How global fuel prices and baby boomers led to my 77% gains in 6 weeks

I tend to be skeptical when people claim an interest in “economic literacy” (or in “prosperity”). Many people seem strongly committed instead to defending their prior biases and choices. However, what about when the data does not fit the presumption / dogma?

First, people seem to me to focus too much on secondary “investment” markets and not enough on primary “economic” markets. Below is an example of what I mean by that. (By the way, a big reason that I made 77% gains recently in 6 weeks was because IN ADDITION to focusing carefully on investment markets, I respect basic economics as well.)

So, when gas prices go way down, what do people say in response? Many people say “awesome- what a relief!”

However, when gas prices passed $11 per gallon in parts of Europe in 2008, many people said “I just can’t continue my old patterns… and I might even get an electric vehicle.” They are responding to “economic fundamentals” (lower prices attract more buying and higher prices attract less buying).

However, many people do not know the BIG long-term issue in fuel markets (because they invest their attention instead mainly on financial speculations). I will cover that issue further down.

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Before we get to that, note that opposite to “economical thinking” is the thinking of mainstream investors in regard to what they buy. When asset prices have been rising for a long time, many people say “great… I will plan to borrow a few more hundred thousand dollars to speculate more aggressively on more rising prices in the future.” Then, when prices eventually go down, the first response after all that enthusiasm / mania is “this is fine… I clearly should immediately buy even more now that prices have dipped.”

That kind of thinking is evidence of a speculative financial bubble. I have seen it in real estate, stocks, bitcoin, gold, and so on.

Mainstream speculators totally ignore the issue of “economizing” most of the time, then when convenient in the service of their pre-existing bias / dogma, they briefly give some “lip service” to the principles of long-term economic patterns. For instance, if I offer to show them data that “this latest dip might not be brief,” how interested are they in preserving >$100k of equity in real estate (or in an IRA)? In some cases, perhaps “not at all” (at least not yet).

So, to the vast majority of people investing in mainstream investment markets, those markets are VERY “secondary” even to those investors. Those markets will never be as important to their everyday lives as buying fuel month after month (or buying groceries, etc…). Those “secondary” markets are for “excess capital for investing” (such as their retirement funds).

Even with real estate speculators (as in anyone who expects to eventually resell property at a higher price), their expectations may be greatly divergent from the actual data. What data? Outside of 1996-2006, real estate prices in the US overall have barely kept pace with inflation in recent decades. You might not want to see the data, but I could show you the chart (and you could easily find it yourself).

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Moving on, I mentioned above a big long-term issue in fuel markets. There are a few ways to present the issue, so here is the what I consider the most concise: decade after decade, INFLATION-ADJUSTED fuel prices were dropping in the US (among other places), but… that has changed.

The all-time low in gasoline prices (when adjusting for inflation) was 1999. Gas prices increased quite a bit in to 2008, then fell and “bounced around” since then.

Since 1999, oil prices went from $11 per barrel to $148 per barrel, then down to about $30, then bounced for a while as well. (Very recently, they have been plunging, as shown in the chart below.)

I wrote about the importance of fuel prices a lot starting in 2004. I also have repeatedly said since 2009 (after fuel prices had plunged) that fuel prices would eventually rise again. Specifically, I predicted that they would recover enough to create destabilization in “secondary markets” of real estate speculation, stock market speculation, and even speculation in things like bitcoin and gold.

So, what exactly do we see in the chart below? That is 3 years of time and two markets.

The faint tan line tracks the trend of stock prices for a group of 500 big companies in the US (a.k.a. “the S&P 500”). The prominent black line is the global price of crude oil.

Most notable to me is that the prices of US stocks started to fall PRIOR to global fuel prices (crude oil). That fit with my presumption for a repeat of the pattern in 2007-2008: that fuel prices would eventually rise enough to “break the speculative bubbles” in “secondary markets.”

In fact, another chart I could show is for stock prices worldwide, which peaked in January of 2018… which was LONG before the decline began in global oil prices. Real estate markets in some parts of the US had also weakened long before the recent peak in oil prices (though not yet in a clear overall decline). Bitcoin’s bubble popped late in 2017. Gold’s bubble popped way back in 2011.

FYI, stock markets in Asia overall have been down since 2007. In Europe, the all-time high in stock markets was way back in 2000.

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Next, besides the issue of fuel prices, another “long-term economic issue” involves population trends (“demographics”). Basically, in many parts of the world that were involved in World War 2, there was a baby boom of high birth rates (that later declined).

As that generation retires, they begin to cash in their retirement accounts to spend on their actual retirement. Apparently, the younger generations in the workforce are not pouring in equal amounts of capital in to their retirement accounts. More selling than buying results in declining prices (whether of stocks or anything else).

Even without the issue of fuel prices worldwide, the issue of the retiring of baby boomers globally is another big factor in my long-term forecasts. As for those who “defend their pre-existing bias” that hyperinflation will “balance everything out,” where is the data to back that up?

In contrast, I can point to the case of Argentina, where stock prices plunged in 2018 even as the currency there was losing massive amounts of purchasing power. Did their huge national debt lead to massive inflation? Yes, but asset prices still plunged.

https://seekingalpha.com/article/4183072-argentinas-stock-market-risky-risk-worth-taking

I can also point to Japan, where stock prices peaked in 1989. Did their massive national debt lead to a plunge in purchasing power of their currency? No, the Yen deflated (increasing in purchasing power). Plus, stock prices plunged to 7200 Yen in 2009 from a high of about 39000 Yen in 1989.

What most “insulated” Americans overlook is that the US has a massive advantage over most of world by being the #1 producer of crude oil. Why did US stocks rise so much since 2009 compared to the majority of Asia and Europe? Places that spend billions of dollar per day importing fuel must either balance that cost with exports… or eventually they will not be able to afford to import billions of dollars of fuel per day.

How did global oil prices plunge from $148 to $30 so fast after the 2008 peak? Did the economies of many parts of the world greatly reduce consumption? How about the EU, Japan, China, and India?

Fuel consumption did fall, but not really by much (or for very long). Here’s some data:

https://www.indexmundi.com/energy/

But in Europe, fuel consumption from 2006-2016 was down. It is the type of development that had not been considered by mainstream investors and analysts.

To confirm the data, see page 8 of this PDF:

https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review/bp-stats-review-2018-full-report.pdf

Also, data on page 11 shows that coal and oil have been losing “market share” to natural gas for a LONG time. What would happen to the economy of various nations if those prices rise from current levels ($4) to prior levels ($15)?

That would be (relatively) unfavorable for importers and favorable for producers (places where natural gas is extracted), right? That is the same differential that is evident in other fuel markets like coal or oil (or electricity generated as nuclear, hydroelectric, wind, etc).

So, my perspective is that without a MASSIVE and rapid shift toward the widespread use of a much less expensive (and sustainable) fuel source, the retiring of the baby boomers worldwide will “pop all of the speculative bubbles.” I do not expect one. I could be wrong though.

Will there be a huge advance in energy technology coming (or already underway)? That is certainly possible…. although without WIDESPREAD implementation of a technology of that kind, I continue to expect a specific series of major changes in global economics (and politics).

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