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Newsletter #22: March 16, 2009
Are stocks and oil bottoming?
Was last Tuesday’s 350-point rally the beginning of the end of the bear market or just a false “bear trap?” And a related question: “Did oil bottom at $33 and will it get re-tested?” Let’s see what we know.
Some things we know
Sometimes the objective observable facts can yield fairly clear conclusions. Usually that’s not the case. Usually you can use the available facts to make a decent argument in either direction. But sometimes the facts seem fairly clear.
For example, there should have been clarity about being at a turning point in 1982 - I think it was in September. We knew that interest rates were at historical highs, put there deliberately to try to strangle inflation out of the economy. High rates were strangling the economy as well as inflation. Then Paul Volker - the man who determined the direction of interest rates - actually told us in a magazine interview that interest rates were not going to go any higher, that the interest rate squeeze was over. So we could pretty well know that interest rates were going to head down. Falling interest rates are nearly always good for equities, and at that point nothing would have helped the economy as much as lower interest rates. So by the Fall of 1982 there were very good reasons to anticipate a strong, sustained upward movement in stocks.
Now we know interest rates are low. Short rates are almost zero. Even long rates are assuming only about 1% inflation, about as low as a healthy economy could go. So if we think that eventually the global economy will recover and become healthy again then clearly interest rates can only rise somewhat. If we think as some do that the huge cash injections and deficits being run by the U.S. government will eventually cause inflation, then rates could rise a great deal. If foreigners start to refuse to buy more U.S. debt as the Chinese hinted they might consider last week, then interest rates could go much higher. Rising rates are not generally good for stocks. In fact they are a heavy wind in the face of equities.
Here’s what else I think we can know with a fair degree of certainty:
- Financial stocks have been in panic mode partly because of a silly “mark to market” rule that makes no sense when there is no market to mark to for huge quantities of bazaar derivative-based securities; thus this rule has caused everyone to mistrust the banks and probably to underestimate the real value of their assets. That problem seems like it’s about to go away. Let’s pray.
- Speculators have been able to short down the stocks of companies with any whiff of unknowable risk in part because the “uptick rule” was abolished by the S.E.C. in 2007. The uptick rule is about to be re-established, so that problem is about to go away too.
- Banks are making healthy interest rate spreads on their loans.
These three facts are very bullish for financial stocks, which were selling at historically oversold prices. They’ve jumped but still seem cheap. I remember when Viacom sold for $2 per share in 1974. Eventually it got up to about $50. Could Citibank (C) be in a similar position today? I wonder what Citi’s global brand franchise and presence just by itself is worth.
On the other hand we also know that
- the economy is in the toilet and there is likely to be more pain for some time to come,
- consumer spending is unlikely to become robust for many years to come because people have lost a lot of their asset base and the appetite to resume their borrow-to-spend consumption habit,
- there is a lot more manufacturing and retailing capacity in the U.S. than the economy will need for many years to come, so capital spending is likely to be restrained for a long time,
- some major loan categories such as commercial real estate, car loans, and credit card loans still have a lot of write-downs to come,
- Eastern Europe is in worse shape than the U.S. and could cause financial strains for the Euro countries that could exacerbate global economic weakness. Some developing countries are in even worse shape.
The sum of all the above “facts” leads me to two conclusions:
1. We are likely to see more of a “relief rally” as it becomes increasingly clear that the government has finally unlocked the banking sector so that it can start to function more like normal. That success will reflect more optimism on the broader economy. A relief rally could extend for months and could bring the market back to Dow 10,000.
2. But a sustained long term bull market - lasting for years - is unlikely because stocks will be fighting a headwind of inflation concerns, higher interest rates, and sluggish fundamentals of demand - both consumer and capital spending. More important (or maybe the same thing), corporate earnings will be fighting the same headwinds for a long time.
So my guess - and I cannot exaggerate the humility and reluctance with which I offer this guess - is that after some kind of rally, we will enter into a period of general trendlessness, what is called “a stock-picker’s market.” That’s when stock averages fluctuate without direction. In such a market some individual stocks do well based on the ability of the company to succeed in a weak economy. Here is where Peter Lynch’s old concept of investing in companies you know and have confidence in should pay off.
What about energy investments?
