Gold has continued to consolidate in a large sideways holding pattern focused around US$1300, disappointing bulls and bears alike.
The failure of gold to rally to the US$1527 area prompted us to reconsider our second alternative in mid September. That view called for a continued frustrating consolidation. Now we are in the final stages with a final slow, meandering upward move to US$1300 – US$1330. Then a strong downward move will take us to US$770 and potentially lower. This move will be typically powered by a sudden news flash that “spooks” the market. The extent of the down move will prove to be devastating and set up the key buying opportunity for the next long term bull market. In a worse case scenario gold could fall towards the US$400 level. We shall watch the unfolding downward move to discover the depth of the fall.
Interestingly gold’s consolidation phase looks set to be complete in the next month taking us into the end of the year. We also anticipate the US stock market to have completed it’s upward move, accomplishing a long term top that will stand for decades to come.
We will be publishing close to this all time peak our “Next Major Phase: the coming Mini Dark Age 2018-2030” which will spell out what is happening, the whys and things to expect.
The 19th National Congress of the Communist Party of China starts next week
It will be the single biggest event this year, of unprecedented significance
Xi will cement his position and secure his legacy at the Congress
China is changing and has changed more than the market gives it credit for
Under Trump, the United States has abdicated its global role
What we are witnessing is a geopolitical reality show
The rise of China and the decline of the US will spawn a new FX king!
The 19th National Congress of the Communist Party of China will take place at Beijing’s Great Hall of the People, starting October 18.Photo: Zhao jian kang / Shutterstock.
The 19th National Congress of the Communist Party of China kicks off next week in Beijing and promises to be the single biggest event this year for financial markets and the international balance of power. This makes it a true paradigm shift – an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way. That’s exactly what this Congress will be and it’s the reason why it is of historic significance for each and every one of us and for the global economy.
Let’s throw some context around this. China already leads the world in credit creation, growth and now in most technology fields. My take remains that President Xi will focus on quality over quantity, that reducing pollution is the number one social issue in China and that the Party is taking more and more control. The net output will be:
Lower than expected growth for the next 18 months (while China converts its economy from export engine to one of productivity gains – President Xi wants 2010 GDP per capita doubled (Rule of 72= 72/7% GDP per year = 10 years) which means an objective of 7% growth per year, but most of this will be productivity driven which means investment first (hence lower growth), then higher.
Reduction of pollution = electrification of cars – by 2030 100% of cars will be electric vehicles – this will catapult China to leadership in battery technology, E-engines, and pollution reduction. (Don’t forget that from 1900 to 1910/13 the US went from 100% horse carriages to 100% cars!)
High ratio of R&D and innovation to gain leadership. China is already dominant, but will be even more so in E-commerce, payments and fintech. (See McKinsey report below).
Slow gradual openness in capital account, more access to the market for foreigners and a big focus on converting global trade from USD to CNY.
Weaker CNY post-congress.
Major negative credit and growth impact on the rest of the world.
Change comes much faster than we human beings like – our brains are simply not designed to accept quick changes, and one of the few shortcomings of the brain is that it likes (and uses) the recent past to extrapolate the future. We think in a linear fashion but world the evolves in a super log-normal way. An excellent example is seen in the pictures below from New York in 1900 and 1913. Notice the difference in street traffic in the space of just 13 years.
I think the next 13 years will surpass those years in way back then in New York in terms of change, dynamics and how we act, analyse and live.
The upcoming 19th Party Congress is highly anticipated but we technically know most of what will be said courtesy of the modus operandi of The Party and the excellent work by Charles Panton(*) “predicting” the President Xi speech at the 19th Chinese Party Congress. Turns out most of it is “given” and here is my copy-and-paste from Charles Panton’s work:
(*) Charles Parton worked as a diplomat in both the British and EU services, spending much of his career in China. Since retirement, he has set up his own consultancy, China Ink, as well as being London Director of China Policy and Special Adviser on China to the House of Commons Select Committee. He is shortly to return to Beijing as Internal Political Adviser to the British Embassy.
…a constant theme of Xi Jinping’s speeches is the need for innovation.
…he (President Xi) was in charge of the drafting of the report delivered to the 18th Party Congress by his predecessor Hu Jintao.
The deeper purposes of the Congress and the report are to reaffirm the Party’s importance to itself and to the nation.
“Ecological Construction‟, added “Making Great Efforts to Promote Ecological Progress”. Neither addition is surprising, given that Party legitimacy would be threatened by popular dissatisfaction if areas such as education, health, social security, as well as pollution and food safety, were not put higher up the political priority list.
There are likely to be 13 major sections….(See table below for 16th,17th and 18th Congress comparison…)
The Past Five Years. To judge from the past, this section will aim to set a positive tone in order to remind the Party and people that only the Party could have achieved China’s rise.
Party Theory and Ideology. This section is likely to be relatively short. It will restate the principal tenets of “Socialism with Chinese Characteristics” and the need for and benefits of reform and opening up. Xi has spent much of his first term emphasising the importance of ideology and continuity with the Party’s roots, so even if shorter, this section will be hard hitting.
Xi Jinping Thought, Theory or Concept? This congress may well see the apotheosis of Xi’s “important series of speeches” into “Xi Jinping Thought”, “Xi Jinping Theory” or the plain “Four Comprehensives”, Xi’s contribution to the CCP’s canon of Marxist-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Three Represents (of Jiang Zemin) and the Scientific Outlook on development (of Hu Jintao). The academic prophet, gazing at the Party’s liver to predict the future, will pronounce on the importance of the difference between an “ism”, “Thought”, “Theory” or just a simple description (as Jiang and Hu gained). In practice, what actually matters is that Xi is more powerful than his two predecessors at the start of a second term and may become more so than Deng: at the level of policymaking and personnel, he is getting his way, even if at the level of implementation and down among those who hold real power in China, the 2,862 Party county secretaries, his writ runs less effectively). But for what it is worth, I think that we shall be hearing of “Xi Jinping Thought”. Interestingly, an article in Research on Party Building magazine, a monthly publication on communist theory, published an article in its July edition on “Xi Jinping Thought”.
