Monday, May 22, 2017

Brexit – Should you still invest in the European Union?

Euro skeptics are mostly far-right (or left) extremists. They are often the same as the ant-emigration crowd. The losers today of automation and globalization.  So this period from 2008 until 2017 has been a time where a lot of pain came to the surface. The public answer was the election of people such as Trump where the population demands a breather from never ending global chance. The world faced a lot of headwinds, including the ever-deeper intrusion from governments and big business into our personal finances and even into our living room.  Many feel powerless against the current elites who incessantly crave for evermore bureaucracy, the power to impose their lifestyle on others and years of empty promises of more jobs at the expense of those in society who saved their money.  Few persons in this world are truly rich. To have meaningful affluence a household should have a net worth of at least 10 million – i.e. the Decamillionaires. That is less than half of the ‘one percent’ and I think I am exaggerating even that. With 70 to 80% of Americans unable to handle a $1000 emergency expense without going even deeper into debt, who is truly rich?
We only read about the super rich: Bill Gates, Warren Buffett, etcetera in the news papers and yes they influence the world due to their economic leadership not because of their voting power. So really who are paying taxes and on who are imposed every increasing numbers of new rules and laws?  Tax hikes on the superrich won’t do anything except driving them away into tax havens. The real taxes are paid by the middle and the lower portion of the ‘upper classes’.  Why do you think that many of the so-called 1% are considering themselves ‘middle class’?  People feel (and are) lied to by the political class who portray everything in black and white soundbites amplified by a media that is out of touch with their readership and form increasingly part of the ‘elites’. Don’t forget many of the bureaucrats, politicians, lobbyists and media members never worked in the real economy that is providing the funds for our welfare state but even more for all sycophants at the public trough. It is for real reasons that so many people are moving to libertarian ideas – because they want to lead their own life.  It is not for nothing that the Alberta’s NDP stronghold is Edmonton!  Bet that Ottawa votes overwhelmingly Liberal?
When teachers and other civil servants are millionaires because of their defined benefit pension plans as soon as they retire – often a lot earlier than most in the private sector do -, one must wonder who is serving who? Europe is a bit ahead in this because they practiced the ideas of a cradle to grave welfare state much earlier than here in North America. But over the last decade the bill has been presented and by now Europe is moving back to the solid right. Their financial dire straits are the direct result of their state socialist philosophies of the previous decades. Political correctness – green energy everything proves to be costly and eating into the wealth of Europe’s population.  With a 19 trillion U.S. dollar economy, it is larger than the U.S. and NAFTA. It is the real juggernaut in the world.  It is the U.S. own fault that they spend most on defense – but they also benefitted from that by being the worlds most powerful military nation and having the world’s largest defense industry contributing to its economy. Europe after two world wars is not so keen on world dominance as the U.S. is but now Trump demands they spend more on the military and guess who will sell them all those new weapons? 
Many libertarians feel that they have no business being the world police.  Many libertarians feel the government should stay not only out of their life but also out of the life of citizens in other countries. Strangely enough Obama was more into that than Trump. Don’t tell me that there is logic in politics!  So, the British voted for Brexit at a low point in the evolution of the EU. After a difficult period, leave it to the Brits to run for the exit!  Just like Quebec in Canada – they will end up being the big losers (history may proof different). There are lots of similarities between Quebec and Great Britain as it was called in the past. But the clearest lesson is that the process of separation seldom leads to more affluence and just contemplating going such a route is economically very expensive. Just consider what has happened to Montreal over the decades. London may not be far behind.
