Greenspan: Bonds Are in a Bubble, Stagflation Is Coming

[CommissarJones]

"By any measure, real long-term interest rates are much too low and therefore unsustainable," the former Federal Reserve chairman, 91, said in an interview. ... "We are experiencing a bubble, not in stock prices but in bond prices. ... We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s."

https://www.bloomberg.com/news/articles ... nspan-says

I am skeptical about Greenspan's view of equities, which is based on the so-called Fed model. Its shortcomings have been pointed out elsewhere by commentators who know much more than I about these things.

If Greenspan is correct in saying that 1970s-type conditions are set to return, it may be worth recalling that the decade was great for commodities and lousy for both stocks and bonds. I believe commodities are very cheap at the moment relative to other asset classes.

[odysseus2000]

commisarJones
I am skeptical about Greenspan's view of equities, which is based on the so-called Fed model. Its shortcomings have been pointed out elsewhere by commentators who know much more than I about these things.

If Greenspan is correct in saying that 1970s-type conditions are set to return, it may be worth recalling that the decade was great for commodities and lousy for both stocks and bonds. I believe commodities are very cheap at the moment relative to other asset classes.

There are many ways to look at rates. Some say the high rates in the 70's era were a bear market in bonds compared to experience over many previous centuries. We also have the Japanese experience of long term low rates.

The trouble with extrapolating 70's commodity prices to now is that we are no longer capacity constrained due to China and also we no longer have OPEC able to ramp oil prices as they wish, and now we have lots of US production too, nor are we likely to let a Hunt brother like ramp of silver or another commodity. Additionally it is now clear that we have seen peak oil for transport. Every time super markers report their like for like fuel sales fall. Without inflation I am not sure how commodities ramp. One can argue that higher rates, if the US gets them, will be inflationary & help gold, but there is so far no sign that I see to support this.

If I was to pick a comparable time yo now it would be the 1990's when we had the Internet growing exponentially, now we have AI, Augmented reality, virtual reality, web services, electric cars, hyperloop replacement of rails etc all ramping. So to me it looks like equities in these ramping sectors will do well. The FANG (Facebook, Amazon, Netflix, Google) along with Apple, Nvidia etc & also Chinese names like Baba, Bidu etc.

Regards,

[PeterGray]

Additionally it is now clear that we have seen peak oil for transport

That is not the case. It's probably true that the coming of peak oil for car transport is more visible than before, but globally car use is continuing to rise and majority of the growth is in oil driven cars, and will continue to be for some time. I doubt the actual peak global use of oil for car use will be reached for 10 or possibly even 20 years. The global story is not the same as the story in the developed world, where car use is already high (and possibly approaching saturated!).

Oil use for other forms of transport - lorries, planes and ships also continues to rise, and HC free ways of fueling those are a long way behind cars.

Globally oil use continues to rise at around 1%pa. I doubt that will change much in the near term. It's certainly true that OPEC does not have the control over the PoO that it did, but that does not preclude further periods of high ($100+) prices. There has been massive underinvestment in major oil exploration and development in the past 2-3 years. Those sorts of projects have times lags of several years. There is a strong likelihood of significant imbalance of oil supply and demand in the opposite direction occurring in the next few years.

Peter

[odysseus2000]

Hi Peter,

We will have to agree to disagree on this.

Regarding road transport we are seeing falling hydro carbon use due to hybrids & as electric rolls out this will accelerate & is clearly seen in supermarket fuel sales.

Sure you can argue that developing nations will still use hydro carbon, but cars have a finite life (few exceed 20 years) & the advantages of electric over hydro carbon are so substantial that all motor manufacturers will go that route. In the UK the future market for hydrocarbon vehicles is zero by government mandate so manufacturers will no longer spend money developing such cars.

The biggest market for electric is China & India will follow. If you look at every aspect of electric cars there are advantages: easier to make, simpler to maintain, much better performance etc.


Regarding flight all the same things apply. Electric motor offer many advantages for flight and there are now several all electric small planes being flown such as:

http://www.theatlantic.com/sponsored/th ... light/208/

These are just small scale proof of concept machines, but the big makers like airbus are moving towards commercial electric airlines because, like cars, electric propulsion is better. Electric motors can much more easily tilt allowing for vertical take off etc.

http://www.airbus.com/newsroom/topics-i ... ation.html

Sure it is possible that as we transition there could be price rises because of lacking development, but one can't ignore many extraction developments that make for easier & faster production. Much US production is hibernating, waiting for higher prices, if these come they can produce a lot more.

Regards,

[TUK020]

The biggest market for electric is China & India will follow. If you look at every aspect of electric cars there are advantages: easier to make, simpler to maintain, much better performance etc.

It is important not to confuse the viability of a technology and the economic and market circumstances for the technology to take off.
I suspect that the big opportunity for motorised vehicles in India is the take up in rural parts of the economy. An electric vehicle might be grand, but what would you plug it into to charge?

