the life of oil fields but major new discoveries arrive at a snails pace far slower than the world's growth.
As long as prices rise in a slow and orderly pace our economy can adjust to those changes, however if prices spike (international tensions, war etc.) high energy costs behave as a massive deflationary tax. This will send our economy tumbling down and very possibly the U.S. stock market.
If oil prices rise greater than 75% from one year-earlier level, investors at that time should shift their portfolio geared towards deflationary times. This would be oil indicator as negative.
If oil prices rise from one year-earlier less than 10% or drop then the inflationary play is in effect; a positive for economic growth along with possible higher stock prices.
Where to find one year-earlier oil prices? Alaska Department of Revenue
Going back a year ago West Texas Intermediate (WTI) was $98.66 and currently based on cash prices for today is $54.11 for a decline of 45%. The reflationary play is in effect which historically has been positive for stock prices for the Fed's will feel embolden to goose the economy with little fear of pushing up consumer prices. Even though they have ended QE low interest rates will still be with us. If they do raise rates in 2015 it will be more symbolic than substance with slow 25 basis point increases. They are more interested in reducing their balance sheet for the next economic downturn which may arrive quicker than they think. Of course predicting recessions is fraught with the same results as predicting oil prices.
Today we are caught between the "rock and the hard place" as no doubt the reflationary play is in effect (the rock) unfortunately share prices are starting out at high levels in relationship to earnings and dividends (the hard place). Currently Shiller PE10 is at 27.19 or 64% above its average since 1881 of 16.58. Using DYI's averaging formula an allocation of 24% in stocks is warranted the remainder placed into high quality corporate and/or Treasury notes/ bonds.
Dividends which comprise historically two thirds of an investors return the remaining one third being the change in PE. This two third return being so high is why DYI stresses dividends. Today the market is 135% above its average. Using DYI's averaging formula for dividends we have been completely thrown out of the market! Make no mistake this is one nose bleed high market, in my opinion, market gains from here will be transitory!
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 12/1/14
John J. Xenakis
Stock market continues parabolic climb with high volatility
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As I've written several times recently, the extreme volatility of the stock market is very dangerous, because it indicates that the stock market is being used as a gambling parlor completely unrelated to the company stock shares underlying the market. As we reported ten days ago, the Bank of International Settlements has taken the same view. ( "8-Dec-14 World View -- Bank of International Settlements warns of 'fragile' and 'sensitive' markets")
The drunken euphoria that I heard from analysts today, after the parabolic 421 point surge in the Dow Jones Industrial Average, is a sign of just how dangerous the situation. They don't seem to realize that if the Dow can go up 428 points in one day, then it can just as easily go down 428 points in one day. And with the S&P 500 price/earnings ratio at around the astronomically high 19, well above the historical level of 14, it's only a matter of time before the stock market bubble bursts.
And that's exactly the kind of situation that triggers a panic. These swings are getting wider and wider, just as they did prior to the 1929 crash.
The stock market fell 90% following the 1929 panic, but that didn't happen all in one day. It fell 13% on Black Monday, and then another 12% the next day, but then it gained back 17% on the next two days, so by the end of the week, people were wondering whether it would recover completely. But it kept relentlessly falling, and only bottomed out in the summer of 1932, despite repeated interventions by the Fed, and repeated claims by President Herbert Hoover that "Prosperity is just around the corner."
It shouldn't be called the "Crash of 1929," since the stock stock market didn't really crash in 1929. It should be called the "Panic of 1929" since, after all this time, the day that America remembers is the day of the panic, October 28, 1929. That's how it will happen again. These wild swings will keep increasing, until one day these computerized trading computers ("algos," as they're now called) will take over and produce some sort of "flash crash," and a lot of people will lose a lot of money. That will be the panic that everyone remembers. Then the stock market will partially recover, and people will cross their fingers, but the worst will be yet to come.
December 22, 2014
John P. Hussman, Ph.D.
When rich valuations are coupled with tame credit spreads and uniform strength across a broad range of market internals and security types, one can infer that investors remain tolerant toward risk. In that environment, risk premiums may be low, but there’s no particular pressure for them to normalize. Trend uniformity and well-behaved credit spreads are an indication of risk tolerance, which allows overvalued markets to remain overvalued without immediate consequence. In stark contrast, increasing dispersion across securities and sectors, deteriorating market internals, and widening credit spreads are all subtle indications of growing risk aversion – icebergs that can easily rupture the Titanic of severe overvaluation. This risk-aversion creates upward pressure on low risk premiums, which normalize not smoothly but in spikes, resulting in air-pockets, free-falls and crashes.
Coupled with an increasingly synchronized global economic downturn, we’ve seen a particular collapse in oil prices. Some observers view this as if it is “stimulative” to the economy, but that perspective confuses the price decline resulting from an inward shift of the demand curve as if it was caused by an outward shift of supply. Our view is that the concerted decline in commodity prices, foreign currencies, and Treasury yields, coupled with a blowout of credit spreads in junk debt (particularly energy-related debt) is all consistent with weakening global economic prospects. Given the “cleanest dirty shirt” perception of the U.S. dollar, the greenback has certainly benefited from this dynamic. But to expect this benefit to persist assumes that a) the dispersion between U.S. and global prospects will continue to widen, and b) that widening is not already priced into the currency markets.DYI
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