A secular bull market is underway

Thursday, 7 October 2021 — Wollongong

[6 min read]

The Australian reports:

‘Thermal coal and LNG prices have both hit fresh peaks as the global energy crisis bites ahead of the northern winter, but Australian coal and natural gas producers may struggle to lift supply to take advantage of surging prices.’

Ya think so!

The energy crisis is not one of surging demand. It’s one of too little supply that is unable to adjust to changes in demand.

That’s the crux of the problem in Europe and the UK right now, where natural gas prices have gone exponential.

For that, you can thank years of virtue signaling by politicians and environmental groups about the evils of oil and gas. At the same time, hundreds of billions of dollars were invested in renewables (with the help of billions in taxpayer subsidies), which moved well ahead of the capacity of storage technology to make use of that investment.

The UK and Europe are a few years in advance of Australia in terms of their green credentials. Which is why things are particularly acute there right now in terms of gas prices. Sure, there are clearly other factors at play. But it’s hard to argue the situation wouldn’t be so dire if not for the headlong rush towards ‘net zero’ without proper planning.

Short-term relief may be on its way though. Overnight, oil and gas prices fell after Russia offered to increase supply. How nice of them…

From Bloomberg:

‘Gas prices fluctuated wildly on Wednesday — surging a staggering 60% over just two days in Europe before sliding fast after Russia’s President Vladimir Putin said the country is ready to help stabilize global energy markets.

‘Dutch and U.K. futures plunged more than 7%. That’s after hitting fresh records earlier over increasing fears of energy shortages across the region. In the latest testament to how global gas markets have become, U.S. natural gas prices also plunged by as much as 8.3% after settling at the highest level in 12 years just a day earlier. Oil futures accelerated losses. The swift pullback in prices — after a week of almost uninterrupted gains — underscores just how extremely volatile energy markets have become in recent days, fanning fears of inflation around the world.’

What was that?

Fanning fears of inflation?

Ummm…no.

This is a supply issue, not a demand issue.

Soaring energy prices will more than likely sap final demand. It will hit business profit margins, and where rising costs can be passed on, consumers will take the hit leaving less left over for discretionary spending.

Don’t expect central bankers to get this though. The Bank of England is already talking about potentially having to raise rates to ward off the inflationary hit from the energy supply crunch.

Obviously, higher energy prices will feed into higher consumer price inflation numbers in the months ahead. But central banks are making a mistake thinking this is a result of strong economic growth driving demand.

No, the underlying cause of this energy crisis is the result of years of underinvestment in future oil and gas supply.

Raising interest rates in the face of an energy supply crunch would just be dumb. It’s just adding an expense on an expense.

But we are talking about central bankers here. So I wouldn’t be surprised what they do.

When it comes to the oil and gas stocks, it’s important to realise that most companies in the LNG space have long-term contracts that are generally linked to the oil price, not the ‘spot’ LNG price.

Where producers can pump excess capacity to sell into the spot market is a bonus, but it’s often not enough to move the profit needle substantially.

But Australia’s largest LNG producer, Woodside, appears to have a bit of spare capacity to sell into the spot market. As The Australian reports:

‘“Woodside may have three to five spot cargoes this winter that could fetch over $US500m just by themselves,” Credit Suisse analyst Saul Kavonic said.

‘“It used to be a very rare event to see a ‘gold’ LNG cargo sold, referring to a cargo worth more than $US100m. Now they are selling strings of gold cargoes and may need to term a ‘platinum’ cargo in case a $US200m cargo is sold.”’

For the broader market, you’d expect rising energy prices to act as a headwind at some point. Perhaps it will take some company announcements relating to cost pressures impacting earnings or retail sales coming in below optimistic ‘reopening’ forecasts before it’s priced in.

Speaking of reopening, it’s happening soon for NSW. Presumably, the other fear-riddled states won’t be too far behind. It will be interesting to see how the increase in energy usage that comes with increased movement impacts Australia.

Whatever the shorter-term impacts of this energy supply crunch, one thing is for sure — the green and ESG trend will lead to much higher traditional energy prices in the future. The transition to renewables will occur because of record-high fossil fuel prices.

A secular bull market is underway.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

Today, we are looking more deeply at how the Federal Reserve’s fake money — approximately US$8 trillion of it since 1999 — has fouled the economy and corrupted its major industries.

