Important Breaking News for the Week of May 19, 2008
May 23
Unsold houses rise to 23-year high in April (May 23 - MarketWatch)
The U.S. housing market weakened further in April with a flood of homes coming on the market even as sales and prices declined, the National Association of Realtors reported Friday.
Resales of U.S. houses and condos dropped 1% to a seasonally adjusted annualized rate of 4.89 million from 4.94 million in March. Economists expected sales to fall to 4.83 million.
The number of homes on the market represented an 11.2 month supply at the April sales pace, the biggest since the combined single-family/condo records began in 1999.
Median sales prices for houses and condos fell to $202,300, down 8% from a year earlier and the second largest price decline on record. Median prices are down 12% from the peak.
While I have my reservations about the accuracy of the NARs numbers (they are usually too rosy), the basic trends they reveal are useful. Yes, it’s true that home sales have managed to hover around 5 million since August of last year, but inventories have been steadily climbing and now stand at levels that call for further price reductions. Obscured by the NAR methodology is the fact that actual sales were probably lower and inventory is probably higher. Why? Because the NAR ‘counts’ a house that is repossessed by a bank as a ‘sale’ as long as that sale went through a realtor somehow. Many do, and so the real buying pressure from actual owners or investors is surely lower than the reported number. Similarly, because many of the REO properties are sitting on the books of banks and are not yet in the MLS system, the real inventory available for purchase is certainly understated. As I said, the NAR numbers conveniently tend to include and exclude items in a biased fashion.
Subprime, Alt-A mortgage delinquencies rising (May 22 – Reuters)
Delinquencies in U.S. subprime debt and higher-quality mortgages known as Alt-A securities are continuing to increase, Standard & Poor's said on Thursday.
Delinquencies for Alt-A mortgages rated between 2005 and 2007 are climbing, with total delinquencies rising as high as 17 percent in some cases, more than 6 percentage points higher than previous estimates, the ratings agency said in a report.
Lower-quality subprime mortgage delinquencies soared as high as 37 percent for mortgages originated in 2006, 4 percentage points higher than previous estimates, S&P said.
Subprime loans traditionally have high rates of delinquency (a first step on the path towards foreclosure), but 37% is a staggering number. ALT-A are loans made to people whose credit risk is judged to be better than subprime but less than prime. They are “tweeners.”
Needless to say, a 17% rate of delinquency is utterly outside of the models that Wall Street used to assess risk, meaning that the losses being incurred were neither expected nor adequately hedged. I wrote about the looming ALT-A problem last year and so this news does not surprise me in the least, although the rates are real eye-openers.
Next up you can expect to hear about Option ARMs, the loans they allowed purchasers to decide (“opt for”) how much of the interest and/or principal they wanted to pay each month. You might be unsurprised to learn that many people opted to pay the bare minimum. And you might be surprised to learn that accounting rules allowed the unpaid portion, which was tacked onto the loan balance, to be recorded as “profits” by the banks and mortgage companies. As those earnings were booked in 2005-2007, they are already done and gone. However, when it turns out that the loans are going bust, those profits will have to be undone. The option ARM fiasco will result in a massive round of profit restatements for a lot of companies, beginning, I would guess, as early as the 3rd or 4th quarter this year.
JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County (May 23 - Bloomberg)
Like homeowners who took out mortgages they couldn't afford and didn't understand, Jefferson County officials rejected fixed- rate debt and borrowed instead at rates that varied with the market. The county paid banks $120 million in fees -- six times the prevailing rate -- for $5.8 billion in interest-rate swaps. That was supposed to protect the county from rising rates for their bonds. Lending rates went the wrong way, putting the county $277 million deeper into debt. In February, the county's interest rate soared to as much as 10 percent, up from 3 percent just weeks earlier. The swaps have now compounded the risk that Jefferson County will file for bankruptcy as it faces its worst financial crisis since it was founded in 1819.
Crikey, why does anybody trust Wall Street? This is stunning. JPMorgan overcharged an outmatched county in Alabama by $100 million and failed to even minimally deliver the exact sort of protection that the county thought it was buying. Instead of being insulated from interest rate risk, they were completely exposed. This is an awful story, and if I were in a leadership position down there I would certainly be tugging on the starter cord of my very best attack lawyer.
POLL-Non-OPEC oil output growth slows to a trickle (May 22 – Reuters)
Oil production from countries outside OPEC is stagnating despite a more than sixfold rise in oil prices since 2002, driven partly by the failure of non-OPEC producers to deliver a lot more oil. A Reuters survey of 12 analysts put the consensus forecast for non-OPEC oil supply in 2008 at 49.56 million barrels per day (bpd), down from 50.36 million bpd estimated in the previous poll in March. The poll points to supply growth from producers outside the Organization of the Petroleum Exporting Countries of 0.67 percent in 2008 versus 2007, which compares with growth of about 1.4 percent estimated in the previous poll.
