Yellen cites 'potential dangers' in U.S. stock valuations

1) Has the oil boom benefited anybody? Yes it has.

2) Has the oil boom benefited morally/politically sympathetic groups, such as the American poor? Yes it has.

3) Will the oil boom benefit humanity as a whole, over the medium to long term? The jury is still out on this one, and the answer may in fact be no.

It is perfectly possible to do things that are beneficial in the short run but ruinous in the long run.

"Middle of nowhere" was intended to elicit imagery, not insult. Various places that are in the middle of nowhere are actually my favorite ones in the world.

The latter is exactly what causes the former to be wasted. If demand drops (or even merely does not rise as quickly as expected), then the price drops. If you were relying on high prices when you made your decision to invest more money to increase capacity, then what previously looked like a good idea may now be a bad one.

When your break-even price is $60 to $65/barrel and prices fall below that, your net return is negative. But the best part is you don't even get to stop producing. The costs for most oil sources must be paid largely up-front, and your marginal cost may be only $20 to $30/barrel. So when oil drops to $50/barrel, you can choose between continuing to produce at a loss of $10 to $15/barrel over the life of the well, or stop producing and suffer a much, much larger loss. That keeps supply high and prices low.

One oil source that does not have large up-front costs is fracking. Or, more exactly, fracking sites only last 18 months or so before production slows to a trickle, so you have a much smaller time horizon to recoup up-front costs. So the amount of fracking will very likely decline quickly. But viewed from an economy-wide standpoint, there was still plenty of malinvestment here: drilling equipment rental, trucking, rail, etc., require large capital outlays but carried high prices when oil prices and thus demand was high. As demand drops, they may not be worth the amount invested in them.

That's what oil industry PR wants you to assume.

Los Angeles has over 1,800 active oil wells, one on the grounds of a public high school, one across the street from a hospital: http://www.nileguide.com/destination/blog/los-angeles/2010/0...

http://www.vice.com/video/oil-of-l-a--3

There are thousands more in and around residential areas in Los Angeles and Orange counties.

There is even fracking and waste water dumping going on in the city:

http://www.cafrackfacts.org/fracking-in-california/where-is-...

http://baldwinhillsoilwatch.org/

Yes, if the market is overinflated, it's because growth itself has failed to happen.

The basic problem is that every major economy is simultaneously trying to restart its growth through exports. We're in a currency war.

(1) Its correlation with the S&P 500 is insanely high. So, just using it as a proxy for the S&P is fine.

(2) We've tracked the DJIA going back over a hundred years, so that data is readily available.

Overall, the S&P 500 is a better index, but criticizing someone for using it in their analysis isn't worth the distraction from their actual thesis.

Why the anxiety??

With the housing bubble, it was very clear that the traditionally correlated mortgage and rental prices had separated, signalling that mortgages were in a bubble.

Pointing a chart and saying it's high doesn't prove anything. You need to show signals other than the federal reserve moderating inflation (which is normal).

I was visiting a friend last night, who is looking to buy her first house.

She told me that she's been having trouble because people are showing up for $300k houses ($150-200k 5 years ago) and offering, same day, without an inspection, $600k cash offers.

That tastes funny.

There may be somebody, but they aren't known, don't get listened to or otherwise don't exist for purposes of this sentence. The existence of a Micheal Burry* does not keep a bubble from forming.

*A "The Big Short" person of interest.

But yeah - I'd expect a drop in stock prices once interest rates hike a bit. We have in effect a generation (perhaps two) that has known nothing but very low rates.

It might be easier to define the "wrong thing" to do, but even that is usually short for the "wrong thing to do yesterday". Most people don't go and make the exact same mistake again unless they believe there is a convincing reason why This Time Is Different™.

Common sense "wrong things" also bring tradeoffs or don't have clear policy mechanisms. Even if we all agreed the stock market was overinflated, how can we deflate it without restricting valid investment and hurting the broader economy?

As we look at regulation of the financial system, I would argue that we should not lose sight of the systems we already have for mitigation and recovery. When they were most needed, they worked well.

The nature of a market economy is that people are free to make decisions, including accidentally bad and purposefully bad decisions. I don't think it's possible to eliminate the bad without also unintentionally limiting some of the future good.

Bankers are humans, the most intelligent species we know of. They want to be bad actors, and they're constantly dreaming up ways to do it better.

Any infrastructure or regulations will eventually (and probably soon) be co-opted. Furthermore, given the nature of regulations (that 1% are in control of them, and the other 99% are beholden), once co-opted they will be impossible to modify to repeal. Now they help the bad guys do bad things, and they're not going to let you take them away.

It gets worse, because humans are intelligent. If they spent all that effort co-opting these regulations, might it not be better to write the regulations in the first place? Much less effort for something even more adapted for them to do bad things.

And since the nature of legislatures is that 0.01% are on control of them, and the other 99.99% are beholden to them, once co-opted it's impossible to repair the damage.

So no, we don't need infrastructure. We need that like we need a hole in the head.

Take stocks or real estate. The price goes up. People see the price going up. They buy, because they want to buy something where the price is going up so that they will make money. That buying increases demand without increasing supply, so the price goes up some more. That's a bubble - where the price goes up because people are buying because the price is going up (and so they think it's going to keep going up). It's a positive feedback loop.

But bonds... nobody's buying bonds because they think the price is going to go up. They're buying bonds because they think bonds are safe. But, in fact, bonds aren't very safe. The next direction interest rates will move is up; when they do, bond prices will fall. The longer term the bonds, the more the price will fall.

Note well: I am not an economist. I am not an investment advisor. This is my understanding of how things work, but it is not financial advice.