June 30, 2008
1. More politicians are waking up to reality - we need to drill for oil in the U.S. Leaders who are supposed to worry about our future instead of being re-elected in 2 years should have figured this out years ago. As usual, no leadership in Congress, heads in the sand until disaster strikes. So here we are, domestic oil production down 20% since 1980, oil consumption higher, 60% imported, oil prices the highest in history.
Politicians who still oppose drilling (like Daschle) make this
argument: drilling won't help us today, it takes years to get new
oil. Duh! And that has been the mantra for decades to get
votes. But how about thinking about our future??
The argument of opponents to new exploration is equivalent to not starting Microsoft
because there is no immediate profit, or no need to start first grade because
what's the immediate payoff? This is the mentality of people running our
country and we are worse off because of it. There is an election in a few
months, be sure to make your views known.
2. China has
invested tens of billions of dollars in infrastructure and raw materials deals
in Africa as they take steps to assure their
supplies of needed oil and commodities in the coming years. For the next
decade, the pressure on commodity prices and supplies is likely to be strong,
even if China and India growth
slows.
In many countries that provide raw materials, governments
own the producers. As we know, governments don't run businesses very
well. Oil output in Venezuela,
for example, has declined since Chavez took control.
Governments in many of these
countries are also unstable, and from time to time, they nationalize assets
that were developed in partnership with other countries. Russia and Venezuela are excellent
examples. Exxon sued Venezuela
for assets confiscated and won in court. I wonder if governments that are
dictatorships will be as civilized when their assets are seized. Let's
hope so.
3. Today's high oil price reflects market assessments of the
balance of supply and demand in the future. Demand has grown strongly as China and India joined the growth club.
More growth means more oil demand.
On the supply side, the picture is not so good. Oil
fields in the U.S. and the Middle East are old and the amount of oil that we can
extract each year declines. We are not finding new oil fast enough to
replace declining output in the old fields. This is made worse by government
restrictions in the U.S.
on locating new oil. Most countries with oil are increasing their oil
production with new discoveries, but U.S. oil production is down 20%
since 1980. If the U.S.
developed its own oil assets, the price would fall since the market would know
that supply was going to be larger in the future.
Then, the money we pay for oil
would stay at home and not enrich the foreign suppliers of oil. On the
other hand, if we use up their oil first, then in future years, we'll still
have our oil and they will be short. Interesting dilemma.
4. Although large banks have been writing off the bad loans
they made related to real estate and raising new capital, there is still more
bad news to come. Most of the problems are in Florida,
California, Nevada
and Arizona
where a third of bank loans are tied to real estate and 90 percent of the
increase in foreclosures exists. This is true in Georgia and North Carolina as well. A huge chunk
of the bad loans made in these states were made by banks that do business
nationwide, yes, those Wall Street Banks. This
means that they have less money to lend and this affects business everywhere,
not just in the troubled states.
Foreclosures are definitely up,
and these do cause losses for lenders. But keep in mind that a huge
number of these foreclosures are not putting families out on the street, they
are speculative purchases where no family ever planned to move in. The
purchaser hoped to flip the home for a profit, but the flippers ran out of
flippees. It's bad, but not as bad as the numbers suggest.
5. The role of oil speculators has become very controversial,
as many blame them for gas prices. The amount of money devoted to
commodities indices has risen from $20 billion in 2003 to over 250 billion
today.
But let's look at the fundamentals. There are only a
few buyers for oil, such as refiners and chemical companies. You and I
don't want a load of oil delivered to our homes. The real determinant of
the price they will pay depends on the price they can charge for the things
they make from oil, such as gas, plastics and chemicals. If users of
these items won't pay higher prices, then producers won't buy the oil at higher
prices. The popular term for this these days is "demand
destruction". The higher the price, the lower the quantity taken.
So, as the oil tanker travels
across the ocean, ownership of the oil it carries can change many times as
speculators buy and sell it. But in the end, the last speculator must
sell to a real user of oil. If a refiner can't sell the gas at higher
prices, it wont pay higher prices for the oil. Thus, it's not speculators
driving up oil prices, it's a shortage of oil relative to demand. Markets
work. In the U.S.
it is a shortage of low sulfur oil, the only type of oil our refineries can use
and that's the oil whose price is out of sight.
6. Many investors think stocks provide protection from
inflation. However, the evidence suggests that this is not the
case. Surges in inflation are generally bad for equity prices. One
reason this occurs is that inflation generally leads to higher nominal interest
rates and thus a reduced value of the expected profits that stocks promise.
