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Feb 02
Yogi Berra and the Shale Bust

It is said that the principal function of economic forecasters is to make weathermen and fortune tellers look good.  While the myriad failures of economic prognostication are well known (economists have failed to correctly predict every U.S. recession in real time since World II), it is the sorry fate of energy analysts to make even economists' cloudy crystal ball seem a useful tool.  No commodity on earth is studied more intensively than oil by investors and governments alike; yet there is no price that more routinely embarrasses forecasters than oil and its friends elsewhere in the energy complex.  The past six years have amply demonstrated this record of futility, with expert opinion veering from endless scarcity to endless glut and back again, while the world's most analyzed price zooms from $150/ bbl to $35, then back to $110 and now, most recently, down to $45.  While the experts debate Peak Oil, Saudi politics, OPEC policy, and the promised endless abundance of cheap North American shale resources, the rest of us can safely conclude that, when it comes to oil prices, they haven't got a clue.

We prefer to turn to noted economist and philosopher Yogi Berra, a rare market analyst whose observations have stood the test of time.  Dr. Berra famously teaches that "predictions are hard, especially about the future" and that "in baseball, you don't know nothing."  With respect to the latest plunge in oil prices, he also reminds us that "it's déjà vu all over again." Energy markets are nothing if not bipolar. They are remarkable in their ability to swing from extreme optimism to extreme pessimism, with little room for neutral feelings.  It seems probable to us that the current sudden collapse of oil sentiment into abject pessimism is an overreaction.  The conventional wisdom on oil is frequently wrong- in our view the emerging bearish consensus on oil prices (and the related expectation of extended disinflation/ deflation in world bond markets) is yet another psychological extreme which will come to look foolish in the fullness of time.  Indeed, from current levels we are inclined to believe that the short trade in oil is getting so crowded, nobody ought to go there any more (with apologies to Yogi).

In tracing the history of sentiment extremes, in oil, houses, stocks, currencies or virtually any other market, magazine covers have proven to be a useful and reliable indicator of turning points.  By the time an idea reaches the cover of Time, Newsweek, or the Economist, one can be sure it has so permeated the general consciousness that there remain few people left to be convinced.  Major tops and bottoms are made in such environments, when opinion becomes so one-sided that there is only one direction in which markets may change their collective mind.  In general, the magazine cover indicator is more informative the more general interest the publication, and the wider the circulation.  We therefore note with great interest that within the past two weeks, both Time and the Economist have made cheap oil the theme of their respective cover stories: on January 17th, the Economist cover asks how falling oil prices offer a chance to "Seize the Day" to transform energy policy, while a week later on January 22th, the Time cover announces "Cheap Gas: How Long Can It Last? How Low Will It Go?"  Like most energy analysts, magazine editors have a terrible record forecasting oil prices.  Their record is so bad, in fact, that we have compiled below a history of oil price in magazine covers since 1983.  The chart shows that magazine editors have a contrarian genius for flagging tops and bottoms in oil prices, expressing anxiety about rising prices just before a collapse, while extrapolating low prices forever just before a dramatic rise.  Right now, the magazine cover indicator suggests the bottom in oil prices is near.  While we believe there are many good fundamental arguments to support this view, experience, humility and the wisdom of Yogi Berra argue that such arguments are beside the point.  Consensus opinion on oil has become both overwhelmingly bearish and very widespread; the long honorable tradition of forecasting folly argues that now is the time to think about positioning against both a further fall in energy prices and the deflationary expectations in the bond market.​

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Nov 18
Introducing Northwest Passage Soundings

Welcome to the Soundings blog at Northwest Passage Capital Advisors.  In this space we'll periodically share our thoughts on markets, investment ideas, and economic themes in the emerging markets and beyond.