Eventually, These Things Will Matter
Nov 19 2008 - Mike Williams - Morning Minutes
Good Morning:
Please make sure you take time to sign-in and review the comments of the last week or so. As this process enters its steepest pain levels, logic has been lost--as is the case during all panics. Rest assured, I understand and respect the elements in play. It has not been a friendly year at all--but in almost all cases, we can span around the globe and see most are far worse off.
It does not merit any suggestion as to how or why it will end, only that it will be a surprise that does it. These notes are not designed to suggest items to be ready for on a day-to-day basis. We try to persuade you to think in larger terms...not now--next. Yes...it is more difficult to do so than one can imagine at times. They are tracks to run on to get your mind prepped for the next surprise...the next trend...the next obvious.
Eventually It Will Matter
- As I write this morning, Crude Oil has traded below $50 for the first time since May of 2005. We have gone from running out to being awash in it. If I had said to you on July 15 of this year, "Crude will be $50 by Thanksgiving", what would you have thought?
- The good news? The worse the news flow gets--the more crude will fall.
- Shortly, gasoline costs will be well below $2.00 in most parts of the country. I have already had many reports below $1.70!
- The combination of lower fuel costs and massive sales at the retail level, along with very strong inventory controls, suggest the shopping season will be better than whatever is feared.
- LIBOR spreads have fallen by over half in the last 3 weeks. Most corporate bonds are now priced as junk. Once the auto companies are fit into their body bags, expect massive buying interest in the now very high-yielding corporate debt market. We are watching several issues right now that suggest we can target 15% yields over next 5 to 7 years.
- He's back. The Prince is in the headlines today. He will be picking up several million more shares of C as the world once again visits the deathbed of the beaten down bank.
- Eighty-five (85) countries have reduced rates in the last 3 weeks. They will do so again in the weeks ahead--at least once. Trillions of dollars have been committed in backstopping efforts and stimulus packages of all shapes and sizes.
- All of this money will eventually, as sure as gravity, make it into the system. Then, as the world embraces deflation, we will peer around the corner to find inflation and the musical chairs will continue.
- ASSUME we have a very severe recession underway and it will be as such for the next year--lengthening the one we are already in. Assume further that it is far worse than suggested...use a 6% loss on our GDP over the previous 12 months. We will lose nearly $850 BILLION in national output.
- If you are going to make that assumption...then you have to accept two things as equalizing effects: a) you are now betting on consensus so do so at your peril and b) you MUST allow for the fact that crude (and other cost inputs) will fall even further...likely very close to $25 to $30. By the way, don't laugh about that number...it is only $19 a barrel from here.
I digress.
A fall from the highs by, say, $110 a barrel, would produce a domestic annual economic savings of roughly $880 BILLION in the US corporate and consumer spending structure. That will come in lower costs to all concerned.
The point? A staggering recession will be nearly entirely offset by an equally staggering savings structure. Sure, the oil companies will make less for awhile but you will recall that 100 days ago, when everything was obvious--but, uhh, far different from today--the crowd wanted the heads of all oil CEO's.
Remember?
Remember what used to be obvious....100 days ago? A year ago? Two years ago? January 1, 2008?
- Yes, this will all change. This benefits noted above will all eventually matter. This panic has created values not seen in decades. I also know that the note can be played too loudly. As the saying goes, "If I get too many more steals, I will go broke..."
- There is more pain, more angst and more frustration. There is more fear, more volatility, more red ink.
- And then, when it feels the absolute worst, it will end.
- It will end for reasons no one in the crowd knows right now. It will end for reasons no one even cares about right now. It will end with the crowd not caring about value anymore.
- Not everything will get better at the same time....but rest assured when it gets better, you will see gains in the first 12 months after the lows in staggering proportions.
- The next big mistake will be all the buying of government bonds we see now at deflationary environment, record low yields. By the way--that is not the way to buy safety.