Where the next Crash will come..............

[Cut-Throat]

I have been pondering this the last few days:


There was a saying about 15-20 years ago that went something like this:

"If you want to know where the next Crash will be, follow the Cash"

Over that time period that has been a fairly reliable indicator. The cash is always piling on the hottest investments. Lately the 'victim' has been residential real estate market. In some of the hottest markets, I have seen reports of properties plunging 30-40%. A couple years ago, the attitude was you could not lose in real estate.

In the Late 90's It was Stocks - Particuluarly the Hot Tech Stocks. - declines in Tech Stocks was as bad as 80%

What is the market attracting all the Cash today? - It's Oil - It's gonna go up forever right?

Anyone remember the last Oil Boom? - In the late 70's? - Then came the bust in the early 80's - Houston Texas was 'giving away' houses.

Also remember the 'Gold Fever' of 1981 - Gold was $1000 (1981 Dollars) an ounce back then. "Get some quick before it goes to $2000"

Right now Oil seems like the 'can't lose' investment to almost everyone. - But these sectors are usually where the crashes come.

 

[Mwsinron]

Ya seems like it would be energy. Hard to believe 75$ a barrel will drop by 30 to 40 %.

 

[brewer12345]

Real estate, no question. The crash there is starting to unfold, and it will take a while, but that is the next mega crash. Too much (stupid) innovation in the mortgage market:

Can't afford fully amortizing payments? OK, just pay us interest monthly. Can't afford the interest payments? OK, just pay us 1% annually (for a while).

You just know that will end in tears.

 

[AltaRed]

Ya seems like it would be energy. Hard to believe 75$ a barrel will drop by 30 to 40 %.

But the same things were said about the last oil boom and bust, and the tech sector.  The problem is that people envision primarily what they see today. What happens if there is a significant recession and both the Chinese and Indian economies falter substantially...in addition to reduced demand in Europe and North America?  A mere 5% drop in oil demand (~3.5 million barrels per day) would result in prices in the $30-40 range, if not less, since the marginal barrel of oil has nowhere to go.

Remember the Asian financial crisis of 1998?  That was a mere hiccup in the world economy and oil dropped to ~$10/B for the better part of a year. Granted it only lasted a year (or less) but a global recession could have a considerably longer impact on oil prices.

Those in energy investments could be severely burned and petroleum exporting countries would be severely pinched. The Canadian stock market for one could potentially drop by 50% because of the high commodity content.  It would make the 1998 Canadian royalty trust market collapse look like a picnic this time around. There are something like 40 trusts out there highly leveraged with expensive reserves with a large part of the units in the hands of seniors relying on these things for cash flow.

 

[riskadverse]

At the risk of starting a religious war : Index Investing

 

[macdaddy]

I agree with you, but how much of the run up in commodities reflects the weakening of the dollar? and expectations of continued weakening. i think it's pretty clear that the weak dollar policies will continue.

 

[Mwsinron]

At the risk of starting a religious war : Index Investing

Oh Ill be interested in hearing the discussion about that.

 

[dmpi]

As far as oil, Look at the long term tends:
1. American average gas milage has been getting worse, not better. Too many SUVs.
2. Parents buys all of their kids cars when they turn 15, putting yet more drivers on the road.
3. Fast growing countries like China & India will need a large amount of oil.

Unless the American consumer can cut down the demand, I don't think this $75/barrel oil is a flash in the pan. Matter of fact I wouldn't be too supprised if actually climbs itself even higher.

As far as the "bubble". I'd say Real Estate (& only in a few places), Small Caps, Gold, Everything that has to do with China, Hedge Funds, & Classic Cars (biggest of all bubbles).

 

[Marshac]

Unless the American consumer can cut down the demand, I don't think this $75/barrel oil is a flash in the pan. Matter of fact I wouldn't be too surprised if actually climbs itself even higher.

Agreed, especially considering that peak oil may be upon us in the next several years. Increasing demand and increasing scarcity doesn't bode well for lower prices. Once global YOY crude output turns negative, watch the prices skyrocket.

I have one of these on my office door. It's amazing how many people in my office have never heard of the 'peak oil' concept.

 

[haha]

I agree with the poster who said that a deep world recession would put a severe knock on the crude oil market.

