by Addison Wiggin & Ian Mathias
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Crude hits record as expert says, “We should leave oil before it leaves us”
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Yuan reaches milestone on its way to possible reserve currency status
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Gold up, pound down, corn sets record, wheat more profitable then heroin
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Pulling plastic to fill the collection plate… Consumer debt figures worsen, again
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Fertilzer as investment theme? Why it might not be a load of manure
— Oil closed at a record high $110.87 yesterday, after busting briefly above $112 intraday.
— “We should leave oil before oil leaves us,” International Energy Agency (IEA) chief economist Fatih Birol commented yesterday. “That should be our motto.”
Birol told the German monthly Internationale Politik the day will come when the world runs out of oil. But steadily rising demand and falling supply, with no dramatic spikes from now till 2015, will give the world time to adjust — assuming the world has the foresight.
“Looking at this long term,” says Birol, “it becomes clear that nothing changes whether oil runs out in 2030 or 2040 or 2050. One day, it will definitely be finished. We should prepare for that day with research and development, how we can replace oil, what kinds of living standards we will be able to maintain, what alternatives we can develop.”
Last November, Birol said he’d experienced an “earthquake” in his thinking about supply and demand, owing to the growing demand for oil in China and India. His new comments are a whale of an aftershock.
— Rising crude is driving stocks down…but not by much
The Dow dropped less than a half a point. The S&P and Nasdaq each lost a point, give or take a few 100ths of a percent. The Dow would have had a worse day had Boeing not soared nearly 5% — despite fessing up to more delays with its 787 Dreamliner.
As traders await earnings season, UPS, which operates the world’s ninth largest air fleet, cut its first-quarter forecast by 10%, citing fuel costs.
— While you wait for earnings season to commence yourself, keep these words of wisdom in mind:
“I know as a former banker,” our managing editor Chris Mayer warned readers of Capital & Crisis this week, “that a financial company is essentially a black box.” A lot of smart people got smacked upside the head with the credit crisis. Legg Mason’s Bill Miller had a big position in Bear Stearns. Marty Whitman from Third Avenue had a big position in MBIA. Bill Nygren at Oakmark Funds had a big position in WaMu. You get the idea.
“As an outsider,” wrote Chris, “you just can’t know what’s really going on in a loan portfolio. There are too many ways for management to snow you. Plus, owning anything with leverage adds enormous risk.
“Many of these financial institutions owned loan portfolios leveraged 30 times or more. That’s like you buying $1,000 worth of stock with $33 and borrowing the rest. Obviously, you can’t withstand much of a decline in the stock. It’ll bury you.”
— Citibank, for example, announced plans to unload $12 billion in shaky loans at about 90 cents on the dollar. The loans are part of $43 million in financing for leveraged buyouts that Citi itself had to pony up last year after the credit markets seized up.
Now private equity giants Apollo, Blackstone and TPG will hold the paper if the deals go through.
— Apollo, by the way, is taking a page from Blackstone. It’s filed plans for an IPO sometime in the near future. Blackstone famously went public last June at $35 per share. The founders, Pete Peterson and Stephen Schwartzman, pocketed $3.2 billion and $8.7 billion on the deal, respectively.
Blackstone shares now trade for less than $20.
— Yesterday, when it seemed people were falling all over themselves to predict the onset of a U.S. recession, we got a forecast for when it will end. Next January, says former Treasury Secretary Larry Summers.
“It is overwhelmingly likely that we are in recession,” he told the Harvard Club in New York yesterday, joining the cacophony of economic prognosticators, as if it matters. “And if we are not currently in a recession, we’re certainly in something that feels a great deal like a recession.”
Summers distinguished himself by boldly stating the worst of the credit crisis is over…and with it the recession will end by January 2009.
— In the meantime, here’s some shocking news: Americans are digging themselves ever deeper in debt. Figures from Equifax and Moody’s show average balances on credit cards during the first quarter of 2008 rose 9.5% from a year earlier. Home equity lines of credit are up 8.1%.
The figures are worse in places where housing prices got the most out of control during the bubble. Astounding.
But this time around, the increased spending isn’t necessarily for SUVs and big-screen TVs. “Food, fuel and medicine,” says a credit counselor with the National Foundation for Credit Counseling, “people are charging their day care, even their tithes to church, and any incidental items.”
