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Has the mother of all asset bubbles really begun?

If you were to lay every theory about the economy end to end it would create a great wall big enough to see from outer space. Actually that was just made up, but sometimes it feels as if that is the case. And when you have that many theories, sooner or later one will get a prediction about right. Does that mean the author of that theory is blessed with some kind of sixth sense; is deserving of the Nobel Prize? It may, but it may just be a fluke.

Nouriel Roubini got closer to predicting the crisis of 2008 than any other economist in the world. Does that mean he is the greatest economist in the world?

Being a bear is great, because sooner or later something bad will happen. If you keep predicting doom, sooner or later you will look clever. Stop. Is that really the time? Must dash…No, it’s okay the clock stopped at 7.45. It won’t be right for another 25 minutes yet (now you know what time this article is being written). Just as a stopped watch is right twice a day, a perennial economic bear gets it right from time to time.

Let’s set that aside and say that in the case of Mr Roubini we really are talking about a man with an uncanny sense of what is going on. If that is so, let’s listen to what he says.

Recently he told Yahoo finance: “The risk of the end game from QE is not going to be goods inflation, it’s not going to be a rout in the bond market. The risk is like during the 2003-06 [period] – we’re exiting very slowly and we got an asset bubble.”

He added that we may be creating an asset bubble worse than the previous, one that he called the “mother of all asset bubbles.” He said it may not crash this year or next, but in two or three years down the line we may see yet another financial crash.

His writing was more subtle, he steered clear of using sensational phrases like “mother of all asset bubbles”, but actually Andrew Sentance – the man who used to be the Bank of England MPC’s main hawk – said something similar in the ‘Sunday Times’ yesterday.

Mr Sentance said: “There is a danger we are falling into a trap similar to that which ensnared the big western economies in the decade before the financial crisis. Private sector bankers, who believed themselves to be ‘masters of the universe’, fuelled a global credit boom that went spectacularly wrong in 2007/08. Now, we may be putting excessive faith in new masters of the universe, central bankers and their ability to sustain economic growth though the magic of money creation.”

Are they right? Are Professor Roubini – or Dr Doom as he is often called – and Andrew ‘the hawk’ Sentance right? That question will be considered in tomorrow’s thought for the day.

Austerity and fixed currency like medicine by leach

Actually, this is not really news because the matter was aired here back in January. But it is so good, here is the story anyway. Nobel Laureate Joseph Stiglitz – a man who has been described as the leading economist in the world (although one assumes the people who describe him thus are different from those who use a similar description for Roubini) – has said the Eurozone and its governments are in a suicide pact.
Last month he had a good look at the policy of austerity, and slated the Eurozone for the damage caused by a fixed currency.

That is not the news; this story has been told here before.
But he also said: “It reminds me of medieval medicine. It is like blood-letting, where you took blood out of a patient because the theory was that there were bad humours.

“And very often, when you took the blood out, the patient got sicker. The response then was more blood-letting until the patient very nearly died. What is happening in Europe is a mutual suicide pact.”

Well, you may not agree with it, but that metaphor about blood-letting is pretty good. Don’t let a little thing like your own personal beliefs get in the way of admiring Stiglitz’s poetry.

China slows, but it’s still good

The latest flash composite Purchasing Managers’ Index for China and produced by Markit/HSBC was out this morning. The index fell back to its lowest level in four months.
In fact it was quite a drop. Last month the index hit 52.3, a two year high. In February it was down to 50.4. Actually, that is a pretty poor reading. It is above the 50 no –change mark, but only just. Then again, February was the month of the Chinese New Year. This makes it very hard indeed to draw any conclusion from this particular index. So let’s move on.

North Sea oil investment at 30 year high as shale gas myth exposed

This is how it is supposed to work. The price of oil is high, therefore we see more investment; more exploration, more, well… more attempts to find oil.

And sure enough, companies are throwing more money at all the black stuff.

Take the North Sea. According to Oil and Gas UK – that is the trade association which represents, surprisingly enough, the UK oil and gas industry – no less than £11.4 billion was invested into the UK oil and gas industry in 2012, and this is expected to rise to £13 billion in 2013. And that is apparently a 30 year high.

