Enjoy Lower Gas Prices While They Last

The one silver lining I’ve seen in the current economic crisis is that oil prices have dropped like a stone, taking gasoline prices with it.   I gassed up my 4-cylinder sedan for $26.88 earlier this week… gas was $2.19 per gallon.   Tonight there are stations in the Twin Cities area that are advertising $1.97 per gallon.  Crazy, eh?

The last time prices were this low was in early 2007, and I honestly thought we’d never see prices that low again.  I guess I didn’t consider what a global financial crisis and associated commodity deflation would do.   A lot of the current pricing is due to forced selling by hedge funds and other large investors who have been facing margin calls and other fun stuff like that.  It gives us a picture of how much of oil’s $100-plus pricing was due to speculation.

It is interesting that diesel pricing has not fallen as far.  I couldn’t begin to explain why that is the case.  Other commentators out there can.  The main takeaway I get from this is that the prices we pay for food & other goods will not fall much until diesel prices go down.

For those of us who drive or otherwise use a fair bit of gasoline can revel for the moment in the return of lower gas prices.   I would caution against thinking that we are ‘reverting to the norm’ with regard to gas prices.

For your consideration:

Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

Emphasis mine.  The original story is here.

The article continues in saying that even with additional investment, the annual decline rate is in the neighborhood of 6.4 percent.   We won’t feel this for a while, especially if the developing world’s ability to import oil is compromised due to the global financial contagion that has been sweeping around the world.   Eventually, though, the impact of declining supply will be felt.

Enjoy the lower prices while they last… just don’t be surprised when they start heading north again.

The Dark Side

Another down day on the markets… the price of almost everything is collapsing it seems.  Stocks, bonds, commodities, gold, oil, you name it.  OPEC declares they are cutting daily production by 1.5 million barrels per day and no one notices or cares as oil continues to drop in price.    Financial firms and large corporations are hemorrhaging staff every day.   People fret over their portfolios, their house’s value, and their retirement funds.

Sounds pretty ominous to many Americans, but in reality, we’ve still got it pretty good compared to much of the world.   While the first world worries about how to keep the stock markets liquid, people in many parts of the world are trying to figure out what they are going to feed their children for dinner this evening, or if there will be any power to be had anytime soon.   There are millions of desperate people in the world, and their number is growing daily.    It is situations like this that, left unattended, can lead to chaos, famine and war.

Most of the problems are happening right now in far away countries that many people haven’t even heard of.  There are no guarantees that it will stay that way.  A major humanitarian catastrophe in, say, Mexico would have a much more immediate impact on Americans.  Perhaps it will come to that, or perhaps it will even hit home here in the US at some point.

A down side of our modern way of life is that many of us urban folk are completely dependent on an intricate delivery system that needs to function well to work.   Imagine how quickly grocery store shelves would be depleted if truckers couldn’t get diesel fuel for one reason or another… or if the grocery store chain couldn’t get the short-term loans that businesses often rely on to keep distributors happy or employees paid on time.

The financial crisis we are facing is global, and it’s good to remember that it affects more than just stocks, bonds and housing prices.   We are all linked, and if we don’t get this under control relatively soon, things could get very ugly indeed.

Read This

Fiscal Cat 5 Hurricane Warning

We are not through the worst part of this financial crisis.  In fact, odds are good that the spastic gyrations of the stock markets are just the start of what’s to come.   For the Americans reading this, keep in mind the linked article when you hear political speeches about taxes… specifically who’s going to raise them and who isn’t.   We will all be paying more taxes in the future… the main question is the form those taxes will take.

If we are forced to print more dollars or Treasury bonds, the inflationary affect is more or less the same.   I don’t know about you, but I won’t feel all warm & fuzzy if my income taxes don’t rise, but everything I buy costs 25-50% more.   Inflation is the hidden tax on everyone… and it’s one that doesn’t have to be approved by Congress.

Read the linked article, and if you don’t understand what LIBOR or Treasury spreads are about, break out thy mad google skills and learn up.

October Surprises

A short update here… life has been busy.

Wall Street continues to gyrate wildly.  Some folks are calling for a bottom, some aren’t.   Personally, I think things are so hosed up that even the best & brightest out there have no real idea where the market is at.    On some levels, the current activity of the stock market may not be all that important.

