That could be bad.
Remember it’s a cycle: The money goes from the middle class to Saudi Arabia and
Russia and then it gets returned to the middle class in the form of credit or
debt, home equity loans, things like that. If the oil price goes down, people
may have all these debts, but no ability to service them. This is what happened
in the early 1980s when petrodollars were invested in the emerging market
countries. These countries actually did quite well in the 1970s because they
could just borrow money like crazy. In theory, like the middle class today, they
should have done badly because of the higher oil prices, but the real effects on
their economies were more than offset because they were able to borrow a lot of
money. But they hit the wall in ’81, ’82 when the oil price came down; all of a
sudden there was no credit left. That’s one scenario to worry about today.
A
second scenario is if the oil price goes a lot higher, there’s some point where
the effect on the real economy starts to hurt too much. But I actually think
that it may have to go up a lot for that to happen. If the price goes to $100,
$120, the petrodollar effect gets even bigger and, so far, it has had this
strange sterilizing effect. What does this mean for your investment strategy? The high-risk category that we like best remains various oil equities. There
are actually two independent reasons for this. One reason is just the
conventional reason—people are underestimating the long-term supply problem. So you believe the peak oil thesis? Yes. And that makes oil a fairly good investment. But the petrodollar effect
opens some opportunities. If you are in Riyadh or Moscow or wherever, and you
have a pile of money you made in oil, you’re not going to invest in oil or
energy companies. That’s why these companies are still systematically cheap. If
you look at the forward price of oil for 2012 and beyond, it’s like $70 per
barrel. But oil company equities are being priced as though oil is going to be
$45 to $50. It’s the one risky asset in the world economy where there are no
petrodollars going into it. What sort of oil stocks do you like? The majors? We think many of the oil services companies are quite attractive in a peak
oil world because people are going to have to spend a lot more on servicing
these fields. We also like the Canadian oil companies. The problem with the
majors is that in a peak oil world, you have to worry about confiscatory taxes.
Even in the U.S., at $100 a barrel, we’ll start hearing talk of windfall profits
taxes and all sorts of stuff. Our judgment is that Canada is probably the single
country in the world that’s the most immune to the tax risk of higher oil
prices. What other themes is Clarium pursuing? Our other short-term view is that there’s a massive housing bubble in the
U.S. In many ways, it’s similar to the 1990s equity bubble. By any of a number
of measures, house prices are extreme. We think that housing is going to slow
down quite a bit. What will precipitate that? The Fed’s tightening? I think the housing bubble is like a light switch. It’s on or off. When it’s
on, the Fed’s not tight enough, no matter how high it sets rates. And once it
gets turned off, it will turn out the Fed’s way too tight, no matter how much it
eases. The Fed is in an unenviable position; it is very similar to 1999, 2000,
when it was trying to raise interest rates and deflate the equity bubble, but
once they poked it and got it to burst, it was not like they could all of a
sudden cut rates and get it restarted. Although that was Greenspan’s recurring strategy. Yes. There are two thoughts on that. Certainly the view that there was a
“Greenspan put” gave people an excessive degree of complacency about investing
in equities in ’98 to 2000. But the Greenspan put had this byproduct of creating
a housing bubble that was even bigger than the equity bubble. So if you’re a
policymaker today and you’re trying to think what you are going to do the next
time around, it would seem to me that the bias this time around is going to be
to stay tight for somewhat longer. While they may be done raising rates, they
may just not cut them that aggressively.
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