At the same time, I would be very surprised if oil were not at least $75/bbl in today's $, over any 2 year period in a normal world economic state. And it could be much higher.

I have heard ideas like "$25 or $35 of the current price is speculation by hedge funds". My question is how? They can buy all the futures they want, when the contract settles, the physical market has to clear. There are only so many tankers and tank farms around to store oil and products, and most of them are in use in normal inventory management. Maybe someone who is in the business could explain this idea of speculation to me, because as I see it the world is consuming about 85 million bpd, and producing only marginally more than that. I doubt the Saudis are holding back production. If you were an obscenely rich man in a country where many would like to see you dead, would you be looking to the long term when oil is $75 a barrel? Would you feel that your personal wealth was more secure under ground in Saudi Arabia or in a vault in Switzerland ?

We know that American CEOs will routinely make decisions for their private interests and against the interests of their shareholders- to get the stock price up to cash options- regardless of the long term damage down to the business. Why would we expect a Saudi Price to be any more honest or altruistic?

So I believe that oil prices will fluctuate. But I wonder if many who feel sure that there is a bubble are the same people who did not invest in this industry at the turn of the millennium. Since they missed the boat then, they naturally would feel better to "know" that the boat is going to sink.

Ha

 

[Leonidas]

I have heard ideas like "$25 or $35 of the current price is speculation by hedge funds". My question is how? They can buy all the futures they want, when the contract settles, the physical market has to clear. There are only so many tankers and tank farms around to store oil and products, and most of them are in use in normal inventory management.

Maybe they're sticking it in places like Singapore?

Singapore fuel oil stocks hit record-highs near 14 million barrels following two months of heavy Western inflows and the glut will remain as shipments exceeding 3 million tonnes are due in East Asia in August.

Inventory levels in the city-state have soared to an all-time peak of 13.956 million barrels (2.15 million tonnes) for the week ended July 26, up 716,000 barrels from a week ago, government figures showed.

"This is the third consecutive month of above 3 million tonnes of Western arrival volumes and it is really killing the market," said a trader.

http://archive.gulfnews.com/articles/06/07/28/10055466.html

 

[kcowan]

As far as the "bubble". I'd say Real Estate (& only in a few places), Small Caps, Gold, Everything that has to do with China, Hedge Funds, & Classic Cars (biggest of all bubbles). 

Yup the runup in prices at places like Barrett-Jackson has been unbelievable. And China is dependent on the US economy. The RE bubble burst in the US will cause a slowdown in consumption and a Chinese downturn in exports.

Scary prospects indeed!

 

[haha]

Maybe they're sticking it in places like Singapore? 

Singapore fuel oil stocks hit record-highs near 14 million barrels following two months of heavy Western inflows and the glut will remain as shipments exceeding 3 million tonnes are due in East Asia in August.

Inventory levels in the city-state have soared to an all-time peak of 13.956 million barrels (2.15 million tonnes) for the week ended July 26, up 716,000 barrels from a week ago, government figures showed.

Thanks for the info and link.. Still, that is only 16 hours world usage. That doesn't seem extravagant, given that there is a war in Iraq that involves an oil producer, and another war in Lebanon that threatens to involve another oil producer- Iran.

Ha

 

[d]

most things that follow economic cycles overshoot on both the upside and the downside ... i'd guess (but am not betting) that in addition to RE, we'll see oil and other commodities (including gold) "correct", and suspect that submerging markets have not fully "corrected".

 

[farmerEd]

Good thread..but of course the natural question that leads out of all this is what ISN'T a hot investment right now? i.e. what is in the dog house and unlikely to stay that way?

so, geniuses...most of us agree that the easy money has been made in RE? where is the money going to go next?

 

[Scrooge]

Remember the Asian financial crisis of 1998?  That was a mere hiccup in the world economy and oil dropped to ~$10/B for the better part of a year. Granted it only lasted a year (or less) but a global recession could have a considerably longer impact on oil prices.

Those in energy investments could be severely burned and petroleum exporting countries would be severely pinched. The Canadian stock market for one could potentially drop by 50% because of the high commodity content.

Well, if oil drops under $30-40, we may have bigger problems than Canadian stocks going South. A number of potentially volatile places like Saudi Arabia and Russia depend on high oil prices to keep their populations relatively fat and happy. The last time we saw oil at $10 (1998), it left Russia effectively bankrupt and its pro-Western government fell. Something similar happening in Saudi Arabia could be even worse news.

