2019 - The Game Changers

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by: Mark J. Grant

Looking back is not always that easy and sometimes painful. Your vision may not be 20/20 but reasonable clarity may be had by sticking to the facts and the actual data. Having said this, looking forward is a much tougher proposition. You are looking into the unknown. We haven't gotten there yet.

However, staring into the future is a task that must be undertaken from time to time. I stare hard at pending "Risks." Others stare hard at pending opportunities. "Preservation of Capital" demands that "Risks" come first, as "avoidance" is often the key to success. If you can stay out of the potholes, you can keep going and proceeding ahead is what gives us all the ability to win at the "Great Game."

One of the biggest "Game Changers" is the breakage of a fifty year cycle where the United States, and Europe, had to depend upon hostile nations for oil and natural gas. We were hemmed in by them and many political decisions and economic decisions were based upon the fact that we needed their energy. With fracking and re-fracking and horizontal drilling, this has all changed and to the significant benefit of the Western world.

Last week the United States Geological Survey (USGS) announced a groundbreaking oil and gas discovery in the West Texas Permian Basin. According to the organization's statement, 46.3 billion barrels of oil, 281 trillion cubic feet of natural gas, and 20 billion barrels of natural gas liquids are now believed to lie untapped in the Texan and New Mexican Permian Basin. The figures in last week's announcement are more than double the previous resource assessment.

"Christmas came a few weeks early this year," said U.S. Secretary of the Interior Ryan Zinke in response to these rather incredible numbers.

American strength flows from American energy, and as it turns out, we have a lot of American energy. Before this assessment came down, I was bullish on oil and gas production in the United States. Now, I know for a fact that American energy dominance is within our grasp as a nation.

Dr. Jim Reilly, the Director of USGS, a part of the U.S. Department of Interior, highlighted how remarkable the discovery was in the larger context of the industry.

In the 1980's, during my time in the petroleum industry, the Permian and similar mature basins were not considered viable for producing large new recoverable resources. Today, thanks to advances in technology, the Permian Basin continues to impress in terms of resource potential. The results of this most recent assessment and that of the Wolfcamp Formation in the Midland Basin in 2016 are our largest continuous oil and gas assessments ever released. Knowing where these resources are located and how much exists is crucial to ensuring both our energy independence and energy dominance.


What this all means is that we are now capable of breaking OPEC's back. They have lost control. The United States has gained control. We can now tell them to "Stuff It," as we not only gain energy independence but a whole new source of revenues, and taxes, that can be used to our advantage, as we export oil and natural gas to both Europe and Asia.

Any fool can know. The point is to understand.

- Albert Einstein

The next, far less pleasant "Game Changer" is the Democrats taking over the House. This is going to cause all kinds of turmoil, in my estimation. They are likely going to try to impeach President Trump and the markets may take a bath if this happens. Bonds or equities, the rancor of serious political infighting is never good news.

Then we have Brexit becoming quite unwieldy, Italy still fighting over its budget with the European Union and the economy of China slowing down as both their internal and external debts rise to record levels. Then there is the Chinese currency, which could get "re-evaluated" several times during the next year. The tariff stand-off with the United States is, in fact, a "Game of Thrones" as each nation vies for global power and influence. All of these issues could change the Game and cause roller coaster rides in the markets.

Next, there is the Fed. They are the central bank of the United States and the continual raising of interest rates is not helping the economy of the country. "Will they stop or will they go on," is the central question. The Governors have 14 year terms and they can brandish their "Independence" as they wish, but the Fed was created by the Congress in 1913 using the Federal Reserve Act and what is given can be taken away, or muted, if the Congress does not feel that the Fed is acting in the best interests of the country. The Fed is NOT a Constitutional mandate, I remind all of you.

Then there is the CLO market. There are some large financial institutions that are worried that the bottom is about to drop out of this market. As an observation, the total outstanding volume of leveraged loans is about $1,130 billion or 5.5% of the U.S. GDP. CLOs, which are repackaged corporate debt, has made up most of the appetite for these loans.

These instruments hold approximately half, or $600 billion, which is roughly 3.0% of the U.S. GDP. The catalyst for the concern is not so much the drop in prices as the fund flows, with Lipper reporting that loan funds saw a record outflow of $2.53 billion in the week ended December 12, as we are now in the fourth consecutive week of selling. A significant "Game Changer" could be happening here.

The road to success is dotted with many tempting parking spaces.

- Will Rogers

"Game Changers" now abound all around us. Look closely, think, plan, execute, don't slow down. Stay out of harm's way. Avoid the Risks. Choose wisely!