Warren Buffett explains why he never listens to economists

Warren Buffett explains why he never listens to economists

 

 

Warren Buffett believes economists do not add value for investors.

In a 2016 interview video clip found using CNBC’s Warren Buffett Archive, the billionaire investor explained why he does not give much credence to financial market predictions from economists.

“I don’t pay any attention to what economists say, frankly,” Buffett said two years ago. “Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No.”

The Oracle of Omaha cited the example of the economist John Maynard Keynes, who went through periods of heavy losses trading currencies in the 1920s and 1930s and stumbled while speculating on stocks. Buffett said Keynes faltered using top-down economic forecasts such as credit cycle predictions.

But when Keynes switched to a value philosophy focused on owning stocks of a few well-run companies over the long term, his investment performance improved, Buffett noted.

“If you look at the whole history of [economists], they don’t make a lot of money buying and selling stocks, but people who buy and sell stocks listen to them. I have a little trouble with that,” the investor added.

Contraction in U.S. Shale Pushes Oil to $40

Contraction in U.S. Shale Pushes Oil to $40

Contraction in U.S. Shale Pushes Oil to $40Crude oil prices have rallied by more than 30 percent since early February and investors are growing more confident that a rebound is in order. Have oil prices finally turned a corner?

The sudden wave of cautious optimism surrounding the direction of oil prices can be boiled down to the decline in U.S. oil production, a trend that is starting to pick up pace. While U.S. oil producers managed to stave off significant production declines in 2015, drillers are finally starting to capitulate with oil prices in the mid-$30s per barrel and below.

The effects are starting to show up in the data. The EIA reported weekly estimates showing that U.S. production has now dropped below 9.1 million barrels per day (mb/d). That is a departure from the past few months – the U.S. saw little to no decline in output in the fourth quarter, as weekly figures pointed to a resilient rate of production that hovered between 9.1 and 9.2 mb/d. That trend continued into the early part of 2016 even though prices crashed below $30 per barrel.

However, by the end of January, the EIA believes that U.S. oil production finally started to see output fall. Between January and the end of February, the U.S. lost over 150,000 barrels per day in production. The EIA’s weekly figures are not as accurate as their retrospective monthly estimates, but since the monthly figures are published with several months of a lag, it could be a few more months before we get a more accurate picture of how fast output is falling.

The rig count also continues to fall, suggesting that production declines are more or less locked in for the next few months at least. The oil rig count dropped below 400 for the week ending on March 4. Drilling activity has ground to a halt, and with capital budgets stretched or broken, the industry won’t be able to bring enough new sources of supply online to offset mounting legacy production.

The announcements from U.S. shale companies back up the data emerging from the EIA. In recent weeks more than a dozen U.S. shale companies announced that they expected their production to decline in 2016, a list that continues to grow. For example, Continental Resources, an iconic driller in the Bakken, has pretty much given up on completing wells in North Dakota this year. The company’s output could fall by 10 percent this year as a result. More and more companies are following suit.

Taken together, it appears as if the market is finally starting to balance, even if the process may protracted and painful for E&P companies. Growing optimism about the direction has pushed oil prices up by 30 percent in less than a month. WTI jumped above $36 per barrel on March 7, the highest price since early January. Brent is closing in on $40 per barrel.

Oil speculators are becoming more bullish on oil prices. Hedge funds are rapidly liquidating their short bets, as fears of sub-$20 oil have all but vanished for now. According to data from the CFTC, net-short positions fell by 15 percent for the week ending on March 1. “We might see the real bottom being behind us,” Ed Morse, head of global commodity research at Citigroup Inc., said on Bloomberg TV on March 4.

In addition, although a lot of questions remain, OPEC representatives are planning on meeting with Russia’s energy minister between March 20 and April 1 to follow up on their production “freeze” agreement. An outright cut to production remains a long-shot, especially since Saudi Arabia’s oil minister Ali al-Naimi all but ruled it out at the IHS CERAWeek conference in Houston in late February. It is hard to imagine OPEC and Russia shifting course from the production freeze, but any agreement to take additional action represents an upside risk to oil prices.

Given the mounting evidence, it seems that the oil price rally is finally here, then? Maybe. But it is also possible that bullish sentiment is starting to outstrip the fundamentals, even if the fundamentals are trending in the right direction. U.S. production declines are still proceeding modestly, a pace that is not quick enough to soak up the 1.5 mb/d or so of excess supply anytime soon.

Moreover, oil storage levels are still rising in the United States, hitting a new record last week of 518 million barrels. Until inventories are drawn down substantially, oil prices will run into a ceiling every time they try to rally.

The worst of the oil bust may be over, and oil prices dropping to $20 per barrel seems increasingly unlikely. But with prices up more than 30 percent in just a few weeks and the world still suffering from oversupply, is there really any more room for price gains in the short-term?

Corporate News, Oil Rebound Help Propel Wall Street

Dow falls triple digits; energy off 3.5% as oil gives up gains

NYSE Rule 48 Casts Cloud Over Big BoardU.S. stocks held lower in choppy trade Tuesday after weaker-than-expected Chinese trade data renewed concerns about global growth.

