My predictions for the next 10 years:
We have reached a point where every economic recovery, is going to be killed by rising oil prices. Yes, there is lots of oil still in the ground. The problem is, much of it cannot be profitably extracted, unless oil is at a price which will cause a global recession. Exploration and development of exotic oil, deepwater oil, GTL, etc., have all reached the point of diminishing returns (measured by energy, capital and risk needed for the next barrel added to supply).
There is no more consistent pattern of economic history, than oil price spikes causing recessions. The scenario, is a "rolling plateau", where economies and stocks do a sine wave pattern, over and over. Peak-to-peak (or trough-to-trough) for the sine wave, will be 2-4 years.
This will continue until, at some point in the future, fossil fuels are replaced by renewables. This process is in its infancy. The entire rich world should have been working hard on renewables and Energy Independence, since the oil shocks of the 1970s. Unfortunately, the U.S. decided to garrison the ME oil fields, as our national energy strategy. One of these years, we will finally get on the right course, and do what Japan, Europe, and China are doing: committing to a future steadily less reliant on fossil fuels.
For investors, this means:
1. BuyAndHold, which hasn't worked for most stocks for 10 years, will continue to not work. We are in a Secular Bear Market, which probably won't end, till the S&P500 hits a PE of 10.
2. For almost all stocks, BuyTheDipSellTheRally will be the only way to make money. In general, when energy prices are starting to hurt the economy and stock market, and when the S&P500 is at the top end of its LT PE range of 10-20 (now at 21), that will be the signal to exit long positions, and/or hedge with shorts.
3. The best investing sector, will be energy. All energy: oil, coal, natgas, wind, solar, batteries and other energy storage, smart grid, LED lights and other efficiency, etc. Rather than debating which sub-sector of energy will do best, it makes sense to own a bit of all of them. It's broad enough to get plenty of diversification, and still stay entirely within the general theme of energy.
4. Energy stocks will not be immune to the "rolling plateau" pattern. Oil will not hit $200, because (as we saw in 2008), when oil hits $150, the economy crashes, and demand collapses (temporarily). |