If Trump truly exits NAFTA then there is a big price to pay in our North American economy. Trump the negotiator may think that ‘he who is willing to let go is in the stronger bargaining position’ just like Quebec thought this for years but remember the state Canada was in during the 1990s – the height of Quebec separatism - and consider what would have happened to Canada if Quebec had succeeded!  Trudeau Senior and now Junior are the true leaders of divisiveness in Canada because they are so Quebec centric that they have no idea how to consider the interests of the West. It seems right now ‘deja-vu all over again’. How come that under Harper Canada was united more then ever and as soon as one of the Trudeaus come in, the West feels like talking separatism again?  But as said, separatism is not the solution but the indication of sickness or problematic times.
Western Europe knows full well how much unification has contributed to their peace and affluence.  How great life without borders is and how convenient a single currency is. But there are also problems. Big problems!  Just like in Canada, Europe is very diverse. In fact, it is even more diverse than Canada ever will be. How to take the interests of such diversity properly into account?  Obviously creating a big bureaucracy (like Brussels) and drowning the population into exhaustive regulations doesn’t work.  The election system is quite good in Europe – a system customized for each member state by history.
Canada is struggling with elective problems. How to take care of an uneven population? – where the majority in the East has elected the federal government before election booths have closed on the West Coast.  How to take care of regional conflicts of interest and ensure that the city population doesn’t crush the rest of a province?  Are Vancouverites with their urban experience really qualified to impose their views on a resource economy in the interior of BC?  Yes, a vote in rural Alberta weighs heavier than that of a citizen in Calgary or Edmonton but if that wasn’t the case people would be driven off the land by urban ideologies that often do not reflect economic realities.
Yes, in many ways Europe is the true leader of the world not the U.S. as many self-deluded North Americans seem to think. Now that Europe starts to recover this may become much clearer over time. Do you want to know the impact of an aging population? Look at Japan and Europe!  Do you want to know what the economy might evolve into when the world population stabilizes – the front leader is Europe. Even though the Euro monetary system has significant issues to work out, especially how to deal with their diverse economic conditions and lifestyles, they are now slowly turning the corner. Brexit was the low point; Dutch and French elections mark a potential turning point. Brexit will be a great learning experience for European unification and the bill may be paid by the British. The British people are very charismatic – who cannot empathize with the Welsh, the Scots and the Irish such a charming and colorful lot of rogues? But it is likely they have most to lose from Brexit. I sincerely hope that we don’t have to say: “You were a great nation and it was nice knowing you.”
From an investment point of view, Europe leads the real world.  Asia is the up-and-coming kid but they have a very turbulent way ahead. If you think Europe has problems just think about where China, India and there ‘spheres of influence are going – South China Sea a powder keg. Not to mention the Middle East. Yes, North America is a powerhouse and we should invest in our own economy but things can go and will go wrong here as well. Emerging markets are obvious candidates for economic growth but they have considerable risk and it is highly questionable that investing in their stock market will be beneficial. I think Europe is a lot more promising than many believe.  Russia is troublesome and Putin is a wildcard. What would happen in case of assassination or if the man becomes too audacious and triggers a war? Will Russia turn in another North Korea or will it become a respected member of the global community?
Western Europe deserves a much larger part of our investment portfolio than many of us have. Think of it this way, with the reductions of freedom over the last decade here in North America and with Scandinavian countries often depicted as the new ideal states (Seen any uplifting Scandinavian movies lately? – I don’t believe they exist) Europe may enter a new era of prosperity and an era of lots of introspection and social leadership

