texas Archives - Page 5 of 8 - Bankers Anonymous

September 12, 2016September 12, 2016

Hello Houston

The Houston Chronicle recently started running my stuff, and I’m excited.

In honor of my introduction to Houston, I’d like to offer a personal story about my very first trip to Houston. Best of all, this anecdote has a pithy financial moral at the end.

In Spring 2001 I lived in New York City and sold emerging market bonds for Goldman Sachs. “Emerging markets” means Latin American, Asian, Eastern European, Middle Eastern and African bonds – all very volatile products. It was a super-fun job. I had recently picked up a new client – a couple of clever guys who operated a hedge fund within a successful pipeline company in Houston.

I set up a visit to Houston because, of course, I already knew this company’s reputation. They dominated not only their pipeline business but had financially engineering their way into oil and gas trading, water-rights and paper-trading, and now a sophisticated, relative-value, emerging market bond hedge fund. (If the words “relative-value emerging market bond hedge fund” make perfect sense for you, then congratulations. If they don’t, then this column is for you.) Anyway, Fortune Magazine named them “America’s Most Innovative Company” for six years in a row. These guys were my kind of client.

First trip to Houston

We drank cocktails together in a fancy Houston bar while I listened to my clients describe the keys to their success.

“We just have the smartest guys in every business we tackle, and we know how to go after a business and make money off it.”

I was so convinced. I’m not kidding.

The smartest guys, with the best ideas, and all this awesome financial engineering? What could possibly go wrong? Personally, I planned to invest in the stock of that pipeline company as soon as I got my next bonus. Which, fortunately for me, was many months away.

For the next few months I spent a fair amount of my free time researching the company on my Bloomberg terminal. The amazing thing about Bloomberg terminals – for those of you who haven’t worked on Wall Street – is that I could find anything and everything about the company I could ever want or need. Historical earnings data and future projections. Analyst reports. News stories. Key executive bios. Charts and graphs and comparisons. I even personally knew key executives there! I loved my clients, and I loved this stock. And I couldn’t wait to get paid, so I could start investing in all those smart guys with all their innovative financial techniques.

Better lucky than good

One of the most important lessons I learned in my Wall Street years is that it’s far better to be lucky than good. (That’s not the previously-promised pithy moral lesson, but it is true.)

Enron collapsed in the Fall of 2001 – before I got paid my bonus – so I never poured my own money down that rat hole. But boy was I eager to do it – only weeks before they collapsed.

Ever since then, whenever I hear people tell me about an individual stock they have bought, or plan to buy, and their reasons for doing so, I think of my clients at Enron.

What I learned from this Enron experience is that – not unlike Lord Commander Jon Snow – I know NOTHING when it comes to picking a good stock to buy. I thought I had access to EVERYTHING. And yet, I was completely wrong.

What I’d like you to know also – that promised pithy financial moral is right here – is that when it comes to picking individual stocks, you also know nothing.

My “I believe” speech, Bull Durham-style

So, I don’t believe in individual stock-picking when it comes to money matters and being smart.

“Well now,” you, as Susan Sarandon’s character Annie Savory in Bull Durham, might ask, “what do you believe in then?”

“I believe in getting wealthy,

Markets, cost discipline, the power of compounding,

Aggressive allocations, never selling, and neighborhood poker (if you like to gamble),

That Jim Cramer’s finance shows are self-indulgent, dangerous, garbage fires.

I believe Lee Harvey Oswald could not have acted alone.

I believe there ought to be a constitutional amendment outlawing variable annuities and the carried interest loophole.

I believe in index funds, entrepreneurship, selling investments only when you have to have the money and never for ‘timing” or ‘tax’ reasons, and long, slow, deep, soft automatic retirement-account dollar-cost averaging that lasts five decades.”

“Good night,” I whisper, as I turn and walk out the door, Crash Davis cool.

Leaving you/Annie/Susan Sarandon character breathless to say anything but:

“Oh my.”

A version of this ran in the Houston Chronicle and the San Antonio Express News.

