FRICK AND FRACK WENT UP THE TRACK…TO HELP THE FED KNOCK THE MARKETS OFF TRACK?

5/1/20

While yours truly’s posts about the presidential election (e.g., PRESIDENT TRUMP WILL NOT BE RE-ELECTED, 4/22/20) and the vice-presidential sweepstakes (e.g., THE DEMOCRATIC VEEP RACE:  HOW ABOUT A FEMALE TIM KAINE…OR A NAME OUT OF LEFT FIELD?, 4/29/20) are of wider interest and thus draw more readers, my background is in finance and I thus feel compelled to address a few things in the markets that bother, or delight, me from time to time:

·         Fracking, as an industry, is uninvestable, and one needn’t get into the details, financial or otherwise, of every enterprise involved in this process to make that conclusion, avoid the industry, and thus save one’s self a lot of money, grief, and aggravation.   One simply has to realize that fracking depends on high oil and gas prices for profitability, but fracking itself makes sustainably high oil and gas prices nearly impossible by increasing supply at the margin just when prices get high.

One could make the same argument, one supposes, about any commodity…higher prices bring on more supply that in turn lowers prices…Econ 101 stuff.   However, fracking is especially acutely subject to such market discipline because it operates at the margin of an already imbalanced market.   Further, that imbalance preceded the COVID crisis and will continue long after that crisis is behind us.  One does not have to be on the “alternative energy is the wave of the future” bandwagon to conclude that, due to both supply and demand factors, oil is probably going to be cheap forever.   The last word of the last sentence is a dangerous one, especially in finance; nonetheless; yours truly is comfortable with it in this context.

While one could argue with yours truly’s conclusions regarding the uninvestability of fracking, I suspect that investors in Occidental Petroleum agree with me, secretly or otherwise, after OXY’s $38 billion investment in big time fracker Anadarko that has crippled Occidental.  So do legions of junk bond investors whose reach for yield led them to frackers in the nether regions of that market.

One suspects that the uninvestability of fracking delights environmentalists, much as the large-scale replacement of coal with cheap natural gas as fuel for electric power plants has done.   These are both instances of the markets’ achieving environmental goals more efficiently and on a much larger scale than can governmental regulation.

·         Officials at the Fed and enthusiasts for its current aggressively expansionary tactics, including Chairman Jay Powell, contend that one of the Fed’s achievements in the last few weeks is having given companies access to the financial markets that they would otherwise not have had, and doing so without actually expending any money but merely by stating a readiness to expend such money.   Doubtless this is true, but this process of access granting, if you will, has been quite indiscriminate.   Yours truly suspects that we may find, and maybe sooner than a lot of people think, that many of the companies accessing the markets as a result of Fed intervention were previously incapable of accessing the markets for a reason.   Cruise lines come immediately to mind, but there are others.    Others disagree, of course, but that is, as the old saying goes, what makes a market.   One only hopes that the Fed will allow those on the wrong side of this market, whatever that side might be, to suffer the financial consequences of their misplaced wagers.  Given the activism of the Fed of late, one would be forgiven for doubting that it will.

·         Yours truly has mentioned this before, but one of the expressions to which the wise men of the markets nearly unanimously nod in agreement is

“Markets hate uncertainty.”

I know what those who repeat this tripe are trying to say, i.e., markets go down in response to greater uncertainty.   But that very observation renders the statement nonsensical.   Markets don’t hate uncertainty; markets thrive on uncertainty because markets are designed to handle, and price, uncertainty.   Without uncertainty, there would be no need for markets; markets owe their very existence to uncertainty.   So how can markets “hate” uncertainty?   

Mere semantics, one might argue, but to those of us who understand and have come to implicitly trust markets, and the English language, the expression “Markets hate uncertainty” is especially grating.   More importantly, blind accession to such inexact language can easily lead to dangerous policies designed to eliminate uncertainty for fear of letting markets do their job by pricing in greater uncertainty and going down.   See the last bullet point.