Tuesday, May 9, 2017

My new GOOC portfolio – Get Out Of Canada

Canadians have always had a self-destructive streak. They want to be the nice guys of the world.  Oil and gas are not nice but are reality. That is where Alberta and the rest of Canada always seem to clash and Pierre Elliot Trudeau is the poster boy of this attitude.  Another liberal to the West, seems to have taken over Trudeau’s baton with blocking Alberta’s landlocked oil and gas – although she favors exporting gas on her side of the border.
In Alberta, we have an NDP premier – a lapse of Albertans’ common sense. But to be honest, after 40 years in power, conservatives deserved a big kick in the behind. But how are we Albertan investors to protect ourselves from the current downward spiral.  I love life in Alberta – it is one of the best places in the world and Canada is one of the best countries in the world. Although due to Canada’s large areal extent and uneven population distribution it tends to tear itself apart politically.
I am tired of the nearly always under-performing Canadian stock market and maybe this is the time to admit that focusing on Canadian investments is a poor form of diversification. Ah… I am sure you’ve figured out where this is going.  Yes, with Canada’s adverse business climate it is time to get out.   Wynne, Notley, Clark and Trudeau – it is virtually impossible to get a more anti-business political stage i.e. the Alliance of Pretty People (APP).
I am economically dependent on Alberta with real estate and owning a business tight to the oil and gas industry. Thus it may be best to have a stock portfolio with heavy international emphasis. So that is U.S., Europe and emerging markets. There are some Canadian large caps with heavy international interests such as the 5 banks, Power Corp, the large insurance companies such as Manulife and asset manager Brookfield.  One must place a small bet on recovering oil and gas say 5 to 10% of the stock portfolio and another 5 to 10% on gold and silver. So that leaves about 50% of the stock portfolio for international markets.  I would say, 30% of that could be invested in the U.S. with world class companies such as Johnson&Johnson, Microsoft, Apple, Bank of America, Brystol Myers Squib… and so on. Finally, with the recovery in Europe on its way, put 15% in Europe and the remaining 5% in Emerging Markets – the latter best through ETFs.  Voila, our new strategy ‘GOOC (get out of Canada)’ portfolio phase I.
If Canada is so self-destructive that over the last 6 months so many international major oil companies ran for the exit, why shouldn’t we do the same to protect our retirement.  Next phase… avoid Canada’s disease of self-entitlement and self-righteousness.

Sunday, April 23, 2017

Thriving in an uncertain world

We are now 4 months into 2017 and my fears for an imminent stock market crash has diminished.  Many investors realize that the Trump plans may take a bit longer to realize than the first months of the Donald’s presidency. To be honest, I still don’t know what to make of this ‘shock and awe’ president, he seems to be a master at keeping everyone off balance with his flamboyant tweets and with his often more sedated staff that he uses to execute his real plans. Like any trader, he is not showing his hand.

So now, investor enthusiasm has cooled and the markets are a lot less euphoric than just a few months ago. The U.S. economy and that of Europe and even the economies of some emerging markets are looking better and better. Yet there are many turbulence causing clouds on the horizon; not the least being the French elections. But here is what many of us forget: Do you really think that today’s worries are so much worse than say those during the cold war when as a child I was living in a country that could be reached from Russia’s nuclear arsenals in under 7 minutes by jet?  Yes I am talking about Western Europe in the ‘Happy Days’ of the Fonz. We’re looking at those days as if they were ‘good old days’ with ever appreciating stock markets.  Well, dig out your rusty memories and you realize that those days with the Vietnam War and Cambodia were far from that ‘Happy’. Violent crime rates weren’t that low either. Oh then there was China’s Mao and Cuba’s Che.

So, stop whimpering over today’s excessive uncertainty. Life is uncertain and in fact, we are living in one of the most peaceful periods in history.  It is just that if someone dies in Paris in the morning, you read it in the Globe that afternoon! What are the problems we have today? ISIS?   Syria?  Compared to Vietnam or the 2nd World War that is small potatoes. More people die in traffic than by the hands of ISIS. I will say it again on this blog: “We never had it so good!”. 

Today we’re struggling with low oil prices.  Yes I underestimated how fast the oil-shale drillers got U.S. production back up. I compared it with Canada’s unconventional and conventional oil. Well the Permian is booming right now and in Canada that is far from the case. Though we have turned the corner as well.  Because heavy oil construction cannot be turned off right on the spot, Canadian ‘oil sands’ production has actually increased, in spite of the devastating fires in Fort McMurry last year.  And because of falling operating costs (yes, not only Americans can produce now cheaper), many of those projects are still moderately economic. The weak players have often gone bankrupt or similar.  Look at PennWest which went from 160,000 barrels per day to barely 20,000. You call that survival?

