The Darkness Within
This is no time for negativism. This is the time for us all to stay positive and optimistic that life will go on, that our species will persevere, and that the kindness of the human soul will prevail. When we saw Saudi Arabia rear up on its hind legs to push the oil production limits up at great expense to the price of their black crude, we were secretly encouraged. We all benefit from cheaper oil, at least when that wends its way to the gas pump. We start by liking anyone who kicks Putin in the ass and hearing that Saudi Prince Muhammad Bin Salman (not exactly the poster child for ethical behavior) was spanking Russia and reminding them about who rules OPEC and the oil market, felt momentarily good. Then, when we all stopped giggling about a size 12 sandal up Vladimir’s hinny, we realized that dramatically falling oil prices were more a sign of the distress of the global economy in this time of Coronavirus. That is a sobering thought, as it should be.
But then those of us who waited in line for every-other-day gas fill-ups in the early 1970’s stop to think about why gas has gone from 30 cents a gallon to $4 a gallon. Surely inflation is part of that and is somewhat justifiable…but wait, isn’t a big part of inflation driven by rising oil prices and all that that causes in the rising costs of almost everything? Hey. Maybe oil doesn’t need to be as high as it is. It has created a vast transfer of wealth over the last fifty years and that wealth has not always gone to good things for mankind. Indeed, those of us aware and in-synch with climate change drama (that would mean anyone who is neither from Houston, nor with a name that rhymes with Rump) believe that the recipients of this massive wealth transfer reality have had enough and need now to refocus their energy (note the intentional pun) towards renewable forms and cleaner, greener forms of energy. Oil should be dead and there is something prophetic about the great viral scourge of our age, COVID-19, being the agent for that demise.
It is also somewhat encouraging when we learn that oil shale costs are now greater than the $20/barrel price that oil has fallen to. We all liked thinking that cash-poor farmers could monetize their old and tired farms for fracking and that oil-shale deposits would lead to more energy-independence for the U.S. and a few other beleaguered countries that used more oil than they produced. But we have to stop ourselves again on this one and recognize that rewarding over-indulgence in black gold should not be seen as a positive and God knows fracking has enough detracting points such as destabilizing the earth’s mantle and polluting our valuable groundwater to make it at best a very questionable practice for long-term habitability of our planet. Don’t try to make that argument to a Wyoming oil field roustabout or a pipeline company in the same region or you might find yourself with a size 12 steel-toed boot up your ass like Vladimir.
Well, today I read about another bad thing about the falling price of oil. You may know that one of the largest sovereign wealth funds (SWF) in the world is the Norwegian fund. What has made the Norwegian fund so very different and noteworthy in the land of big-money SWF’s is that they are clearly designated as a pension fund for the citizenry of Norway. In fact, it goes by the name of the Government Pension Fund of Norway and most, if not all, of its reserves are a direct product of the largesse of the North Sea oil fields that have been developed by Norway. I have always thought that Norway was one of those highly enlightened Scandinavian countries that do good while doing well for their citizens. And certainly the use of the proceeds of this vast natural wealth that Norway has so successfully exploited to feed the appetite for oil from the juggernaut known as the developing or developed world was better used than, say, the Saudi’s feeding the 6,000 princes with their Maybach Uber-sedans. This fund was like the Alaska Permanent Fund, which uses the regulated proceeds from the Trans-Alaska Pipeline System to pay an annual dividend to all residents of the state. This effective form of universal income to Alaskan residents was theoretically to pay them their due from a piece of state patrimony and to somehow even out the pain of the loss of the wild aspects of the state that the pipeline moderated. The Government Pension Fund of Norway went one step further by identifying a big future problem, the looming pension crisis that will be foisted upon us all in the next thirty years, and decided they could use the bounty of nature to offset the impending problem by getting out ahead of it.
Now I read that the Government Pension Fund of Norway is suddenly rethinking its mission due to the rather dramatic fall in the price of their primary revenue feedstock, oil. The Pension Fund has suddenly become a piggy bank or rainy day fund that the government has decided it needs to tap to get the Norwegian economy jump-started in a post-Coronavirus world. Pretty amazing. This is a clear admission that Coronavirus is a piggy-bank-breaking event of grand proportions and more.
What it tells us is that a major long-term thinking institution that everyone would agree is thoughtful and enlightened relative to most funds, has determined that the fall in the price of oil is not a temporary phenomenon, but a permanent one. It also says that these times are no longer normal by standards of even one year ago and the pressing need for shoring up of underfunded pension liabilities is no longer a pressing need compared to the more pressing needs of the jump-starting the economy post Coronavirus. This is a $1 trillion dollar fund that will be decumulating immediately to make payments to prime pumps (and not oil pumps). Now, some cold and heartless economists (being the “dismal science” that it has always been) will say that’s to be expected since the pension liability just shrank. Why did it shrink? Because old people are dying faster than young people and this Coronavirus will adversely impact the aged and infirmed and thus reduce BOTH the immediate payout needs and post-retiree medical costs as well as generally reducing the longevity charts enough to reduce the projected liability of future payments. We will need less pension assets than we did a year ago. That’s undoubtedly going to be the theory, but I dare you to try to find a document in any pension management committees files that will admit to that.
The FT reports that there is concern about the Asian pension system of some $7 trillion (dominated by the historically conservative Anglo-Saxon Australian Superannuation Funds of some $3 trillion) and that they will also be breaking the glass and dipping in to support their economies. Once these glass piggy banks get broken they are totally Humpty Dumpty and probably never can be put back together again in our lifetime.
That means several key things to the world. First, this liquidity will be at the expense of a dramatic further sell-off in equities despite the current hope that these depressed prices will induce more equity buying. Add to that the fact that government debt will need to be bought somewhere and whatever is left in pension funds will probably be mandated to be more invested in the Coronavirus War Bonds of the near future (there is actually one afloat in the EU already). Equity will follow the trend that has already begun and become less of a public market security and far more held privately. That is a “Dark Ages” financial retreat of major import, but one that we have seen coming around the track for a while now. Equity will be more conservatively priced and there will be fewer Billionaire Unicorn players in the world, which none us us probably will miss.
What does it mean for us all? Do what we can to expect the darkness within the economic soul to emerge, watch out for it, and do our best to minimize your own dark thoughts in favor of a new, more egalitarian order that spurs growth for the collective good of our grandchildren.