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August 29, 2016September 5, 2016

Public Pensions – The Big Four In TX

A key reason why I started a discussion of public pension funds in Texas by saying “Don’t Panic” is because 88% of Texans covered by a public pension plan are participants in one of just four plans, and the good news is that none of these four are in distress. Right now.

The largest four pension plans – Teachers Retirement and Employee Retirement System (TRS), Employees Retirement System of Texas (ERS), Texas County and District Retirement System (TCDRS) and Texas Municipal Retirement System (TMRS) – cover over 2 million Texans. So no distress means you can stay calm.

On the other hand, if you had a worrying kind of paranoid view of public pensions – like I kind of do – you would notice that size should inversely correlate with complacency. The bigger they come, the harder they fall, as Jimmy Cliff and others point out.

The problem of size

If the Teachers’ pension system goes poorly – or any of these four go poorly – we can’t rely solely on my three rules of thumb to alert us.

We need an additional layer of scrutiny because the absolute scale of the problem is what we should worry about. The bailout for miscalculating on this scale might swamp the state budget.

This is what people in California worried about in the aftermath of the Great Recession in 2010, or what people in Illinois this year worry about. Namely, might the entire state of Illinois have to seek bankruptcy (or its legal equivalent) as a result of unfunded pensions?

Review of the Big Four

Four state pension plans dominate the Texas public pension scene, with over 2 million Texans participating.

Of these, the Teachers’ Retirement System (TRS) is the big gorilla, about six times as big as the next biggest pension system, with about 1.5 million members and over 150 billion in assets, as of its 2015 report.

The funded ratio of the TRS – the ratio between estimated assets and estimated liabilities, stands at 80.2 percent – or just at the point where reasonable observers feel comfortable most of the time. Remember, 100 percent means fully funded, but many funds do just fine running in perpetuity in the 80 to 90 percent region.

Meanwhile, the time to amortization – the estimated number of years it will take to fully fund teachers’ pensions – stands at 33 years, which is a bit on the high side. The Pension Review Board would prefer 15 to 20 years, but according to the state legislature, 40 years is the panic point, statutorialy speaking.

Finally, TRS estimates investment returns of 8% going forward, which seems too high to me, roughly in the top quartile of estimates. It’s not totally out of line with other pensions nationally, but it’s not a conservative estimate either.

One of the next biggest, the Employees Retirement System of Texas (ERS) resembles TRS in the sense of a 76.3 percent funded ratio, as well as a 33-year amortization, or time to pay down its unfunded liabilities. Back in 2014, the ERS reported an “infinite” amortization time period, essentially meaning it would never pay off its debts. So while 33 years is uncomfortably long, it also represents a step in the right direction from the previous years. The ERS also assumes an 8% return, which again isn’t conservative.

The two other big pension systems right now appear in healthier shape than either TRS or ERS. The Texas Municipal Retirement Systems (TMRS) scores higher than the first two, with a funded ratio of 85.8 percent, and an easier 17-year amortization. It’s 7 percent return assumption also means it has more room for error in its model, in case markets do not cooperate over the coming decades.

Meanwhile, the Texas County and District Retirement System (TCDRS) has a pretty comfortable 90.5 percent funded ratio, meaning estimated assets cover nine-tenths of estimated liabilities. In related news, actuaries estimate it will take only 9 years to amortize its debts. These levels for the TCDRS look good enough that the 8 percent return assumption feels less threatening.

Taken as a whole, these four systems indicate acceptable levels of risk as of now. They also mostly compare favorably with pension systems in other states.

A little panic

Ok, do you want to be a little bit scared? Fine, I’ll help you.

Josh McGee, Chairman of the Texas Pension Review Board, points out that these four big pension plans in general, and the Teachers Retirement System in particular, run an additional risk beyond the normal risk – simply based on their massive sizes.

pension_liabilities — “You want to see something really scary?”

You see, if a small pension plan goes bust, a responsible government entity has a problem of filling in the hole, but the hole might be, and hopefully is, manageable through belt-tightening, cutting future benefits, and higher taxes.

