Thursday October 27, 2005 - 13:40:38 GMT
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Black Swan Capital - www.blackswantrading.com
“The limitations of a trader are those of his qualities. He must subsist upon fluctuations; he eats and drinks his profits; his estate is in his pocket. Of a great opportunity in speculation he gets only the forelock.”
Garet Garrett, Where the Money Tree Grows
The “peak oil” crowd has enjoyed the game so far. Why shouldn’t they? They made a one-way bet that paid off big time. But too confident they have become in their belief in regression analysis it seems. So we ask: Is it ever that easy? And we answer: No!
We answer “No!” not because we know anything in particular about oil. But because peak oil requires one to assume “things are different this time.” That is a very dangerous belief when it comes to speculation.
The following excerpts are taken from a Bloomberg story carried by The Standard this morning:
“The further into the future, the steeper the decline in prices the past two weeks: December 2005 oil has shed 1 percent while December 2011 is down 3.5 percent. This may be a signal that the ‘oil-pricing paradigm has undergone a major adjustment,’ said Melbourne-based oil and gas analysts Andrew Williams and Gordon Korkie.
“Soaring fuel costs after Hurricanes Katrina and Rita have cut US energy demand, the report said. This may ‘solidify into long-term trends,’ helping to crimp prices. Oil has more than tripled in four years. ‘It's tough to get bullish with US demand shrinking,’ said Anthony Nunan, assistant general manager for international petroleum business at Mitsubishi in Tokyo. ‘That's partly why from a long-term standpoint oil is getting sold.’
Hmmm! “Tough to get bullish when US demand is shrinking,” says Mr. Nunari. And is there any proof US demand is shrinking. Could it be crude is sowing the seeds of its own price destruction? Maybe!
The Bond King, Bill Gross of Pimco, ways in on that question in his recent missive [our emphasis]:
“As a final piece of historical evidence that suggests current yields are approaching their peaks, I submit a chart of the 5-year Treasury as a proxy for the ‘bite’ of interest rates, conundrum and all. It is my favorite indicator, but one that is often ignored by the investment public since it takes so long to unfold and doesn’t carry the immediate sizzle of a Fed hike. My take from Chart 2 [below] is that tighter money and higher yields in the intermediate portion of the curve unfold over 1-2 year cycles and generally in the magnitude of 200 basis points (the ‘Volcker’ tightening being the exception). The current upward cycle is now 27 months in duration and 230 basis points in magnitude, enough by historical standards to slow an economy or even produce a mild recession given increased leverage and the exogenous shock of energy prices.
Source: Bill Gross, Pimco Investment Outlook, November 2005
Though we didn’t include a warning label on this morning’s issue, in fairness to new readers, we must tell you past records show an extremely high negative correlation coefficient between our crude oil bearishness and eventual crude oil prices. But logic of our view rests on a bet that a broken clock is eventually right, rather than a belief that “things are different this time.”
Black Swan Capital
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