Blog

Week of May 5, 2008

Sunday, May 11, 2008, 12:38 PM

Medvedev Boxed In by Oil as Putin Bequeaths Economic `Dead End' (May 5 - Bloomberg)

The government has ignored advice from the World Bank and other
organizations to invest in other industries, start-up companies and
infrastructure. Instead, the central bank has amassed $530 billion in
gold and foreign-currency reserves; Putin has put $130 billion of that
in a sovereign-wealth fund that would provide no more than a two-year
cushion if energy prices fall.

I find it slightly distasteful that the World
Bank is chiding Russia for building up its foreign reserves, which are
a form of savings. Rather, I think the World Bank should be chiding the
US (and the UK and Europe) for failing to save. And perhaps Russia sees
something in the future of the energy markets that the West does not,
eh? Something that would cause it to want to buy gold in favor of
building up a lot of new, energy-intensive industries?


IRAN

United States is drawing up plans to strike on Iranian insurgency camp (May 4 - Timeonline)

The US military is drawing up plans for a “surgical
strike” against an insurgent training camp inside Iran if Republican
Guards continue with attempts to destabilise Iraq, western intelligence
sources said last week. One source said the Americans were growing
increasingly angry at the involvement of the Guards’ special-operations
Quds force inside Iraq, training Shi’ite militias and smuggling weapons
into the country.


Poke. Poke. Poke. If the US does not
manage to provoke a war with Iran before the November elections, I will
be somewhat surprised.


ECONOMY

BofA may renegotiate Countrywide deal price
(Reuters)

Bank of America Corp is likely to renegotiate its
deal to buy Countrywide Financial Corp down to the $0 to $2 level or
completely walk away from it, said Friedman, Billings, Ramsey, which
downgraded Countrywide to "underperform" from "market perform."

Countrywide's loan portfolio has deteriorated so rapidly that it
currently has negative equity and the proposed takeover of the company
will be a drag on Bank of America's earnings due to the elevated credit
expenses at Countrywide, analyst Paul Miller wrote in a note to
clients.

Countrywide (CFC) is toast, and Bank of
America, lauded last year for their "savvy professionalism" in picking
up CFC on the cheap. At the time, a few observers thought it one of the
worst mistakes ever, myself included, because CFC was accumulating a
massive portfolio of foreclosed homes and the state of their balance
sheet was unknown. Now Bank of America seemingly wants to walk away,
but is really angling for another Fed guarantee. That's not to say BoA
won't walk away, it's just they'd prefer to get a sweet deal like JPM
did when they acquired Bear Stearns.


PEAK OIL

We're Nearing Crunch Time for Oil
(May 04 - Seeking Alpha)

It’s looking increasingly like Crunch Time for oil
will be in effect during the 2010 to 2016 time frame. I’m being
optimistic in forecasting an end date for it, but the starting time is,
if not etched in stone, predictable with some substantial certainty. If
any new reader wants to understand why supplies will diminish sharply
around 2010, click on megaprojects, Mexico, Saudi Arabia, Russia, oil
demand, and oil supply. You should be up to speed in about half an
hour.

Crunch Time is when global supplies will start diminishing while
demand is still trying to grow. It’s when the price of oil will move
into the stratosphere as poor countries and poor people are priced out
of the market and competition for oil is mainly between the wealthy. As
I’ve analogized before, it will be similar to the competition for
waterfront real estate in Palm Beach. And you know the price of that.

Peak Oil will change everything you know and
experience in life. It is past time to stop waiting for our authorities
to publicly proclaim that we have a problem and to begin the long
process of preparing yourself and your community. See next four
articles for confirmation of the reality of plateauing oil production.




Mexican oil production is a concern for U.S.

(May 4 - The Advertiser)

Mexico's oil production is in a dangerously steep
decline. Why should that matter to the United States? Because Mexico
exports 1.2 million barrels of oil per day to the United States, which
is 8 percent of the U.S. supplies.

Mexico ranks third behind Canada and Saudi Arabia in exports to the
United States. In an already tight oil market it would be difficult for
the United States to find another million-plus barrels. And if we
could, it would likely come from a shakier supplier.

As fast as Mexico can announce a projected
decline in production, they have to amend it to match an even sharper
decline in actual production. There are simply no 'spare' 1.2 million
bpd countries lying around out there....




Russian April oil output falls again; exports rise

(MOSCOW, May 4 - Reuters)

Russian oil production fell for a fourth month in
row in April, confirming pessimistic forecasts for the year, when it is
expected to fall for the first time in a decade, while exports rose on
the back of improved weather.
Energy Ministry data released on Sunday showed production stood at 9.72
million barrels per day, down from 9.76 million bpd in March and over 2
percent lower compared to the post-Soviet high of 9.93 million bpd in
October last year.


As goes Russian exports, so goes the world's oil supplies...and the western economies...



North Sea oil's ebbing tide (May 4 - The Observer)

According to the pessimists, the rigs off Britain's
coast could cease pumping in a decade's time. But, as Tim Webb warns,
the oil giants could depart leaving 9 billion barrels under the sea bed
- because the economics of residual fields simply don't add up.

