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Week of April 21, 2008

Sunday, April 27, 2008, 2:23 PM

MARIKO Watanabe admits she could have chosen a better time to take up
baking. This week, when the Tokyo housewife visited her local
Ito-Yokado supermarket to buy butter to make a cake, she found the
shelves bare.

"I went to another supermarket, and then another, and there was no
butter at those either. Everywhere I went there were notices saying
Japan has run out of butter. I couldn't believe it..."


Saudi Arabia, the world’s biggest oil producer, has
put on hold any plans to further increase long-term production capacity
from its vast oil fields, its most powerful policymakers have said. In
a series of statements, including one by the king himself, the kingdom
has warned consumers it does not reckon there is a need for further
expansion, an assumption disputed by the world’s biggest developed
countries.



Uh oh. An odd 'decision,' given the next two articles...


Emerging Market Oil Use Exceeds U.S. as Prices Rise
(Bloomberg - April 21, 2008)

China, India, Russia and the Middle East for the
first time will consume more crude oil than the U.S., burning 20.67
million barrels a day this year, an increase of 4.4 percent, according
to the International Energy Agency in Paris. U.S. demand will contract
2 percent to 20.38 million barrels daily, the IEA says.

MEXICO CITY (AP) -- Mexico's state-run oil company
said Monday that oil production fell 7.8 percent to 2.91 million
barrels a day in the first quarter as current reserves dwindle.

Petroleos Mexicanos, or Pemex, has struggled with falling reserves,
especially at its main Cantarell oil field, and lacks the money and
expertise to launch new drilling projects. Pemex only has enough proven
oil reserves to last nine years at current production rates.


If I was in Mexico and knew I only had 9
years of oil left, I'd be making some radical changes to my lifestyle.
Because that would imply that in only maybe 3 or 4 years there would no
longer be sufficient surplus for export and everything would change. Up
here in the US we need to figure out how to replace our #3 source of
imports. Anybody know of any countries sitting on a couple million
barrels per day of spare capacity?



Japanese Tanker Fired On In Gulf Of Aden
(CBS/AP - April 21, 2008))

(CBS/AP) Oil prices spiked to a record $117.40 a
barrel after a Japanese oil tanker was attacked in Middle Eastern
waters, off the east coast of Yemen.

The 150,000-ton tanker Takayama was attacked about 270 miles off
the Yemen coast in the Gulf of Aden while it was heading for Saudi
Arabia, its Japanese operator, Nippon Yusen K.K., said in a statement
posted on its Web site.

None of the ship's 23 crew members was injured, and the extent of
damage to the tanker was under investigation, the company said. Kyodo
News agency reported that the Japanese tanker was leaking fuel after it
was fired on by a rocket launcher from a small boat. No other details
were immediately available.


Uh oh. This is also not a great sign, obviously.

WASHINGTON (AP) -- The odds the country will fall into its first
recession since 2001 are rising sharply. Thirty percent of economists
now believe the economy will shrink in the first half of this year, up
from 10% who thought this in January



Gas prices push higher
(CNNMoney.com - April 20, 2008)

CAMARILLO, Calif. (AP) -- The nationwide average
for a gallon of gas touches $3.47. A survey says the national average
price for regular gasoline rose nearly 16 cents in the past two weeks.

The Bank of England will today announce a plan to
swap about 50 billion pounds ($100 billion) of government bonds for
mortgage-backed securities to lower credit costs, three people familiar
with the matter said





The trillion-dollar mortgage time bomb

(CNNMoney.com - April 21, 2008)

NEW YORK (CNNMoney.com) -- Among the nightmares
lurking around the corner for the already battered housing and credit
markets would be a meltdown at mortgage financing giants Fannie Mae and
Freddie Mac.

Although few are predicting an imminent need for a bailout just
yet, credit rating agency Standard & Poor's recently placed an
estimated price tag on this worst case scenario -- $420 billion to $1.1
trillion of taxpayer's money.


