Blog

Week of May 19, 2008

Sunday, May 25, 2008, 7:48 AM
Friday Headlines

May 23

Unsold houses rise to 23-year high in April (May 23 - MarketWatch)

The U.S. housing market weakened further in April
with a flood of homes coming on the market even as sales and prices
declined, the National Association of Realtors reported Friday.

Resales of U.S. houses and condos dropped 1% to a seasonally adjusted
annualized rate of 4.89 million from 4.94 million in March. Economists
expected sales to fall to 4.83 million.

The number of homes on
the market represented an 11.2 month supply at the April sales pace,
the biggest since the combined single-family/condo records began in
1999.

Median sales prices for houses and condos fell to
$202,300, down 8% from a year earlier and the second largest price
decline on record. Median prices are down 12% from the peak.

While I have my reservations about the
accuracy of the NARs numbers (they are usually too rosy), the basic
trends they reveal are useful. Yes, it’s true that home sales have
managed to hover around 5 million since August of last year, but
inventories have been steadily climbing and now stand at levels that
call for further price reductions. Obscured by the NAR methodology is
the fact that actual sales were probably lower and inventory is
probably higher.
Why? Because the NAR
‘counts’ a house that is repossessed by a bank as a ‘sale’ as long as
that sale went through a realtor somehow. Many do, and so the real
buying pressure from actual owners or investors is surely lower than
the reported number. Similarly, because many of the REO properties are
sitting on the books of banks and are not yet in the MLS system, the
real inventory available for purchase is certainly understated. As I
said, the NAR numbers conveniently tend to include and exclude items in
a biased fashion.


Subprime, Alt-A mortgage delinquencies rising (May 22 – Reuters)

Delinquencies in U.S. subprime debt and
higher-quality mortgages known as Alt-A securities are continuing to
increase, Standard & Poor's said on Thursday.

Delinquencies for Alt-A mortgages rated between 2005 and 2007 are
climbing, with total delinquencies rising as high as 17 percent in some
cases, more than 6 percentage points higher than previous estimates,
the ratings agency said in a report.

Lower-quality subprime
mortgage delinquencies soared as high as 37 percent for mortgages
originated in 2006, 4 percentage points higher than previous estimates,
S&P said.

Subprime loans traditionally have
high rates of delinquency (a first step on the path towards
foreclosure), but 37% is a staggering number. ALT-A are loans made to
people whose credit risk is judged to be better than subprime but less
than prime. They are “tweeners.”

Needless
to say, a 17% rate of delinquency is utterly outside of the models that
Wall Street used to assess risk, meaning that the losses being incurred
were neither expected nor adequately hedged. I wrote about the looming
ALT-A problem last year and so this news does not surprise me in the
least, although the rates are real eye-openers.

Next
up you can expect to hear about Option ARMs, the loans they allowed
purchasers to decide (“opt for”) how much of the interest and/or
principal they wanted to pay each month.
You
might be unsurprised to learn that many people opted to pay the bare
minimum. And you might be surprised to learn that accounting rules
allowed the unpaid portion, which was tacked onto the loan balance, to
be recorded as “profits” by the banks and mortgage companies. As those
earnings were booked in 2005-2007, they are already done and gone.
However, when it turns out that the loans are going bust, those profits
will have to be undone. The option ARM fiasco will result in a massive
round of profit restatements for a lot of companies, beginning, I would
guess, as early as the 3rd or 4th quarter this year.


JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County (May 23 - Bloomberg)

Like homeowners who took out mortgages they
couldn't afford and didn't understand, Jefferson County officials
rejected fixed- rate debt and borrowed instead at rates that varied
with the market. The county paid banks $120 million in fees -- six
times the prevailing rate -- for $5.8 billion in interest-rate swaps.
That was supposed to protect the county from rising rates for their
bonds. Lending rates went the wrong way, putting the county $277
million deeper into debt. In February, the county's interest rate
soared to as much as 10 percent, up from 3 percent just weeks earlier.
The swaps have now compounded the risk that Jefferson County will file
for bankruptcy as it faces its worst financial crisis since it was
founded in 1819.

Crikey, why does anybody trust Wall
Street? This is stunning. JPMorgan overcharged an outmatched county in
Alabama by $100 million and failed to even minimally deliver the exact
sort of protection that the county thought it was buying. Instead of
being insulated from interest rate risk, they were completely exposed.
This is an awful story, and if I were in a leadership position down
there I would certainly be tugging on the starter cord of my very best
attack lawyer.


POLL-Non-OPEC oil output growth slows to a trickle (May 22 – Reuters)

Oil production from countries outside OPEC is
stagnating despite a more than sixfold rise in oil prices since 2002,
driven partly by the failure of non-OPEC producers to deliver a lot
more oil. A Reuters survey of 12 analysts put the consensus forecast
for non-OPEC oil supply in 2008 at 49.56 million barrels per day (bpd),
down from 50.36 million bpd estimated in the previous poll in March.
The poll points to supply growth from producers outside the
Organization of the Petroleum Exporting Countries of 0.67 percent in
2008 versus 2007, which compares with growth of about 1.4 percent
estimated in the previous poll.