Oil is a matter of supply-and-demand and the amount of money floating around. This report says that non-OPEC oil growth is stagnating, and this is even WITH the Biofuels added in for good measure. Non-OPEC growth is trending dangerously close to slipping below zero into negative territory.
'Squawk Box' Guest Warns of $12-15-a-Gallon Gas (May 21 – Business & Media)
It may be the mother of all doom and gloom gas price predictions: $12 for a gallon of gas is “inevitable.” Robert Hirsch, Management Information Services Senior Energy Advisor, gave a dire warning about the potential future of gas prices on CNBC’s May 20 “Squawk Box.” He told host Becky Quick there was no single thing that would solve the problem, due to the enormity of the problem. “[T]he prices that we’re paying at the pump today are, I think, going to be ‘the good old days,’ because others who watch this very closely forecast that we’re going to be hitting $12 and $15 per gallon,” Hirsch said. “And then, after that, when oil – world oil production goes into decline, we’re going to talk about rationing. In other words, not only are we going to be paying high prices and have considerable economic problems, but in addition to that, we’re not going to be able to get the fuel when we want it.”
Robert Hirsch authored a seminal report on the challenges of Peak Oil, which you can find on my essential articles page. If you haven’t read it, I recommend that you do. His analysis is thorough and I am glad to see that he’s getting some serious air-time to express his views. Unless we have a doozy of a global recession that knocks back oil demand, I am expecting a real turning point in the public consciousness about the magnitude (big) and duration (forever) of peak oil.
May 22
In My Opinion: One law is causing prices to go through the roof (May 19 – Star Telegram)
Many individuals who are investing in oil and natural gas futures are going out in the media and trying to convince the American public that either we are out of oil or there is a serious supply shortage of crude against worldwide demand.
The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil? Did you know that their conclusion was that speculators were responsible for a 70 percent overcharge in the price of oil in the months leading up to the summer of 2006?
There are many out there who are starting to really get concerned about the price of oil, but, unfortunately, they are mainly directing their ire at the role of speculators. In my estimation, this leaves out the legitimate roles of supply, demand, and monetary expansion. Also, one other thing that escapes these commentators is an understanding of how the futures markets work.
Unlike a store where a person buys something and then it’s gone, in the futures market for every buyer THERE MUST BE A SELLER. That is, for all the buying that is going on, there is an exactly equal amount of selling going on. The only way that ‘speculators’ can persistently drive the price of a commodity higher is if they go out and take the physical product off the market and store it somewhere. Otherwise, market fundamentals dictate that sooner or later the price will come down. It bears noting that oil has not ‘just recently’ exploded upwards; it has been climbing higher and higher for 4 years now. How’s that for ‘persistent’?
Oil's perfect storm may blow over (May 22 - UK Telegraph)
The perfect storm that has swept oil prices to $132 a barrel may subside over the coming months as rising crude supply from unexpected corners of the world finally comes on stream, just as the global economic downturn begins to bite.
Here’s another view on why oil may come down in price, centering on the premise that there’s plenty of supply with more coming on line and that this will tip the price back down. This is entirely possible, but I will note that the supply data used for this article conflicts with the data that I have in hand.
For instance, it claims that Russia will produce more oil in each of 2007, 2008, and 2009 while Russia already says that its oil production is down 3.3% yr/yr (from '07 to '08). If true, this kind of shoots a hole in the supply-coming-on-line argument. Still, the view expressed in this article are worth keeping in mind.
Oil Rises Above $135 as OPEC Says It's Powerless to Stop Rally (May 22 – Bloomberg)
Crude oil rose to a record above $135 a barrel as OPEC ministers said they could do nothing to stop the rally that has more than doubled prices over the past year.
Oil has risen 18 percent this month as banks increased price forecasts because of limited supply and demand growth. OPEC has "no magic solution" to high prices, Qatar's oil minister said. The IEA, energy adviser to 27 nations, said it plans to reduce its long-term projection for oil supply.
"We are not in charge anymore," Shokri Ghanem, Libya's top oil official, told Bloomberg Television. "OPEC is producing as much as the market wants. It is speculation, it is geopolitics, it is dollar erosion" behind the gains, he said.
The Wall Street Journal reported earlier that the International Energy Agency will lower its 2030 supply projection to 100 million barrels a day from 116 million. The Paris-based IEA was founded in 1974 in response to the Arab oil embargo.
