Stephen Roach on why “The global economy is headed for trouble”
Countrywide sets up $16 billion subprime refi program… a few days late and several billion short
Dollar rallies, but so does gold… how the metal’s break from the norm alters our price target
German research group confirms our ’04 prediction — why social unrest and wars could result
$100 oil is all but certain, says Kevin Kerr… how to trade it like a Maniac
Electricity costs rising at rates unseen since 1981… cost of education up sharply, too
Markets enjoyed a day of intense volatility yesterday. The Dow and S&P fell about 1% within a few minutes of the opening bell… and it looked like “Gray Friday” was going to darken Monday.
Then, just as dramatically, the buying began. And by lunch, all the indexes were in positive territory. What a ride… the roller coaster came to a stop at about 0.3% gains for the Dow and S&P, and a full 1% in the black for the Nasdaq.
But this kind of buying is not likely to continue… for several reasons.
“After nearly five fat years, the global economy is headed for trouble,” writes Morgan Stanley’s Steven Roach.
“The American consumer has been the dominant engine on the demand side of the global economy for the past 11 years… Growth in U.S. consumer demand is typically powered by two forces — income and wealth. Both income and wealth effects are now coming under increasingly intense pressure — leaving consumers with little choice other than to rein in” spending.
“In August and September 2007,” Roach points out, “private sector nonfarm payrolls expanded, on average, by only 52,000 per month — literally one-third the average pace of 157,000 of the preceding 24 months. Moreover, this dramatic slowdown in the organic job creating capacity of the U.S. economy is likely to be exacerbated by a sharp falloff in residential construction sector employment in the months ahead…
“Moreover, the bursting of the property bubble has left the consumer wealth effect in tatters. After peaking at 13.6% in mid-2005, nationwide house price appreciation slowed precipitously to 3.2% in mid-2007… I suspect that overall U.S. home prices could actually decline in both 2008 and 2009 — an unprecedented development in the modern-day experience of the U.S. economy…
“With both income and wealth effects under pressure,” Roach concludes, “I don’t see any way saving-short, overly indebted American consumers can maintain excessive consumption growth. For a U.S. economy that has drawn disproportionate support from a record 72% share of personal consumption, a consumer-led capitulation spells high and rising recession risk. Unfortunately, the same prognosis is likely for a still U.S.-centric global economy.”
For its part, Countrywide Financial announced this morning a $16 billion subprime loan refinancing program. The nation’s biggest lender has targeted some 80,000 subprime borrowers who will most likely default when their rates are reset next year.
“Countrywide believes that none of our subprime borrowers that have demonstrated the ability to make payments should lose their home to foreclosure solely as a result of a rate reset,” said a statement from Countrywide President David Sambol.
Of those 80,000 homeowners, the bank plans to move 52,000 into prime loans or guaranteed Federal Housing Administration loans. The 28,000 others, who have credit issues too severe to qualify, will have all sorts of rate reductions and modifications available that, to us, sound only marginally less sleazy than regular subprime loans.
Countrywide announces earnings on Friday… heh. Brace yourself.
The dollar staged a slight comeback overnight, bucking the rapidly approaching $1.45 euro back down to $1.42. The buck pounded the pound down to $2.03, too. The yen fell to 114.
After falling as low as $748, gold prices rallied steadily in overnight trading. Now near $760, gold is showing signs of entering an atypically bullish trend. This time, when the dollar bounced, gold did as well.
“As a bullish gold trader,” comments Mr. Ed Bugos from his vantage point in Vancouver, BC, “I would like to see the FX value of the dollar start to rebound, and for gold to shrug it off and continue higher. That would imply not only that all the currencies are losing their real values, but the foreign currencies the most.
“If gold keeps going up on declines in the U.S. dollar index, it may set itself up for a big correction just shy of my $900 target. But if the dollar bounces and December gold consolidates in a range between $725-780 for a month, then we could blow past $1,000 easily on this leg.”
Since cresting the $90 mark late last week, oil prices have mercifully backed down to around $86 dollars this morning. Naturally, we ask is this a pullback from a faux high or just a pause before the next rally?
