Goodbye, cheap oil!

Monday, 24 October 2022 — Albert Park

[9 min read]

Dear Reader,

Surprise!

We got a big day of green from the US markets in their last session for the week just gone. That’s setting up the Aussie market for a good start to this week.

And thank goodness. It’s been a dog of a market for a good six months or more. But I think the market is turning in favour of the bulls.

You know what’s brought the market down this year. Ukraine. Inflation. Rate fears.

I’d argue these are well priced into the market now…and perhaps we’re due for a bounce, based off nothing else than the reality may not be as bad as originally feared. It usually isn’t.

Certainly, if you’re a Victorian, you’re now being showered with Daniel Andrews’ magic money tree.

Not only is he going to take over the state energy business, he’s going to equity finance new home buyers as well.

The Australian Financial Review reports:

‘Daniel Andrews is offering to pay a quarter of the price of home purchases with a $1.1 billion shared equity scheme in the Victorian premier’s latest intervention into the free market ahead of the November 26 state election.’

Here, laid bare, is the paucity of Australian policy-making.

There is no long-term plan here. Throwing more dollars at housing like that does nothing for affordability. A few lucky buyers get a leg up.

But it’s just treating a symptom instead of the disease. Andrews’ magic money tree is nothing more than an endless stream of debt, and he won’t be around in the top job to pay it off when the time comes.

Much will be said of Daniel Andrews’ legacy whenever he gets the flick, or retires. Most of it will be drivel.

One of the hard facts that can’t be denied is most of his ‘achievements’ are financed with staggering amounts of borrowed money. Victoria is a pauper dressed as a prince.

It may not matter today, or next week, but there will come a time when the Victorian debt has the same global appeal as British gilts do right now.

Victorian debt is simply a worthless stream of paper from a government with unsustainable finances.

You can say that about most bonds that trade around the Western world. Politically, the people won’t tolerate budget cuts even if the current spending can’t be financed from revenue.

So governments and central banks simply create the money in the same way the Bank of England is doing right now to prop up British pensions.

But paper money is not wealth. It is a claim on wealth.

Right now, British pensioners are seeing the purchasing power of the pound shredded as the pound declines and drives up imported costs. The same is true of the Japanese yen.

Energy is the perfect example.

Oil trades in US dollars. If the pound declines against the dollar, it buys less oil. It’s that simple.

The Bank of England can create billions of pounds with a keystroke. But markets aren’t stupid. They either give less oil, or demand more pounds for the same quantity of oil.

And so the British standard of living keeps going down from its former top spot.

Great Britain becomes little England, but nobody planned it that way. It’s just that for every wealth creator like Richard Branson in the UK, there’s now a 100,000 Daniel Andrewses.

Everybody has a spending plan for other people’s money. But how many create wealth now relative to what they receive in ‘free’ healthcare, subsidies, public transport, and all the rest of it? It’s no wonder James Dyson, another business titan of the UK, moved to Singapore.

There’s trillions of wealth locked up in Western bonds right now. As governments inflate their debt, those bond holders are being fleeced of real wealth in the same way the Romans clipped and debased coins.

That wealth in bonds is going to migrate away to ‘real’ assets that protect purchasing power.

One of those is likely to be oil. Green fantasies aside, oil is still power in today’s economy and a massive competitive advantage.

The pampered citizens of the West are waking up to this because it’s finally hitting them where it hurts — their hip pocket.

It was the frackers in the US that kept the cost of oil down the last decade, and most Westerners threw it back in their face on environmental grounds, while enjoying the cheap airfares and lower cost of living the frackers delivered.

Ha! That’s modern Western society for you.

Now we’re in a new era…

Saudi Arabia, for example, feels comfortable today telling the US to jack off because they’re the lowest-cost producer of the world’s most valuable commodity.

If the 2022 bear market has taught investors anything, it’s that in times of trouble, cash flow is king. All the fancy tech stocks with the big plans but no money coming in have gone to the dogs.

Those businesses producing real cash flow — real wealth — are now the desirable companies to own.

Of course, it’s possible for the price of oil to get dragged down in the short term, but that’ll be because the economy’s in recession.

For some green fanatics, that’ll be their fantasy come true — to protect Mother Earth.

Stay tuned this week for more on this from my colleague Greg Canavan. There’s a crude awakening coming indeed.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

In the news this week, The Hill:

‘Home sales declined the most on record in September as mortgage rates surged and pushed prospective buyers out of the once-hot housing market, according to a new report.

