Guest Post: There's Something Happening With Oil

Submitted by Yves Lamoureux of Blackmont Capital

There's something happenening here!
What it is ain’t exactly clear. There’s a man with a gun over there.
Telling me I got to beware. I think it’s time we stop, children, what’s
that sound. Everybody look what’s going down.

                                                                            -Buffalo Springfield-

And what’s going down is oil. After our recent warnings on gold, the yen and the carry trade unwinding here comes the energy sector. A big part of inflationary expectations that will get unwound too.

For the last two decades the trend of inflation has been easing. The same as applied to the general trend of the percentage growth in the GDP. One big problem for managers is to drive looking forward rather than manage backward. Oil as an echo bubble will quickly fade away and will bring better prospect at anchoring inflation expectations.

Armed with some of the best real return on treasuries for years, we decided to study the behavior of oil to bonds. We have used the ishares Barclays 20 years ETF as our bond proxy to compare to crude oil.

It becomes evident that in general when oil drops you will see an upturn in the price of the bonds. That’s in theory what you would expect. I also checked the opposite where oil rallied. In fact the TLT used as a proxy does go down and confirms the behavior in both direction.

I believe that with lower sustained inflation expectations a lower term premium will be required for holding bonds.

We are in fact headed back in term structure to the 50’s and 60’s……

Yves Lamoureux, Investment Advisor, Blackmont Capital inc.

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CI Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.