But we have many companies, most of which were tiny and unknown just a few years ago that are rising out of the ashes. Lots of people are still without work – waiting for ‘the turn around’.  So, in hind sight, what was this oil price war really about?  I’d say it was about Free(er) market versus State owned Oil (and Gas).  OPEC is the embodiment of state-owned oil. The government owners can control how much their country produces.  They boast the ‘cheapest’ production costs but reality is that they use their oil dollars to run and control their population and fight their wars. OPEC cannot exist without spending ‘petro dollars’ to control their populations and to support their wars (think Iran vs Saudi or think of the civil unrest in Venezuela). So their cost of production is not the $5 or $10 dollars per barrel that they claim. Their real breakeven is $50 or $60 per barrel. Probably they start restoring their severely diminished sovereign funds around $70 per barrel.

So now they rile against the North American oil industry for taking more and more of their market share. But we represent the ‘Free Market’ and our governments don’t control our output other than imposing more and more cumbersome regulations and carbon taxes.  Regulations that make those governments popular in the East where most of our population lives but with little understanding of how much oil and gas contributes to this country’s wealth - along with numerous other natural resources. It is the profitability of our operations that determine how much we produce. The latter is set by the economic climate, the skills of the oil industry workers and the pace of innovation. North American oil output is not set by government (to some degree) but by the market and economics and no government owned oil company driven by politics can compete with that.

The disastrous results of the ‘Green Revolution’ in Ontario show the same. Governments are poor investors and the high prices of their energy driven by ideology rather than economics has driven the Liberals to the bottom of the polls now that Ontarians feel the bite in their purse. I like the idea of renewal energy, but it has to be economic and its real costs in dead birds, landscapes cluttered with windmills and the uncertain energy supply should not be hidden behind ideology. Lately, that same Liberal government plans to mislead its population by expanding rent controls.  The short term thinking population needs a scapegoat for exploding housing prices. So blame the evil (often mom&pop) landlords who cannot fight back. Reality is, as pointed out by most economic hand books, rent control restricts investment in revenue generating properties (reduces available rental units) and leads to less property maintenance (i.e. creates slums). 

But getting back to topic: the oil-price wars. That OPEC countries try telling North America to reduce oil and gas output to control energy prices. As explained this is just ridiculous and it shows OPEC’s lack of understanding as to how the ‘free market’ works. Two worlds: government owned versus privately owned oil are slugging it out.  It is clear, who will win in the end – the free market.  Saudi is putting part of Aramco up for sale to get cash.  As long as that government controls the company and even refuses to disclose its real oil and gas reserves, I wouldn’t touch that deal with a 200-foot pole.  Oops, did I make a stock recommendation?   No! I didn’t I am just pointing out that Saudi-Aramco is un-investable but I have no idea how its stock will perform.

I have moved away from the stock market into a private real estate venture. Building a personal residence in a semi-depressed real estate market. Short term, it is high risk because my real estate portfolio goes to overweight.  But real estate is a long term gain and I will rebalance within a year (I hope). This works well in my overall view that the stock market is nearing a crash. But there may also big stock market gains ahead because we have not reached the euphoria stage yet. Alas, this is an uncertain world and we can only pray that, as often happens with patience, that matters will work out.  In the meantime, at my age, I am clearly still in the thick of things and going out on a limb (within reason). Isn’t that what live is all about – going after a worthwhile challenge?  In my mid-sixties and building my own dream residence certainly is worth it for me. Who says the Golden Years are a dream-like state of vacations, golf clubs and dying of boredom?

Saturday, April 1, 2017

It is not panicking but embracing uncertainty that lays the foundation of our future wealth and prosperity

Humans are in many ways like herd animals and they feel safe in numbers when they follow fashionable concepts. This is even true when those concepts are wrong and may lead us humans over the cliff. We humans are conservative and fear change. Change of climate. Isn’t it ironic that forecasters of a warming climate warn of forest fires, storms and failed harvests; while those who predict an oncoming ice age, warn of droughts, forest fires, storms and failed harvests.

