Hi, there. I'd like to welcome you to our Market Commentary with Jim Allworth, who is RBC Dominion Securities Investment Strategist. Before I introduce Mr. Allworth, a few housekeeping items. For those of you who have dialed in on the phone, all of the lines have been muted. If you wish to ask questions after Jim's comments, please press the one followed by the four on your phone, and the operator will take it from there.
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Now I'd like to introduce our speaker, joining us all the way from the other side of the country in beautiful Vancouver. Jim Allworth has been in the investment business for 51 years, both as a research analyst and portfolio strategist. He has been with RBC Dominion Securities for more than four decades, where he has developed the investment policy for the firm and translated that into solutions for individual clients.
As an investment strategist, Mr. Allworth utilizes RBC's extensive global, economic, political, and sector analysis to develop a strategic view on the expected direction of major financial markets. Mr. Allworth co-chairs the Global Portfolio Advisory Committee, which provides strategic analysis of financial markets and establishes the asset allocation mix for clients worldwide. He regularly contributes to our Global Insight monthly publication. Mr. Allworth is a graduate of Simon Fraser University with a concentration in economics. With that, thank you for joining us today, Jim, and I will pass it over to you.
Thanks, Heather. Great pleasure to be here, and welcome to everybody on the call. I think if there was a word that sort of captures where we are, it's uncertainty. For some time over the last few months, it's been massive uncertainty, and still kind of leans toward that extravagant description. Every time we kind of get some of this, what we're dealing with, in our sights and understood, there's something else that comes along that stirs the pot again.
So I would like to start by reminding myself, and reminding you along the way, that we've undergone spectacular change in rapid order. This has happened very, very quickly. It wasn't very long ago, say, the middle part of February, where the stock markets were still motoring along and going to new highs, and people were kind of sitting back and expecting that 2020 would be a decent year for economic growth and for corporate earnings, and in all likelihood, if corporate earnings were going up, the stock market would be, too, to some degree, and that we'd put another good year under our belt with dividends received and some appreciation in the value of the businesses we owned.
That was happening despite the fact COVID had arrived in China and had shut down the Chinese economy. But there was this feeling that somehow or other, it was just a Chinese problem, and that to the extent it was going to affect us, it might slow down our economy a little bit here in North America and in Europe because of disruption of supply chains into China and out of China. But there was a sense that somehow or other, the rest of us would not get a direct hit from the virus.
And that view really changed over the course of about 10 days. Not only did the virus arrive, but it increasingly showed that it wasn't going to be well-behaved. The number of new cases started to surge, and suddenly, instead of just washing your hands, we encountered whole new questions of social distancing and shutting businesses down and shutting down large groups of people getting together, in fact, even small groups of people to getting together if they weren't intimately related to you. A very, very different picture.
And as it seemed like the bottom was dropping out of the economy and expectations, the bottom seemed to drop out of the stock market as well, and shares started going down, and very, very rapidly and in a very scary fashion. And before it was over, there was not only a lot of selling, but a fair bit of panic selling as well.
The market regained its composure, if you could put it that way, towards the end of March. But the economy hasn't regained its composure, or hadn't. And we headed into the second quarter of the year, the one that began in April, knowing that it was going to be awful. In fact, by the time we were a week or two into March, we knew that the second quarter was going to be horrible with all these businesses closed, and people at home not spending money, and all those things that went along with this.
I said to my colleagues a few times back then that knowing the second quarter was going to be bad wouldn't be the same as living through the second quarter when it actually was bad. And I think that's been true. We've had a really unprecedented-- which is an overused word these days, but it is unprecedented-- and kind of awful economic data come out.
Well, now we're in what seems a surreal environment where the economic news continues to be bad, but the stock market has moved up a long way off its lows and is a lot closer to its old highs than it is to its lows. And in fact, one index, the NASDAQ in the US, has actually set a new high. And that's prompted a lot of bewilderment and a lot of headlines that read, what are investors thinking? The market is way ahead of itself. It's dangerous when the market gets ahead of the economy, and so on. And that's left people just as uncertain as perhaps they were at the bottom, although maybe not feeling quite so beaten up.
