Jump to content

Oil Will Fall Below $35, says Art Laffer (Jan. 2007)


No6

Recommended Posts

I received this interview today. At first I thought it might be an early April Fool, but the guy is serious. Apparently, it's all rosy from here on in, so get used to it.

 

Exclusive Interview: Art Laffer Says Oil Will Fall Below $35

by Dr. Mark Skousen

 

Last week, I had the opportunity of a rare interview with one of the world’s most ingenious financial economists, Arthur B. Laffer, at his new office in Nashville.

 

A former professor at the famed University of Chicago, Art Laffer is the inventor of the “Laffer Curve,” found in all economics textbooks; it demonstrates that cutting taxes can stimulate productivity so that government revenues can actually increase. The Laffer Curve has been proven right, especially when it comes to cutting capital gains taxes…

 

Every year after a capital gains tax cut, such as 1978, 1986, 1997, and 2001, revenues from capital gains have increased substantially.

 

Laffer is a sought-after expert. His offices are crowded with letters and photos of famous people – Alan Greenspan, Ronald Reagan, Jane Fonda, et al. While I was in his office, he got a phone call from former governor Mitt Romney, who is running for president, and Steve Moore from The Wall Street Journal.

 

But he’s also known as a brilliant money manager and economic forecaster, and since 2000, his Macro 100 stock portfolio is 48 percentage points ahead of the S&P 500 Index. Below is our interview, where we’ll take a look at his unique top-down approach to investing.

 

Is the Laffer Curve a Free Lunch in Economics?

 

Mark Skousen: I see your Laffer Curve is still in all the textbooks. How does it feel to be famous?

 

Art Laffer: I love it. It’s great. I was blessed with a name that is very entertaining [laughter].

 

MS: Is the Laffer Curve alive and well?

 

AL: I brought it back in the 1980s under Reagan, but it’s been around for time immemorial in economics. And it’s true. How can you ever be worse off if you lower tax rates and you get more money?

 

MS: So there is a free lunch in economics?

 

AL: Of course, there’s a free lunch!

 

MS: Is there a free lunch in finance? Do investors get a free lunch taking advantage of Warren Buffett’s expertise in Berkshire Hathaway?

 

AL: Sure. When Buffett acquires a very large asset and gets it at a discount, because he sees things we don’t get to see as retail investors, it’s hard not to win. It’s a huge advantage over other investors.

 

MS: Do you manage money?

 

AL: We have two firms: Laffer Associates is our research firm and boutique broker/dealer. We have close to 350 institutional clients. And we have a money management firm, co-owned by General Electric, again for institutional investors. We advise the Huntington Funds on the Macro 100 stocks, so individual investors can take advantage of our services through the Huntington funds. We’ve been in business for six years.

Laffer’s Top-Down Investing Style

 

MS: Do you have a unique strategy?

 

AL: Our angle is unique. We look at the world from macroeconomics. For example, if oil goes from $10 to $70, you will do well no matter what oil companies you buy. So the key is to invest in sectors that are benefiting from changing macroeconomic policies. We look at trade, income and fiscal policies.

 

MS: What’s your favorite sector right now?

 

AL: Growth stocks, both small- and large-cap. We think we’re in a “neutral interest rate” environment – we don’t think they are going up or down by much right now. We also invest in companies in individual states that are lowering taxes, and avoiding companies in states that are raising taxes.

 

MS: Are there states that are lowering taxes?

 

AL: Oh, my, yes, over 40 right now. State governments are cutting taxes like mad, and adopting pro-growth strategies. It’s very exciting. This is one of the most overlooked pluses in the economy right now.

 

MS: But aren’t most companies national or global these days?

 

AL: That’s true for McDonald’s and IBM, but many companies are concentrated in just one state, such as auto suppliers. We also do our stock analysis country by country.

 

MS: Are you still bullish on China and India like most analysts?

 

AL: Yes, but not as much as I used to be. I was bullish on Japan a year ago, but not so much now. We look at every country’s monetary policy, tax policy, etc.

 

MS: You’re not investing in Venezuela?

 

AL: No. I’d be out of Venezuela for a lot of reasons. Oil is going to come way down in price.

 

MS: Oh, really? You sound like Steve Forbes, who predicted $35 a year ago in one of my IU interviews.