Building a moderately prosperous society in all respects. Traditionally, this short section looks forward to the big tasks of the next five years, mainly in the area of the “Five Constructions”(economic, political, cultural, social and environmental). It is likely also to remind cadres of the importance of themes dear to Xi Jinping’s heart, such as poverty alleviation, innovation, Belt and Road Initiative, corruption and Party discipline. And judging by the meetings of late July, the main theme, not surprisingly, will be稳中求进 “progress amid stability”, a phrase we shall see often.
The environment and ecology. This was a new section in the 18th Congress Report reflecting ecology’s rise to become one of the five “constructions” and its addition to the Party constitution. Quite apart from the lamentable state of the environment itself, a major driver for inclusion was the threat to social stability: according to some Chinese academics, around half of protests involving over 10,000 people had an environmental cause. (This is a new key in our opinion!)
Party building. This is always a lengthy and important section, hardly surprising, given that this is, after all, the Party’s congress and given that “comprehensively [and] strictly govern the Party‟ is one of the “Four Comprehensives”. The 18th Congress report was much harder and more urgent than its predecessors on ideals, faith in Party ideology, working for the people, corruption and discipline. This report is likely to be harder still. Over his first five years Xi has not just launched an unending and deep war on corruption, but also carried out a series of campaigns to instill discipline and cut abuse of public funds by cadres. It is traditional to have a section on intra-Party democracy and Party unity; we can expect the former to be more by way of lip-service, the latter to feature prominently. Xi will undoubtedly recommit to the war on corruption and is likely to doff his cap in the direction of the new National Supervision Commission, which is due to start work in earnest next March. Nor should it be forgotten that the Party Congress elects a new Central Commission for Discipline and Inspection.
Charles Parton concludes:
“…but it will give an idea of how he views progress towards those reforms, the priority of tasks needed to ensure their full delivery over the next five years, his political thinking, and perhaps his perception of problems. Foremost among those are implementation (by officials) and trust (of the people). Xi and Premier Li Keqiang have spent much time in the last few years railing against vested interests and failure to implement set down policies. Trust from the people in the Party is in short supply. One of the purposes of the Report is to show the people that it is right to entrust governance to a single party. Most people buy the line that under the CCP China has taken back its rightful place in the world; they are less persuaded by the claim that the Party rules in their, rather than its own, interests. That could be a worry if economic or environmental factors set back further progress towards prosperity’”.
It’s important to understand that the “economic plan” for China in the next 5 years is already in place as the 13th five-year plan was initiated in July 2016 – there are a mere 219 pages to read up for you…. (Link – China Five-year plan).
Here are a few takeaways:
Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, and the Scientific Outlook on Development; and put into practice the guiding principles from General Secretary Xi Jinping’s major addresses.
The Chinese Dream of the rejuvenation of the nation and the core socialist values have gained a firm place in people’s hearts. China’s soft power has continued to become stronger. Notable achievements have been made in military reform with Chinese characteristics, and new steps have been taken to strengthen and revitalise the armed forces. A new phase has begun in the all-around strengthening of Party self-governance, and significant headway has been made in improving Party conduct and building a clean government. New heights have been reached in China’s economic strength, scientific and technological capabilities, defense capabilities, and international influence.
However, the need has become more pressing to improve the quality and efficiency of growth and transform and upgrade the economy. As the economy is experiencing a new normal of growth, there is a clearer trend toward a more advanced form of growth, improved divisions of labour, and a more rational structure. With the structure of consumption being more rapidly upgraded, broad market space, a strong material foundation, a complete industrial structure, an ample supply of funds, and abundant human capital, along with the cumulative effects of innovation that are beginning to show, our overall strengths are still notable. A new style of industrialisation, information technology adoption, urbanisation, and agricultural modernisation are experiencing deeper development, new drivers of growth are in the making, and new areas, poles, and belts of growth are becoming stronger. All-around efforts to deepen reform and make progress in the law-based governance of the country are unleashing new dynamism and bringing new vitality.
Maintain a medium-high rate of growth. While working to achieve more balanced, inclusive, and sustainable development, we need to ensure that China’s 2010 GDP and per capita personal income double by 2020, that major economic indicators are balanced, and that the quality and efficiency of development is significantly improved. Production will move toward the medium-high end, significant progress will be made in modernising agriculture, information technology will be further integrated into industrialisation, advanced manufacturing and strategic emerging industries will develop more rapidly, new industries and new forms of business will keep growing, and the service sector will come to account for a greater proportion of GDP.
Achieve significant results in innovation-driven development. We will pursue innovation-driven development, ensure that business startups and innovation flourish, and see that total factor productivity is markedly improved. Science and technology will become more deeply embedded in the economy, the ingredients needed for innovation will be allocated to greater effect, major breakthroughs will be made in core technologies in key sectors, and China’s capacity for innovation will see an all-around improvement. Fulfillment of these goals will help China become a talent-rich country of innovation.
The focus on innovation and the progress of it is somewhat surprising, at least to me:
Note: China has gone from 0.4% in 2005 to 42% in 2016, in mobile payment the Chinese do 11x more than the Americans, and most surprising of all, in Global Unicorns (start ups > $1 bn) China has 34 vs. US 46 but mostly the same valuation!
In terms of investment China is also already a global leader:
The context here is that China is 1/3 of the global growth impulse (source: IMF) and indirectly 50% of credit – our own Christopher Dembik tracks the China Credit Impulse, which is the flow of credit:
This chart leads real economy by 9-12 months in other words. Nine months from now in mid-2018 China will be in severe slowdown, one which I believe China is creating through control of the banking system in order to to set up the release of productivity investments, where China comes from a level which is 20-30% of the US. The next five years will be one big technology R&D and innovation drive under “Chinese Characterstics”.