Sea level and climates have been changing since the dawn of this earth. So those who live on the coastal plain are always living with the dangers of changing sea level. It is this fear of change that makes mankind so easy to manipulate by those who feel they can tell us how we should live.  It is not only fear of climate change; it is fear of terrorism despite the fact that cars kill many more people every year than terrorists have over many decades. It is fear for our health that makes us panic and obey rules imposed by those who claim to know how we should live. It is fear for another big stock market crash like the one in 2008 that keeps us up at night. Fear for losses in the stock market although we all should know by now that we don’t lose with a stock market portfolio as long as we hold on during down turns rather than sell (often at the bottom).  It is the time spend being invested that ultimately determines our ever-increasing net worth.

Right now, the U.S. seems to be ground zero in a battle between those who want to tell mankind to how to live and those who want less government intervention. Yet, it doesn’t truly matter in the end, because all governments and associated bureaucracy have one thing in common:  the desire for power to govern others.  The more mankind counts on leadership from above, the more likely we will lose both our wealth by increased taxation (direct or indirect) and we will give up our privacy and freedom. Ultimately, we will turn into a blubbering mass of fear clinging to the manipulations of politicians and ‘private sector’ leaders who will love to take care of us from cradle to grave.  When you see how easily Goldman Sachs leaders become secretary of state or of treasury, maybe you realize that many of these leaders are only looking out for number one – themselves.   Wall Street is to make profits from YOUR savings NOT to build up assets that make you a financial adult (i.e. when you are independent of your boss and your job – formerly known as ‘retirement’).   We should take care of our own lives; be accountable to ourselves. Even if society could take care of you from cradle to grave – this is your life to live and the buck stops with you!

Who would look after your money better you or your broker or your financial advisor?  Will it be safer to invest your savings in a publicly traded company run by corporate rats and robotic senior managers rather than investing in yourself and in your own business? Not all business owners are millionaires but most millionaires are business owners.  So why then would you think that stock market investing is the best you can do with your savings?  Are you doubting your own competence that much?

We humans are so fearful and we follow our ‘leaders’ so anxiously because everyone does so and we don’t want to standout from the crowd. Yet we all claim to be ‘contrarian’ investors. In my experience, we lay the foundation of prosperity and success when we dare to go out on a limb. Typically, you only get going when you don’t feel comfy but on edge. Only when we’re ‘on edge’ do we dare to try things that may make us avoid real dangers and learn from new endeavors – many opportunities we didn’t knew existed just one or two years before.

Things happen in life. Maybe you lost your job. You think OMG how am I going to pay for my daily living? Well, the first thing that you will learn is that ‘bad things’ do happen even to you. If you haven’t build a bit of a cash reserves for ‘bad times’, you will make that mistake never again. You may find out that you got a decent severance pay and that you qualify for EI. Many people realize things aren’t that bad after all and ‘gosh I am so happy to be out of that terrible work environment’. Don’t run out in a panic signing up to the first new job that comes along. This is a fantastic opportunity to review your life: what you do love about it and what you hate? Relax, take a vacation to distance yourself from your situation. Have coffee with friends and past colleagues. This is when you may learn about the people in your life that you can really count on and you may be surprised who they are. You may realize how good or bad your reputation in your profession really is and work on improving it. Or you learn about new things you like much better than your previous job. You could start your own business – being your own boss. Our lifespan is ever increasing and chances are that you may have several completely different careers between which you can switch back-and-forth or are which you can do concurrently.  Example: be a plumber during the day and an angel investor at night. Most of us will be living easily past 80 years old and it may not be impossible for some of us to live far into our second century!  So the future is truly limitless and even if something goes wrong you probably have plenty of time to turn things completely around.  No life is often not easy but life’s challenges may give you perseverance and adaptability; you may realize what an awesome person you are and how many things you are capable of doing on your own.  This is probably also the attitude you need to remain active during your financial adult hood.  The longer you keep on doing challenging things the longer you may be able to stay active even well past your 80s. After all, if you are not active you may as well be dead!  This is how you build a truly fulfilling life.