This article points out that the North Sea is
not only declining faster than thought, but the remaining assets might
be uneconomical to produce at any price. How can this be? Well, it
takes energy to drill for oil so while it may be 'economical' this year
to drill for the remaining North Sea oil, it might not be next year if
the cost of drilling advances to the point that it exceeds the economic
return. This is why I cringe whenever I hear statements (frequently)
along the lines of "shale oil becomes economical at $50/barrel." Yes,
that might be true at the time the sentence is written, but as as oil
prices climb, so does the cost of everything else, especially the cost
of drilling and production equipment, which means the economics shift
right along with oil prices. So when oil was $0, shale oil was
economical at $50, but when oil went to $50, shale oil became
economical at $60, and so on.



Plateau - Non-OPEC production of crude oil seems to have stalled, promising even higher prices at the pump. (May 3 - Houston Chronicle)

The theory of peak oil holds that at some point — a year from now, a
decade — global production of crude will peak, possibly plateau and
then inexorably decline. On the eve of the Offshore Technology
Conference here, the latest production figures for non-OPEC sources, 60
percent of global supply, indicate output has stalled at about 50
million barrels a day.

The flat production is particularly worrisome, because it comes at a
time of record-high prices that ordinarily would stimulate production
growth. As that has not occurred, the world's capacity to produce oil
from conventional sources might have been reached.

The obstacles to increased production are many: Drilling costs have
climbed. Trained workers are scarce. Production from older fields in
the North Sea and Alaska is at 40 percent to 60 percent below their
peaks. Most of the world's oil reserves are controlled by national oil
companies and are out of the multinationals' reach.


The Houston Chronicle? In the heart of the oil patch? Using the words "peak oil"? Uh oh
.


Oil Rises to Record After Report Shows Service Industries Grew
May 5 (Bloomberg)

Crude oil rose above $120 a barrel to a record in New York after a
report showed that U.S. service industries expanded in April, signaling
higher energy use.


Okay, I only put this one here to show you how the mainstream media
often goes to silly lengths to create connections where none exist. Oil
is going up because it's in short supply and has been that way for
years. The service industries are famously non-reliant on oil
energy...so the thought that the reason oil nearly breached $120 on
this particular day was because of a survey of the conditions in the
services area is, well, silly.


Fannie, Freddie to Report Third Loss on Credit Costs
May 5 (Bloomberg)

Fannie Mae and Freddie Mac, the largest U.S.
mortgage-finance companies, will likely report losses for the third
straight quarter amid the worst housing slump since the 1930s,
bolstering their need to raise more capital.

The companies, which own or guarantee 40 percent of the $12 trillion in
U.S. residential mortgages, are reeling from record home foreclosures
and delinquencies that have pushed their shares down more than 50
percent over the past 12 months. Fannie Mae and Freddie Mac may each
need as much as $15 billion in capital after more than $9.4 billion of
mortgage-related losses, analysts surveyed by Bloomberg said.

Note that 40% of $12 trillion is $4.8
trillion, so this means that the additional $15 billion that Fannie and
Freddie will seek represents 0.3% of their total portfolio.
Hmmmmmmm........I wonder if 0.3% is going to cover it?


Barton Biggs Says Economy to Grow, Sees Stocks
May 5 (Bloomberg)

The U.S. economy will grow in the second half of
2008, the Standard & Poor's 500 Index may climb to a record this
summer and commodity prices will retreat as much as 30 percent, hedge
fund manager Barton Biggs said.


I put this article here to contrast with the one below. Whom to believe?

`Suckers' Rally' Signaled After S&P 500 April Surge
May 5 (Bloomberg)

The biggest rally in the Standard & Poor's 500
Index in more than four years is luring investors to equities from
cash, just as options traders are betting the advance will evaporate.

Jean-Marie Eveillard, who runs the $22 billion First Eagle Global Fund,
is skeptical the gains can last because the worst housing slump since
the Great Depression will reduce earnings. S&P 500 companies were
valued at 22.7 times profit last week, the most in four years. Options
traders are paying 63 percent more to protect against a drop in the
S&P 500 than to bet on a gain, the widest difference since at least
2005.

``It may be a suckers' rally,'' said Eveillard, who is based in New
York. ``Investors want to believe. But if I'm right, then there's truth
to the argument that this is the worst financial crisis since the end
of World War II. The same kind of reflex is the wrong reflex.''


Certainly are a lot of divergent opinions
out there about where the stock market is headed. This is certainly one
of the harder investing environments I've ever witnessed, mostly
because there really are very few investments to make right now; only a
lot of speculations.


Metals Surge as Rationing Cuts Power at Biggest Mines
May 5 (Bloomberg)

Chile's worst drought in five decades and power
rationing from South Africa to China mean the price of aluminum, gold,
copper and platinum will keep climbing as the lights go out in the
world's biggest mines.