Source: Bloomberg LLP
Note: We see growth in 5.5% in 2018, 6.0% in 2019, and the current account @ 0% of GDP.
Note: The slowdown in China is already dominant – add Credit Impulse and we have a negative contribution to global growth.
Note: CNY is low down as a basket, but higher vs. USD “naked”. Overall China’s basket will have to drive lower in value to the tune of 1-2% per year.
This is all part of the plan and something President XI will be more confident in after the congress which will see him solidify his power.
China is changing and has changed more than the market gives it credit for – the typical Anglo-Saxon economist keeps his focus on banking system and debt, but unlikely the western world, China can accelerate growth through the release of productivity. The US, under President Trump, has chosen to “retire” from the global economy on the fundamentally flawed concept of America First while China is growing its importance, probably best illustrated by this chart:
Now China also wants a new world order in commodities. China will allow exporters to avoid USD payments for CNY or…. gold! A new gold standard? (LINK: Crude, Gold, CNY)
Source: Nikkei Asian Review
China is enjoying US indecision on foreign policy, which seems to be driven by indecision, spur of the moment changes and randomness. Opposite this sits China, with its One Belt, One Road, Asian Development Bank and the Shanghai Cooperation Organisation – there are in excess of three billion people in this alliance – and with Pakistan and India joining in 2015 that number will be four billion by 2050.
The future belongs to the countries and companies which can command the consumers, no one is better placed than China (and India).
We are witnessing a geopolitical reality show where one hegemonic power, the US, almost voluntarily is giving up its dominance.
The US Federal Reserve concludes its two day meeting later today. It’s timely to recap where we are with market activity and our long term picture we call The End of the Long Game 2009-2018. The Fed will be signalling their intention to shrink the Fed balance sheet which sits at around $4.5 trillion. In effect this function can be seen as deflationary. As market traders comment, its akin to “taking the punch bowl away at the end of the party”. The main game which has been in play since the 1990’s is about to change in a very big way.
Stocks are completing the last few squiggles of it’s rise from March 2009. Stocks are running on fumes now and we anticipate stock market activity to be choppy as it makes its final highs.
Will there be a big crash in October? No, we don’t think so but it will prove to be frustrating and choppy. Will there be a final spike, like 1929? Maybe. It doesn’t matter unless you are a trader with instant access. We have entered a phase where it is prudent to reduce risk. Certainly the DJIA can spike 1000-2000 points in a last gasp. Can the market run to the end of the year? We think so and that is our likely time target for the final top. Very late December into early January 2018. Something would have to change substantially to see a continued up move well into 2018.
Courtesy TradingView (www.tradingview.com)
It’s quite likely we’ll see stocks stagger into the top based on money supply growth rates which have remained weak over the last 6 months. Money supply growth gives asset values like stocks and property the juice to rise as they have done since 2009.
Our targets for a major top in US stocks is for the DJIA to reach as high as 25000 (SP500 2800) in a blow off final frenzy. Alternatively the major indices will wimper out between DJIA 22500 – 24000 (SP500 2520- 2688)
We had predicted gold would move to US$1525+/- in a counter correction to the long down move since 2011. It now looks like the deflationary forces gathering give rise to some darker alternatives.
Our bull scenario suggests that from around US$1290-$1305 we will see prices rise off the back of a weaker US dollar (see below). That move we see as very short term, a case of 1-2 weeks absolute max. Potential targets include US$1375 and US$1460.
Given that this is a counter correction in a long term correction phase we would anticipate the long term downward trend to reassert itself. We are looking for a long term target of US $770 and possibly lower.
Our bear scenario suggests prices move sideways from here before entering the downward move suggested above. That sideways range of US$1190 – US$1330 would indicate the underlying weakness in the global economy and markets.
Dollar Index 1970 – Present (Courtesy tradingview.com)
The dollar has been wrapping up the last phases of a consolidation time. Political force has been used to get the dollar lower to enhance US export activity. Essentially there has been a currency war in progress. Battling central banks around the world using interest rates and money printing to create a trading advantage for exporters.
Having come off it’s highs in 2017 we believe it is clearly a correction phase. That phase may be coming to an end now or in a couple of weeks time. We believe the US dollar is about to get very strong making new highs above the 2017 highs and potentially to the 2000/2001 highs.
Looking at individual pairs:
EURUSD: We see extending off the back of the US Fed meeting an advance to 1.22-1.23 and reversal back down with the EUR weakening over the coming months. Expect the German elections to play an important part in October and further developments in the Brexit negotiation talks impact on the Euro.
AUDUSD: In the short term may continue to advance into the 82-84 cent region before the longer term US dollar trend reasserts itself. Australia seems to be privileged in being the economy “leading the way” as political confidence continues to fail, bringing economic confidence with it. This is also reflected in the stock market.
USDJPY: The dollar/yen may already have bottomed and is moving ahead of other pairs.
GBPUSD: Like the AUD and EUR we see it continuing to extend in the final phase of it’s rally. It will come under the influence of US dollar as that currency reasserts itself in the coming weeks/months.
The impact of the Fed unwinding it’s balance sheet will, in the very short term have little impact on markets. The announcements due today may shake markets. In the longer term, as the Fed continues with balance sheet shrinkage, we will see the impact of tightening liquidity and ultimately raised interest rates. The Fed is keen not to panic the markets or the economy. The effect however will be to close an interest rate trap as rates rise and people holding long bonds are caught with losses.
In particular, pension funds have suffered with low interest rates. They have been forced to chase yield by buying lower quality assets or go offshore to buy foreign currency denominated yielding assets. They are set to extend their suffering as they get caught once again.
