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Gregor Macdonald

Image | Getting on the Train
Getting on the Train

Given emerging data in 2012, it's becoming increasingly clear that the post-war automobile era in the United States is now in well-articulated decline. Accordingly, it makes sense to note the beginning of a long-term supertrend that is just getting started: the resurrection of America’s rail system.

Getting on the Train

Given emerging data in 2012, it's becoming increasingly clear that the post-war automobile era in the United States is now in well-articulated decline. Accordingly, it makes sense to note the beginning of a long-term supertrend that is just getting started: the resurrection of America’s rail system.

Image | Reducing Your Exposure to Oil Prices
Reducing Your Exposure to Oil Prices
 PREVIEW

Executive Summary

  • How to cut household exposure to oil prices
  • Spending is shifting from road to rail transport. You need to get out in front of this.
  • How to take advantage of the energy arbitrage that rail transport will offer in future years
  • Important case studies of what's to come
  • The big change ahead (and the argument for optimism)

If you have not yet read Part I: Getting On The Train, available free to all readers, please click here to read it first.

Portland, Oregon is a city well known internationally for its commitment to sustainability. Over the years, the downtown area has been wisely restored into a very pedestrian-friendly streetscape. And while Portland continues to have problems – mainly a weak economy that could benefit from greater diversification – the city continues to attract people from all over the world who are looking for a better place to ride out some of the problems now facing developed economies.

Over the past year, since moving to Portland myself, I've had a chance to do some accounting of how much I've reduced my own exposure to oil. Let me first say that getting oil out of the household budget was not my only reason for moving to Portland. However, as someone who started looking at these issues 10-15 years ago, the prospect of greatly reducing my oil consumption was a key factor in my decision to relocate.

Now, while it's true that reduced oil consumption is more common for everybody living here in Portland, the other important element (and this will seem obvious) is that living in other cities and regions typically means a greatly increased exposure to oil. So while the cost of food, medical care, and many goods is just as expensive here in Portland as elsewhere, it is now rather sobering to consider the burden of high oil prices in other regions from my new vantage point – especially given that oil has found a new equilibrium price around $100 a barrel.

By moving to Portland, we completely shifted the core of our energy consumption to natural gas and also electricity, which in the Pacific Northwest is largely sourced through hydropower. Electricity rates in the Pacific Northwest are either the lowest or among the lowest in the United States. Also, because of the rich offerings in public transportation choices, we were able to drop one of two cars. But there's more…

Reducing Your Exposure to Oil Prices
 PREVIEW

Executive Summary

  • How to cut household exposure to oil prices
  • Spending is shifting from road to rail transport. You need to get out in front of this.
  • How to take advantage of the energy arbitrage that rail transport will offer in future years
  • Important case studies of what's to come
  • The big change ahead (and the argument for optimism)

If you have not yet read Part I: Getting On The Train, available free to all readers, please click here to read it first.

Portland, Oregon is a city well known internationally for its commitment to sustainability. Over the years, the downtown area has been wisely restored into a very pedestrian-friendly streetscape. And while Portland continues to have problems – mainly a weak economy that could benefit from greater diversification – the city continues to attract people from all over the world who are looking for a better place to ride out some of the problems now facing developed economies.

Over the past year, since moving to Portland myself, I've had a chance to do some accounting of how much I've reduced my own exposure to oil. Let me first say that getting oil out of the household budget was not my only reason for moving to Portland. However, as someone who started looking at these issues 10-15 years ago, the prospect of greatly reducing my oil consumption was a key factor in my decision to relocate.

Now, while it's true that reduced oil consumption is more common for everybody living here in Portland, the other important element (and this will seem obvious) is that living in other cities and regions typically means a greatly increased exposure to oil. So while the cost of food, medical care, and many goods is just as expensive here in Portland as elsewhere, it is now rather sobering to consider the burden of high oil prices in other regions from my new vantage point – especially given that oil has found a new equilibrium price around $100 a barrel.

By moving to Portland, we completely shifted the core of our energy consumption to natural gas and also electricity, which in the Pacific Northwest is largely sourced through hydropower. Electricity rates in the Pacific Northwest are either the lowest or among the lowest in the United States. Also, because of the rich offerings in public transportation choices, we were able to drop one of two cars. But there's more…

Image | Where Stock Prices Are Headed Over the Next Year
Where Stock Prices Are Headed Over the Next Year
 PREVIEW

Executive Summary

  • Why household balance sheets are worse off than advertised
  • Why the recent rosy BLS jobs numbers actually mean bad news
  • How the Fed is squeezing investor capital out of other traditional asset pools and into the stock market
  • Expect to see the stock market moving higher in 2013; that is, until QE3 fails
  • What to expect if QE3 fails sooner than anticipated

If you have not yet read Part I: The Future of Gold, Oil & the Dollar, available free to all readers, please click here to read it first.

