Virtually every analyst has been puzzled by the seeming immunity of stock markets to soaring oil prices (USO), (DIG), (DUG) this year. In fact, stocks and crude have been tracking almost one to one on the upside. The charts below a friend at JP Morgan sent me go a long way towards explaining this apparent dichotomy.

The first shows the number of barrels of oil needed to generate a unit of GDP, which has been steady declining for 30 years. The second reveals the percentage of hourly earnings required to buy a gallon of gasoline in the US, which has been mostly flat for three decades, although it has recently started to spike upwards.

The bottom line is that conservation, the roll out of more fuel-efficient vehicles and hybrids, and the growth of alternatives, are all having their desired effect. Notice how small all the new cars on the road are these days, many of which get 40 mpg with conventional gasoline engines. As for my own household, it has gone all electric.

Developed countries are getting six times more GDP growth per unit of oil than in the past, while emerging economies are getting a fourfold improvement. The world is gradually weaning itself off of the oil economy. But the operative word here is 'gradually', and it will probably take another two decades before we can bid farewell to Texas tea, at least for transportation purposes.

But the Mileage is Great!

Many hedge fund traders are unhappy about the current near monopoly enjoyed by the top three ETF issuers, Black Rock, State Street, and Vanguard, which control 80% of the market. At last count more than 1,300 ETF?s were capitalized at more than $1.4 trillion. The result has been grasping management fees, exorbitant expense ratios, and poor structural designs, which create massive tracking error.

The good news is that new entrants are flooding into the ETF space, and the heightened competition they are bringing will help curtail the worst of these abuses. This development will accelerate the demise of the bloated and arthritic mutual fund industry, whose end has been a long time in coming. Not only will management fees and expense ratios plunge, there will be a far broader range of offerings, as new funds are launched from a diverse range of institutions coming from differing areas of expertise. Failure to enter the newly lucrative ETF market by the remaining giants sitting on the sidelines means that their existing mutual fund businesses will be cannibalized.

Look no further than bond giant PIMCO, which CAME out with a plethora of fixed income related funds, Van Eck?s expanding list of ETF?s for commodities, and the even growing list of inverse and leveraged inverse ETF?s presented by ProShares. The bottom line will be that lower costs and tighter spreads will leave more profits on the table for the rest of us.

The Mutual Fund Industry is Getting Cannibalized

ETF?s are much more attractive than mutual fund competitors, with their notoriously bloated expenses and spendthrift marketing costs. You can?t miss those glitzy, overproduced, big budget ads on TV for a multitude of mutual fund families. You know, the ones with the senior couple holding hands walking down the beach into the sunset, the raging bulls, etc.? You are the sucker who is paying for these. Sometimes I confuse them for Viagra commercials.

I once did a comprehensive audit on a mutual fund, and a blacker hole you never saw. There were so many conflicts of interest it would have done Bernie Madoff proud. Any trainee assistant trader can tell you that more than 90% of all mutual fund managers reliably underperform the indexes, some grotesquely so.? Published performance is bogus, they show a huge survivor bias, not including the hundreds of mutual funds that close each year. And there?s always that surprise tax bill at the end of the year.

If there was every an industry crying out for a fundamental restructuring, consolidation, price competition, and ultimately a whopping great downsizing, it is the US mutual fund industry. ETF?s may be the accelerant that ignited this epochal sea change, with the number of mutual funds recently having shrunk from 10,000 to 8,000. It?s still early days, with ETF?s only accounting for 5-6% of trading volume, even though they have been around for a decade.

The Mutual Fund?s Days Are Numbered