But the TRS, with an unfunded future liability a little more than $33 billion, is too big to fix, if something goes terribly wrong.

Just to attach a sense of scale to the $33 billion figure, the state of Texas spent about $112 billion on everything last year, so it’s not like a $33 billion hole can be solved by any reasonable measures. TRS looks fine-ish right now, but failure is too big a financial risk for the state to run, so extra caution is needed.

I still say “Don’t Panic” but I’d also say don’t get too comfortable either. A little bit afraid might be just right.

A version of this post ran in the San Antonio Express News

Please see related posts:

Public Pensions – Don’t Panic, Use Heuristics

Public Pensions – Dallas Police and Fire Pension System Clusterfck

Public Pensions – Houston Might Have a Problem

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August 18, 2016March 26, 2017

Public Pension System Heuristics

Douglas Adams’ Hitchhikers Guide To The Galaxy famously advised us on the book cover “Don’t Panic,” and I think that’s a useful starting point for discussing public pensions in Texas.

You see, I started by wondering “should we panic?” when I began a personal project of studying public pensions, for a variety of reasonable suspicions, which I’ll share. After sharing my suspicions, I’ll tell you what I think the informed citizen – that’s you and me! – should worry about, and monitor, with respect to Texas pensions. Next week I’ll tell you specifically more about the biggest public pension plans in Texas.

The stakes for these multi-decade math models are particularly high for cities and counties that offer pension plans to employees.

Just ask the folks of Central Falls, Rhode Island (2011), both Stockton and San Bernardino, California (2012), and Detroit (2013), where insufficiently-funded and/or overly generous pensions sent those governments into bankruptcy protection. The City of Chicago is currently engaged in a multi-year game of chicken over its pension benefits. Some see bankruptcy as the future for Chicago, or possibly its public school district.

My suspicions

My first suspicion began because we’re in an environment of extremely – historically significant – low returns from bonds, such as 1 to 2 percent over the next ten to thirty years. Meanwhile, almost all public pension plans in Texas routinely model a 7 to 8 percent annual return over decades. That assumed annual return matters because with even a moderate allocation to bonds, risky assets like stocks have to make up the difference. Stocks and other things in the pension investment portfolios – like private equity and real estate – have to return 10 percent or more on average – every year for decades – just to make up the high returns that bonds can’t. That seems like an uncomfortable assumption over the next few decades. That made me suspicious.

On top of the current market environment, pension plans always represent some of the most complex financial systems in the universe. Complexity makes me suspicious too.

Actuaries, the poor souls charged with solving the math problems to figure out whether pensions will support public workers in old age – or conversely drive governments into bankruptcy – have a lot to keep track of.

Tracking the money going into a pension may at first seem relatively straightforward, depending as it does on employee headcount, employee salaries and contributions, and employer contributions. It gets a little trickier when you have to make assumptions about long-term investment gains – for the next thirty years.

Money paid out of a pension plan, however, really increases the complexity. The easy part of the equation here are the costs of administering a plan. The hard part comes from the fact that payouts generally continue for the life of workers. We don’t know exactly when people will die, so actuaries have to accurately model the expected length of the lives of workers. They also have to estimate when workers will separate from employment, and when they will claim benefits, and how much those benefits will be. On top of that, they have to model such things as dependent-spousal benefits, as well as rates of disability, both of which increase benefit payouts.

Ideally, these actuarial estimates need to work over long time periods. Contributions made to support a thirty year-old worker today may need to fund payouts for that worker fifty years from now. That’s a long time to estimate anything.

It seems analogous to those scientists at the Southwest Research Institute in San Antonio who planned the science behind the New Horizons space probe of Pluto launched in 2006 who then waited for a few seconds of planetary flyby in deep space in 2015. I picture these scientists sort of praying at launch ten years ago, like, “I hope our math works?”

No, pensions are easier (although in some ways harder!) than that Pluto mission, because there’s a political component to public pensions. If the teacher’s or policeman’s fund runs out in ten years, they don’t just throw up their hands and say “whoops, don’t worry about it.” Instead taxpayers – that’s you and me – will pay one way or another to honor previous public pension commitments, even if generally future retirees after that take a hit as well.