 

[AltaRed]

Well, if oil drops under $30-40, we may have bigger problems than Canadian stocks going South. A number of potentially volatile places like Saudi Arabia and Russia depend on high oil prices to keep their populations relatively fat and happy. The last time we saw oil at $10 (1998), it left Russia effectively bankrupt and its pro-Western government fell. Something similar happening in Saudi Arabia could be even worse news.

I agree. There could be tons of fallout in many places should there be a deep prolonged price cut.

One of the things I used to be involved in my company (oil&gas) was scenario planning exercises where we would pick up to 4 or 5 possible world outcomes - economically, politically, etc and then try to figure out how our company would operate in each scenario. It would take maybe 20 people 3-4 days to flesh these out and what is most remarkable about such scenarios are the 2nd and 3rd order effects - the domino effect so to speak of a particular situation.

That is why I said earlier, don't be surprised by the possibility of $30-40 oil....it could be a very real outcome.

 

[ERD50]

A mere 5% drop in oil demand (~3.5 million barrels per day) would result in prices in the $30-40 range,...

Very interesting number. I keep thinking that high oil prices in the short term might be good in the long term as they would help to fund alternate energy sources. $70-$80 oil starts to make economic sense for some alternates.

But, if those alternate sources replaced 5% of the oil demand, hmmm, oil prices would drop, and the alternates would not look so good.

Hopefully, some alternate sources would get down to the $30 barrel equivalent price once they became mature. And, hopefully, the alternates have a lower total impact on the environment.

It will be fascinating to see how this plays out over the next 20 years. I just read that algae might be able to produce 10,000 gallons of bio-diesel per acre - sounds promising at even 10% that rate.

http://en.wikipedia.org/wiki/Biodiesel

-ERD50

 

[Danny]

Businessweek is hyping Clean Energy this week.

Wall Street's New Love Affair
Why Some of the World's Smartest Investors are Betting Billions on Clean Energy.

The Magazine Cover Indicator is thought of as a reliable contarian indicator in some investor circles.....of when to get out of whatever they are promoting....or get into whatever they are dissing....

 

[IBWino]

I'm not sure what "clean energy" is or if there is such a thing. Hydro and wind maybe, but there are limited sources for these. As for solar, it takes a lot of energy to produce the materials used to make solar panels, batteries and inverters used in the typical solar system. It also currently takes as much energy to produce a gallon of ethonal as it provides (although this is better than gasoline, it actually takes more energy to produce a gallon of gas than the gallon provides). It also takes a more energy to produce hydrogen than hydrogen provides as a fuel.

 

[d]

It also currently takes as much energy to produce ...

i believe you would find that any energy conversion process take more energy input than is delivered by the output.

 

[wabmester]

i believe you would find that any energy conversion process take more energy input than is delivered by the output.

Yeah, with oil we're just exploiting "free" heat and pressure from momma earth. That's a bit different than spending money to grow corn and then spending more money to turn it into ethanol. It's not the energy input that matters, it's the monetary input.

 

[Danny]

I'm happy that less of my money is going overseas...and more is going to help the farming community - its not just ADM & Cargill profiting - farmers, co-ops and the rural community that depends on them for their living...I would prefer they hurry up and use other bio-mass than corn for the ethanol - but it's what we have right now....

 

[Ed_The_Gypsy]

In re: biodiesel,

Beware. There are a lot of deals being cooked up to make biodiesel and suckers investors are being sought. It is all Barnum and Bailey, IMHO.

I am an engineer who has been solicited to design such plants. The principals do not seem to understand that
a) these plants are more complicated than they imagine,
b) it costs more to design and build such a plant than they imagine,
c) it costs more to run one than they imagine, and
d) it takes longer to build one than they can imagine.

There are environmental issues that are not being taken seriously. One of the waste products is caustic. Such a plant must have odor abatement, too.

These guys seem to think all you need is a couple of large pots and pans and you are free to mint money.

Ethanol was/is a similar chimera.

There will be a few respectable plants built. They will lose money unless the government subsidises them.

Free advice and worth every penny.

 

[brewer12345]

Ed, you think biodiesel is not currently economically feasible? What kind of diesel price do you think would make it work?