Running Out of Planet to Exploit
(NYT, Krugman, April 21, 2008)

Suppose that we really are running up against global limits. What does it mean?

Even if it turns out that we’re really at or near peak world oil
production, that doesn’t mean that one day we’ll say, “Oh my God! We
just ran out of oil!” and watch civilization collapse into “Mad Max”
anarchy.

But rich countries will face steady pressure on their economies
from rising resource prices, making it harder to raise their standard
of living. And some poor countries will find themselves living
dangerously close to the edge — or over it.

Don’t look now, but the good times may have just stopped rolling.

Food Rationing Confronts Breadbasket of the World (NYSun April 21, 2008)

MOUNTAIN VIEW, Calif. — Many parts of America, long considered the
breadbasket of the world, are now confronting a once unthinkable
phenomenon: food rationing. Major retailers in New York, in areas of
New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers
grew frustrated and occasionally uttered expletives as they searched in
vain for the large sacks of rice they usually buy.


Part of my advice 'package' that I
deliver at my seminars is that people should not assume that food
security will always be there. I know this is a radical concept for
some, but once you look at the just-in-time delivery system that
continuously resupplies each community with food, it is easy to think
of ways that it might be disrupted.




So,
just like in the olden days, I recommend that people keep a decent
larder of food on hand. Like 2-3 months' worth at minimum. That is, I
want you to assume responsibility for your food needs beyond simply
assuming that the stores will always be open and stocked with whatever
you need whenever you desire it. In my house, we haven't changed our
buying habits with respect to perishables (breads and anything in the
'fridge), but we have been consistently overbuying anything that will
keep for a year or two.

We've mainly bought extra canned goods, oils, pasta, and some items in
jars. We started doing this so that we'd have a slight food buffer on
hand - just in case - but quickly found that this was a great way to
beat inflation. Because a lot of the food we eat was bought last year,
we are eating for a lot less than people who are buying and consuming
food at today's prices.

And this explains why I have been watching the developing food
crisis with great interest. There are some very real supply issues out
there (for rice and wheat) but now we find out in the article above
that cooking oil is now on the 'shortage list' as well.

And I suppose I wouldn't be quite as alert as I am if this next
picture hadn't been taken by a friend of mine last Friday evening at
the Big Y right here in Greenfield MA.


That kinda brings it all right home for me, so to speak.


Wal-Mart-owned Sam's Club limits rice purchases (AP - April 23, 2008)

Sam's Club, the membership warehouse division of Wal-Mart Stores Inc.,
is limiting how much rice customers can buy because of what it calls
"recent supply and demand trends," the company said Wednesday.

The broader chain of Wal-Mart stores has no plans to limit food purchases, however.

Sam's Club's restriction is effective immediately at all locations
where quantity restrictions are allowed by law. It does not apply to
other staples such as flour or oil

Good news...looks like the shortages are
limited to rice, and we might expect that situation to resolve itself
soon as price brings more supply to market. Wal-Mart says "no worries."
Great little wake-up call there, though. I hope you were paying
attention.




The Role of Speculators in the Global Food Crisis
(Der Spiegel - April 23, 2008)

Vast amounts of money are flooding the world's
commodities markets, driving up prices of staple foods like wheat and
rice. Biofuels and droughts can't fully explain the recent food crisis
-- hedge funds and small investors bear some responsibility for global
hunger.

Regarding the Der Spiegel article above. I
appreciate the fact that they are highlighting the impact of hot money
on poor people, but I am aghast at the fact than an entire article was
written about inflation without ever having mentioned the fact the all
western economies are creating new money at the fastest rate measured
in decades. Not since, well, the last horrific bouts of inflation.


California foreclosure "surge": Up 327% from '07 levels
(LA Times - April 23, 2008)

The number of California homes lost to foreclosure
in the first quarter surged 327% from year-ago levels -- reaching an
average of more than 500 foreclosures per day -- DataQuick said in a
report, warning that the widening foreclosure problem could "spread
beyond the current categories of dicey mortgages, and into mainstream
home loans."