"We are trying to get a better understanding of depletion rates and expectations of productivity," Bill Ramsey, the agency's deputy executive director, said in a telephone interview. "There is growing awareness that raising world output is a problem," and it is "too early" to give any estimates, he said.
OPEC is convinced that oil prices are not based on true supply and demand fundamentals, but they share the blame across speculators and ‘dollar erosion’ (another way of saying dollar inflation). However, the real kicker in this article is the new estimate put out by the IEA, calling for global oil supplies in 2030 to be a full 15% lower than their last estimate. This is big news...I can’t remember IEA estimates ever going anywhere but up. This admission of an output problem has enormous implications for a world addicted to oil-fueled growth.
What if gas cost $10 a gallon? (May 16 – Money Central)
According to Todd Hale, a senior vice president for consumer researcher Nielsen, at $10 a gallon, the average family's gas bill would leap from 16% of its retail spending to about 40%. People would drive less, yes. But many have to drive to work or the supermarket, and they'd cough up the cash -- screaming all the way -- and cut back elsewhere.
Businesses and farmers, meantime, would be squeezed as the costs of transport, petrochemical fertilizers and plastics rose. If an oil shock came quickly, sending gas to $10 a gallon and oil to roughly $350 a barrel, the chain reaction of spiraling prices and sliced consumer demand would hit us hard.
This article does a reasonable job of outlining the main areas of impact that will result from oil moving higher. They speculatively put that number at $10/gallon for gasoline and work from there. Where the article falls a bit flat is in its implicit assumption that we’ll all just scrimp a little and carpool a bit, but basically live the same lives. In my view, if the retail energy budget for an average family moves from 16% to 40%, it’ll be a lot more than a set of minor adjustments we’ll be facing.
An Oracle of Oil Predicts $200-a-Barrel Crude (May 21 - NYT)
But while oil and gas prices have been rising for a while now, Americans have only just begun to reduce gasoline consumption, so their efforts to conserve have not dragged down oil prices.
“The fact that the U.S. gasoline demand can be down and that the U.S. gasoline consumer is no longer driving world oil prices is a monumental event,” Mr. Murti says. He spends most of his time talking to money managers and analysts, many of whom keep asking him if oil prices will stay high if speculators abandon the market, and says he applauds investors for driving up oil prices, since that will spur investment in alternative sources of energy.
Mr. Murti has achieved fame for having correctly called for this “Super Spike” in oil prices and is now shocking the investment community with calls for $200 oil. So he’s being taken pretty seriously. What I like about his analyses is that they are exactly that – data-rich discussions of the primary drivers and trends that effect oil prices. The most important point I gleaned from this article is in that last paragraph, namely that the main shock to the oil markets was the recognition that the US consumers' demand for gasoline is no longer the only relevant factor in the demand equation. Slowly, the US-centric view long held by investors is slipping away.
Small Businesses (and Their Customers) Feel Sting of Inflation (May 22 – NYT)
Inflation has sunk its teeth into small businesses this year. The number of owners citing inflation as their No. 1 concern on the National Federation of Independent Businesses monthly economic index in April was at its highest level since 1982. One in five owners is raising prices, according to William C. Dunkelberg, the trade group’s chief economist.
Officially, the government is indicating that inflation is in check, taking into account seasonal variations. On Tuesday, the Labor Department reported that wholesale prices climbed just 0.2 percent in April. The core rate, though, which excludes food and energy, had its largest year-over-year jump since 1991.
And last week, the government reported that consumer prices inched up in April, suggesting cooling inflation.
But on Main Street and in households across America — where rapidly rising fuel and food prices are not excluded — the picture is not so rosy. Gasoline prices are now up to about $3.80 a gallon. The cost of diesel fuel, which powers many small business vehicles, set a record yet again on Wednesday, about $4.56 a gallon, up nearly 64 percent from a year ago. And food prices rose at a 0.9 percent rate in April, the biggest one-month jump since 1990.
Here’s another article to confirm that the reality facing consumers and small businesses is vastly different from the official statistics on inflation. Very simply, a monthly rate of 0.2% does not jibe with inflation being the #1 concern for small businesses. Think about it – inflation overshadows looming recession, and we’re supposed to believe that it’s only running at an annual rate of 2.4%? That's a very low rate, historically. Unfortunately, many brokerages and investment houses make recommendations based on this misinformation, leading to profound investing mistakes.
Hmmmmm? (June 2008 – PIMCO Investment Outlook)
The correct measure of inflation matters in a number of areas, not the least of which are social security payments and wage bargaining adjustments. There is no doubt that an artificially low number favors government and corporations as opposed to ordinary citizens.
But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation.
A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.
A skeptic would wonder whether the U.S. asset-based economy can afford an appropriate repricing or the BLS was ever willing to entertain serious argument on the validity of CPI changes that differed from the rest of the world during the heyday of market-based capitalism beginning in the early 1980s.