 

AL: Oh, yes, and easily lower than that, over the next two years.

 

MS: Many of my gold bug friends, including Jim Rogers, see a 20-year bull market in commodities. What do you think?

 

AL: They are wrong, wrong, wrong! Oil, copper, gold… they’re all coming down and will continue to fall in price. We’ve seen a huge bull market in commodities, and at the same time, we are now seeing the dollar at its lowest level in terms of its trading partners.

 

MS: Do you envision the dollar crashing?

 

AL: No! It’s going to rise. When oil prices decline, the trade deficit – what I call the capital surplus – is going to come way down. These are all cases of a reversal to the mean.

Positive Outlook for U.S. Stocks

 

MS: What about the U.S. stock market?

 

AL: I’ve never seen the U.S. stock market so well positioned as it is now. They’re really cheap right now. According to my own method of valuing stocks – taking into account profits in relation to interest rates and tax rates, which I call “capitalized economic profits,” the stock market has never been lower in relative terms. I don’t see a recession coming, I don’t see interest rates going up. Tell me, what tax increases do you see coming down the road?

 

MS: Well, the Democrats are now in charge of Congress, and they could raise taxes.

 

AL: I was more worried about the Republicans raising taxes! I love gridlock on Capitol Hill. I don’t see a big tax increase right now. Have you noticed that the Federal deficit has fallen dramatically? The Laffer Curve works!

 

MS: What’s your opinion of the new Fed chairman?

 

AL: Ben Bernanke, an orthodox Jew from South Carolina, is terrific. He may be boring, but he’s sound. The Fed has been leaning against inflation, and the monetary base is hardly growing at all, just what you want. The price of gold is going to come down, and the dollar is going to strengthen in 2007. This isn’t the 1970s. Compared to those days, today we have wonderful fiscal policy, and wonderful monetary policy. Who would have thought that since the 1970s, the highest Federal income tax rate and capital gains rate have fallen from 70%, to 35%? We don’t have 21% interest rates, we have 4% rates today.

 

MS: Aren’t you worried by the regulatory stranglehold of Sarbanes Oxley?

 

AL: I think Sarbanes Oxley is great! Yeah, it’s added a layer of regulation that has hurt small business, but I’m on a lot of company boards, and a lot of companies have found Sarbox to be highly beneficial because they’ve learned a lot more about their companies, the good and the bad.

 

MS: Isn’t it true that you are always optimistic about the stock market and the economy?

 

AL: No, not at all. In the 1960s and 1970s, I was a big pessimist.

 

MS: Did you anticipate the Nasdaq collapse in the early 2000s?

 

AL: Yes, sir! I warned investors to “take warning” in late 1999, and in 2000, when inflation and interest rates were rising sharply, I told investors to go to the basement and hide and wait until its over. [Laffer showed me copies of papers he had written confirming his bearish views in the early 2000s.]

The War on Terror

 

MS: Are you concerned at all about worldwide terrorism and the war in the Middle East?

 

AL: I really don’t see much of a problem. I think the Middle East is terrible, but it’s always been terrible. Iran and Iraq need the oil money badly, but when the oil price drops sharply, as it will, it will be the best foreign policy we ever had, and we’ll get rid of those tyrants in Iran and Venezuela. Sure, terrorism is a problem, but I lived through an era in the 1950s and 1960s under the fear of Soviet attack, and that was much more scary.

 

www.investmentu.com

 

Did he say interest rates were 4%???? Either this is a very old interview rehashed or perhaps age is catching up with him?

Link to comment
Share on other sites

Interesting post No6. For someone who proposes to take a very macroeconomic view of investing he's missing the real elephant in the room when it comes to corporate profits. Namely, that they have never been this high as a proportion of turnover. I think this is largely a factor of downward pressure on wages. In the past 6 years US GDP has grown by 32% while corporate profits are up 132%! This is out of line and cannot continue. Contrary to the beliefs of those on the left capitalism works not by exploiting workers but by rewarding them for productivity gains. This way company shareholders and workers both profit. Either worker productivity is remaining static, in which case wages may not rise but companies will struggle to increase profits or worker productivity is rising in which case companies will need to reward workers for this by increasing real wages. Neither option looks good for profits remaining so large relative to revenue.