Those governments are being forced to choose whether to reduce power to
their 1.4 billion residents or curtail energy supplies to the world's
biggest copper, aluminum, platinum and gold factories. The energy used
by China's aluminum smelters each week could provide enough power for
more than 2 million people for an entire year.

Runaway growth in emerging markets that's squeezing world oil supplies
has led to electricity shortages, cutting output of commodities needed
for ever-rising demand. Platinum jumped to a record in January after
mines in South Africa closed for five days as utilities rationed power.
Cobalt gained 58 percent in the past year as production growth in the
Democratic Republic of Congo was limited by electricity supply.


If you were going to lock yourself in a
room and write a scenario for what events might mark the top of Peak
Oil, something like this article would have to be right at the top of
your list. Right now all the articles chronicling the various problems
in food production, oil prices, and metals mining have managed to steer
clear of recognizing that Peak Oil might be playing a role in the
stories...but not for much longer, I suspect. The 8000 pound elephant
in the corner is starting to become a bit too obvious.


Countrywide Takes Away Home-Equity Credit Lines in Las Vegas
May 6 (Bloomberg)

Since January, Countrywide, Bank of America Corp.,
Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about
600,000 equity credit lines nationwide, said Michael Kratzer, president
of a Bankrate Inc.-owned Web site that's fielding consumer complaints.
The lenders are targeting borrowers in cities where property values are
falling, including Las Vegas, Chicago and Los Angeles, he said.

Frozen credit and real estate declines are putting a chill on spending
and hurting the economy. In February, taxable sales in Clark County,
Nevada, which includes Las Vegas, fell 3.1 percent from a year earlier,
dropping 13 percent at furniture stores and 6 percent for durable-goods
wholesalers. In the same month, as it became harder to borrow money
across the U.S., consumer spending rose at the slowest pace in more
than a year.

``It's really putting borrowers in a panic,'' said Kratzer, president
of feedisclosure.com in North Palm Beach, Florida. The amount of credit
frozen nationally may be $6 billion, based on an assumption that the
600,000 borrowers each had $10,000 available, he said.

If you watched "Debt" in the Crash Course,
you are aware of the 23-year-long experiment with ever-increasing
amounts of debt. For consumers that have grown accustomed to going
deeper into debt when required, the trend outlined in the article above
is really nothing short of a disaster.



U.S. April Business Bankruptcy Filings Increase 49%
May 6 (Bloomberg)

U.S. business bankruptcy filings in April increased 49 percent from a
year earlier, the biggest gain so far this year, as the slowing economy
prompted more companies to shut down.

Business filings rose to 5,173 during the month, according to
statistics compiled from court records by Jupiter eSources LLC in
Oklahoma City. Total bankruptcy filings, including those by
individuals, were up 31 percent from a year earlier to 93,096, the
group said.

As predicted, business bankruptcies are now
on the rise. No surprise there; that is simply a feature of recessions,
especially the ones that were fueled by reckless amounts of cheap
credit. The next prediction I have is that Credit-Default Swaps - meant
to protect bondholders against default - will be the the type of
derivative that will finally wreck the illusion that "all is under
control."


U.S. Q1 productivity up 2.2% as hours worked drop (May 7 - CBSMW
WASHINGTON MarketWatch)

Productivity of the U.S. non-farm business sector accelerated to a 2.2%
annual rate in the first quarter, as businesses slashed working hours,
the Labor Department estimated Wednesday. Economists were expecting
productivity to rise 1.8% in the first quarter. Unit labor costs - a
key inflationary signal - rose at an annual rate of 2.2% in the first
quarter. Economists had expected a 2.6% gain. Real hourly compensation
rose 0.1%. Compared with the same quarter a year ago, productivity was
up 3.2% while unit labor costs rose 0.2%. This is the smallest gain in
labor costs since 2004.

From one lie springs all the rest. Since the
official measures of inflation no longer reflect reality, it means that
all of the measures derived from inflation are either less useful
themselves or are entirely useless. Remember, inflation is deducted
from GDP, so if inflation is understated, GDP is overstated.
Productivity, as described in the article above, is derived from GDP.
Specifically, output (GDP) is divided by input (mainly labor). So if
the output is overstated, the productivity will be overstated. As
always, be very discriminating about which numbers you choose to
believe. While it can be painfully boring, my preference has been to
take the time to understand how the numbers are gathered and how they
can be 'spun,' which allows me to maintain a healthy level of
skepticism.



European Retail Sales Drop by Record on Rising Costs
(May 7 - Bloomberg)

European retail sales declined 1.6 percent in March, the most since at
least 1995 and twice as much as economists forecast, as soaring fuel
and food costs sapped consumer spending. The drop in euro-area retail
sales from the year-earlier month is the largest since the data series
began more than a decade ago, the European Union's statistics office in
Luxembourg said today.

Two things that the Eurozone does, but we do
not do over here, are to maintain a reasonably accurate means of
measuring inflation and then to deduct that inflation from consumer
spending. So Europe always seems to be getting hit faster and harder
than the US during downturns. However, from my perspective, it may
simply be that they tell a more accurate story to themselves than we do
over here.



