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Homeowners Can't Catch Up |
by Bill Bonner
Ouzilly, France
Now the summer days are dwindling down to a precious few. This morning, it
is overcast and chilly here in central France. The leaves on the aspen and
linden trees have turned yellow already and whenever the wind blows, they
flutter to the ground as if they were trying to get away from something.
This afternoon, we have been invited for a private tour of a grotto not
far away. According to our information, hundreds of years ago, the
grotto was sealed off by falling rock. Thus it was protected and
preserved remains of human habitation from 30,000 years ago.
"Yes, there is a span of about 10,000 years in which there is little
evidence of human habitation in Europe," said the owner. "Maybe humans
almost died out during that period; we don't know what happened. But when
this cave was opened, we found some remains that were dated from that era.
It's a remarkable find. A group of 20 scientists has been working there
all summer. They told me they found 1,000 artifacts a day. Of course,
we're not talking about statues and battle axes. Most of these discoveries
are bone fragments...maybe even grains of cereal..."
We'll find out more this afternoon...
Meanwhile, we turn our attention to the world of money.
And we begin by asking:
Just what are we trying to figure out?
Well, we want to understand what is going on...don't we?
And we want to try to guess about what is likely to happen next, don't we?
We'd like to know, for example, whether stocks were going up or down...and
whether this is a good time to buy property...or gold...or Treasury bonds.
We'd like to know, wouldn't we?
Of course we would. Unfortunately, 'it is not given to man to know
his fate,' as the ancients put it. All we know is what happened
in the past...and the fate of men who came before us... Even that we known
only in a wispy, uncertain kind way. All we have are stories...
Back to that in a moment...
Here are the facts from yesterday:
The Dow rose 30 points. Oil closed down - to $72. Gold remained where it
was.
Ben Bernanke was put up for another term as head of the Federal
Reserve. And the Obama administration said the downturn was a
little worse than it had thought, so it's estimate for the 2010 budget
deficit had to be updated - increased by 19% - to $1.5 trillion. The
Congressional Budget Office did its own count and came up with $1.4
trillion. Either way, it's a lot of money.
We have wondered where the money would come from. Yesterday, Goldman's top
economist, Jan Hatzius, said he thought much of it would be 'monetized' by
the Fed...with the Fed's balance sheet increasing as much as $2 trillion.
The Fed's balance sheet is the monetary ballast for the whole
economy. As it increases, so does the amount of sail the economy
can put up. In theory, the potential for inflation increases
geometrically; one dollar on the Fed's balance sheet could be multiplied
into $10 in the economy. Bernanke has already doubled the Fed's balance
sheet - buying up and additional $1 trillion worth of Wall Street's
failures and the feds' debt. He might have to buy another $2 trillion
worth - bringing the total to $4 trillion - before this crisis is behind
us, said the Goldman fellow.
Home prices are still going down, says the latest report, but 'less than
forecast.' Is that good news? Well, it could be worse.
The latest sales figures show an uptick. But careful analysis
shows that homes sales figures are still terrible. People are
buying $250,000 houses...but they're the houses that sold for $500,000 in
2005. And the poor folks with $500,000 houses...and jumbo mortgages...are
sinking. Almost half of them will be underwater by 2011, according to one
estimate.
The feds now say that 10% unemployment is unavoidable. Naturally, when
people lose their jobs they have a hard time keeping up with mortgage
payments.
"Bay Area Delinquency Rates Soar," says a headline.
Two years ago, when a homeowner was late on his mortgage payments, there
was a 45% chance that he'd catch up. This is known as the "cure rate."
Well, now the cure rate is down to 6.6%. Homeowners never catch
up...they fall further and further behind until the house is foreclosed.
Want some more news? In past recessions, the United States emerged first
and pulled the rest of the world out of its funk. This time, the United
States is still on its way down...so analysts look to China. The Peoples'
Republic says it is growing fast. It also says it will have an inflation
rate of 2% this year. Currently, prices are falling at a 1.8% rate. China
is in deflation, not inflation. What's up in China? We won't know for a
while...but don't count on it to pull the world out of a correction. China
needs a correction as much as anyone.
