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I have a question for you - what is the one thing someone could say that indicates their humility and intelligence?
I was wrong.
When someone can cop to making a mistake, the admission is a signal that they are self-aware of their thinking. The self-awareness of errors in both thought and judgment causes reflection on what went wrong and how someone can learn from their mistakes.
I want to review some errors I made in some columns I wrote this year. I hope this lookback is as instructive for you as it is for me.
About five months ago, I said the following: "...expect to continue seeing a slowdown in residential investment until interest rates change to make returns on residential investment more favorable."
I was wrong on this call. Let me explain what made this prediction incorrect.
At the time, I thought the permitting process in local municipalities would slow down residential fixed investment. My thinking was that local government officials did not want to issue more housing permits and create an excess supply of future homes.
What I failed to see was that lower interest rates and a strengthening economy would increase buyer demands for housing. As the demand for purchasing homes rose, so too would permit us to build new homes. Local government officials could see an increase in future tax revenues from a more excellent supply of newly built houses.
Thus, both permits and the supply of new homes increased this year. The increase in new housing permits and starts is one of the reasons why GDP growth in the U.S. has been positive. I expect this trend to continue in 2020.
Another call I got wrong was on the price of oil. About nine months ago, I said the following: "The rise in the price of oil is not heading for a slowdown anytime soon. That's because we are rapidly approaching the spring and summer travel months when crude oil demand is highest. Should cuts in oil remain while demand is high and rising, you could see oil prices go well past $80 a barrel this summer."
Well, oil prices for West Texas Intermediate have not gone past $80 a barrel this year. Heck, they haven't even gone past $70! Prices for WTI crude has hovered between $55 and $60 a barrel since mid-May.
The first reason is that demand for gasoline in the U.S. declined this summer and fall. As the demand for gas declines, the price for oil, which is refined to make gasoline, also will decrease. Couple this with a rising supply of oil inventories from increased production in the U.S. and OPEC, and you have the makings of a price decline, which I failed to anticipate earlier this year.
Another reason for the decline in oil prices is due to the strength of the U.S. dollar. Commodities like oil are priced in U.S. dollars. There is an inverse relationship between the change in oil prices and the value of the U.S. dollar. As the value of the U.S. dollar rises, the cost of oil declines and vice versa. A rising U.S. dollar makes buying oil more difficult for foreign countries who produce oil. Foreign countries sell their foreign currencies to buy U.S. dollars for oil purchases.
Finally, trade issues have been a bit of a bearish factor in oil prices. During the summer, a trade deal between the U.S. and China was looking more unlikely as the months wore on. Also, U.S. sanctions against Iran and Venezuela for selling the oil they produce did not work as planned, which caused oil supplies to rise. Thus, higher quantities of oil over the summer and fall have to lead to lower oil prices in the markets this year.
In retrospect, I called this one terribly and should think harder about my process when studying the market for oil prices.
And then, there's my call on EOS.
Oh boy, was this really bad!
About seven months ago, I was bullish on the prospects of EOS as a promising crypto-currency. I believed at the time that with Coinbase listing the crypto on its exchange, as well as EOS raising $4 billion in an initial coin offering (ICO), the price for EOS would rise.
What I failed to see was that several investors in EOS tokens are located in China. Because China is led by a state-run government, other investors fear the Chinese government may interfere with the crypto's development. The potential interference of the Chinese state-government in EOS development probably caused other investors in EOS to sell.
Another reason for EOS's decline is that developers of applications find the structure of EOS too centralized. When a centralized structure of crypto like EOS prevents developers from making money on new applications, their use and participation on the network will fall. As the community of app developers for cryptos like EOS falls, so too does the price of the crypto.
Sadly, I failed to recognize these two issues in my write up earlier this year.
So, in short, I need to do a better job in weighing factors that cause an asset's price to rise or decline over time. I also should be better at understanding economic indicators like housing permits. Housing permits can spur or curb demand for housing starts and supplies, depending on the state of our economy. My hope is that 2020 will be the start of an improved process when thinking about what and how I look at the economy and investments across different asset classes.
Thanks so much for reading my columns this year. I appreciate all the new and old followers of my community here on @ello. Your interest is much appreciated - happy holidays!