High metal prices have Congress looking at switching to steel for pennies, nickels
(May 6 -
WASHINGTON)

Further evidence that times are tough: It now costs
more than a penny to make a penny. And the cost of a nickel is more
than 7 1/2 cents.

Surging prices for copper, zinc and nickel have some in Congress trying
to bring back the steel-made pennies of World War II, and maybe using
steel for nickels, as well.

Now this is actually kind of funny. On the
one hand we have the government claiming, as they did for the most
recent GDP reading, that inflation is only 2.6% per year, but on the
other hand we have a spending crisis going on over at the mint which is
losing money hand over fist due to massive inflation in metals. And not
even precious or semi-precious metals: we're talking copper, nickel,
and zinc. I mean, really, now, how much longer do we have to put up
with the massive gap that exists between the official inflation
measures and reality?



Vallejo votes to declare Chapter 9 bankruptcy

The Vallejo City Council voted to declare
bankruptcy Tuesday night after months of last-ditch wrangling failed to
rescue the city from financial catastrophe.

The North Bay city of 117,000 now heads into largely uncharted
territory, as no California city of this size has ever opted for this
route.

"This has been a long frustrating process for everyone," said City Manager Joseph Tanner. "There are no winners here tonight."


We've had growing levels of insolvency at the personal, and then
corporate, and now, finally, at the city level. I've had my eye on
Vallejo for a while and am not particularly surprised by this news. I
am only wondering how many other cities are close to the same level of
crisis. My best guess is that the next city to do this will be San
Diego. California cities are more prone than most, due to the high cost
of state-mandated pensions for city workers. Consider that most public
servants can retire after 25 years at 80% of salary, and you'll quickly
understand the dimensions of the problem - many people collect
'retirement' benefits for more years than they actually worked in their
positions.



Corporate defaults on upswing as debt comes due
(By Matt Krantz, USA TODAY)

Companies counting on consumers spending like there's no tomorrow are finding tomorrow may not be as bright as they'd hoped.

Corporate defaults, including the owner of the Tropicana casinos this
week, are reaching levels not seen in years as companies struggle with
a fickle bond market and nervous consumers.

Already this year, 27 U.S. companies have defaulted on their debt,
according to Standard & Poor's, exceeding the 16 companies that
defaulted in all of 2007. Many of these companies, including Tropicana
Entertainment, have already filed for bankruptcy protection.

Bankruptcy experts say the uptick in defaults is just beginning,
because massive amounts of debt will come due at a much faster pace in
about a year.

"The flood hasn't come yet, but the leading wave of the flood is in
sight," says Martin Zohn, head of the bankruptcy practice at law firm
Proskauer Rose.


More news on the corporate default issue. Well written, and worth a read.


Economy

California mulls options to cut $20bn deficit (May 7 - The Financial Times)

California state legislators are considering radical revenue-raising
measures including a new services levy and a temporary tax on high
earners to address a budget crisis that has spiralled into a $20bn
(€12.98bn, £10.1bn) deficit.

John Laird, a Democratic assembly member, said the state should look at
exploring alternative revenue-raising measures. "A $20bn deficit is 20
per cent of our general fund," he said. "A cuts-only strategy is
unsustainable and untenable."

However, California is entering a recession and the state's revenue
base is declining, which may force the governor's hand. Mr DeVol said
the fiscal picture could be worse than publicly acknowledged by state
officials. "The [budget] outlook is based on slow growth, not a
recession," he said.

California is in for some tough times.
Accustomed to continuous growth, and the poster-child for false,
bubble-fueled lifestyles, California will be sorely tested over the
next couple of years. The $20 billion shortfall in state revenues is
staggering and represents 20% of their total budget. Last time they had
a similar, though smaller, crisis, Governor Schwarzenegger put a
referendum on the ballot that sought to avoid fiscal insolvency for the
state by selling bonds. The debt-for-current-spending plan passed by a
vigorous margin, as voters elected to have future citizens make the
tough decisions. Note that the current shortfall may be much larger
than projected because it is based on continued growth, not a
recession. For more on this, see the next article on down.


Vallejo, California, Residents Foresee Cuts as Bankruptcy Looms (May 8 - Bloomberg)

Vallejo, with a population of 117,000, is being
squeezed by declining home sales that have rippled through its economy,
cutting into the taxes it relies on from local retailers and home
owners. It has been pushed to the breaking point, city officials say,
by union contracts with firefighters and police it can't afford or
renegotiate.

After talks with unions stalled, the seven members of Vallejo's city
council decided unanimously to approve filing for bankruptcy.

According to a report by City Manager Joseph Tanner, the city would
otherwise face "draconian" cuts to close a $16 million budget shortfall
that would leave the community faced with deteriorating roads and
public buildings and rising crime.

"This is dire," said Councilwoman Erin Hannigan. "We are at rock bottom."


