Addison Wiggin – February 28, 2012
- Besides Iran and the Fed, three more reasons Byron King says the price of energy is rising
- Boomtown USA: A micro example from the “Rust Belt” that illustrates the macro revival Byron sees all around
- Consumers confident, investors itching for more gains: Dan Amoss with a word of caution and a chart to back it up
- Chinese lawmakers richer than American ones… Wyoming reels in its aircraft carrier plans… give-and-take with Byron King about Keystone XL… lessons from Silly Putty… and more!
The average American is paying 13 cents a gallon more for gasoline than he did a week ago. Gasbuddy.com says the national average price for regular unleaded is $3.67.
A barrel of oil goes for $108.33 this morning — up nearly $12 in February alone.
There is, of course, a “fear premium” caused by the prospect of a New War… and an “inflation premium” caused by the Federal Reserve’s monetary promiscuity….
But there are some more onerous factors at work, too. Bureaucracy among them.
A word of warning, if you’ve got any strains of “free market” blood coursing through your veins, be prepared for those platelets to begin boiling…
“In North America,” Byron King explains from his perch in Pittsburgh, “refiners are already processing summer blends of gasoline that meet ‘clean air’ mandates. There are a multitude of blends, each required in a specific region.”
“You can’t sell ‘Chicago’ gasoline in Philadelphia, for example, or ‘Seattle’ gasoline in Los Angeles. The U.S. is a patchwork of chemically dissimilar fuel blends. It makes for a logistical mess, having to transport specific blends to specific regions.”
“That, and every year, we see a late-winter or early-spring spike in oil prices because the ‘clean air’ gasoline blends require more oil as feedstock. That is, ‘clean air’ reduces refinery yield.”
“So perhaps we have ‘cleaner’ air (and perhaps not), but at a significant overall increased cost at the pump.”
One more less-onerous, less-predictable factor leading to hire gas prices: Europe’s bitter-cold winter.
“You may be tired of reading about economic issues in Greece and Italy,” says Byron, “but that doesn’t mean that they’re not still using oil when it’s cold.”
On a related note: All but three of Japan’s 73 nuclear reactors remain offline after Fukushima. “The Japanese,” says Byron, “are using more oil to generate electricity and run their industries.”
And that’s on top of China’s exploding consumption. “Just take a look,” says Byron, “at one trend that’s driving demand (so to speak), namely the skyrocketing numbers for vehicle registrations in China. There’s huge growth.”
“The only limiting factor for China will be the world’s future oil supply — or I should say China’s future oil supply from the rest of the world.”
In the face of these factors, falling U.S. demand and rising U.S. supply become irrelevant. “You compete for your gallon of gasoline with people from every other nation across the world,” says Byron, returning to a theme from last week.
“That is, it’s ‘your’ gallon if you can afford it. When the price of oil goes up and the other issues are factored in — like a cold winter in Europe, and rising Asian demand — the U.S. demand decline pales in significance.”
“The bottom line is to expect higher oil prices over the next few years, and higher pump prices as well. Sure, we’ll see oil prices rise and fall, because nothing goes up in price forever (except for the cost of medical care and college educations in the U.S., perhaps).”
“But you had better get used to living with oil price volatility and prepare to live your life accordingly.”
And invest accordingly.
“There’s no doubt there’s an energy surge in Washington County,” says Jeff Kotula, president of the Washington County, Pa., Chamber of Commerce.
Washington County is smack in the middle of the Marcellus Shale. The Chamber is bragging about 45 economic development projects during 2011… and 24 of them were energy-related. The county is third in the nation in employment growth.
County Commissioner Harlan Shober got a chuckle during a news conference yesterday when he mentioned Gasland, the documentary that’s highly critical of the “fracking” process that pulls shale gas from the earth. “Washington County could also be called jobland,” he said.
Add Washington County to the long list of U.S. communities seeing a revival thanks homegrown natural gas and oil. Byron says it’s not too late for your portfolio to snag a piece of this prosperity, no matter where you live. But for reasons he makes clear, it’s best if you move on this in the next two months.
Oddly, U.S. consumers are taking an Alfred E. Neuman approach to gasoline prices.
The Conference Board is out this morning with its numbers on consumer confidence… and the headline figure spiked big this month to 70.8.
That’s almost as good as the year-ago figure of 72, which marked a post-2008 high.
Gas prices this time last year averaged $3.35.