Oil is a matter of supply-and-demand
and the amount of money floating around. This report says that non-OPEC
oil growth is stagnating, and this is even WITH the Biofuels added in
for good measure. Non-OPEC growth is trending dangerously close to
slipping below zero into negative territory.


'Squawk Box' Guest Warns of $12-15-a-Gallon Gas (May 21 – Business & Media)

It may be the mother of all doom and gloom gas
price predictions: $12 for a gallon of gas is “inevitable.” Robert
Hirsch, Management Information Services Senior Energy Advisor, gave a
dire warning about the potential future of gas prices on CNBC’s May 20
“Squawk Box.” He told host Becky Quick there was no single thing that
would solve the problem, due to the enormity of the problem. “[T]he
prices that we’re paying at the pump today are, I think, going to be
‘the good old days,’ because others who watch this very closely
forecast that we’re going to be hitting $12 and $15 per gallon,” Hirsch
said. “And then, after that, when oil – world oil production goes into
decline, we’re going to talk about rationing. In other words, not only
are we going to be paying high prices and have considerable economic
problems, but in addition to that, we’re not going to be able to get
the fuel when we want it.”

Robert Hirsch authored a seminal report on the challenges of Peak Oil, which you can find on my essential articles page.
If you haven’t read it, I recommend that you do. His analysis is
thorough and I am glad to see that he’s getting some serious air-time
to express his views. Unless we have a doozy of a global recession that
knocks back oil demand, I am expecting a real turning point in the
public consciousness about the magnitude (big) and duration (forever)
of peak oil.


May 22

In My Opinion: One law is causing prices to go through the roof (May 19 – Star Telegram)

Many individuals who are investing in oil and
natural gas futures are going out in the media and trying to convince
the American public that either we are out of oil or there is a serious
supply shortage of crude against worldwide demand.

The
question is: Does it surprise you to discover that the US Senate
investigated the rigging of the oil market by speculators in the summer
of 2006 – and concluded that there was no supply and demand problem
with oil? Did you know that their conclusion was that speculators were
responsible for a 70 percent overcharge in the price of oil in the
months leading up to the summer of 2006?

There are many out there who are starting
to really get concerned about the price of oil, but, unfortunately,
they are mainly directing their ire at the role of speculators. In my
estimation, this leaves out the legitimate roles of supply, demand, and
monetary expansion. Also, one other thing that escapes these
commentators is an understanding of how the futures markets work.

Unlike a store where a person buys something and then it’s gone, in the
futures market for every buyer THERE MUST BE A SELLER. That is, for all
the buying that is going on, there is an exactly equal amount of selling
going on. The only way that ‘speculators’ can persistently drive the
price of a commodity higher is if they go out and take the physical
product off the market and store it somewhere. Otherwise, market
fundamentals dictate that sooner or later the price will come down. It
bears noting that oil has not ‘just recently’ exploded upwards; it has
been climbing higher and higher for 4 years now. How’s that for
‘persistent’?


Oil's perfect storm may blow over (May 22 - UK Telegraph)

The perfect storm that has swept oil prices to $132
a barrel may subside over the coming months as rising crude supply from
unexpected corners of the world finally comes on stream, just as the
global economic downturn begins to bite.

Here’s another view on why oil may
come down in price, centering on the premise that there’s plenty of
supply with more coming on line and that this will tip the price back
down. This is entirely possible, but I will note that the supply data
used for this article conflicts with the data that I have in hand.

For instance, it claims that Russia will produce more oil in each of
2007, 2008, and 2009 while Russia already says that its oil production
is down 3.3% yr/yr (from '07 to '08). If true, this kind of shoots a
hole in the supply-coming-on-line argument. Still, the view expressed
in this article are worth keeping in mind.


Oil Rises Above $135 as OPEC Says It's Powerless to Stop Rally (May 22 – Bloomberg)

Crude oil rose to a record above $135 a barrel as
OPEC ministers said they could do nothing to stop the rally that has
more than doubled prices over the past year.

Oil has risen 18
percent this month as banks increased price forecasts because of
limited supply and demand growth. OPEC has "no magic solution" to high
prices, Qatar's oil minister said. The IEA, energy adviser to 27
nations, said it plans to reduce its long-term projection for oil
supply.

"We are not in charge anymore," Shokri Ghanem, Libya's
top oil official, told Bloomberg Television. "OPEC is producing as much
as the market wants. It is speculation, it is geopolitics, it is dollar
erosion" behind the gains, he said.

The Wall Street Journal
reported earlier that the International Energy Agency will lower its
2030 supply projection to 100 million barrels a day from 116 million.
The Paris-based IEA was founded in 1974 in response to the Arab oil
embargo.

"We are trying to get a better understanding of
depletion rates and expectations of productivity," Bill Ramsey, the
agency's deputy executive director, said in a telephone interview.
"There is growing awareness that raising world output is a problem,"
and it is "too early" to give any estimates, he said.