So how do we make sure public pensions are on the level, despite their complexity, and despite historically low returns from bonds?

One answer is first, not panicking. And then, vigilance. That’s what former Texas State Comptroller Susan Combs urged through her office with the publication of the 2014 report “Your Money and Pension Obligations,” and the creation of a searchable pensions database.

But how to you continue vigilance in the face of all the complex moving parts of public pensions?

I’m a big fan of that Texas Transparency site. You can see important data online, and I’m here to tell you the three things to look for in that public data.

Heuristics

My frequent answer to complexity: Heuristics! (I love that word.)

I mean, rules of thumb. Here are the three main rules of thumb that pension board members use to figure out whether their plans are healthy or in trouble.

First: Are liabilities (future payouts) at least 80 percent covered by money already in the pension plan? This is called the “Funded Ratio.” If you’re at 80 percent, then you’re pretty good. It doesn’t have to be 100 percent. Less than 60 percent and you’ve got a potential problem.

Second: If you have a shortfall – meaning your future payouts are less than 100 percent funded – then how quickly can you pay down your debts? Is the estimated time to pay off any pension shortfalls between 15 and 25 years? If yes, then according to the Texas Pension Review Board (PRB) you’re probably good. State law (HB 3310) and PRB Guidelines sets up a maximum of 40 years or else they start to get all up in your pension’s grill with reporting requirements and restrictions on benefits.

Third: Are the return assumptions over the next thirty years reasonable?

Reasonable right now means something kind of within the range of what other pension plans assume. NASRA – The National Association of State Retirement Administrators, but you probably already knew that – reports the average return assumption nationally as 7.62%.

As I’ll mention in a follow-up story on Texas’ Big Four Pension plans, three out of four of the state’s biggest pension plans assume annual returns above that average, with an assumed annual rate of return of 8 percent. Sadly, we can’t expect Texas to be the financial equivalent of Lake Woebegone, where all the market returns are above average. I wouldn’t conservatively plan on anybody consistently being able to earn an 8 percent return over the coming decades, especially when bonds return 1 to 2 percent. And even small “misses” on that measure, compounded over decades, can cause huge headaches down the line.

So yeah, I’m worried about that measure for millions of public employee retirees, and then I’m worried for all the taxpayers acting as unwitting backstops to those pension plans.

A version of this post appeared in the San Antonio Express News.

Please see related post:

Dallas Pension Plan – An Example Of What Can Go Wrong

The Big Four Texas Pensions

Houston Pensions – Worth Monitoring

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April 18, 2016April 18, 2016

More on (MORON) Public Money For Private Sports Owners

This may seem like small-ball (because it is!) but I can’t sit idly by when my city’s government proudly announces their intention to shovel $75 million of public money toward building a minor-league baseball team stadium. This makes me so angry.

I earlier nominated municipal attempts to lure the Oakland Raiders to San Antonio as ‘The Worst Financial Idea of 2015,” so careful readers of this space will not be shocked to learn my view of the city’s planned $75 million taxpayer-subsidy for a downtown minor league baseball stadium.

elmore_sports_group — Do these guys deserve $75 million?

I’ve read three opinion pieces in the last three weeks opposing the plan, and I agree with all three. I’ll offer my finance perspective below, but it’s worth reading and reviewing the other sports and visioning reasons for why this deal stinks.

Opinions against

Express-News sports columnist Roy Bragg rightly points out that AAA baseball is a bizarre reach-for-mediocrity for San Antonio. It’s a kind of “I hope we make it to the third tier of US cities!” that isn’t something we should aspire to, much less pay for with public money.

Express-News opinion columnist Josh Brodesky reminds us “there’s a reason why ‘minor league’ isn’t a compliment,” as he recalls counting the fielding errors during AAA-baseball games he watched as a kid. Teams at the AAA level resort to fan-friendly gimmicks because the game quality can’t compete with the pros.