The broad categories of energy investing are
- alternative and renewable energy
- coal
- natural gas
- oil
I don’t follow coal and I pay little attention to solar, wind, geothermal and other alternatives because the stocks tend to have speculative technology risks and rich pricing. I think SQM, a quasi-alternative energy play, is attractive now that it’s price has come down into the mid-20’s because it has an established cash flow in several good commodities (including iodine) and is a leader in lithium, which could see an explosion in demand from next-generation cars.
Natural gas is in a long term over-supply situation because of the vast discoveries of non-standard sources like shale. Natural gas could see a pop because $4 is too low to sustain production. The price could bounce dramatically based on very low rig counts, as some analysts now believe. But there is no reason to think that longer term natural gas in North America will sell much above $6 for very many years unless some national policy is adopted to promote its use to power cars and/or trucks. So I don’t own companies heavily tied to natural gas, other than some gas pipeline companies that offer attractive yields and Devon, which is an exceptionally well run company and a potential acquisition target.
Oil is the interesting energy commodity, in my opinion, as it has been for the past few years because of the large and increasing decline rates for existing fields. Oil is interesting from two viewpoints - as a supply-and-demand matter and as a currency hedge. On both scores there is reason to feel that the bullish forces are gathering again and may have their way over the course of the next few years. I think the potential rewards from being long oil and oil stocks are starting to become very interesting.
Oil - the fundamental case
I recently posted an analysis of oil supply/demand scenarios through 2015. While I encourage readers to consider the entire piece, the bottom line of my analysis is that high and rising declines in production from existing oil fields (including especially offshore fields) will - in a few years - overwhelm the recent past and near future reduction in global oil demand. Even if the eventual recovery of the global economy doesn’t cause oil demand to rise substantially from the present much reduced levels, within a few years declines in existing fields will cause another supply shortage. I think we’ll start to see much lower spare capacity around 2011.
However, in the short term oil prices could stay low or even decline from the current $40 -$45 area since the world is in an an extreme and growing over-supply situation at present in terms of spare capacity. I’ve estimated that spare capacity will be just under 6 mb/d by the end of 2009. For comparison, spare capacity was 2 mb/d when oil was over $125.
Continuing declines in global economic activity could exacerbate the over-supply. For example, it was recently reported that Chinese exports were down 25+% in February. The Chinese have been importing substantial amounts of oil to fill their strategic reserves, no doubt adding meaningful amounts of demand, but now they have little more storage capacity left. Also, institutions that estimate demand are lowering their predictions consistently, as the IEA and the EIA did recently. OECD economies will be getting weaker for the next 6 - 12 months in all likelihood. So it seems likely that a significant over-supply condition will pertain for roughly another two years.
The oil price might re-test its prior lows, given the over-supply condition, or the price could begin to creep up with a recovering stock market. But I doubt there will be a sustained rally in the price of oil for a year or more. OPEC’s bet is that restricting immediate supplies will increase price. But restricting supplies also increases spare capacity. If prices rise in the face of a lot of spare capacity, it could be hard to enforce supply restrictions on greedy OPEC members.
On the other hand $40/barrel is too low a price to support some current production for very much longer or to encourage new production. Higher cost oil such as deep offshore and oil sands production face some potential shut-downs at $40 oil. Perhaps more important EOR (Enhanced Oil Recovery) efforts like gas or chemical injection or thermal recovery that have been so effective in recent years at stemming decline rates have little incentive at $40 oil. So the next year or two may see a supply contraction that could lift oil prices somewhat.
Three forces are acting or may act to support the oil price. One is OPEC, of course, and another is possible speculative buying of oil in regard to future inflation and/or potential devaluations in global currencies, about which more below. OPEC has had limited success in keeping oil off the market, thanks mainly to the Saudis. The Saudis are trying hard to get all members to comply better, putting out signals that they will not cut further until all OPEC members comply with their quotas.
A third potential upward influence on oil , a wild card, is the possibility of renewed global military tensions that could threaten oil supplies or supply routes. Military tensions seem to be increasing. One simply has to name the countries to make the point: North Korea, Pakistan, Iran, Palestine, Venezuela, Mexico. Such tensions could rise to the point of becoming a reason for speculators to be long oil.
