Don Luskin is chief investment officer of Trend Macrolytics, an institutional-based market research and consulting firm based in Chicago. Trend Macro's research stretches across all asset classes, and incorporates valuation metrics and political sentiment in its macroeconomic analysis. Luskin has authored numerous books, including "I Am John Galt." He is frequently seen and quoted in the financial media, and appears weekly on CNBC's "Kudlow Report."
Luskin recently sat down with ETF.com to discuss the secondary and tertiary effects of cheap oil, and what that means for the U.S. economy and emerging markets. He also tells us why he remains bullish on Europe but doesn't have strong opinions on currency-hedging eurozone equity exposure.
ETF.com: In November, when WTI was still at $75/barrel, you said oil prices would plunge even further. Within a week or two of that interview, WTI prices fell off a cliff. What is your forecast for oil prices?
Don Luskin: We have a long-term and a short-term forecast for oil. Our long-term expectation—and this is based on observing 160 years of inflation-adjusted oil prices, in today's dollars—is that the right place for oil is a range between $15 and $40. That has been where oil has traded for 160 years, with the exception of three periods.
Each period lasted about 10 or 12 years. One was right after the Civil War. Another was the 1970s, during the era of oil embargo and the Shah of Iran crisis. The other period is the one that just ended. Those are times when, for various economic and geopolitical reasons, the oil price gets temporarily very high.
It takes a while for that high price to send a signal into the investor, business and science world to figure out something to do about this. If you give them long enough, technology always finds a way. So think of oil as an arms race between scarcity and technology, where in the long run our belief is that there is a stand-off in the contest between $15 and $40 in today's dollars.
Fifteen dollars is too low a price, because at that point there is just no incentive to produce. Forty dollars, in the long run, is the high end of that range, because at that price it's enough to get more production. But anywhere in between there you can have a nice, happy marriage, where oil producers can make money and the economy can grow.
ETF.com: So with WTI now trading around $50 [Feb. 4, 2015], does that mean you're bearish on oil?
Luskin: I'm saying that, five years from now, if you adjust for today's dollars, we're going to be between $15 and $40. That's been our forecast all along and it still is.
However, it takes time for technology to play out. Right now there are frackers who can produce a barrel of oil for $23 and there are frackers who can produce a barrel of oil for $90. Somewhere in between there is a fracker who can produce a barrel of oil for $50. Right now he's the one for whom there is just enough demand. So that's why the price is where it is.
OPEC is no longer the swing producer. It's the American fracker who is the swing producer. American frackers have, at today's level of demand, a cost function that is between about $25 and $80. So, unless there is a demand collapse—and I can show you all kinds of statistics that show that demand is actually growing, which is what you would expect when prices come down—we're moving up through the cost structure.
During this year, it's going to get to the point where demand is such that people are going to be moving into larger cars. They are going to be running their air conditioners more—just all the things you can do when energy is cheaper. That means that the oil price, this year, probably wants to live between about $55 and $65. Then, given just the way markets work, there are overshoots. When we got down into the low $40's a couple of weeks ago, I think that was an overshoot on the downside. That was just fire sales. That was just momentum.
It wouldn't surprise me if sometime during this year—probably the first half of this year—you see oil trading in the $70's, maybe a couple of prints in the low $80's. It is not unusual for a super-high-speed bear market like we've had in oil to have a 50 percent retracement. That gets you into the $70's easily.
So, short term, oil is below the bottom of its range right now. I would be a buyer of oil here for this year.
ETF.com: I know you're bullish overall on the U.S. stock market. Obviously, you can buy the whole market through an index ETF, but considering the plunge in oil prices, what sectors or themes are poised to do well in the coming years?
Luskin: Automakers and home builders are major beneficiaries by the end of the year. This is not a unique insight. You hear it all the time. Don't overlook the obvious. We know from the University of Michigan studies that over the last six months, while the oil price has fallen, that consumers are shifting to less and less fuel efficient cars.
It's just a truism in the automobile industry that they don't make any money on those little, gas-efficient compacts. They make all their money on the big hogs. So the demand mix is moving in Detroit's favor. People don't realize that just as transportation is a major component in the oil price, transportation is also a major component in the total cost of ownership of the home. By "transportation," I mean commuting.