Bob Rivard argues persuasively that on the one hand we should prioritize $75 million subsidies for other, more broadly-beneficial projects for the city. In addition, Rivard writes, baseball is a backward-looking sport for San Antonio, appealing to a kind of 20^th Century fanbase when compared to the potentially 21^st Century fanbase that professional soccer would enjoy here.

I agree with these writers on all points.

My own views

My own opposition stems from a mixture of finance and ethics. Financially, economists have proven stadiums to be a bust, while ethically I cringe at using public money to subsidize private sports owners. If sports owners want to build their stadiums for their for-profit businesses, I’m excited to be their fan. I don’t think we should be taxed to line their pockets, while other extraordinary needs in the city go unmet.

What economic development?

The finance case for building a stadium – all that promised ‘economic’ development’ – has been roundly debunked by economists, even if San Antonio’s leadership ignores the evidence. But it’s hard for residents who actually live in the neighborhood of The Alamodome (like me) to ignore that great white elephant’s footprint, as empty as the promises that got it built in the first place. Should I even mention the (lack of) development going on around Wolff Stadium and the AT&T Center, or is that too easy?

Not just finance

More than a finance perspective, however, I see the public financing of private businesses like stadiums in starkly moral terms.

I understand public financing of stadiums as a political strategy dating back to the Roman Empire, when ‘Panem et Circenses’ (Bread and Circuses) helped keep public order. The populi could pack into the Coliseum to spend a pleasant afternoon watching lions rend Christians limb from limb, to forget about their troubles for a while.

You and I might reasonably disagree on the best alternate use for $75 million of public funds. Rivard makes the compelling case that stimulus funds to revitalize the Broadway corridor represents a broad public good within a forward-looking city-wide agenda. Money is always scarce, so if we spend $75 million to subsidize one man’s baseball team, we don’t have that money for other worthy project like this one. I agree.

roman_colliseum — Thumbs Down to Taxpayer financed sports stadiums

I look at it this way: How can we publicly subsidize a privately-owned business by $75 million to move downtown, when we have pressing obligations to address more basic human needs?

You know what gets me angriest about the planned $75 million subsidy for this stadium? The public sacrifice – not literally of persecuted Christians – but rather of what I learned growing up were Christian values, like being my brother’s keeper.

How do I make that ethical leap? Earlier this week the Express News reported that 1 in 4 children in Texas lives in poverty. Food insecurity for kids, in the same neighborhood where some sports owner gets a $75 million subsidy, means neglecting something fundamental. It means the ‘Bread’ part of San Antonio’s political bargain has been sorely neglected.

How can we justify everyone footing the bill for this stadium in ethical terms?

Imagine if our tax collector sent a $58 check (that’s $75 million divided by 1.3 million people) to every city resident, accompanied by a note and stamped envelope, urging them to just endorse the check over to the private owners of a baseball team? How many families could pass it on, or instead would need to use it to relieve their hunger that week? Hunger – most poignantly children’s hunger – is a kind of invisible sickness that erodes the foundations of an ethical society.

Nearly two years ago Mayor Ivy Taylor began to build her city-wide support in one of her first acts as Interim Mayor by shutting down a downtown transportation plan for streetcars that had festered long past its overdue date. This AAA-Baseball Bread & Circus plan – without even enough bread to go around! – is ethically and financial unworthy of our city, and requires another act of political courage by city leadership to stop it in its tracks.

Please see related article

Worst Financial idea of 2015: Bringing The Raiders to San Antonio

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November 9, 2015

Tax Liens In My Life

Since I like to write about finance, all of real life is merely raw material for finance lessons, so I beg your pardon while I talk about tax liens in my life.

A while back I described my astonishment at how low property taxes were for ‘agricultural exemption’ property that I happened to be eyeing for investment purposes. Long story short, I ended up buying a one-fifth interest in raw land in a rural part of the County where I live (Bexar County, TX) agricultural exemption included.

My property investment

I mention my property investment to illustrate the role of tax liens. Bear with me for a bit as I explain a sort of complicated situation.