All in all, it would not surprise me to see gradually increasing oil prices through 12/2010. An oil price in the $70 - $90 range would represent an equilibrium in supply and demand that would reflect the marginal cost of producing more expensive oil. That equilibrium could come about over the next 12 - 24 months as the decline in existing oil field production reduces the amount of global spare capacity thus raising prices to motivate producers to maximize production again.
The really interesting and significant result of my analysis (assuming it is correct) is that by 2012 there will be an oil shortage condition once again, as existed in 2008, which means oil could be selling at over $100 again by some point in 2012. By the end of 2013 I have calculated that oil should be in a serious shortage condition, thus requiring much higher prices in order to destroy demand.
If I’m right about a coming oil shortage, several investment conclusions seem warranted. First, oil stocks should perform decently in the short term and over the next 18 months or so. Some have the potential to do quite well this year even if the price only gets into the $55 - $65 area. Second, long term oil calls look very attractive (I have started to buy some). Third, oil stocks may have even more stellar appreciation in 2011 and 2012 if a trend toward shortages, as I predict, is seen in reduced (even if ample) levels of spare capacity. Fourth, if we return to a condition of oil shortages in four or five years from now, the global economy - which is likely to be growing at that point but still in a weakened condition - might be crippled once again. That outlook is an additional reason that I do not anticipate a long sustained bull market in stocks going forward.
Inflation prospects and oil
The other interesting investment aspect of oil is that it has the potential to become a currency hedge. People have often called oil “black gold.” If fiat currencies, particularly the dollar, run into serious problems, as some analysts have been predicting of late, the price of gold - and oil - would almost certainly escalate as a hedge to depreciating currencies. Investors would look to commodities as a refuge during an inflationary environment, and oil would almost certainly be one of their first choices.
Inflation warnings come mostly from “monetarists”, who believe that inflation is a function of the money supply. If the money supply expands too rapidly, they believe, it inevitably results in inflation. These days they point to the vast funds injected into banks and into the economy at large by the various recent federal bail-out and rescue plans - some $2 or more trillions by some estimates. Huge and growing federal deficits are another cause of inflation concerns and they in turn become more scary when demographics and U.S. entitlement program liabilities, particularly Medicare, are projected into the future.
One could ask - as I have - how come we are approaching a deflationary condition if all this inflated money supply is out there? The reason, as I recently posted, is that money supply is only inflationary if the velocity of money is not contracting. That is, if people are hoarding cash and saving more than they spend, an expanding money supply by itself won’t immediately cause inflation because the declining velocity of money negates the increasing quantity of money in circulation.
What causes the velocity of money to increase or decrease is in large part the rise or fall in people’s asset values and their confidence or fear regarding employment. If their asset values - mostly their houses and their stock portfolios, but also the values of private businesses - are growing and consumer confidence grows, then so does the velocity of money. Then inflation can take place if money supply is not managed properly.
Looking forward, an economic recovery will be coincident with a bottom in housing prices and very likely will follow a rise in stock market prices. As jobs losses eventually stop and the economy actually begins to grow again, a renewed confidence in asset values (and job security) will cause the velocity of money to expand. At that point, given continuing huge federal budget deficits and the vast amount of money already injected into the economy, there is a reasonable fear that inflation could be ignited.
Is that a year away? Two years? Three years? Nobody can know exactly but the Chinese, America’s real bankers, are already sounding the alarm. Team Obama say they are aware of the risk of inflation and they will work hard to bring the federal budget into balance as soon as they think it is safe to raise taxes and cut spending. Still, there is a reasonable concern that in a few years - say 2011 or 2012 - we could see inflation begin to occur.
Interestingly, 2011 and 2012 is exactly when my analysis suggests that declining oil production in existing fields along with rising demand will begin to overpower any new oil production and reduce spare capacity to alarmingly low levels. If that period also corresponds with a more general problem of inflation in the global economy, it seems likely that a rising price of oil could be exacerbated by speculative forces attempting to hedge their currency risks.
Of course, a highly elevated oil price would act like a tax on the economies of oil importing countries. It would tend to cause economic contraction. Oil importing countries could fall back into a contraction once again. As commodity professionals are want to say, “the cure for high prices is high prices.”
