This past week I was interviewed by James Stafford at Oilprice.com.
We discussed, oil, gold, lithium, other natural resources, global
opportunities, and even biotech plays.
Here is the full interview, conducted several days ago.
Think Beyond Oil And Gold: Interview With Mike ‘Mish’ Shedlock
The energy sector was certainly a bargain in January, but no one really
knows where oil will be around Christmas. While we may have already seen the
bottom, stock prices are not the bargain they were.
There are other plays. Think electric vehicles and even driverless cars.
Find what’s undervalued now and get in on some of the games that will dictate
glorious future wealth.
In an exclusive interview, Oilprice.com talked to Mike “Mish” Shedlock, an
award-winning economic commentator who has been providing millions of readers
with investment advice for years.
In this interview, Mish discusses:
• The oil bounce
• The confluence of events that brought oil down
• The manufacturing recession
• The battery revolution
• Lithium, EVs, and driverless cars
• Demographics
• Opportunities in beaten up stocks, bios, potash
• Global opportunities, Brazil, Russia, Japan
Oilprice.com: What do you see as being next for oil
prices? Is the rally here to stay? Where do you see oil prices at Christmas?
Mish: I certainly don’t know, and no one else does
either.
Early this year, many resource plays were massively undervalued and priced
for possible bankruptcy. Had I known the precise timing, I would have sold
everything 2-3 years ago and bought in December.
My intent was to buy a lot of energy companies when oil dropped into the
30s. I didn’t. Instead, gold miners and other resources were a bargain at the
same time. I did pick up more of those.
In regards to oil, there are a lot of companies still going bankrupt. With
the slowing global economy, oil prices may simply level off here. I am
inclined to think that the bottom may be in, but one never knows with these
political pushes against petroleum and fossil fuels.
It’s interesting that when oil fell from $100 to $80 to $70 to $60, people
kept saying the bottom was in, every time oil bounced a few bucks.
I was thinking $35-45. Oil went even lower.
Then when oil broke $30, people threw in the towel. Writers started
talking about oil in the teens!
The same thing happened in gold. When gold fell from $1,900 to $1,050
people started talking about gold in the $600 range again.
Neither oil nor is gold is going to zero.
The best energy plays are companies that have little debt and are
profitable at or near current levels. They will survive another trip south in
oil prices. Debt leveraged companies may not.
Oilprice.com: Do you buy into the theory that Saudi
Arabia has been pursuing a strategy to bankrupt the U.S. energy sector and
maintain its own market share?
Mish: No. We had a confluence of numerous things made for
a “perfect storm” in the oil sectors.
1. The Fed drove down interest rates to ridiculously low levels.
2. Companies saw an opportunity to get cheap financing and they got it.
3. Extraction technology improved.
4. President Obama worked out a deal with Iran to end the embargo. This
added to global oil supply.
5. Cash strapped Russia pumped more oil to support its economy in the
wake of EU and US sanctions.
6. Growth in China slowed.
Drill baby drill!
The U.S. drilled like mad and so did everyone else.
Despite the crash in oil, production in the U.S. dropped only 6 percent,
maybe 8 percent. So we have huge numbers of bankruptcies already filed and
pending, and companies are struggling—yet, they are all still pumping.
The Fed kept these companies alive artificially.
Oilprice.com: What do you see happening at the June OPEC
meeting?
Mish: A lot of talk and nothing else. We see the same
thing with trade discussions. Every year there are two rounds of trade
discussions and nothing ever happens.
Even the Trans-Pacific-Partnership (TPP), looks like its dying on the
vine. It will die if Trump is elected, maybe even if Clinton is. She stated
on 45 occasions while in office that she was for it. Now, she isn’t.
TPP is a massive monstrosity, all done in secret. Few have read it outside
those working on the deal. Only 20% of it relates to trade.
I believe a proper trade agreement would be to drop all tariffs and stop
all subsidies regardless of what anyone else did.
Any country that did that would see investment pour in. But no one wants
to try that. Everyone claims they are for free trade except when it hurts
their exports.