The real action is in the credit markets, where banks are still very leery of lending money to each other.   If you’re not familiar with LIBOR or TED spreads, this would be a good time to become at least acquainted with the terms.  LIBOR rates have eased somewhat, but it still appears that the banks are scared.  Until banks start lending money freely again, the economy will continue to slow down.  And if the price of freeing up the credit market is pumping tons of liquidity (i.e. digital dollars) into the system, that will eventually result in higher interest rates on Treasury bonds and, eventually, all other  forms of credit.  We may keep Wall Street afloat, but if mortgage rates rise to 10% or higher, that will crush the housing market.

Some good news for all of us is that the wipeout in the stock market has forced many hedge funds and speculators to deleverage their holdings.   One side affect of this is the general drop in commodity prices.  Wheat, Corn, Sugar, Oil, Gold, you name it, they all are either falling or staying stable.   For the short term, this means we will be able to enjoy lower prices on many staples for a while.  Gas has fallen to $2.60 in my area and shows no signs of stabilizing.  This is scaring the crap out of OPEC, who was really enjoying selling oil at $125 per barrel or more.    Seeing the price of your product drop by 50% or so will do that to you.

This forced deleveraging in the commodities market is giving us a good look at just how high prices got due to the influence of speculators.    Oil prices have ‘dropped’ to around $70 per barrel right now.   While this seems incredibly low to all of us right now, a few years ago $70 oil was unthinkable.   Short term market influence made the price go crazy for a while, but the underlying struggle between supply and demand is still out there.   If nothing else, a prolonged economic downturn may keep the production peak for world oil output away for another few years.   I would welcome this, wouldn’t you?   Enjoy lower prices for now, but don’t expect this to be a permanent situation.

I’ve been watching the presidential debates… I’m not sure why sometimes, but what the hell, it makes me feel informed.   Barring a sudden resurgence in the markets, I think Obama’s going to be the winner.   The race may tighten, but I don’t think McCain has done enough to convince Americans that he’s the right guy for the job.  Irascible assholes are useful in legislative bodies, but aren’t so attractive in the executive mansion.

One thing for folks to keep in mind… both candidates are talking about no new taxes, or only raising taxes on the rich & big business.  This is typical election year boilerplate.   The fact is that the bills have already been rung up, and they will have to be paid.   If we cannot convince the rest of the world to keep buying Treasury bonds like they’re going out of style, we’ll have to find some way around that.  It might mean raising taxes, cutting spending, eliminating entitlement programs, raising interest rates on treasury bonds, or a combination of those things.  I doubt we will be able to continue functioning the way we are right now for much longer.   The sky may not be falling, but we also will not be able to continue partying on someone else’s dime.

The Financial Game Plan for Next Week and Beyond…

… is being set in Washington D.C. this weekend.    We are all socialists now… we’re just arguing over what kind.

I’m in South Dakota right now… small anecdote for all of you.   I make this drive every 2-3 years or so, and each time I head out here, the number of wind turbines continues to grow.  I counted over 100 of them that I could see within a mile or two of I-90 alone.   The wind always blows out here one way or another.

Have a nice weekend, and let’s see what our economic masters have planned for us come Monday.

Meltdown

Asian markets are disintegrating overnight.  Check any news source you like, it’s nothing but bad news out there, and this looks to be a tidal wave following the sun around the globe.    The markets have not capitulated… yet.  It’s close though.    Beatdowns are being delivered across the board… stocks, bonds, credit markets, foreign exchange, you name it.  This is a crisis of confidence of historic proportions, folks.

For an intriguing perspective on this mess, check out William Engdahl’s latest piece.  I think Engdahl went off the reservation with his embrace of abiotic oil, but his perception of other forces at work is pretty good, I think.  What Engdahl is describing is stealth economic warfare right now, as the various shadow powers struggle to determine the new financial world order.   If this mess doesn’t get fixed soon, the warfare could end up being more than just economic in nature.  I’m not trying to be a scare-monger here… financial crises are often the start of major conflagrations.

I’m no fortune teller, so I have no idea how far into the abyss this whole thing is going.   It’s not looking very good right now, and the people calling the shots seem to be more interested in covering their own asses rather than trying to truly fix things.    Keep your eyes open, think about your future, and stay flexible.   Pay attention, and be prepared.

Sic Transit Gloria Wall Street

One slip, and down the hole we fall
It seems to take no time at all
A momentary lapse of reason
That binds a life for life
A small regret, you won’t forget,
There’ll be no sleep in here tonight

-Pink Floyd

The US Government is pulling out all the stops to try and stop the hemorrhaging of cash that is occurring across the globe.   The problem is not contained, and every trick the Fed pulls to try and get around an obstacle is only leading to yet another obstacle.