OPEC is convinced that oil prices are
not based on true supply and demand fundamentals, but they share the
blame across speculators and ‘dollar erosion’ (another way of saying
dollar inflation). However, the real kicker in this article is the new
estimate put out by the IEA, calling for global oil supplies in 2030 to
be a full 15% lower than their last estimate. This is big news...I
can’t remember IEA estimates ever going anywhere but up. This admission
of an output problem has enormous implications for a world addicted to
oil-fueled growth.


What if gas cost $10 a gallon? (May 16 – Money Central)

According to Todd Hale, a senior vice president for
consumer researcher Nielsen, at $10 a gallon, the average family's gas
bill would leap from 16% of its retail spending to about 40%. People
would drive less, yes. But many have to drive to work or the
supermarket, and they'd cough up the cash -- screaming all the way --
and cut back elsewhere.

Businesses and farmers, meantime,
would be squeezed as the costs of transport, petrochemical fertilizers
and plastics rose. If an oil shock came quickly, sending gas to $10 a
gallon and oil to roughly $350 a barrel, the chain reaction of
spiraling prices and sliced consumer demand would hit us hard.

This article does a reasonable job of
outlining the main areas of impact that will result from oil moving
higher. They speculatively put that number at $10/gallon for gasoline
and work from there. Where the article falls a bit flat is in its
implicit assumption that we’ll all just scrimp a little and carpool a
bit, but basically live the same lives. In my view, if the retail
energy budget for an average family moves from 16% to 40%, it’ll be a
lot more than a set of minor adjustments we’ll be facing.


An Oracle of Oil Predicts $200-a-Barrel Crude (May 21 - NYT)

But while oil and gas prices have been rising for a
while now, Americans have only just begun to reduce gasoline
consumption, so their efforts to conserve have not dragged down oil
prices.

“The fact that the U.S. gasoline demand can be down
and that the U.S. gasoline consumer is no longer driving world oil
prices is a monumental event,” Mr. Murti says. He spends most of his
time talking to money managers and analysts, many of whom keep asking
him if oil prices will stay high if speculators abandon the market, and
says he applauds investors for driving up oil prices, since that will
spur investment in alternative sources of energy.

Mr. Murti has achieved fame for
having correctly called for this “Super Spike” in oil prices and is now
shocking the investment community with calls for $200 oil. So he’s
being taken pretty seriously. What I like about his analyses is that
they are exactly that – data-rich discussions of the primary drivers
and trends that effect oil prices. The most important point I gleaned
from this article is in that last paragraph, namely that the main shock
to the oil markets was the recognition that the US consumers' demand
for gasoline is no longer the only relevant factor in the demand
equation. Slowly, the US-centric view long held by investors is
slipping away.


Small Businesses (and Their Customers) Feel Sting of Inflation (May 22 – NYT)

Inflation has sunk its teeth into small businesses
this year. The number of owners citing inflation as their No. 1 concern
on the National Federation of Independent Businesses monthly economic
index in April was at its highest level since 1982. One in five owners
is raising prices, according to William C. Dunkelberg, the trade
group’s chief economist.

Officially, the government is
indicating that inflation is in check, taking into account seasonal
variations. On Tuesday, the Labor Department reported that wholesale
prices climbed just 0.2 percent in April. The core rate, though, which
excludes food and energy, had its largest year-over-year jump since
1991.

And last week, the government reported that consumer prices inched up in April, suggesting cooling inflation.

But on Main Street and in households across America — where rapidly
rising fuel and food prices are not excluded — the picture is not so
rosy. Gasoline prices are now up to about $3.80 a gallon. The cost of
diesel fuel, which powers many small business vehicles, set a record
yet again on Wednesday, about $4.56 a gallon, up nearly 64 percent from
a year ago. And food prices rose at a 0.9 percent rate in April, the
biggest one-month jump since 1990.

Here’s another article to confirm
that the reality facing consumers and small businesses is vastly
different from the official statistics on inflation. Very simply, a
monthly rate of 0.2% does not jibe with inflation being the #1 concern
for small businesses. Think about it – inflation overshadows looming
recession, and we’re supposed to believe that it’s only running at an
annual rate of 2.4%? That's a very low rate, historically.
Unfortunately, many brokerages and investment houses make
recommendations based on this misinformation, leading to profound
investing mistakes.


Hmmmmm? (June 2008 – PIMCO Investment Outlook)

The correct measure of inflation matters in a
number of areas, not the least of which are social security payments
and wage bargaining adjustments. There is no doubt that an artificially
low number favors government and corporations as opposed to ordinary
citizens.

But the number is also critical in any estimation
of bond yields, stock prices, and commercial real estate cap rates. If
core inflation were really 3% instead of 2%, then nominal bond yields
might logically be 1% higher than they are today, because bond
investors would require more compensation.