Similarly governments have profited by borrowing at low interest rates. They are going to find themselves with a rapidly blown out interest bill. We can comfortably predict (as economist Martin Armstrong says) “the hunt for taxes” will escalate to new levels previously unheard of.
This hunt for taxes, over-regulation of economies and peoples alike will set in motion a chain of events for liberal-democratic nations including civil disruption, secession of states and the ending of empires over the coming decades. If prudence prevails we may see the emergence of The Coming Four D’s.
BTCUSD 6 Months (Courtesy Bitcoin Charts)
We published our prediction for BTC to peak in a parabolic move on 07/09/17. It did shortly after without the added frenzy we were anticipating. It then fell some US$1392 or 29% before stabilizing. We view further falls lie ahead in the short term. There is only a low probability that BTC can make new highs soon. We need more time and price action to unfold before confirming this. For now, expect BTC to enter a prolonged consolidation phase.
The coming changes to the financial market game will have a vast impact on economies and societies in the years and decades ahead. These changes are merely the impact of mistakes made in the past. Human history repeats itself. This is in keeping with our long term predictions. It is only the capitulation of government’s desire to control everything and everyone that we see a new era emerge. By then the nature of the world will have changed forever. New generations of people will again move to repeat the glories and mistakes of the past.
Bitcoin is completing its final consolidation phase prior to a final blow off move. The market for Bitcoin has risen in a parabolic pattern (think 1929 US stock market, Tulip Bulb Craze, Gold in 1980). In chart terms this leads to a final frenzy of speculative activity before a massive plunge. The game is getting ready to change.
In a parabolic move it is impossible to predict the final highs. They are the function of time and the shape of the parabola. Once the time function has been completed, the market is floating in pure air, the bid having been exhausted and like the coyote in the Road-Runner Show, a vertical plunge begins. The dreams of speculators are smashed.
We can draw some longer term predictions from this of course – the first being that we will not see the new highs being regained for at least 10 years, if ever. Usually it takes a new generation of people with the right economic circumstances to relearn the mistakes of the past. The new downturn should draw US$ bitcoin prices back to the US$1100 – US$1500 level over the next 5-10 years. There will be massive counter-rallies from time to time but ultimately, the trend will be down.
We can also observe this final phase is occurring in conjunction with a long term top in US stock markets and possibly an interim high in Gold and Oil. Refer to other recent posts to get an update. The amazing Bitcoin Bubble is just another part of our long term scenario as we mop up the last few stages. Also of interest is how the cryptocurrency mania has absorbed the speculative imagination of investors away from traditional investment mediums such as stocks or property. That is not to say those markets are not overbought or “hot”.
It’s 2025, and 800,000 tons of used high strength steel is coming up for auction.
The steel made up the Keystone XL pipeline, finally completed in 2019, two years after the project launched with great fanfare after approval by the Trump administration. The pipeline was built at a cost of about $7 billion, bringing oil from the Canadian tar sands to the US, with a pit stop in the town of Baker, Montana, to pick up US crude from the Bakken formation. At its peak, it carried over 500,000 barrels a day for processing at refineries in Texas and Louisiana.
But in 2025, no one wants the oil.
The Keystone XL will go down as the world’s last great fossil fuels infrastructure project. TransCanada, the pipeline’s operator, charged about $10 per barrel for the transportation services, which means the pipeline extension earned about $5 million per day, or $1.8 billion per year. But after shutting down less than four years into its expected 40 year operational life, it never paid back its costs.
The Keystone XL closed thanks to a confluence of technologies that came together faster than anyone in the oil and gas industry had ever seen. It’s hard to blame them — the transformation of the transportation sector over the last several years has been the biggest, fastest change in the history of human civilization, causing the bankruptcy of blue chip companies like Exxon Mobil and General Motors, and directly impacting over $10 trillion in economic output.
And blame for it can be traced to a beguilingly simple, yet fatal problem: the internal combustion engine has too many moving parts.
Let’s bring this back to today: Big Oil is perhaps the most feared and respected industry in history. Oil is warming the planet — cars and trucks contribute about 15% of global fossil fuels emissions — yet this fact barely dents its use. Oil fuels the most politically volatile regions in the world, yet we’ve decided to send military aid to unstable and untrustworthy dictators, because their oil is critical to our own security. For the last century, oil has dominated our economics and our politics. Oil is power.
Yet I argue here that technology is about to undo a century of political and economic dominance by oil. Big Oil will be cut down in the next decade by a combination of smartphone apps, long-life batteries, and simpler gearing. And as is always the case with new technology, the undoing will occur far faster than anyone thought possible.
To understand why Big Oil is in far weaker a position than anyone realizes, let’s take a closer look at the lynchpin of oil’s grip on our lives: the internal combustion engine, and the modern vehicle drivetrain.
Cars are complicated.
Behind the hum of a running engine lies a carefully balanced dance between sheathed steel pistons, intermeshed gears, and spinning rods — a choreography that lasts for millions of revolutions. But millions is not enough, and as we all have experienced, these parts eventually wear, and fail. Oil caps leak. Belts fray. Transmissions seize.
And this list raises an interesting observation: None of these failures exist in an electric vehicle.
The point has been most often driven home by Tony Seba, a Stanford professor and guru of “disruption”, who revels in pointing out that an internal combustion engine drivetrain contains about 2,000 parts, while an electric vehicle drivetrain contains about 20. All other things being equal, a system with fewer moving parts will be more reliable than a system with more moving parts.
Current estimates for the lifetime today’s electric vehicles are over 500,000 miles.
The ramifications of this are huge, and bear repeating. Ten years ago, when I bought my Prius, it was common for friends to ask how long the battery would last — a battery replacement at 100,000 miles would easily negate the value of improved fuel efficiency. But today there are anecdotal stories of Prius’s logging over 600,000 miles on a single battery.