 

"Reversion to the mean" will come into play here too.

Link to comment
Share on other sites

AL: I really don’t see much of a problem. I think the Middle East is terrible, but it’s always been terrible. Iran and Iraq need the oil money badly, but when the oil price drops sharply, as it will, it will be the best foreign policy we ever had, and we’ll get rid of those tyrants in Iran and Venezuela. Sure, terrorism is a problem, but I lived through an era in the 1950s and 1960s under the fear of Soviet attack, and that was much more scary.

 

He has the global political outlook of someone living in middle America. Get rid of those tyrants.. What like they did in Iraq! That's going to make it a whole lot easier to get oil out!

The man is clearly a fool!

Link to comment
Share on other sites

They are wrong, wrong, wrong! Oil, copper, gold… they’re all coming down and will continue to fall in price. We’ve seen a huge bull market in commodities, and at the same time, we are now seeing the dollar at its lowest level in terms of its trading partners

 

This does not sound like a convincing and well argued case for oil going to $35.

 

The bottom line for oil is: global production has peaked or is peaking or as a minimum is now flat or rising only by fractional amounts. Demand is growing every year, and if his rosy picture for the US economy pans out, then demand will rise even further.

Link to comment
Share on other sites

US-centered folks see the potential for more oil demand declines in america.

 

but if you lived in china, you would find it hard to imagine that the oil demand steamroller

could go into reverse.

 

your view depends on your vantage point, i suppose

Link to comment
Share on other sites

US-centered folks see the potential for more oil demand declines in america.

 

but if you lived in china, you would find it hard to imagine that the oil demand steamroller

could go into reverse.

 

your view depends on your vantage point, i suppose

 

US doubling the size of its strategic petroleum reserves. Now why would they do that if they weren't worried about long term supply security? Perhaps they know that Iran supply is going off line within the next couple of years as Israel bombs the nuclear complexes and Iran turns off the taps in retaliation.

Link to comment
Share on other sites

The consequence on prices of limited spare capacity is increasing price volatility. There is also an increase in the mean price, but it's the volatility that is the most pronounced. Ken Deffeyes made this point in his book Beyond Oil when he was looking at Nat Gas prices in North America. Oil might well fall to $20 briefly and then wind all the way back up to $100. We're in the first stages of the "fly bouncing off the ceiling". That is, we hit the production limits and oil prices go up, leading to drop in demand and the price dropping. Then the process repeats. It gets progressively more and more serious until the Third World gets pushed back into the bronze age via starvation and revolutions whilst the industrialised countries struggle with economic and social crises. There are endless promises of salvation through new technologies.

 

Laffer was popular under Reagan. What more need one say? Like any fool, he just sees what he wants to see.

Link to comment
Share on other sites

Laffer was popular under Reagan. What more need one say? Like any fool, he just sees what he wants to see.

 

Very easy to be popular when you tell governments they can increase their tax take by lowering taxes. Not necessarily disagreeing (I'm all for lower taxes) just pointing out how easy it is to be popular in political circles if you are telling them exactly what they want to hear.

Link to comment
Share on other sites

Very easy to be popular when you tell governments they can increase their tax take by lowering taxes. Not necessarily disagreeing (I'm all for lower taxes) just pointing out how easy it is to be popular in political circles if you are telling them exactly what they want to hear.

 

Laffer could be right in terms of a highly volatile oil price that neverthless is trending upwards. Woody Brock makes a convincing case for both rising prices and rising volatility here:

 

http://www.sedinc.com/documents/energy2005.pdf

Link to comment
Share on other sites

  • 4 weeks later...

From the Bedlem thread.

 

From PICK OF THE WEEK Date 23.02.07 No. 65

 

Close to, or just past the peak, totally irrational behaviour takes over and we meet ‘The Church of

the Super Cycle’. Its apostles, whose message is forever ‘this time it’s different’ always have a

slightly different excuse why the coffee, zinc or uranium cycle will run forever, even though they

know it has never happened before. It is particularly odd: for these people, outside their highly paid

hobby of investing other people’s money, are normally pleasant and rational human beings.