A readjustment of
investor mentality in the valuation of all three of these investment
categories – bonds, stocks, and real estate – would mean a downward
adjustment of price of maybe 5% in bonds and perhaps 10% or more in
U.S. stocks and commercial real estate.

A skeptic would wonder
whether the U.S. asset-based economy can afford an appropriate
repricing or the BLS was ever willing to entertain serious argument on
the validity of CPI changes that differed from the rest of the world
during the heyday of market-based capitalism beginning in the early
1980s.

It perhaps was better to be “entertained” with the
notion of artificially low inflation than to be seriously “informed.”
But just as many in the global economy are refusing to mimic the
American-style fixation with superficialities in favor of hard work and
legitimate disclosure, investors might suddenly awake to the notion
that U.S. inflation should be and in fact is closer to worldwide levels
than previously thought. Foreign holders of trillions of dollars of
U.S. assets are increasingly becoming price makers not price takers and
in this case the price may not be right. Hmmmmm?

The author of this piece, Bill Gross,
is the managing director of PIMCO, the largest bond fund in the world,
with hundreds of billions under management. In this article he makes
the case that the official inflation number is too low and notes that
this favors the government and corporations. It’s only a small step
from there to wonder exactly how this came about. Regardless, you need
to be aware that the government inflation numbers are scandalously out
of whack with reality and adjust your investments and purchasing habits
accordingly.


First Quarter U.S. Home Prices Fall 3.1%, Ofheo Says (May 22 - Bloomberg)

House prices dropped by a seasonally adjusted 1.7
percent in the first quarter, the biggest decline in the history of
Office of Federal Housing Enterprise Oversight house price index.
Prices have fallen by 3.1 percent in the last year, marking the largest
drop since records began in 1991. House prices fell 1.4 percent in the
fourth quarter of 2007.

Although it remains the Fed’s
preferred barometer of house prices, the magnitude of price declines
tracked by OFEHO is less than those measured by the Standard &
Poor’s/Case Shiller home price index, another closely watched housing
measure.

"It's a dismal picture, there's no way around it,"
Kasriel said. "A complicating factor is the fact that so many
homeowners owe more on their mortgages than their houses are worth.
This is a financial crisis. You can't put lipstick on this pig."

The government measure of house
prices reveals a -3.1% year-over-year decline. A more comprehensive
private measure, the Case-Shiller index, says -12.7%, or more than 400%
higher. I am not aware of a single government number that errs on the
side of being overly negative. All of them, and I mean ALL of them, err
on the side of being overly positive in nature. If this is not a
deliberate set of acts, then it is one of the more statistically
improbable happy coincidences in our lives.


Actuaries Scrutinized on Pensions (May 21 - NYT)

By firing its actuarial consultant last week, the
New York State Legislature shone a light on one of the public sector’s
deepest secrets: All across the country, states and local governments
are promising benefits to public workers on the basis of numbers that
make little economic sense.

"Financial burdens have been
hidden" as a result, said Jeremy Gold, a New York actuary and economist
who was one of the first to call attention to the gap between actuarial
figures and economic reality. Many economists now agree with Mr. Gold,
saying they believe actuaries are routinely underestimating the cost of
providing governmental pensions by as much as a third.

"Actuarial assumptions based on misinformation are a recipe for disaster," said the Texas attorney general, Greg Abbott.

Wow. I have been harping on the huge
deficits that exist in state and municipal pensions for awhile, but
this article is stunning. It reveals that flagrant conflicts of
interest and shoddy methods have been the rule, not the exception, in
the world of public pensions. The errors were (and are) so egregious
and have compounded unseen for so long that I seriously doubt there is
any reasonable way to make good on the claims. Benefits were overly
generous, as were the assumptions about pension fund returns. A recipe
for disaster, indeed.


May 21

Oil for 2016 Delivery Passes $141 on Supply Concern (May 21 – Bloomberg)

Oil prices are heading to more than $141 a barrel
in the next eight years, according to futures contracts on the New York
Mercantile Exchange, on concern that growth in supply may fail to keep
pace with rising demand.

Oil for delivery in December 2016
surged $20.09, or 17 percent, in the past four trading days since
Goldman Sachs Group Inc., the world's biggest securities firm by market
value, forecast oil would average $141 in the second half of 2008 on
constraints in production and a lack of substitutes. Crude for July
2008 climbed 4.4 percent in the same period, and today rose to a record
$130.47.

The gain, more than triple the increase in oil for
delivery this summer, "fits in" with the Goldman forecast which "talked
recently about long-dated crude in particular," said Tim Evans, an
energy analyst for Citi Futures Perspective in New York.

The futures market can exist in two
conditions. One is called 'backwardation,' meaning that the outlying
contracts are cheaper than the current one, and the other is called
'contango,' meaning the future contracts are more expensive than the
current one. For as long as I have been observing oil, it has been in
backwardation (i.e., the future is cheaper than the present). The fact
that the future is now significantly more expensive than the present
means that oil traders are concerned about future availability of oil.
This is a big move.


