Coming in 2016

Know it is not New Year’s Day when predictions typically come. Truthfully have been looking for trends and indicators before making up my mind during a volatile December and January. Here are keys for 2016 and possible gray swans that could be missed.

1. Global Economy will continue to slow down gradually. Predictions of end of the world will surround us, but main drivers are a slower growing China economy and governments will need to reign in spending. Do not expect China to have a hard landing, and expect several governments will cut spending slowly over the year as tax receipts are reduced by their economies. Middle East and Asian countries most affected.

2. US Economy will have a mild recession. The long slow growth is due for a pullback, but do not foresee a collapse. The US economy will stabilize the world economy. Stock markets may fall further than the economy over weaker earnings and short term jolts to expansion plans. We may already have over 50% of the stock price pullback. Typical recessions stock losses are 15% to 30%.

3. Commodity prices will stay weak until the global recession passes. Expect industrial metals like copper & iron stay weak for a couple years. However most of the price drop has already occurred. Will hurt Australia, Canada, Russia, and South American countries dependent on mining.

4. Silver is forming a bottom around $14. Moderate chance could step down a bit more, but likely price will increase by end of year as mining slows down and supplies get tighter. Gold is trying to form a bottom, but is more of an emotional investment driven by fear. Could take one more step down or start another bull market. Consider accumulating both gold and silver in 2016.

5. Oil should stay weak for now, but expect prices to turn up a bit in summer to end of year. Expect prices to rebound to $40 to $55 per barrel by mid-2017 at the latest. Think the cartel will pull together sometime in the next year. (gray swan)

6. Unemployment will likely stabilize as job growth slows. Truth is the easy productivity games are ending. Robotization is a time-consuming investment more likely during growth cycles where payback is guaranteed. Having participated in both successful and unsuccessful automation projects, it takes time to develop robots and computer programs.  However it is a good investment for your business during a mild recession to prepare for the next growth spurt.

7. Gray Swans:

            ISIS/Daesh - will weaken in Syria / Iraq under direct pressure. Will grow stronger in Libya and Africa where non-functioning governments cannot handle the crime.

            Europe - Economy is recovering, but slowed by less demand in Asia. Will struggle with more immigrants coming and increased nationalistic parties gaining power. Will see Eastern Europe struggle most, but watch Italy, Belgium, France and Spain for risk.  

European Union - Not likely, but countries leaving the union would be considered a serious warning for the end of the Euro.

Terrorism - Expect more attacks on soft targets like malls, restaurants and hotels.

Computer Hacking will increase in 2016 and become more of international issue.

2016 is setting up as mild year with increasing risks. Also see there will be pleasant surprises with new technologies, medical treatments, disruptive companies and areas of growth to offset some of the worries. Stay positive and looking for opportunities.

Concern - Will America Keep Taking Risks?

Everyone has seen the news about the Deep Horizon oil platform exploding, burning and sinking in the Gulf of Mexico. The large oil spill is very memorable, and the news stories are telling about the people who will be negatively affected by the large oil spill. Very heart wrenching.

In addition British Petroleum is getting ripped in the press as everything from incompetent to evil money makers. BP is responding announcing they are doing everything they can to clean up the problem, and will pay for all the damages. Properly so, I may add.

The real question is what will happen long term? Is this going to be like Three Mile Island accident, where the nuclear industry fell behind the rest of world in developing nuclear energy? Think about it. One accident caused a whole industry to stop in its tracks over 30 years ago. Almost no new plants have been built for three decades.

What is the result? Most of the technology has moved to other countries. Canada and France develop much more nuclear electricity than we do. The other scary side effect is these plants were designed to be replaced after 25 to 30 years and then replaced by modern plants. We have

Will one oil spill stop more drilling and exploration? Will the US be more dependent on imports to provide the gasoline and diesel for our cars and trucks. Most of us drive cars, and all of us buy groceries and goods delivered by trucks. Are we going to stop producing energy we need to complete in a global economy?

There are over 30,000 drilling platforms in the Gulf of Mexico. There are plenty of opportunities for more accidents and oil spills. Are we going to stop driving and eating? No. We can not stop taking reasonable risks.

Our military is trained in taking risks. They professionally get in harms way and fight enemies who would love to kill them. We don't see them hiding in a military base in the US. We see our men and women all over the world in the worst conditions performing admirably. They do it by preparing for the risks and using training to overcome.

The US has to keep drilling for oil as well as developing alternatives. This will take decades to resolve. In the meantime talented men and women will come up with solutions to these problems and improve processes to make them safe. We must continue to develop energy and take risks to succeed.

