Gas Prices Hurting Americans… Even Kids, Two Booming Chinese Industries, Credit Crisis Forecasts, and More!

by Addison Wiggin & Ian Mathias

  • Americans driving less… biggest reduction since gas shortage scare of 1979
  • Gas prices remain at records… how fuel costs are about to damage the U.S. education system
  • Two booming Chinese industries… in spite of the crashing Shanghai Composite
  • CEOs, CFOs and the world’s best fund manager say credit crunch is far from over
  • The next wave of the real estate crisis… now visible on the horizon?

Americans have cut back driving by over 30 billion miles,
reports the Federal Highway Administration. From November 2007-April 2008, FHWA’s latest data show total miles traveled declined 1%, or around 30 billion miles, from the same time in 2006-2007. Such a drop is the biggest since 1979, when the Iranian revolution spurred a U.S. gas shortage.

Put another way, drivers are moving about at the same rate as in 2005, when 8 million fewer people lived in the U.S.

“[Previously], people might change their pattern for a short period of time,” says Mary Peters, secretary of transportation, “but it almost always bounced back very quickly. We’re not seeing that now.”

And we wouldn’t expect it anytime soon. The average gas price from November-April was around $3.30 a gallon.

The national average gas price remains the same this morning: $4.07
, a cent from its all-time high. Diesel remains at its record high, or $4.79 a gallon up 68%, or $1.90, from this time last year.

Even those not old enough to drive are about to get hurt by high gas prices.

Around 475,000 diesel-running school buses transport 25 million children to school every day in the U.S., says The Wall Street Journal today. According to the American School Bus Council, those half million buses drive around 4.3 billion miles a year.

At today’s prices, schools are set to spend $2 billion on fueling busses this year a $600 million increase from 2007.

Meanwhile, the market for Chinese SUVs is thriving.
Sales of SUVs were up 40% in the first four months of this year, double the growth rate of the Chinese market for normal cars.

There’s even an odd “gray market” for Hummers sprouting while GM officially has no Hummer dealers in China, the FT reports 15 dealerships in Beijing alone are selling the things. Some manufacturers are quickly designing spinoffs, like Dongfeng Auto’s cleverly named HanMa.

“As a boy, I always dreamt of owning a big car,” a Hummer-driving Chinese real estate executive told the FT. “There are plenty of other sources of pollution than cars, and life is short, so we should enjoy ourselves, anyway.”

“The Chinese cement business is booming, too”
reports Byron King. “Construction in China, seemingly, has no end. There are well over 100 metropolitan areas in China with populations over 1 million. And these areas are growing fast. They are consuming all the cement they can lay their hands on.

“One area, called Chongqing (formerly Chungking), has a population in excess of 37 million. No typo. That’s about the population of California, and about 30% larger than the population of Peru (29 million). The population of Chongqing is growing (births plus immigration, minus deaths) at about 1,500 people per day. They all want a place to live. That’s just one illustration of why there’s a construction boom in China.

“When it comes to using cement, China dwarfs everyplace else on the planet. Here is a revealing graph from our friends at The Oil Drum:

“Heck of a graph, huh? Can you believe the comparison of China with everyplace else? The bottom line in all of this is that cement is a growth industry, maybe a growth industry on steroids.”

Despite booming industries left and right, Asian markets sagged overnight.
China’s Shanghai Composite shed a remarkable 6.5%. Just a day after snapping a two-week losing streak with a mighty 5% surge, Shanghai Composite investors took their profits and ran companies strained by high energy prices led the way.

If you haven’t been watching, the Shanghai Composite’s massive decline this year is as impressive as its breakneck ascent was in 2007 this market is not for the weak of heart:

Other Asian markets didn’t fare much better yesterday indexes in Hong Kong, Taiwan, Japan and India fell over 2%.

Markets in the U.S. declined yesterday,
as well, just not as dramatically. Financials put a fresh batch of fear in the market: Regional banking giant Fifth Third Bancorp revealed massive mortgage exposure, slashed its dividend, trimmed forecasts and said it plans to raise billions in emergency cash.

Shares of FITB plunged 27%, and the broad market followed suit. The Dow, S&P 500 and Nasdaq all fell about 1%.

The oil market stood relatively still yesterday,
despite several big oil headlines. President Bush clamored away on the boob tube, urging Congress to pass legislation allowing drilling offshore and in the ANWR region. At the same time, the weekly Energy Department inventory report showed oil supplies and demand had declined.

Traders digested the news and decided to keep prices pretty much where they were. Crude popped as high as $136 yesterday, but has since settled down to $134.

