A lot has been going on in the arena of US politics, but it’s important to keep an eye on the economic numbers as well. Long term, whoever is President in 2008 is facing an American crisis not seen since the days of Roosevelt and Hoover.
Today’s grim news is that oil has tripped the $130 mark and is heading even higher.
Oil climbed to a life-time high above $130 a barrel on Wednesday, driven higher by a combination of long-term production worries and a near-term focus on tight fuel supplies.
A U.S. government report later on Wednesday was expected to show crude inventories rose for a fifth straight week.
Stocks of refined products were also forecast to have increased slightly, but the market is concerned distillates, which include heating oil and gasoline, could run short.
U.S. light crude for July hit $130.41.
London Brent crude gained.
“This market refuses to lie down,” said Robert Laughlin of MF Global. “There is fresh length coming into the market even at these lofty levels.”
Financial analysts are beginning to talk about a long-term sea change in the US economy, a change where the US is no longer the determining factor in the global money game, and instead is just another player on the board.
How far the US falls in economic stature has everything to do with oil and where oil ends up in the next couple of years.
Arjun N. Murti remembers the pain of the oil shocks of the 1970s. But he is bracing for something far worse now: He foresees a “super spike” — a price surge that will soon drive crude oil to $200 a barrel.
Mr. Murti, who has a bit of a green streak, is not bothered much by the prospect of even higher oil prices, figuring it might finally prompt America to become more energy efficient.
An analyst at Goldman Sachs , Mr. Murti has become the talk of the oil market by issuing one sensational forecast after another. A few years ago, rivals scoffed when he predicted oil would breach $100 a barrel. Few are laughing now. Oil shattered yet another record on Tuesday, touching $129.60 on the New York Mercantile Exchange. Gas at $4 a gallon is arriving just in time for those long summer drives.
Mr. Murti, 39, argues that the world’s seemingly unquenchable thirst for oil means prices will keep rising from here and stay above $100 into 2011. Others disagree, arguing that prices could abruptly tumble if speculators in the market rush for the exits. But the grim calculus of Mr. Murti’s prediction, issued in March and reconfirmed two weeks ago, is enough to give anyone pause: in an America of $200 oil, gasoline could cost more than $6 a gallon.
Oh, and Murti’s ultimate boss at the time of his now infamous 2005 prediction? You guessed it, Goldman Sachs CEO Hank Paulson, now Happy-Talk Hank, our Secretary of the Treasury.
Yes, oil could crash back to $70 a barrel. It could also go to $150 or $200 a barrel. I’ve already said that gas at $6-$8 a gallon would break the US economy. Anything worse then that would obliterate us.
Think of how many jobs and services you use every day that depend on cheap fuel. Do you live in a city where there is mass transit that can get you and your family to work, school, and where else you need to go if you couldn’t afford your car? What about the costs of the good and services you consume daily, what about the people who work there?
The cost of everything goes up. People will cut back sharply on spending. People will start going our of business. We’re on the upward slope of a mass increase in inflation. It will be followed by a sharp deflationary drop that will wipe out millions of jobs, from pizza delivery drivers to CEOs.
Some people believe that where we are headed is much, much worse then that. Keep an eye on fund manager David Tice. Wall Street has long ignored him and laughed at his doom and gloom predictions. They stopped laughing about 9 months ago. He’s betting big that we’re headed for far worse than a recession.
Tice, founder of the Prudent Bear Fund, is in his element as short sellers savor a rare advantage in their tug of war with Wall Street’s bulls. Tice, an economic history addict who lines his office bookshelves with volumes on the Great Depression, is the most bearish of bears. He’s been preaching for almost a decade that runaway mortgage lending would blow up.
Tice blames former Federal Reserve Chairman Alan Greenspan, who led the central bank as it ratcheted down the benchmark U.S. interest rate to 1 percent in June 2003 from 5 percent in March 2001 and held it there for a year. Borrowers rushed in and mortgage debt soared to $1.4 trillion in 2006, double the $708 billion in 2001, according to Fed data.
Tice is somebody to pay attention to. But watch what he’s saying now.
Now, Tice says the Standard & Poor’s 500 Index may tumble 40 percent during the next 12-24 months as the credit crisis undermines the economy, bankrupts households and companies and whacks profits. The drop would be worse than the 37 percent plunge in the index from 2000 through 2002.
That’s bad. The next paragraph should scare you shitless.
Tice predicts U.S. equities will enter a bear market that may exceed the 15-year slump from 1965 to 1980. Moreover, he says if the Fed and Wall Street don’t break their addiction to easy credit, the economy will eventually crash in a depression — a condition marked by reduced purchasing power, unemployment and corporate failures.
Mark today’s date, May 21, 2008. The financial press is printing predictions of not just recession, mild, severe, prolonged, or otherwise. It has used the “D” word. Depression.
If the guy who called the current economic disaster is warning of a fifteen-year bear market and a depression, I’d listen to him. Has Wall Street really made any efforts to get away from the cheap credit fixes that Tice is warning about? Of course not. What has been the Fed’s answer to today’s problems? MORE CHEAP CREDIT. Cutting rates. Giving banks sweetheart deals on borrowing taxpayer dollars at a pittance. A dollar that has plummeted into the abyss and shows almost zero signs of turning around long-term. The Fed has learned precisely nothing.
The Fed is trying to inflate the bubble when there’s a massive hole in it. It will eventually run out of currency to inflate with, and when that happens, kaboom.
Tice continues. He’s made a mint betting short on the US consumer and long on commodities.
“We’ve become a country of drunken sailors” he says, snapping his fingers as he makes his point. “If you spend, spend, spend, there are going to be consequences to that — you can’t borrow your way to prosperity.”
Even so, the turmoil has been good for Prudent Bear. After five years of trailing the S&P 500 with an annualized 0.9 percent loss compared with the index’s 11 percent annual gain, the tables have turned for Tice’s mutual fund. Prudent Bear, which has $1.1 billion in assets, has returned 9.5 percent from June 30, 2007, to May 20. That’s almost 14 percentage points better than the 4.3 percent decline in the S&P 500.
Tice, a short seller who profits when prices fall by borrowing and selling shares and then repaying at a lower price, bet correctly that Citigroup Inc. and Merrill Lynch & Co. would be hammered by mortgage losses.
He shorted companies that consumers were likely to avoid in a declining economy, such as Bed Bath & Beyond Inc. and Harley-Davidson Inc., according to Prudent Bear’s annual report released on Sept. 30, 2007.
Prudent Bear went long on metals with Capstone Mining Corp. and other ore producers. Shares of the Vancouver-based silver, copper and zinc miner jumped 81 percent during the past year through May 20 thanks to the commodities boom and the falling dollar.
He knew what was coming all along. Nobody believed him then. They are lining up to shake his hand now. Most of Wall Street is still betting the opposite, that the stock market is poised for a record run just around the corner, and that the worst is over.
Who do you honestly believe, as you see your friends and neighbors losing their jobs, cars, and homes? Who do you honestly believe as you’re plunking down a Benjamin to fill the gas tank in the family SUV and seeing your food prices skyrocket at the store?
Sure, the stock market has picked its face up off the floor. But it’s always darkest just before it turns pitch black.
Be prepared.