That possibility is a little too far into the future to have any claim to likelihood or to base any action on right now. But it is one reason that I am not optimistic about seeing another long sustained bull market in stocks as we saw, with a few short interruptions, from 1982 - 2008.
The solution to a coming commodity shortage must lie in new technologies. We must get our transportation fleet converted to electricity and find better ways to generate that electricity, among other things. But the problem from an investing perspective in hoping for a technology fix is that it cannot be implemented sufficiently by 2015 - my longest investment horizon - to make much of a difference.
Tags: peak oil energy investments
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26 responses so far ↓
1 TommyGuy // Mar 16, 2009 at 1:04 pm
Nice piece, Jim! As was your analysis of oil supply and demand. My feeling is that new projects have been slowed even more than you may be assuming, meaning that existing declines will be felt sooner rather than later. I’ve always felt that declines are THE big story. In the meantime, you have OPEC in a race downhill with demand. Sooner or later, they’ll catch it.
Also, “spare capacity” is a bit misleading because, as you point out, everyone has been assuming spare capacity last summer was around 2mb/d. Whether it was or not, the supply/demand balance was such that prices were squeezed up and up over a period of years. So I would assume that when we get back to a spare capacity of 2mb/d, we’ll be heading back toward $150 oil.
At this point, I think the economic situation has pretty much guaranteed that peak oil is history. From now on, declines are in charge. As you rightly point out, it won’t take more than a few years before the situation is dire. In the meantime, our only hope is to keep demand down through conservation and efficiency. Let’s hope it doesn’t stay low because of long-term economic distress!
On another subject, it’s my opinion that two factors will result in nat gas prices rising sooner: one is the rate at which rigs are being laid down. Many of these are hard to restart quickly. Two is that a lot of the new nat gas is from shale gas, which has incredibly high decline rates. So the declines in gas may overwhelm the industry’s ability to restart new supply. Never mind the fact that many companies have no interest in building supply up in the face of these low prices.
2 Sondra stein // Mar 16, 2009 at 1:34 pm
So, what are you doing with your money?
3 David Puchkoff // Mar 16, 2009 at 1:37 pm
Jim, nobody sees the angles the way you do. But it’s what’s just over the horizon’s edge that always changes the equation. I’m glad you’re thinking about it all from high on Crested Butte.
4 Barry // Mar 16, 2009 at 2:31 pm
I think your analysis is right on target.I think all natural resource stocks are the right place to be for the next 5 years.
5 robert essian // Mar 16, 2009 at 5:20 pm
Nice report Jim.
By all indications OPEC will get their $75-$80 oil very soon. Fact is the world needs that price to keep production levels up for when the economy starts its next growth spurt.
Above ground issues will not be peaceful in the near future…Peace
6 Karol // Mar 17, 2009 at 1:45 am
Jim,
Oil space capacity, just what is it?
Is it the oil stored above in tanks and ships or even holes in the ground?
What is max storage?
Since OPEC did not cut I am of the thinking that there is still lots of storage available world wide. Meaning the spare storage can be filled without having to suffer the cost of backing off during a short down turn in demand. I like what you wrote but I think you are giving to much time for the up-coming roller coaster ride. I feel we are in for some whoops-c’s-doo’s.
7 Karol // Mar 17, 2009 at 1:55 am
correction:
Oil spare capacity
Also, if we had only 2mb/day and now have 6mb/day available what’s the difference? It’s still oil and it’s still part of a limited supply? Could the differences hide in the needs of the producer to sell? I hinting at OPEC needs to destroy US alternative efforts.
8 wynn // Mar 17, 2009 at 7:30 am
good piece, I have missed your big picture analysis…….
but, Leah points out that John Keneth Galbrath once said: “The only function of economic forecasting is to make astrology look respectable.”
Agree with projected max of 10,000 dow, lack of money velocity for a while, $70-90 oil equilibrium, 2011-2012 inflation kick in. Also agree with a who ever said we are in for some whop-de-whops…. sort of like the high entrance to hawks nest this week in cb.
thanks for helping me refocus on a distance further out than the end of my toes.