Well, I think if we go through what's happened, we'll get a sense of why the market is where it is and how we should feel about it. And I think the starting point should be that if there's one thing that's good news in this, it's that the pandemic has, to a great degree, followed the trajectory that got laid out for it once it arrived.
Once it was here and we couldn't deny that, the people who know about this stuff-- epidemiologists and, for that matter, mathematicians-- told us that the number of cases would surge quite quickly. And of course, the great worry was that they would surge so far that they would overwhelm the health system altogether.
But whatever-- whether it was contained to some degree or whether they surged dangerously-- that the number of cases would probably peak somewhere in April. They would start coming down in May and June and on into the summer. And the more they came down, the more the discussion would start up about how do you reopen the economy and reopen the economy.
And I would say that's kind of precisely where we are. And the only thing that really changed in there at all was that our friend out at the border, Donald, kind of argued that he wanted the economy open sooner rather than later, and he planted the flag at the Easter weekend. And I think gratefully and happily, he got talked out of that. He made more gestures about wanting things reopened thereafter, and pushed very hard politically to get things reopened by the second week of May.
And while plenty of places felt that they weren't ready to open, they came under great political pressure to do so. If you lived in a state in the United States that was next door to a state that had opened, and your state wasn't opened, then your politicians would come under pressure to get with the program and open, too. And so we find ourselves with an awful lot of states reopened, but quite a few of those would have told you three weeks ago or four weeks ago that this would have been way too early, that they wanted to wait on into July before they considered this.
And that's raised this question of because some places have reopened earlier than they would like, are we going to get a new wave of infections? And it appears that that's true in some places. So for example, Florida, where new cases peaked back in March and started coming down, has had a new wave of infections. And those number of daily cases have gone to new highs. And the same is true in a state like Arizona and several other states.
Happily so far, in most of those states, the number of deaths hasn't gone up and has stayed relatively low. But the number of new cases has definitely exploded. And there may be a lag there, so we may be seeing an increase in the number of deaths over the course of the next couple of weeks.
It's also fair to say that there are some states that have reopened where that's not happened. And the most important one, probably, is New York, which, after Italy, turned out to be the hot spot in the world and had a huge crisis on hand, and has brought that down to a level where the number of new cases are a tiny fraction of what they were at the peak. The number of new deaths have dropped off dramatically. And they are going through a measured reopening to make sure that they don't get a recurrence.
Since we're talking about the virus and its progress, there's a couple of things I'd like to mention. One of them is that I just mentioned New York. New York and Italy may be telling us something about where the virus is headed. In both cases, you had very large numbers of people be infected and complete shutdowns, and in both cases, success at bringing the new number of new cases down.
About three weeks ago, two doctors in Italy, both of them running big regional healthcare operations that had just come through this huge effort to try to deal with the coronavirus-- these two very highly regarded medical people said that in their opinion, the virus had changed vary substantially in the preceding three weeks, that what they were seeing was that a far smaller number of people who were infected had to be hospitalized. And of the people who were hospitalized, a far smaller proportion had to go into intensive care, and an even smaller proportion had to undergo ventilation.
And they believe that the virus in their area had changed and had become much less virulent and more benign, which is, I am told, what viruses usually do. Over time, they usually become less virulent and more benign. Well, when they announced this to the world, there was a lot of pushback from a lot of other health authorities who said they were sending the wrong message, that there wasn't data to confirm this, and so forth.
However, I noticed last week that the head of health care in New York City, the hardest hit part of the United States, made exactly the same observation, that in the New York area, the virus had become much more benign. Far fewer cases had to be hospitalized, much lower proportion in intensive care or ventilation. I would call that good news. Now because it's changed that way in New York City or in Italy doesn't mean that automatically, at the same time, it's changed elsewhere. But it says that it's likely that the virus would trend in that direction.