The fourth quarter of 2005 was an interesting example of this phenomenon for several

commodities. We will focus solely on oil. Within weeks of the devastating hurricanes Rita and

Katrina causing an oil price surge to nearly $80 per barrel, there was overwhelming evidence that

world supply exceeded demand by between half a million and two million barrels per day (on a

daily production rate of around 85 million barrels). This has remained the case for the last fifteen

months and whilst every world oil storage facility is brimming over, tankers are steaming as slowly

as possible to their destinations, because there is no storage capacity left. Industrial nations,

including China, have become slightly less oil inefficient; 2006 was one year of only four since

1945 when world oil consumption actually fell. Changing economic activity also kicked in: China

switched much power production to coal and macho American SUVs were left unsold as more fuel

efficient and lighter Asian automobiles were snapped up. Such information was available in free

newspapers.

 

Institutional investors however, having avoided significant exposure to oil companies at $25 or $45

per barrel in the three years to 2005, then decided in 2006 as the price peaked that oil was the sure

fire, no-risk, and super-cycle safe investment. As a consequence, the sector last year witnessed not

only the largest number of new issues worldwide (many now trading below their offer prices), but

the highest level of net new investment of any major sector. Despite this inflow, oil shares

generally performed poorly.

 

We have not held a single oil, gas or coal share since the end of the first quarter in 2006. Although

we have no idea where the price is going (but our guess is down, down, then down), so utterly

clear was the data showing supply thumping demand that this was hardly a genius call. We even

tried modelling supply and demand on the assumption that the two key countries behind higher

consumption - China and America - grow at record rates: still the oil market had a problem. So it

remains very puzzling why so many rational people persist with such dramatic denial, as

demonstrated in their investment portfolios.

 

http://www.greenenergyinvestors.com/index....amp;#entry15716

Link to comment
Share on other sites

  • 2 months later...

I dont see it.

 

US Oil inventories are sliding, and we are coming into the summer driving season.

Meantime, demand continues to grow in countries like China and India

 

Falling prices seem like an oil bear's dram, not reality

 

Perhaps this bogus economist should changed his name to Laugher- he was joking, right?

Link to comment
Share on other sites

Oil down to near $61. Still a long way from $35 though.

 

Maybe it is possible. Woody Brock has argued that rising oil prices will be accompanied by greater price volatility:

 

http://www.sedinc.com/documents/energy2005.pdf

 

His reasoning seems completely right to me. But what is very unlikely IMO is that, if oil fell to the $35 level, it would stay there for long. It would be a buying opportunity in a bull market.

Link to comment
Share on other sites

I think we'll probably see $35-$40 at some point this year or next. OECD oil demand fell last year for the first time in 20 years, so higher prices do have an effect.

It's a brave call and that article is a few months old and the price of oil has remained stubbornly high for all those, including western politicians and central bankers who would like to see it fall to help their inflation plans. For instance from that article.

 

"Crude oil's fall to $50 a barrel may push US gasoline pump prices below $2 a gallon for the first time in more than two years, based on historical price moves. The last time the average price for regular gasoline was below $2 was in March 2005, according to the AAA, the largest U.S. motorist organization. Prices are already below $2 in some parts of the country, including Oklahoma City and Kansas City, Missouri. The nationwide average was $2.209 on Jan. 17, down from a peak of more than $3 during the summer."

 

Well, prices seem to be on the up again. Did Jim Puplava say that he paid $3.70 a gallon this week on FSN?

 

Utah up $2.92 to $3.09 overnight.

 

http://deseretnews.com/dn/view/0,1249,660217404,00.html

 

Don't think the oil producers would want to see it go to $35, they might just reduce production to try and keep the price up. That, with any perceived bad news and speculation seems to be keeping the price up as well as the usual good news stories about Chinese and Indian growth. If it fell to $35 it would represent a great long term buying opportunity.

Link to comment
Share on other sites

  • 7 months later...
I dont see it.

 

US Oil inventories are sliding, and we are coming into the summer driving season.

Meantime, demand continues to grow in countries like China and India

 

Falling prices seem like an oil bear's dram, not reality

 

Perhaps this bogus economist should changed his name to Laugher- he was joking, right?

'

Although I like Art, man was he 180 degrees off on those predictions. The tough part is, he was contrary to the fundamentals. I mean, math is math and there's no getting around it.