It perhaps was better to be “entertained” with the notion of artificially low inflation than to be seriously “informed.” But just as many in the global economy are refusing to mimic the American-style fixation with superficialities in favor of hard work and legitimate disclosure, investors might suddenly awake to the notion that U.S. inflation should be and in fact is closer to worldwide levels than previously thought. Foreign holders of trillions of dollars of U.S. assets are increasingly becoming price makers not price takers and in this case the price may not be right. Hmmmmm?
The author of this piece, Bill Gross, is the managing director of PIMCO, the largest bond fund in the world, with hundreds of billions under management. In this article he makes the case that the official inflation number is too low and notes that this favors the government and corporations. It’s only a small step from there to wonder exactly how this came about. Regardless, you need to be aware that the government inflation numbers are scandalously out of whack with reality and adjust your investments and purchasing habits accordingly.
First Quarter U.S. Home Prices Fall 3.1%, Ofheo Says (May 22 - Bloomberg)
House prices dropped by a seasonally adjusted 1.7 percent in the first quarter, the biggest decline in the history of Office of Federal Housing Enterprise Oversight house price index. Prices have fallen by 3.1 percent in the last year, marking the largest drop since records began in 1991. House prices fell 1.4 percent in the fourth quarter of 2007.
Although it remains the Fed’s preferred barometer of house prices, the magnitude of price declines tracked by OFEHO is less than those measured by the Standard & Poor’s/Case Shiller home price index, another closely watched housing measure.
"It's a dismal picture, there's no way around it," Kasriel said. "A complicating factor is the fact that so many homeowners owe more on their mortgages than their houses are worth. This is a financial crisis. You can't put lipstick on this pig."
The government measure of house prices reveals a -3.1% year-over-year decline. A more comprehensive private measure, the Case-Shiller index, says -12.7%, or more than 400% higher. I am not aware of a single government number that errs on the side of being overly negative. All of them, and I mean ALL of them, err on the side of being overly positive in nature. If this is not a deliberate set of acts, then it is one of the more statistically improbable happy coincidences in our lives.
Actuaries Scrutinized on Pensions (May 21 - NYT)
By firing its actuarial consultant last week, the New York State Legislature shone a light on one of the public sector’s deepest secrets: All across the country, states and local governments are promising benefits to public workers on the basis of numbers that make little economic sense.
"Financial burdens have been hidden" as a result, said Jeremy Gold, a New York actuary and economist who was one of the first to call attention to the gap between actuarial figures and economic reality. Many economists now agree with Mr. Gold, saying they believe actuaries are routinely underestimating the cost of providing governmental pensions by as much as a third.
"Actuarial assumptions based on misinformation are a recipe for disaster," said the Texas attorney general, Greg Abbott.
Wow. I have been harping on the huge deficits that exist in state and municipal pensions for awhile, but this article is stunning. It reveals that flagrant conflicts of interest and shoddy methods have been the rule, not the exception, in the world of public pensions. The errors were (and are) so egregious and have compounded unseen for so long that I seriously doubt there is any reasonable way to make good on the claims. Benefits were overly generous, as were the assumptions about pension fund returns. A recipe for disaster, indeed.
May 21
Oil for 2016 Delivery Passes $141 on Supply Concern (May 21 – Bloomberg)
Oil prices are heading to more than $141 a barrel in the next eight years, according to futures contracts on the New York Mercantile Exchange, on concern that growth in supply may fail to keep pace with rising demand.
Oil for delivery in December 2016 surged $20.09, or 17 percent, in the past four trading days since Goldman Sachs Group Inc., the world's biggest securities firm by market value, forecast oil would average $141 in the second half of 2008 on constraints in production and a lack of substitutes. Crude for July 2008 climbed 4.4 percent in the same period, and today rose to a record $130.47.
The gain, more than triple the increase in oil for delivery this summer, "fits in" with the Goldman forecast which "talked recently about long-dated crude in particular," said Tim Evans, an energy analyst for Citi Futures Perspective in New York.
The futures market can exist in two conditions. One is called 'backwardation,' meaning that the outlying contracts are cheaper than the current one, and the other is called 'contango,' meaning the future contracts are more expensive than the current one. For as long as I have been observing oil, it has been in backwardation (i.e., the future is cheaper than the present). The fact that the future is now significantly more expensive than the present means that oil traders are concerned about future availability of oil. This is a big move.
U.S. House passes bill to sue OPEC over oil prices (May 20 – The Boston Globe)
The House overwhelmingly approved legislation Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure.
The bill would subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow.
The measure passed in a 324-84 vote, a big enough margin to override a presidential veto.
