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Geeks Rule of Thumb

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July 09, 2008 – Comments (7)

 I am a fan of Hussman and Naked Capitalism referred to an article of his.

I love this expression:

Geek's Rule o' Thumb: When you have to fit a sixth-order polynomial to capture price history because exponential growth is too conservative, you're probably close to a peak.

Anyway, this post has a very good argument suggesting oil is peaked and bubbled and predicting $60 oil.

http://www.nakedcapitalism.com/2008/07/hussman-likelihood-of-60-oil.html

7 Comments – Post Your Own

#1) On July 09, 2008 at 2:53 AM, DemonDoug (48.37) wrote:

hah! I don't see soccer moms out there buying barrels of oil or chinese speculators gambling their mattress moneys on it.  that's when you know we are at a peak.

God i would LOVE oil at 60 again.  I'd put like 90% of my cash reserves into SU.

Oil will be at 200 before it will be at 60, because it is unlikely to ever see 60 again.

I wouldn't be surprised to see oil in the 90-100 range.  I would be surprised (pleasantly so) if it went under 90.  I cannot envision a scenario where it goes below 80.

Here are my points to refute his:

"Any discussion of inflation should begin by noting that the bulk of recent inflation has been restricted to food and energy. Outside of those groups, the year-over-year change in the CRB commodity price index is already negative."

This is the same argument the Fed uses.  Why don't we just not use water and air while we're at it and see how well we do as a society.  Besides which, his argument is completely refuted by the official data from the BLS

CPI-U, US City Average, All Items Less Food and Energy:

(NSA)  +0.1% in May 2008

(SA)  +0.2% in May 2008

(NSA)  +2.3% since May 2007

I know you are a deflationista deb, but weren't you the one who posted about how 2% inflation every year leads to an exponential curve eventually?

"Meanwhile, U.S. government spending, while still undisciplined, is relatively stable and not expanding rapidly."

I guess a US budget deficit of $268billion for the first 3 quarters of FY 2008 is "not expanding rapidly" eh?  Estimates for the full year are between $350-400b, one of the highest in history.

"...my view remains that broadening economic weakness and an unwinding of speculative pressures will combine to produce steep declines in commodities prices, most probably by the end of the summer season."

He makes a compelling case, unfortunately he does not address demand from emerging economies, except to say that china's economy will have ramifications due to their stock market going down.  No evidence of slowdown in China, just says that because their stocks are going down their economy will follow.  I'm not sure how much you can trust the government of China with their statistics, but if they can be believed, "Growth in the world's fourth-largest economy was 10.6 percent in the first three months from a year earlier, beating market expectations of about 10 percent." (source: Ministry of Commerce, PRoC)

I think he does make a compelling case of oil dropping 10-15%.  Pure speculation and volatility would allow for that on it's own, and it is possible oil did get ahead of itself a bit.  But 10-15% would mean oil around 110-120, which based on current demand and inflation issues, is probably about where oil should be in fair value.  Oil is far too valuable a resource to ever be worth 50% of it true fair value.

"It may be difficult to identify a peak in oil when it occurs, but most likely, the fallout from that peak will be spectacular."

Oil will have peaked when we are finally able to manufacture it, most likely probably from algae or some other biologic organism.  GreenMycoon has put up a few very dense but informative blogs about energy.  I don't think it will be that hard to predict.  My prediction for oil for a while now has been a price target of 200/barrel by 2010, with smaller chances for 250 and 300/barrel.  Hussman's arguments are based on a prediction of disinflation, which I am not seeing at all right now.  He also  "argues Friedman is only half correct in seeing it as “always and everywhere a monetary phenomenon" " - and I don't agree.  The net effect of increasing the monetary supply is inflation; if not in oil then the money flows elsewhere.  This is the nature of the bubble economy we've had for the past 10+ years in the US.  As long as the money is flowing it will flow somewhere, right now the investment du jour is oil.  This is why I think it can correct, but fundamentally it's not that overvalued.

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#2) On July 09, 2008 at 4:08 AM, saunafool (98.88) wrote:

If oil drops to $60/bbl, I'll buy you 100 pounds of back bacon.

Then I'll be with Doug, piling money as fast as I can into SU, RIG, OII, DWSN, OYOG, SLB, and a dozen others.

It's not impossible, it's just unlikely. Global exports have been falling for the past 2 years. That's the fundamental problem. Even if Saudi produces 200,000 bpd more, they consume 300,000 bpd more. Over time, global oil supply is falling behind demand and nothing appears to be changing that anytime soon.

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#3) On July 09, 2008 at 11:18 AM, Imperial1964 (98.31) wrote:

I follow John Hussman's articles closely and I like the following quote about inflation:

“the burden of government is not measured by how much it taxes, but by how much it spends.”

 

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#4) On July 09, 2008 at 11:22 AM, dwot (46.92) wrote:

Demondoug, I keep thinking you aren't looking at what I'm looking at with the inflation/deflation argument.  I don't think we are disagreeing here, but we are using different definitions.  So, what exactly do you expect to happen to M2 and M3?

Saunafool, I do like these one sided bets, I get something if I win and I lose nothing if I lose :).  Of course I never did collect on dinner and a movie from a friend over an XMSR bet, lol.

$60 is a bit of stretch even for me, but I still don't rule out $80, again with the exception on the exchange rate.  I do expect the US dollar to devalue further over the next 5 year.  

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#5) On July 09, 2008 at 11:40 AM, dwot (46.92) wrote:

Good quote Imerial, but what was really interesting to me sitting around with peers in my age group this week, we were all griping about our taxes being reduced.

We are all in the pay for the gross excesses and negligence of our parent's generation in management and demands on the people's resources.  I always think of it like this, I never expected that I would have to pay back my education and be paying for the next generation's at the same time. 

In any event, the way we all look at it is we were used to the level of taxation and we saw the deficit coming down every year.  Now we have this moron elected who is going to give us the first deficit after working so hard and sacrificing so much to have a healthy Canada from a fiscal responsibility position.  I've even written to our moron Prime Minister and told he deserves zero credit for the health of Canada's finances and it is because of Mulroney and he is the destroyer of everything Mulroney did for Canada.  I think it should be manditory that elected officials have third year calculus because I am so sick of gross math negligence in government policy.  All countries should hold politicians to the highest standards in math ability as they are managing our financial resources and have the ability to destroy us for years, like Trudeau did to Canada and like Harper is proving to follow suit.

Our taxes were really high when I was first trying to get established.  You have no assets to help carry you through that period and the high taxation was totally crippling.  At $80k of income you had to pay 54.9%.  I don't think I would have been so opposed if that bracket had started at say $150k because when we had that tax bracket if you had $150k of income it would not have crippled you from getting established.  For at least 5 years we paid about 50% more in taxes then we paid on mortgage and we were paying an accelerated rate of mortage payments.

We all know what it cost us to get the debt under control and we'd rather pay now then cripple everything later.  

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#6) On July 09, 2008 at 12:47 PM, WillSurfForFood (79.33) wrote:

Either I'm not geeky enough to understand that rule of thumb or too geeky. As far as I know a higher order polynomial is needed to fit a curve through more points not really needed to fit to a higher growth. Perhaps they just need a larger exponent.

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#7) On July 09, 2008 at 1:20 PM, dwot (46.92) wrote:

WillSurfForFood, but then what happens when numbers get bigger?  Eventually the exponent does take over.  Those were my first thoughts when I read it as well.

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