Investment spending is going to disappoint in 2020
A big economic theme/hope in 2020 is that business investment is going to rise because 'uncertainty' on China-US trade has fallen.
I disagree with the premise and argue that technological uncertainty and election uncertainty is more than enough to offset that (something I speak about in the video below) but even if that were true, investment still won't rise next year.
Why, because investment is about to crater in US oil. The mode of the market has shifted. For years oil shares were rewarded for increasing production and acreage. In the past 9 months that's flipped and now the market wants to see profits and free cash flow. The only option is to cut back on exploration and drilling. The result is far less investment in that sector -- which is a huge part of overall US investment.
The WSJ today writes about the ongoing bust in shale.
North American shale investment, or spending on drilling and fracking, is forecast to fall about 6% this year, then tumble another 14% in 2020, adjusted for inflation, according to energy analytics firm Rystad Energy.
Those numbers have been rapidly shifting as companies announce 2020 capital budgets and I'd say they're optimistic. We could see investment fall by as much as 50% over the next two years. Many of the companies promised they would be profitable at $30 oil but with crude at $55, many are struggling to push out cash and it's going to get enough tougher with financing getting much tighter.
"The boom time is done at this point, unless oil prices go up significantly," said Michael Plante, senior economist at the Federal Reserve Bank of Dallas.
