“The outlines of the new economic order, rising from the disintegration of the old, are apparent.” Franklin Delano Roosevelt’s annual message to Congress, 1935.
Oil traders look a little twitchy today, don’t they? Crude oil spiked $5 in New York trading on a rumor that Iranian naval vessels fired at U.S. naval vessels. Nothing was confirmed and prices settled down. No smoke. No fire. No shooting war. Not yet.
It’s one of the great frauds of modern finance that markets efficiently “price in” everything that is known, at every second of every day. The jittery oil markets show that traders have no idea what a shooting war in the Persian Gulf—home to a majority of the world’s known oil reserves and 25% of its daily petroleum exports—would mean. “Really bad,” is an imprecise economic forecast.
What can the market really “know” about how the oil price would behave in a war between Iran and the U.S? Oil itself probably doesn’t even know. And as former U.S. President Bill Clinton might say, it depends on what the meaning of “know” is.
For example, when Coles sold off its Myer department store business, did it “know” that a good management team at Myer would manage nearly $160 million in pre-tax earnings? Did it “know” that based on those earnings, after you net out other items from the $1.4 billion sale price, that it effectively sold Myer for six times earnings? It obviously didn’t “know” any of that, or it wouldn’t have done it in the first place.
That is the problem with so-called efficient markets. They don’t price it what people know. They price in what people think they know, which is often different from what is really going on. Markets are efficient in the sense that they reflect the vastly different opinions millions of participants have of the same set of objective facts. Which is another way of saying what passes for “reality” in the market is just the collective, subjective perceptions of people who have varying degrees of knowledge about what is actually going on. Many of them are just guessing.
Investors and managers and even editors of the Markets and Money don’t “know” what the future is. All we’ve got are our basic and simple rules. By low, sell high. Neither a borrower nor a lender be. Save for a rainy day. Don’t consume more than you produce. Never start a land war in Asia. These are timeless truisms. Though simple, they are effective, and people repeat them for a reason, because they tend to prevent you from doing really stupid things because you think you “know” better.
We have no idea what is happening or will happen in Iran because we don’t know the motives of the people involved. As we wrote yesterday, the scary truth is that no one is entirely in control. But putting that all aside, we note that the world continues to use more and more oil, and find less and less of it. “Knowing” that is enough reason for us to be long oil.
And though we are skeptical about it whether it can really be “clean,” we are keeping our eye on coal technologies. Before the oil age, coal was the industrial world’s fuel of choice. And it may be the fuel of the future, seeing as how coal is abundant and less geopolitically sensitive than oil. It’s just that coal is so dirty.
Sir Nicholas Stern, author of the famous report on climate change that came out of Britain, says Australia should pursue a “technological edge” in coal to go along with its massive coal reserves. By doing so, Sir Nick says, Australia “Will be developing a technology that it can market but it will also be helping to preserve the market for coal because countries around the world are taking the problem more seriously.”
“The problem,” is climate change. Coal is not the solution to that problem. But cleaner use of coal is part of the solution, and thus, part of the investment opportunity. In the meantime, a portfolio of companies in the alternative and renewable energy space is a realistic way to ‘diversify’ your energy portfolio away from fossil fuels.
And then there’s uranium. It’s doing its version of a 1970s-style “melt up,” without the assistance of rampant inflation. (also previewing what gold may do soon). “Share prices in Australia’s listed uranium sector rallied yesterday as the spot price of uranium edged closer to the US$100 a pound mark…Uranium miners Energy Resources of Australia (ERA) and Paladin Resources followed the price jump…of the advanced explorers, Energy Metals rose 13.7 per cent to $5.80, Nova Energy (NEL) 11 per cent to $3.88 and Toro Energy to 14.51 per cent to $1.10.”
What comes next for the uranium industry? New mines? New listings? Or a “rationalization” in which the wheat are separated from the chaff? Probably a little bit of all of them. But are uranium stocks already overvalued and due for a spate of correction and volatility? You bet. When the spot price inevitably reaches $100, we’d expect to see a shakeout and correction, at which time it would be worth knowing which mines and companies have the best prospects going forward.
Markets and Money