Post #3205 J

Interesting Financial Speculations

I think if you do any kind of financial investments, you always get these promotions from various investment newsletters, many from the perma-bear camp, that a financial Armageddon is just around the corner. If we consider something like 1 of every 3 years is down over the recent history of the major indexes, eventually the fear-mongering doom-and-gloomers feel that they are vindicated, even if we don't see a total collapse of say 60% or more.

I have looked at investment newsletters in the past, but to be honest there's nothing in what I own which is a current or past stock pick. As I mentioned in a recent post, I'm having to believe in a stock's story, and in a pricey market, I also subject the pick to a variety of fundamental and technical tests. (In addition, I limit the size of my position and may build the position in installments.) Like any honest investor, I've made my share of losing positions over time; hopefully, I've learned from my mistakes, and at least with my retirement money, my net gains (including any losses) have multiplied my original investment.

But there are some recent comments made by certain analysts that I've found very interesting:

• The Fed's war on interest rates has had unintended consequences. One example is a major agricultural equipment manufacturer which makes loans to farmers. The author suggests that the financing subsidiary is able to effectively pass the benefit of cheap money in the form of  lower-cost loans to their equipment customers. Lower loan costs effectively lower the prices of new/additional tractors and other farming equipment (and/or lowers the barriers of entry for new farmers). The greater competition/output of farm products can result in lower prices and farm income--pressuring the ability of farmers to pay off those loans. Those loans could come back to haunt the equipment manufacturer. (Of course, you could see similar plays in natural resource overcapacity, which had been supported by China's import materials binge. 

Then, of course, there was the recent shale oil/gas boom fueled by up to 30% of  aggregate loan amounts made on cheap money policy, all too vulnerable to a commodity price war from OPEC. A simple Internet search will show 67 energy companies in 2015 alone filed for bankruptcy, many Wall Street banks having to boost energy loss-reserves, 9 of the top 10 bankruptcies in 2016 being energy companies, etc. Why is it just years after a massive real estate bubble fueled by cheap money policy (and other dysfunctional public policies) burst, that we saw another bubble emerge in the oil patch? It's not like in a sluggish global economy bankers couldn't foresee OPEC defending market share with price cuts.)

• Another bear analyst suggests that capital flight from collapsing European Union and Japan economies could find their way to Wall Street, resulting in an unsustainable stock market bubble and an inevitable day of reckoning.

Here's another interesting note (let me first note, I've been an Amazon customer for almost 20 years; I don't directly own it, although it may be included in a high tech ETF position). Although Amazon recently reported a good year over year profit increase and continues to report impressive quarterly sales revenue gains, during its whole history, it hasn't gained, say, for example, a Walmart annual profit in the neighborhood of say $17B.  The argument is, of course, Amazon has had to build a nationwide distribution system and is a dominant retailer with which even Walmart is having trouble countering. But still, its profit margin per revenue dollar is tiny and you have to wonder if and when long-patient investors will be rewarded. (Granted, their unrealized capital gains are impressive.) Still, you have to wonder how much this build-out would be possible if we did not have extraordinarily accommodating money policy.

via IBT

One of the most worrisome comments I've seen is from an analyst on Tesla:

We don't think earnings matter... The stock seems so disconnected from any form of fundamentals, and right now is purely driven by momentum — making earnings less relevant

Let's be clear: I am NOT calling a market top here, but we are likely in the late inning of the ball game that began in 2009. I'm worried about two things in particular:

• I am worried about Trump's response to even a minor recession.  He seems like a Herbert Hoover-redux. He could trigger a global economic trade war. Already he has scrapped TPP and is suggesting that he wants to renegotiate NAFTA.
• I'm not sure how the Fed will respond to a new crisis. They don't have much of an interest rate, and they still have a bloated balance sheet from rounds of quantitative easing. Right now Treasury bonds are still the gold standard of safety, but our national debt is larger than the economy. The nightmare scenario is where the Fed has to step in to buy Treasury bonds to bid prices higher, to support interest rates. When and if the market senses the Fed is monetizing the debt or holders start dumping Treasury notes, we could see inflation rear its ugly head.

The Oil Patch Boom and Bust

If you go back just a few years back in the blog, you can find my discussions of Williston, ND, a focal point for the oil shale Bakken formation. In the early part of the decade, Williston became an oasis of prosperity; the local and state unemployment rate was negligible. It wasn't just that oil field workers and truckers were pulling in high-5 to 6-figure wages; it had a spillover effect in the local economy. I remember pointing out in the minimum-wage kerfuffles that even fast food places were having to nearly double the minimum wage (or more) to attract workers; Walmart was posting job listings starting at $17/hour; their business was so brisk, customers were buying merchandise off pallets, not even waiting for shelves to be stocked. Monthly apartment rates had skyrocketed from hundreds to thousands of dollars.

So what happened when the global price of oil dipped below the high marginal costs of Bakken production (as it has remained since the Saudi price attack)? I suspected but I never looked it up until I started work on this post: this year-old post talks of 45 statewide fracking crews reduced to 8, new apartments going vacant despite 50% lower rates, Walmart and other (energy) area businesses cutting wages 15-30%; people are taking on second jobs to make ends meet; the population has dipped 15%, tax revenue has been cut in half and public debt has been downgraded to junk status. Hotels filled to capacity now are two-thirds vacant, despite a 25% rate cut. Transportation to and from the area has drastically dropped.

The boom/bust was not the first; Williston had had prior experience in the 50's and 80's. And certainly the oil story has not died, although we would need to see a more robust global economy and recovery in natural resources.