Register

Peak Oil is You


Donate Bitcoins ;-) or Paypal :-)


Page added on March 5, 2020

Bookmark and Share

The Things That Matter Don’t Change

Business
Summary

There is gravity to the coronavirus and the possibility to spread and infect populations around the globe.

The coronavirus points to the clear danger of concentrating manufacturing supply chains in one country.

As the U.S. downsizes its navy and withdraws from being the world’s policeman, the transport of oil to where it’s needed will become more perilous.

By James Puplava

Admit it. It’s discomforting. It makes you ill at ease. It makes you question the world around you. In a matter of a few days, the markets have plunged into chaos and disorder. What changed? Gone is ebullience, replaced by fear and despair. Such is today’s world of high frequency trading, financial concentration, and a massive index bubble. What used to take weeks, if not months, can now take place in just a few days. As shown in the graph below, in just one week the Dow fell over 4,000 points breaking through its 50-day and 200-day averages. Even if you are not an investor, you are aware of what is happening in the markets.

Source: Stockcharts.com, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

The world is bracing for a possible pandemic. There is gravity to the coronavirus and the possibility to spread and infect populations around the globe. But if there is any country to best minimize its lethality, it is the U.S.

In the short term, it’s impacting travel and global supply chains. Companies like Apple (NASDAQ:AAPL), Hyundai (OTCPK:HYMLF), and Nissan (OTCPK:NSANY) are forced to close factories or cut production outside of China. The result is global manufacturing inventory levels have plunged to their lowest levels since 2012. While at the same time, rising orders could deplete these low levels of inventory even faster.

Even as the virus is spreading to other nations, the good news is that China is reporting a slowdown in the number of outbreaks and deaths. In the words of the late John Bogle, “this too, shall pass.” When it does, which could be as soon as the end of the second, third, or fourth quarter of this year, economic activity will sharply pick up in order to replenish depleted inventories.

But what if things don’t improve or this turns into an actual pandemic? What then? A black swan event such as this could possibly derail the current recovery or, worse, lead to a possible recession. We can’t rule out the worst.

Changes in the Global Supply Chain

On a positive note, I believe with containment, restrictions on travel, a possible vaccine and the best possible medical care and facilities in the world, this virus will eventually be contained. What will change and has now become a widely discussed theme on our podcast and elsewhere, is the global supply chain. The coronavirus points to the clear danger of concentrating on manufacturing supply chains in one country. The rerouting of global supply chains was already moving from China to other countries as companies diversify their supply chains making them less vulnerable to disruptions from either tariffs or pandemics as we see now.

The global order and supply chain management is in the process of reversing as globalization trends reverse themselves and political alignments reorder themselves. These are topics we covered earlier this year in an FS Insider interview with geopolitical strategist Peter Zeihan on his new book Disunited Nations: The Scramble for Power in an Ungoverned World. His book deals with many of the issues of the transition to clean energy which will not go smoothly or work in many countries during this new realignment of the economic order.

Coca Cola, Exxon Mobil, and IBM

I want to share with you a few slides from last year’s client meetings. They are a graph of three companies during the great financial crisis when the S&P 500 lost close to 60% of its value. These three companies experienced half the loss and recovered quickly once the bear market ended. More importantly, is what happened to their dividends during the greatest financial crisis since the Great Depression. Had you done nothing, you would have received your dividends and those dividends went up every year during the financial crisis. During the financial crisis, IBM (NYSE:IBM) increased its dividend 95% and 199% since the crisis ended. Coca-Cola (NYSE:KO) increased its dividend over 32% and Exxon (NYSE:XOM) raised its dividend 30%.

The stock prices of all three companies fell a little over 30% during one of the biggest and longest-lasting bear markets in history. But the dividends continue uninterrupted. I cannot guarantee future performance of any company. Nothing in life or the markets is guaranteed. But I can say with a high degree of confidence that a dividend aristocrat (company that has raised its dividend every year for 25 years or more) is likely to continue doing so in the future.