In most major metropolitan areas, if you are a young, starter family and you want a starter home, you've got to get outside of the urban area where you probably work—which means you are going to be commuting, which, in most places in this country, means you are going to be driving a car.
If you want to be able to have a safe, comfortable, long commute, you're not doing that in a Yugo. You're doing that in a Toyota Highlander. You're going to be guzzling more gas. If you can't afford to do that, you'll just stay in your urban apartment with your three kids crowding you out. You're not going to like it, but you're not going to have a choice.
All of a sudden, it's going to be possible to have another suburban boom like we did in the mid-2000s. Because in the mid-2000s, the whole housing boom started when oil was at $10 a barrel. Do you remember that oil was at $10 a barrel in 1999 when the housing boom started?
ETF.com: Some folks are expecting this housing rebound to falter in the near future. Based on what you are saying, do you expect another housing boom in the coming years?
Luskin: That is exactly what I'm saying. I'm trying to look at the secondary and tertiary consequences of treating the oil price as a kind of an externality, as a given, where it's just the random number generator. When that number is $100, there are thing you can do and things you can't do. One of the things you can do, when it's $45, is have a really long commute.
ETF.com: I definitely want to get your thoughts on Europe, because you've been bullish on the continent from early 2014. Draghi just announced a 1 trillion euro quantitative easing package. Is that going to do the trick? Are you more bullish, or less bullish on Europe than you were several months ago?
Luskin: I'm more bullish, but it's qualified. I guess you could really say I'm as bullish as I've ever been. My reasons have always been very fundamentally driven. They've not really been about some rabbit that Mario Draghi is going to pull out of his hat.
The crisis of 2011 and 2012 forced big, sclerotic economies like Italy and Spain to do things they wouldn't have done otherwise—modernize and liberalize themselves and to become more efficient, less unionized, less government regulated. Those things lead to growth. Those are the things they've done. The growth is starting to show up. For example, Spain outperformed Germany last year on every economic metric.
So my first reaction to QE is, why? Why did you need this? The excuse is because inflation is too low. Well, we know why that is. That is because the oil price has collapsed. Was this a bad thing all of a sudden? I'm in the strange position of thinking that the market needs something to catalyze its awareness that Europe will be just fine.
This tantrum that the market threw to make Mario Draghi feel like if he didn't do that he would lose all this credibility—he did it on a dare, basically. All of a sudden, all of these things that were true before he did it are now appreciated. They used to be underappreciated. Is that because he did it? No. That changed the perceptions. It didn't change the reality; the realities are fine. So, I'm still very bullish on Europe.
ETF.com: Earlier in the year, you weren't a fan of currency hedging. But assets are pouring into currency-hedged eurozone ETFs. In the aftermath of this QE announcement, have you changed your view on currency hedging?
Luskin: I think you might be slightly overstating my zeal on the subject the last time we talked. With the exception of the Bank of Japan's very conscious effort to devalue the yen, which was incredibly overvalued, I see currency as a random walk that is extremely hard to predict.
I'm not against hedging them. I'm not for hedging them, either. There are plenty of people out there that have very strong views of it and make fortunes on it and lose fortunes on it. I just feel like it's not something I understand all that much.
In this last six months while the euro has become fairly weak, isn't it strange that in this economic zone, the big narrative is that they are lapsing in deflation? Deflation, by definition, means that the currency becomes more valuable than the goods that you can buy with that currency. So you would expect to see a deflationary currency appreciating, not depreciating.
I look at that and I say, this is why I don't recommend hedging. I don't recommend not hedging. This just doesn't make any sense. Why do we have this deflationary currency where the currency is weakening? That is not supposed to happen. So that just tells me that maybe there is a genius who can figure that out, but it is not me. So I'm not making any recommendations on it.
ETF.com: You've been talking about cheap money continuing in the U.S. The developed world is mired in deflationary pressures and central banks are either engaging in QE or cutting interest rates. Does all this bode well for emerging markets in 2015? If so, how do you play emerging markets?
Luskin: Great question. I believe the central bank story for emerging markets is secondary at best at this point. These policy postures you are talking about—there is nothing new about them. Everything you said is true, but it is all old news. The true regime change is the collapse in the oil price. Oil matters more to emerging market countries than it does to developed countries. Certain emerging markets like Russia are dependent on oil because that's how they make their living.