U.S. House passes bill to sue OPEC over oil prices (May 20 – The Boston Globe)

The House overwhelmingly approved legislation
Tuesday allowing the Justice Department to sue OPEC members for
limiting oil supplies and working together to set crude prices, but the
White House threatened to veto the measure.

The bill would
subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela,
to the same antitrust laws that U.S. companies must follow.

The measure passed in a 324-84 vote, a big enough margin to override a presidential veto.

The legislation also creates a Justice Department task force to
aggressively investigate gasoline price gouging and energy market
manipulation.

Meanwhile, Congress throws a fit and
threatens suit against OPEC for not selling their oil to us fast enough
at a price that we like. What an unfortunately American response, which
can be characterized as "Things aren't to our liking so we're going to
sue you!" The mental image I have here is one of an adolescent in the
candy aisle throwing a fit. I saw one waggish headline that described
this action as "Congress passes law requiring OPEC to sell oil to
China." My main complaint with this law, besides the fact that it
displays an appalling lack of understanding about the current energy
predicament, is that it will potentially harden the response of many
countries that already feel that the US requires strict adherence to
'the rules' by other countries but does not follow the rules all that
closely itself.


 Debt-squeezed Gen X saves little (May 20 – USA Today)

For years, experts have warned that too many of the
USA's 79 million baby boomers aren't financially ready for their coming
retirements. Yet, if the boomers have had it hard, it's nothing
compared with those next in line: Generation X — people such as the
Shorts. The Gen Xers, generally defined as those born from 1965 through
1980 — now 27 to 43 years old — have even less assurance than the
boomers of receiving company pensions and projected Social Security
benefits.

"One of the biggest issues facing the Gen Xers,"
observes Pam Hess, director of retirement research at Hewitt Associates
and a Gen Xer herself, "is lots of competing priorities, juggling lots
of different costs and financial priorities. It will continue to be a
struggle."

Consumer debt is one of the main reasons. Nine out
of 10 consumers in their 30s are in debt, compared with 76% of those in
their 20s, according to the Federal Reserve's Survey of Consumer
Finances. In a recent Charles Schwab study of more than 2,000 Gen Xers
nationwide, 45% of respondents said they had too much debt to think
about saving.

Gen-X is in tough shape. They
matured during the tail end of the largest credit bubble in history, so
they will receive all of the debt and very few of the benefits, if any.
The article points out that a large percentage are not saving for
retirement at all, and this fact will greatly complicate the efforts by
boomers to unload their portfolio assets when they seek to retire. To
whom will they sell them, if Gen-X isn't buying?


Freddie Mac Suffers Bout of Temporary Insanity (May 21 – Bloomberg)

How long does the word "temporary" mean? The
accountant who wants to stay employed knows the right answer: "How long
do you want it to mean?"

That new twist on an old joke goes a
long way toward explaining Freddie Mac's net loss last quarter of $151
million, which was smaller than analysts' estimates. In reality,
Freddie is gushing much more red ink than that. Yet hardly any of it is
showing up on the company's income statement.

That's mainly
because the government-chartered mortgage financier has deemed $32.4
billion of paper losses from mortgage- related securities as
"temporary." Freddie's big sister, Fannie Mae, is in a similar, though
less extreme, position with $9.3 billion of such losses.

To
put this in perspective, $32.4 billion is more than double Freddie's
$16 billion of shareholder equity under generally accepted accounting
principles. It's almost twice as much as the company's $17 billion
stock-market value. And it's infinitely greater than the fair value of
Freddie's net assets, which at March 31 was negative $5.2 billion.

*Sigh.* As cynical as I get about
financial shenanigans, I find I just can't keep up. Freddie Mac posts a
"narrower than expected" loss of $141 million, but only after sliding
$32.4 billion (with a "b") of bad debt over into an accounting
cul-de-sac. Taxpayers are going to be asked to pick up an enormous tab
for this housing debacle, and that $32.4 billion is just the ante to
what is likely to be a recordbreaking pot. How do you feel about that?
Instead of having sufficient funds to fix our infrastructure or pour
into alternative energy, we'll be asked to pony up to fix the balance
sheet of a privately held company whose stockholders and directors
profited handsomely over the past ten years. Heads - they win; tails -
you lose.


White House denies Iran attack report (May 21 - Jerusalem Post)

The White House on Tuesday flatly denied an Army
Radio report that claimed US President George W. Bush intends to attack
Iran before the end of his term. It said that while the military option
had not been taken off the table, the administration preferred to
resolve concerns about Iran's push for a nuclear weapon "through
peaceful diplomatic means."

Army Radio had quoted a top
official in Jerusalem claiming that a senior member in the entourage of
President Bush, who visited Israel last week, had said in a closed
meeting here that Bush and Vice President Dick Cheney were of the
opinion that military action against Iran was called for.

The
official reportedly went on to say that, for the time being, "the
hesitancy of Defense Secretary Robert Gates and Secretary of State
Condoleezza Rice" was preventing the administration from deciding to
launch such an attack on the Islamic Republic.