‘A report from the real estate company Redfin shows the number of homes sold fell by 25 percent and new listings dropped by 22 percent last month, marking the biggest declines on record in both categories — excluding numbers at the onset of the coronavirus pandemic in April and May 2020.

‘Although prices have declined recently, sky-high mortgage rates have pushed monthly payments up by more than 50 percent year over year, according to the report.’

Middle-class Americans store much of their wealth in their homes. If house prices are cut in half, so is much of their wealth. And, houses are typically a leveraged asset, a liability as well as an asset. They owe money on it. As their asset declines, the gap between the asset and the liability narrows…and sometimes closes altogether. Then, they are ‘under water’, with no more assets left. Only liability.

But household wealth is not an easy-come, easy-go matter. It’s the story of who we are and where we came from. It is a vernacular story; it echoes personal challenges, successes, and failures over many years. We might have laboured for an entire 40-year career in coal mining, truck driving, or biological research. We invested in Amazon…we missed Tesla…and how were we supposed to know the market would turn down in 2022?

Blood, sweat, and years

In a normal, honest, give-and-take world, people do the best they can with what they’ve got. They suffer failures…they enjoy successes; they spend much of the money they earned. But they made their mortgage payments and saved as much as they could. And now those savings are stained with sweat…and often tears.

And then, when they go to their graves, a lawyer does a financial obituary, adding up the hours worked…subtracting the pizzas ordered; he comes up with a final tally.

But sometimes an anti-vernacular event — a rip-off — intrudes.

The novelist Stefan Zweig described hyperinflation in Germany in the early 1920s:

‘The mark plunged down, never to stop until it had reached the fantastic figures of madness — the millions, the billions and trillions. Now the real witches’ sabbath of inflation started…

‘I sent a manuscript to my publisher on which I had worked for a year; to be on the safe side I asked for an advance payment of royalties on ten thousand copies. By the time the check was deposited, it hardly paid the postage I had put on the parcel a week before.

‘On street cars one paid in millions, trucks carried the paper money from the Reichsbank to the other banks, and a fortnight later one found hundred thousand mark notes in the gutter; a beggar had thrown them away contemptuously. A pair of shoelaces cost more than a shoe had once cost; no, more than a fashionable shoe store with two thousand pairs of shoes had cost before; to repair a broken window cost more than the whole house had formerly cost, a book more than the printer’s shop with a hundred presses.’

Teachers had been held in high esteem in German society — before this episode of hyperinflation. But the poor professors’ wages were cut down to nothing by the inflation. They had to roll up their sleeves to pick through the garbage…or turn their daughters out onto the street to prostitute themselves…so that the family might eat.

We’ve seen a more modest version of this with our own eyes.

Promises broken

We had a meeting with the then-president of Argentina in the late ‘90s. He had connected the Argentine peso to the US dollar, one to one. Everything seemed fine. And he swore that they would never abandon ‘the peg’ with the dollar.

‘It would be disastrous’, he predicted.

But just months later, we got to see how disastrous it was. The government had spent too much money. It could no longer afford to redeem pesos for dollars. So, it ‘broke the peg’. Bank accounts were seized. Accounts that had been in dollars were converted to pesos. People who saved in dollars, ‘just to be safe’, suddenly found their wealth clipped of 65% of its value.

Salaries were slashed by inflation. Picking through trash became common. Some people looked through the trash to find something to eat. Others pulled out the cardboard boxes, which they could sell for pennies to recyclers.

There were riots and demonstrations…which ended in the election of one of the most corrupt and incompetent governments in Argentina’s history. Inflation rose. The peso was worth about 30 US cents in the early 2000s. Now it’s worth less than half a penny.

Civilised, vernacular order broke down. People came to see that the system was unfair…and that it rewarded people who cut in line. Each payday, they felt cheated. ‘What’s the point of working?’, they asked themselves. And then…

‘These guys are crooks…and they’re getting rich. I should be a crook too.’

When that happens, the whole system breaks down.

China’s great leap forward

In the late 1950s, China began an ambitious campaign to modernise itself. Led by Mao Tse Tung and the communist party, the Chinese embarked on a great crusade. The whole society — its government, politics, economics, finances, and industries — were all brought together, like an attacking army, to transform China into a modern industrial powerhouse.

At the time, China was an agrarian society. Most people still tilled the soil…and stuck to their traditional ways of life. It wasn’t the most sophisticated economy in the world. But it was capable of supporting 600 million people.

In Mao’s new plan, farmers were forced onto collective farms. Private plots were made illegal. People who tried to keep their own gardens were branded as ‘counterrevolutionaries’, and often tortured, imprisoned, killed outright, or worked to death.

