Thursday, February 6, 2014

Grantham Letter

Is this why oil futures say that crude is going to decline to $75 within 8 years and stay there forever?

Okay, “Enough!” you say. But at $10,000 to $15,000 per battery in three years plus some economies of scale, there will probably be a $40,000 vehicle that even die-hard cheapskates like me will have to buy. (Our stop-gap Jetta diesel, which gets an honest 41 miles to the gallon, was $24,000.) One can easily see that in 10 years there could be a new world order in cars. (And if that weren’t enough, there is a wholly different attack on the traditional gasoline engine from an entirely new technology, the hydrogen fuel cell, to be introduced by Toyota this year.) In short, with slower global economic growth, more fuel-efficient gasoline and diesel vehicles, more hybrids, cheaper electric cars, more natural gas vehicles, and possibly new technologies using fuel cells and, conceivably, methanol, it is certain that oil demand from developed countries will decline, probably faster than expected. Some emerging countries, notably China, are likely to take more dramatic and faster steps to reduce demand than we have ever thought about. Already they have 200 million electric vehicles – mostly motorbikes – almost as many as the rest of the world squared. Total global oil demand at current prices or higher is likely to peak in 10 years or so. At much lower prices we would fairly quickly lose most of our high-cost production: deep offshore, fracking, and tar sands. Times may be changing faster than we think. My guess is that oil prices will be higher than now in 10 years, but after that, who knows? The idea of “peak oil demand” as opposed to peak oil supply has gone, in my opinion, from being a joke to an idea worth beginning to think about in a single year. Some changes seem to be always around the corner and then at long last they move faster than you expected and you are caught flat-footed.
This is entirely possible. I'm not long oil at all.

In general, though, I'm pretty dubious of a guy who believes in "climate change" and is anti-fracking.

12 comments:

Stagflationary Mark said...

Here's what I find amusing.

I'm still driving a 1996 Camry (less than 90k miles on it).

If everyone else converts to higher mpg cars in an effort to be frugal then, as a frugal person myself, I won't have to! Hahaha! :)

P.S. I'm not long oil either.

November 9, 2009
I'm Deflationary

As such, I am changing my short-term inflation mood in the upper left hand corner of my blog to show my deflationary bias. That doesn't mean that I think oil can't make it to $100. Who knows? I don't think it will stay there if it does though, any more than it could stay at $140 the last time.

It eventually all comes down to supply and demand. We built a supply side based on never ending debt-based demand. Now we're watching it all fall apart.


As expected, oil is certainly having a hard time staying above $100.

Time will tell. Feels a bit like Japan after their housing bust though (which wasn't so much deflation as 0% inflation for those who bother to look). Got ZIRP?

Stagflationary Mark said...

Bonus thought:

What will oil do if China slows? Check out the natural log of imports from China divided by our disposable personal income.

China's Growth Is Slowing? Big Shocker.

It has "market saturation" written all over it.

CP said...

That's U.S. imports from China/U.S. disposable personal income?

CP said...

0% inflation feels like deflation for people who have made commitments that depend on gradual currency devaluation.

Stagflationary Mark said...

That's U.S. imports from China/U.S. disposable personal income?

Yes.

0% inflation feels like deflation for people who have made commitments that depend on gradual currency devaluation.

Indeed!

The typical TIPS holder (as seen on Yahoo's message boards) roots for higher inflation. I don't get it personally.

All higher inflation does is give the government something to tax. As an inflation protected treasury holder, I root for 0% inflation. That's just about optimal.

If inflation ran at 30% per year, I'd be stuck having to cough up tax on 30% gains each and every year. The only way I could do that is by selling the TIPS I own to pay the taxes. Not good!

That said, at least I'd have inflationary gains (unlike nominal treasury holders).

So here I sit in inflation protected treasuries rooting for low inflation. It's not much different from having fire insurance on my house and rooting for no fires. ;)

CP said...

