With the benefit of hindsight, it now appears that the energy boom of the past few years might have been a bubble, not just in the US, but worldwide. Booms have a tendency to turn into bubbles when they attract too much equity and debt capital, which leads to excess capacity. When the bubbles inflate, so do the prices that attract all the capital. When the resulting excess capacity leads to falling prices, the bubble bursts as capital dries up. The key characteristic of tulip and other bubbles is expectations that tulip prices will continue to rise even as more tulips are produced.
During the second half of the 1800s, we had the railroad boom in the US. During the early 1900s, the booms were in autos and appliances. The Great Depression ended with the defense spending boom of World War II. During the 1950s and 1960s, the expansion of the highway system stimulated the growth of suburbs. The resulting housing boom ended in a big bust at the end of the previous decade. The IT revolution stimulated the US economy during the 1990s. The energy industry was energized by the technological revolution, resulting in the fracking boom.
Again, with the benefit of hindsight, it now seems that the fracking boom was a bubble financed by investors desperately seeking better returns available from high-yield bonds issued by energy companies and countries. The chart of US plus Canadian oil production looks a bit like the chart of asset-backed commercial paper outstanding prior to the financial crisis of 2008.
The high-yield bond market has been hard hit by the sudden risk aversion of investors, particularly those who bought energy-related bonds. Many have been seeking safety in lower-yielding US Treasuries. The Bank of America Merrill Lynch US high-yield corporate bond yield rose from the year’s low of 5.15% on June 24 to Friday’s 7.04%, the highest since July 27, 2012. The spread over 10-year Treasury yields widened over this period by 237bps from 257bps to 494bps.
Today's Morning Briefing: The Energy Bubble. (1) Worrying about the Middle East in the Midwest. (2) Too much of a good thing? (3) US consumers are happy shoppers. (4) Widespread shopping spree. (5) Consumers of last resort. (6) Definition of a bubble fits oil’s boom/bust. (7) High-yield market highly stressed. (8) Capital is drying up for drillers. (9) Submerging oil economies. (10) Fed in 2015: None and done? (11) Can US offset all the rest? (12) Iranian surrogates threatening Saudis. (13) Still bullish. (14) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)
During the second half of the 1800s, we had the railroad boom in the US. During the early 1900s, the booms were in autos and appliances. The Great Depression ended with the defense spending boom of World War II. During the 1950s and 1960s, the expansion of the highway system stimulated the growth of suburbs. The resulting housing boom ended in a big bust at the end of the previous decade. The IT revolution stimulated the US economy during the 1990s. The energy industry was energized by the technological revolution, resulting in the fracking boom.
Again, with the benefit of hindsight, it now seems that the fracking boom was a bubble financed by investors desperately seeking better returns available from high-yield bonds issued by energy companies and countries. The chart of US plus Canadian oil production looks a bit like the chart of asset-backed commercial paper outstanding prior to the financial crisis of 2008.
The high-yield bond market has been hard hit by the sudden risk aversion of investors, particularly those who bought energy-related bonds. Many have been seeking safety in lower-yielding US Treasuries. The Bank of America Merrill Lynch US high-yield corporate bond yield rose from the year’s low of 5.15% on June 24 to Friday’s 7.04%, the highest since July 27, 2012. The spread over 10-year Treasury yields widened over this period by 237bps from 257bps to 494bps.
Today's Morning Briefing: The Energy Bubble. (1) Worrying about the Middle East in the Midwest. (2) Too much of a good thing? (3) US consumers are happy shoppers. (4) Widespread shopping spree. (5) Consumers of last resort. (6) Definition of a bubble fits oil’s boom/bust. (7) High-yield market highly stressed. (8) Capital is drying up for drillers. (9) Submerging oil economies. (10) Fed in 2015: None and done? (11) Can US offset all the rest? (12) Iranian surrogates threatening Saudis. (13) Still bullish. (14) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)
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