 

Commodities are in demand like never before. The dollar, from a fundamental perspective, should become weaker (long-term). As for oil, maybe it's a bit overdone, at this moment ($90 barrels) due to the speculative nature of all open markets. Maybe we're nearing or even passed peak oil, maybe we haven't. The fact is that the US produces less oil than we did 20 years ago. Mexico is producing far fewer barrels each and every year. Deep water (at massive cost), tar sands (at massive cost) and Saudi oil are the only remaining frontiers. Saudi says they have oil to last forever.....yea right. At some point, productivity per dollar must start to decline, and that curve may be somewhat steep.

 

IMO, gold is useless, except when people really feel the US is coming to an end and therefore hyperinflation will follow. That happened in 1980, and to a MUCH lesser degree, now. If the world gets in a collective bind, what good is gold? You can't eat the stuff. It's only good (sometimes) as a hedge when reltive differences appear. Silver, copper, nickel, oil.....those are birds of a different color, as they are used. Remember, energy is the ONLY real currency. In 1770 ,the world was close to the same as it was in 500. Why? Because abundant energy hadn't been discovered. Man used their own physical ability as energy. We used slaves and enslaved animals. We had harnessed wind (as in sail boats) and water to a small degree. That was it. Look at the changes from 1840 until 1920 (steam and coal). The universe changed more each year than it had in the previous recorded history. Then look at 1940 to today. The difference is energy. The US burns 200,000,000 gallons of auto fuel (gas and diesel) each and ever day. This is why the concept of alternatives such as biodiesel and ethanol to replace our current demand is absurd. As for electricity, we consume 16 billion kwh each and every day. Until we have alternatives truely figured out, and in place at a reasonable price, energy is the only game in town. Inflation will stem from the ultimate cost of energy, in all it's forms, as everything stems from the denominator which is energy.

Link to comment
Share on other sites

  • 4 weeks later...
'

Although I like Art, man was he 180 degrees off on those predictions. The tough part is, he was contrary to the fundamentals. I mean, math is math and there's no getting around it.

Well, the gap between $35 and approximately £100 is a long way. Wonder what Art is predicting today?

Link to comment
Share on other sites

  • 4 months later...
Absolutely Laffer-Bull (...groan)

Here is his latest gem.

 

Another prominent economist, Arthur Laffer, who became well known for his supply-side theories that influenced President Ronald Reagan, says money "is and has been exceedingly tight."

 

Laffer believes the Fed should cut another 50 to 75 basis points. He says the dollar is being driven down by investors pulling capital out of the U.S. "We're not a capital magnet anymore because of very bad fiscal and regulatory policy," Laffer says. "This isn't a monetary problem, it's a fiscal and trade problem. And it is correctly a weak dollar because there is no political will to do what's right."

 

Laffer says if today's higher commodity prices were due to inflation, interest rates would also be higher and the monetary base would be growing faster. By his measure, growth of the monetary base has slowed since mid-2001, and he believes this could lead to stagflation — high prices with slow economic growth — if the financial markets don't recover.

 

http://www.smartmoney.com/theeconomy/index...0080430-the-fed

Link to comment
Share on other sites

And if McCain becomes President?

 

IT HAS been widely noted that the Republican presidential nominee, Senator John McCain, is not a man who is personally comfortable with the ins and outs of economics. Mr McCain has admitted as much, but has insisted that this is not a problem, because he has surrounded himself with expert economic advisors. Just how expert, you ask? The New York Times is on the case:

 

“What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.”

 

Dani Rodrik has dubbed this faith-based economics, which strikes me as far too kind a characterisation. Of course, one might not fret too much about such a statement from a presidential advisor if the candidate himself had the analytical ability to separate economic fact from economic fiction, but that is obviously not the case here.

 

Balancing out Mr McCain's economic team is Arthur Laffer himself, who notes that the Senator is "on the right track." The track being that which leads to astounding deficits, one assumes, given that Mr McCain's highly touted war on earmarks will do nothing to counteract spending increases on entitlements and defence.

 

http://www.economist.com/blogs/freeexchange/2008/03/

Link to comment
Share on other sites

Archived

This topic is now archived and is closed to further replies.

×
×
  • Create New...