Meantime our prayers are with the families of the lost and the injured from the accident.
Steve

Energy prices have resumed rising

The price of oil is going up and there are several questions why.Oil storage are full and full tankers are sitting outside our harbors. Due to supply, prices should be falling.

In the back of everyone mind should be the situation in Iraq. The nuts running Iraq want to dominate the middle east, and really believe they can bring their mullah back from the 13th century by destroying infidels (Israel) and spreading their religion throughout the world. Russia is not supporting sanctions against Iraq, and may force Israel to attack. If that happens Iraq will mine the waterways and trap 25% of oil tankers from reaching the West. Needless to say prices should spike if this happens.

Add to that US government spending tripling our debt without any job creation. The value of the dollar is falling by design which also drives up prices of commodities. They believe it will make us able to export more, but they have not eased regulations on small businesses. Add to that small businesses are afraid what will happen with the health care bill. No wonder the economy is slow. This does not even include banks and businesses deleveraging, nor consumers reducing spending over job fears and increasing savings.

No wonder oil went from $65 to $80 in the last eight weeks. Gold has crossed $1,000 per ounce and is still rising. The dollar is still easing. Do not see anything stopping these trends in the next six months, or until the Iraq situation and health care is resolved. I bought ETF's in Gold at $950 and Oil at $65 because I expected the dollar to fall.
Steve

PS - see current MarketWatch article below about oil prices.
http://www.marketwatch.com/story/oil-falls-as-api-reports-rise-in-crude-supplies-2009-10-21

Plastic Molders Predict Increasing Oil Prices and Report Market Conditions

Interesting report by Injection Molding magazine that covers a prediction the price of oil will be in the 90's or 100's again by the end of the year. Notable is the recommendation manufacturers convert to all electric molding machines to save energy costs.

It also reports every market using plastic injection is down except medical products. It is an interesting read on the economy by Lisa M. Pellegrino
Steve

http://www.plasticstoday.com/imm/articles/MEI0709

Are Oil Prices Going to Continue to Rise?

Friday the market price closed at $72.25 per barrel. The price of a barrel of oil has increase 17% in the last month. Four months ago the price per barrel was around $36. Here in California, gas prices have zoomed from $2.25 per gallon to $2.85 per gallon. Just in time for the driving summer season. What is happening?

First of all, oil went too high when it zoomed past $100 to $147 per barrel. There was no economic justification for oil going up so high. Speculators drove the market too high has everyone had to buy oil to make some money. When everyone is buying the same thing, you are nearing the peak price.

Oil usage dropped rapidly as gas cost over $4 per gallon. Mileage driven went down as people drove less, bought better mileage cars or took the public transit. This is a permanent change in behavior, and lowered usage more. Of course oil supplies rose. Then the price per barrel over-corrected into the 30’s. This happened despite cuts in production by OPEC. Demand fell faster due to a global recession.

But there are multiple situations affecting price. Developing countries like China and India are buying more cars. Oil stocks have fallen to normal levels. Bio-fuels have risen to be roughly 6% of consumption. Politically the Obama administration is not supporting drilling more oil domestically. Lower prices let that slide by without much political pressure, but I expect that to be a mistake as usage will increase worldwide. The energy alternatives for the green energy do not replace oil however. They generate electricity.

OPEC desires stability. They realize now too high of prices can stall the global economy reducing demand which ruins their economies. They recently increased production about 0.5% to stabilize demand.

So what is driving the price increases? The amount of money the government is borrowing and the policies of the treasury to fight the recession. The dollar is under pressure due to the debt levels and the value of the dollar will fall as the economy recovers. The Chinese and OPEC are looking to protect themselves by diversifying away from the dollar.

So what is my prediction? Oil will stay in the $50 - $80 range this year. Expect this bubble to deflate a bit by August. $3 per gallon gas is too big of a drag on the US economy to help the global economy recover. Second this should be a slow economic recovery. Oil usage is starting at a lower consumption rate for 2009 and 2010.

Long term the falling value of the dollar will be inflationary. US energy policies with global warming taxes will hurt energy independence for the next ten years. It will be cheaper to import oil than produce it domestically. Unless an energy break through occurs, expect oil prices to rise in the years 2011 - 2013.
Steve Amos

When Will Oil Prices Fall?

The main cause of high oil prices is political. Environment nimby’s have stopped construction of power plants with lawsuits, and punitive taxation stopped investment domestically.