[The US consumer isn't going to be able to pull the global economy out of
this mess - because who is lending them a hand? Certainly not the US
government. Don't wait for them to bail you out - take charge of your fate
and use a completely legal 'loophole' to receive your first "bailout"
income check.
See how here.]
And now...for more news:
"So what has
stocks soaring now, during this great deleveraging - this credit crunch
- this historic pullback in household balance sheets?" writes Ian
Mathias in today's issue of The 5 Min. Forecast.
"Consumer confidence, of course.
"We recently vowed to stop calling our national brethren 'consumers' in
favor of less degrading words - like Americans, citizens or just plain
old people. Thus we report the Conference Board printed a surprisingly
optimistic gauge of American consumption attitudes (doesn't that sound
better?) yesterday. After two months of decline, the index kicked back
up to 54.1, just shy of a 2009 high.
"Coupled with the latest printing of the home price index, that was
enough to keep this mega-bounce alive and kicking. The news shot the S&P
500 to a 1% gain within moments of yesterday's opening bell, which
eventually faded into a 0.25% advance. The index is up almost 4% in the
last five trading days. The Dow hasn't fallen for six days in a row.
"We accept that improving consumption attitudes could bump stocks
higher, especially retail. But we wonder... Do consumption attitudes
lead markets, or the other way around?
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"Seems like Joe
Six-pack is routinely late to the party, no? We blew the post Lehman
crash, stayed gloomy during the best of the stock rebound, got bullish
in June when stocks went nowhere and lost confidence last month when the
market shot up again.
"So what does a big improvement in consumption attitudes tell us now? If
anything, that the stock rally is about to cool off."
Ian writes every day for The 5 Min Forecast, an executive
series e- letter that provides a quick and dirty analysis of daily
economic and financial developments - in five minutes or less. It's a
free service available only to subscribers of Agora Financial's paid
publications, such as Resource Trader Alert. RTA's
latest report details a trading strategy that will help you rake in some
nice gains in a short period of time...without having to touch stocks.
Get the full report here.
And
back to Bill's ruminations:
We've been alerting readers to a special announcement that Strategic
Short Report's Dan Amoss was set to make this past Monday:
the next major bank headed for collapse.
Not only did this report create a major buzz at the Agora Financial
headquarters in Baltimore, but on Monday, national media outlets began
digging around for more details on Dan's financial short play.
Out of respect for those who took us up on the Strategic Short Report
offer, we aren't going to release the name of the bank - yet. But we can
tell you this: this bank not only didn't reduce their dividend,
they dropped their loan provisions.
Day traders may be cheering, but for the long haul, this spells disaster.
Says Dan: "I still expect a big surge in provision expenses, likely as
soon as the quarter ending in October. If you don't believe that the
Canadian and US economies are going to come roaring back, which I don't,
this is still an attractive short sale."
Stay tuned for more on this story - and if you haven't already, check out
Strategic Short Report by
clicking here.
For 40,000 years - maybe longer - our ancestors have walked the very earth
where your editor puts his feet. They lived. They died. What did they
know? Scientists say they were as smart as we are. What did they talk
about? What did they think about?
"Every time something is given, something is taken away,"
we suggested over dinner last night.
"No, that's not right. You're saying that life is a zero-sum game...that
it can never get better...that it can never really improve...that there
can be no real progress..." Elizabeth replied.
"Well, not exactly...I'm saying that there are no free lunches in
nature. That if a man is smarter, he is not likely to be faster
too. But I'm not saying anything particular...or scientific...I'm just
announcing a general principle...more like a vague intuition about the way
things work. According to one theory, for example, mankind migrated from
Africa to Europe. In Europe, during the Ice Age, he encountered a great
challenge: cold weather. Most humans and pre-humans probably couldn't
survive it. But some did. And they did by evolving into maybe
smarter...maybe slower...people with bigger heads. According to the latest
thinking on the subject, the bigger brains were a disadvantage in warmer
climates...because they got too hot. I guess they took up too much energy
too.
"But they were an evolutionary necessity in colder climates...where the
cold weather not only made possible a hotter head, but also made it a
necessity. People needed bigger brains to anticipate the change of seasons
and save winter, for example. They had to see what was coming. They had to
look at what was coming...and prepare for it. They had to work together
too...to hunt large game...and to fight off competitors. Those who
couldn't do so died out. Well...that's the theory."