Note that Vallejo, like many other cities in CA, is being sunk by past
pension promises that are simply too large to bear. This is shaping up
to be one ugly fight, because it pits past workers against current
needs. What should the citizens give up? Their town services, or
promises made by past politicians to past workers? There are no easy
answers here, but my observation is that the past promises made to
municipal employees were fantastically over-generous and they will need
to be renegotiated. This same dynamic is already hitting my town in MA,
and I expect this to be a fairly common experience all across the
country.


Europe and US unite on stronger dollar (May 8 - The Financial Times)

The US and Europe now have a united desire to see the dollar strengthen
against the euro, senior officials have told the Financial Times.

Policymakers welcome the recent rebound in the dollar, which at one
point on Wednesday rallied to a six-week high against the euro. They
are concerned that the currency markets have been paying too much
attention to short-term economic weakness and market stress in the US,
and not enough to the medium-term prospects for the US and Europe, a
senior US official said.

Senior Eurozone officials believe that the dollar-euro rate had reached levels unhelpful to both the US and Europe.


As usual, I am both amused and annoyed by the so-called monetary
authorities who speak of currencies as if they have a "right level"
that can be set by fiat, or policy. These articles never mention any
awareness on the part of the authorities that market fundamentals
should somehow play a role in setting the currency prices. While the
Eurozone is also overproducing money in horrendous quantities, they are
nowhere near as reckless as the US, and that is why the dollar is
falling. Instead of seeking to legislate a trading value, which is
hopeless, I would prefer to see them make some constructive comments
which could help. Specifically, they should call on the US to reign in
its deficit spending, set to hit $400b to $500b this year; control its
trade deficit, still well over $700b for the year; and boost its
domestic savings rate.


Rice Gains for Fifth Day on Myanmar Cyclone, Increased Demand
(May 8 - Bloomberg)

Rice gained for a fifth day after a cyclone in
Myanmar flooded 5,000 square kilometers (1,930 square miles) of
farmland, and Malaysia began imports from Thailand.

Rice futures, which touched a record last month, rose as much as 3.5
percent to $22.35 per 100 pounds on the Chicago Board of Trade,
bringing this year's increase to 61 percent.

The purpose behind posting this article is to
make a point about supply, demand, and prices. So many of the basic
materials of life are in such thin supply relative to demand, that it
only takes one bad piece of news to upset the markets. In this case,
rice was already in short supply, and now, after a single storm in one
corner of the world, rice prices are shooting upwards as a result.
Ditto for oil and the Nigerian unrest. In a well-supplied market, such
stories are noted but mainly shrugged off. These sorts of incidents are
telling you something. The age of shortages is here. We can adapt, and
we will change, but the old days of massive bounty are receding into
the rear-view mirror


Infrastructure

On the pot-holed highway to hell
(May 7 - The Financial Times)

If anyone doubts the problems of US infrastructure, I suggest he or she
take a flight to John F. Kennedy airport (braving the landing delay),
ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway
and try to make a mobile phone call en route.

That should settle it, particularly for those who have experienced
smooth flights, train rides and road travel, and speedy communications
networks in, say, Beijing, Paris or Abu Dhabi recently. The gulf in
public and private infrastructure is, to put it mildly, alarming for US
competitiveness.

Americans may not like the sound of that, but they cannot expect the US
to maintain the economic dynamism of the late 20th century in the 21st
unless they buckle down. Sooner or later, wishful thinking is going to
crash into financial reality.

Ouch. And right on! Of course it takes a Brit
to come over and write about this subject. It takes fresh eyes, I
suppose. I have a running joke with a good friend of mine who happens
to travel a lot to places like Nepal and Pakistan, and the joke is that
if he's calling me and I can hear him fine and we don't lose the
connection, I know he is in one of those countries. This article
accompanies the bit I did in Chapter 13 of the Crash Course, which
speaks to the horrid state of the US infrastructure. You should read
the article, because it makes it clear that a crumbling infrastructure
is a serious impediment to the future prospects of a country. To
paraphrase an old saying: broke and crumbling is no way to go through
life. See next.

Aging systems releasing sewage into rivers, streams (May 8 - USA Today)

America's aging sewer systems continue to dump
human waste into rivers and streams, despite years of fines and
penalties targeting publicly owned agencies responsible for sewage
overflows, a Gannett News Service analysis shows.

The analysis of Environmental Protection Agency (EPA) data found that
since 2003, hundreds of municipal sewer authorities have been fined for
violations, including spills that make people sick, threaten local
drinking water and kill aquatic animals and plants.

If you are a homeowner who has tangled with the
state septic board, this article has to leave you somewhat angered. For
you or I, if our septic system is judged to be "sub-standard," even
though it may not be leaking or near a body of water, we have to fix
it, immediately and at great cost, usually in the thousands of dollars.
Meanwhile, states and municipalities regularly dump tens of billions of
gallons of untreated sewage straight into the waterways. Leaving that
issue aside, this article provides a great summary of the state of our
sewage treatment facilities, and the news is sobering. These systems
need fixing and they will be fixed. I just wish we'd been doing this
back when the credit bubble funds were still flowing freely. During a
recession? No, that's not how I would have done it.