As you know, production from the North Sea has been falling in recent years. But Oil and Gas UK stated: “Thanks to the recent surge in investment a significant upturn can now be predicted over the next three to four years, rising to approximately two million boe per day by 2017 with significant benefits for the UK economy. By way of example, the projects approved in 2011 and 2012 alone will over time produce more than two billion barrels of oil and gas, generate £100 billion value for the economy and an additional £25 billion in production taxes for the Exchequer.”

Malcolm Webb, Oil & Gas UK’s chief executive, said: “Here is some really good news for the UK. After two disappointing years brought about by tax uncertainty and consequent low investment, the UK continental shelf (UKCS) is now benefitting from record investment in new developments and in existing assets and infrastructure, the strongest for more than three decades. The recent introduction of targeted tax allowances to promote the development of a range of difficult projects, coupled with the Government’s ground-breaking commitment to provide certainty on decommissioning tax relief, has prompted global companies and independent businesses alike to take another look at the UK as an investment destination and resulted in a new wave of investment. It is crucial that we sustain this momentum in the years ahead.”

But here is a question. If shale gas is going to be such a panacea for the energy industry why do we need all this North Sea investment? Before you respond, read on because there may be a conspiracy afoot.
As you know, the US – thanks to shale gas – is moving towards energy self-sufficiency. Or is it?

According to this article on TrustNet – Beware of hype over US energy Boom – we might be seeing a fair degree of exaggeration. The gist of the article is that in the US cars run on what in the UK we call petrol. They do not run on natural gas, which is the product of shale gas.

The article cited Charles Whall and Tom Nelson, co-managers of the Investec Global Energy Fund who said: “There is neither government policy incentive, nor infrastructure, nor consumer appetite to transition a meaningful proportion of the US vehicle fleet to natural gas vehicles in the foreseeable future.” They even hinted at some kind of conspiracy within the oil industry to talk up shale gas. They explained: “For as long as leading energy agencies continue to talk about stellar US oil production growth, the fallacy will persist that the oil market is well supplied. This will hold back the move to natural gas for transportation and the need for behavioural change and greater efficiency.”

So there you have it, talk up shale gas and less money will be spent on efficiencies and alternatives to oil, thus the price of oil will stay high.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


Showing 3 comments

  1. Michael,

    Unforunately, North Sea oil only accounts for 8% or so of UK GDP – so the increased investment, while welcome – is hardly likely to be transformational.

    The increased investment is perhaps the result of George Osborne fiddling with North Sea taxation having initially kiboshed investment with poorly thought out additional taxation on North Sea oil in 2011.

    As for US Shale Gas – usually where you find gas you find oil in varying quantities. Those super trusting Scandinavian folks in North/South Dakota appear to be sitting on rather a lot of it. I think it’s called the Bakken formation – unless I’m confusing it with Indonesian Coal owning families?

    While refinery capacity in the US is a problem, I would have thought that this oil could be cracked into petrol.

    This is not to mention the opportunities for CNG/LPG vehicle conversion from petrol; where there’s a will, there’s a way.

  2. The oil related comment ties in nicely with two items on BBC Radio4, which grabbed my attention (at around 9am today). The first was a remark about Laffer charts (? probably miss spelt, but you will know what I mean), anyway, those things used to maximise tax revenue from such things as North Sea oil. I’d never heard of them and found it re-assuring that Mr Osborne is on the ball in that area at last. The next item was a bit more worrying, an interview with a US diplomat, who was asked about the likely American position with regard to the popular British notion that the Falkland Island’s will always remaining under UK sovereignty. His answer was frankly not what I expected at all. He referred to the increasingly vociferous Hispanic lobby in the USA, which made open support for the British stance ” difficult and not as ideal an outcome as further dialogue and negotiation”.
    Whatever the bluffs and counterplays in the big game may be, my short term strategy is always simple and obvious. Long on neglected North Sea drillers with reasonable prospects, Short on distant southern ocean cousins off the Argentine, pending restoration of the fiscal and political balance of power.

  3. By the by: Fracking isn’t new. The technique has been used for donkeys years in conventional oil drilling to stimulate downhole formations where appropriate.
    And “gas” as you know, remains a liquid under the kind of pressure several thousand feet of Earth exerts on it. But it very rapidly expands to many times its liquid volume if allowed to rise to the surface without adequate pressure control in the drillstring by the mud column, ( what’s known as a “Blowout”, as on Piper Alpha, Deepwater Horizon and others).

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