Every day, here at The Daily Reckoning, we give you information
on the latest trends and events in financial markets. But everybody has
access to the same information. And what is information, anyway?
What is it worth? What does it mean?
For thousands of years, people exchanged information. Then, it must have
been a different kind of information...things we can barely
imagine...about where animals were getting their water...about where to
find seeds and how to avoid sickness...how to prepare for winter...and how
to fend off wild animals. Then, the dominion of the human species was not
so sure. There were saber-toothed tigers, lions, wolves, even
mastodons...giant sloths... Early man was probably as often prey as
hunter. He had to be on his toes to survive.
Information was one thing. But there was more. He needed wisdom...and
technology... as well as facts. He had to learn to store food for winter
as well as beat back attacks by wild beasts. He had to know how to make
cloaks out of animal skins...and how to stock firewood for a rainy, snowy
winter...and how to find shelter.
We imagine tribes sat around the campfire and told stories. The stories
reported victories and defeats...disasters and triumphs...heroes and
enemies. But the stories were more than just information: they
carried lessons...moral lessons...about what to do and what not to do.
That is the tradition to which we are heirs here at The Daily
Reckoning. We pass along information: but without a story, the
information is just noise.
Our story is the story of the seasons. It's the story of heroes and
villains...of fatal flaws and inevitable disasters.
The common flaw is an old one. The Greeks couldn't seem to tell a story
without mentioning it. 'Hubris'...the kind of pride that goeth before a
fall...the arrogance that leads people to think they can get away with
something... that they not only can know their fates...but that they can
control them.
Today, Ben Bernanke is our tragic hero. His flaw is as
obvious as his challenge. He thinks he can stop the world from turning....
stop the seasons...avoid the hard, correcting winter by tempting the sun
with bailouts, stimulus and cheap credit. His arrogance is an affront to
the gods.
The old tales tell us what will happen. He will fail. But when...how? That
is a different story. It is the story future generations must tell. We
must live it.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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The End of Our Dependence on Foreign Fuels?
Energy costs are rising. You and I both know that. Heck, in the past few
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The Navy knows that too...and they've tapped a secret source of
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This source of energy has enough reserves to reduce our dependence on
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|
The Daily Reckoning
Presents: |
After the epic
crash last year, the price of oil is stabilizing and it should rise
exponentially over the following years. Over the past year, global
consumption has stayed weak, however once the economy recovers, says
Puru Saxena, crude oil should resume its secular bull-market. Read on...
Peak Oil: Supply Data Doesn't Lie
by Puru Saxena
Hong Kong, China
Despite the 'demand destruction' hype, it is interesting to note that
during this severe global recession, worldwide oil usage has dropped by
a minuscule 2.7%. So, what will happen when the world comes out of this
recession? Who will rise up to the challenge and meet our insatiable
thirst for energy? These are critical questions not many are willing to
ask.
According to the US Department of Energy, liquid fuel demand in the
developed nations peaked in August 2005 at 41.89 million barrels per
day. Since then, it has plunged by 3.6 million barrels per day to 38.27
million barrels per day. However, you may want to note that despite
these tough economic conditions, consumption has been extremely
resilient in the emerging world. For instance, demand in the developing
countries peaked in October 2008 at 46.33 million barrels per day and it
is down by only 0.36 million barrels per day! I am amazed that
the worst global recession in decades has barely managed to shrink
energy demand in the developing world. Whilst this is wonderful
news for the energy investor, it is a terrible sign for society.
At present, our world is using up roughly 84 million barrels of liquid
fuels per day and for the moment at least, there is sufficient supply to
meet demand (Figure 1). However, when economic activity picks up, it
won't take much for demand to zip right past supply. Remember, it is
much easier to increase usage, but it takes a long time to ramp up
production. So, unless this is a permanent global recession (which I
doubt), it is inevitable that the price of oil will go up significantly
over the medium to long-term.