I only bought one fifth of the property, while the other four-fifths remain owned by four siblings (not mine) who inherited the property. While the family dynamic is opaque to me (they were strangers to me before my investment), I understand that some siblings have sufficient money and some don’t, and some siblings care to pay attention to details like property taxes, and some don’t. Meanwhile, taxes on the parcel of land have gone unpaid for a few years.

This makes me extremely nervous for my investment.

Fail to pay property taxes, and you eventually run the risk of losing your property to the foreclosure power of the taxing authority, typically a city or town. Needless to say, I don’t want to lose this property, and if we leave taxes unpaid for too long, eventually Bexar County will take the land.

Tax lien lenders

Now, you may or may not have ever heard of ‘tax lien’ lenders and investors, so if not, let me be the first to illuminate for you a fascinating little section of the real estate finance world.

Ever since I registered my name on the property deed as partial owner last Spring, I have been inundated with solicitations from tax lien lenders. My name – along with the siblings – shows up publically as owners of a parcel with delinquent taxes owed. Hence, the solicitations.

The tax lien lenders offer to pay our property taxes now owed on the property. Meanwhile, if we did the deal, the lenders would use the real estate as collateral for the loan in the event I (and the sibling heirs) fail to pay back the loan in the future. Tax lien buyers (or in Texas, tax lien lenders) have the power to act like the municipality, and eventually take over the property for themselves in the event of non-payment.

In my complicated situation, with some of us owners unable to pay the taxes or possibly unwilling to put up money for the others for an indefinite amount of time, these lenders make some sense.

Partly I mention this whole anecdote because tax lien investing/lending is an obscure but important part of real estate and municipal finance.

Partly I mention this because tax lien investing may inspire a natural aversion. On the face of it, any lender who has the power to take away your property seems, I don’t know, scary? I mean, regular bankers seem unlikable enough. From a PR standpoint, however, the specific combined function of ‘tax collector’ and ‘money lender’ has an even tougher time getting a fair hearing. Those labels have served for thousands of years as biblical shorthand for enemies of the common people.

Personally, I have no problem with the solicitations to pay my taxes in exchange for an eight to twelve percent loan. We might need that solution.

The ironic thing here is that – in my old investing life – I was on the other side of this situation.

My tax-lien buying

I discovered tax lien investing in 2005 after buying a book called The 16 Percent Solution, in which the author explained a high-return and low-risk path to wealth through tax lien investing. Through my investment company I first started purchasing liens in New Jersey and New York, eventually branching out into Connecticut, Vermont, Rhode Island and even Mississippi.

Incidentally, I was a very unwelcome (meaning: Yankee) participant in my one Mississippi tax lien auction. I’m just happy to have gotten out of there in one piece. Bless your hearts, people of Wilkinson, Mississippi!

Tax lien investing and lending happens around the country, with state and local variations adding to the complexity. On the positive side, the interest rates earned seem very attractive, while the risk seems low. On the negative side – as I learned over the course of a few years of tax lien investing – it’s quite easy to lose money through tax lien investing as well.

As I purchased liens, I sometimes wondered about the complex situations that led people to become delinquent on their real estate taxes. Now I’m in one of these complex situations, and I sort of get it.

My situation

I don’t know when we will all be able to agree on paying the taxes. It may be a better idea to borrow the tax money – even if we have to pay eight to twelve percent on the loan – than to risk losing the property outright to the county via foreclosure. A loan may give us enough time to figure out an eventual solution – either by paying the taxes or selling the property.

A version of this ran in the San Antonio Express News.

See related post:

Real Estate Tax Rant – Agricultural exemptions

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June 7, 2015

Pundits Talking Their Book

One of clearest, most knowledgeable, and most readable pundits on financial markets is a guy named Bill Gross. Gross, known in financial circles as the “The Bond King” and the founder of mutual fund giant PIMCO, writes an entertaining monthly letter with musings on his life, asset prices and value, and the future direction of financial markets.

Despite the nice things I just wrote about Gross, you should never, ever, take his advice when it comes to investing. Ever. The man’s monthly newsletters are the most egregious example of what’s known in finance as “Talking your book.”