Energy

Energy
Oil nears $124 as market tightens

(May 8 -The Financial Times)

Oil continued its record breaking run which has
seen crude prices reach new peaks each day this week while gold was
little changed ahead of interest rate decisions in Europe on Thursday.

Nymex June West Texas Intermediate came within touching distance of the
$124 level, hitting $123.90 a barrel before easing back to trade 1 cent
higher at $123.54.

ICE June Brent rose 15 cents to $122.47 after hitting a new peak at $122.79.

The global oil market continues to show signs of tightening in spite of
crude prices almost doubling in the past year. Opec output fell in
April, with Nigeria and Iraq leading the cartel’s production decline.
Opec production fell by 320,000 barrels a day to average of 32.05m b/d
in April.


Oil keeps marching higher and higher...I
simply don't know of too many ways to view this data besides concluding
that the market participants think that oil at these levels is worth
buying. What do they know?

[Natural] Gas customers feeling the pressure
(May 8 - Herald Journal)

Northern Indiana Public Service Company customers
will continue to feel the pressure of rising prices with an
announcement this month of yet another increase in the cost of natural
gas.

The month of May makes four times in a row NIPSCO has called for an
increase and it's the eighth month in the past year to see costs for
natural gas go up.

The latest increase of 14.7 percent, or approximately $10.25 per month
more for residential customers using 50 therms, is the largest increase
so far with April's increase of 12.75 percent running a close second.


The other thing we need to keep a close
eye on is Natural Gas (NG), which is used to provide a huge proportion
of our peak demand electricity, for heating and cooling homes, and as
the feedstock for innumerable industrial processes such as making
fertilizer. While it is well known that our NG supplies are dwindling,
and may already be past peak on the North American continent, I see
very little awareness of this fact, let alone concern. In truth, a NG
crisis would be potentially more immediately harmful that an oil crisis
because of how NG is used. For instance, a NG crisis would lead to
electricity shortages, especially during moments of high demand, such as
during a heat wave.

Conservation or 'total meltdown' (May 8 - Courier Times)

Gov. Ed Rendell came to Bucks County Wednesday to call for nearly $1
billion in clean energy grants and conservation programs and he warned
the state was on the “brink of disaster” from utility bills that could
soon skyrocket.

Speaking of utility bills....Pennsylvania's
Governor is speaking in dire terms about their mounting bills and is
seeking to boost alternative energy sources.

Iran supply problems add to fears of oil hitting $200 a barrel (May 7 - Times Online)

The Iranian petroleum industry needs foreign investment and, despite
the country’s vast oil and gas reserves, is struggling to maintain
production levels, according to industry experts.

Although Iran is Opec’s second-largest exporter, production at the
country’s leading oil and gasfields is believed to be falling by as
much as 10 per cent annually because of a lack of investment and
expertise.

Here's another data point suggesting that a
single problem with a single supplier could upset the oil markets.
Again, this is a sign that the oil market is extremely tight and
confirms my view that we are about to experience a supply-demand
crossover event. My expectation is that such an event will unfold
roughly like the food crisis. One day everything will seem fine and
then, rather suddenly, perhaps over the course of only a week or two,
recognition will suddenly dawn that there's actually not enough oil for
the world at any price. National hoarding by producers will erupt and
prices will skyrocket and gyrate wildly. I hope I'm wrong, but the
signs ar getting clearer and clearer....


IMF warns on global inflation (May 8 - Financial Times)

Global inflation has re-emerged as a major threat to the world economy,
the International Monetary Fund said on Thursday in a stark warning
that marked an abrupt change of tone from its emphasis on the risks to
growth.

John Lipsky, IMF deputy managing director, said “inflation concerns
have resurfaced after years of quiescence” due to soaring energy and
food prices. Mr Lipsky said global growth was slowing but headline
inflation was “accelerating”.

In an indication the commodities boom may not be the bubble imagined,
Mr Lipsky said the forces pushing prices up “appear to be fundamental
in nature” – and these were being amplified by lower US interest rates
and the dollar’s decline.

Ah! Finally we have an official on record
talking about the impact of a gusher of money on commodity prices. Of
course, he was oblique, and only said that "lower US interest rates"
were "amplifying" fundamental trends. There are two reasons lower US
interest rates would drive commodity prices. One is that when interest
rates slip below the rate of inflation (a.k.a. "Negative Real Rates"),
commodity speculation tends to 'take off' as investors seek places to
put their money where it won't be destroyed by inflation. The second
reason is that low interest rates are accommodative and support growth
of the money supply. More money = inflation. Always does, always will.
Still, this is as close as I've seen any official source get to the
real driver of inflation. So far....


Cost slows nuclear plant drive (May 7 - Chicago Tribune)

As crude oil briefly leapt Tuesday to a record
$122.73 a barrel, and one analyst suggested the price might soon reach
$200, America would seem poised for a nuclear power resurgence.

