March 30, 2007 – I’m writing somewhat of an educational series now on why the only person you can depend on to build wealth is yourself. Although I’ve blogged about this before, I was reminded of this topic because when oil passed the $66 a barrel mark this week, all of a sudden, the $100 a barrel oil articles came out of the woodwork again. No more than just a couple of months $30 oil and $20 oil articles flooded the media as oil dropped to about $50 a barrel. In this blog I’m going to lay out the many reasons why investors that follow newsletters and the mass media often are goaded into extremely poor decisions that they regret down the road.
Back when oil was testing the $50 floor, one newsletter touted $30 an barrel oil, and as proof, stated the following agreeable testimony:
Steve Forbes stated at the end of 2005: “You’re going to see oil down to $35-$40 a barrel. It’s a huge bubble, I don’t know what’s going to pop it but eventually it will pop – you cannot go against supply and demand, you cannot go against the fundamentals forever.”
Kenneth S. Rogoff, Professor of Economics at Harvard University : “I predict that we will see at least one period of $20 oil at some point over the next ten years.”
Philip Verleger, an oil economist who’s gained a reputation for early warnings on oil-price swings: “If pension funds decide they don’t want to take the risk anymore and bail out, we could see prices go a hell of a lot lower; I think prices could dip below $30. It really depends on what these pension funds do.”
Granted, this person predicted $30 a barrel oil by 2009 and we’re still a long ways away from 2009 but just two months ago, when oil dropped below $55 a below, this person penned an article entitled “$30 oil. Who is crazy now?”boasting that, in October, 2006, he had predicted $30 oil was coming. Maybe the price of oil will drop significantly at some point in the future, but obviously the title of the article implies that the drop to $30 was imminent. Even though this person maintains that he is and was predicting $30 by 2009, if oil drops to $55 a barrel and you say “Do you believe me now?”, that’s a ridiculous statement to make if you’re saying that the $55 a barrel price in January, 2005 is proof that a prediction you are making for 2 years down the road is right. The only reason you would title an article “$30 oil. Who is crazy now?” when the price of oil dropped significantly is if you truly believed that oil was heading to $30 a barrel in several months, not two years down the road.
And this is exactly the problem that I have with so many investment newsletters that are intended to sell subscriptions. Do I care that Steve Forbes predicted in 2005 that oil was going to $35 a barrel? Do I care that a Harvard economist named Kenneth Rogoff predicted that oil will go to $20 a barrel sometime within THE NEXT 10 YEARS? How do these predictions help anyone build wealth? These predictions were somewhat based upon the opinion that the Peak Oil Theory was wrong, and that new exploration technology would continue to lead to significant discoveries of heretofore unknown oil reserves. In fact, last November, in my blog, The Myth of Peak Oil is Melting Away…Literally, I wrote “But the reality is that many people are lazy and would rather have someone else tell them what to think. In December, 1999, a great majority of people all over the world believed in Y2K because the media made us believe in its catastrophic inevitability — a catastrophe that never happened. I believe Peak Oil is the same.” Yet despite this belief, I still blogged on January 11, 2007, in The Real Deal About Gold and Energy, “That’s why I just can’t see oil going to $30 a barrel as many are predicting now. In fact, I don’t think oil will go much below $50 even though it is descending right to the verge of $50 and many are stating that $40 oil is a given now.”
For long-term predictions to be worth anything to investors, they have to be solid without involving any fundamental changes in the reasons that support that prediction. Many analysts will say , well no one can predict geo-political tensions that arise and how they might affect financial markets. Again this is a lot of bull. Just because you don’t have knowledge about politics doesn’t mean that predictions for how political tensions will affect financial markets can’t be made. People equate their own ignorance about a subject material with “it can’t be done!” instead of taking a pro-active approach, learning what they need to know, and stating, “it can be done!” That person quoted above will never convince me that the pension funds have more control over setting the price of oil than oil cartels like OPEC and the threat of war.
All maalamalama Members, if you have read the modules that I recommended you read right away upon joining, should know why I made that statement in January. By now you should know that politics significantly affect financial markets. In fact, be sure to stay tuned for your 1st Quarter update that you will receive soon because I’ll have some updated views on what is going on in Iran and what type of reaction is likely to be sparked by their sale of oil in Euros. So the question is this. Is predicting that a volatile commodity like oil will hit a certain price point sometime within the next 3 years or 10 years of any value to anyone? If oil goes to $75 a barrel in April, and you started planning for $30 oil in January, obviously your investment choices are bound to have dug you a deep hole that you must now climb out of.
