by Addison Wiggin & Ian Mathias
- Gas prices soar… Dan Amoss on the future of this “luxury expense”
- Food isn’t getting any cheaper, either… our resource trader on how to play it
- Time for a move? The 10 best cities in the world, and our favorite way to visit No. 1
- Bonds on fire… Treasury, Fannie Mae paper pumps up mortgage rates to 2009 highs
- Plus, Chris Mayer with the first signs of the world’s next “strategic asset”
Banks, bonds, bailouts, Barack, Bernanke… let’s put them all on the back burner today and talk about something we all REALLY care about: the price of gas. Welcome to an everyman’s issue of The 5.
The national average gallon of the cheap stuff has risen 41 days in a row, to $2.62 a gallon. That’s a $1 rise, or 61%, from the average price at the start of 2009. Certainly enough to scuff the luster off those economic “glimmers of hope,” don’t you think?
“This hits everyone,” famous Yale economist Robert J. Shiller told the NYT. “It has the potential to affect your confidence.” According to Shiller, a few months at these prices could offset President Obama’s new $400-800 middle class tax cut. The Oil Price Information Service claims today’s gas prices costs consumers $400 million more every day compared to January’s ultra-low prices.
Will it go higher from here? If oil’s price is any indicator, maybe. While gas prices are up 61% from their lows, crude oil has more than doubled.
“Consumer behavior has changed,” writes Dan Amoss. “The typical basket of consumer goods is also changing. Most consumers are smart and adaptive and realize they need to save a lot more out of their paychecks, and will do so despite the government currently encouraging as much spending and risk taking as possible. This trend will last for years, and we should not underestimate it.
“Consumers will still spend more wisely on things that provide good value, and on affordable luxuries like gasoline (the talking heads still underestimate how strong gasoline demand will remain throughout this recession). Yes, I consider gasoline a luxury, and more probably will as the rest of the developing world increases gasoline consumption — recession or not. Governments are printing money and running deficits, and as long as this is happening, this new money will chase goods that every human demands — like refined oil products.”
Food costs have recovered very quickly, too. Exhibit A:
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According to The Economist’s Food Price Index, the global cost of food is down only 2.2% since the start of 2008… much better than most asset classes can claim.
“We have corn, wheat and beans in our sights,” reports our resource trader Alan Knuckman, “and hope for heavy profit taking to lock in the large recent price gains and allow us a better entry level.
“Because of the wetness, spring planting has not reached normal annual levels and supported grain prices at the beginning of the crop year. Spring wheat in North Dakota is typically above 96% planted as of last week, but only 60%-plus is in this year. Low carry-over from tight supplies is the underlying theme that makes the grains potentially explosive.
“Generally speaking, the asset market is entering another phase — after bottoming from an unnatural price depression of the vital resources that are consumed every day. This next step forward, as I see it, is a recovery as global demand rebounds and life continues on for the billions around the world who are not money managers, bankers or insurance executives mired by overleveraged portfolios and bad bets.
“Life goes on with, hopefully, a little less reckless abandon in the financial markets, with some lessons learned to prevent another push to the March stock market lows. People will continue to drive, heat, eat, produce goods/services and put the ‘consume’ in ‘consumer.’
“Conspicuous consumption may be out, but pent-up demand for goods we need has only been delayed.”
We agree… which is why we’re currently offering a 50% discount on Alan’s Resource Trader Alert. Details here.
Speaking of The Economist… guess which city topped the paper’s 2009 “livability” list?
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Vancouver, B.C.
What an odd coincidence… the place where we hold our annual Investment Symposium happens to have the most appealing juxtaposition of health care, stability, culture, environment, education and infrastructure (according to an Economist Intelligence Unit poll released today). Vancouver scored 98 on a scale of 100, ousting any city in the U.S… and the rest of the world. Aside from our array of esteemed speakers and an itinerary of special events, the city of Vancouver is a great reason to join us this July. If you’re interested, click here now… we’re already over 70% booked.
If you’re curious, Vienna is The Economist’s second choice, followed by Melbourne, Toronto, Perth, Calgary, Helsinki, Geneva, Sydney and Zurich, in that order. If you’re a glutton for punishment, check out Harare, the capital of Zimbabwe. The hyperinflated city ranked dead last.