So here we are. This is another one of those “we have to pass the bill to
find out what’s in it kind of things.” No thanks!
I have written about the TPP many times, here’s a pair of them:
- Obama’s Trans-Pacific Partnership Fiasco vs. Mish’s
Proposed Free Trade Alternative; How Will TPP Function in Practice?
- Hillary Clinton, Dead Rats, Toilet Paper Politics
Oilprice.com: As you’ve seen over the last few weeks
we’ve seen an increase in demand and many supply outages. Is this the end of
the glut or will it hang over the market for a while?
Mish: Supply will hang over the market for a long time to
come. China is slowing way more than people realize. What little rebound
there was in Europe appears to be on its last legs.
The oil market crashed to take falling demand into consideration, likely
overshooting. The rebound is to a more natural level. If I had to guess a
range, I would say a $35-$45 range. It could be higher. I have no bets on it.
Oilprice.com: Goldman Sachs’ top-end estimate is $60 or
above. How would that impact the economy?
Mish: Let’s approach that question from the opposite
direction.
All the people who said that falling and low oil prices are “unambiguously
good for the economy” were wrong.
If oil rebounds to $65, then maybe my idea that the global economy is
slowing rapidly is wrong.
But $65 or higher could also happen with some sort of war-caused supply
squeeze in the Middle East or if OPEC and Russia voluntarily made huge cuts
in production.
In general, if oil is going up in the absence of a supply shock, then it
usually means the global economy is improving.
The dip below $30 was likely an overshoot. If so, the subsequent rebound
to the mid-$40s was just a bottoming event. Judgments need to be based on
what happens next, not a rebound from the depths of hell.
Europe has huge migration problems and voters are fed up. You see it in
the rise of some fringe parties all across Europe.
In the U.S., Donald Trump beat all expectations. If the economy was really
doing well, people would not be so angry everywhere you look.
Oilprice.com: How big of a stimulus do you think low oil
prices have had on the economy?
Mish: At best, little to none, and more likely negative.
The economists thought that people would go and spend all their gasoline
savings on consumer goods but that didn’t happen.
Instead, the savings rate rose. People did spend more on rising rents and
rising healthcare costs, not where the Fed wanted consumers to spend.
We lost a lot of high paying jobs in the energy sector and some of the
local economies are struggling.
The net effect of all of this was certainly negative as it played out.
Last month, we saw a good report or two in manufacturing, but they went down
again this month. Manufacturing is undoubtedly still in a recession.
Oilprice.com: What about renewables, and particularly,
battery technology? If battery technology improves rapidly, and the
driverless cars accelerates, would oil be hit hard?
Mish: It could, but the timeline is in question. I don’t
think a massive switch to batteries will happen any time soon in most
consumer cars.
There are plenty of variables here and more questions than
answers—especially when it comes to time frame and reverberations.
Are people going to stop buying cars and go to Uber? Are those cars going
to be battery, gasoline, or hybrids of some sort? I don’t know.
I propose a phased progression.
First, long haul truck driver jobs will vanish, then taxi driver jobs will
vanish.
When the average person in the city says “I don’t need my own car anymore”
remains to be seen.
Oilprice.com: How do demographics fit into the picture?
Demographically speaking, millennials don’t see things the same way as the
boomers do.
Mish: Millennials don’t care much about cars – they’re
content to do other things that aren’t as energy intensive as their parents
did. They don’t want big houses as they’ve seen their parents lose houses to
debt. They live with parents and don’t eat out as much. This all cuts into
demand energy.
So does a mountain of debt. Yet the economists are still trying to figure
out why the economy is growing slowly.
I discussed that in Household Debt Still Below 2008 Peak.
As of March 31, 2016, total household indebtedness was $12.25 trillion, a
$136 billion (1.1%) increase from the fourth quarter of 2015. Overall
household debt remains 3.3% below its 2008 Q3 peak of $12.68 trillion.
Check out the trend in mortgage debt vs. the trend in student loan debt.