I’m sorry, but if oil hits $75 or $80 a barrel on the way to $30, that is not just a temporary spike in an ongoing falling trend on the way to $30. If oil hits $75 a barrel that’s a 47% spike higher from about $51 a barrel in January, and a 47% increase is not a short-term blip in a major trend. Actually what’s happened already is not a short-term blip in a major trend. Here’s a news bulletin for the thundering sheep herd. Political confrontations, unless they are manufactured by the media, which does happen on occasion, are not, and should not, be considered as short-term blips. That’s why all maalamalama Members understand that they must understand politics to make wise investment decisions.
The confrontations between sovereign states in the political realm do cause fundamental changes in the behavior of commodities. Politics and governments have always been intricately linked to the price movements of commodities and stocks, and as long as investors fail to realize how these links operate, they will continue to make poor investment decisions based upon surface financial media news that they track. To draw an analogy for that oil prediction above, that’s like making a $850 an ounce prediction for gold as a long-term target, then having gold drop 47% from its present price of about $660 an ounce to $350 an ounce and telling people that this downward spike in price was a short-term dip in a longer upward trend.
But perhaps this isn’t even the best analogy because one must consider the historic range of commodities when deciding how to interpret recent price movements, not to mention inflation as well. So oil has traded somewhere between $50 a barrel and $78 a barrel for the past couple of years so the current $16 spike in price since January from below $51 a barrel to $67 a barrel represents 57% of its trading range for the past couple of years. Gold has traded between about $411 an ounce to $720 an ounce since 2005, so comparatively speaking, $176 would represent 57% of this $309 trading range. So perhaps if gold fell from its present price of about $660 an ounce to $483 an ounce and then maintaining that such a hypothetical dip in price was part of an ongoing upward trend would be a closer analogy to the oil claims above.
Finally of course, to be really accurate, one would need to examine the inflation adjusted prices of these commodities as I have often blogged about the inaccuracies of many statements made in the financial media because of their failure to consider inflation adjusted indexes and prices. However, in this case, since I’m only discussing the past 2 years, I’m going to concede that this argument would need to be adjusted for inflation without actually taking the time to do so due to the nominal value that such adjustments would actually add to my argument.
Now that oil futures hit a six-month high this week, this same publication that employs the person that touted $30 oil just three months ago recently pronounced that $4 gas is on the way in the U.S.! They stated, “Simply put: while demand will not be significantly reduced and supply cannot be significantly increased, supply can be reduced. All it will take is one crisis or even the intimation of a crisis, and oil and gas prices will spike.” So what happened to $30 oil going to hit before $60 oil? Now that it’s not convenient to make that statement anymore, future oil spikes higher instead of downward is the much better bandwagon to jump on now.
Granted, these conflicting articles were published by different persons within the same company, but they still were published by the same company. And this is typical of the news that you see originating out of most financial media. First we had the story of Jim Cramer feeding nonsense to Wall Street Journal writers to push the ideas that would line his own pockets with money. In addition, we now have investment publications and media publishing whatever stories will attract more readers and thus more advertising dollars or con more subscribers into buying subscriptions. And for what? So they can receive more bandwagon news that will never help them build wealth?
That’s why all Underground Investor readers have known for a long time now that it is foolish to believe that you will ever build any real wealth if you follow the mainstream financial media and the advice of the majority of investment newsletters. Note that we say “the majority” because we do believe that there are some solid ones out there, but similar to our beliefs about superior financial consultants, we believe the percentage of solid ones are less than 1% of all the ones in existence. Everyone has their own agenda, and the agenda of most services in the investment industry is almost never to ensure that you, the investor, becomes wealthy. This is why you often even hear that Chief Investment Officers at major firms spout widely divergent views on the same subjects. It’s not necessarily just because their opinions differ, which might be the case, but often it may also be due to their employer’s targeted marketing campaign to grow revenues and profits.
In the past, why do you think stock analysts were paid obscene salaries of $20 million or more (which by the way was paid out of the management fees of their clients)? Was it because they were so smart? Hardly. It was because they would promote the companies with whom their firms’ investment banks had large deals. Being a good soldier at a firm had its rewards. We have said this a million times, and we’ll probably say it a million times more. Following surface level information in the investment industry will kill your ability to build wealth. Following many investment media outlets and pundits often will kill your ability to build wealth as well because they merely regurgitate surface level information that have merely compiled from various sources.
You must learn what are the important relationships to follow, how to dig out the truth underneath the surface level reports, and learn that your wallet will never be anyone’s top agenda unless you are the person that has seized responsibility for managing his or her own money. And seizing responsibility doesn’t mean relying on other people’s research. This simply won’t work. Seizing responsibility means learning how to do everything yourself, including your own research. Still want the easy way out? Good luck relying on an outsider of the investment industry, well over 99% who will never have your best interests at heart.
[tags]peak oil,wealth literacy,gold,politics and stocks[/tags]