9 rbblum // Mar 17, 2009 at 10:21 am
Newsletter #22 appears to portray a reasonable expectation of the path we could be traveling; allowing for the global community to re-establish itself in the shadows of the US capitalist misstep while transitioning into alternative energy sources.
Unfortunately, it is that next leg of the path not outlined (highly inflationary environment with likely threat of military conflict) that will probably be more challenging than the current stroll through the park . . . since I believe the availability and abundance of inexpensive food sources will be added to the list of future concerns.
10 fred poppe // Mar 17, 2009 at 11:04 pm
Jim, Many thanks for sharing your thoughts. In regards to energy investments I see pros and cons. For the pros: 1. the launching of mass production of the $ 2000 Tata ( reminds one of Ford’s T model) The Credit squeeze forcing many small operators out 3. The high depletion rate as you mentioned and the increased costs of production - something will have to give soon.
For the cons: 1. Federal gasoline tax of $1+ per gallon Ford’s CEO calls for $ 4 gas.
He can’t sell the mandated small car production, Americans want big cars.
2. a prolonged hunkering down by the consumers
3. Continuing over production by the likes of Venezuela etc. who just need the revenue
It is quite an interesting puzzle
I am still in RIG, DVN, PBR
(in the red). If ‘hope dies last’ - at leat patience is a virtue.
Try to figure - I just love those controversies.
Any Black Swan can apply to the pros or cons. Good Luck
11 KV // Mar 19, 2009 at 5:34 am
Jim,
Great timing! Markets are up, especially financials, oil is crossing $50, and dollar is devaluing…
If dollar erodes enough, and with $1 Trillion from Feds, we can see all the commodity take off, and believe it or not, the economy to, except a hair cut will be $50, instead of $20 at a locval barbershop.
Good call. May be we should be market timing!
12 robert essian // Mar 19, 2009 at 12:57 pm
If I made add KV, is the rush of income tax money into the family budget. The talking heads haven’t mentioned this much, and it should add a nice bounce to the economy as well; Pay off debt, pay down credit, purchases, etc.
With interests rates going lower for just about everything maybe the finance engine will start to hum instead of sputter. The economy is showing rays of sunshine. This of course could last until the dark clouds of hyperinflation rears its ugly head. I’ll take it for now because deflation is a total drag.
A build of 3 million barrels of oil, and oil goes up. That is good news…Peace
13 Karol // Mar 20, 2009 at 3:51 am
I’m having a problem with the thinking that economic recovery will be coincident with bottom housing. The world’s changing and single family housing is going extinct.
14 robert essian // Mar 20, 2009 at 3:54 am
Jim, I feel so much more prepared to comment on your site now than I did last year. So when I just watched an interview with Matt Simmons on Bloomberg that the world has only purchased 1 million Prius in the last 10 years it struck me that the masses have no idea what is headed our way. That we will not be able to produce or purchase enough vehecles to make a dent in reducing our dependency on oil especially with the world economy’s in such a mess. In addition we are not spending near enough on infrastructure to move the supply around even if we do produce it. Finally, we are not spending enough now on the marginal fields to have ready when the economy’s do turn around. It seems to me that what we are facing today economically will continue in ebbs and flows based on our ability to supply the market. Is it time for a Marshall type energy plan for our country? Man did President Obama ever run into a hornets nest. My prayers are with him/with us…Peace
15 Karol // Mar 21, 2009 at 3:56 am
just in:
We saw on Friday the price of oil rise. This was some say do to poor navigation by skippers of multi-million dollars war ships that belong to us. Wow!
Not even OPEC could do so well for oil investors. I think what we are seeing here is not all rise and fall with the tide of the stock market. Stocks and oil are inherently different just as gold is different then the dollar or the peso.
I’m in the small class of investors that is now not doing “angel” investing. I do look at the alternative plays but stay away.
Gold is always golden and it will keep your boat even keel. Why lead keels can’t do as good for a boat! Do you and I need lead in our investments? No, we are trying to get the lead out of gasoline so why not our investments?
Beware of this:
if you thought that people were shooting for the moon last year as the price of oil rose do to peak oil fears just watch as you now sit back in your seat and view the live printing of paper “moon” money.