You know what they say...it's not
official until it's denied. I posted this particular rumor about Iran
because the claims about Dick Cheney advocating while Condi was
hesitating sounded believable to me. Perhaps this is what oil is
'telling us'?


Plunge in US commercial property (May 20 – FT)

Commercial property prices in the US in February
saw their sharpest decline since records began nearly 15 years ago as
sources of finance for deals has dried up, according to data from
Standard & Poor’s out yesterday.

The value of commercial
buildings fell 1.03 per cent between January and February, the largest
monthly decline since at least 1993, when the industry was just
emerging from a deep slump.

As I said in my report on real
estate a number of months ago, residential real estate goes bust first,
and then commercial follows, with a lag of about a year. Look for a
commercial real estate bust to gather steam and start to take down the
regional banks that are the main holders of the debt.


Less Shopping = Fewer Malls (May 21 – WSJ LAS VEGAS)

Retail construction, which surged in recent years
amid easy financing and robust consumer spending, has lost momentum as
retailers curtail growth plans and lenders remain stingy.

Developers, in turn, are hitting the brakes. This year, they are
expected to complete retail projects totaling 136.4 million square feet
in the top 54 U.S. markets, says market researcher Property &
Portfolio Research Inc. But, next year, newly completed projects will
amount to only 70.9 million square feet, reflecting the construction
slowdown initiated in recent months. In comparison, the average annual
production from 1998 to 2007 was 122.7 million square feet.

My comment on this article stems
from the number of square feet of retail/commercial space that is built
every year. Consider that our population grows by ~3 million every
year, yet for a ten year stretch the average construction was ~123
million square feet each year. That works out to ~40 square feet of new
commercial/retail space for every new member of our society. Anybody
else think that maybe, perhaps, we have all the commercial space we'll
need for a while? Like, maybe we could stop building for the next 10
years and nobody would notice?

SpacerTuesday

The Export Land Model (ELM)
very simply subtracts a given country's rising domestic consumption
from its ability to export surplus oil. The conclusions from this
simple step are breathtaking. In short, there could be essentially zero
oil available for export in as few as six to nine years. Please read
this article and think very carefully about your own life, where you
live, where you get your food, and even what you do for work. I have
done all of this, and, based on this article and the next four, my wife
and I are dialing up our already aggressive (by most standards) action
plans to new level.

May 20

What the Export Land Model Means for Energy Prices (May 19 - David Galland for John Mauldin)

Mexico provides about 14% of the oil the US
imports. On any given day that makes it either the #2 or #3 leading
source for US oil imports after Canada and Saudi Arabia. Given that the
US currently imports close to 70% of its oil needs, the Mexican oil is
critical.

But here's the thing. Using straightforward ELM
calculations, Jeffrey Brown is confident that Mexico will ship its last
barrel of oil to the United States -- or anywhere else, for that matter
-- about 6 years from now, in 2014. In a recent interview with Brown, I
asked about this forecast.

"Mexico was consuming half of their
production at peak in 2004. And if you look at the '05, '06, '07 data,
they're basically on track, on average, to approach zero net oil
exports no later than 2014," he confirmed.

Of course, the US
is completely unprepared to replace this source of oil, especially
considering the growing stresses on global oil supplies caus[ed] by
ballooning demand from emerging markets. That means the international
competition for available supplies is only going to get more desperate
in the months and years ahead. What will this mean to oil prices,
according to Brown?

"From this point out I think we'll see a
geometric progression in prices ... you know, $50, $100, $200, $400,
whatever. The only question now is how short the periods will be
between prices doubling again."


Where are we going to replace an
entire Mexico-worth of production? What will happen if Russia, the #2
exporter, goes "off line" in only 6 years? Even if the US begins today
building high-speed rail lines and reconfiguring our urban centers and
suburban living arrangements, we'd need at least 15 to 20 years to make
a smooth transition. If, instead, the US entirely loses its imports
(worst case scenario), then we'd have to find a way to live on our ~5
million barrels of daily domestic production. Which means we'd have to
select between running our military, farming & food distribution,
and running some of our cars. That is, we have enough domestic oil to
run any one of those three options, but not all three. Clearly, some
very big adjustments are on the way. Are you ready?


Bush to Arab nations: You're running out of oil (May 19 – The Scotsman)

PRESIDENT George Bush yesterday told leaders of the
oil-rich states of the Middle East that they must face up to a future
without their precious hydrocarbons.

In a stark warning, he
said their supplies were running out and urged them to reform and
diversify their economies. The outgoing United States president told
the World Economic Forum, meeting in the Egyptian resort of Sharm
el-Sheikh, that it was time to "prepare for the economic changes ahead".

"Over time, as the world becomes less dependent on oil, nations in the
Middle East will have to build more diverse and more dynamic economies."