The legislation also creates a Justice Department task force to aggressively investigate gasoline price gouging and energy market manipulation.
Meanwhile, Congress throws a fit and threatens suit against OPEC for not selling their oil to us fast enough at a price that we like. What an unfortunately American response, which can be characterized as "Things aren't to our liking so we're going to sue you!" The mental image I have here is one of an adolescent in the candy aisle throwing a fit. I saw one waggish headline that described this action as "Congress passes law requiring OPEC to sell oil to China." My main complaint with this law, besides the fact that it displays an appalling lack of understanding about the current energy predicament, is that it will potentially harden the response of many countries that already feel that the US requires strict adherence to 'the rules' by other countries but does not follow the rules all that closely itself.
Debt-squeezed Gen X saves little (May 20 – USA Today)
For years, experts have warned that too many of the USA's 79 million baby boomers aren't financially ready for their coming retirements. Yet, if the boomers have had it hard, it's nothing compared with those next in line: Generation X — people such as the Shorts. The Gen Xers, generally defined as those born from 1965 through 1980 — now 27 to 43 years old — have even less assurance than the boomers of receiving company pensions and projected Social Security benefits.
"One of the biggest issues facing the Gen Xers," observes Pam Hess, director of retirement research at Hewitt Associates and a Gen Xer herself, "is lots of competing priorities, juggling lots of different costs and financial priorities. It will continue to be a struggle."
Consumer debt is one of the main reasons. Nine out of 10 consumers in their 30s are in debt, compared with 76% of those in their 20s, according to the Federal Reserve's Survey of Consumer Finances. In a recent Charles Schwab study of more than 2,000 Gen Xers nationwide, 45% of respondents said they had too much debt to think about saving.
Gen-X is in tough shape. They matured during the tail end of the largest credit bubble in history, so they will receive all of the debt and very few of the benefits, if any. The article points out that a large percentage are not saving for retirement at all, and this fact will greatly complicate the efforts by boomers to unload their portfolio assets when they seek to retire. To whom will they sell them, if Gen-X isn't buying?
Freddie Mac Suffers Bout of Temporary Insanity (May 21 – Bloomberg)
How long does the word "temporary" mean? The accountant who wants to stay employed knows the right answer: "How long do you want it to mean?"
That new twist on an old joke goes a long way toward explaining Freddie Mac's net loss last quarter of $151 million, which was smaller than analysts' estimates. In reality, Freddie is gushing much more red ink than that. Yet hardly any of it is showing up on the company's income statement.
That's mainly because the government-chartered mortgage financier has deemed $32.4 billion of paper losses from mortgage- related securities as "temporary." Freddie's big sister, Fannie Mae, is in a similar, though less extreme, position with $9.3 billion of such losses.
To put this in perspective, $32.4 billion is more than double Freddie's $16 billion of shareholder equity under generally accepted accounting principles. It's almost twice as much as the company's $17 billion stock-market value. And it's infinitely greater than the fair value of Freddie's net assets, which at March 31 was negative $5.2 billion.
*Sigh.* As cynical as I get about financial shenanigans, I find I just can't keep up. Freddie Mac posts a "narrower than expected" loss of $141 million, but only after sliding $32.4 billion (with a "b") of bad debt over into an accounting cul-de-sac. Taxpayers are going to be asked to pick up an enormous tab for this housing debacle, and that $32.4 billion is just the ante to what is likely to be a record breaking pot. How do you feel about that? Instead of having sufficient funds to fix our infrastructure or pour into alternative energy, we'll be asked to pony up to fix the balance sheet of a privately held company whose stockholders and directors profited handsomely over the past ten years. Heads - they win; tails - you lose.
White House denies Iran attack report (May 21 - Jerusalem Post)
The White House on Tuesday flatly denied an Army Radio report that claimed US President George W. Bush intends to attack Iran before the end of his term. It said that while the military option had not been taken off the table, the administration preferred to resolve concerns about Iran's push for a nuclear weapon "through peaceful diplomatic means."
Army Radio had quoted a top official in Jerusalem claiming that a senior member in the entourage of President Bush, who visited Israel last week, had said in a closed meeting here that Bush and Vice President Dick Cheney were of the opinion that military action against Iran was called for.
The official reportedly went on to say that, for the time being, "the hesitancy of Defense Secretary Robert Gates and Secretary of State Condoleezza Rice" was preventing the administration from deciding to launch such an attack on the Islamic Republic.
You know what they say...it's not official until it's denied. I posted this particular rumor about Iran because the claims about Dick Cheney advocating while Condi was hesitating sounded believable to me. Perhaps this is what oil is 'telling us'?