In a world of negative interest rates and 1- to 5-year treasury yields now down below 1% as of this writing, it is nice to be able to provide income and yields that are far above the market and that continues to rise each year. No one enjoys seeing a stock they own fall in price but the reason we own these companies is for their dividends and the possibility of dividend increases. That will not change despite fluctuations in stock prices. Historically, a company with rising profits, cash flows and rising dividends eventually rise in value along with rising stock prices.

A Note on Energy

The feeling on Wall Street is fossil fuels are dead, passé and investment shibboleth. This is a false narrative pedaled by Wall Street and Washington with the belief we have reached “peak demand” for oil and fossil fuels. Things have reached such extremes that U.S. energy stocks are at the lowest price relative to the S&P 500 since the attack on Pearl Harbor.

The current state of energy companies has more to do with their success and the shale revolution that took U.S. oil production from just over 5 million barrels per day (MBD) to the current rate of 12.6 MBD, turning the U.S. once again to the world’s largest energy producer in less than a decade, far above either Saudi Arabia or Russia. The other factor is the mistaken belief in what Wall Street and Washington are promulgating as “peak demand.”

In my opinion, this false narrative is going to be shattered by the middle of the decade when we’ll be more likely to experience another oil shock instead of an oil collapse. I would like to point to two studies, one geological by the Geological Survey of Finland and one geopolitical by Zeihan. They both come to the same conclusions but from two different perspectives: Oil is the lifeblood of the global industrial economy.

If the price rises as it did in 2009, economic growth cannot happen. According to the Finland study, the global system was still 84.7% dependent on fossil fuels. Oil accounts for 90% of the global supply chain and all manufactured products depend on the availability of oil-derived products or services. It is a prerequisite for the transportation of large quantities of goods over long distances. Oil, information technology, container ships, trucks, train, and aircraft form the backbone of globalization and our current industrial ecosystem. According to the study’s authors, a global lack of oil could represent a systemic risk to the functioning of global economies. As shown in the Finland study, everything in our modern world either runs on or is made from oil.

The study concludes the transition to clean energy and electric vehicles will not be smooth and will take much longer than what is commonly believed with the risk of disruption. Zeihan reaches the same conclusion from a different perspective geopolitically. Without energy, there is no industrial lifestyle. The problem with oil, according to Zeihan, is it is not where people are, and it is only thanks to American naval sea supremacy that has allowed oil to reach the people with minimum fuss. He points out that clean energy needs economies of scale: huge utility-level facilities in calm, sunny deserts or windswept plains-zones not well-known for hosting large population centers. This is in abundance in countries like the U.S., Australia, Mexico, Argentina, and South Africa. For the bulk of the other 85% of the earth’s land, green tech isn’t yet productive enough to be all that useful at displacing fossil fuels in scale. Zeihan emphasized four-fifths of the world’s international crude oil is waterborne. As the U.S. downsizes its navy and withdraws from being the world’s policeman, the transport of oil to where it’s needed will become more perilous.

In another important point from OilPrice.com, about 70% of the world’s oil supply comes from fields discovered before 1970, and the bulk of that oil comes from 10-20 enormous fields now in decline. Over 81% of existing oil production is already in decline with average decline rates from 5-7%. In order to make the transition to clean energy, we will need the discovery of four additional Saudi Arabia’s by 2040. U.S. shale is now running on fumes and needs higher oil prices in order to grow. Without oil, the world does not grow.

That is the reason we own oil and oil companies that pay good dividends. If you’re alive today or were just born, you will live in the oil age for the rest of this century despite what the pundits on Wall Street and Washington tell you.

Original Post



114 Comments on "The Things That Matter Don’t Change"

  1. JuanP on Sat, 7th Mar 2020 3:35 pm 

    Just so y’all no. A millions not as big as it used to be.

    WOOO WOOO!!!

  2. JuanP on Sat, 7th Mar 2020 3:37 pm 

    Theres nothin for me to fear but my insanity.

    I runnin out of toilet paper.

    I the worse cus me don’t use toilet papar.

  3. Davy on Sat, 7th Mar 2020 3:41 pm 

    So true juanpee. so true

  4. Davy on Sat, 7th Mar 2020 5:04 pm 

    Hey everyone, I’m now breaking my plagiarized cut and paste salads into multiple parts now, in the vain hope that someone, anyone, will pay some kind of attention to me. I used to spam my stupid stolen salads all in one go, but you all kept neutering me so bad I had a find a slightly different, but in the end, identical way of presenting you my stupid zeroIQ nonsense.

