Mr. Conrad is a well-known and favorite speaker among the South Bay investment groups. Bud thoroughly researches the market areas, and looks beyond stocks for investment opportunities. A provocative and outspoken speaker, Bud Conrad answers questions fully, and brings a wealth of charts to explain economic projections.
In this time of World Geopolitical confrontation, where the US has occupied Iraq, the implications for investment have become more political than ever. Our National election is very controversial, and the results will be as important as they have been since the Vietnam War. We must be concerned about the world situation because we are more globalized and so dependent on the international actions than ever. Oil has been a base of our growth economy, and is both a driver and a result of our political actions. World usage continues to increase, with the US using 30% of world supply, while China's growth in use last year was 30%. Oil is fundamentally limited: the US owns only 2% of the reserves, while the Middle East has 65%.
The War has been very costly, driving deficits up, the dollar down, and interest rates up. Higher oil price makes the trade deficit worse, adding to the above dollar weakness. The expectation is that we will extend spending for the war in Iraq and on Terrorism for a long time. The Trade Deficit at $500B per year means that the US borrows that amount. Foreigners have been lending this amount to us, but there is question if they will continue as the dollar weakens, destroying their holdings. An important link is the value of the dollar. Central banks are changing how they handle our trade deficits. Predicting the future includes understanding how the twin deficits affect the Fed and interest rates. The collection of these observations is to realize that the current situation is repeating some of the aspects of the 1970s, where physical assets performed better than stocks, while inflation and interest rates soared. Successful investing in the decade ahead will require looking beyond traditional stocks and bonds.
Bud Conrad has been a futures investor for 25 years, and close to full-time investor for a decade. He teaches graduate courses in investing at Golden Gate University. He worked for a number of computer companies including IBM, CDC, Amdahl and Tandem, so uses engineering concepts like feedback in his market analysis. He holds a bachelor of engineering from Yale and an MBA from Harvard.
Bud Conrad's Projection for 2005: 12/2004 Summary Yr end est Bud's est November 2004 estimates for end 2005 Stocks: S&P 500 mostly flat 1250 Crude goes above $50/bbl $60 Gold rises $535 Fed has to raise to defend $ 3.5% 10 Yr Treasury 5.2% Japanese 3 month interest rate 0.25% PPI rises to 8% 8.0% Dollar falls 10% against Euro 140 Yen 95Y/$ 90 GDP: Slowing with consumer tap 2.5% Earnings grow, but only 7%, not 28% (operating) 7% Government deficit rises $500B World economies continue growth > 2% 2% Trade Balance (CA) stays negative $650B -$650B Housing prices drop 5% across US -5% Unemployment rises a tick % 5.6% Economy slows, Inflation returns to Physical Assets Currency weakens as gold, oil, rise Stocks stay unexciting from rising rates, weaker P/E -- Albert (Bud) Conrad, Jr., December 17, 2004 Reply
Bud Conrad's Projection for 2005: 12/2004 Summary Yr end est Bud's est November 2004 estimates for end 2005 Stocks: S&P 500 mostly flat 1250 Crude goes above $50/bbl $60 Gold rises $535 Fed has to raise to defend $ 3.5% 10 Yr Treasury 5.2% Japanese 3 month interest rate 0.25% PPI rises to 8% 8.0% Dollar falls 10% against Euro 140 Yen 95Y/$ 90 GDP: Slowing with consumer tap 2.5% Earnings grow, but only 7%, not 28% (operating) 7% Government deficit rises $500B World economies continue growth > 2% 2% Trade Balance (CA) stays negative $650B -$650B Housing prices drop 5% across US -5% Unemployment rises a tick % 5.6% Economy slows, Inflation returns to Physical Assets Currency weakens as gold, oil, rise Stocks stay unexciting from rising rates, weaker P/E
Oil & Inflation Prediction As the WTI futures (9/16/2004) are selling a barrel of oil for delivery 6 years out for just $37 your estimate seems very high. A lower oil price clearly also means less inflationary pressure on PPI so that number is also likely to be significantly lower. -- K. Jacobs, December 17, 2004 Reply Re: Oil & Inflation Prediction Long Oil was my best trade as a futures trader last year. I have studied the backwardation, where farther out contracts trade at a lower price compared to nearby, and for most of the last decade that has been the case. My conclusion is that in this case futures are not a good predictor of future price. In fact, I took advantage of that discount and bought farther out contracts, so that I made not only the money from the rise in spot price but also from the discount being brought up to the spot price. I really wish I could have given my talk on oil. It is one of the clearest part of my talk. Simply: There is only a fixed amount of oil in the world, and we hav used up about half. Asian growth, especially China, has fueled (!) demand. The US uses 25% of world consumption. The US owns 2% of the world reserves. The Middle East owns 65% of the world reserves. From these base statistics, you can predict the world conflicts of the next generation. I have much more detail on US stocks compared to price and on how big reserves are. But that data will have to wait to another time or maybe I'll re present it to the Saratog Library group on January 15 at 10:00. Much of the material was originally presented to them last April when the investment implications were more pressing. -- Albert (Bud) Conrad, Jr., December 18, 2004 Reply Re: Re: Oil & Inflation Prediction How much do you think the fall in the dollar exchange rate will affect the price of oil? -- Claire Starry, December 28, 2004 Reply
As the WTI futures (9/16/2004) are selling a barrel of oil for delivery 6 years out for just $37 your estimate seems very high.