The most dangerous thing in your life is ‘falling a-sleep at the wheel’; ending up trapped in a rut. That so-called ‘bad thing in your life’ is usually an opportunity – a new beginning. So embrace life; embrace change. Don’t fear life and don’t cling to leaders who only want to manipulate you for their own, often power hungry, purposes.  Don’t let them be in charge of your life, instead ‘choose yourself’.

Thursday, March 16, 2017

Investor secret No 1: How to deal with the next bear market! And Wall Street hates it!

Do you think you can play guitar and sing as well as Paul McCartney? Malcom Gladwell thinks it takes a bit of talent and at least 10,000 hours of jamming. So 7 hours a day and 220 working days per year that means 6.5 years of hard work. Well there are lots of financial experts who must have done that but who has out outperformed Warren Buffett? Are you goanna do that to achieve a blissful retirement?

You know how many have tried to figure out which company is the next Microsoft or Apple or…?   The beauty is that you really don’t have to be a stock market addict to achieve your financial goals and probably you can do it with plenty to spare. You don’t even need a lot of financial advice. What you do need is time, living below your means and… being stubborn like a Dutchman. Yeah, I know… If you aren’t Dutch, you aren’t much! Bad luck. Just like Warren said, his birth in North America was a lottery ticket win. So, if you are not Dutch like me, well… it was nice knowing you. 
Just Kidding. But a bit of strong headedness (is that English?) doesn’t hurt and I will show you why. Maybe that motivates you to build a bit of Canadian backbone. Oooh, eh was that not entirely political correct? Anyway, back to serious money matters.
So, I made this spreadsheet. Regular victims of this blog may be aware that I recommend to take profits and build cash now that the bull market is so advanced. But is that really the crux of making big money? Typically, I do have cash when approaching the peak of obvious screaming market tops such as during the high-tech bubble. But other crashes came out of nowhere. As so many tell us, market timing is impossible. My spreadsheet starts in 2016 during which we in Canada had an excellent stock market (close to 24% return or so). Then, I let the nightmare begin with a 30% crash in the first 6 month of 2017. So, after such a fall stocks are on sale and the scenario switches to buying stocks with a vengeance. But, gosh, the timing was off and in the 2nd half of 2017 the market loses another 5%. Thankfully this is not a very long bear market. By June 2018 the market has regained its 2016 highs. So it lost 35% and had, to get back to the same level, i.e. make on the remaining money a 53% return. The last half of 2018 is flat. The market returns 0. What is the result in January 2019?
Fig 1. Portion of spreadsheet showing calculations for 2016 to determine results of investment strategy Case I on net worth.

Well, I have 4 cases that run through this market scenario. All start with a $200,000 portfolio.  Case I with little cash (95,000 in the stock market, 100,000 in real estate and 5% in cash). Case 2 is the ‘high cash’ scenario. $65,000 in stocks, $100,000 in real estate and $35,000 in cash. Who will win by January 2019?  Case 3, is the Panic scenario. We starting out with the Case 1 but after the market crashes 30%, the investor sells all his stocks in a panic and stays out of it until January 2019; well after the market has recovered. LOOSER!  The last is Case 4 – PERFECTION. Just like Case 1 this investor stays low in cash but just before the 30% crash he sells all his stocks. Then he starts buying in January 2018 just when the market takes off. Nobody, except liars, do this consistently. But heck, who wants reality?
So stock investments earn an average 2.5% dividend and the real estate appreciates steadily at 3% per year and cashflows 3% of asset value in net rent. Not entirely realistic but close enough.  Oh, see those guys in Vancouver and Toronto laughing?  (Not for long I think). The spreadsheet with Case 1 is shown in figure 1 (sorry it’s a bit long and had to be chopped).  Anyway, who is looking at it closely anyway. The results are graphically displayed in figure 2 (including calculation errors, although I did my best to not make them).
This was a bit of a shocker for me. I thought being well positioned in cash would make me oodles of money. You can see on the graph what really happened.
Figure 2. Results of various strategies during the fictional bear market of 2017.