This surge in foreclosures tells us that we
are still accelerating towards a housing bottom in most key markets.
Not quite there yet. Probably 2-3 years away, assuming there is no
other event waiting to pile on to the situation, such as a major energy
crisis.


Capacity warning for oil producers
(FT - April 21, 2008)

The International Monetary Fund warned oil ministers on Monday that
their expansion in capacity was failing to keep up with surging demand,
leading to instability in the market.

John Lipsky, the IMF's deputy director, told a meeting in Rome:
"While oil demand has remained robust, the supply side response to
rising prices has been disappointing.

Yes, that's an odd thing there...one would
have thought suppliers would have responded strongly to the price
signals. There are a couple of good reasons why they may not have done
so:

  1. They can't because their fields are past peak.
  2. They aren't really excited by the prospect of accumulating more dollars
    or other paper currencies in exchange for their actual wealth.


Here's hoping it's reason #2.


04/24/2008
Here
the Wall Street Journal makes the same case I've been making - namely,
that buying your food early and often is a great strategy in times of
accelerating inflation. This article is worth a read....

My
only complaint about this article? It blames rising food prices on a
supply-and-demand issue and does not mention the effect of the massive
increase in money that the central banks have been dumping into the
markets for the past 10 years.

But other than that, it's a keeper. (Note: I
couldn't figure out which parts to cut out for reposting, so that's the
whole article below...).


Load Up the Pantry

(WSJ, April 21, 2008)
I don't want to alarm anybody, but maybe it's time for Americans to start stockpiling food.

No, this is not a drill.

You've seen the TV footage of food riots in parts of the developing
world. Yes, they're a long way away from the U.S. But most foodstuffs
operate in a global market. When the cost of wheat soars in Asia, it
will do the same here.

Reality: Food prices are already rising here much faster than the
returns you are likely to get from keeping your money in a bank or
money-market fund. And there are very good reasons to believe prices on
the shelves are about to start rising a lot faster.

"Load up the pantry," says Manu Daftary, one of Wall Street's top
investors and the manager of the Quaker Strategic Growth mutual fund.
"I think prices are going higher. People are too complacent. They think
it isn't going to happen here. But I don't know how the food companies
can absorb higher costs." (Full disclosure: I am an investor in Quaker
Strategic)

Stocking up on food may not replace your long-term investments, but
it may make a sensible home for some of your shorter-term cash. Do the
math. If you keep your standby cash in a money-market fund you'll be
lucky to get a 2.5% interest rate. Even the best one-year certificate
of deposit you can find is only going to pay you about 4.1%, according
to Bankrate.com. And those yields are before tax.

Meanwhile the most recent government data shows food inflation for the average American household is now running at 4.5% a year.

And some prices are rising even more quickly. The latest data show
cereal prices rising by more than 8% a year. Both flour and rice are up
more than 13%. Milk, cheese, bananas and even peanut butter: They're
all up by more than 10%. Eggs have rocketed up 30% in a year. Ground
beef prices are up 4.8% and chicken by 5.4%.

These are trends that have been in place for some time.

And if you are hoping they will pass, here's the bad news: They may actually accelerate.

The reason? The prices of many underlying raw materials have risen
much more quickly still. Wheat prices, for example, have roughly
tripled in the past three years.

Sooner or later, the food companies are going to have to pass those
costs on. Kraft saw its raw material costs soar by about $1.25 billion
last year, squeezing profit margins. The company recently warned that
higher prices are here to stay. Last month the chief executive of
General Mills, Kendall Powell, made a similar point.

The main reason for rising prices, of course, is the surge in
demand from China and India. Hundreds of millions of people are joining
the middle class each year, and that means they want to eat more and
better food.

A secondary reason has been the growing demand for ethanol as a fuel additive. That's soaking up some of the corn supply.