The story for Teslas is unfolding similarly. Tesloop, a Tesla-centric ride-hailing company has already driven its first Model S for more 200,000 miles, and seen only an 6% loss in battery life. A battery lifetime of 1,000,000 miles may even be in reach.
This increased lifetime translates directly to a lower cost of ownership: extending an EVs life by 3–4 X means an EVs capital cost, per mile, is 1/3 or 1/4 that of a gasoline-powered vehicle. Better still, the cost of switching from gasoline to electricity delivers another savings of about 1/3 to 1/4 per mile. And electric vehicles do not need oil changes, air filters, or timing belt replacements; the 200,000 mile Tesloop never even had its brakes replaced. The most significant repair cost on an electric vehicle is from worn tires.
For emphasis: The total cost of owning an electric vehicle is, over its entire life, roughly 1/4 to 1/3 the cost of a gasoline-powered vehicle.
Of course, with a 500,000 mile life a car will last 40–50 years. And it seems absurd to expect a single person to own just one car in her life.
But of course a person won’t own just one car. The most likely scenario is that, thanks to software, a person won’t own any.
Here is the problem with electric vehicle economics: A dollar today, invested into the stock market at a 7% average annual rate of return, will be worth $15 in 40 years. Another way of saying this is the value, today, of that 40th year of vehicle use is approximately 1/15th that of the first.
The consumer simply has little incentive to care whether or not a vehicle lasts 40 years. By that point the car will have outmoded technology, inefficient operation, and probably a layer of rust. No one wants their car to outlive their marriage.
But that investment logic looks very different if you are driving a vehicle for a living.
A New York City cab driver puts in, on average, 180 miles per shift (well within the range of a modern EV battery), or perhaps 50,000 miles per work year. At that usage rate, the same vehicle will last roughly 10 years. The economics, and the social acceptance, get better.
And if the vehicle was owned by a cab company, and shared by drivers, the miles per year can perhaps double again. Now the capital is depreciated in 5 years, not 10. This is, from a company’s perspective, a perfectly normal investment horizon.
A fleet can profit from an electric vehicle in a way that an individual owner cannot.
Here is a quick, top-down analysis on what it’s worth to switch to EVs: The IRS allows charges of 53.5¢ per mile in 2017, a number clearly derived for gasoline vehicles. At 1/4 the price, a fleet electric vehicle should cost only 13¢ per mile, a savings of 40¢ per mile.
40¢ per mile is not chump change — if you are a NYC cab driver putting 50,000 miles a year onto a vehicle, that’s $20,000 in savings each year. But a taxi ride in NYC today costs $2/mile; that same ride, priced at $1.60 per mile, will still cost significantly more than the 53.5¢ for driving the vehicle you already own. The most significant cost of driving is still the driver.
And here is what is disruptive for Big Oil: Self-driving vehicles get to combine the capital savings from the improved lifetime of EVs, with the savings from eliminating the driver.
The costs of electric self-driving cars will be so low, it will be cheaper to hail a ride than to drive the car you already own.
Today we view automobiles not merely as transportation, but as potent symbols of money, sex, and power. Yet cars are also fundamentally a technology. And history has told us that technologies can be disrupted in the blink of an eye.
Take as an example my own 1999 job interview with the Eastman Kodak company. It did not go well.
At the end of 1998, my father had gotten me a digital camera as a present to celebrate completion of my PhD. The camera took VGA resolution pictures — about 0.3 megapixels — and saved them to floppy disks. By comparison, a conventional film camera had a nominal resolution of about 6 megapixels. When printed, my photos looked more like impressionist art than reality.
However, that awful, awful camera was really easy to use. I never had to go to the store to buy film. I never had to get pictures printed. I never had to sort through a shoebox full of crappy photos. Looking at pictures became fun.
I asked my interviewer what Kodak thought of the rise of digital; she replied it was not a concern, that film would be around for decades. I looked at her like she was nuts. But she wasn’t nuts, she was just deep in the Kodak culture, a world where film had always been dominant, and always would be.
This graph plots the total units sold of film cameras (grey) versus digital (blue, bars cut off). In 1998, when I got my camera, the market share of digital wasn’t even measured. It was a rounding error.
By 2005, the market share of film cameras were a rounding error.
In seven years, the camera industry had flipped. The film cameras went from residing on our desks, to a sale on Craigslist, to a landfill. Kodak, a company who reached a peak market value of $30 billion in 1997, declared bankruptcy in 2012. An insurmountable giant was gone.
That was fast. But industries can turn even faster: In 2007, Nokia had 50% of the mobile phone market, and its market cap reached $150 billion. But that was also the year Apple introduced the first smartphone. By the summer of 2012, Nokia’s market share had dipped below 5%, and its market cap fell to just $6 billion.
In less than five years, another company went from dominance to afterthought.A quarter-by-quarter summary of Nokia’s market share in cell phones. From Statista.
Big Oil believes it is different. I am less optimistic for them.
An autonomous vehicle will cost about $0.13 per mile to operate, and even less as battery life improves. By comparison, your 20 miles per gallon automobile costs $0.10 per mile to refuel if gasoline is $2/gallon, and that is before paying for insurance, repairs, or parking. Add those, and the price of operating a vehicle you have already paid off shoots to $0.20 per mile, or more.
And this is what will kill oil: It will cost less to hail an autonomous electric vehicle than to drive the car that you already own.
If you think this reasoning is too coarse, consider the recent analysis from the consulting company RethinkX (run by the aforementioned Tony Seba), which built a much more detailed, sophisticated model to explicitly analyze the future costs of autonomous vehicles. Here is a sampling of what they predict:
Self-driving cars will launch around 2021
A private ride will be priced at 16¢ per mile, falling to 10¢ over time.
A shared ride will be priced at 5¢ per mile, falling to 3¢ over time.
By 2022, oil use will have peaked
By 2023, used car prices will crash as people give up their vehicles. New car sales for individuals will drop to nearly zero.