Market historians have recently started to point out that the current advance in the S&P500 is now 40 months old and has made gains of over 115% since the March 2009 lows. In other words, the doubling from the lows in price and the duration of the advance now late in its third year together suggest that a cyclical top is near. Furthermore, despite some noise in U.S. macro data – which has been briefly more hopeful, yet remains well within the phase of stagnation – earnings estimates have been coming down as the world economy continues to shift into lower gear.

Perhaps for the first time in a while, we can actually say that the Fed's decision to start QE3 was moderately anticipatory, in contrast to its ad-hoc and reactive policymaking over the past five years. It is not merely that the Fed soberly accepted that the economy was not getting better. The stagnant, tractionless macro data over the past year has spoken quite loudly to that fact. Indeed, the U.S. economy is merely treading water, and the Fed's move to QE3 serves as a sharp retort to those who would relentlessly attempt to portray stagnation as recovery.

Where Stock Prices Are Headed Over the Next Year
 PREVIEW

Executive Summary

  • Why household balance sheets are worse off than advertised
  • Why the recent rosy BLS jobs numbers actually mean bad news
  • How the Fed is squeezing investor capital out of other traditional asset pools and into the stock market
  • Expect to see the stock market moving higher in 2013; that is, until QE3 fails
  • What to expect if QE3 fails sooner than anticipated

If you have not yet read Part I: The Future of Gold, Oil & the Dollar, available free to all readers, please click here to read it first.

Market historians have recently started to point out that the current advance in the S&P500 is now 40 months old and has made gains of over 115% since the March 2009 lows. In other words, the doubling from the lows in price and the duration of the advance now late in its third year together suggest that a cyclical top is near. Furthermore, despite some noise in U.S. macro data – which has been briefly more hopeful, yet remains well within the phase of stagnation – earnings estimates have been coming down as the world economy continues to shift into lower gear.

Perhaps for the first time in a while, we can actually say that the Fed's decision to start QE3 was moderately anticipatory, in contrast to its ad-hoc and reactive policymaking over the past five years. It is not merely that the Fed soberly accepted that the economy was not getting better. The stagnant, tractionless macro data over the past year has spoken quite loudly to that fact. Indeed, the U.S. economy is merely treading water, and the Fed's move to QE3 serves as a sharp retort to those who would relentlessly attempt to portray stagnation as recovery.

Image | The Future of Gold, Oil & the Dollar
The Future of Gold, Oil & the Dollar

The ability of reflationary policy to mute the worst risks of debt deflation has been a source of enormous frustration for stock market bears ever since the 2008 collapse. Yes, the initial moderate rally out of the S&P500’s black hole was perhaps not so surprising in 2009. Bombed-out stock markets can always manage some sort of rally. But the ability of the rally to continue through 2010, and then 2011, and now 2012 has been quite vexing and painful for bearish investors.

Indeed, the entire post-2008 market phase has now produced an era of consistently poor performance for hedge funds. Recent data, for example, shows that an incredible 90% of hedge funds are underperforming the S&P500 through mid-September.

Will the pain continue?

The Future of Gold, Oil & the Dollar

The ability of reflationary policy to mute the worst risks of debt deflation has been a source of enormous frustration for stock market bears ever since the 2008 collapse. Yes, the initial moderate rally out of the S&P500’s black hole was perhaps not so surprising in 2009. Bombed-out stock markets can always manage some sort of rally. But the ability of the rally to continue through 2010, and then 2011, and now 2012 has been quite vexing and painful for bearish investors.

Indeed, the entire post-2008 market phase has now produced an era of consistently poor performance for hedge funds. Recent data, for example, shows that an incredible 90% of hedge funds are underperforming the S&P500 through mid-September.

Will the pain continue?

Image | The War Between Credit and Resources
The War Between Credit and Resources

The Federal Reserve is probably not ready to take the aggressive plunge into Nominal GDP Targeting, but it likely will.

Such a policy, which received wider attention during Ben Bernanke's Congressional questioning last year and was also highlighted this year in a paper delivered at the Jackson Hole conference (Woodford, opens to PDF), has not caught any visible traction with Washington policy makers possibly because it’s seen as either too radical, or simply too new.