No government has successfully managed an economy like a business. We have been successful letting the market determine winners. The government can sponsor research, but business has to invest. Its simple – higher taxes equal no profits and no oil.

What should we do is promote every energy source. Drill offshore, coal, natural gas, solar, hydrogen, conservation, and nuclear. Government should not pick the winners, but goal has to be energy independence.

When will oil prices fall? When the US has the will to build nuclear power plants.

Energy Independence

President Bush’s energy proposals to Congress include the right solutions to free the US from energy dependence. We need more domestic oil production, natural gas, pipelines, nuclear power, solar, grass based ethanol and to better technology to clean coal for our independence. There will be few jobs in the future without energy infrastructure, and the political risk from oil producing countries cutting our supply is substantial.

Our dollar is falling in value for because of oil imports. Oil imports were 4.9 billion barrels in 2007. Estimate $75 per barrel is $367.5 billion, or 50% of the $711.6 billion US trade deficit. We need to expand drilling off all coasts and domestic refining.

Corn based ethanol is not efficient and is causing food shortages. We need to develop cellulous (grass) base ethanol.

France generates 90% of their electricity with nuclear power. Our nuclear plants are decades old and need to be replaced for safety. Solar power will contribute in the next decade, but we need electricity at night for non polluting electric cars.

We need to balance fiscal, political and environmental responsibility in our energy policies. The US can not surrender our children’s future to imports. We need to meet our own needs domestically.

Invest in Productivity and Innovation

The economy is in a mild recession. The housing bubble has burst and is reverting to mean (normal) values. The super leverage of the 2000’s is being unwound as the investors who took the risk are paying the price of risk. There is a lot of speculation about how bad the economy will be.

We will not have a great depression. This is just a normal business cycle, unless political protectionism makes the situation worse. This cycle is predictable and expected by mature investors. There are challenges coming, but nothing to panic over.

Consumers will not be able to use their homes to use like an ATM to keep spending. Increased energy and food costs further will reduce consumer spending power. Consumers will change their spending towards different priorities for the next few years until incomes increase again. Job outsourcing globally will keep salaries low.

Consumer spending is the driver of two thirds of spending. Fortunately the world is now more successful everywhere, and increased demand is now coming from Eastern Europe, Asia, India and the Middle East. So consumer spending will recover internationally first.

So how will the economy recover? Productivity and innovation has always driven economic growth.

Invest in businesses, products or services that increase productivity. Can you lower shipping costs, use energy more efficiently, use less material in products, service clients quicker at less cost, or reduce overheads? These are the drivers of productivity. And the companies that do this are the ones to own.

Innovation and market changers are the companies that will thrive in the future. Look at Apple’s success in changing the music market. There are kids who have never bought a CDs nor albums. They buy music through iTunes. Television and movies are the next to be changed. Low cost hardware and better software has made an explosion of producing content available. With so many choices for customers, how can major studios or networks hold on to viewers? Look for distribution over the web to grow.

Computer grow exponentially more powerful, and programs now do the leg work of thousands of technicians or clerks. CAD changed how we design products, test ideas, and do research. Better quality and lower prices have come with these innovations. In fact, as the price gets lower more people have access to the power of software. Look at the success of new medical products that are improving medical care. CAD has speed up development tremendously. Furthermore the web will be replaced by cloud computing which will increase the amount of data available faster.

Invest in energy businesses that increase productivity of creating energy or conserving energy. One caveat, they must be profitable at a much lower oil prices. Energy will be the next bubble to break. $100 to 120 per barrel is not sustainable.

Oil was stuck in the $15 to $20 per barrel range for two decades. A price of $30 dollars per barrel would be reasonable today with normal inflation. The value of the dollar fell about 30% over the last two years, so $20 to $30 per barrel is now $30 to $45 per barrel. Demand will fall at the current high prices, and alternative production methods are cost effective above $30 per barrel. Both will reduce future demand for oil and lower prices. Invest only in energy processes that are cost effective at $30 - $45 per barrel. I expect oil to fall to $60 – $70 per barrel in 2009.

In summary, the future economic growth will be from productivity and innovation. Productivity and Innovation will overcome a few years of low growth or recession. This is where we need to invest for future profits.

Solving the Energy Problem

Why do we want to solve the energy problem? Look at the risks of doing nothing. How much of our trade imbalance is based on oil? Oil is a significant threat to our economy and world peace.

Hugo Chavez in Venezuela has threatened to cut off oil to the US? Vladimir Putin and Russia has the power for using natural gas and oil over Europe. Iranian President Mahmoud Ahmadinejad is using oil wealth to threaten destroying Israel and potentially starting a world war against the West?

