Oil Breaks Down: Should Stock Market Bulls Be Worried?
From CHRIS KIMBLE, technical market analyst:
The above chart from the IEA shows that the United States is projected to provide 70% of the increase in global oil supply over next five years. And below are maps of Vancouver's supply of electric vehicle chargers compared to Amsterdam's.
The competing forces are energized and heating up in the forthcoming U.S. election cycle.
Chris Hayes All In with AOC
As I have been pointing out on my chart of TSX INDEXES for Energy, Real Estate, Financial Services, Gold and the Bank of Canada Commodities in $CAD, that...
...the Thompson Reuters CRB chart embedded in the chart shows that global commodities measured in USD has been dropping since 2008, although recently since September (2018), there has been a near term rally in commodities... BUT
...since Oct 3, 2018, the Thomson Reuters/CoreCommodity CRB Index has been coiling down (MarketWatch.com).
On my Twitter Feed from @hks55 came their chart suggesting that the commodity super cycle is poised for another leg down due to China's slowdown in credit creation that had spurred the commodity boom as Kyle Bass illustrates in this comparison between Chinese credit creation and their GDP (the link includes the 41 second video).
China’s Slower Credit Growth
Underscores Worries Over Economy
Bloomberg, Aug 2018
It's a big day in the Oil Markets as the price of crude slips below the sentiment price of US$50 the list is growing of oil majors who are withdrawing from further investment in Alberta.
Also yields in the bond markets are continuing their rising trend; ie: the cost to finance is rising.
- MAR 9/17 Lower oil prices have the potential to take down the stock market Market Watch
- MAR 9/17 Energy Credit Risk Soars As Crude Carnage Continues Zero Hedge
- MAR 9/17 U.S. Solar Market Has Record-Breaking Year, Total Market Poised to Triple in Next Five Years SEIA Org
- MAR 9/17 Canadian crude just got a lot more Canadian as another global giant bails on the oilsands Financial Post
- MAR 8/17 World Doubled Its Solar Power Capacity in 2016 Futurism
- FEB 26/17 With Shale Oil Production Like This, Who Needs Trump? Bloomberg
- FEB 22/17 Exxon will leave 3.6-billion barrels of tar sands oil in the ground Environmental Defense
- FEB 14/17 Don't Hold Your Breath For $70 Oil Prices Forbes
- JAN 15/17 Future of the oilsands: the good, the bad and the ugly CBC News
- DEC 14/16 Norwegian giant pulls out of Alberta's oilsands National Observer
- APR 21/16 Kurzweil predicts solar industry dominance in 12 years Electrek
The first bullet point above should concern the Canadian real estate markets. If a stock market correction gets sparked, the combination of rising interest rates and falling equity values should spook the real estate bull. Mortgage term renewals will go up in price and the bank of mom and dad will reconsider the risk of the rising cost of money. Parents, especially retirement aged or close to it, will not be too eager to take on more debt and purchasers of any age will have to consider timing as an investment criteria rather than buying anything with a front door for fear of missing out as is happening in Toronto. Timing is difficult, but lenders would become more insistent on basic risk assessment fundamentals such as the Income Approach to valuation instead of a rubber stamp and a drive-by appraisal.
Sentiment change is an investment killer and in Canada it would not take much to gather momentum as evidenced in my ongoing Federal Direct Investment plot which has been negative for almost 20 years, and which widened dramatically in 2015. Capital flows are net positive going out of Canada because investors want better returns which is why the oil majors are leaving Alberta for less regulatory and lower cost of production environments.
A March 2000 stock market correction event would lend credence to my February 22, 2017 post Need For Speed which posits that a housing correction could unfold in a much shorter time span than what Harry Dent has in mind especially with Trump-O-Nomics in the house.
Al Gore on the Solar Revolution - TED Talk Clip 1.50 min
2 solar home systems sold every minute in Bangladesh
Zombie real estate in Vancouver BC is a problem. The owners have placed a high value on keeping them empty when vacancy rates are at historical lows. See the Beautiful Empty Homes Vancouver archive. In March 2016, theGeorgia Straight reported some 10,000 condos were vacant. The city now wants to tax the owners between a ½% and 2% of the assessed value; CBC News Sept 14, 2016.
As it is now with the state playing monkey business with interest rates (ZIRP and NIRP) and removing credit risk from a lender's balance sheet (CMHC) and reacting with "supra" taxes layered upon individuals deemed to be distorting the market, we end up with more complexity, uncertainty and unproductive investment.
