Low oil prices, or deflation generally, explained with the age of the capital.
(The time from investment to finished consumer goods)
All investment comes from savings, that is the consumer consumes less than the producer produces, (and the consumer and the producer is really the same person).
We have short time investments, like the chairs in the hairdressers saloon, or the food in the restaurant, or the wares in a sport shop. The investment returns in a short time.
Then we have the long time investments. The oil that we consume now, comes from platforms and wells that were made dozens of years ago. The same goes for hydro power and iron ore mines. The oil wells we invest in now, will give us oil to consume in twenty years.
In between are investments of varying time to consumable products.
The price signals govern what the capitalists invest in. For long time capital investments, it was oil and iron. What is invested now, likewise is governed by the price signals. Some think that electric cars, and self driving cars are the thing of the future, therefore the megafactory.
There is a balance between saving and the different categories of investments. If the consumers save more, in aggregate, than they used to, more capital is available, bidding down the interest (and bidding down current consumer prices). This signals to investors: forget short time investments, go long term!
Opposite, if consumers save less, they bid up current consumer goods and less capital is available. Both signals to the investor: Forget long term, invest in goods and services for the immediate future. And the balance is restored.
NOW, WHAT HAPPENED?
Central banks, not the savers, made money available, bidding down the interest rate. Since the financial crisis, but really, long before that, all the way back to the eighties.
This signalled to investors: Go long term! AND to the consumers: Consume now!
This is the reason for the epic imbalance in the capital structure. We have had bidding up of consumer goods and at the same time heavy investing in long term investments. Now, after these investments begin to materialize into consumer goods, we have exhausted consumers (lending), and a surplus of goods from long time investments (oil, iron, buildings, infrastructure). Too many oil wells, mines, railways, car factories hotels, offices and houses. (If you haven't seen surplus in all that, you will soon). Errors in deployment of scarce capital means lower productivity and lower standard of living for all. It is a world problem.
The problem will persist as long as the interest rate is manipulated by central banks, and years after.
(The time from investment to finished consumer goods)
All investment comes from savings, that is the consumer consumes less than the producer produces, (and the consumer and the producer is really the same person).
We have short time investments, like the chairs in the hairdressers saloon, or the food in the restaurant, or the wares in a sport shop. The investment returns in a short time.
Then we have the long time investments. The oil that we consume now, comes from platforms and wells that were made dozens of years ago. The same goes for hydro power and iron ore mines. The oil wells we invest in now, will give us oil to consume in twenty years.
In between are investments of varying time to consumable products.
The price signals govern what the capitalists invest in. For long time capital investments, it was oil and iron. What is invested now, likewise is governed by the price signals. Some think that electric cars, and self driving cars are the thing of the future, therefore the megafactory.
There is a balance between saving and the different categories of investments. If the consumers save more, in aggregate, than they used to, more capital is available, bidding down the interest (and bidding down current consumer prices). This signals to investors: forget short time investments, go long term!
Opposite, if consumers save less, they bid up current consumer goods and less capital is available. Both signals to the investor: Forget long term, invest in goods and services for the immediate future. And the balance is restored.
NOW, WHAT HAPPENED?
Central banks, not the savers, made money available, bidding down the interest rate. Since the financial crisis, but really, long before that, all the way back to the eighties.
This signalled to investors: Go long term! AND to the consumers: Consume now!
This is the reason for the epic imbalance in the capital structure. We have had bidding up of consumer goods and at the same time heavy investing in long term investments. Now, after these investments begin to materialize into consumer goods, we have exhausted consumers (lending), and a surplus of goods from long time investments (oil, iron, buildings, infrastructure). Too many oil wells, mines, railways, car factories hotels, offices and houses. (If you haven't seen surplus in all that, you will soon). Errors in deployment of scarce capital means lower productivity and lower standard of living for all. It is a world problem.
The problem will persist as long as the interest rate is manipulated by central banks, and years after.
Good stuff and makes our current predicament very clear.
But to what end?
Stand With Rand? Go Galt?
Short everything but the almighty dollar?
Move to Goa and dance on the beach?
The past hundred years (but greatly accelerated over the past 30) has seen massive artificial wealth creation on a global scale. But it is artificial and based on false valuation of CB money. Most of this wealth is going to simply disappear when the CB system breaks. You can't short because it is impossible to know the timing.
I think the best way to get a sense for what survives and what does not when money dies is to read about both the great depression (when the FED defaulted and their first bubble blew) and Germany (when they defaulted through printing).
Accounts in both generally read similar, people said that one day they and their neighbors had work and money to pay for things, and then overnight it all seemed to just vanish and the next day jobs were gone and no one had any money to pay for things. That is how fast CB money can lose value when their liabilities are suddenly revalued to their true value.
The US and Germany took different paths but ended up in slightly similar places. The US allowed a debt implosion and defaulted resulting in a depression, here prices fell but people had no money to pay for things. Germany took the printing press path, here everyone had money but prices rose so fast that the money people had was not enough to pay for things. Same thing, different path.
What survived though from an investor perspective was different. In Germany people with hard assets (gold, land) did fine because these held value, but people who saw what was happening and used debt to purchase hard assets did great (kept the assets, debt disappeared). In the US, gold was confiscated and devalued and land dropped in price (but taxes remained). Here people with hard assets did not do great, and people who used debt to buy hard assets got crushed. (My great grand-father apparently lost all of his land in this time, not because he had debt but because the taxes were more than anyone could afford).
So the dilemma is you have to guess which way the Central Banks will go, honest default or money printing. And that we don't know.
If you look at what the CB's have done so far it points to monetary inflationary outcome. This time one tempered with extreme market interventions in the bond, stock and metals 'markets'.
To both previous posters: I shamelessly point out the main point of my post/article, which is that the long term capital investments in the history, for producing current goods now, have been overweight. And that the consumers are exhausted by consumption of savings. So I would look for those things to crash (or continue crashing): Oil, iron ore, aluminium, platforms, bulldozers and other machinery, ships, then the companies that work in the early phases of investment of those things: Mineral surveillance, Seismic Surveillance, shipbuilding.