Invest in Oil !
pleasing sweet oil
16 Perry // Mar 21, 2009 at 8:36 am
Hi, Jim:
I enjoy and appreciate your analysis very much. I have had the crude in mind but wan’t ready to pull the trigger, until this time around when Fed moved to print money. There was a street.com news report and the guy thinks $50 is way too high, and should be below $30. He displayed 2 nice charts of Days In Inventory vs Price and Spare Capacity vs Price, both provide support to his view. Here is the link: http://www.thestreet.com/_yahoo/video/10474844/high-and-low-with-oil-prices.html?cm_ven=YAHOOV&cm_cat=FREE&cm_ite=NA&s=1. What do you think?
17 jkingsdale // Mar 21, 2009 at 8:56 am
Perry - thanks for your question. It brings out the very valid point that there is still an excess of oil in the world. Therefore the price could easily decline in the short term. I think the recent rise has more to do with speculative interest and short covering due to the projected budget deficit and weak dollar than it has to do with supply and demand.
18 robert essian // Mar 21, 2009 at 10:10 am
Jim, based on some research it is estimated that 25 to 35 percent of the cost of crude oil is speculation and not supply/demand issues. So again your point is valid.
Matt Simmon’s speculated that 20% of oil held in Cushing is sludge built up over 80 years. This would suggest 60+ million barrels are not really stored there. Reasonably one could conclude that there is not as much oil in the world market as one suspects (age of the tanks being a factor). Would this effect the numbers or is it common knowledge?…Thank you
19 Karol // Mar 23, 2009 at 5:57 am
Rocket Science:
The older we investor’s get the harder it is to re-earn money we’ve lost. We just do not have the time left in our lives to rebuild.
Hence, … ?
20 robert essian // Mar 27, 2009 at 9:28 pm
Professor, just out of the hospital, can’t sleep, and had things on my mind that needed the heck out.
Common sense/fact:
1. We are not producing enough oil world wide.
2. We use 9 barrels of oil for every 1 we find. There goes the reserves.
3. Saudi Arabia’s fields are drawing down, and are past Peak. My conclusion was based on every other oil find ever developed. They deplete with every barrell produced. They’ve been pumping along time. Call it a gut feeling.
4. Oil is $54.00 (+/-) a barrel in a deflationary trend! Demand distruction? Supply distruction!
5. Not to long ago oil reached $147.00 a barrel, and I made some serious bank. Alot of people did. Those that didn’t notice, notice now, and will not miss out on the action. The cattle will be ready to stampede the oil patch at any hint of a recovery.
6. Oils going North from here, and the profits will be huge.
7. China and India are serious players now!
8. Those that have it are going to need more of it themselves.
9. Political unrest
10. The DOLLAR
Time to really focus now, and be a trader. Buy low, and sell high. Buy and hold would still work out but nothing wrong with taking some profits now and then.
My final thought. Food, clothing, sheltor, and energy will be every families mantra for the next ten years or more.
How did I do teach?…Peace
PS: Got sick saving my puppy who had fallen through the ice near my home. He was about 50 feet from shore. He went out as we turned to go back home. Never seen him go on the ice. I was with my grandsons on an adventure in the woods near my home. Got on my belly and dragged my fat ass out on the ice to the puppy. All I could think of was my grandson’s weren’t going to see their puppy slip under the ice. Bre Bre my oldest grandson (4) (upon my safe arrival) called me brave, and a super hero. It don’t get any better than that. Was drenched, and froze my ass off. Risk/reward. Glad I’m here to tell the tale…Peace
21 KV // Mar 29, 2009 at 10:30 am
RE - Happy to hear that you are back chasing the puppy!
In your note yo state: The DOLLAR. Well here is some news on that front - from Forbes:
Boldly stated, Zhou–backed by Russia, Brazil and India–wants to break the dollar’s hegemony in global finance. In a paper grandly called “Reform the International Monetary System,” Zhou has called for the creation of an international currency unit that he admits will require “extraordinary political vision and courage.” He suggests that we start with a blend of the dollar, pound, yen and euro–the so-called Special Drawing Rights (SDR) created by the IMF in 1969 that borrowed a concept first recommended by famed economist John Maynard Keynes.
Link: http://finance.yahoo.com/banking-budgeting/article/106817/Dollar-Slams-Up-Against-a-Great-Wall
If this happens, oil to $100, albeit, hughly deflated dollar, and massive inflation. We will be paying for last eight years of playing Empire!