The Dow Jones industrial average traded about 100 points lower. Earlier, the index briefly fell more than 150 points in mid-morning trade, with Caterpillar (CAT) and Goldman Sachs (GS) the greatest contributor to declines.

“I think a little bit of profit-taking after the run-up that we’ve seen. We’re in a bit of a news vacuum this week. Earnings are all done. China trade data was shockingly bad. … The question keeps coming out. How bad is the slowdown in China?” said Ben Pace, chief investment officer at HPM Partners.

The S&P 500 briefly traded about 1 percent lower, as energy temporarily dipped more than 3.5 percent. U.S. crude oil futures turned lower, trading just below $37 a barrel as of 10:46 a.m. ET.

The Nasdaq composite also temporarily declined 1 percent as Apple (AAPL) and the iShares Nasdaq Biotechnology ETF (IBB) (IBB) traded lower.

“I think a little bit of profit-taking after the run-up that we’ve seen. We’re in a bit of a news vacuum this week. Earnings are all done. China trade data was shockingly bad. … The question keeps coming out. How bad is the slowdown in China?” said Ben Pace, chief investment officer at HPM Partners.

The S&P 500 briefly traded about 1 percent lower, as energy temporarily dipped more than 3.5 percent. U.S. crude oil futures turned lower, trading just below $37 a barrel as of 10:46 a.m. ET.

The Nasdaq composite also temporarily declined 1 percent as Apple (AAPL) and the iShares Nasdaq Biotechnology ETF (IBB) (IBB) traded lower.

“I do think the recession scenario is off the table but I think the equity rally we had was one … fueled by very short-term technical factors,” said Jack Ablin, chief investment officer at BMO Private Bank. “The more investors digest the data, whether economic data, corporate profits, or new data, the less they want to own U.S. large-cap stocks. U.S. equities are priced for a global expansion that is not in the cards.”

On Monday, WTI settled higher at $37.90 a barrel, its highest level of the year so far. Gains in energy stocks offset declines in tech to help the Dow Jones industrial average and S&P 500 posted their first five straight days of gains since October.

“Oil prices have picked up a lot … We seem to have found some relief from that,” Pace said. We were “near-term overbought. We needed a catalyst (for profit-taking). The catalyst was China.”

China’s exports fell 25.4 percent year-over-year in February , more than expected and the largest since May 2009, according to Reuters. The trade surplus was at $32.59 billion in February, versus analysts’ expectations of a $50.15 billion surplus.

Analysts largely attributed the sharp drop in the data to a slowdown in business activity around the early February Lunar New Year holidays, Reuters said. Exports for the first two months of the year were still down 17.8 percent and imports off 16.7 percent from the same period last year.

The data also showed China’s February crude oil imports jumped 20 percent on year to their highest ever on a daily basis, driven by import quotas and stockpiling.

In a light week for U.S. economic reports, the key news item is European Central Bank’s Thursday meeting.

“We’re expecting more stimulus from the ECB and the question is whether investors are going to see that as worries about a global slowdown or something that will propel markets higher,” said Chris Gaffney, president, EverBank World Markets.

“The euro is holding $1.10. Certainly traders don’t believe the ECB is going to do anything aggressive in terms of pursuing negative rates further,” he said.

Treasury yields traded lower, with the 2-year yield (U.S.:US2Y) at 0.86 percent and the 10-year yield (U.S.:US10Y) at 1.80 percent as of 11:03 a.m. ET.

The U.S. dollar index was a touch lower, with the euro at $1.10. The yen was at 112.50 yen against the greenback.

In mid-morning trade, the Dow Jones industrial average (Dow Jones Global Indexes: .DJI) declined 135 points, or 0.79 percent, to 16,935, with Caterpillar (CAT) the greatest decliner and Home Depot (HD) leading a few advancers.

The Dow transports traded more than 2 percent lower as JetBlue (JBLU) plunged more than 7.5 percent to lead decliners.

The S&P 500 (^GSPC) traded down 21 points, or 1.04 percent, at 1,980, with energy leading eight sectors lower and utilities and consumer staples the only advancers.

The Nasdaq (^IXIC) composite declined 47 points, or 1.01 percent, at 4,660.

The CBOE Volatility Index (VIX) (^VIX), widely considered the best gauge of fear in the market, traded near 18.5.

U.S. crude oil futures declined $1.21 to $36.69 a barrel on the New York Mercantile Exchange.

Gold futures rose $4.30 to $1,268.30 an ounce as of 10:56 a.m. ET.

This is what's really wrong with oil

This is what’s really wrong with oil

This is what's really wrong with oilThis is what’s really wrong with oil

In mid-2014, crude oil prices were about $100, depending on which grade you wanted to buy. Now prices hover near $30—roughly a 70% decline in 18 months.

The ongoing oil price collapse is having a severely negative impact on the wealth of those who own oil reserves. Western oil companies and OPEC member states, however, aren’t so worried about oil reserves in the ground.

The number one problem is oil on the surface.

There’s Too Much Oil in the Market

Supply far outstrips current demand—which, as we know from Econ 101, yields lower prices. The International Energy Agency said in its January market report that “unless something changes, the oil market could drown in oversupply.”

