Taking a short break - no post this week

I'm taking a short break this week and expect to post again on Sunday, May 17.

Oil flows spell deep depression

Energy is not just one commodity among many in the economy; it is the commodity. Without energy, nothing gets done. And, oil is not just one form of energy in the energy commodity complex; it is the energy source upon which our modern way of life depends. In fact, it is the main energy source running through the arteries of the global economy.

Far from being a boon to the world, ultra-low oil prices signal that the global economy is flat on its back—even worse, flat on its back with two broken legs.

Petroleum geologist and consultant Art Berman recently detailed the problem in this piece. Berman is the man who accurately predicted—starting way back in 2008—the persistent losses that shale oil and gas would produce for the companies that extracted them. The shale industry continuously vilified Berman for his analysis over the next decade, even as the industry was in the process of blowing 80 percent of investors' capital as of last year. With the arrival of the coronavirus, the coup de grâce has just been delivered to a shale oil and gas industry that was already on its knees.

Perhaps the most important thing to understand about the current oil "glut" is that it is not merely the result of producing too much oil for an economy humming on all cylinders. It is primarily the product of a coronavirus-infested economy in which demand has dropped 20 percent in just a few weeks. As Berman points out, estimated U.S. oil consumption has returned to a level not seen since 1971.

Insuring against catastrophe: The coronavirus predicament

People insure themselves against many types of potential catastrophes: a house fire, a car accident, the untimely death of a spouse, a serious health problem. For other unexpected expenses, prudent people, as we say, save money "for a rainy day." For some reason people and governments have chosen not to insure themselves (individually or collectively) against two catastrophes that have been much in the news lately: pandemics and large investment losses.

There is a connection, of course, for the two are tightly coupled. Here are some of the similarities between the two:

1. Both occur at irregular and sometimes very long intervals.
2. Both require careful thought and regular financial outlays to hedge against.
3. Despite persistent warnings from experts, most people (and governments) did not act on such warnings.
4. Now that the worst has occurred, many investment advisors and governments say, "No one could have seen it coming"—even when such a statement can be proven immediately false with easily obtained video evidence!

Will we learn from our current experience?

The answer in some cases will certainly be no because the incentives in our system encourage those in high places to act imprudently. Executives of publicly traded companies have spent trillions of dollars buying back shares of their own companies in order to goose stock prices and make their stock options more valuable—without regard for the need for cash reserves to make it through a recession.

The coronavirus scoreboard: The illusion of understanding and control

Cable television news now frames its news anchors with constantly updated coronavirus statistics, usually the number of cases and the number of dead. There is a sense of urgency in those numbers as viewers watch them tick higher. But, by definition those numbers cannot move otherwise since they are totals of past events.

A more useful indicator would be current active cases. But, that would be hard to count since so many cases are mild or at least uncounted among those now ordered to stay home. And, there are not currently enough testing materials to do complete testing of the world's population. As it turns out, the number of people who have had the virus may be 50 to 80 times higher than what is currently being recorded. The best we can do for now is to track the number of new cases identified by tests not yet widely available in many areas and see if they decline.

More than anything public officials want to convey the impression of understanding what we face and having solutions to control the outbreak. What they have done successfully in some places through severe social distancing and stay-at-home orders is to reduce the velocity of the spread of the virus without any ability to reduce the number of people who will ultimately contract it. It is really only a matter of time before all those who remain susceptible will get infected unless they hide in total isolation away from humans for good or until an effective vaccine is available—which may be a long time and possibly never. See here and here.

The Saudi-Russian oil price war tag team: Are things what they seem?

To the casual observer Saudi Arabia and Russia, two of the top three producers of oil in the world, have been having a spat about what to do about low oil prices. (See here and here.) Each has accused the other of bad faith and counterproductive behavior. But is that merely what the two oil powers want you to believe?

We've been here before. Throughout most of 2016 Saudi Arabia and Russia put on a two-person show for the entire world, pretending time after time to move close to an agreement to lower production in order to prop up oil prices, only to back away or delay at the last minute. The two kept this up for most of 2016. They incited periodic spikes in the oil price without ever having to cut one barrel of production, spikes that kept prices higher for weeks until they drifted back down to levels that reflected reality.

But I believe the most important thing they were trying to achieve then was to create an atmosphere of continuing uncertainty. That uncertainty was supposed to scare investors and lenders away from U.S. shale oil producers who were still hurting from an oil price collapse that began at the end of 2014. Saudi Arabia and Russia wanted to prevent those producers from resurrecting U.S. production and undermining oil prices again. Simply stated, Saudi Arabia and Russia wanted the shale oil industry to go bust in a way that would prevent a recovery for many years.