— The dollar sank again yesterday. The dollar index reached ever closer to the 70 mark.
— As the dollar falls, gold rises, at least for now. Gold closed in New York yesterday at $934, up a good $20.
“Still,” says our gold man Ed Bugos, “gold prices face head winds in the short term from the probability of a general commodity correction, a bounce in the dollar and a pickup in central bank gold sales, which are usually heavy this time of year (to June/July).
— The Bank of England cut its key interest rate 25 points, to 5%, yesterday. U.K. rates are now at their lowest level since November 2006.
“The Brits are in same unenviable position as the U.S.,” EverBank’s Chris Gaffney says, “with an economy in recession, but inflation rising. We encouraged investors to exit positions in the pound sterling a while ago, and continue to believe the pound will follow the U.S. dollar down.”
An alternative play worth considering is EverBank’s World Energy CD, available for the first time this week, and for the time being, only to Agora Financial readers. This new CD is indexed equally to the Canadian dollar, Australian dollar, and Norwegian krone — currencies all poised to benefit from their countries’ oil, gas and uranium riches. Sound intriguing? EverBank has all the details here.
— The European Central Bank, ever the inflation hawk, decided to hold firm at 4%. The euro scuttled sideways at $1.57…a price it’s been quite comfortable with of late.
— The Chinese yuan reached a milestone yesterday. It now takes less than seven yuan to buy a U.S. dollar.
The Chinese “people’s” currency has risen 18.4% against the greenback since Beijing dropped its strict dollar peg in 2005. A forecast from the Bank of Tokyo-Mitsubishi puts the yuan at 6.3 to the dollar by year-end, citing, among other things, euphoria over the Olympics in August.
We ourselves forecast that the yuan is the most likely candidate to replace the dollar as the reserve currency of the world. Although it’s not likely to occur without some serious political and economic disruption. Before the British pound gave way to the U.S. dollar as the world’s reserve — there were two world wars and a Great Depression. Catch up on your history…and your forecasts with the fully revised and updated edition of The Demise of the Dollar here.
— Indeed, yesterday, China moved ever closer to overtaking Germany as the world’s second largest economy. The Chinese government published its revised 2007 GDP growth figures…it went up from 11.4% to 11.9%. The 2006 growth number jumped too, up to 11.6%, from 11.1%
— Still, Chinese leaders are starting to panic over the rising price of coal. Rather, the impact of the rising price of coal on ordinary Chinese. So it’s frozen electric rates.
“Every American who lived through the 1970s,” comments Byron King, “remembers that energy price controls lead to inefficient use patterns and large losses to industry. Unfortunately, the Chinese have not learned this American lesson, despite large amounts of industrial espionage within the U.S. over the past 20 years or so.”
As a result, coal-fired electric plants in China are now money-losing propositions. Forty-two percent of China’s 4,773 large-capacity power plants recorded losses in the first two months of this year.
Not to worry, says a spokesman for the country’s State Electricity Regulatory Commission. The government will “allow power costs to reflect coal prices” at some time in the future. The future probably won’t arrive until after the Olympics.
— Along with oil, gas at the pump here in the U.S. has reached another record. A survey of gas stations by AAA and the Oil Price Information Service turned up a national average of $3.34 per gallon this morning. Summer driving season hasn’t begun in earnest. It will be interesting to see if, when and where the price begins to slow Sally down.
— Corn, too, has reached an all-time high…again. The USDA reported stockpiles of corn are dropping faster than expected yesterday, driving the price to $6.16 per bushel in Chicago overnight.
— Wheat is getting so scarce in the global markets that it’s proving more lucrative for some farmers in Afghanistan to plant this year than opium poppies.
Who needs NATO troops when you have record wheat prices?
And owing to the rising price, wheat imports will comprise 1% of Egypt’s entire GDP this year. Meanwhile, ordinary Egyptians wait in line for bread as often as three times per day. Fights have broken out in those lines consistently. Seven people have been killed.
— Farmers in Pakistan are planting less wheat because of rising fertilizer costs.