“I wouldn’t call this much of a pullback,” says our Maniac Trader, Kevin Kerr, in this MarketWatch interview. “We’ve only seen prices come down $3-4… you can always expect some hefty profit taking at new highs.
“I expect oil to ramp up higher still… $100 oil is definitely going to happen. I’ve set my $100 price target for the next three-six months.”
Confirming a study we published in 2004, “Peak Oil” occurred sometime in 2006 and world oil production will be cut in half as early as 2030, the Energy Watch Group (EWG) said yesterday.
“The EWG report is 234 pages long,” reports our resident geologist and oil connoisseur Byron King, “so we won’t go into detail here. But it reviews the history of world oil production over the past century and forecasts future output using the most sophisticated statistical techniques available. With characteristic German precision, the EWG report forecasts the onset of severe shortfalls in oil output to meet forecast demand.”
According to the group’s research, global oil reserves lie near the 1.2 gigabarrel range — a mere 42-year supply at current consumption levels. “The world soon will not be able to produce all the oil it needs, as demand is rising while supply is falling,” said Hans-Josef Fell, EWG’s founder. “This is a huge problem for the world economy.” The group goes on to predict extreme shortages of fossil fuels will lead to wars and social breakdown.
Oil production will fall 7% this year alone, says the group. “Better think again before buying that gas guzzler,” Byron suggests. “But from an investment standpoint, the EWG report validates the model we use at Outstanding Investments. That is, we look for firms that own or control reserves of energy or ores in the ground, or that have unique technical skills to get those reserves out of the ground. Those are the firms that will profit in the future environment of energy scarcity and high prices.”
The average retail price of electricity rose 9% last year — the biggest leap in 25 years. According to an Energy Department report released yesterday, electricity prices rose the fastest rate since 1981, thanks largely to the lifting of retail price caps.
This winter, the report estimates a 4% hike in electricity costs.
And if food, energy and health care costs aren’t enough for you, the price of higher education increased faster than inflation this year.
Attending a four-year public university costs 6.6% more this year than last, reported the College Board yesterday. The cost of going to college is not only more expensive than ever, but also growing at record high rates.
According to the College Board, the average annual price for a four-year public university is up $381 from last year, to $6,185. The same education on a private campus rose slightly less… up 6.3%, to $23,712 a year. Including room and board, public colleges jump to an average of $13,589, while private costs are boosted to $32,307.
This year, George Washington University became the first major university to leap over the $50,000 per year mark… but don’t worry, that price includes room and board. Thank God.
“You got some pushback from the elderly re: your comments on Social Security,” writes a reader. “I think you were spot on! The ‘greatest generation’ is not so great — they are the ones responsible for the horrific situation(s) we find ourselves in today. The real greatest generation will be the future generation that has to clean up after them.
“Let me reveal my bias. I am 44 years old. My wife and I have calculated that over the life of our oldest daughter, 10 years, we together have sent the S.S. Administration $150,000. Yes. The wage base only keeps increasing! Over 10 years, it would be fair to say, including dividends, interest, capital gains and compounding, the amount paid to S.S. is far greater! Maybe it’s really $300,000-350,000?
“This is $350,000 stolen from my children. They will have far higher tax rates as workers, they will have not nearly the employment opportunities of the so-called ‘greatest generation,’ they will have to endure the GREATER DEPRESSION on our doorstep and generally a much lower standard of living. So to the blowhards protesting your observations regarding baby boomers, I say f- you!”
“In response to your 5 Min. readers who claim you guys are liberals,” comments another, “I think they might be interested to know that 75% of our national debt was created while so-called conservative presidents held office.
“Isn’t it great how we’ve bastardized the definition of a conservative since the days of Nixon? This is more evidence that a third party needs to emerge to get this country back on the right track. Libertarians need to take back the true conservative platform, while the neo-cons continue to flush the Republican Party down the crapper by pandering to hawks, cowards and radical evangelicals.”
We note with more than a little irony that the newswires are abuzz this morning with allegations of some $1.2 billion missing in Iraq… on the heels of the Bush administration begging Congress for yet another $42 billion to fund the “troops” over there.
The invoices and supporting paperwork for the contractor who can’t account for the missing dough, DynCorp, “were in disarray,” said CNN. Really…
The 5 Min. Forecast
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