A lower oil price clearly also means less inflationary pressure on PPI so that number is also likely to be significantly lower.
Re: Oil & Inflation Prediction Long Oil was my best trade as a futures trader last year. I have studied the backwardation, where farther out contracts trade at a lower price compared to nearby, and for most of the last decade that has been the case. My conclusion is that in this case futures are not a good predictor of future price. In fact, I took advantage of that discount and bought farther out contracts, so that I made not only the money from the rise in spot price but also from the discount being brought up to the spot price. I really wish I could have given my talk on oil. It is one of the clearest part of my talk. Simply: There is only a fixed amount of oil in the world, and we hav used up about half. Asian growth, especially China, has fueled (!) demand. The US uses 25% of world consumption. The US owns 2% of the world reserves. The Middle East owns 65% of the world reserves. From these base statistics, you can predict the world conflicts of the next generation. I have much more detail on US stocks compared to price and on how big reserves are. But that data will have to wait to another time or maybe I'll re present it to the Saratog Library group on January 15 at 10:00. Much of the material was originally presented to them last April when the investment implications were more pressing. -- Albert (Bud) Conrad, Jr., December 18, 2004 Reply Re: Re: Oil & Inflation Prediction How much do you think the fall in the dollar exchange rate will affect the price of oil? -- Claire Starry, December 28, 2004 Reply
Long Oil was my best trade as a futures trader last year. I have studied the backwardation, where farther out contracts trade at a lower price compared to nearby, and for most of the last decade that has been the case. My conclusion is that in this case futures are not a good predictor of future price. In fact, I took advantage of that discount and bought farther out contracts, so that I made not only the money from the rise in spot price but also from the discount being brought up to the spot price.
I really wish I could have given my talk on oil. It is one of the clearest part of my talk. Simply: There is only a fixed amount of oil in the world, and we hav used up about half. Asian growth, especially China, has fueled (!) demand. The US uses 25% of world consumption. The US owns 2% of the world reserves. The Middle East owns 65% of the world reserves.
From these base statistics, you can predict the world conflicts of the next generation.
I have much more detail on US stocks compared to price and on how big reserves are. But that data will have to wait to another time or maybe I'll re present it to the Saratog Library group on January 15 at 10:00. Much of the material was originally presented to them last April when the investment implications were more pressing.
Re: Re: Oil & Inflation Prediction How much do you think the fall in the dollar exchange rate will affect the price of oil? -- Claire Starry, December 28, 2004 Reply
How much do you think the fall in the dollar exchange rate will affect the price of oil?