Consumers are not alone in their ebullience.
“The idea that we’re in an ‘economic recovery’ has now fully taken hold of investor psyches,” says our short strategist Dan Amoss. “As it fades, much of the recent rally will be repealed.”
“The recovery idea,” Dan says, “is based heavily on coincident and lagging indicators, while the best leading indicators are still negative.”
Dan drew our attention back on Sept. 30 to the recession call by the Economic Cycle Research Institute (ECRI). Since then, the economic data that matter to ECRI have gotten worse.
“The economy is weaker today than it has been in 21 months,” according to ECRI’s Lakshman Achuthan in a Bloomberg interview. “In 50-plus years of history… economic growth has never slowed this far without a recession following in short order.”
Achuthan’s best-case scenario: A “mild recession” on the order of 2001.
“The ECRI model,” Dan points out once again, “doesn’t issue false alarms. It relies on a robust series of economic metrics. The growth rate is still negative”:
“The bullish bandwagon is crowded,” Dan surmises. His guidance: “Stick to a contrarian view by holding short positions and accumulating gold mining stocks.”
[Ed. Note: Jonas Elmerraji recommended a gold miner this morning to readers of Penny Momentum Trader. He’s looking for a short-term gain of 10%, and the gains could be even bigger for more aggressive readers who pursue a call option.]
Gold is pushing toward a four-month high this morning, up to $1,784. Silver’s on another tear, up nearly 3%, to $36.52.
“I think this move will continue and we should see at least $2,000 by the end of March,” says our friend and Gold Switzerland proprietor Egon von Greyerz in an interview he passed along via email this morning.
“What central banks around the world are trying to do, the Titanic, the world economy, is sinking,” he says, “and they can’t even rearrange one deck chair. The one deck chair is Greece. Greece isn’t solved. In the end, Greece will default.”
“In the last 18 months, world money supply has gone up by $10 trillion. There is massive money printing taking place worldwide. So central banks are doing this, but it is the wrong remedy because we are not going to solve anything by printing.”
“The forest fire actually needs to burn the whole forest down. This is what needs to happen to the whole world economy. We need to reset the world economy and start again. Iceland is the best example of that, and this is what needs to happen to the whole world.”
Meanwhile, John Paulson is telling investors his gold fund will be the best performer in his hedge fund family over the next five years.
“The billionaire,” Bloomberg reports, “at a meeting yesterday at the Metropolitan Club in New York, said the metal is the best hedge against currency debasement as countries inject money into their economies, said [a person with knowledge of the matter], who attended the event and asked not to be named because the information is private.”
Gold as a hedge against currency debasement? Wow, that’s really proprietary information he’s got there!
OK, there was one interesting nugget that emerged: Paulson says his own money makes up 55% of the Gold Fund’s $1.2 billion in assets.
That’s only 5.2% of the $23 billion Paulson’s firm manages. At least for now. The percentage will be much more substantial by the time all’s said and done.
Once again, major U.S. stock indexes are drifting today. The Dow is playing footsie with 13,000, but could easily be rebuffed, rebuked or rejected outright by day’s end.
The S&P has gotten past resistance at 1,365 and as of this writing has reached second base at 1,372
Yesterday, Abe Cofnas suggested a binary-option play on the Dow: Buying a Wall Street 30 12,925 binary and selling-to-open a 12,825 binary.
As I type, the underlying Dow futures are at 12,998. That means one half of Abe’s recommendation is in the money — and poised for a $100 payout on Friday! Stay tuned.
In addition to the consumer confidence numbers, traders are chewing on these figures…
- Durable goods orders: Down huge in January, 4.0% according to the Commerce Department. That’s the biggest slump in three years. True, a tax credit expired at year-end 2011 allowing full depreciation on equipment purchases… but this will bear watching
- Case-Shiller home price index: Down 4% in December to the lowest level since its peak in 2006. That’s the 20-city composite. The national figure is even worse, with prices now back to mid-2002 levels.
Along with business savvy and Western fashion, it appears China is adopting another all-American trait: graft for those at the top.
The Hurun Report, a magazine catering to China’s wealthy, finds the richest 70 members of the National People’s Congress have a combined net worth of $89.8 billion.
That’s more than all 535 members of the U.S. Congress… plus the president and his cabinet… and all nine Supreme Court justices. Put together, they’re worth a paltry $7.5 billion.