Plunge in US commercial property (May 20 – FT)
Commercial property prices in the US in February saw their sharpest decline since records began nearly 15 years ago as sources of finance for deals has dried up, according to data from Standard & Poor’s out yesterday.
The value of commercial buildings fell 1.03 per cent between January and February, the largest monthly decline since at least 1993, when the industry was just emerging from a deep slump.
As I said in my report on real estate a number of months ago, residential real estate goes bust first, and then commercial follows, with a lag of about a year. Look for a commercial real estate bust to gather steam and start to take down the regional banks that are the main holders of the debt.
Less Shopping = Fewer Malls (May 21 – WSJ LAS VEGAS)
Retail construction, which surged in recent years amid easy financing and robust consumer spending, has lost momentum as retailers curtail growth plans and lenders remain stingy.
Developers, in turn, are hitting the brakes. This year, they are expected to complete retail projects totaling 136.4 million square feet in the top 54 U.S. markets, says market researcher Property & Portfolio Research Inc. But, next year, newly completed projects will amount to only 70.9 million square feet, reflecting the construction slowdown initiated in recent months. In comparison, the average annual production from 1998 to 2007 was 122.7 million square feet.
My comment on this article stems from the number of square feet of retail/commercial space that is built every year. Consider that our population grows by ~3 million every year, yet for a ten year stretch the average construction was ~123 million square feet each year. That works out to ~40 square feet of new commercial/retail space for every new member of our society. Anybody else think that maybe, perhaps, we have all the commercial space we'll need for a while? Like, maybe we could stop building for the next 10 years and nobody would notice?
The Export Land Model (ELM) very simply subtracts a given country's rising domestic consumption from its ability to export surplus oil. The conclusions from this simple step are breathtaking. In short, there could be essentially zero oil available for export in as few as six to nine years. Please read this article and think very carefully about your own life, where you live, where you get your food, and even what you do for work. I have done all of this, and, based on this article and the next four, my wife and I are dialing up our already aggressive (by most standards) action plans to new level.
May 20
What the Export Land Model Means for Energy Prices (May 19 - David Galland for John Mauldin)
Mexico provides about 14% of the oil the US imports. On any given day that makes it either the #2 or #3 leading source for US oil imports after Canada and Saudi Arabia. Given that the US currently imports close to 70% of its oil needs, the Mexican oil is critical.
But here's the thing. Using straightforward ELM calculations, Jeffrey Brown is confident that Mexico will ship its last barrel of oil to the United States -- or anywhere else, for that matter -- about 6 years from now, in 2014. In a recent interview with Brown, I asked about this forecast.
"Mexico was consuming half of their production at peak in 2004. And if you look at the '05, '06, '07 data, they're basically on track, on average, to approach zero net oil exports no later than 2014," he confirmed.
Of course, the US is completely unprepared to replace this source of oil, especially considering the growing stresses on global oil supplies caus[ed] by ballooning demand from emerging markets. That means the international competition for available supplies is only going to get more desperate in the months and years ahead. What will this mean to oil prices, according to Brown?
"From this point out I think we'll see a geometric progression in prices ... you know, $50, $100, $200, $400, whatever. The only question now is how short the periods will be between prices doubling again."
Where are we going to replace an entire Mexico-worth of production? What will happen if Russia, the #2 exporter, goes "off line" in only 6 years? Even if the US begins today building high-speed rail lines and reconfiguring our urban centers and suburban living arrangements, we'd need at least 15 to 20 years to make a smooth transition. If, instead, the US entirely loses its imports (worst case scenario), then we'd have to find a way to live on our ~5 million barrels of daily domestic production. Which means we'd have to select between running our military, farming & food distribution, and running some of our cars. That is, we have enough domestic oil to run any one of those three options, but not all three. Clearly, some very big adjustments are on the way. Are you ready?
Bush to Arab nations: You're running out of oil (May 19 – The Scotsman)
PRESIDENT George Bush yesterday told leaders of the oil-rich states of the Middle East that they must face up to a future without their precious hydrocarbons.
In a stark warning, he said their supplies were running out and urged them to reform and diversify their economies. The outgoing United States president told the World Economic Forum, meeting in the Egyptian resort of Sharm el-Sheikh, that it was time to "prepare for the economic changes ahead".
"Over time, as the world becomes less dependent on oil, nations in the Middle East will have to build more diverse and more dynamic economies."
Ha ha ha. I threw this article in for a little ironic humor. First, it's funny, because Bush is lecturing another country besides his own about some coming 'economic adjustments' due to energy. Second ,because Bush thinks those adjustments will happen because the US will 'find alternatives' - as if the $1 billion a year in tax credits by the US government was going to somehow make a difference. Our president is so seriously out of touch, all I can say is that he is providing excellent comedic value at a time when our nation sorely needs a good laugh.