However, after four years of broad reflationary policy (and another year to come) failing to meaningfully spur U.S. employment growth, the Fed may be willing to try such measures by late next year, 2013.

The War Between Credit and Resources

The Federal Reserve is probably not ready to take the aggressive plunge into Nominal GDP Targeting, but it likely will.

Such a policy, which received wider attention during Ben Bernanke's Congressional questioning last year and was also highlighted this year in a paper delivered at the Jackson Hole conference (Woodford, opens to PDF), has not caught any visible traction with Washington policy makers possibly because it’s seen as either too radical, or simply too new.

However, after four years of broad reflationary policy (and another year to come) failing to meaningfully spur U.S. employment growth, the Fed may be willing to try such measures by late next year, 2013.

Image | What Happens Once We’ve Burned All the Resources?
What Happens Once We’ve Burned All the Resources?
 PREVIEW

Executive Summary

  • Why purchasing power and quality of life will decline in OECD countries, even as economic 'growth' is maintained
  • Why 'energy mix' is as critical as 'energy supply'
  • The potential of natural gas as a "bridge" fuel
  • Why we're inheriting a "slower moving" world

If you have not yet read Part I: The War Between Credit and Resources, available free to all readers, please click here to read it first.

Low-Quality GDP

Declinists have been surprised by the ability of policy makers to slow the rate of our post-Peak-Oil financial collapse using quantitative easing. But the global economy stopped funding new industrial growth with oil starting seven years ago. Accordingly, the transition to coal as the source to fund growth was well underway before the financial crisis began.

And it remains vexing, to be sure, to understand how the world economy has been able to move forward – at least a little – in the post-2008 environment.

Nevertheless, we now have those answers and no longer need to forecast an imminent black swan or tail event…

What Happens Once We’ve Burned All the Resources?
 PREVIEW

Executive Summary

  • Why purchasing power and quality of life will decline in OECD countries, even as economic 'growth' is maintained
  • Why 'energy mix' is as critical as 'energy supply'
  • The potential of natural gas as a "bridge" fuel
  • Why we're inheriting a "slower moving" world

If you have not yet read Part I: The War Between Credit and Resources, available free to all readers, please click here to read it first.

Low-Quality GDP

Declinists have been surprised by the ability of policy makers to slow the rate of our post-Peak-Oil financial collapse using quantitative easing. But the global economy stopped funding new industrial growth with oil starting seven years ago. Accordingly, the transition to coal as the source to fund growth was well underway before the financial crisis began.

And it remains vexing, to be sure, to understand how the world economy has been able to move forward – at least a little – in the post-2008 environment.

Nevertheless, we now have those answers and no longer need to forecast an imminent black swan or tail event…

Image | The March to $200+ Oil
The March to $200+ Oil
 PREVIEW

Executive Summary

  • Why pressures to the downside have less impact when the global economy is weak
  • Why oil's new floor is $80
  • The 'upside risk' story for oil prices
  • Why prices will march up to the $150-175 range over the next 2-4 years (with increasing sensitivity to spikes of over $200+ per barrel)

If you have not yet read Part I: The Repricing of Oil, available free to all readers, please click here to read it first.

I encourage others to read the entire recent paper on Nominal GDP (NGDP) Targeting by Michael Woodford (recently delivered at Jackson Hole) or to simply read its coverage, either by Joe Weisenthal at Business Insider or Paul Krugman at the New York Times. In short, I take the appearance of the Woodford paper (link opens to PDF) as the inevitable next-step solution to the problem of unpayable debt and scarce resources. By loudly and flagrantly voicing a policy pursuit of inflation, Nominal GDP Targeting (which has been discussed for some time in economic circles) would be the next iteration of behavioral prodding in Western economies.

More importantly, the growing acceptance of NGDP targeting in policy circles simplifies the battle that began a decade ago: the struggle to counter emerging scarcity of natural resources with the provision of greater and greater amounts of cheap credit. Within the contours of this battle lies the answer as to whether oil’s next major move is downward, in a deflationary collapse, as global demand vanishes in a new economic crisis; or whether oil’s next major move is higher, as the five billion people in the developing world pull the OECD along in a new expansion.

Modeling the next move in oil prices is, of course, a very different task than it was ten years ago…

The March to $200+ Oil
 PREVIEW

Executive Summary

  • Why pressures to the downside have less impact when the global economy is weak
  • Why oil's new floor is $80
  • The 'upside risk' story for oil prices
  • Why prices will march up to the $150-175 range over the next 2-4 years (with increasing sensitivity to spikes of over $200+ per barrel)

If you have not yet read Part I: The Repricing of Oil, available free to all readers, please click here to read it first.