Gold shot up $15 at the New York open this morning, to $905 an ounce.
Since the dollar and oil were relatively unchanged today, the spike appears to be homage to the gold frenzy of earlier this year when investors bought gold to protect themselves from equity market turmoil.

“If gold is to enter its next breakout,” Ed Bugos told us at yesterday’s editorial meeting, “it needs to shake this attachment to the dollar and oil. If the markets take another turn for the worse, or if inflation fears continue to escalate, investors will turn to gold and we’ll enter our next leg up.”

“I don’t think we’re through the credit crisis,”
said hedge fund manager John Paulson at a conference in Monaco yesterday. Paulson, if you recall, was the top-performing hedge fund manager of 2007 and one of the many prophets of the subprime crisis. Now, he adds his voice to the many predicting a tough economy through 2009.

“I believe we’re going to go into recession, I think the second half [of the year] will be worse than the first half, and I think the recession will last into 2009… The primary factor leading to recession will be a decline in consumer spending, and I believe that will be more pronounced in the coming months.”

Paulson went on to say that financial sector losses could total over $1.3 trillion. As of today, losses have yet to total $400 billion.

71% of American CFOs say the U.S. economy won’t begin to rebound until 2009,
says a Duke University/CFO magazine survey. Of the CFOs polled, 54% don’t expect a turnaround until at least next summer.

And on the operations side, a third of the nation’s top chief executives plan to cut jobs in the next few months.
In a separate Business Roundtable survey of CEOs released today, the number of CEOs expecting to fire employees in the coming months increased notably, from 22% in April, to 31% this month.

Investors bought 70% less commercial real estate in the first quarter of 2008 than they did in Q1 2007,
reported the National Association of Realtors yesterday. A “mere” $48 billion worth of commercial properties were bought and sold during the period, a stark decline from the $157 billion in the same period last year.

“Slow economic growth is lowering demand for commercial space, mostly in the office and industrial sectors,” said Lawrence Yun, chief economist for the NAR.

“I’ve been thinking the same things about these ETFs lately,”
a reader responds to our mild skepticism of exchange-traded funds yesterday. “I’ve been invested in streetTRACKS Gold Shares and iShares Silver Trust, but as matters get worse more rapidly, I’m beginning to think about how they are not the same things as gold and silver.”

“I am wondering just how truly safe ETFs are,”
writes another, “such as gold and silver ETFs. If you are holding a few gold or silver coins in your hand, you know what you have. Are all those ETFs beyond failure? In other words, are they as safe as the real thing? Who backs them? What happens if those who back the ETFs go bust — or is it not possible that they will?”

“I have been working in wind energy as a project developer since 2000,”
writes a reader. “The U.S. wind industry just had its big trade show in Houston two weeks ago. There were 13,000 of us there, up 40% from last year. There were nearly as many exhibitors (750) as there were attendees in 2001.

“As someone who likes to be out ahead of the field, I couldn’t help but think, ‘uh-oh.’ Not that the industry itself is in trouble, but there are way too many people getting involved.

“The big long-term opportunities will be in operations and maintenance and buying distressed projects down the road. For now, turbine vendors, blade vendors, gearbox vendors, bearing vendors, tower vendors, etc. are all doing very well and should for the foreseeable future.

“Besides efficiency, wind will be the cheapest and most reliable to cut down on CO2 emissions. And utilities (as well as their regulators) are buying into this in a big way.”

“I don’t think it’s quite a shock that people 65-plus have higher bankruptcy rates,”
writes a reader in response to yesterday’s 5 Min. headline
. “On one hand, people younger than that are in the building stages of their lives. A bankruptcy means a delay or downsizing of houses, cars, etc. On the other hand, what do the 65-plus folks have to lose? Is any judge going to look at someone whose sole income is Social Security and think there’s a way to work it out with their creditors? There’s also a profound shift in thinking at that age — a number of people I’ve spoken to seem to have a “Me, worry? I’ll be dead by then” attitude on many issues.

“After all, credit ratings don’t follow you into the great beyond — if I were 75 and had the choice between being denied medical attention and bankruptcy, I’d be all over the latter. Heck, I might even live it up and let the credit card companies worry about collecting from my nonexistent estate. Why credit card companies issue cards without ever actually verifying assets/ability/motivation to pay has been a complete mystery to me for years.”

“Please pass along my regards to Mr. Wiggin,”
writes our last reader. “I joined the Reserve some time ago, and I think it’s probably the best money I’ve spent in quite some time… maybe ever.”

The 5:
I’ll be sure Addison reads your note thanks for sending it. We really believe the Reserve
is the best value our business has to offer, and we’re happy to hear you agree.

Enjoy your day,

Ian Mathias
The 5 Min. Forecast


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