Ha ha ha. I threw this article in
for a little ironic humor. First, it's funny, because Bush is lecturing
another country besides his own about some coming 'economic
adjustments' due to energy. Second ,because Bush thinks those
adjustments will happen because the US will 'find alternatives' - as if
the $1 billion a year in tax credits by the US government was going to
somehow make a difference. Our president is so seriously out of touch,
all I can say is that he is providing excellent comedic value at a time
when our nation sorely needs a good laugh.


Peak oil and politicians (May 17 – Truthout)

To be clear, peak oil is often misunderstood. The
date that the world reaches peak oil is not the date we actually run
out, but the date that we stop increasing production. This is followed
by a "plateau" where oil production is flat. Eventually, oil production
will decline.

Even a plateau is a big problem for a world
economy that is based on growth. In a world where 850 million are still
going hungry and 3 billion out of 6.5 billion live on less than $2 a
day, stagnant oil production means an end to development models based
on economic growth. The statistics show that oil production has been
flat for more than two years now.

These facts are simple. As
Hubbert said back in 1956: "Nothing sensational about it, just
straightforward analysis." And yet the most powerful institutions in
our society continue to do everything they can to avoid confronting the
truth.

I put this article in as good
background, especially for those who might be wondering about where the
US stands politically on the subject of Peak Oil. Also, it makes the
important point, which apparently cannot be repeated often enough
because the US press is still confused on the matter, that "Peak Oil"
is not the same as "running out of oil." It is the moment after which
less oil comes out of the ground each year and does so more grudgingly
and expensively.


Not Enough Oil Is Lament of BP, Exxon on Spending (May 19 - Bloomberg)

Never have so many oil and gas companies spent so much to produce so little.

That's the challenge facing Exxon Mobil Corp., Royal Dutch Shell Plc,
BP Plc, Chevron Corp., Total SA and ConocoPhillips, which will spend a
record $98.7 billion this year on exploration and production, Lehman
Brothers Holdings Inc. estimates. Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labor and material.

The wagers are buttressed by delays at fields including Kashagan, a
Kazakh deposit where the budget has more than doubled to $136 billion
and the first production is eight years behind schedule. Waters frozen
half the year forced contractors to build artificial islands, while
care must be taken to protect workers from deadly hydrogen sulfide
fumes emitted by the wells.

"The future is going to be very
trying for the international oil companies,'' said Robert Ebel,
chairman of the energy program at the Center for Strategic and
International Studies in Washington. "There's no more easy oil for them. Kashagan is a shining example of the problems they face bringing new oil into play."

"The international oil companies cannot dictate the tempo any more,''
said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. ``They can try projects that didn't work two years ago, but it's not a question of money. They don't have access to resources."

Very simply, big oil companies are
spending several times as much to find and produce a faction of the oil
that they were producing even just a few years ago. Much of this
article seeks to blame geopolitical tensions as the culprit, but never
addresses why we might be finding so much less oil in all of the places
where there are no tensions. Bottom line, there's less oil to find and
produce.


Russia's oil exports down 3.3% to 448 mln bbls in Jan-March (May 19 - RIA Novosti MOSCOW)

Russia's crude exports declined 3.3% year-on-year in the first quarter to 61.1 million metric tons (448 million barrels), the country's top statistics body said on Monday.

Here's some very recent data that
confirms the fact the Russia is possibly past peak. Since Russia is the
#2 exporter, this is very concerning. If Russia stops exporting in 6 to
9 years, where will we find a replacement Russia? Perhaps we can just
ask Congress or the US stock market, as both seem utterly unconcerned
by this data. Maybe they know.


Far From Normal (May 20 – Jim Kunstler)

Those were the words that Fed chairman Ben Bernanke
used to describe the financial markets (and by extension the economy)
these heady spring days when everybody else with a rostrum, it seems,
has pronounced the so-called liquidity crisis contained. There's a
great wish for American finance to return to business-as-usual --
raking in fantastic fees for innovating new modes of tradable paper,
and engineering mergers and buy-outs that generate huge fees plus $100
million kiss-offs for corporate CEOs in the noble struggle to dismantle
America's productive capacity -- but apparently events are still out of
hand.

The Federal Reserve itself has been instrumental in
promoting abnormality by doing everything possible to prevent the
work-out of bad debts in the system. Since money is loaned into
existence, and loans are debts, the work-out of bad debt suggests the
discovery that a lot of money has disappeared -- which is exactly the
case. The Fed has postponed the work-out by sucking up truckloads of
impaired, untradeable securities in exchange for loans to giant banks
who don't have enough cash on hand to pay their janitors.


Jim Kunstler does not pull any
punches and does a fantastic job of summarizing just how absurd the US
financial markets have become. I recommend reading Jim to anybody who
harbors the notion that we can simply wave a few magic wands and get
back to busily trading paper as the basis of 'what we do.' Jim's blog
is one of several that I have permanent links to on my "Resources"
page. You can find the link in the navigation bar to your left.


Citi-run group wins Pa. Turnpike lease (May 19 – Marketwatch NEW YORK)

A consortium led by a unit of Citigroup and Spain's
Abertis won a $12.8 billion auction to lease the Pennsylvania Turnpike
for 75 years.

