M&B Fund Underweight Energy Pitch: Revisited

Then:

Maize & Blue Fund - Economist Group - Sector Pitch - Underweight Energy

Now:

Comments

[egdeh orez]

Good call.

I began heavily short oil a month ago as well.  I thought I was crazy until I read your report.

[John Self]

Good analysis.  Everyone should note the time horizon (3-6 mos.), though.  On a longer time frame, I like the sector -- unless China flames out.

[Mark of Zerro]

Nice analysis.  But the thing is, why do I now have the urge to go long oil?! 

[Sudden Debt]

forget that urge... I bought a shotload of speeders long on oil friday, and it looks like the stoploss will be reached today...

[steve from virginia]

This analysis is backward: the inability of the economy to withstand oil prices above a certain nominal 'pain level' sets the dollar value of crude on the upper bound.

The flight to dollars is a recognition of the non- inflationary relationship of dollars against crude. The dollar is a defacto hard(ening) currency backed by crude oil. That is, each dollar is freely exchangable on demand for a valuable physical good. From this all the ills of credit imbalance are manifesting themselves both overseas and in the US.

Instead of questionable (sovereign/corporate/municipal/junk) debt, non- oil commodities or other currencies the 'smart set' wants cash. Consider, the Federal reserve has been running a money laundry for Wall Street insiders and banks to convert illiquid 'securites' also for USA cash. Dollar is king and currency is the new 'it' girl.

The hard dollar is exceptionally deflationary and as more traders recognize dollar value vis- a- vis oil there will be an increasing preference for it, a preference that in turn amplifies the dollar's value - and the preference for it - further.

The next 'turn' will be when cash dollar preference manifests itself in Treasuries worldwide as all and sundries sell to raise cash dollars - so as to buy fuel. Dollar preference rather than deficits are the real hazard looming over the time horizon.

Meanwhile, back at the ranch, as the nominal price of crude declines, its 'real' price or its percentage of input costs relative to output will continue to increase as it has since 1999. Right now oil is too expensive to leverage the sort of wasteful commerce that has been the mainstream of US business activity since the end of WWII. Wasteful (fun) commerce is all the post- modern economy has to offer, unfortunately.

Check back next year as the only forms of 'economy' will be the buying and selling of money in order to gain dollars and access to fuel which sheds utility as its real value increases. This situation is analogous to that in the early 1930's before the various gold standards were abandoned. Gold prior was a reasonable means of rationalizing international exchange at a reasonable gold price. As the real price of gold increased it became too valuable/costly to exchange. The lack of exchange priced productive economies out of business along with banking systems one after the other.

The challenge now is to abandon the oil standard which is solidifying under our feet.

Right now both oil and dollars are becoming too valuable to waste which undercuts the basis of all the world's economies.

[tom a taxpayer]

Steve - Thanks for the insights. I appreciate your in-depth analysis.

[besodemuerte]

I still have difficulties understanding this, but from a common sense stance it's logical to think oil is the real backbone of the world and thus effects everything to substantial length.  Gold is great and all but to be blunt, if you don't have oil...you die.  Your economy dies, your military dies, your lifestyle dies, and your country dies.  That is, until someone comes up with the next revolutionary power source.  Therefore continuing the chain of discovering new and better power sources than yesteryear throughout history.