Kames Capital: We thought 2008 was a once in a million years crisis

Comment from Scott Jamieson, head of multi-asset investing at Kames Capital
“It is only the third week of January and already oil prices have fallen by over 20% this year. The chart below puts the weakness of recent months in context…. prices have collapsed. The extent of the drop is matched only by that during the Great Financial Crisis – something that we are assured will never happen again in our lifetimes and far beyond.
“As we have observed before, the energy market challenge is more about excess supply than sagging demand. The market rumour mill would now have us believe that all the storage tanks etc in the world are full. If so, then a lack of storage may exert some – much needed – production discipline that (significantly) lower prices could not. Temporarily at least, a trough may be at hand.
“More broadly however, the return of crisis conditions within the energy markets serves to remind us that the macroeconomic and financial market challenges revealed in gory detail during 2008/09 remain largely unresolved. Admittedly the global banking system is now on a much sounder footing – that is if you ignore China. This improvement has however been because the rest of us – through government policies etc – have absorbed the problem. Alan Greenspan used to argue (before 2007) that the beauty of the proliferation of derivative exposures was that risks were dispersed widely across participants in financial markets; he was both right and wrong. Socialisation of past credit excesses has been extensive and, if anything, those excesses have multiplied.
“Ballooning oil production, spawned by the easy credit conditions associated with quantitative easing (QE), needs now to go into reverse. As the sector contracts the labour-shedding has only just begun. QE has fuelled a number of other bubbles – look at capital city property prices. There is no reason to suppose that the reality checks will be limited to the energy industry.
“It is impossible to put a timetable to these adjustments but it would be utter folly to deny they will happen. The best solution that policymakers have dreamt up has been to replace one set of bubbles with another. In the short term this has, and will continue to be, a very pleasant experience for those exposed to the bubble ‘cures’. But in the longer term, examples of lightning striking twice will abound.”