By 2030, gasoline use for cars will have dropped to near zero, and total crude oil use will have dropped by 30% compared to today.
The driver behind all this is simple: Given a choice, people will select the cheaper option.
Your initial reaction may be to believe that cars are somehow different — they are built into the fabric of our culture. But consider how people have proven more than happy to sell seemingly unyielding parts of their culture for far less money. Think about how long a beloved mom and pop store lasts after Walmart moves into town, or how hard we try to “Buy American” when a cheaper option from China emerges.
And autonomous vehicles will not only be cheaper, but more convenient as well — there is no need to focus on driving, there will be fewer accidents, and no need to circle the lot for parking. And your garage suddenly becomes a sunroom.
For the moment, let’s make the assumption that the RethinkX team has their analysis right (and I broadly agree): Self-driving EVs will be approved worldwide starting around 2021, and adoption will occur in less than a decade.
How screwed is Big Oil?
Perhaps the metaphors with film camera or cell phones are stretched. Perhaps the better way to analyze oil is to consider the fate of another fossil fuel: coal.
The coal market is experiencing a shock today similar to what oil will experience in the 2020s. Below is a plot of total coal production and consumption in the US, from 2001 to today. As inexpensive natural gas has pushed coal out of the market, coal consumption has dropped roughly 25%, similar to the 30% drop that RethinkX anticipates for oil. And it happened in just a decade.
The result is not pretty. The major coal companies, who all borrowed to finance capital improvements while times were good, were caught unaware. As coal prices crashed, their loan payments became a larger and larger part of their balance sheets; while the coal companies could continue to pay for operations, they could not pay their creditors.
The four largest coal producers lost 99.9% of their market value over the last 6 years. Today, over half of coal is being mined by companies in some form of bankruptcy.
When self-driving cars are released, consumption of oil will similarly collapse.
Oil drilling will cease, as existing fields become sufficient to meet demand. Refiners, whose huge capital investments are dedicated to producing gasoline for automobiles, will write off their loans, and many will go under entirely. Even some pipeline operators, historically the most profitable portion of the oil business, will be challenged as high cost supply such as the Canadian tar sands stop producing.
A decade from now, many investors in oil may be wiped out. Oil will still be in widespread use, even under this scenario — applications such as road tarring are not as amenable to disruption by software. But much of today’s oil drilling, transport, and refining infrastructure will be redundant, or ill-fit to handle the heavier oils needed for powering ships, heating buildings, or making asphalt. And like today’s coal companies, oil companies like TransCanada may have no money left to clean up the mess they’ve left.
Of course, it would be better for the environment, investors, and society if oil companies curtailed their investing today, in preparation for the long winter ahead. Belief in global warming or the risks of oil spills is no longer needed to oppose oil projects — oil infrastructure like the Keystone XL will become a stranded asset before it can ever return its investment.
Unless we have the wisdom not to build it.
The battle over oil has historically been a personal battle — a skirmish between tribes over politics and morality, over how we define ourselves and our future. But the battle over self-driving cars will be fought on a different front. It will be about reliability, efficiency, and cost. And for the first time, Big Oil will be on the weaker side.
Within just a few years, Big Oil will stagger and start to fall. For anyone who feels uneasy about this, I want to emphasize that this prediction isn’t driven by environmental righteousness or some left-leaning fantasy. It’s nothing personal. It’s just business.
 Thinking about how fast a technology will flip is worth another post on its own. Suffice it to say that the key issues are (1) how big is the improvement?, and (2) is there a channel to market already established? The improvement in this case is a drop in cost of >2X — that’s pretty large. And the channel to market — smartphones — is already deployed. As of a year ago, 15% of Americans had hailed a ride using an app, so there is a small barrier to entry as people learn this new behavior, but certainly no larger than the barrier to smartphone adoption was in 2007. So as I said, I broadly believe that the roll-out will occur in about a decade. But any more detail would require an entirely new post.
You know where we are in the business cycle when you start receiving calls about multi-level marketing schemes or offshore stock brokers call to offer a “trade of a life-time”. Maybe its a property deal in outback Australia, or opportunities to profit with 30-35% gains. This kind of behaviour merely reflects the emerging ebullience of social mood. Its the start of the lemming rush that occurs at or near a top. It is a confirming indicator and a useful signal that it’s getting ready time to get off the “escalator”.Monitoring social mood can indicate where we are in the business cycle. This type of unsolicited business activity – the hawking of schemes, stock market investments, too good to miss business opportunities always comes just before the top of a business cycle. You can be assured we don’t see stock spruikers at or near the bottom of a market. Instead at the low, nobody will want to talk about these special investment opportunities. By that time, sentiment will have reached an extreme opposite and become extremely negative to all forms of opportunity.
So if you’ve heard from someone wanting to show you an investment opportunity or a new multi-level marketing product beware. Its not the opportunity that matters, its the timing of the call that’s telling you everything you need to know.
Since mid March 2017, US stock indices have been moving sideways in a slow meandering phase. There’s more to go before this phase completes. This sets up a pattern or determinacy that leads to a clear outcome and conclusion.
You can expect the market to continue consolidating and moving sideways burning time. Its frustrating and slow. A balance of forces has emerged on the back of the so called ‘Trump Rally’. Volume and activity will continue to shrink. We don’t expect the DJIA to go below its 20553 lows (18/05/17). At some stage over the next 2 to 8 weeks stock markets will explode on the back of a ‘surprise’ news announcement.
The coming stock advance will be swift and carry the DJIA 750 to 2000 points (S&P500 150 to 400 points) higher on high volume and bullish sentiment. Suitable targets put the DJIA at 21560 to 22800. Once the rally gets underway we might be able to sharpen our targets.
Our patterning also calls for a complete retracement of the rally. Anticipate on completion of the advance, a rapid pullback on the DJIA to at least 20553 (S&P 2352). The thrust and pullback will catch a lot of people by surprise.