And none has been more corrupted than the one that got most of the money — Wall Street.

We are in a privileged position. In our own business, we see financial excesses backing up like a clogged toilet.

We see the rush of enthusiasm…the gush of new money…and the market flush with optimism, fantasy, and fraud.

And if we pay attention, we may know when to expect it all to go down the drain.

That’s right. We’re in the financial industry too. And just looking at what investors want to learn about is a good indicator of what’s ahead.

When they are most athirst for a sector…a technology…or a market — it is ready for a correction.

Next big score

For example, for many years now, we’ve seen a decline in interest in our Diary.

We don’t take it personally. Here at the Diary, we aim to connect the dots and figure out what is actually going on. But when the money is flying fast and furious, people only want to know how to get some of it.

Old-fashioned, long-term value investing falls from favour. Experience and reason give way to trading tricks…and technical jargon (even when nobody understands what the hell it means) is the lime-coloured leisure suit of the day:

‘You want to buy into the metaverse, with a disruptive new blockchain technology, bigger than 7G…bigger than the internet…more important than the wheel?

‘How about an EV with a trillion-mile battery…the next hot crypto…and a $5 gazillion new market? It’s going to the moooon! And Elon Musk is already on board. But be sure to act before midnight tonight!’

Buy and hold is out of style. Now, everyone is looking for the big score on new technology. The next Tesla!

No real investment

But even fast-moving blockchain start-ups aren’t racy enough for today’s players. They want to trade options on rocketing stocks. The Wall Street Journal reports:

‘So far this month, single-stock options with a notional value of roughly $6.9 trillion have changed hands, well above the $5.8 trillion in stocks that traded, according to Cboe data through Sept. 22. […]

‘By one measure, options activity is on track to surpass activity in the stock market for the first time ever. In 2021, the daily average notional value of traded single-stock options has exceeded $432 billion, compared with $404 billion of stocks, according to calculations by Cboe’s Henry Schwartz. This would be the first year on record that the value of options changing hands surpassed that of stocks, according to Cboe data going back to 2008.’

Trading options is not ‘investing’ in the classic sense. You’re not counting on earnings to payoff, neither in the form of dividends nor in capital gains. Instead, you’re just betting that you’re on the right side of the trade.

There’s no real ‘investment’, in other words. No new factories. No new employees. No new product lines or improved service — nothing that will increase the world’s wealth and payoff for investors.

It’s not win-win…it’s win-lose. For every winner, there’s a loser. Overall, the sum is theoretically zero.

Sub-zero

In practice though, the sum is sub-zero. Remember, you either make it — by offering wealth-increasing goods or services. Or you take it — by robbing a liquor store…going into politics…or gambling.

But when making goes down and taking goes up…the world is a poorer place. Precious capital is misallocated…squandered on buybacks and pointless ‘wars’.

What really counts in an economy is net investment — how much money is being saved and used to build more wealth? And last year, that number was little changed from 22 years ago, even though the economy is now more than twice as large.

Rich learning

Even the nation’s most prestigious and wealthiest universities have gotten the get-rich-quick bug. As colleague Byron King puts it, their endowments have become ‘hedge funds with universities attached.’

Again, the WSJ is on the case, ‘University Endowments Mint Billions in Golden Era of Venture Capital’:

‘Large college endowments have notched their biggest investment gains in decades, thanks to portfolios boosted by huge venture-capital returns and soaring stock markets.

‘The University of Minnesota’s endowment gained 49.2% for the year ending June 30, while Brown University’s endowment notched a return of more than 50%, said people familiar with their returns, which aren’t yet public.

‘Meanwhile, Duke University over the weekend said its endowment had gained 55.9%. Washington University in St. Louis last week reported a 65% return, the school’s biggest gain ever, swelling the size of its managed endowment pool to $15.3 billion. The University of Virginia’s endowment reported a 49% gain. Universities’ returns may include portions of endowments, plus other long-term investments.’

You’d think such august institutions of higher learning would be asking some questions. How come our investments increase at a 50% rate…even when the economy only struggles along, gaining less than 5% a year?

How is that possible?

Tune in tomorrow…

Regards,

Bill Bonner,
For The Rum Rebellion