[odysseus2000]

TUK020
It is important not to confuse the viability of a technology and the economic and market circumstances for the technology to take off.
I suspect that the big opportunity for motorised vehicles in India is the take up in rural parts of the economy. An electric vehicle might be grand, but what would you plug it into to charge?

The beauty of electric is that you can power it from the sun, a quantity that is abundant in India via solar panels.

The price of electric traction and solar panels continues to decline giving rural nations (India, Africa etc) the ability to cleanly power their transport. China is demonstrating and leading the world in electric traction technology, both the motors and the charging.

If you compare the capex and running costs of electric to diesel the advantages of electric are overwhelming even before you consider the environment and safety of energy supply, no hostile entity can cut off the sun light whereas refineries and producers hold consumers over a barrel anytime they want to and are themselves vulnerable to terrorist or military threats.

Regards,

[TUK020]

In developed countries, most consumer solar power is there as a 'top up', and for any serious momentary demand (e.g. to charge an EV) the grid is there to do the heavy lifting. A lot of solar generation is done on a subsidised marginal cost basis, assuming the grid is there when you need it.
If you don't have a grid, then in your EV capex you need to factor in a significant amount of solar generation (and probably battery storage to cope with cloudy days).
This is likely to slow adoption of EVs in places where a grid is not established

[Mapfumo]

Additionally it is now clear that we have seen peak oil for transport. Every time super markers report their like for like fuel sales fall.

The Wall Street Journal had a nice summary of different predictions for peak oil recently (this is overall consumption, not just for transportation, but currently more than half of all oil is converted to gasoline, so it's not too bad a proxy). No-one is saying it's already happened.

https://www.wsj.com/articles/get-ready- ... 1495419061

[odysseus2000]

It is true that in the developed economies, the existing grid will be used as in this German solar & storage scheme:

https://youtu.be/CNkP1egOdwY

In the developing world one expects to see ad hoc development of small scale grids such as this Kenya micro grid:

https://youtu.be/Mz9HPX7DbEQ

However, all of this solar is still in its infancy and there are still forecast increases in oil usage:

https://www.eia.gov/outlooks/steo/report/global_oil.cfm

The use of lpg & cng in many nations such as Fred Bloggs reports is another development that takes away some of the crude oil dependence. But as noted in this thread (Mapfumo) the oil consumption article does not break out transport fuels.

Meanwhile there is increasing demand for feed stocks as the eia article notes regarding new US ethane plants leading to expected rises in 2018. For now the electric transport market is only beginning, but to not expect we have reached peak oil for transport requires that all the hybrids & electric cars are abandoned. In the UK the best measure I have for oil transport consumption is the super markets like for like sales of fuels & all the ones I have seen show declines.

However, if all of these solar & substitute fuels are going to have an effect we should begin to see oil consumption plateau & then begin the decline from peak oil.

Regards,

[odysseus2000]

Hi Fred Bloggs,

Thank you for that super useful information.

I easily get confused as to what is liquid & what is gas. I am not helped by HGL which as I understand it is Hydrocarbon Gas Liquid which is argued to increase US liquid oil consumption in 2018, but is it really correctly called a liquid if it is, as I understand it, essentially a compressed gas?

Is there anyway to get a handle on what liquid transport fuel (petrol, diesel) demand is like?

Regards,

[odysseus2000]

Hi FredBloggs,

Thank you!

One question is still confusing me. When the Energy Agency talk of HGL, is this what you call NGL?

Also is this all added in to create the total oil demand, such that:

total oil demand = crude oil + NGL (HGL?)

I am just trying to make some sense of the numbers and wonder if the total oil demand numbers are made up of declining crude and rising NGL, or is this too simple a way to think about things?

Regards,

[odysseus2000]

FredBloggs

Sorry, never heard of HGL. But it is not unusual for the same thing to have several different names. Or indeed one name to refer to more than one thing. Confusing! But no, NGL should not be considered as oil demand by proxy, in my opinion.

Thank you!

Maybe I misunderstood the EIA link I gave earlier as the way I understood it, they said their predicted increase in oil consumption was due to demand for HGL (NGL) in the US due to the new ethane plants.

I often get confused by the nomenclature of the various reporting bodies and would welcome any comment that can present reliable data as to whether crude oil for transport is going up or not, but perhaps this is asking too much in a complex business like energy.