“The cost of fertilizer here in the U.S. is out of control, too,” adds Kevin Kerr in advance of his Midwest ag tour, “and that’s if you can get it. Two farmers I spoke to yesterday said they cannot get the fertilizer they need and are terrified to plant and spray for fear of losing what fertilizer they have if the rains come again.”
Which brings up an interesting investment angle, if you’re so inclined. Speaking at a conference in London yesterday, hedge fund manager Hugh Hendry said that financial shares could take a quarter century to return to their pre-crisis levels of last summer.
“There will be violent rallies,” Hendry said of the financials, “and those might last for up to a year. But you know when liquidity comes back into a market it seeks out not the laggards, but the leaders.”
Then he added, “The leaders are fertilizer stocks.”
— The airline industry, already on the ropes, could be down for the count after the inspections and cancellations that fouled up life for 100,000 passengers yesterday alone.
It’s something special, but not in the air…
American Airlines stock sank 11% as its fleet of MD-80s was grounded. The FAA determined the wiring bundles in the wheel wells hadn’t been properly secured, even after an earlier round of inspections and repairs.
“I have never in my life seen regulation more out of control than it is right now,” said veteran industry consultant Darryl Jenkins. “The price to the industry and to the traveling public is going to be enormous.”
— Starbucks is a glutton for punishment. With sales going cold and the share price down 40% in a year, the company is inviting its customers to come up with ideas to boost sales. The Web site MyStarbucksIdea.com has already generated 10,000 suggestions.
Here’s one from The 5: Make better coffee.
— “Greenspan is far more liable,” writes a reader obviously annoyed with the former Fed chief’s Reputation Rehab Tour, “for our current mess than anyone I can possibly think of, because of his low interest rate decisions.
“I retired Jan. 1, 2000. I had sold my house in 1998 in preparation for traveling around the country in an RV for a few years, with the idea that I would be able to return to the area (Sacramento, Calif.) and buy a smaller retirement home.
“Within a couple of years, my retirement funds had lost approximately $500,000, which was bad enough. However, because of the super low rates and liar loans, housing in that area grew far beyond reason (which I attribute directly to Greenspan and his Fed bank policy) and out of my reach when I got ready to buy again in 2006.
“I knew in 2003-04 that we were headed for big trouble, as there was no way normal people could afford the prices of houses and there would have to be a day of reckoning. That is why I think Greenspan is a fool and a liar and probably should be prosecuted for his performance.”
The 5
responds: You’ll get a kick out of the book written by Whiskey & Gunpowder contributor Fred Sheehan and William Fleckenstein called Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve then.
— “I’m glad that Greenspan won’t be able to stop regulation of the mortgage industry,” writes a reader. “It is the neoconservative unfettered market stupidity that got us here. Unbridled greed will always go as far as allowed, to the detriment of all others.
“We must start using our money for this country in rebuilding of infrastructure; greatly slowing immigration; protecting our borders (yes, build that fence); conserving resources; banning low-mpg vehicles, except for special uses; and getting our troops out of South Korea, Germany and other countries where they are not needed. We have been bled to death supporting the world — let it support itself.
“The first question I would ask of anyone who is losing their house is did they vote for Bush? The second question is did they use their home to buy playthings with tax-free loans? If yes to both, they have only themselves (and perhaps their god) to blame and don’t deserve help. Finally, tax religion. That would probably pay for health care and do a lot more good.”
The 5
responds: If the market were unfettered, you might have a legitimate gripe. But where Fannie Mae, Freddie Mac, and the Federal Home Loan Banks — government-sponsored entities that get lower than market rates on capital — make up 90% of the mortgage market, this bubble was and is anything but unfettered. To suggest that the neocons believe in free markets is a joke. They’ve simply co-opted the words. What they really care about is wielding power and controlling markets — the exact opposite ideal.
Regards,
Addison Wiggin
The 5 Min. Forecast
P.S.: We got one review from a blogger after last night’s screening of I.O.U.S.A. in Philadelphia. He completely missed the distinction between the national deficit and the national debt. And he paid no heed to the tsunami of spending on entitlements that threatens to “swamp the ship of state,” in David Walker’s terms. But other than that, he seemed to catch a fair bit of our drift. Take a look. It begins in the third paragraph.
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