So too, the customs of the countryside were banned. Weddings, funerals, feasts — traditional rituals of vernacular society — were outlawed. They were replaced by propaganda meetings and ‘struggle sessions’, in which the ‘deniers’ and unreconstructed peasants were beaten…forced to admit their crimes…and often killed.

Early on, Mao had played a little trick on his enemies. He invited criticism. This flushed out his adversaries, conservative intellectuals, and ‘bourgeois elements’. Later, these people were targeted. The intellectuals were sent to the countryside, where they were worked and starved. The resistors were tortured, tried, and executed.

Critics learned to keep their mouths shut. Even at the height of the madness…when millions were dying, and it was obvious that the modernising crusade was a ghastly failure…there was very little criticism or debate.

Mao knew nothing about metallurgy. Somehow, he became convinced, in the way confident ignoramuses often are, that the peasants could make steel in backyard furnaces. Millions of trees were cut down to fire up these primitive steel mills. Billions of man-hours were wasted trying to do what couldn’t be done. The result was only a few lumps of useless pig iron.

Meanwhile, those left on the farms were given new directives — from bureaucrats who knew nothing about farming. They were told to plough deeper, in the belief that the roots would have more room to grow…and to plant the seeds closer together to increase the harvest. Then, the deciders set productivity quotas based on their fantasy projections and confiscated almost all the food the farms actually produced.

Elsewhere, crops went unharvested because so many people had been diverted into the fruitless campaign to make steel in backyard ovens.

The result was the largest famine in history — manmade…and unnecessary.

How many died? Maybe 30 million. Maybe 50 million. Jung Chang and Jon Halliday, historians who wrote what many consider the definitive biography, Mao: The Unknown Story, believed 70 million. Of course, no one knows exactly. But the suffering was on a scale not seen since the Black Death haunted Europe. Whole families tried to survive by eating tree bark and clay…but starved to death anyway. There were widespread reports of cannibalism. Trying to escape or begging were punishable — even by death.

In addition to the famine, the communist police and militia did their part. In their efforts to force the Great Leap Forward onto the people, they’re said to have tortured and killed more than two million of them.

The next great crusade

China’s Great Leap Forward is worth studying. Because it’s recent history; it happened during the lifetimes of many people reading this.

Science was already well developed — including chemistry, metallurgy, and agriculture.

China, for all its faults, had automobiles and trains…it had tractors and trucks. And it had a civilised culture that was thousands of years old.

And yet, its elite — then in charge of the communist party — thought they knew better. Even when they saw that their new crusade would actually reduce China’s GDP and its population — they refused to admit failure. Instead, they stuck with it, only gradually and quietly dropping the worst elements of the program.

Chairman Mao, by the early ‘60s, was responsible for causing the deaths of millions of his countrymen. But he was neither disgraced nor hung…instead, he was a hero, and reclaimed power in 1966. Then, he began yet another Great Crusade, the Cultural Revolution, which resulted in maybe a million more deaths.

How was it possible? How did so many people allow themselves to be bullied and bamboozled into such lethal programs?

People are neither always good nor always bad…neither always smart nor always dumb…but always subject to influence. And the influences are not always good ones. The big-mouths, the meddlers, and the power-mad monsters always cause problems. And then, they offer solutions that are worse than the problems they are meant to solve.

There’s no record of any public crusade, intended to make the world better, that actually did so. The Great Crusades of the Middle Ages, the religious wars of the 15th, 16th, and 17th centuries, the French Revolution and the Terror, the First World War, the Russian Revolution, Nazi Germany, the Soviet Union…Prohibition, the War on Poverty, the War on Drugs, the War on Terrorism — all were disasters.

And now, the people who brought you these marvellous mishaps bring you another big campaign. It may be the most ambitious crusade in human history.

Like the Great Leap Forward, it’s led by fanatics. Dissent is repressed as ‘misinformation’. And it will upend our traditional, vernacular economy.

There are now eight billion people on planet Earth. They depend on fossil fuel. More importantly, they depend on the system that brought us fossil fuel — a system of bid and ask…please and thank you…give and take…

…that is, they depend on a vernacular economy that gives them what they want — fairly, freely, and effectively.

Take away that economy…substitute central planning by bureaucrats and party hacks, armed with statistics, quotas, rifles, tear gas, penalties, subsidies…

…and ‘printing-press’ money…

…and what do you have?

A cold day in hell.

Regards,

Bill Bonner,
For The Daily Reckoning Australia