    I hope enjoyed them as much as I enjoy plagiarizing the works and words of others whose intellect I couldn’t hope to match.

  5. REAL Green on Sat, 7th Mar 2020 5:24 pm 

    So true Davy. So true.

  6. JuanP on Sat, 7th Mar 2020 5:54 pm 

    Hey everyone, I’m now breaking my plagiarized cut and paste salads into multiple parts now, in the vain hope that someone, anyone, will pay some kind of attention to me. I used to spam my stupid stolen salads all in one go, but you all kept neutering me so bad I had a find a slightly different, but in the end, identical way of presenting you my stupid zeroIQ nonsense.

    I hope enjoyed them as much as I enjoy plagiarizing the works and words of others whose intellect I couldn’t hope to match.

  7. Richard Guunette on Sat, 7th Mar 2020 5:54 pm 

    That’s right fucknut so leave!

  8. Davy on Sat, 7th Mar 2020 6:10 pm 

    Were not foolin anyone. We all no Richard Guunette and JuanP and REAL Green are us.

    Dumbasses

  9. JuanP on Sat, 7th Mar 2020 6:37 pm 

    Were not foolin anyone. We all no Richard Guunette is JuanP and He wants to be REAL Green

    Dumbasses

  10. Davy on Tue, 10th Mar 2020 4:48 pm 

    “”Deeper Than Corona” – The Real Causes Of The Oncoming Economic Collapse”
    https://tinyurl.com/tv9keg7 zero hedge

    “That while the coronavirus may in fact be the catalyzer for the oncoming financial blowout, it is the height of stupidity to believe that it is the cause, as the seeds of the crisis goes deeper and originated much earlier than most people are prepared to admit.”

    “The Ugly Truth of Today’s Crisis”

    “New “sub-prime” bubbles have been created in the Corporate Debt sector which has risen to over $13.8 trillion (up 16% from the year earlier). A quarter of which is considered junk, and another half graded at BB by Moodies (a step above junk). Household debt, student and auto debt has skyrocketed and since wages have not kept up with inflation causing even more unpayable debts have been incurred in desperation. Industrial jobs have collapsed consistently since 1971, and low paying service jobs have taken over like a plague. The last report from the American Society of Civil Engineers concluded that America desperately needs to spend $4.5 trillion just to bring its decayed infrastructure up to safety levels. Roads, bridges, rail, dams, airports, schools all received near failing grades with the average age of Dams clocking in at 56 years, and many water pipes over 100 years old, and transmission/distribution lines are well over 60 years. The factories which once supplied those infrastructure needs are long outsourced, and much of the productive workforce that had that living knowledge to build a nation are retired or dead leaving a deadly generation knowledge gap in its place filled with millennials who never knew what a productive economy looked like (and aging baby boomers who have tried hard to forget what it was). American farmers have probably been the most devastated in all this with dramatic population losses across the entire farm belt of America and the average age of farmers now 60 years. It was recently reported that 82% of U.S. Agricultural family income comes from off farms, as mega cartels have taken over all aspects of farming (from equipment/supplies, packaging and the even the actual farming in between).”

    “Like any addict who wakes up one morning at rock bottom with the sudden terror that his death is nigh, the first step is admitting we have a problem. This means simply: acknowledging the true nature of the current economic calamity instead of trying to blame “coronavirus” or China, or some other scapegoat. The next step is begin to act on reality instead of continuing to take heroine (a fine metaphor for the addiction to derivatives speculation). An obvious first step to this recovery involves restoring Glass-Steagall in order to 1) break up the Too Big to Fail banks and 2) impose a standard of judging “false” value from “legitimate” value which is currently absent from the modern psycho that lost all sense of needs vs wants. This would allow nations to re-create a purge of the unpayable fictitious debt and other claims from the system while preserving whatever is tied to the real economy (whatever is directly connected to life). This process is sort of akin to cutting a cancer. This act would look very similar to what Franklin Roosevelt did in 1933 which I outlined in my recent paper How to Crush a Bankers’ Dictatorship.”