Case 1 – Low cash did do OK.  Net worth in January 2019: $264,965
Case 2 – High cash did better. Net worth in January 2019: $267,806 – Better but not a lot.
Case 3 – Panic. Oops   Net worth in January 2019: $214,826. Thanks a lot for real estate. Otherwise he would have lost close to 10% of his net worth. Now he is a bit head.
Case 3 – Unreal Perfection. Net worth in January 2019: 324,058.  Wow. But then nobody is perfect. So, if something is too good to be true, then…

The real lesson is: Never sell in a panic! Have always enough cash to live from and wait out the bad times. Other than perfection, a diversified portfolio will get you through. Even if you did not have the real estate.  Without the real estate you would have accumulated less cash during the downturn for reinvestment in stocks. Also, your net worth would have shown much larger ups and downs which is not good for your stomach and your imitation Dutch strong headedness. A less volatile net worth helps you to not sell in a panic.   Real estate and stocks are not well correlated. Although in 2008 both crashed simultaneously. The only thing that held up well and peaked in 2011 was gold. So, being diversified in asset classes such as stocks, real estate, precious metals and cash helps you combat panic attacks because it reduces volatility.
The real world is filled with numerous scenarios and cases. The investment game is different every day but some basic investment truths, not always in favor of Wall street or your broker, remain. Don’t panic and diversify. The rest is window dressing. I am becoming more and more a fan of Market Index ETFs. Maybe a topic for another post.

Thursday, March 9, 2017

Peak Oil and Gas is back

Oil and Gas exploration and exploitation, in particular of ‘unconventional reservoirs’ has been breathtaking over the last ten or so years. Multi-stage hydraulic fracturing or ‘fracking’ of horizontal wells has been truly revolutionary.  But now stories of depletion are going around lately in plays such as the Bakken of Montana. Now this may be premature but the fact is that the more things change, the more they stay the same. The oil and gas industry is somewhat ‘testosterone driven’ and currently that means, you produce more when you can frack bigger than your neighbors. Not much different from keeping up with the Joneses. But that is, as always with technology, about to change.

My company worked in many tight oil and gas plays and what you are not being told is that many of those ‘revolutionary plays’ have been producing for decades and that the old verticals often produced more over their lifespan than newer horizontals do. There is clearly an ‘end of the road’ scenario developing. Neither has the fracking revolution changed the fundamental laws of physics although many industry concepts have lost their meaning and are in dire need to be redefined. My company is in the forefront of this redefinition, although our financial means are very limited. But the key message is that there is a limit to how much these pools can deliver although the extend of their reserves is mind-blowing.
The question though is economics and the employment of capital to find new plays. So, there is a base price at which oil and gas are uneconomic to produce. Costs have been driven down and some companies can produce at amazingly low prices while still making some money. That is what we are seeing today with oil around $50 per barrel and gas at around $2.8 per mcf. But this is for drilling at rock bottom prices; prices undoubtedly will increase when the number of new drills increase. Then the breakeven price will increase as well.  This is for drilling out known and partially developed plays. But, as said, those existing plays will decrease in output over the coming years.  Individual wells decline typically 60 to 70% in the first year and ‘stabilize’ after a few years around a decline rate of 10 to 20%. To keep on producing at the same level year-in-year-out will require a staggering amount of new-drills.
To offset these costs, industry will try old and new techniques to extend the lives of their wells. I am sure that even the ‘tightest’ oil and gas pools will be revisited over the coming decade to see if fluids or gases can be injected after all to maintain reservoir pressure (the energy that moves the hydrocarbons first to the wellbore and then to the wellhead and pipelines). This will increase the breakeven price even further. Investment capital to finance innovations and exploration for new reserves has dried up to virtually nothing. This is the most expensive portion of oil patch operations and this requires a lot more brain power than just apply ever bigger fracks. Fracks that are now shown, when applied to the maximum, can indeed trigger earthquakes – mild ones but over the long term, who knows…  Speaking in terms of economics and liability, this will likely increase breakeven costs even further.