Land management should not be in the hands of short term profiteers. There are alternatives. Land in the Fiji Islands is managed through three complementary systems. Leased land covers 90% of their territory (83% "Native Land", 7% "Crown Land") and 10% of the land is "Freehold". Source
If land costs were built on productivity incentives and protected from the boom and bust of demographic pressure, urban planning departments could create longer term strategies and developers could be more productive on the improvement side of land development. But with very high land costs, the market forces us to build to the minimum of efficiency standards and the maximum of financial rewards.
The crappy little toaster that you call an electric baseboard heater inside an inefficient envelope is indeed just a heat transferring conduit. The condo boom is a commodity arbitrage not an affordable housing plan. (The Condo Game, CBC Doc Zone, January 2015)
The Democratization of Production
Be lazy like a fox. WikiHouse
Tesla's Powerwall 2 and Solar Roof Launch
The sun provides more than enough energy in just one hour to supply our planet’s energy needs for an entire year. Your home can capture this free, abundant energy source through rooftop solar tiles, turning sunlight into electricity for immediate use or storage in a Powerwall battery. Tesla, October 28, 2016
Grim expense report: Alberta's debt soars to $10.9 billion
CTV NEWS August 24, 2016
MEANWHILE: Tesla Master Plan Part Deux July 20, 2016
The Grand Opening of the Tesla Gigafactory
Building the world’s largest battery factory
to accelerate a sustainable energy future. July 30, 2016
While we wait for the April real estate data to dribble in, let's look at the commodity sector that peaked in 2011 and is now threatening to break a major uptrend channel and possibly retest the 2006 lows; a time when the Yield Curve inverted and soon after the BoC and U.S. Fed etal went on a ZIRP to NIRP bender in an effort to spark inflation. Clearly low rates have not produced CPI inflation but a speculative frenzy for Yield.
The top panel in the mashup above is the Thomson Reuters Commodity Index chart since the 1980's provided by Kimble Charting Solutions. The commodity index is made up of 18% Energy, 24% Metals, 29% Softs and 29% Agriculture.
The bottom panel is from ZeroHedge and their post underscores that energy junk bonds are at an all time default rate high.
...the energy high-yield default has soared to a record 13% rate, surpassing the 9.7% mark set in 1999, according to Fitch Ratings.
AND THIS from Bloomberg May 1, 2016 Saudi Arabia's determination to keep pumping more oil into global markets brings to mind its former oil minister Sheikh Yamani, who said back in 2000 that the Stone Age did not end for a lack of stones, and the oil age will not end for a lack of oil.Those working for him at the time, interpreted this as a warning to OPEC about the pursuit of high oil prices: namely, that it would just speed up the development of alternative technologies and drive away customers, leaving oil sitting beneath the ground without buyers.Sixteen years later, the kingdom's leaders seem to have heeded his warning. Both Deputy Crown Prince Mohammed bin Salman and oil minister Ali al-Naimi have said they will no longer subsidize high-cost oil production by limiting supply. If there's oil to be left under the ground, they're determined it won't be Saudi Arabia's.
Battery Powered Homes
The aging boom in real estate has been fabulous for sellers unloading risky and depreciating assets. A recent study of "good and bad booms" (abstract below) suggests that as productivity declines over an aging boom, the risk of insufficient collateral becomes evident. The U.S. productivity chart has momentum relative to Canada's.
Abstract: Good Booms, Bad Booms
by Gary Gorton and Guillermo Ordoñez, February 2016
NBER Working Paper No. 22008
Credit booms are not rare and usually precede financial crises. However, some end in a crisis (bad booms) while others do not (good booms). We document that credit booms start with an increase in productivity, which subsequently falls much faster during bad booms.
We develop a model in which crises happen when credit markets change to an information regime with careful examination of collateral.
As this examination is more valuable when collateral backs projects with low productivity, crises become more likely during booms that display large productivity declines. As productivity decays over a boom as an endogenous result of more economic activity, a crisis may be the result of an exhausted boom and not necessarily of a negative productivity shock. We test the main predictions of the model and identify the component of productivity behind crises.
Canada needs stronger business investment
Glen Hodgson, Conference Board of Canada
“2015 was another mediocre year for the Canadian economy, growing by only 1 per cent in 2015 after a technical recession in the first half of the year. The weakest aspect of Canada’s economy this year was the feeble performance of private investment, projected by the Conference Board of Canada to contract by nearly 8 per cent compared to 2014 levels. Much of this contraction is due to the sharp pullback in investment in the oil patch, now expected to decline by 40 per cent over the course of the year. That result for 2015 is depressing enough—but as the chart shows, Canada’s poor private investment performance in 2015 was not a one-time thing.
