Pricing oil for the future
“To run a pricing market for a non-renewable resource off rationing short-term supply and demand makes no sense.” – Gregor MacDonald
One of the worst traps in thinking about the future is assuming that your images of 20, 30, or 50 years ago are still likely, or even possible, in the future. Gregor illustrates this beautifully in his post “Jett Rink’s Speedboat,” about how today’s major oil finds will never lead back to some cheap oil pseudo-paradise of the 1950s and 60s. They cannot. Because this world is so very different.
Notice also his comments on how hyperbolic oil companies are becoming from oil field “discoveries” that sound dauntingly difficult – and how the market responds anyway.
Real Estate: What’s Completely New, and Different From the Eighties
There are certain classic responses you will hear from people when they resist strategic ideas about the future. Let’s say that you recognize a threat to your current business and suggest a course of action. One of my all-time favorite reactions you are likely to hear is:
“We tried that once in 1980s…it didn’t work! So, you know, it can’t work now, either.”
Everything on earth, including perpetual motion machines, dividing by zero, and drinking red wine with fish w
as tried, to no avail during the 1980s by now-depressed executives. As a result, these jaded, weary bureaucratic warriors will attempt to shoot down anything that even smacks of an earlier attempt at greatness. Their tool of choice will be to compare the current strategic situation to the decade of neon and shoulder pads.
The way around this roadblock is a rigorous comparison of both strategic situations, today and yesterday. A non-aggressive way to handle this is to say, “Alright, it sounds like you learned a lot back then. Perhaps we could discuss how both situations compare?” Then you can go through all the things that have changed and see if you can unpack this person’s assumptions about their view of the future.
*Note of caution!* Some classic strategic blunders will always apply, and should be taken mostly at face value. Pay attention when you hear, “Don’t invade Afghanistan. We got the Soviets to do it in the 1980s, and it’s really nasty.” This one is true! They learned it in the 1980s, 1950s, 1920s, 1890s, 1120s, and so forth back to Alexander the Great. It’s a good bet.
*Additional note of caution!* Getting a puppy for a studio apartment, betting on stock tips from inlaws, tattooing the name of recently-met paramours on easily-visible parts of your body – you might want to avoid these mistakes as well, with or without rigorous analysis.
Now, let’s explore this technique in an economic situation rapidly unfolding before us. Many of my regular readers may be aware of the somewhat significant difficulties in the banking industry due to developments in the housing sector. (Ahem.) Everything – how do you say? – caught on fire and burned to the ground after people around the world decided that their three-bedroom ranch with a 1950s kitchen was worth EIGHTEEN MILLION DOLLARS, and then the banks developed ingenious financial instruments around this unusual state of affairs.
This you probably know. Now, if you’re a consumer of national television networks and some major print publications, then you may be hearing lots of protestations about how there’s never been a better time to buy! After all, we’ve seen it all before, especially in the boom-and-bust Eighties. (See “Scandals: Savings and Loan.”) This is a perfect time to ask whether this cycle is like the 1980s, or perhaps something new that requires new analysis and several scenarios.
My hero Mish is pumping out excellent analysis of the global economy, inexplicably free, and he came up with the following list of strategic conditions that are sharply different from just a few years ago:
- Tougher lending standards: no more liar loans, bigger down payments, closer look at incomes, etc.
- Tougher appraisal standards
- The difficulty of finding jobs
- Wage and benefit cuts shrinks affordability for those who do have a job
- Huge bank-owned shadow inventories
- Huge developer shadow inventories, especially in condos
- Consumer willingness to “walk away”
- Rising delinquencies and foreclosures due to rising unemployment
- Rising taxes
- Overleveraged consumers
- Pent-up demand to sell in a “please get me out mentality” if prices rise just a bit
- The upcoming boomer retirement downsizing event
- A change in consumer attitudes regarding housing as an investment
- A new frugality in consumer attitudes towards debt in general
This is a textbook perfect example of how to argue for a new approach to the strategic future. Seen this real estate market before, and you know for certain it’s going up? Then how do you think the overleveraging of consumers will impact the situation? What about all those empty condo towers in Florida with one family each? What about all those Boomers who were going to sell their houses anyway to move to more exciting or warmer or less busy places? What about the banks now waterlogged with houses nobody wants to buy?
You don’t want to discount people’s experience – it can sometimes be useful to hear of how the past can inform today’s decisions. It’s also acceptable to logically deconstruct the future into systems and trends (See: Future, Inc.) and to ask people if their assumptions about the future meet such demonstrably different trends at play. You may still get resistance, but at least people will be clear about where they are coming from.
Rocking the foundations of our assumptions about wealth creation
Paul Krugman is reflecting what I saw weeks ago when discovering a chart that compared GDP growth with total U.S. debt. The story tells itself:
Obviously, the GDP growth of the past 10 years has been illusory, juiced up by debt. This was par for the course, really; Anytime you drive the housing sector from pure imagination instead of job growth, you’re in Fantasyland economics. Says Krugman:
At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?
Why did we keep up the charade? I submit that Boomers getting ready to retire wanted so badly to see their assets increasing in value, they were willing to let assumptions go unchecked, up to and including believing in frauds like Bernard Madoff delivering ahead of the market over and over again.
Which brings us to futures studies and statistically-driven management: anytime we rely on numbers for management, we must rigorously check the qualititative basis for our beliefs. That means incredulity, inquiry, skepticism and the conversion of sacred cows into delicious dialectical cheeseburgers.
Check your assumptions – it appears to be the hot new style
How funny that the tools and principles of foresight are coming into vogue, this time without even the mention of a flying car or a rocket pack.
Take my friend Jim Cramer for example, host of CNBC’s Mad Money, textbook definition of an extroverted personality, and one of the greatest fund managers in history. Even he’s doing it. Last night’s show was entitled “Don’t Assume – You Know They Say,” and in it he spent the entire half hour inciting his audience to challenge all of their assumptions about the global economy.
You know, CRAZY intellectual exercises like challenging your assumptions about the price of oil around the global (under $60!), asking if America will have an automotive industry, wondering if the United States will keep taking cues from Evo Morales’ socialist administration in Bolivia. To play with the different possibilities that come out of each tweaked assumption – it’s a good practice for everybody.
Wait, if all the television hosts start thinking this way, what will we do for a living at Competitive Futures? I suppose I’ll go back to playing Latin music and enjoying our new intellectual Golden Age. For the moment, I think I’ll keep showing up at work.
About Eric Garland
Eric is one of the world's pre-eminent thoughtleaders in forecasting and strategy. He helps leaders of business and government make critical decisions about their futures.Connect with us
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