So will the price of brainpower, especially since we have lost and are about to lose so many baby boomer brains. Yes the young millennium brains bring in new views but also a lot of learning mistakes. From my experience, an experienced baby boomer can evaluate a play two or three times as fast as a millennium(er?) and... do it better. Yes the old brains will possibly deteriorate and the young ones will become more experienced but there is, due to past ‘industry busts’ an enormous age gap between those two generations of oil men and women. So I foresee over the coming 5 to 10 years society will pay dearly for all this in the form of higher oil and gas prices.  It is easy to predict oil and gas prices in straight, inflation adjusted, lines. But that is not reality. To a large degree, our recovery from 2008 financial crises has been financed by cheap energy prices and based on the testosterone of the ‘cowboys’ in the oil patch. Soon this will prove unsustainable and then brain power and expertise will be needed – by then a lot of this expertise has been discarded and lost in the pursuit of cheaper and cheaper drills. Let’s pray that by that time renewables and new energy sources can take up the slack, but somehow, I doubt that very much.
So yes, we will probably never run out of oil and gas, same as for coal – look how much is still in the ground. But there is an economic and practical limit that we can produce at. I would say, there is not only peak oil demand but much more likely there is peak oil supply and it is, once again, just around the corner.

Sunday, March 5, 2017

Another explanation for the populist vote

What is going on in this world?  Brexit, Trump, Marin Le Pen !  Racism; anger ; discontent ; xenophobic drivel!

Let me say it different. People are fed up being told how they should live!  That, I think, is the real issue. We live in a world where information is bombarded into our heads continuously from shouting advertisements when we wake up and turn on our laptop or tablet, to political parties and news papers that berate us on political correctness, worrying about everything from fugitives to SARS to cholesterol, climate change and an economy that approaches the end of the world. Top it off with a continuous flood of change and uncertainty. No wonder people are dreaming of a simpler live and to be left alone. Yesterday my car repair shop reminded me via a direct marketing call that I MUST come in for my 48,000km maintenance and that I better put on a set of new tires.
Then my dentist tells me that I HAVE to floss while I just read in the newspaper that flossing does not have an immediate health benefit. Cholesterol is good again and the consumption of butter is healthy… until next week. Blueberries are a great anti-oxidant and cinnamon is good for diabetics. Every minute there is a new ‘fact’ thrown at you about your physical or mental lifestyle and what you should do. People just are fed up with experts, smooth talking politicians, about hearing that our income hasn’t kept up with inflation and oodles of other nonsense.

It is nonsense! Truly, we never lived so good; if they only stopped telling us how miserable live and the economy is one might actually enjoy  life. But then, who would make money if nobody bought news papers and supported politicians?

This is what the public truly says when voting for Brexit or Trump: ‘Leave me alone. Stop harassing me over paying taxes, carbon BS and border taxes. I just want to live in peace and if you don’t do that then we will vote for alternatives just to get rid of you busybodies.’ In today's world, it is nearly impossible not to be deluged with advice about what you ought to do. Including personal finance.  So shut down your darn computer. Close down your web browser and enjoy life. Get off this blog!

To be honest, I don’t care whether you read this blog or not. I don’t make money of it, nor do I get a lot of feed back. For me it is kind of a financial diary and I shoot my ideas into cyberspace… a vacuous sounding board. Who knows, someone may benefit from it or considers me a looser, a ‘troll’, or whatever. So, close this blog and go enjoy your life without worrying about what I or anyone else tells you about what you should do.
Darn it, even the spell and grammar checker is trying to tell me what to do!  Wellllll EYE Donut Kiff eh Shittt!