Addison Wiggin – February 22, 2012
- No longer a stimulus: The payroll tax cut, transformed into a coping mechanism for high gas prices
- Why are “American” gasoline, diesel and jet fuel destined for export? Byron King peels an onion at the request of The 5 readership
- How a deal between China and Turkey pounds another nail into the dollar’s well-sealed coffin
- Beyond radiation and chemo: Patrick Cox on the trail of a cancer vaccine
- Fitch says fie on Greece fix… an “insane” lawsuit settlement… and more!
In celebrating Congress’ agreement to extend the payroll tax cut through year-end, the president made a startling claim yesterday: The tax cut, he says, “helps to pay the rent, the groceries, the rising cost of gas — which is on a lot of people’s minds right now.”
Frankly, we’re a little surprised that he’d make the connection.
Two months ago, we pointed out how all of the proceeds from the payroll tax cut in 2011 essentially went into the gas tank: A family earning the median household income got an extra $989 in their paychecks. But higher gas prices last year took an extra $1,300 out of a typical family’s budget, compared with the average gas price over the previous decade.
When the payroll tax cut was passed in December 2010, it was advertised as economic stimulus. Now it’s just a rebate that helps people try to keep pace on the cost-of-living treadmill.
Maybe the Bureau of Labor Statistics (BLS) will find a way to use it to bring down the “official” inflation rate, too.
(Whoops, don’t want to give ’em any ideas…)
With oil crossing $106 yesterday for the first time since last May, we piece together today’s episode of The 5 knowing energy — or at least the cost thereof — is, indeed, on the minds of many readers.
“This absolutely stunned me,” writes one, “I read several sources that said the oil from the Keystone XL pipeline will mostly be exported after being refined in Port Arthur, Texas.”
“I was strongly in favor of the pipeline until I heard this. Are politicians and oil experts unaware of this, or are they just using it as a political football?”
“I keep looking at the apparent reality,” writes another, “that Big Oil USA is sending refined fuel to countries outside the U.S. in order to keep the costs of fuel high.”
“Let’s get something clear,” writes our resident oil field geologist Byron King by way of response. “Canada’s oil is Canada’s oil. It’s not America’s oil. We in the U.S. can’t boss Canada around. That’s not how this world works.”
[Heh. Don’t you just love Byron?] “Of course, the U.S. is very fortunate that historically, about 100% of Canadian oil exports have come here. Why? Due to Canada’s proximity and the close historical-cultural relations between our two great nations.”
It also helps that the oil in Alberta’s tar sands is “stranded” in the middle of the continent. It’s a lot easier to send it via pipeline across the U.S. Great Plains than to build a pipeline over the Rocky Mountains to Canada’s Pacific coast for export to Asia:
“The midcontinent pipeline systems go only to Cushing, Okla., where the carrying capacity is maxed-out,” Byron goes on. “The result is that Canadian oil sells at a discount to world prices, because it cannot get to a place where it can compete in volume and price with the world tanker markets.”
“Still, every barrel of Canadian oil — to Cushing or elsewhere — satisfies U.S. demand and displaces the need to import another barrel of oil from overseas — Venezuela, Nigeria, Saudi Arabia, wherever…”
That brings us to the Keystone XL expansion — which would “unstrand” the oil by sending it to Gulf Coast refineries… and ports.
“What happens to Canadian oil when it pipelines down to Houston?” Byron asks rhetorically. “Refiners will buy it and crack it down, in lieu of Venezuelan, Nigerian, etc., crude. You’ll drive your car on Canadian oil or fly in airplanes powered by it or eat food that was trucked across the country with it.”
Will some of those barrels also be exported?
“Maybe,” says Byron, “but so what? What’s the problem with that? It’s not ‘your’ oil, unless you buy it. Meanwhile, U.S. people and companies will still get paid for handling the oil, storing it in tanks, loading ships, whatever.”
Why will it be exported?
“It’s that darned economic recession” says Byron acerbically. Or at least as acerbically as he gets.
Americans drove 1.2% fewer miles in 2011 than they did in 2010, according to new figures from the Federal Highway Administration. That’s the fewest number of U.S. road miles since 2003 — despite 7% population growth during that span.