Think about the war in Iraq? The fight between the Shiites, Sunnis and Kurds is over religion, power and oil wealth. Iran, Syria and the terrorists are all interested in Iraq’s power and wealth.

How about a potential overthrow of the pro US government in Saudi Arabia? Al Qaeda was spawned under the House of Saud, and a large number of their citizens hate their government. What happens if they lose power?

Why should we continue to give money, political power, and an economic weapon to people who hate us? The current risk of supply problems is significant, and would damage our economy.

How much of our trade deficit is based on oil? The 12 months through November 2007 the US imported 3,647,889 barrels. Assuming the average price over 2007 was approximately $75 (Current prices are in the low $90’s), oil imported was approximately $273.5 billion in 2007. Our trade deficit in 2007 was $711.6 billion, making oil imports about 38% of the deficit.

To solve the oil problem, we need plans for the long term as well as the short term. This is a series of solvable projects that needs a long term vision to happen.

Short term actions:
Drill more domestic oil off all the coasts and in Alaska to cover the next decade. Everyone points to the potential for pollution. Oil drilling and transportation processes have improved dramatically over the last 50 years. The rare accidents are cleaned up quickly. Oil will always be needed for premium energy, plastics and products. The US needs to increase production.

Locate more natural gas reserves and develop pipelines to heat buildings and homes. Our infrastructure is reaching its limits, and needs expansion.

Find better ways to clean pollution from coal emissions, and require the whole world to use the technology (including China, India, Russia and developing countries) for a level playing field. China and India are causing three to ten times the pollution than the US. Why should we be held to higher unfair standards like the Kyoto protocol than the rest of the world?

About global warming:
Human caused global warming is not scientifically proved beyond a doubt. Global warming is a natural cycle with a little human contribution since the industrial revolution.

Why is a 1 degree Fahrenheit (0.5 degree Celsius) increase over 100 years traumatic? History shows a normal range of variation around 3 degrees Fahrenheit (1.7 degrees Celsius) in the last 2,000 years. Go back millions of years and the natural temperature variation is larger. The biggest factor related to global warming is the natural variation in the output from the Sun.

The fanatics are talking CO2 will destroy the world. People and animal exhale CO2. Are we talking about people and animals breathing CO2 being the main cause of a pending future natural disaster? I don’t think the world is that fragile.

If human kind is contributing less than 1% to 5% maximum of global warming, why are some panicking? Most of the research is based on computer models that are simpler than reality. These models do not work well when compared with current data. Look at the hurricane predictions from 2006 & 2007. The results missed reality going the wrong way from the faulty models. Most global warming models are based on faulty logic. The lack of good science is why I do not take global warming seriously as a panic.

Long term actions:
Generate more electricity using solar and nuclear. Solar electrical generation is finally becoming efficient enough to be cost effective. It could generate 10% of future needs as well as being pollution free. Tax incentives and private industries should be the source of solar products.

Nuclear energy is the choice of many countries including Canada, Britain, Spain and France. France generates 90% of their electricity from nuclear power. The plants in the US are aging, and need to be replaced with new, safer designs that are also more energy efficient soon. The older nuclear plants need to be retired for safety. Legal battles with environmental extremist have prevented new nuclear energy plants. We need to make nuclear power politically possible and economically feasible.

Convert hybrid cars to plug in hybrids to use less oil. This requires more electric generation from solar, coal and nuclear. Hybrids work because of the expanded range for practical transportation. Pure electric cars are too limited in distance for average commuting, and public transportation takes too much time for busy Americans to use. Most of us do not live near transportation that goes near our offices without doubling our commuting time. Time is our most valuable resource. This is why less than 3% ride public transit to work.

Create fuel cells to replace the gas engine generating electricity for hybrids. Fuel cells are getting close to being more economical for gasoline and alternative fuels like ethanol, natural gas and hydrogen.

Grow and develop grass based ethanol since corn based ethanol is too energy inefficient. Grass based ethanol generates much more energy than corn at a lower cost. We also need a pipeline system that carries ethanol. Transporting ethanol in trucks is too expensive and unreliable for extensive use.

The Results of Energy Independence Program:
A ten year program for energy independence will bring world oil back to $30 - $50 per barrel when the US stops importing oil. Dictators will have loss their income and a threat to use against the West. The possibility of war would be reduced. The American economy would improve with less trade imbalance.

The technology is there for everything proposed here. It takes a leader, political commitment, private and governmental investment, and the will to get it done. We are ready for the leadership to step up.