The second thing I'd say about this is that there's a second wave that everyone has been worrying about, and everyone has thought that we're likely to get it in the fall when you come to the flu season. We think it's probably a pretty good thing to bet on because every pandemic in the past has had more than one wave except one, and that was the SARS epidemic. So it's likely we're going to get a second wave.
We're not as concerned about it because this is now something of a known quantity. We've been through this. All the things that bedeviled us when this arrived-- the shortages of testing equipment, shortages of personal protection equipment-- all those things are behind us. We're in the position, and certainly will be by the fall, where there's no lack of testing equipment, no lack of personal protection equipment, no lack of ventilators. Those things are going to be well in hand.
We're also going to be in a position where health care professionals are knowing more and. More what they're dealing with. They know which patients need which treatments these were all things they had to find out by trial and error, and at considerable risk to themselves. And those risks have dropped away as they understand the nature of this.
It's also true that every emergency room in North America and in Europe, and probably everywhere, has been reconfigured in the process of this to handle new COVID cases coming in the door, and every isolation ward has been reconfigured. So again, we're not working from behind. We're working ahead. So well there may well be a second wave, we don't think it's likely to push us towards the kind of shutdown bedlam that we've been going through.
Well, whatever the trajectory of the pandemic-- and why don't we stick with what we've got, which is that it's weakening now, and heading into the summer months to some degree, anyway, and that we'll probably get a second wave and then, and then ebbing even further and next year-- is probably going to tell us something about the trajectory of the economy, too.
And the good news, as things are reopening, is that we're starting to see the kind of green shoots in the economy that would argue that the economy isn't broken in terms of what motivates people to do things. And I'll just share a couple of them with you.
One of them, and a very important one in our view, is that mortgage applications in the United States have been moving up. And the mortgage applications we're talking about-- and these, by the way, are reported every week by the Mortgage Bankers Association in the US-- the mortgage applications we're interested in are the ones that are for new homes as opposed to the mortgage applications to refinance an existing mortgage.
So this is people walking in and applying for a mortgage because they want to go out and buy a house. Well, that, like every other housing statistic, fell off a cliff when the economy started to shut down and people were scared. But it's turned around. And it hasn't just turned around and bounced off a very low level and is up a bit. It's surged up and is actually higher. It's the highest level it's been at since 2009. It exceeded all the peaks prior to this, which is remarkable. It says that there's some significant portion of people who are looking out there and saying, you know, I wish the pandemic wasn't around. But I need to buy a house and I'm going to buy a house.
And similarly, car sales in May were up 40% over what they were in April. Now April was a truly horrific month, so we're still a long way short of the old levels. But they're out there, and people are going to showrooms, just like they're going to model homes. People in the housing construction business have registered far more optimism in surveys of their sentiments because they see far more people showing up at developments and model homes and online and so on.
This says something about the resilience of consumer confidence. And if the consumer is getting more confident, then businesses tend to become more confident as well. And that one two is quite important.
So as things go, we think that the third quarter, which begins in July, will be a real improvement on the second quarter. And of course, it should be, because we'll go from having huge numbers of businesses absolutely closed to having some significant portion of those businesses reopened and reopening further as the third quarter proceeds. And we think the fourth quarter will be an improvement on the third quarter, and that 2021 will be an improvement on 2020.
But we're also preparing for the idea that it's going to be a bumpy road, that every week and every month won't always be an improvement on the one before that, that it may very well be three steps forward, two steps back, and occasionally three steps forward, three steps back. And that means we're probably going to continue to have a lot of negative economic news. And that's almost a given.
And I don't mean to be a media basher. I'm not at all. I just know that if I was the editor of a newspaper, or of a television news program or an online news service, and I was looking around every day for newsworthy things to report to people, there's just, in this environment, way more negative things that you can be sure about that you can go out and report on than there are positive.
Positive things require some degree of speculation about the future. Negative things required just walking down the street and talking to somebody who's been disadvantaged by this, or whose livelihood has been lost by this, or whose savings or business has been lost by this. And that's not going to go away, any more than it did after the financial crisis.