    “Where Franklin Roosevelt had to drive this process solo in the 1930s, today’s America luckily has a China-Russia alliance that have created a powerful “New Deal” of win-win cooperation in the form of the evolving Belt and Road Initiative with invitations for western nations to jump on board.”

  11. REAL Green on Tue, 10th Mar 2020 5:26 pm 

    “America luckily has a China-Russia alliance that have created a powerful “New Deal” of win-win cooperation in the form of the evolving Belt and Road Initiative with invitations for western nations to jump on board.”

    So true Davy. So true.

  12. JuanP on Tue, 10th Mar 2020 7:15 pm 

    Deeper Than Corona – The Real Causes Of The Oncoming Economic Collapse”
    https://tinyurl.com/tv9keg7 zero hedge

    “That while the coronavirus may in fact be the catalyzer for the oncoming financial blowout, it is the height of stupidity to believe that it is the cause, as the seeds of the crisis goes deeper and originated much earlier than most people are prepared to admit.”

    “The Ugly Truth of Today’s Crisis”

    “New “sub-prime” bubbles have been created in the Corporate Debt sector which has risen to over $13.8 trillion (up 16% from the year earlier). A quarter of which is considered junk, and another half graded at BB by Moodies (a step above junk). Household debt, student and auto debt has skyrocketed and since wages have not kept up with inflation causing even more unpayable debts have been incurred in desperation. Industrial jobs have collapsed consistently since 1971, and low paying service jobs have taken over like a plague. The last report from the American Society of Civil Engineers concluded that America desperately needs to spend $4.5 trillion just to bring its decayed infrastructure up to safety levels. Roads, bridges, rail, dams, airports, schools all received near failing grades with the average age of Dams clocking in at 56 years, and many water pipes over 100 years old, and transmission/distribution lines are well over 60 years. The factories which once supplied those infrastructure needs are long outsourced, and much of the productive workforce that had that living knowledge to build a nation are retired or dead leaving a deadly generation knowledge gap in its place filled with millennials who never knew what a productive economy looked like (and aging baby boomers who have tried hard to forget what it was). American farmers have probably been the most devastated in all this with dramatic population losses across the entire farm belt of America and the average age of farmers now 60 years. It was recently reported that 82% of U.S. Agricultural family income comes from off farms, as mega cartels have taken over all aspects of farming (from equipment/supplies, packaging and the even the actual farming in between).”

    “Like any addict who wakes up one morning at rock bottom with the sudden terror that his death is nigh, the first step is admitting we have a problem. This means simply: acknowledging the true nature of the current economic calamity instead of trying to blame “coronavirus” or China, or some other scapegoat. The next step is begin to act on reality instead of continuing to take heroine (a fine metaphor for the addiction to derivatives speculation). An obvious first step to this recovery involves restoring Glass-Steagall in order to 1) break up the Too Big to Fail banks and 2) impose a standard of judging “false” value from “legitimate” value which is currently absent from the modern psycho that lost all sense of needs vs wants. This would allow nations to re-create a purge of the unpayable fictitious debt and other claims from the system while preserving whatever is tied to the real economy (whatever is directly connected to life). This process is sort of akin to cutting a cancer. This act would look very similar to what Franklin Roosevelt did in 1933 which I outlined in my recent paper How to Crush a Bankers’ Dictatorship.”

    “Where Franklin Roosevelt had to drive this process solo in the 1930s, today’s America luckily has a China-Russia alliance that have created a powerful “New Deal” of win-win cooperation in the form of the evolving Belt and Road Initiative with invitations for western nations to jump on board.”

  13. makati1 on Tue, 10th Mar 2020 7:15 pm 

    “America luckily has a China-Russia alliance that have created a powerful “New Deal” of win-win cooperation in the form of the evolving Belt and Road Initiative with invitations for western nations to jump on board.”

    So true Juan. So true.

  14. Davy on Tue, 10th Mar 2020 8:51 pm 

    Your one of the more smarter Americans mak. Your lucky you got out in time.

Leave a Reply

Your email address will not be published. Required fields are marked *