The diligent reader will have noticed that I frequently use the formula “the economy is energy transformed” to cross out my truths about the march of the world to come.
But I just realized that I never had tried which to me was obvious.
And so, in this week’s article, I’m going to try to demonstrate the relationships that link the economy, financial markets and energy, which is not going to be easy. The reader will have to wait.
As usual, I will use charts, of which here is the first.
The red line (left scale) is the relationship between the US stock market index (S&P) and the price of a barrel of West Texas Intermediary or WTI base 100 oil in 1940, when the modern world began.
- If the red line goes up, it means that the value created by publicly traded US companies is greater than the cost of the energy they used (oil). For once and speaking as an economist, in these periods the marginal value created by American companies is greater than the marginal energy expenditures that they had to make to produce these goods or services and therefore the stock price is rising faster than the oil price.
- If the red line goes down, it means that the new values created do not cover their energy cost, which seems to indicate that the economy is going to go bad. And this reality is reinforced by the fact that almost every time the red line goes down we have a recession in the US, marked by vertical gray shading.
Let’s go a little further.
The red line tends to rise structurally as the chart indicates.
Falls in the red line can therefore be temporary, with an upward trend (from 1980 to 2000, for example) or, alternatively, with a structurally downward trend (from 1970 to 1980) and, in the second case, this would mean they are in a power shortage structurally lacking.
And the difference is enormous for the financial markets, which brings me to the black line, which is none other than the earnings price multiple for the American market (right scale).
Explanations (again) about what the PE relationship is. It is a “financial” practice to divide the market price of a company’s stock by the earnings earned by the same company, to determine whether or not this price is high. The higher the multiple, the more expensive the stock and vice versa. This calculation appears for the entire American market since 1940 and is the black line.
Some comments are in order
- This relationship is very volatile, it goes from 10 to 20, then falls to… 4 before rising to 43, to fall back to 14 before rising to 38…
- So the question is, why is this multiple that should be relatively stable so volatile?
And the answer is given… by the red line, and here it is: the price of earnings goes up.
When they can’t take it anymore, the red line goes down, the growth rate of the economy also goes down with future earnings and the stock market goes down and with future growth falling, the price-earnings multiple goes down.
And to speak in the sound of the great economists of the past: for some three centuries we have had a constant struggle between the Schumpeterian invention and what I call the Malthusian constraint. When Schumpeter wins, the multiples increase and the opposite happens when the Malthusian restriction is presented again.
We live in a world where, at time “t”, there is a finite amount of energy to use.
What Malthus was saying was simple: as population grows in geometric progression and agricultural production in arithmetic progression, at one time or another there will be scarcity and therefore famine, and these famines will bring things back into balance.
This is exactly the reasoning of the greens today. And their solution is always the same: the disappearance of the human species, rationing administered (by them, of course), waiting for that happy ending, and the concentration camp for the reluctant.
It is not that they love nature, the reality is that they hate humanity, which is not the same thing.
Fortunately, Schumpeter, like the Fox, came along and explained to us that scarcity and high prices of energy or food stimulated invention and that salvation would come from invention, which always happened.
My thesis, as the reader knows, is that we have entered a Malthusian period again, where energy is at such a high price that it is almost certain that the red line will continue to fall and the black line will continue, and it does. It’s going to be hard to make money in the future from energy consumers, but maybe it won’t be so hard to make money from energy producers, if we leave them alone.
Let’s give some examples accepting the dictate of not emitting CO2
- Charcoal ; There is coal that I don’t give a damn about in the world. Perhaps it is possible to make coal power plants that would use some of the energy they would produce to bury the carbon? Technically, we should get there if we can get to Mars.
- Nuclear. We have considerable nuclear waste buried in the east of France. Apparently there is already a technology that would transform this waste into another form of uranium that could be used in new nuclear power plants (which will be built, but we know how to do it) and this waste would give us twenty centuries of energy autonomy.
- Until then, maybe the merger will work?
In any case, we will have to look for something because we have once again entered a period of energy scarcity, as the second graph shows.
The black line is the S&P/WTI points ratio. I subtracted the long-term trend to “flatten” it.
As the reader can see, every thirty years or so we have an energy crisis: 1920, 1950, 1980, 2010 and maybe 2040?
Each time, we get away with new discoveries.
As for the red line, it is simply the black line that I fast forward fifteen years (half the cycle) and reverse to show what awaits us in the future, if the thirty-year cycle continues.
Therefore, the next maximum and minimum for energy consumers should be reached around 2040.
At that time, I will be 97 years old and I will certainly let you know when the time comes. But the reader can tailor his portfolio if he remembers that in 1980 listed energy stocks represented 30 percent of the S&P, while in 2020 they were only 3 percent of the S&P itself.
So the best way to do better than the stock indices was, from 1970 to 1980, to have only energy stocks or only stocks that represented companies that were able to make money even if energy was expensive, to then spend, from of 1985 (collapse of oil prices) in societies that benefited from cheap energy such as airlines or international tourism, and from which it was necessary to exit in 2020.
As I continue to write, we are back in the 70’s, which makes me quite young. Therefore, it is necessary to have energy values.
Now let’s move on to the sensitive issue: will “green” energies be the solution?
This is not what the markets believe, as shown by my latest chart showing the evolution of the world’s two energy sectors, the fossil sector and the green sector (source MSCI Indices, Macrobond).
Since 2009, green values have made twice as good than fossil stocks, even though they are monstrously subsidized and institutions are forced to buy them (ESG).
This is what happens when you let the Malthusians come to power.
His actions to create the shortages and famines that they announced, which will only surprise those who think that ideologues are capable of making decisions for the common good.
We are in full triumph of the Malthusian ideology.
The class currently in power in Western countries, but only in western countrieswants to reach a world government and for that they need to create scarcity to distribute ration vouchers to the most obedient.
Other countries do not see very well why they should obey the elites in power in Western countries, which heralds many conflicts to come.
Between the globalized elites and the “scientific” socialists of my youth, there are hardly any differences. Scratch a green and red appears.
Arrogance, the temptation to take oneself for God, always leads to disaster and those who come out of it are never politicians but inventors and individuals who display their talents in systems. free and on a human scale.
We have moved away from it but reality will bring us back to it.
And this will not be bad but good, very good news.