22 gepay // Apr 11, 2009 at 5:03 pm
I don’t know alot except what I read and experience. My research tells me that Citi is a zombie bank being kept alive by the taxpayers bailouts, the Fed, and Treasury. Bank America the same. The profits that citi said they made came funneled through AIG. The stress tests that the Treasury mandated are using models created by the banks and only 219 examiners are doing them for the 19 biggest banks in the US . How rigorous can they be? Several of the large banks are insolvent and this is not being dealt with. Geitner thinks it is an illiquidity problem. The other fact is it isn’t banks aren’t lending, it is the overdebted consumer and overcapacity businesses that are not borrowing.
Housing has not bottomed. Unemployment has not bottomed. commercial real estate is just starting to bottom. not to mention - where will this years college graduate with debt slavery like college loans to pay back going to get jobs. We have yet to absorb the effects of - my nephew, 15 years in IT and computer programmig lost his job last fall and hasn’t found another. Three kids and a mortgage, he is scared. - This scenario is being repeated everywhere across the US, the eurozone, and Japan.
The banks toxic assets (legacy assets according to the Geithner plan) were leveraged up to 30 times by the banks in the US and Europe. They do need to be written down. Under the Geithner plan , the taxpayers will pay for keeping insolvent large banks operating.
Sheik Yamani who was the Saudi oil minister during the 70s and early 80s said, “The stone age did not end because of a shortage of stones and the oil age will not end because of shortage of oil.” Peak oil only means the end of cheap to pump sweet crude. If technology does not replace it, then the price will rise and the economy of the world will operate at a lower level.
23 gepay // Apr 11, 2009 at 5:10 pm
I meant comercial real estate is just starting to crash. Credit card loans, auto and other will really start defaulting in earnest when unemployment benefits start running out. Where is the new engine (the increase in productivity enabled by the computer revolution was not passed on into wages of workers but was siphoned off by Wall street and the upper 1-5%. Easy credit was given instead and look where we are) that will power the growth being forcast a couple of years down the line?
24 rbblum // Apr 11, 2009 at 9:55 pm
Team Obama says they are aware of the risk of inflation and they will work hard to bring the federal budget into balance as soon as they think it is safe to raise taxes and cut spending.
Only a couple of concerns regarding the above passage: (1) Team Obama’s budget plan going forward is a political wildcard strategy calling for an ever increasing dollar amount to the annual budget in the first 3 years of the Obama presidential term. Afterwhich, during the 4th year of the Obama presidency, the annual federal budget will supposedly be decreased by an anticipated 50%. But the federal annual budget will still be increasing incrementally for each of the four years of the Obama presidency and (2) the federal government is still, as evidenced by the stimulus bill and the omnibus spending bill, requiring the states to obligate to higher state contributions to federally mandated programs in future years. However, there is currently an ongoing effort (blowback/pushback)) of approximately 16 states to reassert state’s rights over federal dictates/mandates.
Whether Team Obama is cognizant of inflation has to be an afterthought or pandering to the public for pushing Obama’s ideology is of the utmost concern that will alter the economic rules and environment as we have known them to be: class warfare which will also result in more taxes/user fees and higher taxes/user fees, more local/state/federal government jobs in order to establish and maintain a stable work force, more union jobs in order to maintain higher wages for the working class, more economic control as determined by the federal government.
Granted, the jury is still out and the silent majority will likely make a valiant effort to push back if they don’t want to live in a world defined by the ideology of Team Obama. But while the mad scientists of the federal government continually play with the social and economic system of old, inflation has got to be a solid bet . . . followed by a more sustained period of demand destruction.
25 richjoy // Apr 12, 2009 at 5:02 am
Interesting…especially as you referred to supply/demand, rather than “peak oil”. (Yes, I’m tired of peak oil postings)
26 TheTradingReport » Blog Archive » Oil and Stocks Have Bottomed, But Their Paths Forward Vary // Apr 12, 2009 at 11:43 am
[…] and stocks seem to have bottomed as I suggested last month. Since that March 16th post, stocks are up another 8%, a scorchingly hot run on an […]
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