< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: Contrary Contrarian's View

Monday, May 02, 2005

Contrary Contrarian's View

Everyone knows about Roach's view, Gross's view, and the views of other big bad bears alike. Most of the sentiment in these views I share (bond players afterall, are bond players). Let me play a contrary view for a spell, if for no other reason than the bulls would never say such a thing (call it the Contrary Contrarian's, or CC view).

First, there is oil. Peak oil fans forecast doom and gloom (we recommend some here and here). No way to keep up with demand. That is all true in my view. The peak in oil supply and the slow drift downwards in production will doubtless cause pain and misery for many in the world. The CC view would argue that the pain will be felt almost exclusively in the third world. The reason is that the first world has the capital resources to shift its energy production whenever necessary. If supply can't keep up with demand, new markets shall be made. Precisely what this is remains to be seen, but the CC sees it as if its already there. Sure it will be expensive, sure a lot of money will be wasted, but industrialized economies can and will do it, notso in the third world.

Second, there is oil. Consumption in the US will slow, steadily, due to a period of energy production decreases. This, it turns out, is most welcomed news for US economists because it begins the hard task of rebalancing America's, and Americans, over-extended debt. Again, Asian economies not dynamic enough to switch out of the currency exchange game and create their own domestic demand will fail. This will cause exports sold in America to decrease, short-term, though margins improve long-term. Another round of slack US consumer demand follows as export prices increase (less competition). The slackening though is not violent in the US. Its slow but steady and helps us more than it hurts.

Third, there is bankruptcy. The slower consumption rates lead to increase savings rates, which inevitably lead to lower than forecasted bankruptcy rates. The mass consumer restructuring many of us predicted never unfolds, all thats noticed is a slight increase in actual filings, though its far less than anticipated. With the disaster avoided, lenders become increasingly competitive and real interest rates fall accordingly.

Fourth, there is the next asset bubble. The first asset bubble, equities, popped with the end of the tech boom. However, it didn't cause the huge rebalancing many had predicted because another bubble took its place, real estate. This freed up huge sums of leveraged capital for Americans and stretched housing markets to their now nauseating heights. Yet, just like equities, the real estate bubble pop will not be felt as drastically as most assume. The CC view says another bubble takes it place, probably intellectual property rights, and America is saved from feeling the sharp effects of a real estate correction.

That is the CC view, for what its worth.