There’s more to this story than just low oil prices as Canadian firms continue to sit on mountains of cash embedded in their balance sheets. As a result, it is no surprise that we are in the midst of a multi-year period where growth in private investment is weak—the lagging edge of our economy—with little sign of a significant turnaround in 2016. A prolonged period of little or no real growth in private investment is bad news for productivity growth, since it suggests we are missing opportunities to invest in new technology, build our productive base and boost the competitiveness of the Canadian economy. What could prompt stronger investment growth? The growing U.S. recovery should boost demand for Canadian exports and eventually cause firms to invest in order to expand their productive capacity and seize the available export opportunities. But until there is evidence that Canadian firms are responding to a stronger order book, private investment will remain the lagging edge of our economy.”
Global GDP is slumping
Bob Hoye, Institutional Advisors
“The graph of global nominal GDP runs from 1981 to date and covers another “new era” of financial manias. Our era has been fabulous as reckless adventurers have dominated financial markets as well as central banks. As with previous examples, the action has been mainly in financial assets with real estate prices soaring in the financial centres. Although the experiment in ambitious policy has seemed without limit, there was a severe setback in 2009.
The alert to the “Great Recession” was classic. Credit spreads reversed to widening in June 2007 and commodities reversed to weakening in June 2008. The rest as the saying went, was history. At -5 per cent, the current slump in global GDP is almost as severe as the one in 2009. This was preceded by the reversal in credit spreads and weakening commodities that began in June 2014. Central bankers have been charged with preventing contractions. This diminishes perceptions of risk and accounts get leveraged. Throughout history margin clerks have always trumped central bankers. This time around, central banks are highly leveraged.”
Bob Dylan - Things Have Changed
First In ~ First Out
According to StatsCan, in 2001 after the dot.com blowout and the markets then turned to commodities, there were +/- 329,129 employees working in the Oil, Gas & Mining industries per year in Canada and in full year 2014 that number had increased by 60.8% to 529,248.
This includes "support activities" but not the peripheral jobs in the general economy that depend on the spending by those oil, gas and mining employees.
According to the New York Times December 8, 2015 "If It Owns a Well or a Mine, It’s Probably in Trouble".
“The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm. “Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.”
Some energy experts are even beginning to express concerns that sovereign wealth funds of Saudi Arabia and other wealthy Persian Gulf and oil-producing countries will redeem their money from investment firms in the coming year to shore up their balance sheets. If they do, the moves could initiate more instability in global equity and debt markets.
Credit lines drying up for oil companies?
Distress (bonds trading over 1,000bps) has been spreading across the HY space. From its starting point in energy a year ago, it has now reached other commodity-sensitive areas such as transportation, materials, capital goods, and commercial services. But it did not stop here and is also visible in places like retail, gaming, media, consumer staples, and technology – all areas that were widely expected to be insulated from low oil prices, if not even benefitting form them.
In other words, what was until a year ago a purely "energy" phenomenon is now an "everything" phenomenon, despite promises by every prominent economist that plunging energy prices are great news for the economy.
Imagine $35 Oil for 5yrs
A US-Style Canadian housing correction possibility is a potential that CMHC's CEO Evan Siddall discussed at a private audience presentation in New York, November 30, 2015 if oil remained at an average price of USD$35 per barrel for 5 years.
The top chart are oil prices since the OAPEC (Arab members of OPEC plus Egypt & Syria) oil embargo. Note the 22 year period of sub-$35 oil prices not long ago.
Oil averaging $35/bbl for 5 years
- 26% drop in Canadian home prices
- 12.5% peak unemployment
Global deflation and a US-style Housing Correction
- 30-44% drop in Canadian home prices
- 12-16% peak unemployment
"Canada’s home price growth since the 2008 recession has outpaced that of the U.S., Australia, and the U.K. It also reiterated risks to housing include high debt-to-income and concentration of net worth in housing." Financial Post November 30, 2015 (My Household Debt and Earnings charts are updated monthly - BR)
Donald Sadoway "Science Serving Society"
Energy 2064 with Professor Donald R. Sadoway
The Bill Gates Backed Canadian Building a Better Battery
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
Balance Of Trade
Rent Or Buy