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The simplest argument for the oil price decline is for once correct. A wave of new U.S. fracking oil could be seen to be overtaking the modestly growing global oil demand. It became clear that OPEC, mainly Saudi Arabia, must cut back production if the price were to stay around $100 a barrel, which many, including me, believe is necessary to justify continued heavy spending to find traditional oil. The Saudis declined to pull back their production and the oil market entered into glut mode, in which storage is full and production continues above demand. Under glut conditions, oil (and natural gas) is uniquely sensitive to declines toward marginal cost (ignoring sunk costs), which can approach a few dollars a barrel — the cost of just pumping the oil.

Oil demand is notoriously insensitive to price in the short term but cumulatively and substantially sensitive as a few years pass. The Saudis are obviously expecting that these low prices will turn off U.S. fracking, and I’m sure they are right. Almost no new drilling programs will be initiated at current prices except by the financially desperate and the irrationally impatient, and in three years over 80% of all production from current wells will be gone! Thus, in a few months (six to nine?) I believe oil supply is likely to drop to a new equilibrium, probably in the $30 to $50 per barrel range. For the following few years, U.S. fracking costs will determine the global oil balance. At each level, as prices rise more, fracking production will gear up. U.S. fracking is unique in oil industry history in the speed with which it can turn on and off. In five to eight years, depending on global GDP growth and how quickly prices recover, U.S. fracking production will start to peak out and the full cost of an incremental barrel of traditional oil will become, once again, the main input into price. This is believed to be about $80 today and rising. In five to eight years it is likely to be $100 to $150 in my opinion. U.S. fracking reserves that are available up to $120 a barrel are probably only equal to about one year of current global demand. This is absolutely not another Saudi Arabia.

Once upon a time, you actually had to pay lenders to borrow money. It was an archaic ritual called "interest"—here's the Wikipedia page if you don't believe me—but it's over now. 

In fact, it's the opposite of how things work today, at least in Europe's brave, new, deflationary world. France, Finland, Belgium, Denmark, the Netherlands, and Germany are all getting paid by investors—that is, bond yields are negative—to borrow for up to four, and sometimes six, years. Switzerland is even getting paid to borrow for ten years. That's never happened anywhere before. But it's not just governments that people are paying for the privilege of lending to. It's companies, too. Or at least one of them: Nestlé. Its €500 million debt that comes due in October 2016 became the first corporate bond of a year or longer to have a negative yield, after it got as low as -0.0081 percent on Tuesday. (Its borrowing costs later rose to a, relatively-speaking, punitive -0.002 percent).

Friday’s employment report showed a 257,000 increase in January non-farm payrolls. This news was followed by a spike in Treasury yields up to 1.96%, a 4% plunge in utility stocks, a 5% plunge in precious metals shares, and took the S&P 500 within a fraction of a percent of December’s record high, before a late-day retreat. These frantic market movements smack of an investment climate dominated by one-dimensional “theme” based behavior - where asset prices have been amped up on yield-seeking speculation, but where the most marginal change in the outlook can trigger a race for the hills or a pile-on, depending on whether the asset has features that are consistent with that theme. On Friday, the knee-jerk reaction was that stronger employment will prompt the Federal Reserve to raise interest rates sooner, creating a scramble to get out of yield-sensitive Treasury bonds and utilities, to buy dollars, and to sell foreign currencies and gold. Of course, in equilibrium, there must be someone on the other side of those trades, so prices moved to the extent needed to find that match.

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By our estimates, never in history, prior to the past 5 weeks, have the prospective 10-year nominal annual total returns of both stocks and Treasury bonds been below 2% at the same time. We currently project a 10-year nominal annual portfolio total return averaging only about 1.7% annually for anything close to a standard portfolio mix of equities, bonds and cash – regardless of how much diversification one has within each of those asset classes.