But profits are the ultimate
determinant of stock prices. And the most important determinant of
profits is labor costs, accounting for about two-thirds of business costs on
average. If these go up with inflation, profits are squeezed and share
prices suffer. If labor costs don't rise with inflation, as seems to be
the case these days, then inflation is not as harmful.
Another caveat, many companies make a significant share of their
profits from foreign operations. Exxon would be a good example, or Coke
or drug companies. Thus, inflation in the U.S. may not have as much of an
impact on their profits as it used to. And that, in part, depends on the
value of the dollar as many companies like Caterpillar sell more when the
dollar is weaker. For investors, lots to keep track of. Good luck!
7. The issue of executive pay
continues to trouble investors. It looks like greed gone wild and it
appears that Boards of Directors aren't doing their job. There is truth
in this, although it doesn't apply across the board.
But greed extends beyond pay. The recent disclosure that the former
heads of Fannie Mae got sweetheart loans from Countrywide is an
example. Both of these CEOs made hundreds of millions of dollars on their
jobs. Yet they engaged in other activities such as getting special deals
on huge mortgages from Countrywide, knowing that it was at best highly unethical
and likely illegal. [Countrywide provides about a quarter of the
mortgages purchased by Fannie Mae, Bank of America about 5% perhaps explaining
why B of A still wants to buy them.]
Both of these CEOs are crooks,
plain and simple, looting shareholders' earnings to fatten their bank accounts
and leaving their respective companies in worse shape. Problem is that
punishments are still not severe enough to deter this behavior. After
fines and a wrist slap, they still have millions of our dollars.
8. Economists have warned for years about the looming crisis in
the public sector arising from the outrageous promises made to workers and
retirees. There isn't enough money to pay for these promises. The
big three automakers are sinking under the weight of such promises.
Social Security and Medicare will do the same to the economy.
The town of Vallejo, California might provide
a glimpse into the future. Three-fourths of the city workers earn
over $100,000, the city manager earns more than Vice President Cheney, police
captains earn more than $300,000 (6 times what a school teacher earns).
Firefighters earn $170,000 a year on average. These workers can retire at
age 50 and get 90 percent of their pay. There are only 120,000 residents
to bear this cost.
Unable to meet these promises, the
city has declared bankruptcy. Now, scale that up to promises made for
Social Security, Medicare, Medicaid and the like. If workers can't afford
to pay these promises, they will have to be broken.
9. Although immigration is critical to the growth and success
of the American economy, it also presents some important challenges.
Having more people is not good if those additional people cannot be as
productive as the current population. Thus, education is a critical key
to making sure that immigration is an asset for America, not a liability.
The latest census shows that 55 million Americans over the
age of 5 don't speak English at home, an increase of over 70% since 1990.
In some states like Georgia
and North Carolina,
non-English speaking homes have risen over 200% since 1990. In California, over 40% are
in non-English speaking homes, up over 50% since 1990. Texas
and New Mexico
are similarly situated.
Having
everyone speak and read the same language is a real plus for economic growth
and job creation. If I can't understand you, I can't hire you. This
is one problem faced by the European community. There are as many
languages as countries (27) so labor mobility between countries is
restricted. This is a real challenge to the education system as
well. Many of these people are or will become bi-lingual, an advantage in
a globalized economy. But many aren't getting the education they need to
compete in that economy. And that will be a problem.
10. The farm subsidy program sets floor prices below which, it
is argued, farmers can't stay in business making corn or milk. If market
prices fall below these floor prices, taxpayers make up the difference.
Since the last farm bill was
passed, the prices of cotton, corn, wheat and soybeans are up 100 to 200
percent. And no surprise, it looks like the new "floor" prices might be adjusted
to this year's record high prices! So if corn prices were to fall from
today's record $6 a bushel to the pre-ethanol price of $3, you would give corn
farmers $10 billion a year in subsidies. So, farmers get rich whether
corn prices fall or not. Sugar growers are now guaranteed $21 a pound compared
to a world price of $12. Candy companies are leaving the U.S. as a
result.
President Bush's proposal to limit these subsidies to small farmers making
less than $200,000 was rejected. Instead, the Democrats will pay your
money to "farmers" (many don't farm at all, just collect the subsidies and hire
the farming out) making as much as 2.5 million, hardly a poor farmer. The
bulk of these subsidies go to rich farm owners including agricultural corporations.
Bottom line, the government is setting food prices, you either pay high prices
at the store, or if prices fall, the government will lift the difference out of
your wallet as you bend over to pick up a cheaper gallon of milk.