So gas prices are up, food prices have recovered… at least you can refinance your home at a super-cheap rate. Uh-oh…
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Despite a public, full-fledged, trillion-dollar government manipulation campaign, mortgage rates have soared over the last two months. As we’ve documented in these pages, bond traders have rightfully sold long-dated government bonds, the paper that is most tightly correlated to mortgage lending rates. Say again: This spike is in spite of the fact that the Federal Reserve has openly announced it will be an aggressive buyer of both mortgage-backed paper and U.S. government bonds. Oy… disaster waiting to happen.
Mortgage bond yields are spiking, too. Yields on a Fannie Mae package of 30-year mortgages now exceed 5%, up over 100bps in three weeks, and to their highest level since last Nov. 24, 2008 — the day before the Fed announced it would be an indiscriminate buyer of Fannie and Freddie paper.
Yet stocks remain relatively unfazed. Major indexes finished flat yesterday and are down just slightly today. We suspect traders are looking anxiously upon Treasury bond auctions later this week. The Treasury’s sale of 10-year notes tomorrow could make quite a splash… we’ll let you know how it goes.
The same anxiety applies to the greenback, which has abruptly ended its recent rally. The dollar index shot as high as 81.4 Monday, before falling back to just above 80 this morning.
Thus, today’s dollar weakness is giving commodities a boost. Oil is back up a buck today, to $69 a barrel. Gold bounced off a low of $945 an ounce, to $955 as we write.
“Water troubles cost the president of Madagascar his job,” reports Chris Mayer, on a commodity issue soon to be commonplace. “But in a twist, it was water troubles in South Korea that did him in. Daewoo, a big South Korean conglomerate, worried about how it would increase food supplies, given its water-stressed homeland. So it signed a deal with Madagascar to lease half of its arable land to grow crops to ship back home to South Korea.
“When the people of Madagascar heard about the deal, they were very unhappy. The new president of Madagascar wasted no time and scotched the deal. It’s just another step along the road to water becoming a strategic asset, just like oil. Another episode in an unfolding series called the global water crisis.
“Water is one of four areas that look most attractive to me in a big-picture sense. I remember them with an acronym I’ve created: WAGE. It stands for Water, Agriculture, Gold and Energy.”
Chris has plenty of exposure to all of these on the back page of Mayer’s Special Situations… which you can access right now for just a dollar. No kidding… get ’em right here.
Ten banks will begin paying back TARP loans today. As we mentioned yesterday, the Obama administration OK’d the repayment of TARP bucks from JP Morgan, Goldman Sachs, American Express, Bank of New York Mellon, Morgan Stanley, State Street, Capital One, BB&T, U.S. Bancorp and Northern Trust.
If each company opts to redeem all the preferred shares the government holds, the Treasury can expect $68 billion in repayments. CNN insists these funds will be returned to “taxpayers,” but in reality, the money will go into the Treasury’s general account, to be loaned again or squandered elsewhere.
Last today, get ready for “Stress Test Part Two.”
"The employment numbers for 2009,” reads the latest report from the Congressional Oversight Panel, “have already exceeded the harshest scenario considered so far, suggesting that the stress tests should be repeated." Now at 9.4%, the unemployment rate is already higher then the Stress Test’s “adverse” scenario. All that’s left is a “worst case,” where unemployment reaches 10.3%… now a near certainty.
Ugh, what a mess… we might have to go through this again. Who could have seen this coming?
“You wrote,” a reader writes us, “that the Obama administration’s desire to regulate CEO compensation is ‘another nail in the coffin of capitalism.’”
“I own 50 individual stocks and have NEVER been asked how much I think the execs are worth (in many cases, a negative number). We, the stockholders don’t determine exec compensation, regardless of the propaganda saying we do. These guys are on several boards, and approve huge salaries for each other — the ultimate good ole boys network. No human being can be worth that much unless working in several parallel universes at the same time for a single paycheck. Go look at the salaries of equivalent companies in Europe. These companies have no problem attracting top talent, which is another lame excuse for fleecing and offending stockholders of U.S. companies.
“If this is your idea of capitalism, you must be living in La-La Land. I’m sick to death of being ‘screwed’ by this brand of capitalism (and I use the term very loosely).”
The 5: That’s a great point. But if you don’t like it, why not just sell your stocks and avoid businesses that you feel overpay their execs? How could they “screw” you if you’ve got nothing to do with them?
Thanks for reading,
Ian Mathias
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