How Subprime Will Hurt Your Kids, Byron King on $115 Oil, Food Crisis Getting Serious, $2 Mil Camels, and More!

by Addison Wiggin & Ian Mathias

  • The latest victims of the subprime meltdown… your kids
  • Highlights of the Fed’s latest Beige Book… why a rate cut is all but certain
  • Gas, oil, food… fresh all-time highs
  • Byron King gets behind the real reason for $115 crude
  • Why Aussie farmers are trading their plowshares for decanters… and how it hurts the whole world
  • Merrill Lynch disappoints… another economic think tank says credit crisis barely halfway finished

As we suspected, lousy credit conditions are oozing their poison outside the mortgage market. Next victims? Your kids.

“Today’s environment is the most difficult we have seen in our 35-year history of student lending,” Sallie Mae CEO Albert Lord decried this morning. “Under current conditions… loans can only be made at an economic loss.”

Tight credit markets have “dramatically” increased the cost of funding. Without a “systemwide liquidity solution,” says Lord, the government-backed student lender won’t be able to continue making profitable loans.

Sallie Mae chiefs announced a $100 million quarterly loss this morning — their third quarterly loss in a row. They also announced they’ll be forced to whack 1,000 jobs from the payroll.

“Economic conditions have weakened since the last report (February),” reads the ever-blase Beige Book. The Fed released its 12-district, lily-white page turner yesterday, showing mostly what you might suspect… economic activity is slowing in most places, the housing market remains “anemic” and consumer spending is in the dumps.

If anything, the latest release all but seals the deal for a Fed rate cut at the end of the month. Fed heads are once again in denial of American inflation. Regions reported “little change in retail price inflation,” read the report.

Right… no retail price inflation here, either. What country were they surveying?

The national average retail gasoline price hit yet another all-time high yesterday. Hmmn. That’s one area of inflation that impacts, umn, everyone. Overnight, the price jumped 2 cents, to $3.41. A year ago today, the average price at the pump was $2.86.

Diesel hit another all-time high, too, at $4.14.

Oil found itself another all-time high last night, too. There have been so many record highs lately among energy, commodities, grains and precious metals… they don’t seem so remarkable anymore.

For its part, the light sweet stuff began its march yesterday morning when the U.S. Energy Department announced a greater-than-expected decline among oil and gas inventories. Factor in a little dollar weakness overnight… et voila, you’ve hit $115 a barrel.

“Here’s the big picture behind today’s oil prices,” explains Byron King. “The world oil supply has become very tight. Demand is rising. The world’s oil industry has reached a plateau in overall output. New output cannot keep up with depletion from older oil fields.

“The price of oil going up would ordinarily clear the market. But with all the ‘extra’ money creation coming out of the U.S. Fed, prices are going up even faster.”

The following chart tracks the price of oil against the nation’s money supply since 2001.

“About 87% of the move in the price of oil,” says Mr. King “can be explained by the increase in supply of dollars gushing around the globe. We’re now at the point where just the expectation of loose money is also inflating the price of oil. There is probably $15-20 worth of ‘speculation premium’ pumped into every barrel.”

Rice and corn futures both hit record highs yesterday, as well. Rough rice in Chicago jumped up another 2%, to $22 per 100 pounds. Corn did the same, up 2%, to $6.08.

Rice has now shot up 75% in the last two months alone. Corn is up 30% this year. Wheat has managed 120% gains over the past 12 months.

The World Bank recently estimated at least 33 countries are experiencing serious “social unrest” because of skyrocketing food and energy costs. Yeah… this is becoming a calamity, and we’re having trouble finding signs of improvement anytime soon. For example…

In Egypt, lines for bread look like this:

Egyptians — gasp, even the precious Egyptian civil servant class — are waiting in line for hours in front of these subsidized bakeries. Fights break out often, says a reporter from NPR covering the story this morning. Prices at unregulated bakers run around 8 cents per loaf… eight times the cost of the price at the government-supported stands.

The radio station’s contacts reported uprisings, riots and food-related corruption all over the region, including Egypt, Tunisia, Morocco, Saudi Arabia and Yemen. Government policy and corruption have been blamed — on both sides of the Atlantic. Egypt’s largest source of wheat imports? The U.S., whose farmers have been systematically planting crops for biofuels, rather than food exports.

On the other side of the world, extreme drought and telling profit margins have Australian rice farmers switching to growing wine grapes. Australian rice? Yeah, that’s what we thought, too. But the reduction in rice imports from Australia has helped add pressure to an already strained global market for the little white grains.

A multiyear drought has crushed the Australian rice industry. According to The New York Times this morning, the Aussie rice crop has been decimated… down 98% over the past six years.

As the weather worsens, Australian farmers have taken to growing wine grapes — not because the grapes command higher selling prices, but because the water required to grow rice is too expensive.

Regardless what you think of their politics, The N.Y. Times makes great charts. We nicked this one for you this morning:

The U.S. stock market enjoyed some big gains yesterday. J.P. Morgan, Wells Fargo, Coca-Cola and Intel all announced better-than-expected first-quarter earnings. Advancing stocks outnumbered those in decline more than 5-to-1. The Dow, S&P 500 and Nasdaq shot up over 2%.

But already today is looking like a different story:

Merrill Lynch announced a bigger-than-expected quarterly loss… and a $5.5 billion write-down this morning. Unlike the rosy news from J.P. Morgan yesterday, the folks at Merrill reported a net loss of nearly $2 billion during the first quarter, amounting to $2.19 per share — much worse than the expected $1.99 loss.

Merrill has now written down over $27 billion over the past three quarters.