Figure 1: Supply and demand - balanced for now
On the supply side of the equation, let me be clear. If I was asked to
pick the biggest threat to a sustainable economic recovery, Peak Oil would
top that list. Remember, Peak Oil doesn't mean that we are running out of
oil reserves, crude will be around for decades. However, 'Peak Oil' does
imply that we are dangerously close to peak global oil production. 'Peak
Oil' also means that rather than experiencing a burst in oil supplies as
many expect, from here onwards, we will witness sharp declines in global
flow rates. In a nutshell, the era of cheap energy is over and the
price of crude oil will rocket higher over the coming decade.
|
"...it is much easier to increase usage,
but it takes a long time to ramp up production. So, unless this is
a permanent global recession, it is inevitable that the price of
oil will go up significantly over the medium to long-term." |
|
Now, many
skeptics will argue that if Peak Oil was real, the price of oil wouldn't
have dropped to roughly US$30 per barrel in last autumn's stunning crash.
Valid point; but let us not forget that the spectacular plunge occurred at
a time when global economic activity virtually came to a standstill. Let
us also keep in mind that last autumn's crash in asset prices was caused
by a total freeze in credit and the associated asset liquidation. Whilst I
agree that the final action in crude oil's parabolic blow-off last July
smacked of speculation, I can assure you that speculation alone couldn't
have created a multi-year boom whereby the price of crude oil went up by
almost 1500%! As you can see from Figure 1 above, supply clearly fell
short of demand between 2005 and 2008, and this is why we had a
magnificent bull-market in crude oil.
Make no mistake, global demand for liquid fuels will rise again - and if
my homework is correct, supply won't be able to keep up.
If you ignore the noise and review hard data, you will observe that the
vast majority of the world's most prolific oil provinces are now past peak
production and in a state of permanent depletion. According to the BP
Statistical Review of World Energy, out of the 54 oil producing nations
and regions in the world, only 14 are still increasing production.
Alarmingly, 30 oil producing nations and regions are definitely past their
peak output and the remaining 10 appear to have modestly declining
production rates. Put another way, when weighted by production, Peak Oil
is already a grim reality in 61% of the oil producing world!
Still not convinced about Peak Oil? Then review Figure 2, which charts the
expected combined flow rates for crude oil, lease condensates and Canadian
Oil Sands. As you can see from the grey shaded area, production is about
to decline by roughly 5 million barrels per day by 2012.
Figure 2: Has crude oil production peaked?
Ironically, Figure 2 also plots the optimistic (almost laughable) forecast
made by the International Energy Agency (IEA) in its "World Energy Outlook
2008". Interestingly, in last year's "World Energy Outlook", the IEA
stated that in order to fulfill its optimistic projections, the world had
to install 64 million barrels per day of new supply by 2030 or the
equivalent of six times the Saudi Arabian output! Furthermore, the IEA
declared that the energy industry had to invest hundreds of billions of
dollars every year to achieve this favorable outcome.
Now, I can understand that the IEA is a government-funded agency so it has
to paint a rosy picture, but it is ominous that the energy
watchdog failed to mention where this surplus oil would come from!
Well, I guess you get the idea. Global crude oil production has probably
peaked, new discoveries have dried up and there is a shortage of capital
for investment purposes. Apart from these factors, if you believe the
energy optimists, all is well in the energy industry and the price of oil
is about to drop to zero!
After years of extensive research, I have no doubt in my mind that unless
global demand stays weak forever, we will see supply shortages in
the not too distant future. And before that occurs, the price of
crude oil will stage an explosive rally. Accordingly, I suggest that all
my readers allocate a large proportion of their investment portfolio to
upstream energy companies and to businesses in the energy services sector.
Finally, in the energy complex, the price of natural gas is still scraping
along its recent crash low and this is a fantastic long-term investment
opportunity. As we approach winter in the Northern Hemisphere and heating
demand picks up, we are likely to see a big rally in the price of natural
gas. So, investors may want to allocate capital to this unbelievably
inexpensive commodity.
Regards,
Puru Saxena
for The Daily Reckoning
Editor's Note: Learn how you can make as much as 668% on
the 12 stocks set to rocket as this next new round of "petro-chaos"
unfolds.
See here.
Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong
based firm which manages investment portfolios for individuals and
corporate clients. He is a highly showcased investment manager and a
regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio
programs.
Puru publishes Money Matters, a monthly economic report, which
highlights extraordinary investment opportunities in all major markets. In
addition to the monthly report, subscribers also receive "Weekly Updates"
covering the recent market action. Money Matters is available by
subscription
here. |