"Under the terms and conditions we set, the turnpike will be upgraded and tolls will be no higher than the Turnpike Commission will charge,"
Pennsylvania Governor Edward Rendell said in a press release. "Where
Pennsylvanians will see a major difference is on our other roads. Road
repair all over the state will accelerate and we will be able to cancel
the plan to impose tolls on Interstate 80."

Let's see here, public land was used
to build public roads using public financing. Now many states, like
Pennsylvania, have found that they are losing money by collecting taxes
and performing road maintenance. So they've decided to "lease" them for
75 to 99 year terms to private companies in exchange for a one-time
cash infusion. The idea here is that private companies are going to be
able to provide better maintenance AND make a profit (of course), AND
we're told our fees and tolls won't go up. Suuuuuuuurrrre. Your public
assets, upon which you rely, are being sold off for a song by state
legislatures that would rather avoid making any hard spending choices
today in exchange for a few bucks and a near-permanent loss of public
assets.


Producer prices rise tame 0.2% in April (May 20 – Marketwatch WASHINGTON)

Wholesale prices rose a smaller-than-expected 0.2%
in April after seasonable adjustments, with food prices flat and energy
prices falling, the Labor Department reported Tuesday. The producer
price index has risen 6.5% in the past year, the government said.

The core PPI - which excludes food and energy prices - rose 0.4% in
April, more than expected. Core prices are up 3% in the past year, the
biggest year-over-year rise since late 1991.

The government's
data are seasonally adjusted to hide the impact of normal seasonal
variations to focus on fundamental changes in prices that are not
driven by the ebbs and flows of the seasons. Because energy prices
typically rise more in April than they did this year, the seasonally adjusted figures showed a 0.2% decline. In unadjusted terms, energy prices rose 2.9%.

Wholesale gasoline prices fell 4.6% in seasonally adjusted terms, but rose 3.2% in unadjusted terms.

Oy vey! I thought the CPI was a load, but this is
even worse. I, I, I,...uh, I'm nearly at a loss for words. The Producer
Price Index (PPI) measures the prices that manufacturers pay for their
crude, intermediate, and finished goods. Note the vast gap that exists
between the reported figure of a 0.2% month/month decline in energy
prices and the 'unadjusted' number, which was a staggering 2.9%.

Also, and somewhat mysteriously, the government calculates that the
three areas of prices are up only 6.5% year over year. As bad as that
is, it is most likely off by a factor of 2. In the table below, which I
lifted straight from the BLS website, we can see the basic input values
for each of the three main areas. Here's the basic math question: how
does one average together 6.5%, 10.5%, and 34.3% and determine that,
overall, inflation was 6.5%? That's a real head scratcher.


What’s next for the economy? Look at California (May 19 – Financial Week Reuters)

As it did when the housing bubble began to burst, California is leading the way in the next leg: a consumer bust.

Squeezed by rising unemployment, inflation in food and energy costs and
plunging house prices, Californians are cutting back on spending.
Besides causing woes for state and local government, this is giving
California’s economy another knock and makes further job losses, home
repossessions and banking problems more likely.

The figures
are pretty bad. The median home price has fallen by 29% in the year to
March, according to the California Association of Realtors, and
repossessions are surging. Unemployment has risen by 24%, to 6.2%, in
the same period.

But most importantly, in the 10 months to the
end of April sales tax receipts in California are actually down in
absolute terms. Gasoline tax receipts are essentially flat. When you
factor in that there would have been considerable inflation during the
period, and that some essentials like gasoline will have risen sharply
in cost, the picture is clear: Californians are tightening their belts.

And California
matters. It accounts for 13% of U.S. GDP. It was also where more than a
third of the non-mainstream home loans such as subprime and Alt-A were
made in 2006 and 2007, making it very important to the health of the
banking system.

California is not "just one state
out of 50." It is the seventh largest economy in the world, and the #1
largest economy within the US. As goes CA, so goes the rest of the
country. That last part in bold is worthy of some pondering.


More Atlanta homes at risk; Clayton hardest hit (May 19 - Atlanta Journal)

Foreclosures have reached record levels across metro Atlanta. And every new wave of foreclosed properties hurts values in a real estate market already flooded with houses for sale.

Metro Atlanta posted high rates of delinquent mortgages even though it
had not experienced the dramatic run-up in real estate prices that
states such as California and Florida experienced. Metro Atlanta also
differs from Ohio and Michigan, where the economy has taken a nosedive.

"Atlanta doesn't have any of those characterizations of a super-hot
bubble or a super-weak economy, but it's still tracking the national
numbers," Immergluck said. "I think that has something to do with the
Wild West lending around here."


One refrain I hear plenty of,
including in my own area, is some version of "we didn't really have a
huge run-up in house prices here, so therefore we're going to avoid a
big run-down." That's simply not the case. Atlanta is a perfect example
of that. While some areas, and very few in my estimation, might avoid
some of the downward adjustment of house prices, most won't.

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