“It is extraordinary to see this degree of a marriage of wealth and politics,” says Kenneth Lieberthal of the Brookings Institution.
And he ought to know, working in the belly of the beast.
Wyoming is one step closer to being braced for the apocalypse… but without an aircraft carrier.
As we mentioned yesterday, the Wyoming House passed a bill setting up a committee that would prepare the Equality State for an economic and/or political collapse — including provisions for an alternative currency.
But an amendment that would plan for a military draft, standing army and purchase of an aircraft carrier was stripped from the bill before a second vote.
Too bad.
“My son lives in Wyoming,” a reader writes. “I wrote him yesterday to suggest Lake DeSmet [between Sheridan and Buffalo] for the aircraft carrier base.”
“When Byron King gets a bug up his ‘ear,’” a reader writes from ground zero of the Keystone pipeline debate in Nebraska, “his normally cold logic seems to disintegrate.
“Keystone XL has stated publicly that they already have contracts to sell abroad a huge amount of the oil they wish to get to Houston. Byron’s ‘maybe’ to the fact that a significant amount will be exported shows he has lost his analytic neutrality. So it is utterly ridiculous for him to state that every barrel of Canadian oil satisfies U.S. demand.”
“Hello? The oil will go to the highest bidder, period. If the Chinese have a greater thirst for oil — and with our recession, that’s likely — then it’s a done deal and it’s not our oil. Byron, in a moment of rationality, then says we will at least make a few bucks loading it onto the tankers going elsewhere. This will be a spit in the ocean.”
“One other point: Keystone XL itself cut a done deal with the Nebraska legislature to plan a safer route. After this deal was completely finalized, and both sides said they were satisfied, it was Congress as a political election year gambit that demanded a virtually immediate decision by the president before the alternate route was even defined. Byron needs to take his uncharacteristic blinders off on this one.”
The 5: “One thing’s for sure,” Byron says in reply. “If the Canadians build the Northern Line to the Pacific Ocean… ALL that oil is getting exported to Asia. All of it. Every last freaking drop.”
“The U.S. will never get a chance to buy it… NONE of it, ever… and the U.S. refiners won’t refine it… and the U.S. port stevedores won’t load it at Houston.”
“Face it… like it or no, the U.S. will need lots of oil in the decades to come. Where will we get it? Bakken or no… Marcellus or no… Eagle Ford or no… we’re going to import lots of oil. That’s the fact, Jack…”
“Thus Keystone (or no) is all about prompting the Canadians to route a large trunk pipeline for the world’s largest near-surface hydrocarbon deposit to the Pacific Ocean, instead of the Gulf of Mexico.”
“As for Congress tying Obama’s hands…. well, who’s quoting from the Democrat talking points now??? That’s a pretty lame argument… Really. C’mon…”
“In fact, per the Social Security payroll tax extension that Obama signed at the end of 2011, the environmental issues regarding Keystone are legally ended.”
“And isn’t it rich that the Keystone people have now figured out their own way to play the game. They’re ‘just’ going to build the stretch from Cushing, Okla., to Houston. Very clever, those Canadians. Apparently, there’s some adult supervision somewhere.”
Indeed, TransCanada plans to go ahead with the southern leg of the pipeline. That ought to add a few more jobs to the U.S. revival Byron sees coming along.
Regards,
Addison Wiggin
The 5 Min. Forecast
P.S. “The legend of the lone inventor in his lab is a myth,” writes Jeffrey Tucker, drawing five lessons from the story of Silly Putty in his latest essay for Whiskey & Gunpowder.
“In fact,” he writes, “if you look at the history of just about anything from the cotton gin to the telephone to flight itself, you find a raging dispute over who was first. Patents settle nothing: The bureaucrats approving those things mix things up constantly, and much depends on how the lawyers write them.”
Mr. Tucker is here in Baltimore today, recording Tucker’s Take — the first in a series of videos reviewing some of the most important books in the economic canon of Laissez Faire Books. Think of it as a video guide through the most important ideas in economics — the same ideas that guide, inspire and lead our editors to their best investment recommendations.
If you’re wondering, the video of Jeffrey’s debate with Dean Baker on the proper role of the Federal Reserve is now available for your viewing pleasure. Just scroll down on the Laissez Faire Books homepage.
We expect Mr. Tucker to be a rousing addition to our regular crew this summer in Vancouver. Early registration is already available. Details here.