The level of auto traffic along the Cedar Street, Pecos Texas is a very clear proxy on the health status of the US Oil industry.
Factors negatively impacting economic activities in the area:
US Elections: Oil companies operating in area put activities on hold awaiting for forthcoming mandate
Holidays: Demand for oil drops
COVID pandemic: Demand for oil drops
Responsiveness of lagging indicators:
Lag time between events and lagging indicators within the region is typically 24 hours
Layoffs can happen within 24 hours of environment triggers
Rapid hiring can happen within 24 hours of environment trigger
On occasions, rapid hiring and layoffs could happen simultaneously in different sectors
On mornings during times of Economic boom in the Oil industry, the Pilot center across the street could be observe lined with trucks rushing to fuel up as they go about transporting out their cargo to their destinations.
On such days, the empty parking lot in front of Custom Mufflers Tire Repair center could be seen filled up with trucks getting their wheels serviced.
Investment Funds market exposure strategies can be categorized primarily into three types.
Type 1: Long only strategy: funds that buy and hold positions.
Type 2: Short only strategy: funds that primarily borrow and short shares
Type 3: Market neutral strategy: funds that hold half their position in long and half their positions in short attempting to gain from some form of arbitrage between performers and losers.
To increase profit funds would typically be leveraged. Levels of leverage is dependent on how aggressive each individual fund is. Long Term Capital Management for example, a fund that went bankrupt in 1998, was leveraged up to 20X for some of its positions.
Depressed share prices due to the unwinding of long positions by Type 3 lead to a follow on cascading effect where Type 1 had to unwind their leveraged long position.
This large scale unwinding activity could be inferred from the inverted yield curve observed on 31st Jan 2021. This inversion could also be interpreted as funds opting to maintain liquidity levels by moving heavily into positions like short term US Treasury and cash as they await for the market gyration to settle.
I had a hunch that this year was going to be weird when I landed on the wrong side of the Lotte building during the 2020 new years count down in Seoul only to manage at catching the last 5 seconds of the fireworks after making a dash for it.
Things really started getting weird when COVID broke out in Europe and it seem to be always just 1-2 days behind me as I traversed the cities of Eastern Europe. And that saga came to a climatic end when I scuttled my way back to Singapore just hours before borders shutdown around the world.
Also not to forget mention me cutting all my long positions in oil hours just a day before it experienced its largest crashed in 30 years.
This weirdness got compounded when I started making my way overland eastwards and entire sections of the route I took got shrouded in inferno just a few days after my departure.
I wonder when I do eventually make my way back eastwards end of this year would I past through on the way back be flooded shortly after my departure…
It does remind me of 2008 when I slowly made my way westwards overland from Asia to Europe. Shortly after my departure from Szechuan the earthquake, broke out. This was followed by the Tibetan riots shortly after my departure from the Tibetan highlands and finally the Uighur riots shortly after I crossed the border from XinJiang into Kazakstan.
Wealth is really a subjective reflection of how we feel about the current state of things.
Finance unimpeded by dealing with physical objects tend to respond faster to news and sentiment than physical operations which are tied to physical infrastructure
Credit which the modern economy is built upon trust. In times of uncertainty, trust evaporates credit becomes unavailable. Credit crunch ensues.
Austrian economics versus Keynesian economics
Austrians economists, subscribe fully to the Adam’s invisible hand theory, hold the view the market is always rational, crashes are a necessary catharsis and central banks should not intervene to prevent the crash in this process of creative destruction.
Keynesian economists believe the markets are rational most of the time but malfunctions somethings. In these exceptional times it is necessary to step in to fix the malfunction so as to avert unnecessary hardship. Central banks are the lenders of last resort.
Keynesian economics on handling market malfunction
All market malfunction usually stems from an economic shock
the IT revolution shock lead to heavy and ultimately unsound investment in software technology. The period of rapidly advancing DotComs share prices, the underlying manic optimism, the resultant excess infrastructure capacity and excessive use of leverage marks the initial phase of this malfunction
at the height of the euphoria, market participants start to come to their senses, share prices start softening as demand fails to catch up with excess capacity.
fear sets in when market participants start exiting the market. Panic ensues, rapidly declining share prices and triggered margin calls compounds into a vicious cycle.
The key challenge for central banks in such turbulent times is to act with resolve to provide dollops upon dollops of credit all the way to infinity if necessary to tame the turbulence and to restore proper market functions.
Japan’s 20 years of stagflation and slow recovery post 2008 are outcomes of mild central bank response to stimulate the economy due to concerns over inflation
The real economy
aggregate demand – consumer side
aggregate supply – production side
availability of credit – money supply in the market
Sources of low inflation rate – lack of demand or excess production capacity
East Asian behavior which tends towards saving a larger portion of their earnings compared to the west
Aging population world wide which results in lesser consumption versus a younger population
Automation which allows for higher throughput volume given the same amount of resources.
Good news reporting should seeks to inform rather than sensationalize with attention grabbing headlines. Its easy to appear data driven but still be misleading if you do not use the proper frame for understanding the numbers
On investment bank predictions
When on the receiving end of predictions made by external parties it is important to understand the underlying agenda they are trying to achieve. When examined thoroughly, predictions made by investment banks are so bad and contradictory, they should just stop making public declarations.
However if taking into account their objective is not to inform but to incite a trading decision by their clients so as to make a commission or offload losing positions on their trading books, it makes perfect sense.
Liar’s poker: Rising through the wreckage on Wall Street, Micheal Lewis
A company is only likely to go bankrupt if its creditors recalls debts and it is not able to pay back.
In the event of a major wide spread disaster and there is no one around to take advantage of it, it is unlikely the creditors recall debts
creditors of airlines would more likely want to have all their clients continue generating revenue with the planes to pay off debt than to foreclose of them and take back planes which are at that point worthless inventory for them
Labor unions will not want to have all their union members laid off, they will likely go into negotiations to deal with salary issues.
Ships of cruises are likely to deteriorate fast and require Capex to upkeep
Credit lines and payment schedule can always be renegotiated if impact is industry wide
If creditors are not willing to recall debts, then what would be the cause of bankruptcy? Beware of fake news that preach doom and gloom with no underlying basis
If you bought too early into the dip and you are more than half way into the dip might as well hold on for the recovery. Trying to exit too late into the dip will only cause more losses to be unnecessarily incurred.
Oil specialists are either producers or consumers, it is hard to determine the demand unless you are an insider
Wait till all the bad news are out and sentiment has turned before entering into position. Its ok to only go into position after the company share price has advanced 100% from its lowest levels.