I’m no expert when it comes to matters of high finance, but from what I’ve been reading, the main action is going to be in credit markets and the whole derivatives mess that is yet to come.    The markets will continue to move up & down violently… it’s the nature of things these days.   The world of paper currencies and debt markets is based on confidence and trust… and usually little else.  When no-one trusts anyone else to repay debts, the credit market freezes up, which is exactly what we have been seeing over the last week or more.  Who knows when it will end?

Some data points for everyone to follow:

• We’ve promised to bail out everyone and their brother.  Depending on who’s math you choose to follow, this will cost the US taxpayer somewhere between a ton of cash and a whole shitload.   We will finance these bailouts by issuing more Treasury bonds.     The problems I am reading about these days are that long-term Treasuries (i.e. the 10 & 30-year bonds) are not attracting a lot of interest from potential buyers.   That is because the current coupon (i.e. interest rate) isn’t high enough to get people to invest in our debt.  If we can’t sell Treasuries, we will not be able to finance the daily workings of the government.   If we jack up the interest rate on Treasuries, that means very bad news for the housing market, among other things, as interest rates for mortgages will climb.
• The government if Iceland has come out and stated they are close to bankruptcy.  This will not be the last government that will have to approach the confessional in this way.
• The financial mess that has swept through Europe may mean the death of the Euro.   Again, this is not the first fiat currency to go into a potential death spiral, and it may not be the last.   Paper money has value because people think it does… the minute they stop thinking that, any ‘value’ it may hold disappears in a puff of logic.

There’s plenty of other stuff, but I’m at work right now and aim to keep that job.  The main point is this: the financial storm that’s sweeping across the globe is just the beginning.  We still have trillions of dollars in credit default swaps and other derivatives out there, and the US government is going to be faced with the decision to either raise treasury bond interest rates or save the housing market.

On a plus side, the price of oil has fallen off a cliff.    It will be interesting to see how far down it goes, though OPEC is already stating their lack of amusement with recent market events.    Locally, some gas stations are selling regular unleaded for under $3 per gallon again.   Enjoy what silver linings you can in the current economic dislocation.

We have lived off of credit for a long time, and the bill is now coming due.  The process of paying that debt down is going to be painful for most of us sooner or later.   For what it’s worth, both presidential candidates are promising either tax cuts or no new taxes for all except the wealthy.  I personally think they’re lying.  We have been able to finance our expansion of government through raising the debt ceiling and selling Treasury Bonds like nobody’s business.   We appear to be reaching the end of the line for the ‘buy now, pay later’ method of financing government.   I fail to see how we will repay these debts short of  (much) higher taxation, hyperinflation of the currency or outright debt repudiation… all of which are dangerous.

Should be an interesting 4 weeks until the elections… keep your eyes open.

Bailout a Done Deal

Some pork was added, some threats and strong-arming was performed, and Congress has now allowed pretty much any bank in the world to dump their toxic sludge at our doorstep.

The bill just got passed, but already there are some ugly Easter eggs popping out.

Remember, this entire paragraph 12 was not supposed to go into effect until 2011.

Foreign banks were not in the definition of depository institutions until they changed the effective date from October1, 2011 to October 1, 2008.

If we rewrite the opening of the paragraph to use the words “foreign banks” it reads

Balances maintained at a Federal Reserve bank by or on behalf of a foreign banks may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.

So, to summarize, by changing the effective date the following is now in effect.

Banks don’t have to have cash on hand.

The Fed does not have to maintain an Earnings Protection account for the supplemental reserve fees they charge banks which means they don’t have to give any of the money back to those banks.

They now include foreign banks as institutions they can pay earnings to. Let’s not forget, earnings is really just more American debt. Federal Reserve Notes are really debt, but that’s a topic for another monster blog entry.

link

And another:

The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.

Link

So we’ve basically opened up the magic money machine for anyone holding crappy derivatives or pretty much anything else they don’t want anymore… and now we taxpayers are guaranteeing it all.  So much for letting the ‘free market’ work things out.  Some businesses have been tapped to survive, and the rest will be eaten.

I wish I could muster the outrage to be mad about this.  Unfortunately, it’s the way things are.  All the voter outrage that was mustered earlier this week accounts for naught.   If you’re truly pissed off about this, the best thing you can do is vote against your incumbent rep or senator if he or she is up for election this fall.  Blame falls equally on both sides, and is further proof to me that both parties are working together to support a certain group, and it sure ain’t the average citizen.

There will be more surprises coming out of the bill… just wait.  This is just like the Patriot Act… don’t read, just vote for it… we are always acting in the best interests of America… right?