The financial crisis featured endless news about things that were happening in the economy on a lagged basis that were still very, very negative, and asking the question, does this mean the whole economy is going to turn down again? People spent four years after the recession ended. The recession ended in the third quarter of 2009, the one that was associated with the financial crisis. Nobody believed it was over for another three or four years, and thought about it that way, and heard news stories about it that way. And we should prepare ourselves because we're going to be hearing about this for a long, long time.
The question is, does hearing about it, and hearing negative stories necessarily make it likely that the economy is going to weaken and be weak, too? And the answer clearly is no. And I will just share our historical view with you.
We have had, over the last 100, 120 years, all kinds of things that have provoked shock and awe, that have made people stand back and say, oh my goodness, the world has changed in a way that it'll never be the same again, and in saying that, implying that somehow it'll never be as good again, that this will reduce our expectations for the future over and over and over again.
So you can go back to the Spanish flu that followed in the wake of World War I. Infinitely worse than this. Killed 40 million people worldwide. And the people it killed was not older people like this one has been doing. It was predominantly young adults between the ages of 17 and 35 who were killed by this in the tens of millions right after a world war that had killed tens of millions of people in the same young adult category.
So you could have been forgiven if, in 1920 or 1921, you'd sat down and come to the conclusion that after essentially seeing a generation lost to war and an epidemic, that the economy would be lost, and that generation that was lost meant that the economy would take a generation to recover, certainly at least a decade to recover. And of course, you would have been absolutely wrong because within a year or a year and a half of the end of the Spanish flu, the economy was running, and running very well, and was pretty well unstoppable for the rest of that decade.
Well, we've had pandemics. We've had the Great Depression. We've had deep recessions. We've had world wars. We've had nuclear disasters, financial crises. And the thing that they all have in common is that when they were over, they were over. And quite quickly after they are over, the economy globally recovered and went on growing at its long term potential rate.
I don't mean to beat this horse, but let me just refer to the Depression, which is still on people's minds. The lore about the depression goes like this. It says, the stock market collapsed at the end of 1929, and shortly thereafter the economy collapsed, and it went on falling all through 1930, '31, and '32.
And then, having become a shadow of its former self, it just lay on the ground not moving very much all through the dirty '30s, and it took World War II to kind of pull it out of the ditch and get it moving again. And for the most part, that description is wrong. The first part's right. The stock market collapsed and the economy collapsed right through the end of 1932 and into 1933.
But after that, it's a very different picture. The economy kind of flattened out in '33, and then it started growing very, very fast. In 1934, it grew at about 13%. In 1935, it grew at 16%. In 1936, it grew back around 10% or 11%, and in 1937, it grew at about 6% or 7%. And it would have gone on growing, except that the US Congress lost its nerve. It had been running big deficits to bring the economy back to life very successfully. But it hated running deficits, and they put a tax increase in, an income tax increase in designed to eliminate the deficit in one go.
And in the process, it sent the economy right back into the ditch. The economy shrunk by 6% the next year, and the stock market fell in half again. But World War II still lay a long way away, especially for the Americans, who didn't get into it till the end of 1941. But the economy started growing again in the second half of 1938 and grew very fast at that point, and fast through '39, and fast through '40 and into '41, long before the war was on the scene.
So I am just going over this to point out that even something that you and I still talk about, the Great Depression, its effect on the economy was over when it was over. And the economy found ways to right itself and get back to business at a pretty fast clip.
But it cast this long shadow over people. My parents were Depression people. They both watched their own families be torn apart by the first part of the Depression. And they never got over it. My father made it to 102, and he was always looking over his shoulder for the next depression, sure it was just around the bend. And he'd been sure about that for 70 years.
I can't underline this enough. Even when the financial crisis was over-- the financial crisis ended in the middle of 2009, but people worried about it for another four years. And they're going to worry about this. And somebody said to me the other day that they'd heard that a whole bunch of senior business people are talking about the idea that there'll be more epidemics coming at us over and over again.