You can't easily stock up on perishables like eggs or milk. But
other products will keep. Among them: Dried pasta, rice, cereals, and
cans of everything from tuna fish to fruit and vegetables. The kicker:
You should also save money by buying them in bulk.

If this seems a stretch, ponder this: The emerging bull market in
agricultural products is following in the footsteps of oil. A few years
ago, many Americans hoped $2 gas was a temporary spike. Now it's the
rosy memory of a bygone age.

The good news is that it's easier to store Cap'n Crunch or cans of
Starkist in your home than it is to store lots of gasoline. Safer, too.


04/25/2008
A
vast new, paradigm saving amount of oil found in Brazil...or maybe not.
Even as vast amounts of money are pouring into the stock market, the
Fed is (somewhat) quietly continuing its Trash for Treasuries(tm)
program to the tune of another $75 billion. Meanwhile, some
astoundingly shoddy journalism is starting to appear on the subject of
oil causing me to wonder why.


First, a very encouraging headline and article from Bloomberg of all places.


Brazil Oil Finds May End Reliance on Middle East, Zeihan Says
(Bloomberg, April 24, 2008)

April 24 (Bloomberg) -- Brazil's discoveries of what may be two of the
world's three biggest oil finds in the past 30 years could help end the
Western Hemisphere's reliance on Middle East crude, Strategic
Forecasting Inc. said.

Hmmmm....something isn't adding up here. The
article goes on to say that that Brazil "may" be pumping "several
million barrels" a day by 2020. We already get more than that from the Middle East right now, so we are left scratching our heads as to how our
current plus future demand growth are going to be met by this new find.
Plus, the world oil markets are fungible so it's not really relevant
where it comes from...we could stop buying oil from the Middle East right
now, but it wouldn't really matter, because all the world's oil is
already spoken for. Our gain is somebody else's loss, and vice versa.

But the really disappointing aspect of this article, which
extensively quotes a firm that is openly described as a "shadow CIA"
firm (so who knows what game they are playing at any given moment), is
that it failed to illustrate any of the realities of this particular
Brazilian find. It is very deep, under 7,000 feet of water as well, and
capped by a very hot, viscous layer of salt. That is, it's going to be
very expensive to get and yet it was openly compared to extremely cheap
and easy to extract Saudi oil.

Meanwhile....


Saudi Aramco Aims to Double Crude Oil Supply to China By 2010


April 24 (Bloomberg) --

Saudi Aramco, the world's biggest state oil
company, aims to double its crude oil supply to China by 2010 from
about 500,000 barrels a day last year, an official from unit Saudi
Petroleum Ltd. said.

Well, the thought of Saudi Arabia selling
'our' oil to China is troubling, I suppose, but luckily the whole
notion of Peak Oil has been debunked. At least if this sensational
headline is to be believed:


Myth of peak oil debunked
(NewsOK - April 24, 2008)

The head of Oklahoma’s largest independent producer
of oil and natural gas debunked the myth of peak oil on Wednesday,
saying the biggest hindrance to recovering new reserves of oil and
natural gas are governments and their policies.

Larry Nichols , chief executive of Devon Energy Corp., attacked
taxation and other restrictive governmental policies both abroad and at
home during a presentation at Oklahoma State University’s annual energy
conference.

First predictions that the United States had reached its ultimate
production of oil initially surfaced after World War I, he said, when
government officials predicted the country had found all the oil it
would.

Throughout the 1900s, the prediction periodically resurfaced, he observed.

“And every time, it was wrong, and it was wrong for the same reason
— technology,” he said. “Technology keeps inevitably opening up new
areas in the U.S. and around the world that were heretofore unknown
about. And that is still happening today.”