I encourage others to read the entire recent paper on Nominal GDP (NGDP) Targeting by Michael Woodford (recently delivered at Jackson Hole) or to simply read its coverage, either by Joe Weisenthal at Business Insider or Paul Krugman at the New York Times. In short, I take the appearance of the Woodford paper (link opens to PDF) as the inevitable next-step solution to the problem of unpayable debt and scarce resources. By loudly and flagrantly voicing a policy pursuit of inflation, Nominal GDP Targeting (which has been discussed for some time in economic circles) would be the next iteration of behavioral prodding in Western economies.

More importantly, the growing acceptance of NGDP targeting in policy circles simplifies the battle that began a decade ago: the struggle to counter emerging scarcity of natural resources with the provision of greater and greater amounts of cheap credit. Within the contours of this battle lies the answer as to whether oil’s next major move is downward, in a deflationary collapse, as global demand vanishes in a new economic crisis; or whether oil’s next major move is higher, as the five billion people in the developing world pull the OECD along in a new expansion.

Modeling the next move in oil prices is, of course, a very different task than it was ten years ago…

Image | The Repricing of Oil
The Repricing of Oil

Now that oil’s price revolution – a process that took ten years to complete – is self-evident, it is possible once again to start anew and ask: When will the next re-pricing phase begin?

Most of the structural changes that carried oil from the old equilibrium price of $25 to the new equilibrium price of $100 (average of Brent and WTIC) unfolded in the 2002-2008 period. During that time, both the difficult realities of geology and a paradigm shift in awareness worked their way into the market, as a new tranche of oil resources, entirely different in cost and structure than the old oil resources, came online. The mismatch between the old price and the emergent price was resolved incrementally at first, and finally by a super-spike in 2008.

However, once the dust settled on the ensuing global recession and financial crisis, oil then found its way to its new range between $90 and $110. Here, supply from a new set of resources and the continuance of less-elastic demand from the developing world have created moderate price stability. Prices above $90 are enough to bring on new supply, thus keeping production levels slightly flat. And yet those same prices roughly balance the continued decline of oil consumption in the OECD, which offsets the continued advance of consumption in the non-OECD.

If oil prices can’t fall that much because of the cost of marginal supply and overall flat global production, and if oil prices can’t rise that much because of restrained Western economies, what set of factors will take the oil price outside of its current envelope?

The Repricing of Oil

Now that oil’s price revolution – a process that took ten years to complete – is self-evident, it is possible once again to start anew and ask: When will the next re-pricing phase begin?

Most of the structural changes that carried oil from the old equilibrium price of $25 to the new equilibrium price of $100 (average of Brent and WTIC) unfolded in the 2002-2008 period. During that time, both the difficult realities of geology and a paradigm shift in awareness worked their way into the market, as a new tranche of oil resources, entirely different in cost and structure than the old oil resources, came online. The mismatch between the old price and the emergent price was resolved incrementally at first, and finally by a super-spike in 2008.

However, once the dust settled on the ensuing global recession and financial crisis, oil then found its way to its new range between $90 and $110. Here, supply from a new set of resources and the continuance of less-elastic demand from the developing world have created moderate price stability. Prices above $90 are enough to bring on new supply, thus keeping production levels slightly flat. And yet those same prices roughly balance the continued decline of oil consumption in the OECD, which offsets the continued advance of consumption in the non-OECD.

If oil prices can’t fall that much because of the cost of marginal supply and overall flat global production, and if oil prices can’t rise that much because of restrained Western economies, what set of factors will take the oil price outside of its current envelope?

Image | The Demise of the Car
The Demise of the Car

India’s recent series of power blackouts, in which 600 million people lost electricity for several days, reminds us of the torrid pace at which populations in the developing world have moved onto the powergrid. Unfortunately, this great transition has been so rapid that infrastructure has mostly been unable to meet demand. India itself has failed to meets its own power capacity addition targets every year since 1951. This has left roughly one quarter of the country’s population without any (legal) access to electricity. That’s 300 million people out of a population of 1.2 billion. Indeed, it is the daily attempt of the underserved to access power that may have led to India’s recent grid crash.

But the story of India’s inadequate infrastructure is only one part of the difficult, global transition away from liquid fossil fuels. Over the past decade, the majority of new energy demand has been met not through global oil, but through growth in electrical power.