“Talking your book” means telling other people how they should trade based on what would benefit your own financial portfolio and positions.
In Gross’ case, every single newsletter he’s written for the past twenty years concludes with an exhortation or justification to buy bonds. Which is pretty coincidental, considering he built the world’s largest bond fund.

Great salesman. Not a great predictor of the future

As a salesman, he’s phenomenal.
As a reliable ‘expert’ on financial markets whose advice should be acted upon? He’s a total catastrophe.

Ordinary course of business
Back in my Wall Street days, people talked their book as a matter of course. It was literally my job to explain to clients why the bonds held on my firm’s books were the ones they should buy, or why clients should position themselves with securities the same way we were positioned. That way, I attempted to create demand for the things my firm already owned so we could sell them. Or conversely, if necessary, talking our book allowed us to turn our risks into their risks. Much of Wall Street works this way.

My clients were extremely sophisticated investors and traders, and I don’t feel bad about this at all. They generally talked their books back to me in the hope I would have the same effect on my firm’s investment decisions. We all got very good at recognizing who was talking their book, and, overall all’s fair in love and war and bond sales. Not a big deal.

After I left Wall Street though, I noticed not everybody knew that nearly all finance experts talk their book, nearly all the time.

Knowing this can help in other situations as well.

South Texas
A friend of mine works in the oil and gas industry, delivering trainloads of sand across the country to fracking sites in South Texas. For the past six months, everybody in the fracking industry – from the drillers to the truckers to the hoteliers to the logistics companies – has been cutting back, idling workers and equipment, hoping to ride out the decline in oil prices.

My friend’s company delivers a fraction of the volume of sand that they used to deliver, a year ago.

He described to me how everybody in his world spends a lot of time obsessing over the future price of “the barrel,” which generally means the commodity price of WTI, which stands for West Texas Intermediate Crude. If WTI (aka ‘the barrel’) recovers six to twelve months from now they know all will be well for them and the industry survivors will reap huge profits. If “the barrel” stays low longer than that, however, many companies and people will be wiped out.

In that environment, with everybody’s business so exposed like that, few people can speak objectively about the “the barrel.” Everybody is left ‘talking their book.’

My friend says everybody’s got a theory about when and how prices will soon rise. Maybe geopolitical trouble with Iran will heat up again, hopefully? Maybe the Saudis will stop flooding the market with their crude to punish non-OPEC producers? A particularly hot summer is sure to boost energy demand and sop up the excess supply in the market, right? I mean, surely the new storage tank capacity in Oklahoma will allow us to ride out this oil glut, no? Maybe the US Government will stop dumping oil into the market to punish the Russians for their Ukraine aggression? (That last one is apparently a widely held theory to explain the drop in oil prices, which I find absurd.)

Every expert speaking on a panel to the oil and gas industry, or to a journalist covering the industry, has a theory on when prices will rise. Please give us some good news, the oil and gas industry folks all seem to be saying to each other.

Here’s the problem, though. They are all talking their book. Their views are not to be trusted at all.

Either consciously or unconsciously, people talking their book are particularly unreliable experts on the future of financial markets.

Experts in finance “talking their book” may simply be clever salesmen, like Bond King Bill Gross. Or they may be anxious and exposed to markets, like the entire oil and gas industry in South Texas.

People talking their book generally only mention out loud the data that support their position. The counter view of the market, “the other side of the trade,” generally goes wholly unmentioned.

Here’s some advice you can use. You should always assume that any industry expert you see on television, in print, or online is talking their book. They didn’t go on TV to give you all sides of the story, but rather the data that supports their book of business.

How can you find people in finance who are not talking their book?

Look for the ones who admit to uncertainty. Seek out the experts who tell you what they don’t know, what cannot be predicted, and how opaque the future really is.
When they present data to support both sides of the market – why bonds may be good or bad, or why WTI could go up or down depending on a complex interaction between a series of unknowable, contingent, events – now you may be listening to someone not talking his book. Now you may be hearing from a real expert.

Keep looking for this.

A version of this appeared in the San Antonio Express News.

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