The new CEO, John Thain, emphasized this morning that Merrill had enough capital to meet obligations. They’re not going to need any emergency cash injections, he assured reporters. The statement was, obviously, meant to prevent the type of run that took down Bear Stearns in less than a week.


“I wish he didn’t say that,” Merrill Lynch CFO Nelson Chai told a CNBC reporter after hearing Thain’s reassurance.

Eh… confident in their books, are they?

Losses from the collapse of the global credit markets will amount to as much as $420 billion, predicted the Organization for Economic Co-operation and Development (OECD) this week. The OECD had previously guessed $300 billion… but the storm clouds keep rolling in over Paris.

The OECD announcement marks the fifth major think tank or big-name analyst to speculate on the scope and breadth of subprime mess. The average guess — between the IMF, OECD, Goldman, UBS and S&P — now comes in around $542 billion.

Anyway you slice it, the global consensus is these banks are barely halfway through hemorrhaging their bad bets.

Economic growth in China is slowing, but still cooking with gas. Chinese bean counters announced today what they believe is a 10.6% growth rate for their first quarter. While over a point slower than last year’s pace, Chinese economic growth still dwarfs the U.S.’s by a factor of at least 5.

But with growth, there’s inflation. The national annual inflation rate rang in around 8% for the first quarter. Food prices are up a stunning 21% from a year ago.

Meanwhile, the Chinese government is quietly continuing to allow the yuan to float. The Chinese currency has gained 4.2% against the dollar this year, to about 14 cents. The yuan is on pace to more than double the 7% appreciation it experienced versus the greenback in ’07.

We spoke to a reporter Minqi from the 21st Century Business Review, a paper with 70 million readers and based in Shanghai, last night. During a lull in her line of questioning, she let slip that reporters from her paper who travel to the United States on assignment no longer wish to be paid in dollars, but in their own currency.

There’s a sign of the times.

Other currencies held onto their recent gains against the dollar. The euro remains at yesterday’s record high of $1.59. In fact, it edged just a bit higher into the $1.59 handle and is now just a breath from $1.60.

The pound edged up a bit, to $1.98. And 102 yen will fetch you one solid paper greenback this morning.

Gold traders the world over must have gone to the pub for a pint yesterday… the precious metal has flat lined at $945 for the past 24 hours.

Yesterday, we showed you the nude Carla Bruni. Today… a camel.

Sheikh Hamdan bin Mohammed bin Rashid al-Maktoum, the heir of Dubai leadership, spent $2.7 million on a single camel this week.

After viewing the beast during a UAE camel beauty pageant — seriously — Sheikh Mohammed put down the small fortune and took ’er home. He also spent another $2 million on 15 other, evidently less superior, camels.

“Doctors have been hoisted by their own petard,” says a reader in response to Tuesday’s lead. “If doctors had cooperated with Harry Truman when he wanted to put universal health care through in this country 60 years ago, instead of their American Medical Association (to which, at that time, at least 90% of the doctors in the USA belonged) battling it tooth and nail, we might not have this situation. We might be part of the rest of the civilized world, all of which but us having universal health care.

“A lot of doctors are opting out of Medicare, but sooner or later, that may result in their having no patients, as many older patients are going bankrupt from medical bills even thought they have Medicare. Doctors better get on board and start recognizing the financial problems of ordinary people and start cooperating with other institutions in getting lower medical costs and more insurance coverage for more people (spreading the risk, thus lowering expenses for individuals), instead of pissing and moaning about their problems.

“I was hospitalized for two days when I was on vacation in Scotland eight years ago and I got excellent care under the country’s socialized medical system. Our not having universal health care in this country is a disgrace.”

“In the coming years, the U.S. will finally join the rest of the civilized world,” writes another, “and adopt socialized medicine. We will also open up our enrollment to medical schools and the tuition will be paid 100% by the government, instead of the 70% it is paying now. Then medicine will finally become an area of practice open to more of the people who want to reduce suffering, and not just the connected elite that now crowd our medical schools.

“I’ve tasted both practices, as I have a dual citizenship (British/U.S.), and in my opinion, medicine for the average citizen is better in England. Once the U.S. is socialized, that will also put an end to the ‘brain drain’ currently happening now where foreign physicians practice for a few years in their countries and then, despite the fact that their countries have paid for their education, flee to the U.S., where they can become millionaires. Then costs will go down as more preventative medicine will finally be practiced and physicians and patients will be encouraged financially to change behaviors that increase medical costs and we will have a better medical system at lower cost than we have now.

“Personally, I think the medical field would be better off were it not run for profit. Then some of your readers who think they are worth so much might find other professions or retire to enjoy their millions while the average citizen finally gets his medical needs met.”

The 5 responds: Hmmn. You two seem awfully confident in yourselves. There are a lot of people in the country who, given the choice, would opt for the less-civilized practice of pulling out their own fingernails with pliers over submitting to federal control of the medical system.

“Indeed, there is a medical crisis in the U.S.,” writes a third reader. “And it doesn’t just affect baby boomers. By most reports, nearly 47 million U.S. citizens, or 16% of the population, are without health insurance. Adding insult to unaffordable injury, the average cost for a family health insurance policy in the U.S. is now about $11,000 per year. And the average family spends about $13,000 on medical care and services each year.

“But there is a way around it…move out of the U.S. That’s what my husband and I and millions of other Americans are doing. By the way, in Mexico — where we live — a foreigner can obtain full-coverage health insurance for less than $1 per day. And the quality of care is excellent. Am I worried about health care? Not where I live!”

The 5 responds: First, we had one gentleman who is ready to escape to the Andes. Then another to the Philippines. Now Mexico… the options are piling up. Does anyone want to stay and face universal health care? Good grief.


Addison Wiggin
The 5 Min. Forecast


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