And on the 85th day, after vomiting 184 million gallons of oil into the Gulf of Mexico, British Petroleum finally capped the oil well drilled by the Deepwater Horizon drilling rig under one mile of water. Thank goodness.
You can see from the chart below that uber contrarians and bottom fishers already began taking a punt on BP in late June. They must have reckoned the capping of the well was the beginning of the end of BP’s tribulations. And it IS a big company with a worldwide portfolio of upstream and downstream assets, presumably with the backing of the British government (with nearly 18 million Britons owning BP stock in their pensions).
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It is also true that, in the words of our friend and resource guru, you’re either a victim or a contrarian as a resource investor. Victims buy resource stocks when it’s safe to do so because they’re on the front page of the paper. Contrarians do so when no one wants to touch them.
That said, BP would have to be viewed as short-term speculation right now. For one, it’s not certain the leaking oil has actually been stopped. It’s just been stopped from the top of the well. If the well is ruptured in other places, more leaks will emerge. This could be just the end of the beginning (rather than the end of the end).
The larger question, in our mind, is how long it might take be BP to be litigated out of existence. A complete speculation on our part is that the British government will be forced to take over the company to protect from legal threats. But that’s just wild speculation.
For energy investors, the other issue is how much the ecological catastrophe in the Gulf will affect the willingness of publicly listed companies to drill for oil off shore. It’s a difficult dilemma. If you’re a major oil produce and you’re not adding to your reserves, you’re not going to be punished by shareholders. You’re also going to produce more oil than you find and replace, which is not a long-term survival strategy for a going concern.
But you have to balance the imperative for finding new reserves with the legal risk of another deep water drilling accident. If that kind of accident, no matter how low the probability, represents an existential threat to your business, and you’re the director of a publicly held oil company, can you permit more off-shore drilling?
We wrote about this in the last monthly report of the Australian Wealth Gameplan . Our tentative conclusion – to be followed up with recommendations – is that the BP spill favours National Oil Companies (NOCs). The NOCs are the only institutions that aren’t going to be sued out of existence if they run into drilling accident.
Is it hard to be a contrarian here in Australia, though? After all, commodities are on the front page of the paper every day. It’s the bread and butter of the export economy. Or the iron and coal if you prefer. Does the fact that these things are on front pages of the paper mean you’re already a victim?
Well, not necessarily. In our five years here, we’ve come to be wary of news that celebrates high prices. Anytime those high prices are figured into government revenue projections and make nice pretty graphs on the front page of the paper, you should be cautious.
On the other hand, we find ourselves more and more attracted to picking over share market road kill. You want firms with decent assets, but perhaps hitting a finance hick up. The other real allure for us is finding a commodity that’s fallen so much the momentum chasers can’t be bothered. That’s when you find things very cheap.
Speaking of not cheap, the July 10th edition of The Economist has again called out Australian housing as being the most over-priced in the world. The magazine reports that, “House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009.” That’s not so bad if you already owned a house and bought for the purpose of making a quick capital gain.
But not so fast!
“More concerning,” the magazine continues, “is our analysis of ‘fair-value’ in housing, which is based on comparing the current ratio of house prices to rents with its long-term average. By this measure Australian property is the most overvalued of any of the 20 countries we track.” How overvalued? By 61.1% to be exact.
As far as we can tell, the usual suspects spruiking property in Australia were not as quick to rubbish the article as you might expect. Hmm.
To be fair, the same issue of the The Economist had a dreadful article about gold. It goes to show you that credibility does not come from authority but from a well-made argument. This is a variation on the conclusion Boethius made in The Consolation of Philosophy that reputation doesn’t matter. What other people think of you will be fair or unfair by turns. And it is beyond your control. All you can control is the integrity of your own actions.
But back to the Economist. In its article on gold it concluded, “As the world economy returns to business as usual, the gold market may also return so some semblance of normality…As long as the world economy remains uncertain and investors fear inflation and sovereign default, gold will keep its allure. Eventually, however, the price will weaken: it is even possible that the recent slide to below $1,200 marks the turn. And investors may look back on the bull run of 2009-10 or 2009-2011 with the sort of wonder that humanity has too often reserved for the yellow metal itself.”
As pithy and superficial as that analysis is, it hardly compares to the comment of Citigroup chief economist Willem Buiter. He says that gold is, “the longest lasting bubble in human history” and that he would not put any of his wealth into “something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.”
Sigh. How snarky can you get? It is quite possible that investors are going to make a lot of money speculating on gold shares leveraged to the gold price in the coming years. Gold is not anyone else’s liability. That alone gives it intrinsic value as money, not to mention the physical qualities it possesses which make it a very stable medium of exchange.
But we view gold, fundamentally, as catastrophe insurance against the crash in asset values from a highly leveraged economy. It’s not gold moving up or down versus the dollar. It’s the dollar moving up or down versus the gold, depending on the relative degree of currency mismanagement and money printing by the Fed.
Besides, after the last three years, if you don’t think financial catastrophes are made more frequent and more probable due to the intervention of the banksters and the State in the free market, then you aren’t living on the same planet. Since 2008, we’ve been in a reflationary period in which the most inflationist policies of the world’s central banks have barely managed to keep asset prices moving higher.
Without those policies, asset prices would already be much lower. Recovery to a new production possibilities frontier would also be a lot closer. Bad investments would have been liquidated and the people who wasted capital would have had that money removed from their mismanaging hands.
Instead, we have governments perpetuation the money, power, and mistakes of bankers. To the extent it keeps households happy because it keeps asset prices high, it’s perceived as having a bad odour about it, but somehow necessarily.
Well, that odour is the rotting carcass of a corporatist alliance between big finance and big government. It’s not doing anyone any favours. And it’s smelling up the joint. And it’s certainly not alive, despite the attempt to pump new credit into it. Credit is the lifeblood of an economy addicted leverage and asset growth.
Our view? Phase one of the great credit depression is over. It caused a massive transfer of liabilities from the private sector to the public sector and concentrated those liabilities in a handful of firms that are now considered too big to fail. But if the whole system is a failure, what then?
In PhaseTwo, the Welfare State’s 300-year old model of funding deficits will be stress tested. And what happens when the stress is too much…when a mountain of debt is supported by an anthill of real tangible equity? You’ll read about that in the Economist too, but only after it has happened, and it’s too late for you to have protected yourself from it.
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