Well, there may well be. I just think that the more they come, the more that we'll know what to do with them. So our view is that when this is over-- and we think it may be in the process of ending, and probably will be ending next year-- that the economy will regain its composure pretty quickly and get back to growing at a decent long-term rate.
So why dwell on this? Because it has a big impact on what you would pay for a business. And if we can agree on how we think about this, then what the market has been doing can be put into some sort of perspective.
When you buy a business-- if you went out today to buy a business where you live, or if you're buying shares of the business on the Stock Exchange, or if you're buying the market itself, which is an aggregation of a lot of successful businesses-- you are actually buying all the future earnings of that business on the day you buy it.
So you're buying this year's earnings plus next year's earnings plus the year after that's earnings, and so on off out into the infinite future. And you're adding all those earnings up, and then you're discounting them back to the present using a suitable discount rate, which accounts for the cost of money and for some risk that you're taking. And whatever that works out to, the sum of all those earnings discounted back to the present, is the fair value of that business today.
Well, when you think about it that way, you realize that even if you blew up this year's earnings altogether, and maybe next year's, too, there's still an awful lot of earnings out there in the future, especially if, as we believe, the economy gets back to business and starts operating and growing at its long-term potential rate, which is usually driven almost completely by the growth in global population plus growth and prosperity and growth in productivity.
Well, when you look at it that way, and do reasonable calculations, making reasonable assumptions, you find that, in our view, the cost of the COVID virus experience to the long-term value of businesses is something in the neighborhood of 5%. And in order to make that cost as big as 15%, you have to make pretty dire assumptions about the future, much slower growth than you would expect, certainly much slower than we've experienced over the last 10 years, higher discount rates.
Well, the market, at its worst point, was down 35%. And clearly, what was happening at that time was that people were not looking at the future at all because they thought the future had been shut off by this. They thought there was no future and were desperately trying to get rid of the shares of businesses because those businesses had no future. Clearly overdone.
Well, the market has come back. It's no longer mouthwateringly cheap. It's closer to its long-term value looked at that way, which is still reasonable because that long-term value means you are going to see growing earnings and growing dividends over time. But it's not a slam dunk the way it might have been at the bottom of the market. Of course, at the bottom of the market, nobody wanted to take advantage of that.
Up here they're more cautious about it. And I think, in a way, they should be. At the bottom of the market, all the attention was on what could happen in the short run. There was no attention given to what was likely to happen in the long run. Up here, people are going to be reasonably valuing shares, but I'm not sure that they're properly acknowledging the kind of near-term risks that are out there that could give the market volatility again.
And I would mention a couple. Certainly we've seen a few states that are having problems. If we have more states having problems with a resurgence in cases, and we see those states shut down again, I think the market wouldn't like that. We haven't talked about, but there are a lot of chemical efforts going on to fend of the virus, and lots of those should give you good hope.
I'll mention a couple. We've had two antiviral therapies that have been shown to work. One of them was announced about four weeks ago now, which have given to hospitalized patients, so people who come in with COVID virus and have to be hospitalized. This therapy will reduce the length of their hospital stay by 1/3. That's huge if what you're trying to do is keep your health system from blowing up on you. To cut hospital stays by 1/3 is gigantic.
The second one is a steroid that was announced a little over a week ago. The steroid has been around since the 1960s, used a lot since the 1960s. It's available. It's cheap. And it has been shown to cut the death rate of people who are on ventilators in hospital by 30%. Huge, again. And again, cuts the death rate of people who are just on oxygen, not on ventilators. So this is the first thing that's come out that actually changes the mortality picture of people who have this in a serious form.
Well, there's hundreds of other antivirals being looked at out there. The fact that two have already been shown to do something should, I think, legitimately raise hopes there might be a couple more that have some impact on the virus as well. So there's more options available now for the health care system.