Regards,

[odysseus2000]

Yes, can't argue about growth in aviation fuel usage although even here there are much more efficient planes, such as the dream liner which uses 20% less fuel than the aircraft it replaces:

https://en.m.wikipedia.org/wiki/Boeing_787_Dreamliner

Regards,

[odysseus2000]

FredBloggs
Agreed. Yet this is a virtuous circle for growth. Efficient engines reduce air fares. Reduced air fares increase passenger growth. I suspect for the near to mid term accelerating passenger and air freight traffic will drive jet fuel demand much more than increased effficiency depresses it. A side issue is that depressing demand for gasoline and diesel production at refineries will push the refineries to produce more jet fuel from each barrel of oil. Thus increasing supply and further adding downward pressure on jet fuel prices. The circle continues.......

Yes, one can get to think that airlines are great investments and in the US this has been true thanks to the Justice department allowing the formation of near monopolies and this has been good for airline share prices such as SouthWest:

https://twitter.com/0_ody/status/894521809437155328

But in the UK things are not so good for investors. We now have media coverage of the long lines of UK folk going through very slow passport control at many European airports which will do little to help with an already very competitive landscape. The tremors of Brexit are still visible too: Easy Jet is still within the Brexit candle:

https://twitter.com/0_ody/status/894520067043581953

It is still extraordinarily cheap to fly in Europe which is good for consumers, but one wonders even with low fuel prices if there is much growth here unless we see some airlines fail.

Regards,

[odysseus2000]

FredBloggs
Don't make the mistake of measuring what is happening in the UK as a proxy for what is happening all round the rest of the world. The headline "Fog in the English Channel, Europe cut off" doesn't have the kudos it once had. I can also get 45 minute flights here for about USD 30 just like you can back in the UK.

Yes, low cost flight is a world wide phenomenon and I believe a good one. Always good for people to meet other people & see how things are done in other countries. But can the airlines that sells you a 45 minute flight for $30 do so consistently profitably and have strong share prices.

I have never seen as many European based nationals vacationing in the UK as I do now, many coming on very short trips. But as regards making money out of holding airline stock it is not so easy here currently & the passport queues won't help.

In terms of many business it is irrelevant as with the internet the need to have sales folk hawking product is much reduced & anyhow not many of the 7 billion folk alive now would care if the UK shut down although the 60 million here would notice!

Regards,

[richfool]

I've been researching flights to the far east, but find they are much dearer than last year. Though oil is cheaper now, I had concluded that the increase was due to the fall in the value of sterling (over the last year) against other currencies, or specifically against the dollar which I believe oil is priced in.

[odysseus2000]

richfool
I've been researching flights to the far east, but find they are much dearer than last year. Though oil is cheaper now, I had concluded that the increase was due to the fall in the value of sterling (over the last year) against other currencies, or specifically against the dollar which I believe oil is priced in.

Makes sense. The weak pound is a pain for buying anything overseas at the moment and I don't get the feeling that the present government will do anything to make it stronger more through lack of ability than want.

However, the low £ should help exporters significantly.

Anyone care to suggest exporters who are doing well with the low £?

Regards,

[dspp]

We are an exporter where I work. The bad news that few people in Brexitland like to acknowledge is that the low £ is mostly not good for exporters. Why ? Because most of the raw materials r other input goods are sourced abroad because the UK no longer makes them. The only thing that is priced in £ for us is people. So the more labour input to the goods the more impact a low £ has. So the less productive your workforce the more impact ... But low productivity firms mostly expired a long time ago.

Hey ho. Another bullet in the foot for Brexit land.

[dspp]

FB,
Low productivity in UK economy seems to be an empirical fact from what I have read. Sorry no citations to hand as I am about to head elsewhere. BUT I fully agree with you that the few remaining factories do run very lean based on my observations. The only too things I can think of which might square the circle are the relatively low levels of automation in UK factories vs non-UK; and possibly a blend issue of productivity outside of factories being the real culprit. Not something I need to dig into personally at a UK level, though I worry about it where I am the responsible person in charge. Anyway all I was trying to do was to explain why a low £ is not necessarily a good thing for a net importer running a balance of trade deficit.
regards,
dspp

ps I see non-UK factories as well and they are not standing still.

[richfool]

From what I have seen in a number of TV progs re how various products get from the field through the factory and into the can and onward to the supermarket shelves, is both slick and impressive. Agreed the UK does seem bogged down with over regulation.

A friend of mine lives in France and says they often just ignore the over-bureaucratic regulations there. We in the UK also seem to be overly pre-occupied with overly protecting minorities or those with minority viewpoints, habits etc., enacting unnecessary laws or protocols.

We should have made a bold decision with things like Heathrow decades ago, - such as relocating it to the Canvey Island area (the Boris idea), and setting up hi speed links into London. Instead we continue to tinker with already an overwhelmed Heathrow and Gatwick. I see reference in the meida that NATS is saying that the skies around London are reaching saturation point.

I look forward to us finally Brexiting, but I fear it will be a long rough road before we eventually get there, or start to see any benefits. The EU countries are going to (seek to) drag away a number of financial companies HQ's to mainland Europe, while we prevaricate and fight fires with the complexities of the actual exit.