Impact of dollar decline. A Wall Street pundit and TV panelist offers a milder scenario for ’05 than the one you painted. She writes: “…Financial media have been drawing misplaced parallels between the current dollar environment and the mid-1980s. That was the last time we saw a similar decline in the U.S. currency, ultimately leading (in part) to the crash of '87. The big difference then was that as the dollar continued its two-year decline in 1987, inflation took off and bonds tanked—unlikely scenarios in 2005, given how vigilant the Fed appears to be in keeping ahead of inflation.” (http://www.schwabinsights.com/mktoutlook.html) I don’t share her faith in the Fed, but neither do I think they are as far behind as you do. -- Al Moon, January 17, 2005 Reply
A Wall Street pundit and TV panelist offers a milder scenario for ’05 than the one you painted. She writes: “…Financial media have been drawing misplaced parallels between the current dollar environment and the mid-1980s. That was the last time we saw a similar decline in the U.S. currency, ultimately leading (in part) to the crash of '87. The big difference then was that as the dollar continued its two-year decline in 1987, inflation took off and bonds tanked—unlikely scenarios in 2005, given how vigilant the Fed appears to be in keeping ahead of inflation.” (http://www.schwabinsights.com/mktoutlook.html) I don’t share her faith in the Fed, but neither do I think they are as far behind as you do.
$80 Oil (I also posted this comment under Bud Conrad's "Investment Outlook for 2005" entry in the library.) After our last meeting, I took issue with Bud Conrad's forecast of $80 oil. I recounted a memory of hearing my Mechanical Engineering Professor in 1950 saying that we would soon run out of oil. It hasn't happened yet and it probably won't happen for quite a while. Like other mineral resources, the amount of oil available is a function of how much effort you are willing to spend to get it. Hal Nissley pointed out that the Alberta Tar Sands could be converted to a huge petroleum reserve at prices well short of $80. The history of oil production is full of technological innovations such as recovery techniques and drilling capabilities that have allowed us to keep producing it, albeit at incrementally higher prices. That said, $80 oil is not such a dream when looked at in current dollars. Right now, oil is priced in dollars, but I have to believe that those who control the reserves in the Middle East, Russia, and the North Sea are looking at the relation of the dollar to other currencies and pricing accordingly. A lot of the stuff that they buy is priced in Euros. So, even though oil at eighty 2005 dollars is pretty far off, $80 oil isn't. Still closer to home, we may see gasoline prices rise a lot faster than the price of the feedstock. It would make a good headline to say that $80 gasoline would be here before $80 oil, but not much. I lay that at the feet of California's regulators. -- Al Moon, March 14, 2005 Reply
(I also posted this comment under Bud Conrad's "Investment Outlook for 2005" entry in the library.) After our last meeting, I took issue with Bud Conrad's forecast of $80 oil. I recounted a memory of hearing my Mechanical Engineering Professor in 1950 saying that we would soon run out of oil. It hasn't happened yet and it probably won't happen for quite a while.
Like other mineral resources, the amount of oil available is a function of how much effort you are willing to spend to get it. Hal Nissley pointed out that the Alberta Tar Sands could be converted to a huge petroleum reserve at prices well short of $80. The history of oil production is full of technological innovations such as recovery techniques and drilling capabilities that have allowed us to keep producing it, albeit at incrementally higher prices.
That said, $80 oil is not such a dream when looked at in current dollars. Right now, oil is priced in dollars, but I have to believe that those who control the reserves in the Middle East, Russia, and the North Sea are looking at the relation of the dollar to other currencies and pricing accordingly. A lot of the stuff that they buy is priced in Euros. So, even though oil at eighty 2005 dollars is pretty far off, $80 oil isn't.
Still closer to home, we may see gasoline prices rise a lot faster than the price of the feedstock. It would make a good headline to say that $80 gasoline would be here before $80 oil, but not much. I lay that at the feet of California's regulators.
Pension Cost I’m getting a bunch of annual reports and hearing about others. Pension cost is an item that keeps showing up in these reports. It’s something we haven’t talked about very much. It seems that the decline in the equity markets has forced companies to increase their contributions to pension plans. It’s an interesting feedback loop: higher pension costs mean lower corporate earnings, which, in turn lead to lower equity prices. I don’t remember seeing this loop on your famous feedback block diagram. I hope you will publish it in our library so we can discuss it. -- Al Moon, March 24, 2005 Reply
I’m getting a bunch of annual reports and hearing about others. Pension cost is an item that keeps showing up in these reports. It’s something we haven’t talked about very much. It seems that the decline in the equity markets has forced companies to increase their contributions to pension plans. It’s an interesting feedback loop: higher pension costs mean lower corporate earnings, which, in turn lead to lower equity prices. I don’t remember seeing this loop on your famous feedback block diagram. I hope you will publish it in our library so we can discuss it.
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