If US stock markets hold to these levels to slightly lower we can anticipate the birth of a large rally taking markets to new all time highs. Relatively speaking we would expect this coming rally to be weak. We view this as being the last gasp before the conclusion of The Long Game.
Should the “leave” vote win the coming UK referendum you can expect the impact to have global consequences. It will challenge the survivability of the EU. At the same time it will create massive flights of capital around the world as investors seek refuge for their money. Anticipate the USD being strongly bid. This will have a huge impact on US stock markets at the expense of peripheral markets and their currencies. The nature of global economics has been apparent for some time, though not obvious. Brexit will cause this to accelerate.
What is clear is the counter-intuitive nature of the Brexit situation. The narrative being promoted by the “in” vote is not what it seems. Democratic processes to do with EU politics have earned a reputation for not being so straight forward with several countries having the “will of the people” overturned in the last decade or so.
Should the UK decide to remain in the EU, we anticipate this will only serve to delay the inevitably. Namely the demise of the EU itself. A reading of history itself should remind that all political systems fail and a political system built on faulty premises to begin with, fail sooner. Thus, human nature expresses itself in a cyclical manner again and again.
Charles Hugh Smith writing on his blog Of Two Minds:
The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.
Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.
1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.
2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.
3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.
4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.
5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.
6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.
Each of these dynamics is easily visible in the global status quo.
As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.
This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.
Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.
This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.
The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.
The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.
Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.
Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.
The US stock market has the potential for large, rapid falls over the next couple of weeks. As long as the DJIA stays above 11258 (SP500 1219.8) the market remains in a correction phase.
Completion of the selloff phase above 11258 (SP500 1219.8) would indicate a potential move to new highs over the next few years accompanied by stronger inflation and strong prospects for the US economy.Such a scenario has the potential to unfold with rising interest rates, a strong US dollar and a strong domestic US economy.
A breach of 11258 (SP500 1219.8) followed by a corrective rally would indicate a major bear market was unfolding and provide the momentum swing to take out the 2009 lows.
While this prediction is valid for the US stock market we see signs the US dollar will continue to strengthen over the course of 2016 leading to a potential top. The strengthening US dollar and rising interest rates will have bearish implications for the rest of the world economy where funds are being sucked from the periphery to the centre.
John Mauldin looks at the latest happenings in the Chinese Economy and their significance.
China Beige Book’s fourth-quarter report revealed a rude interruption to the positive “stable deceleration” trend. Their observers in cities all over that vast country reported weakness in every sector of the economy. Capital expenditures dropped sharply; there were signs of price deflation and labor market weakness; and both manufacturing and service activity slowed markedly.
That last point deserves some comment. China experts everywhere tell us the country is transitioning from manufacturing for export to supplying consumer-driven services. So if both manufacturing and service activity are slowing, is that transition still happening?
The answer might be “yes” if manufacturing were decelerating faster than services. For this purpose, relative growth is what counts. Unfortunately, manufacturing is slowing while service activity is not picking up all the slack. That’s not the combination we want to see.
Something else China Beige Book noticed last quarter: both business and consumer loan volume did not grow in response to lower interest rates. That’s an important change, and probably not a good one. It means monetary stimulus from Beijing can’t save the day this time. Leland thinks fiscal stimulus isn’t likely to help, either. Like other governments and their central banks, China is running out of economic ammunition.
One quarter doesn’t constitute a trend. Possibly some transitory factors depressed the Chinese economy the last few months, and it will soon resume its “stable deceleration” course. It is hard to imagine what those factors might have been, though. The data is so uniformly negative that it sure looks like something big must have changed.
What does this economic weakness say for Chinese stocks? Probably nothing. It should be clear to all that the Chinese stock market is completely unrelated to the Chinese economy. They don’t move together, nor do they move opposite each other. They have no consistent connection at all – or at least not one we can use to invest confidently. I went to Macau when I was in Hong Kong a few weeks ago, just to observe the fabled fervor with which the Chinese gamble. The place did indeed have a different “feel” than Las Vegas does. I’m not the only one to think that the Chinese stock market is just an outpost of Macau, but one in which leverage and monetary stimulus can overload the system.
Let me say that there are real companies with real value in China. But the rules on the ground, not to mention the accounting, make it a particularly treacherous market to invest more than your own “gambling money.”
As crude oil falls below US$28.00 per barrel we see a selling climax developing. The final low on this sell off could be anywhere between $12.00 to $27.00 and would lead to a major turning point for the beleaguered oil market. This will complete our oil market predictions first made in 2011 when we predicted US$12.00 per barrel. The final oil market low may well occur in conjunction with a bottom in US stock markets.
Once the lows are in we will release our predictions for oil for the next couple of years. We will also shortly update our “End of the Long Game 2009-2018” scenario.
Gold is in the final phases of completing its downward run from its 2012 highs at US$1923. The three year unwind has created many false starts for the next bull market. The coming recovery will prove to be another of those events. It will however be larger in nature than the attempted recoveries we have seen over the last 2 years.
We anticipate gold, once it has completed its low, will advance rapidly to above the US$1307-$1350 level before continuing a more moderate climb towards the US$1500 mark. Lows often occur in metals, stock markets and currencies at the end of the year. When we have confirmed the low is in we can look more closely to the recovery levels. Of course this also implies some sort of political/economic crisis to drive the metal higher.
PS: Watch bitcoin perform in this coming phase. It should also peak long before gold does and begin to decline. It has performed as a useful barometer for gold over the last few years.
Our research shows the USD has further to strengthen. We are still targeting 0.98 to 1.04 for the Euro/USD, Aud/USD between 0.65-0.675 cents and US$/Yen above 125. This would place the US$ Index around the 103 level for a major top followed by a major pull back. We anticipate this happening in the first 6 months of 2016. We at Emerging Events believe selling US dollars above 103 basis the US$ Index represents good selling.