“Think of it this way,” Byron says. “All those unemployed people, and people who’ve dropped out of the work force, are not using oil. Well, not as much oil as in the good old days. Thus, refinery capacity sits idle, unless refiners use the assets to process oil and ship the products overseas at a markup.”
“Please,” implores Byron, “don’t fall for the anti-Keystone propaganda that exporting refined products is somehow ‘bad’ for America.”
“The world price of oil is what it is, and that sets the price at the pump. Big Oil’s profit per gallon is about 3 or 4 cents. Your state and federal taxes per gallon are about 50 cents per gallon, depending on your state. Exported fuel products are good foreign exchange for the U.S. economy.”
“If politicians (stupidly) banned fuel exports, any number of U.S. refineries would just scale back or shut down.”
In fact, that very export capacity will be an essential building block of the renaissance in U.S. industry that Byron sees coming very soon.
We’re still rather skeptical of Byron’s thesis… but the key to understanding it is that it’s not based on a single U.S.-based energy play, like the Bakken oil shale or the Marcellus gas shale.
“The railroad age… the steel age… the electronics age… the technology age — this phenomenon triggered them all,” he says. “This is something far, far bigger than any single, new resource discovery.”
Nor is there any denying the profit opportunity within. It’s already bringing torrents of wealth to places as diverse as the given-up-for-dead Rust Belt city of Youngstown, Ohio… and Texas’ dusty and remote Dimmit County. To learn how you can grab some of this for yourself — starting as early as this May — please give Byron’s case your attention.
U.S. stocks are climbing down from yesterday’s highs. The Dow hit 13,000 for about a nanosecond, but this morning, it’s back to about 12,920.
A handful of numbers are weighing on traders’ minds…
- Existing home sales: up 4.3% in January, according to the National Association of Realtors, but that was less than the “expert consensus” was counting on
- The eurozone’s service sector shrank in January — another “surprise”
- “Flash PMI” figures from Hong Kong indicate that manufacturing in China might shrink for a fourth straight month.
Precious metals are holding their own after yesterday’s modest run-up. The bid on gold is $1,756. Silver’s down to $34.13.
What little weakness gold is showing appears tied directly to a slight amount of dollar strength. The dollar index is up to 79.2 this morning.
That didn’t take long: After yesterday’s latest “Greece is fixed” announcement, Fitch promptly downgraded Greece from CCC to C. That’s the lowest rating above a default.
In the credit default swap market, traders now peg Greece’s likelihood of default at 93.3%.
“In a global economy saturated with private and public debts, all roads ultimately lead to inflation,” says our short strategist, Dan Amoss, keeping one eye on Greece.
“Central banks unfettered by the discipline of the gold standard will see to that. One of the two following paths will ultimately drive markets to a similar inflationary destination:”
- “Greece defaults in March as the political system breaks down and the EU abandons bailout efforts. We return to a brutal ‘risk off’ environment for a little while. The lag time between a Greek default and another round of quantitative easing from the Fed and ECB would be measured in hours, if not minutes. The resulting surge in money supply would drive up prices in the tightest choke points of the global economy, especially oil.”
- “The EU and ECB continue to push off resolution of Europe’s debt problems, and inflation driven by the ECB and other central banks drives up cost increases for all businesses. This is bad news for sales and profit margins in many sectors.”
China has signed another currency swap arrangement to bypass the dollar in their trade. “This time, China signed an agreement with Turkey,” writes Chuck Butler from his post at EverBank’s currency trading desk.
“China is being coy with these smaller — in terms of world trade — countries, but that’s how they are going to spread their wings, and gain a wider distribution of their currency. And again, I sit here and tell you, dear reader, that China has plans to remove the dollar as the reserve currency of the world.”
“To have the reserve currency title stripped from the dollar would be devastating to our economy. To you, me, our kids, our grandkids. After World War II, the pound sterling could no longer be the reserve currency of the world. Because of the debts they built fighting the war, the U.S. became the financier of the world, and was the only country that had the ability to act as ‘settlement banks’ and use dollars in the terms of trade.”
“Then gloom, despair and agony fell on the U.K. economy. This is what the Chinese have in mind for us. And why are they doing this? They believe that the U.S. has broken their promise to the world to keep the dollar strong, which they can no longer do, given the debts, deficits, economy, scandals, unfunded liabilities and on and on.”