On the other hand, if you're India, where you don't produce any oil, you're a hostage. Well, you've just been set free. This is just an absolute lottery win for India, for most of Asia, China. These are all big oil importers who have just won the lottery. India alone is going to have to build a city the size of Chicago every two years for the next 25 years. That takes oil. This is huge for countries like India. I would be a buyer of India on this news.
ETF.com: Thanks for your time.
Luskin singles out India as an emerging market that's poised to benefit from cheap oil. He compares falling oil prices to a "lottery win" for the country. For marketlike coverage of Indian securities, INDA does the trick. The $2.8 billion market-cap-weighted fund captures large- and midcaps, covering 85 percent of India's total market cap. Even though it charges 68 basis points, INDA tends to trail its index by only 54 basis points, suggesting an efficiently run fund. Trading costs are also minimal, since the fund trades at pennywide spreads. One caveat: A creation unit accounts for close to 4 percent of the fund's underlying securities' total volume, so block traders should take note.
Luskin thinks cheap oil is here to stay, and that will ultimately allow lower commuting costs, leading to another suburban housing boom. ITB is currently the only cap-weighted ETF targeting homebuilders, and it's a solid choice. The fund boasts $1.8 billion in assets and holds roughly 40 of the largest homebuilders like D.R. Horton, Lennar, Pulte and Toll Brothers. ITB also casts a wide net, reaching beyond builders and into home furnishing and improvement retailers. The fund has a history of tracking its index closely in line with its 45 basis point expense ratio. The fund trades at pennywide spreads and exhibits robust block liquidity.
ETF.com Alpha Think Tank ETF Tracker
Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.
We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.
|Ticker||Fund Name||ETF.com Pick Date||TR % (Since Pick Date)||TR % (1 Yr)||Closing Price $ (2/6/15)||Inspired By|
|INDA||iShares MSCI India||2/24/14||33.99||36.71||32.18||Roubini|
|XTN||SPDR S&P Transportation||10/15/14||20.44||30.87||104.11||Kotok|
|INDA||iShares MSCI India||4/9/14||19.60||36.71||32.18||Kotok|
|GXC||SPDR S&P China||2/3/14||17.25||15.11||79.75||Rogers|
|MCHI||iShares MSCI China||4/15/14||16.95||20.31||51.03||Faber|
|DBJP||Deutsche X-trackers MSCI Japan Hedged Equity||6/12/14||16.28||20.67||37.99||Roubini|
|XLU||Utilities Select SPDR||4/9/14||14.11||24.64||46.56||Kotok|
|VHT||Vanguard Health Care||7/2/14||14.07||27.97||128.54||Yardeni|
|USDU||WisdomTree Bloomberg US Dollar Bullish||4/15/14||13.96||N/A||27.82||Faber|
|IYT||iShares Transportation Average||10/15/14||12.90||25.65||160.34||Kotok|
|VTI||Vanguard Total Stock Market||4/28/14||11.51||17.25||106.33||Luskin|
|RSP||Guggenheim S&P 500 Equal Weight||3/10/14||11.11||18.40||80.31||Dorsey|
|BAB||PowerShares Build America Bond||4/9/14||10.54||14.04||30.60||Kotok|
|GMF||SPDR S&P Emerging Asia Pacific||4/9/14||10.49||19.79||86.09||Kotok|
|DBGR||Deutsche X-trackers MSCI Germany Hedged Equity||2/24/14||10.16||15.35||26.07||Roubini|