Ben Bernanke: Contrary Indicator

On May 17, 2007 Ben Bernanke, then chairman of the U.S. Federal Reserve System, spoke at a conference sponsored by the bank's Chicago branch and told his audience the following:

[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

Just 18 months later the world economy was on its knees due to the implosion of the subprime housing market, an implosion that ended up spilling over into practically every other part of the world financial system.

Bernanke's confident speech preceded the highs in the Dow Jones Industrial Average by only a few months and a few hundred points before the index plunged by more than 50 percent. Investment types would style Bernanke's speech as a contrary indicator—an event, utterance or market statistic that suggests excessive optimism or pessimism in a manner that indicates an imminent and major reversal in the prevailing market trend.

Overreacting to coronavirus? The perverse logic of panic during a potential pandemic

The best time to panic, that is, overreact to a potential pandemic is shortly after a novel pathogen has been detected. So say famed student of risk, Nassim Nicholas Taleb, author of The Black Swan, and his colleagues. Of course, at that point, by definition few people have the virus and therefore it does not seem like a threat to the whole community.

In hindsight it is perfectly obvious that the extraordinary efforts now being made by individuals and communities across the world to prevent the spread of COVID-19 should have been made in those areas where the virus was first discovered when it appeared. However, it is natural that authorities do not wish to be criticized for "crying wolf" and, if they are elected officials, beaten at the next election for unnecessarily interfering with the life of the community.

But it is precisely what would be called an "overreaction" that might have stopped COVID-19 in its tracks at the beginning. I've written previously about those whose jobs are to make sure that small problems never become large and that some problems never even appear. The piece was called "Asymmetrical accolades: Why preventing a crisis almost never makes you a hero."

Taking a short break - no post this week

So many half-formed thoughts about our current predicament are running around in my head that I'm taking a short break this week to sort them out. I expect to post again on Sunday, March 29.

Spectacularly wrong: Why Wall Street doesn't understand the corona virus

Investment professionals on Wall Street spend their days reading financial reports and looking at numbers flash on screens. These numbers record the moment-to-moment changes in the collective wisdom of markets about the value of stocks, bonds, commodities and a distressing array of derivative financial products.

From the comfort of the sealed caverns of Wall Street the actual physical and social world is just an abstraction to be quantified and analyzed. One of Wall Street's most prominent investment research and management firms released an analysis that says the corona virus won't be all that bad for the economy.

Analysts from Morningstar Inc.—which is actually headquartered in Chicago's cavernous downtown—say that this pandemic will be a "mild pandemic." I'm not sure how pandemics can be mild, but the analysts outline cases for "moderate" and "severe pandemics."

One of the things that gives these analysts such a sanguine view, particularly in the United States, is the country's advanced health care system which is "likely much more prepared for the taxing of our hospital system, as we appear to have a massive lead over other developed nations in the number of intensive care unit beds per citizen."

And yet, a first-hand report from a physician in those hospitals suggests that there will be very little room for severe corona virus cases in any hospital ICU. Those beds are already being used by patients and not just waiting empty. In all likelihood, hospitals will be quickly overwhelmed and forced to decide who gets critical live-saving treatment and who does not. The "who does not" number could be very large if the Italian experience is anything to go by.

Coronavirus reminds us we are organisms in an environment

A close friend of mine, a professor of English literature, has been researching American philosopher John Dewey, whose book Quest for Certainty captivated me so much many years ago that I read it again right after I had finished it the first time. My friend has been reminding me why I found Dewey so profound while shedding new light on the philosopher's thinking.

Dewey, it turns out, is one of the few thinkers in American life who absorbed the true import of the work of Charles Darwin. Dewey reminds us that, quite simply, Darwin posited that we humans are organisms in an environment just like every other organism. Dewey's star faded after World War II.  American and world society have since lapsed into a narrative that puts humans above and outside nature, protected by technological advancements that supposedly shield us from nature's demands and vicissitudes. The general narrative is that we are heading into a push-button, voice-activated technocratic paradise. (I think of the various Star Trek television series as popular cultural reflections of this view.)

But, the first pandemic in a century is forcefully and sadly reminding all of us that Darwin was right about our place in the natural world, more specifically, that we will never be outside of it.