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?






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