In other words, the mother of all financial bubbles.
“Cancer vaccine therapies are one of the hottest areas of biotech research today,” writes Patrick Cox.
“At least a hundred organizations, I hear, are currently looking for vaccination therapies that train T-cells to more effectively fight cancers.” T-cells are the white blood cells that fight disease and communicate information about threats to the immune system.
“This is only logical, since prior anti-cancer therapies have been, by definition, toxic. Both chemotherapy and radiation therapy harm the patient. The trick is to harm the cancer more, but it is not an optimal solution. Prior to new approaches to cancer, the best possible scenario was to reduce side effects and damage.”
One vaccine is now undergoing an intriguing test: It’s being combined with a drug produced by one of the companies he follows.
“This complex carbohydrate, essentially food, blocks galectin-3s. Briefly,” explains Patrick, “galectins-3s are proteins that have the ability to recognize and attach themselves to specific sugar molecules. This sugar-binding characteristic is typical of all lectins and is essential to our bodies’ functioning, but galectin-3s, for some reason, are also involved in all manner of disorders. Galectin-3s are integrally involved in strokes, heart disease, cancers, inflammation and fibrosis in its many health-destroying forms.”
And… they attach to the aforementioned T-cells. Block the galectin-3s, and doctors could forever change how cancer is treated.
And that’s only one of the breakthroughs on Patrick’s radar. For another, look here.
“Absolutely insane!” a reader writes in reaction to our odd-lawsuit roundup yesterday. “Cybex needs a better attorney — there’s no way in hell a good lawyer could lose this case.”
“I worked for a physical therapist as his business manager, and I knew the difference between a shoulder machine and a leg-extension machine. No PT with a brain could possibly have not known the difference.”
“But I DO want to know the name of the plaintiff’s attorney in case I ever get injured — the SOB must walk on water!”
“I wonder,” writes another, “if you have a stock ticker (or ETF) for lawsuits. I’d buy up the shares.”
“At least the personal injury lawyers are making money.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. Phew!
We just got back to Baltimore after a week and a half of travels and meetings. Thanks as ever to Dave “the Stalwart” Gonigam here at the headquarters for keeping The 5 train running on schedule.
As you know, we were down at Rancho Santana on the Pacific Frontier last week for our annual publisher’s jamboree. Nothing too crazy to report from the meeting. Oh, and we made plans to start exploring Brazil for business opportunities with a trip that begins in early May. If you know of anyone currently doing business in Brazil… let us know!
Following the meeting, we diverted ourselves to Phoenix, where our 12-year-old played in a national soccer tournament. Nail-biter until the last 30 seconds of the fourth match. Despite holding the U-12 No. 1 ranking, their team met with a couple worthy opponents and didn’t make it through the group stage. A team from Massachusetts ended up taking the trophy. That team has now moved up to third place. In two weeks, we meet many of the same teams in a tournament in Virginia.
While in Phoenix, we enjoyed a quick glass of wine with our friend, best-selling author Charles Goyette. Charles has a new book coming out called Red and Blue and Broke All Over. We were honored to have been given the first copy of the book during its maiden print run, which he signed. (Thanks again, Charles, we’re honored!)
Charles is a veteran radio talk show host. We’re thinking of trying to turn The 5 into a radio program… what do you think? Would you listen to such a thing…?
Heh.
Last program note: With the considerable, diligent attention and professional goading of co-author Samantha Buker, we turned in the completed manuscript for a Wiley Little Book series book called The Little Book of the Shrinking Dollar today at 11:26 a.m. EST — 34 minutes before the (mildly) extended deadline.
The book works as a primer for our point of view on the markets and reads like a book-length edition of The 5 Min. Forecast! In other words, it’s a perfect for the jackass you argue with on the golf course about the strength of the U.S. economy. We’ve already received some very positive feedback and suggestions from Ralph Benko, Rick Rule, Ron Paul, Bill Bonner, Peter Cooper, Michael Covel, Chuck Butler, the above-mentioned Charles Goyette and a few others.
The pub date for The Little Book of the Shrinking Dollar is in April, but we’ll fill you in more when we get details ourselves.