Peak oil and politicians (May 17 – Truthout)
To be clear, peak oil is often misunderstood. The date that the world reaches peak oil is not the date we actually run out, but the date that we stop increasing production. This is followed by a "plateau" where oil production is flat. Eventually, oil production will decline.
Even a plateau is a big problem for a world economy that is based on growth. In a world where 850 million are still going hungry and 3 billion out of 6.5 billion live on less than $2 a day, stagnant oil production means an end to development models based on economic growth. The statistics show that oil production has been flat for more than two years now.
These facts are simple. As Hubbert said back in 1956: "Nothing sensational about it, just straightforward analysis." And yet the most powerful institutions in our society continue to do everything they can to avoid confronting the truth.
I put this article in as good background, especially for those who might be wondering about where the US stands politically on the subject of Peak Oil. Also, it makes the important point, which apparently cannot be repeated often enough because the US press is still confused on the matter, that "Peak Oil" is not the same as "running out of oil." It is the moment after which less oil comes out of the ground each year and does so more grudgingly and expensively.
Not Enough Oil Is Lament of BP, Exxon on Spending (May 19 - Bloomberg)
Never have so many oil and gas companies spent so much to produce so little.
That's the challenge facing Exxon Mobil Corp., Royal Dutch Shell Plc, BP Plc, Chevron Corp., Total SA and ConocoPhillips, which will spend a record $98.7 billion this year on exploration and production, Lehman Brothers Holdings Inc. estimates. Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labor and material.
The wagers are buttressed by delays at fields including Kashagan, a Kazakh deposit where the budget has more than doubled to $136 billion and the first production is eight years behind schedule. Waters frozen half the year forced contractors to build artificial islands, while care must be taken to protect workers from deadly hydrogen sulfide fumes emitted by the wells.
"The future is going to be very trying for the international oil companies,'' said Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. "There's no more easy oil for them. Kashagan is a shining example of the problems they face bringing new oil into play."
"The international oil companies cannot dictate the tempo any more,'' said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. ``They can try projects that didn't work two years ago, but it's not a question of money. They don't have access to resources."
Very simply, big oil companies are spending several times as much to find and produce a faction of the oil that they were producing even just a few years ago. Much of this article seeks to blame geopolitical tensions as the culprit, but never addresses why we might be finding so much less oil in all of the places where there are no tensions. Bottom line, there's less oil to find and produce.
Russia's oil exports down 3.3% to 448 mln bbls in Jan-March (May 19 - RIA Novosti MOSCOW)
Russia's crude exports declined 3.3% year-on-year in the first quarter to 61.1 million metric tons (448 million barrels), the country's top statistics body said on Monday.
Here's some very recent data that confirms the fact the Russia is possibly past peak. Since Russia is the #2 exporter, this is very concerning. If Russia stops exporting in 6 to 9 years, where will we find a replacement Russia? Perhaps we can just ask Congress or the US stock market, as both seem utterly unconcerned by this data. Maybe they know.
Far From Normal (May 20 – Jim Kunstler)
Those were the words that Fed chairman Ben Bernanke used to describe the financial markets (and by extension the economy) these heady spring days when everybody else with a rostrum, it seems, has pronounced the so-called liquidity crisis contained. There's a great wish for American finance to return to business-as-usual -- raking in fantastic fees for innovating new modes of tradable paper, and engineering mergers and buy-outs that generate huge fees plus $100 million kiss-offs for corporate CEOs in the noble struggle to dismantle America's productive capacity -- but apparently events are still out of hand.
The Federal Reserve itself has been instrumental in promoting abnormality by doing everything possible to prevent the work-out of bad debts in the system. Since money is loaned into existence, and loans are debts, the work-out of bad debt suggests the discovery that a lot of money has disappeared -- which is exactly the case. The Fed has postponed the work-out by sucking up truckloads of impaired, untradeable securities in exchange for loans to giant banks who don't have enough cash on hand to pay their janitors.
Jim Kunstler does not pull any punches and does a fantastic job of summarizing just how absurd the US financial markets have become. I recommend reading Jim to anybody who harbors the notion that we can simply wave a few magic wands and get back to busily trading paper as the basis of 'what we do.' Jim's blog is one of several that I have permanent links to on my "Resources" page. You can find the link in the navigation bar to your left.
Citi-run group wins Pa. Turnpike lease (May 19 – Marketwatch NEW YORK)
A consortium led by a unit of Citigroup and Spain's Abertis won a $12.8 billion auction to lease the Pennsylvania Turnpike for 75 years.