But enthusiasm for a nuclear future was muted at an industry conference
Tuesday in Chicago, as executives acknowledged financial, regulatory
and waste storage hurdles have raised uncertainties about costs.

Other factors increasing the expense of construction include high
demand for nuclear plants in emerging countries, along with limited
supplies of reactor parts and increased prices for iron, steel and
concrete.

As a result, the estimated price of a nuclear reactor has more than
doubled, to upward of $9 billion, in less than a year, according to
industry estimates.


I post this article not make any specific
claims about nuclear power but as a direct confrontation to the
official proclamations that inflation is running at ~4%. A nuclear
power plant is a very complicated piece of equipment and requires a
vast number of different inputs to construct, ranging from concrete to
steel to labor. Note that the article cites a more than 100% rate of
inflation for building a nuclear plant. Now, admittedly, we aren't all
out buying nuke plants, but I find it inconceivable that we could be
experiencing 4% inflation overall while something as large and diverse
as a nuclear plant could be experiencing 100%+ inflation. That's quite
a spread. I wonder if we've ever seen such a spread before?


Citigroup Leads Wall Street Drive to Hurt Taxpayers (May 9 - Bloomberg)

Taxpayers from Massachusetts to California are
paying Wall Street banks to end derivative contracts gone bad as they
exit the collapsing auction-rate bond market, with penalties in some
cases topping $10 million and compounding the pain of rising borrowing
costs.

Sacramento County, California, paid Morgan Stanley $5 million to cancel
an interest-rate swap agreement when it refinanced $79.5 million in
auction-rate securities last month. The fee added to the cost of the
bonds after the rate on the securities more than doubled to 9.8 percent
in March as dealers stopped supporting the market. "Some of the
termination fees are ugly," said Christopher "Kit" Taylor, former
executive director of the Municipal Securities

Rulemaking Board, the market's regulator. "It's going to be a tough lesson for a lot of issuers."


Here's the deal on this:  Wall Street firms sold a type of
sophisticated derivative to towns and cities all across the country.
These derivatives are no longer marketable, and so nearly $200 billion
in local funding suddenly went 'poof.' Instead of sharing the pain, the
Wall Street banks decided to make the towns and municipalities pay up
to get out of these money traps. Because I believe that the towns and
municipalities ought to have known better, especially after the
bankruptcy of Orange County several years back over the exact same
sorts of tricks, I am not making any point beyond this:  Nobody should
ever trust Wall Street banks to do anything other than take their
money. I'm shocked that people have not yet learned this lesson. If my
town had lost out like this, I'd be screaming for the firing of all
involved.



Oil Rises to Record Above $125 as Nigeria Cuts Curb U.S. Supply
(May 9 - Bloomberg)

Oil rose to a record above $125 and was
set for the biggest weekly gain in more than a year on speculation
[that] reduced exports from Nigeria will curb U.S. supplies during the
peak summer driving season.

Nigeria production, which fell to the lowest level in a decade in
April, has been cut further this month by rebel assaults on Royal Dutch
Shell Plc pipelines. OPEC said yesterday it doesn't need to increase
supplies, even as its president warned prices may reach $200 a barrel.

"In the last couple of weeks attacks in Nigeria have been getting
worse," said Andy Sommer, an analyst with HSH Nordbank in Hamburg.
"Also, the view that oil can go to $200, even though everyone knows
it's not the base-case scenario, is bringing in investor flows."

Close...oil is currently at $126.15 on my
electronic quote screen. I am watching oil very, very closely,
wondering if this is simply a speculative spike or if oil is telling us
something far more important...


I suppose I have read 40 to 50 articles this
past week about spiking food and fuel costs, and not one of them has
mentioned the exploding money supply across the planet. The articles
all mention speculators and supply-and-demand, but never money. While
these factors may play a role, it is always money that is the match
that lights the inflationary fire, and it is alway money that feeds the
fire.

This next article comes from Doug Noland's weekly review called the
Credit Bubble Bulletin and it is fantastic, as always. In my
estimation, Mr. Noland has had the exact right read on the true cause
and effect of the economic imbalances and insanity that have been
building these last few years. His analytical framework centers on the
creation of credit (money, debt) and works from there. Someday he will
be recognized as being right when most everybody else was astray.

Below, he notes the massive, explosive growth in monetary reserves of the world's central banks:


A New Inflationary Epoch (May 9 - PrudenBear.com)

Crude oil closed today above $126. The most vitally important commodity
in the world has now posted a stunning year-to-date rise of better than
30% and has now doubled in the past year. It is worth noting that
during the ten-year period 1996 through 2005 crude averaged about $29 a
barrel. It’s now at four times this level - and running.

I don’t believe it is mere coincidence that crude has posted about a
30% y-t-d price surge at the same time as international reserve
positions have expanded at about a 30% annualized rate - to a stunning
$6.769 TN.

