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Don’t Bet on the US Shale Oil Boom

By Bill Bonner, Chairman, Bonner & Partners on March 3, 2014

Today, a warning about the US shale oil boom…

But first, a little practical advice. You want to buy the car you want at the price you want? Don’t go into a dealership.

We met a man here in Aiken, South Carolina, who owns a nationwide car dealership. He explained:

“This is how it works. The dealer doesn’t really make much by selling cars. He makes it on the add-ons. The customer comes in. He knows what he wants. But he leaves with much more. The salesman shows him the upgrades. The shiny wheels, the onboard entertainment, four-wheel drive, service contract, and so forth.

You want to save money? Just figure out what you really want then get a couple dealers to bid on it. Don’t go into the dealership.”

There… that will save you some money, dear reader.

Fudging the Figures

Now, back to the financial markets…

Dow up 49 on Friday. Gold up $10 an ounce. Online bitcoin exchange Mt. Gox blew up like Krakatoa. And Janet Yellen maintained that it was the weather holding back the US economy, nothing more.

But it ain’t necessarily so.

Officially, real (inflation-adjusted) US GDP increased 1.9% last year. The figures are fudged so much, you have to call the dentist after looking at them.

We could be in recession for all anyone knows. Fewer people are working than at any time since the 1970s, when women began entering the workforce in large numbers. And last year, sales for S&P 500 companies rose only 1.8%. So much of the S&P 500’s sales comes from overseas markets, it is doubtful if US sales growth even kept up with population growth.

What’s wrong?

When the 21st century began, just 13 years ago, the US accounted for 25% of the world’s economic output. Now, the figure has been cut down sharply – to 17% of world GDP. Within 10 years, it is likely that the US will be neither No.1 nor No. 2. Instead, it will have to settle for the bronze medal – in the No. 3 position behind the EU and China.

Three Staggering Policy Mistakes

Some of it is regression to the mean. But some of it comes from staggering policy mistakes. US officials seem to believe:

1) You can borrow your way out of a debt problem.

2) You can keep interest rates artificially low without doing long-term damage to the economy.

3) You can waste the nation’s precious output on zombie activities – including wars, inefficient tax systems, giveaways, bailouts and health-care programs that no one can understand.

We recently mentioned one example of economic distortion caused by ultra-low rates: robots. At zero interest rates, a business can borrow money and replace an employee with a robot. Labor costs go down. Profits go up. Debt goes up too. But who cares about that?

Another example, at ultra-low interest rates energy producers can drill in marginal areas for marginal output of oil and gas. As long as the capital costs are held in check by ultra-low rates, almost any return on investment looks good.

The press reports a new “energy revolution” in the US that is supposed to give the empire a second wind.

Trouble is it ain’t necessarily so. Here’s Bloomberg:

The path toward US energy independence, made possible by a boom in shale oil, will be much harder than it seems.Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back.Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakotas Bakken shale, according to the Paris-based International Energy Agency.Iraq could do the same with 60.

 

Drillers are pushing to maintain the pace of the unprecedented 39% gain in US oil production since the end of 2011. Yet achieving US energy self-sufficiency depends on easy credit and oil prices high enough to cover well costs. Even with crude above $100 a barrel, shale producers are spending money faster than they make it.

Second wind for the US Empire of Debt? Recovery in America?

Maybe not…

Regards,

Bill


Market Insight:

Get Ready for a Major Buying Opportunity in Russia
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

Russian troops have seized control of the Crimea region of Ukraine in violation of international law.

The crisis has hit Russian markets – hard.

Moscow’s main Micex index dropped 9% in early trading. And the rouble has hit an all-time low against the US dollar and the euro.

This has prompted Russia’s central bank to raise its key lending rate to 7% from 5.5%.

A major crisis is brewing. And this spells opportunity for coolheaded investors.

When asked recently by Nick Giambruno at Casey Research what he thought it meant to be a successful contrarian and how that related to investing in crisis markets throughout the world, legendary hedge fund manager Jim Rogers had this to say:

[N]early always if you are a trader or an investor, if you buy panic, you are going to do okay.Now, the people who are investors can also do that, but it usually takes longer for there to be a permanent rally. In other words, if there’s a war and stocks go from 100 to 30 and everybody jumps in, it may rally up to 50, and then the traders will get out, it may go back to 30 again. I’m trying to make the differentiation between investors and traders buying panic.As an investor, nearly always if you buy panic and you know what you are doing, and then hold on for a number of years, you are going to make a lot of money. []Now, it’s not always easy, because you are having everybody you know, or everybody in the media shrieking what a fool you are to even try something like that. But if you have your wits about you and you know what you are doing, and you know enough about yourself, then chances are you will make a lot of money.

There are three important points here:

1) Buying when everyone else is panicking is hard to do and requires having your wits about you.

2) If you are an investor, you’ll need a long-term time horizon to allow your contrarian buys to make money (years, not months).

3) Buying when everyone is panicking… and holding for the long term… will not just make you money. It will make you a lot of money.

Right now, shares of Russian companies are dirt cheap. The Russian stock market trades on just over five times reported earnings. To put that in context, the S&P 500 trades on more than 19 times reported earnings.

That means investors in Russian stocks value each dollar of per-share earnings about one-quarter as high as they value one dollar of per-share earnings in the US.

And Russian stocks could become even better value, if tensions continue to escalate between Russia and Ukraine.

Our advice: Buy panic. Invest a portion of your portfolio in Russian stocks. And hold for the long term.

Editor’s note: Speaking of ridiculous bargains, we’re currently giving away a FREE hardcover copy of Bill and Addison Wiggin’s bestseller The New Empire of Debt – plus our top gold plays. Each stands to benefit if the Ukraine situation worsens… and investors seek safe haven in gold. To claim your free book… and your gold plays… follow this link.

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