The two items are not unrelated.
Household formation is low because of student debt, boomer demographics,
and changing attitudes of millennials.
Oilprice.com: Outside of gold, where do you see
undervalued investments?
Mike Shedlock: I like Lithium but some of the plays in
that space have had a big run-up.
There could be a pullback. In terms of market timing batteries, three to
four years away may as well be light-years from now. The markets typically
don’t care much about things more than a year away.
I am in some tiny companies. And I am willing to be patient. My intention
is to hold them until I think they have met their value.
I am in a couple of biotech plays. I like Sarepta (SRPT), but pull up a
chart. Volatile does not begin to describe the gyrations. I caught an entry
in the teens. The next day it fell to $8. Earlier this year it was at $38.
This volatility is a sad testimonial to the power of the FDA.
Doug Casey calls the FDA the “Federal Death Agency”.
Sarepta has a drug for MD that patients say works, but the FDA says
doesn’t.
A Group of Senators Wrote the FDA seeking approval. Janet
Woodcock, who heads the FDA Center for Drug Evaluation and Research said to
an overflow crowd that included hundreds of kids in wheelchairs “It’s
possible to reach different conclusions based on the data presented today …
Failing to approve a drug that actually works in devastating diseases — these
consequences are extreme.”
This play could easily double or halve depending on the next “Federal
Death Agency” review. I make no recommendation, but my point is twofold.
First, look outside the box for opportunities. The FDA created a panic
opportunity when it issued a preliminary ruling against the drug. A final
ruling is expected later this month.
Second, I wanted to mention the perverse influence of the FDA approving
drugs that have serious side effects and not approving one where an overflow
crowd of parents turned up begging the FDA to approve something that they
believe does, especially when there have been no serious side effects.
The key is not to buy into blind plunges, but rather to see if unexpected
news creates a favorable opportunity.
From a Libertarian standpoint, the decision on Sarepta was pure nonsense.
[OilPrice note: On Wednesday, the Wall Street Journal reported Sarepta: FDA’s Decision on Dystrophy Drug Delayed.]
Oilprice.com: What about cobalt and other resources?
Mike Shedlock: I haven’t looked at cobalt, but perhaps I
should. I am in a Potash play now.
These are the kind of plays that aren’t on mainstream media radar. It
takes a bit of research. The smaller companies are kind of like lottery
tickets. They are also similar to cheap options that don’t expire.
If you don’t put a lot on these plays, and can take a bit of volatility,
you only have to be right on one in 10.
Oilprice.com: How close are we getting to a real breakout
with autonomous trucking, which you’ve written about recently?
Mike Shedlock: Four ex-Google engineers broke away and
started their own Driverless Vehicle Company Called “Otto”.
They’ve been testing driverless trucks in Nevada without a backup driver.
The “Otto” approach is a little different: They retro-fit existing trucks
with their technology. The clincher is that “Otto” will soon be commercially
ready.
I bumped up my timeline for driverless trucks from 2020 to 2019. I now
expect we will lose millions of jobs by 2022 instead of 2024.
Oilprice.com: Do you see the EV revolution taking place
sooner than many are projecting?
Mish: I do. I bought a couple of lithium stocks – one on
the Toronto exchange and one here in the U.S. But yes, I believe people need
to look outside of gold and energy as to how this will take hold.
My opinion on these things is if it takes a government subsidy to work
then it doesn’t work. And we are not seeing subsidies going into this
industry (unlike wind for example).
The free market seems to be adapting on its own to deal with emission
issues.
Oilprice.com: What about global opportunities?
Mish: Brazil is going through huge turmoil right now.
When the political dust settles in Brazil there will be opportunities.
Why buy a general basket of stocks in the U.S. when Median PEs are near
the highest ever?
I like Russia and Japan. With Japan, one needs to think about Yen hedging.
Who knows what crazy thing Abe might do?
Think globally! But be prepared for a currency crisis. Don’t give up your
gold.
Mike “Mish” Shedlock
By James Stafford of Oilprice.com