Um, er, wow!  Is the source for this article ever misinformed! For the
record, the notion of US oil peaking is not even remotely up for debate
seeing as how the US peaked in petroleum production 38 years ago. Given
that the US peaked in 1970/71 at ~ 10 million barrels per day, slid
down a relentless slope of declining production, and currently sits at
less than 6 million bpd, it takes a special kind of person to drag out
failed predictions from around WWI to support a claim that the current
understanding of peak oil is flawed.

I do not post the above article as information, but more as a
sociological anecdote calling for a complete overhaul of the US
educational system. Or something.

In another bout of good oil news (below), Gazprom, the Russian gas
and oil giant, has announced plans to spend more money on production.
That's good news if you are Europe and wondering about next winter. But
what caught my eye was the rather eccentric list of recent investments
made by Gazprom...read then and ask yourself "do these seem like the
kind of things an energy company would do with its money, if there were
good investments to be made in its own area of expertise?".


Gazprom's New Focus On Production
(Forbes - April 24, 2008)

Russian gas export monopoly Gazprom plans to
increase investment in gas production and transportation substantially
while cutting spending on acquisitions. This will reassure European
customers concerned about its capacity to meet export commitments.
However, Gazprom's capacity to deliver will be severely tested as it
tackles an array of ambitious projects.

Gazprom has been under fire at home and abroad for failing to
invest in new production. The company has channeled much of its strong
cash flow of recent years to non-core acquisitions, including:

--a $13 billion stake in the Sibneft oil company;

--European downstream assets;

--media interests; and

--stakes in several power plants in Russia.

"Media interests"??? That's pretty much of a
warning there that good opportunities are getting hard to come by in
the oil and gas business.

Moving right along, the Fed is actively advancing it's Treasuries for
Trash(tm)
program and has announced another $75 billion of Grade A
Treasuries that it is willing to trade for whatever junk grade 'assets'
the big banks happen to have lying around.



Fed to auction $75 billion in Treasuries to ease credit woes
(AJC - April 23, 2008)

WASHINGTON — The Federal Reserve announced Wednesday it will auction an
additional $75 billion in super-safe Treasury securities to big
investment firms, part of an ongoing effort to help strained credit
markets.

The auction — the fifth of its kind — will be held Thursday.
In exchange for the 28-day loan of Treasury securities, bidding firms
can put up more risky investments, including certain shunned
mortgage-backed securities, as collateral.

In the four auctions held so far, the Fed has provided close to
$158.95 billion worth of the Treasury securities to investment firms.

Of course, the Bank of England is doing the
same thing, at about the same scale and for precisely the same reasons
- namely that the housing crisis is getting worse and the banking
system really, really went too far during the run-up to this crisis and
is in deep trouble. Meanwhile, Wall Street parties on while the real
economy crumbles. I'm sticking to my guns here, this crisis is far from
over no matter how many "happy prints" the stock market manages to eke
out.



Hello, Alternative Universe (Bohemian.com April 23, 2008)

Swaps and derivatives trade like stocks and bonds, but most of them
aren't registered securities like stocks or bonds. But swaps and
derivatives aren't exactly Monopoly money, either. What are they?
Ridiculously complex and esoteric. For the last decade, risk managers
on Wall Street pulled their hair out, lost sleep and finally gave up
trying to quantify the risk inherent in them. Yeah, they've given up.
When it came to swaps and derivatives, even auditors couldn't find
their ass with both hands.

{snip}

How is this possible? Advanced technologies make this market possible.
Welcome to money's alternative universe. Alternative trading systems.
Electronic communications networks. Central banks. Private banks. Brass
plate banks. Russian Mafia banks in Cyprus. The Vatican's bank in the
Cayman Islands. The Bush and bin Laden families holding hands and
tip-toeing through the tulips in financial cyberspace. Digital barrels
of oil in virtual supertankers in the Persian Gulf. Digital ounces of
gold in virtual vaults in Switzerland. Digital bushels of corn in
virtual silos in Iowa. Eurex. Euronext. The World Federation of
Exchanges. A transnational community of anonymous traders who have
never met and never will.