I've become very bullish on long bonds after realizing that the natural owners of them (older baby boomers, retirees) have been scared into buying much riskier stuff (SPY index, tech stocks, MLPs) with the mantra about how interest rates are going to go up real soon now.

Stagflationary Mark said...

I've become very bullish on long bonds after realizing that the natural owners of them (older baby boomers, retirees) have been scared into buying much riskier stuff (SPY index, tech stocks, MLPs) with the mantra about how interest rates are going to go up real soon now.

We are in 100% agreement on this. CNBC has been telling us for many years that interest rates can only go up. It is not just a recent phenomenon.

It was very amusing to watch just how sincerely baffled they were when the 10-year fell from 3% to 2.7% recently.

I'll paraphrase from memory.

"Nobody predicted that. Nobody."

What could possibly be a more crowded trade than that!

Nathan said...

In keeping with the theme of widely-held misconceptions, I really enjoy articles like the the following that view younger generations through an anthropological lens.

Millennials invest like their grandparents

"Millennials have kind of a cash-under-the-mattress thinking about saving," Pachuta said. "They feel anxious and fearful of the market."
As a result, millennials are sitting on more cash than any generation, the report found.
"They fully buy into the redefinition of risk as permanent loss," it said.


That kind of strategy is completely counterintuitive to traditional investing advice, which holds that young people should withstand the ups and downs of the market and think longer-term. Millennials arguably need to own more stocks if they actually want to grow their wealth.


It seems like prices in many markets are driven by what present holders of those assets need to rationalize their decisions, not any rational expectations of the future. In particular, baby boomers keep holding their equities and real estate, hoping for greater fools and "household formation". It never occurs to them that what they're proposing to younger generations is such a bad deal that many will simply refuse to play along, as they have in Japan.

CP said...

Nathan, that is a great point. I'm going to put on the front page.

In residential real estate, you'll see downsizing empty nesters who price their house not based on comps but based on the amount of money they "need" to achieve their plans. Same thing.

The baby boomers were definitely planning to sell overpriced assets to younger generations to fund their retirements. Oops.

The comparison to Japan is apt. What happened in 2000-2010 is that we hit the same worker/retiree inflection point that Japan hit in 1990. Basically we will follow their trajectory with about a 20 year lag.

Money printing makes no difference. The BOJ has printed oodles of yen since their demographic collapse started - 4x increase in monetary base since 1990.

The Nikkei fell 65% anyway (75% peak to trough) AND - best part - their 10 year bond yields 60 bps. Their 30 year yields 1.6%.

Check this out: the Japanese price index has not changed in 20 years: http://research.stlouisfed.org/fred2/graph/?s[1][id]=JPNCPIALLMINMEI

Long term view: http://research.stlouisfed.org/fred2/series/JPNCPIALLMINMEI

Mark, you should do a chart on your blog of Japanese monetary base versus consumer price index (not rate of change).

inc monetary bas != inc CPI

In fact, an increase in monetary base and a fall in the inflation rate both look like dependent variables of population!!

CP said...

Can move this thread here:

http://www.creditbubblestocks.com/2014/02/the-avaricious-baby-boomers-failure-to.html

John said...

"In residential real estate, you'll see downsizing empty nesters who price their house not based on comps but based on the amount of money they "need" to achieve their plans. Same thing.

The baby boomers were definitely planning to sell overpriced assets to younger generations to fund their retirements. Oops."

Timing gentlemen, timing!!

The youngest boomers are 50 years old, the oldest are 69 years old.

There is still time for the lead edge of the baby boom to sell their assets to the younger boomers, age 55.

In about seven years when half the boomers are above age 65 all hell will break loose as the mass of boomers discover that the capital they have saved (and parked foolishly in housing and common stocks) must last them 20 more years.

Demographics is destiny and nothing can be done to change it since all of the actors in this drama have already been born.

Anonymous said...

The younger baby boomers - who grew up watching mind numbing color TV nonstop - are the ultimate conformists and dumb money.