|USDU||WisdomTree Bloomberg US Dollar Bullish||9/23/14||9.80||N/A||27.82||Yardeni|
|HEDJ||WisdomTree Europe Hedged Equity||1/12/15||9.67||18.66||60.81||Kotok|
|ITA||iShares U.S. Aerospace & Defense||5/5/14||9.46||17.68||119.50||Bremmer|
|USDU||WisdomTree Bloomberg US Dollar Bullish||9/29/14||8.53||N/A||27.82||Roubini|
|EWH||iShares MSCI Hong Kong||4/15/14||8.08||17.75||21.73||Faber|
|NKY||Maxis Nikkei 225||2/3/14||7.97||6.68||17.69||Rogers|
|VTI||Vanguard Total Stock Market||6/10/14||6.38||17.25||106.33||Friedman|
|HEDJ||WisdomTree Europe Hedged Equity||12/3/14||5.91||18.66||60.81||Fitzsimmons|
|SGOL||ETFS Physical Swiss Gold||11/4/14||5.78||-2.13||120.98||Faber|
|AMU||ETRACS Alerian MLP ETN||1/27/14||5.70||3.97||29.07||Luskin|
|VTI||Vanguard Total Stock Market||10/24/14||5.67||17.25||106.33||Bremmer|
|INDA||iShares MSCI India||7/23/14||5.64||36.71||32.18||Bremmer|
|DXJ||WisdomTree Japan Hedged Equity||1/12/15||5.25||22.06||50.49||Kotok|
|SIVR||ETFS Physical Silver||11/4/14||4.47||-16.19||16.49||Faber|
|EWJ||iShares MSCI Japan||3/3/14||4.05||4.78||11.65||Friedman|
|MUB||iShares National AMT-Free Muni Bond||7/16/14||3.73||7.53||110.79||Kotok|
|FNDX||Schwab Fundamental US Large Company||9/23/14||3.40||17.60||30.02||Yardeni|
|IYY||iShares Dow Jones U.S.||9/3/14||3.32||17.30||103.64||Dorsey|
|GXC||SPDR S&P China||10/8/14||2.68||15.11||79.75||Merk|
|INDA||iShares MSCI India||9/8/14||1.36||36.71||32.18||Fitzsimmons|
|INDA||iShares MSCI India||11/18/14||1.08||36.71||32.18||Luskin|
|DBJP||Deutsche X-trackers MSCI Japan Hedged Equity||11/18/14||0.98||20.67||37.99||Luskin|
|TAO||Guggenheim China Real Estate||8/12/14||0.97||19.11||21.60||Faber|
|SCPB||SPDR Barclays Short Term Corporate Bond||3/17/14||0.70||0.81||30.61||Yardeni|
|PXH||PowerShares FTSE RAFI Emerging Markets||2/17/14||0.64||3.44||18.80||Arnott|
|EWW||iShares MSCI Mexico Capped||1/20/15||0.26||-5.01||58.50||Bremmer|
|EPI||WisdomTree India Earnings||9/3/14||0.22||43.66||23.30||Dorsey|
|IYT||iShares Transportation Average||1/8/15||-0.24||25.65||160.34||Yardeni|
|EWW||iShares MSCI Mexico Capped||3/3/14||-0.47||-5.01||58.50||Friedman|
|IEMG||iShares Core MSCI Emerging Markets||4/28/14||-0.64||5.89||47.93||Luskin|
|XTN||SPDR S&P Transportation||1/8/15||-1.25||30.87||104.11||Yardeni|
|EWS||iShares MSCI Singapore||5/5/14||-1.55||9.11||12.96||Bremmer|
|GULF||WisdomTree Middle East Dividend||3/10/14||-1.68||0.95||20.86||Dorsey|
|EIDO||iShares MSCI Indonesia||5/28/14||-2.43||15.48||27.23||Fitzsimmons|
|BKF||iShares MSCI BRIC||5/22/14||-2.97||7.02||35.85||Arnott|
|DBB||PowerShares DB Base Metals||5/8/14||-3.20||-3.57||15.41||Gartman|
|ELD||WisdomTree Emerging Markets Local Debt||2/17/14||-3.92||-2.92||41.53||Arnott|
|IAU||iShares Gold Trust||1/27/15||-4.55||-1.97||11.96||Merk|
|EWY||iShares MSCI South Korea Capped||2/24/14||-5.65||-3.56||56.15||Roubini|
|ROBO||Robo-Stox Global Robotics and Automation||3/3/14||-5.88||-1.95||25.30||Friedman|
|VNM||Market Vectors Vietnam||4/15/14||-6.68||-6.80||18.83||Faber|
|EIDO||iShares MSCI Indonesia||7/23/14||-6.76||15.48||27.23||Bremmer|
|AUNZ||WisdomTree Australia & New Zealand Debt||10/22/14||-6.97||-4.81||18.33||Gartman|
|UDN||PowerShares DB US Dollar Index Bearish||11/11/14||-8.15||-15.61||22.60||Schiff|
As of 2/6/15