Lessons From the Past - What's New What Isn'tA long time ago when I was a young kid my Dad gave me some important lifelong lessons, many of which I still follow to this day. One of the things he said to me was "If you want to understand what is going on today, you need to learn how we got here in the first place". While I never took history outside of what I was taught in High School, I have always been a student of history and over the years this has certainly paid off in terms of investing over the past 50 years or so. Often people say things are different but in reality they aren't most of the time. That said it becomes very important to figure out when and if things are really different and conventional knowledge doesn't work anymore. Figuring that out when investing is often the difference between making a ton of money or losing a lot of money.
Soooooo...let's look at few things that are going on now.
Left Wing Radicals
This is not new. I was actually one of them in the 1960s. My existential threat back then? Nuclear war. Today it is climate change. It doesn't matter that nuclear war wasn't the existential threat we thought it was in the 60s (we are still here) and likely climate change won't be either (who knows?). But what is important is that because of that my generation changed the way people live despite the opposition of The Elders (of which I am now a card carrying member...lol). We got medicare, old age pensions, greater government regulation etc. The same thing is going to happen again and people who don't think that it will will be proven wrong. If you recognize this then you can look forward and see where this change is going and invest accordingly.
Oil Will be needed forever
The digital camera was invented in 1976. It took a long time for its usage to grow in any significant way but it eventually happened. It took 25 years before Kodak went broke and declared bankruptcy. Now few people buy cameras, they use their phones and try and find old fashioned camera film now. The same thing is going on today in the oil business. We are still in the early days of a movement towards a low carbon centric world but it will happen despite all the problems with the transition that many people including myself have written about. Just like Kodak, Xerox and others who didn't adapt and went broke so will oil companies who don't adapt. Yes for now it might take another 20 years before it happens but it will happen. Companies that recognize this now and use the next 20 years wisely to change will continue to be successful. Those that don't are doomed to scrap heap.
Is a recession coming?
The short answer is yes. That said the signals are confusing. For example in the US, last month they had a huge unexpected jump in the number of new people getting jobs despite having two quarters in a row of negative economic growth. This resulted in many people, especially Democrats in the US saying "See I told you we are not in a recession!"
So if we are in a recession, then this is in fact different from the past where recessions equalled job losses. But is it?
What we are seeing now is the fact that there was huge number of job openings at the start of this year so businesses were actually very short staffed because people we unwilling to work. So what we now see is that the number of job opening is less than half what it was before because the economy is slowing and people decided to accept jobs because they were afraid of going broke in a recession and with high inflation they had no choice. So what were are seeing is in fact nothing new but merely a time lag that might last another quarter or two.
Oil Demand Destruction and oil company share prices in a Recession
This one is more complicated than the first two because it is both what is the same as before and what is different.
Economists talk about this thing called price elasticity which is a fancy word for how senstive the demand for something is relative to a change in its price. Most people talk about elasticity as I have just done when talking about the demand for something. But there is also in fact a thing called supply elasticity. How much does the supply of something change with a change in price.
Historically, these two price elasticities don't change much over time for most things. I believe that this is something different from before and is in fact something new. With the coming of EVs, the sensitivity of oil demand to price with increase as time goes on. So the same change in the price will have a bigger effect on oil demand. Conversely, due to the many factors that Migraine has talked about here, the price elasticity of oil supply will lessen as it will be harder for various reasons for producers to increase the supply of oil. This will have a big impact on oil demand as time goes on.
One thing that won't change is that irrespective of what I just said, in a recession and corresponding reduction in asset prices, the SP of oil companies will go down even if there isn't any demand destruction or change in their profitability.
Inflation is Transitory
It is a rare event in history when the overall price level goes down. It has happened, The Great Depression of the 1930s is a great example. So what people are really talking about is that rate of price change goes down from its peak. Well historically, that is always true because the system self corrects. But the big question is how that will take.
In this case with wages still growing a 5% and this will feed into future inflation, the current higher levels of price change compared to the last 15 years ago will persist for at least a year or longer. In fact, historically, the inflation rates we have seen over the past decade are in fact an anomoly and what we are seeing and probably for the next few years is something closer to what has happened for the last 100 years or so.
Since Central Banks have become so political, you can expect that they will likely get even further behind the curve than they already are and this will result in even higher interest rates and lower asset prices as people move more of their money to the bond market. Be prepared for that!
There is more I could say but this post is already too long.