And then we have the whole question of vaccines. The last I looked, there's 138 vaccines under development. 15 of them are in clinical trials. Seven are in phase one, seven are in phase two, and one has reached the final phase, phase three. Three of the vaccines that are in clinical trials are backed by major pharmaceutical companies, one by Johnson & Johnson, one by Pfizer, and one by AstraZeneca in Europe. The AstraZeneca one is the first out of the gate, and they think that they will be in a position to have approval of their vaccine by late September.
All three of the majors in this have undertaken to ramp up production facilities and actual production of the vaccines before they get approval. And in AstraZeneca's case, they say they're going to have between over a billion doses available on the day they get approval.
Well, that's great news. It's great news we've got guys in trials heading in that direction. What we don't have yet is any definitive statement that says any one of these work. We don't know that. If one works, then there will be another large move up by the market.
If, by any chance, one doesn't work-- let's say AstraZeneca, three weeks from now, comes out and says we're stopping the trials because we see that there's no efficacy being delivered by the vaccine-- I think the market would not like that at all. Despite the fact there's another 130 or so vaccines coming through the pipeline and will be up for approval, I think the fact that one of them didn't work that people had pinned their hopes on that was the early one would definitely set the market back.
And then there's a lot of things that can happen that come out of the woodwork that you and I haven't thought about, but that might show up on the scene. So we've had tremendous changes in policy and monetary policy. And credit markets, which were in huge disarray, have kind of settled down because the Fed has decided to step in and back things dramatically, and so has the European Central Bank, and so has the Bank of Japan, and so has the Bank of England, and so has the Bank Canada, and so on.
But you never know what could happen out there. So I'll offer you a thought here. And I'm not trying to be prophetic because I don't think this will happen. I'm going to suggest it as the idea of something that you haven't thought about, either, that might come along. So Mexico is a pretty big country, has a lot of debt, has a very large tourism sector, has a very large energy sector. Energy and tourism are both in the penalty box fairly substantially and look like they might be there for some extended period of time.
If you woke up five or six weeks from now, and Mexican interest rates had surged higher because the people were worrying about their ability to service their debt, and we got some sort of a credit crisis around Mexico-- or any other one of the big emerging economies that might suddenly find itself in some sort of a financial difficulty-- then I think the market wouldn't like that either. There's plenty of ways for this market to decide to give us a downside.
There are also, as we've discussed, lots of ways for it to give us upside-- a virus that weakens dramatically, a vaccine that works, an antiviral therapy that works. So we're in a period where volatility is going to stay high and probably should, be given the mix of things that can come at us.
How do we handle it from a portfolio standpoint? Well, here we go. We like that long-term future. Every month that goes by, we're closer to the point where you can legitimately expect the economy is likely to start operating more and more normally. We think that we can still find value out there, and especially when we can find some businesses that look like this means a lot for their long-term future. And we can also maybe avoid businesses who look like they've walked into something that may shorten their long-term future.
So we'd like to be invested in equities. And in our portfolios, we still are. But we also don't want to be invested with both feet. So if there was a number, if there was a percentage that in your own mind, you thought, the percentage of my portfolio that should be in equities should be this. I'll pick one out of the hat, 60%, let's say, 50%.
Whatever you have decided, in the long term, you want to have committed to equities, we'd like to be a little shy of that today, a little bit less. We'd like a little bit of dry powder that gives us some staying power if the market goes back into kind of max volatility mode, that allows us, perhaps, to think about buying some of those companies that we would like to include in our portfolio or have more of in our portfolio at better prices. We're happy doing that.
The danger, of course, is that the market doesn't come back, that the market keeps moving higher. Well, if that's the case, we're going to be there because we're still invested. We're going to lose some extra return on the part we've kept back as a buying reserve. But we'd rather come to you and apologize because you have to buy more of these great businesses at higher prices than have to come and tell you we failed to acknowledge that we were in a period where there were downside risks as well, that some of those risks had come home to roost.
So this is-- as portfolios are always driven by several things. One of them is trying not to be hugely influenced by short-term concerns which always loom large, and to keep your focus on long-term value.