Frankly, this should be no surprise. After all, global production of oil started to flatten more than seven years ago, in 2005. And the developing world, which garners headlines for its increased demand for oil, is running mainly on coal-fired electrical power. There is no question that the non-OECD countries are leading the way as liquid-based transport – automobiles and airlines – have entered longterm decline.

Why, therefore, do policy makers in both the developing and developed world continue to invest in automobile infrastructure?

The Demise of the Car

India’s recent series of power blackouts, in which 600 million people lost electricity for several days, reminds us of the torrid pace at which populations in the developing world have moved onto the powergrid. Unfortunately, this great transition has been so rapid that infrastructure has mostly been unable to meet demand. India itself has failed to meets its own power capacity addition targets every year since 1951. This has left roughly one quarter of the country’s population without any (legal) access to electricity. That’s 300 million people out of a population of 1.2 billion. Indeed, it is the daily attempt of the underserved to access power that may have led to India’s recent grid crash.

But the story of India’s inadequate infrastructure is only one part of the difficult, global transition away from liquid fossil fuels. Over the past decade, the majority of new energy demand has been met not through global oil, but through growth in electrical power.

Frankly, this should be no surprise. After all, global production of oil started to flatten more than seven years ago, in 2005. And the developing world, which garners headlines for its increased demand for oil, is running mainly on coal-fired electrical power. There is no question that the non-OECD countries are leading the way as liquid-based transport – automobiles and airlines – have entered longterm decline.

Why, therefore, do policy makers in both the developing and developed world continue to invest in automobile infrastructure?

Image | The Real Story Is the Rise of the Global Powergrid
The Real Story Is the Rise of the Global Powergrid
 PREVIEW

Executive Summary

  • Worldwide, global energy demand is beginning to shift strongly from oil to electricity
  • At the same time, developed countries are psychologically wedded to their oil-dependent infrastructure and mostly developing countries are blindly emulating their developed brethren, condemning them to suffer the same vulnerabilities
  • World demand for energy supply is proving much less elastic than demand for oil
  • Oil is likely soon going to be left to find its true (much higher) price
  • As the realization of the grid's importance dawns on economies, expect massive infrastructure investments to follow

If you have not yet read Part I: The Demise of the Car, available free to all readers, please click here to read it first.

China contains 19% of the world’s population and accounts for 21% of the world’s energy consumption. But India, while containing 18% of the world’s population, only accounts for 4.6% of global energy demand. It is not possible that India can call upon oil to fund the next leg of its industrial growth.

For even after we consider the higher marginal utility of oil in the developing world – higher prices are integrated more easily to the economy as each new consumer uses only a small amount of oil – there is simply not enough economically recoverable oil for India to replicate the Western history of car and highway development.

Furthermore, the prospect that hundreds of millions of India’s citizens, already unserved by the powergrid, would turn first to oil consumption is highly unrealistic. Perhaps the government of India wagered that the Great Quadrilateral was needed as a foundational piece of national infrastructure – not as a bet on a future built for automobiles.

Regardless, we have already seen in the data out of countries like China that the mix of energy demand starting last decade began to shift, strongly, from oil to electricity.

The Real Story Is the Rise of the Global Powergrid
 PREVIEW

Executive Summary

  • Worldwide, global energy demand is beginning to shift strongly from oil to electricity
  • At the same time, developed countries are psychologically wedded to their oil-dependent infrastructure and mostly developing countries are blindly emulating their developed brethren, condemning them to suffer the same vulnerabilities
  • World demand for energy supply is proving much less elastic than demand for oil
  • Oil is likely soon going to be left to find its true (much higher) price
  • As the realization of the grid's importance dawns on economies, expect massive infrastructure investments to follow

If you have not yet read Part I: The Demise of the Car, available free to all readers, please click here to read it first.

China contains 19% of the world’s population and accounts for 21% of the world’s energy consumption. But India, while containing 18% of the world’s population, only accounts for 4.6% of global energy demand. It is not possible that India can call upon oil to fund the next leg of its industrial growth.

For even after we consider the higher marginal utility of oil in the developing world – higher prices are integrated more easily to the economy as each new consumer uses only a small amount of oil – there is simply not enough economically recoverable oil for India to replicate the Western history of car and highway development.

Furthermore, the prospect that hundreds of millions of India’s citizens, already unserved by the powergrid, would turn first to oil consumption is highly unrealistic. Perhaps the government of India wagered that the Great Quadrilateral was needed as a foundational piece of national infrastructure – not as a bet on a future built for automobiles.

Regardless, we have already seen in the data out of countries like China that the mix of energy demand starting last decade began to shift, strongly, from oil to electricity.

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