Is that really true? Drowning is certainly a poor analogy. Drowning is final: you don’t recover from it. We might be bearish on the oil market, but we haven’t written it down to zero.

The problem is finding the balance between supply and demand. The current situation is primarily a result of higher supplies and only secondarily of demand weakness. The world still burns plenty of oil and will keep doing so for many years.

Oil Producers Can’t Control Net Supply
The higher supply has come largely from US and Canadian shale fields as well as the 2014 Saudis’ decision to maintain production levels. Iran’s forthcoming return to the market will add even more supply.

These factors add up to an interesting group dynamic. All oil producers would benefit if production fell and prices rose—but they would not benefit proportionately unless the production cuts were also proportionate.

There is no mechanism or incentive to make it happen that way. Even OPEC, which in theory is a cartel with strict quotas on its members, has no way to enforce its will.

(One thing we know about OPEC members is that they cheat. Always and everywhere, when it is possible, they cheat. Saudi Arabia simply got fed up with being the fall guy. The reasons behind the Saudi strategy are complex, but I am sure an ancillary benefit, from their point of view, is that current Saudi production demonstrates to their fellow OPEC members what noncompliance on quotas will cost them all.)

Debt Pushes Producers to Sell Oil at a Loss
Add in the further complication that shale oil fields, by their nature, are easy to turn on and off. If your oil costs $40 a barrel to produce and you can sell it for only $35, you can cap your wells and wait for higher prices.

But here we hit another problem.

If you borrowed the money to drill your wells in the first place, you need cash flow to service your debt. So you might keep pumping even if you only break even or run a small loss.

That seems to be what many small US producers are doing. The alternative is to default on their bank loans or high-yield bonds.

Indeed, the high-yield bond market seems to have calculated that more defaults are coming. Bond prices have collapsed as low oil prices make it hard to stay current on debt payments.

A Dilemma
What will be the endgame here? If companies default and go into bankruptcy, courts will sell their assets to the highest bidder. Bondholders will push for quick liquidations.

If the assets consist of oil in the ground that can’t be profitably extracted, who will buy those assets?

I don’t really know. I’ve been told the major multinational producers are biding their time, hoping to buy those reserves on the cheap. I also know for a fact that drilling rigs and ancillary production items are going for ten or twenty cents on the dollar at auction.

The cost of drilling new wells is going to be down in the next cycle. The unanswered question is whether the currently producing wells will actually stop pumping during this shake-down process, and if they do, for how long.

Producers face quite a dilemma.

Stock Market You cannot print your way to prosperity here is why

Stock Market You cannot print your way to prosperity here is why

Stock Market You cannot print your way to prosperity here is whyLast week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year.

In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon. They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity.

People throughout history have always sought to acquire wealth. Most of them understand that it takes hard work, sacrifice, savings, and investment. But many are always looking for that “get rich quick” scheme. Monetary cranks throughout history have thought that just printing more money would result in greater wealth and prosperity. Every time this was tried it resulted in failure. Huge economic booms would be followed by even larger busts. But no matter how many times the cranks were debunked both in theory and practice, the same failed ideas kept coming back.

The intellectual descendants of those monetary cranks are now leading the world’s central banks, which is why the last decade has seen an explosion of money creation. And what do the central bankers have to show for it? Lackluster employment numbers that have not kept up with population growth, increasing economic inequality, a rising cost of living, and constant fear and uncertainty about what the future holds.

The past decade has been a lot like the 1920s, when prices wanted to drop but the Federal Reserve kept the price level steady through injections of easy money into the economy. The result in the 1920s was the Great Depression. But in the 1920s prices were dropping because of increased production. More goods being produced meant lower prices, which the Fed then tried to prop up by printing money. Unlike the “Roaring 20s” however, the economy isn’t quite as strong today. It’s more of a gasp than a roar.

Production today is barely above 2007 levels, while heavily-indebted households already hurt during the financial crisis don’t want to keep spending. The bad debts and mal-investments from the last Federal Reserve-induced boom were never liquidated, they were merely papered over with more easy money. The underlying economic fundamentals remain weak but the monetary cranks who run the Fed keep trying to pump more and more money into the system. They fail to realize that easy money is the cause, not the cure, of recessions and depressions. They didn’t realize that prices needed to drop in order to clear all the bad debt and mal-investments out of the system. Because they don’t realize that, we are on the verge of yet another financial crisis.

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Don’t be confused by any stock market rallies over the next few months and think that the worst is over. Remember that after Black Tuesday in 1929 the Dow Jones rallied over the next year before it began slowly and steadily to sink again. The central bankers will do everything they can to delay the inevitable. If they had allowed housing prices to fall in 2008 and hadn’t bailed out the big Wall Street banks, the economy would have corrected itself. Yes, it would have been a severe correction, but it would have been nothing compared to the inevitable correction that will present itself when the Fed runs out of easy money options. The Fed may try to cut interest rates again, maybe even going negative, or it will do more quantitative easing, but that won’t work. Creating more money does not lead to economic growth and well-being. The more money the Federal Reserve creates, the more ordinary Americans will end up suffering.