And the second thing is just this idea that in a way, what you're doing in a portfolio is leaning away from risks when they become inappropriately high, and leaning towards taking more risk when they're worth taking. And we're still of a mind to be leaning modestly away from risks. But we're prepared to change our mind when we think enough things have fallen in place that make it likely that we're once again headed towards a period of growing economy, growing earnings, and growing stock prices.
Well, the long-term growth rate of the economy, without adjusting for inflation-- and that's how you would look at it you're looking at stocks because we don't adjust for inflation with stocks or with earnings-- is typically growth in population plus growth in productivity. And there was a long stretch through the last century when that was a number that was up in the 6% to 7% range. Since the end of the financial crisis, that's come down to be in the 5% to 6% range. Our assumptions going forward from here is that comes down some more and it's in the 4 and 1/2% range.
When do we get there? Well, we think we're on the way, starting in the second quarter, to get to that point. In order to feel that you can legitimately start to look forward to that long term, you need to get back to where we were when this all began. We don't think we'll be back to where the economy was at the end of 2019 before the beginning of 2022.
And if, instead of that, you needed to get back to where it would have been if none of this had happened and the economy had kept motoring along with that growth rate it was achieving, you probably need to the end of '23, 2023. And I would just say that if you had a second wave that was more damaging than we thought, and perhaps worse news on the vaccine front, and we were going to have to wait longer for a vaccine than we thought, then you could probably push both of those out a year. We don't think that's what's going to happen. We think the odds are going for our forecasts. So that's our long-term view.
And let's go to the petroleum business. Well, there's a cyclical recovery and there's long-term recovery, and they overlap from time to time. The energy industry globally, as distinct from the Canadian one, has hit a perfect storm in here. We had the Russians and the Saudis in a price war in a period when we already had a significant imbalance, important imbalance on the product side. So there was just too much gasoline around. A lot of that too much gasoline was in Asia, but not all of it. Some of it was also in Southern Europe.
And if this excess inventories in gasoline started to reduce refining margins, then refiners weren't going to be ordering as much crude. And that was already a situation before this began. Then we had Russia and Saudi Arabia decided to duke it out. Saudi Arabia wanted to push prices down to try and cripple the shale business in the US. The Russians weren't having any of it. They stood off for a month or six weeks. And then everybody got together and, fortunately, cut production by nine and 1/2 million barrels.
And by this time, prices were low enough that US shale production was falling and has still been falling, I guess. And that took away the prospect of excess inventory sitting around in tanks and on ships for a year or two or three or four as the economy gradually came back. And of course, the thing that added to all these woes was shutting the economy down. And that shut driving down. And so in many major cities around the world, the congestion indexes fell all the way down into the tens and 20% range, where they'd normally be up in the 80% to 90% range.
So the good news is that maybe we avoided a long-term inventory problem. But we still have an inventory problem, to some degree. And the other bit of good news is that as economies are reopening, people are driving again. We saw that in China. We're seeing it in the US. In many major cities, congestion levels are back to normal or near normal. But there remains a fundamental supply imbalance problem that's still probably going to take some time to work out.
Now I think we have the finest strategic energy team in the world. And they use fabulously sophisticated techniques to follow inventory on every ship and every tank farm and every place in the world. And their view is that oil prices are going to average somewhere around where they are over the rest of this year, move up firmly into the 40s, maybe even high 40s, next year. And then we'll see thereafter.
If you bring this all back to Canada, to that perfect storm, you can add all the problems of the Canadian industry. And a lot of those, to the extent that they're based out in Western Canada, have to do with takeaway capacity and pipelining. And while those are moving towards resolution, it's far from clear you're going to get resolution.
They've started constructing the Trans Mountain Pipeline, but not in BC yet. There's very mixed reception along the line in BC, and there are people who promised huge disruption, and we may well see it. Biden has said he will cancel XL if he's elected. And so far it looks like he would be elected, so that remains an issue. And the Midwest Line for Enbridge seems to run into court cases, not to mention spills, pretty well constantly. So this remains a huge problem.