"Under the terms and conditions we set, the turnpike will be upgraded and tolls will be no higher than the Turnpike Commission will charge," Pennsylvania Governor Edward Rendell said in a press release. "Where Pennsylvanians will see a major difference is on our other roads. Road repair all over the state will accelerate and we will be able to cancel the plan to impose tolls on Interstate 80."
Let's see here, public land was used to build public roads using public financing. Now many states, like Pennsylvania, have found that they are losing money by collecting taxes and performing road maintenance. So they've decided to "lease" them for 75 to 99 year terms to private companies in exchange for a one-time cash infusion. The idea here is that private companies are going to be able to provide better maintenance AND make a profit (of course), AND we're told our fees and tolls won't go up. Suuuuuuuurrrre. Your public assets, upon which you rely, are being sold off for a song by state legislatures that would rather avoid making any hard spending choices today in exchange for a few bucks and a near-permanent loss of public assets.
Producer prices rise tame 0.2% in April (May 20 – Marketwatch WASHINGTON)
Wholesale prices rose a smaller-than-expected 0.2% in April after seasonable adjustments, with food prices flat and energy prices falling, the Labor Department reported Tuesday. The producer price index has risen 6.5% in the past year, the government said.
The core PPI - which excludes food and energy prices - rose 0.4% in April, more than expected. Core prices are up 3% in the past year, the biggest year-over-year rise since late 1991.
The government's data are seasonally adjusted to hide the impact of normal seasonal variations to focus on fundamental changes in prices that are not driven by the ebbs and flows of the seasons. Because energy prices typically rise more in April than they did this year, the seasonally adjusted figures showed a 0.2% decline. In unadjusted terms, energy prices rose 2.9%.
Wholesale gasoline prices fell 4.6% in seasonally adjusted terms, but rose 3.2% in unadjusted terms.
Oy vey! I thought the CPI was a load, but this is even worse. I, I, I,...uh, I'm nearly at a loss for words. The Producer Price Index (PPI) measures the prices that manufacturers pay for their crude, intermediate, and finished goods. Note the vast gap that exists between the reported figure of a 0.2% month/month decline in energy prices and the 'unadjusted' number, which was a staggering 2.9%.
Also, and somewhat mysteriously, the government calculates that the three areas of prices are up only 6.5% year over year. As bad as that is, it is most likely off by a factor of 2. In the table below, which I lifted straight from the BLS website, we can see the basic input values for each of the three main areas. Here's the basic math question: how does one average together 6.5%, 10.5%, and 34.3% and determine that, overall, inflation was 6.5%? That's a real head scratcher.
What’s next for the economy? Look at California (May 19 – Financial Week Reuters)
As it did when the housing bubble began to burst, California is leading the way in the next leg: a consumer bust.
Squeezed by rising unemployment, inflation in food and energy costs and plunging house prices, Californians are cutting back on spending. Besides causing woes for state and local government, this is giving California’s economy another knock and makes further job losses, home repossessions and banking problems more likely.
The figures are pretty bad. The median home price has fallen by 29% in the year to March, according to the California Association of Realtors, and repossessions are surging. Unemployment has risen by 24%, to 6.2%, in the same period.
But most importantly, in the 10 months to the end of April sales tax receipts in California are actually down in absolute terms. Gasoline tax receipts are essentially flat. When you factor in that there would have been considerable inflation during the period, and that some essentials like gasoline will have risen sharply in cost, the picture is clear: Californians are tightening their belts.
And California matters. It accounts for 13% of U.S. GDP. It was also where more than a third of the non-mainstream home loans such as subprime and Alt-A were made in 2006 and 2007, making it very important to the health of the banking system.
California is not "just one state out of 50." It is the seventh largest economy in the world, and the #1 largest economy within the US. As goes CA, so goes the rest of the country. That last part in bold is worthy of some pondering.
More Atlanta homes at risk; Clayton hardest hit (May 19 - Atlanta Journal)
Foreclosures have reached record levels across metro Atlanta. And every new wave of foreclosed properties hurts values in a real estate market already flooded with houses for sale.
Metro Atlanta posted high rates of delinquent mortgages even though it had not experienced the dramatic run-up in real estate prices that states such as California and Florida experienced. Metro Atlanta also differs from Ohio and Michigan, where the economy has taken a nosedive.
"Atlanta doesn't have any of those characterizations of a super-hot bubble or a super-weak economy, but it's still tracking the national numbers," Immergluck said. "I think that has something to do with the Wild West lending around here."
One refrain I hear plenty of, including in my own area, is some version of "we didn't really have a huge run-up in house prices here, so therefore we're going to avoid a big run-down." That's simply not the case. Atlanta is a perfect example of that. While some areas, and very few in my estimation, might avoid some of the downward adjustment of house prices, most won't.