Yesterday crude oil prices fell briefly below their December 2008 Financial Crisis lows before recovering. Our target of US$12.00+/- a few dollars per barrel remains on track having made this prediction in 2011. We had predicted that oil would consolidate between US$40 – $75 per barrel which it did albeit briefly before resuming it’s slide.
So as we approach our long term target what can we expect from here?
Oil will bounce out of its lows near $12.00 per barrel sometime in 2016. It has the capacity to rally back towards the consolidation phase US$40-$70 per barrel. This bounce will coincide with a strong US dollar and a stronger US economy over the course of 2016-2017. We anticipate however this will not be the birth of a new oil bull market but the beginning of a sideways long term basing formation lasting many years before commencing a move towards US$100 per barrel.
By Greg Canavan writing for The Daily Reckoning:
–In Friday’s Daily Reckoning I mentioned Europe’s negative interest rates and how Mario Draghi at the European Central Bank (ECB) will attempt to drive them even lower in early December. That’s when the ECB next meets.
–It raises the question, is the global bond market bubble at risk of blowing up? There’s significant commentary and worry about stock markets, but not much about the risks brewing in bonds.
–Consider these worrying statistics, from the Telegraph in the UK:
‘As of late November, roughly $6 trillion of government debt was trading at negative interest rates, led by the Swiss two-year bond at -1.046pc. The German two-year Bund is at -0.4pc.
‘The Germans and Czechs are negative all the way out to six years, the Dutch to five, the French to four and the Irish to three. Bank of America says $17 trillion of bonds are trading at yields below 1pc, including most of the Japanese sovereign debt market.’
–It’s fair to say this is unprecedented in financial history. If central bankers get their wish and inflation starts to pick up, there will be billions of dollars of losses in the bond market.
–That because when yields fall, prices rise. And when yields rise, prices fall.
.–In valuation terms, a bond yielding 1% trades on a P/E ratio of 100 times. A bond yielding 0.5% is on a P/E of 200 times. And you’re worried about stocks trading on a P/E of 15 times?
–The scary thing about the global bond market is that it is much larger than the equity market. That’s a function of prolonged low interest rates and a massive increase in government debt issuance since 2008.
–Do you remember that McKinsey study from the start of the year? It found that between 2007 and 2014, global debt levels had increased by US$57 trillion. That is a huge increase.
–And such is the demand for this ‘safe’ asset, the market has easily absorbed this issuance and bid up the price at the same time. That’s frightening.
–I’m not sure where the tipping point is for the global bond bubble. It depends on what happens with inflation. If the rest of the world goes the way of Japan and enters a long, slow, deflationary phase, then bond prices will stay elevated for many years.
–But if inflation heats up and then gets away from central bankers, trillions of dollars will go up in smoke as capital escapes the bubble bust.
–Where will capital go? Property, equity markets? According to this Telegraph article, prime property will benefit:
‘The Norwegian Pension Fund, the world’s top sovereign wealth fund, is rotating a chunk of its $860bn of assets into property in London, Paris, Berlin, Milan, New York, San Francisco and now Tokyo and East Asia. “Every real estate investment deal we do is funded by sales of government bonds,” says Yngve Slyngstad, the chief executive.’
–This lends weight to Phil Anderson’s Cycles Trends and Forecasts theory that global property markets will experience an almighty boom into 2026. This makes sense if inflation starts to pick up and big pension funds want an inflation hedge.
–Stock should also do well from capital getting out of bonds. After all, in the world of finance, everything is relative.
–But if inflation gets out of control, I wouldn’t want to bet on stock markets doing too well either.
–Think of the world’s balance sheet. There’s a lot more debt than equity, meaning the global economy is highly geared. This boosts growth and return on equity when times are good.
–But if inflation picks up strongly it will erase real economic growth. A lack of real growth means lower returns on equity. In such an environment, global bond AND stocks markets will get smashed.
–I’m not sure how far away a pick-up in inflation is. Bond markets certainly don’t seem too concerned about it right now. The good news is, if you know where to look, you’ll see it coming.
–You just need to read charts every now and then. Actually, I mean look at them. But look at them properly…analytically.
— Take the recent share price action of listed law firm Slater and Gordon. In recent weeks, its share price has collapsed. Have a look at the chart below. As you can see, the share price began to move lower before the negative announcement.
–That is, the market knew something was brewing before Slater and Gordon released the news to the ASX. In fact, the share price lost around 40% of its value prior to the release.
–Let’s leave aside the irony of a law firm issuing an announcement after its share price had already collapsed (continuous disclosure, anyone?) and focus on the point.
–That is, the market will generally give you clues about coming moves. With Slater and Gordon, for example, you should have sold when the stock price broke below $2.50. That was a break to new lows and a sign that all was not well.
–A few days later the negative announcement about regulatory changes in the UK vindicated that sign.
–The message here is that the market will generally always give you a clue of impending moves if you know how and where to look. Of course, it’s not fool proof. Sometimes the market throws of false signals.
–But if you want to improve your odds, always listen to what the market is saying before you act. It’s much smarter than you, so pay attention.
An interesting month ahead for October should see a spike down in US stock markets. Potentially this will be the low of the sell off since the highs this year (DJIA 183350.46, SP500 2132.02). The nature of the rally from the lows will reflect on the the longer term trend and we will advise accordingly. If the move proves to be larger (breaching DJIA 11258.01, SP500 1219.80), it will indicate a major change of trend.
At the same time we anticipate gold will also spike up above US$1225 and further. These events may well be precipitated by some flash news. Rumors abound at present of European bank failures and the shock of this would certainly impact global financial markets.
We are currently updating our big picture The End of the Long Game 2009-2018 and will show how this juncture represents a pivotal time for global economies and financial markets.