And again, keeping our eye on the western part of the industry, it's not how much oil you sell that adds significantly to GDP, it's how much oil you develop that adds significantly to GDP. And in order to really bring back an environment where oil development is going to be strong enough that you could actually look at, and Albertans could look at their economy and say, well, that's the way it's supposed to be, now we're running normally, I think, requires significantly higher prices than we are thinking of since most of the oil development is high cost.
And I think it needs more than oil in the 50s to stimulate new development. I think it needs oil that's higher than and conviction it's going to stay higher than that before people start making multi-billion capital expenditure commitments. So I think it's going to remain a challenge for that part of our economy to the extent of the west. And I think that it remain a challenge to pretty much everywhere for a while.
If you translate this back to investment, I think it's going to be quite cyclical. You're going to get upswings, and you can play them, but you don't want to stay around too long. The idea that there's some sort of long-term secular growth facing us here, I think, is hard to support.
Sure. Well, I think $100 is possible. I just think it would produce a supply response that would make it hard for it to stay there very long. The shale industry is in disarray at the moment, and the small guys, who've been doing this almost all through debt, can't refinance. The bulk of those refinancings come starting about three years from now. But many of them are having difficulty getting money to do anything. There are a few guys in it who are very efficient and have brought the costs down, and they're going to be producing no matter what.
But the swing factor are these small guys. And essentially, when prices get high enough, because they're desperate to get cash flow to try and keep the bank off and maybe stay alive, they're going to be very sensitive to if they can make any cash flow, they'll come back. And so they're always, in our view, going to limit things on the upside.
So I think that's a good observation. The other one is your question on green energy. Well, you know, I don't want to pin everything on electric vehicles. But all costs in green energy have just kept coming down. The more green energy development around there is, the more technology has worked to make it more efficient. So wind power, for example. You know, the costs have dropped by several orders of magnitude over the space of a decade and a half and look like they might drop further as even larger generators come into play, and as people literally understand things about how wind operates at night versus day, and things like this.
So it seems to us that many alternative energies are going to keep coming at us with lower cost. Solar panels themselves, the costs have dropped dramatically. And they also seem likely to be able to keep those costs coming down. All green energy would benefit dramatically if there were some real substantial breakthroughs in batteries. And everyone waits for that. But as they're waiting, there's a lot of small breakthroughs in batteries. So you add those up as years go by, and again, battery solutions become greater and greater and greater.
And then the final thing that I think makes this a trend that just isn't going away is that governments are supportive of it. And so part of what we've seen in Europe, all across Europe in this, is an EU policy directive that essentially will support the energy and the power industry. But the support is contingent on the power becoming cleaner and cleaner.
And that seems to us to make it highly likely that we'll see more and more electric vehicles. We'll see more and more alternative energy sources. And we've already seen that they've grown faster and accounted for a larger proportion. I think BP has said that it's turning itself into a power company rather than an energy company. And I think the writing's on the wall, and the seniors have the money to do it, and they're going to go do it. So I suspect we'll see more and more incursions from green energy, and probably more and more investment opportunity from it, too.
Thank you, Jim. In the interest of time, I think we're closing in on the hour here. So I don't think we'll be able to take any more questions. But if you did register a question, please reach out to your investment advisor, and they will work with you on providing an answer to the question that you had.
Jim, I would like to thank you for your time today and your comments, and any closing comments from you before we sign off.
Well, sure. We can move into the second hour, Heather, if you'd like. It's hard to shut me up. No, I won't. I think we got there. I'd just recap that we do think the economy will be heading towards better things. We think there's already signs that it will be. And while we're going to stay alert to the potential for near-term volatility, that shouldn't stop us from owning great businesses that look like they are going to be part of the future. And again, it's a question of leaning towards the risks that are worth taking and away from the risks that are inappropriately high. Thanks, Heather.
All right. Well, thank you, Jim, for your time today, and thank you, everyone, for joining the call. And we wish you all a great day. Thank you.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
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