The above article is written by a deep industry insider - a hedge fund
manager - and I love the writing and the content. It's brilliant. And
you should read it, even thought it is a bit jargon-dense, because it
will help you appreciate that our economic 'system' is really an
out-of-control, overly complicated morass, where greed and self-interest
can pretty much run unfettered.



California Association of Realtors reports sales decreased 24.5 percent, median home price fell 29 percent in March
(C.A.R April 25, 2008)

LOS ANGELES (April 25) – Home sales decreased 24.5 percent in March in California compared with the same period a year ago, while the median price of an existing home fell 29 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

“Sales continue to be impacted by problems in the real estate finance
sector, which by some measures have eroded since the start of the
year,” said C.A.R. President William E. Brown. “Sales in 2007 reached
their peak last February; going forward, the year-to-year declines in
sales should shrink.”

Ouch. These data tell us that the housing
downturn in CA is proceeding at an unheard-of pace. Obscured by these
numbers is the fact that foreclosure 'sales' (where a bank takes
repossession of a home) count in these numbers. I don't happen to have
them at hand, but I would guess that if we stripped those out, sales
would be down in the vicinity of 40% or so. But that's just a guess. At
any rate, worse than reported.

But a 29% decline in median price! I wasn't
expecting that sort of decline for another year or so. Now I'm
wondering exactly where the bottom might be.



*sigh*


U.S. Weighing Readiness for Military Action Against Iran
(WaPo April 26th, 2008)

The nation's top military officer said yesterday that the Pentagon is
planning for "potential military courses of action" as one of several
options against Iran, criticizing what he called the Tehran
government's "increasingly lethal and malign influence" in Iraq.

Adm. Michael Mullen, chairman of the Joint Chiefs of Staff, said a
conflict with Iran would be "extremely stressing" but not impossible
for U.S. forces, pointing to reserve capabilities in the Navy and Air
Force.

"It would be a mistake to think that we are out of combat
capability," he said at a Pentagon news conference. Speaking of Iran's
intentions, Mullen said: "They prefer to see a weak Iraq neighbor. . .
. They have expressed long-term goals to be the regional power."

I happen to have a bunch of articles stored
up on Iran, as I've been keeping a close eye on the possibility that
the US or Israel may attack Iran. This Saturday release (above) has my
antennae up. Why the weekend? Why this message at this time? I
certainly don't know, but I have put a lot of thought into what I would
personally do within the first hours after hearing that the US had
initiated hostilities against Iran.

I will be posting that information at a later date, along with a
full summary of the latest news on this possibility. Suffice it to say
that the odds of an unplanned outcome arising from a shooting war with
Iran are very high.




Strike in Scotland closes major North Sea oil pipeline
(AP - April 27, 2008)

EDINBURGH, Scotland (AP) -- Hundreds of workers at Scotland's only oil
refinery on Sunday began a 48-hour strike that has forced BP PLC to
shut a pipeline system that delivers almost a third of Britain's North
Sea oil.

BP said it had completed the closure of the Forties Pipeline System
by 6 a.m., when 1,200 workers at the Grangemouth refinery in central
Scotland walked off the job. The pipeline brings in 700,000 barrels of
oil a day from the North Sea to BP's Kinneil plant, which is powered
from the Grangemouth site.


Ooops! I'm looking for $120 oil by tomorrow, or maybe the day after.



PENGASSAN [Nigeria] strike halts crude oil export

(The Tide - April 27 2008)

The 860,0000 barrels per day crude oil export
terminal in Eket, Akwa Ibom, operated by Mobil Producing Nigeria (MPN)
Exxon Mobil’s upstream subsidiary, has been shut down.

The Tide on Sunday gathered that contract and employee branches of
Petroleum and Natural Gas Senior Staff Association of Nigeria
(PENGASSAN) Thursday, commenced an indefinite strike following a
breakdown in negotiations for improved staff welfare.


OK - make that $125 oil.

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