Over the past 4 ½ years, official international reserves have ballooned an unprecedented $3.921 trillion, or 138%.
During
this period, crude prices surged almost 300%. Chinese reserves
ballooned more than four-fold over this period to $1.68 Trillion;
India’s reserve position tripled to $303bn; and Brazil enjoyed a
four-fold increase to $189bn. After beginning 2004 at $73bn, Russian
reserves have almost reached the half Trillion mark ($493bn). And in
just the past year, OPEC reserves have inflated 42% to $490bn. To
be sure, the world is awash like never before in excess “liquidity” for
which to bid up prices of critical tradable resources.


Yikes! How can an entire article be written on commodity inflation, let
alone 40-50, and not once mention a 138% increase in monetary reserves
in only four and a half years? I was tempted to use six exclamation
points there, but my old grammar teacher would probably burst into
flames, so I didn't. At any rate, the global central banks are involved
in the equivalent of a massive check-kiting scheme where they each
issue money in excessive quantities while the other ones 'soak them up'
and stuff them onto their balance sheets for safe keeping. No
different, really, than if you and I exchanged checks for a million
dollars, spent the proceeds, and promised to never make the other
person pay off their debt. Meanwhile, the same authorities involved in
this charade are only making me more concerned as they display zero
public awareness that there might be a flaw in this cunning plan.
Instead, they give us statements like those below...


Paulson, Trichet Signal Welcome at Dollar's Recovery Since G-7
(May 10 - Bloomberg)

U.S. and European officials signaled satisfaction
that the dollar is stabilizing after Group of Seven policy makers
expressed concern a month ago about its decline.


European Central Bank President Jean-Claude Trichet said May 8 he
"would be happy" if traders take account of Treasury Secretary Henry
Paulson's admonitions that the U.S. wants a "strong" dollar.

A Treasury official said on condition of anonymity yesterday that the
G-7's statement was aimed at getting investors to look past short-term
U.S. financial-market turmoil.

"They've got to be quite happy as things are moving in their favor
now," said David Gilmore, a partner at Foreign Exchange Analytics in
Essex, Connecticut. "There's a sense the market is finally getting the
message of the G-7."

While the world starves and scrambles for
affordable fuel, the ECB issues 'words' meant to guide the Dollar
higher against the Euro, making it seem as if all we have is a little
difference of opinion over how people value the two currencies.
Instead, I think it would be swell if the ECB and the Federal Reserve,
et al., would describe how they plan to bring monetary growth rates
into alignment with actual production of goods and services. Currently,
that gap is anywhere from 4x to 5x surplus money to economic growth,
and that's why we have inflation.


Federal regulators close Arkansas bank ANB Financial (Friday May 9, 8:45 pm - AP)

Federal regulators says they've closed ANB
Financial National Association banks after discovering "unsafe and
unsound" business practices there.

As of Jan. 31, federal regulators say ANB Financial had about $2.1 billion in assets and $1.8 billion in total deposits.


This is the largest bank failure this year. Hey, it happens. But I am
keeping a very close eye on the trend...be sure to read the Martenson
Report on the FDIC if you want to know why.
Also note that this news announcement came at 8:45 pm on Friday
night...a sure sign that it was meant to be minimized.


Shell pulls out of Iran gas deal
(May 10 - Reuters
LONDON)

Oil major Royal Dutch Shell has pulled out of a planned gas project in
Iran, after coming under pressure not to participate from U.S.
lawmakers who were concerned about Iran's nuclear programme.

Iran is being isolated economically by the
US. First it was a demand by the US government that foreign banks
terminate their contacts with Iranian banks, and now enough pressure
was placed on a non-US based company to cause them to pull out of a
very lucrative gas project. This is an economic act of war, and it
tells me that the risks are still very high of a US or Israeli attack
on Iran. To my knowledge Iran is in full compliance with the NPT
treaty, of which it is a signatory, and has never threatened the US.
But Iran does have the unfortunate fate of sitting on top of a lot of a
very valuable and dwindling resource. See next...


Platts Survey: OPEC Pumps 31.87 Million Barrels per Day of Crude Oil in April, Down 350,000 (May 9 - LONDON PR Newswire Europe)

The 13 members of the Organization of Petroleum Exporting Countries
(OPEC) pumped an average 31.87 million barrels per day (b/d) of crude
oil in April, a 350,000 b/d decrease from March, according to a Platts (http://www.platts.com/)
survey of OPEC and oil industry officials released Friday. The sharp
drop was largely the result of steep output losses in Nigeria.

Excluding Iraq, the 12 members which participate in output agreements
pumped an average 29.49 million b/d, 360,000 b/d down from an estimated
29.85 million b/d in March.

"OPEC production has been relatively steady in recent months, but the
sharp fall in Nigerian output shows how vulnerable overall supply from
the group can be to developments in one country," said John Kingston,
Platts global director.

Drip, drip, drip. How many more data points
do you need to believe that we are at a plateau, if not a peak, of
world oil production? Personally, I am convinced that we are at a point
where demand will now permanently outstrip supply. Some say that
increasing oil prices will kill demand, but I am less sure of that. Is
$125/barrel oil too high? How about $500/barrel? Would that be too
high?

Here's how I look at it. A barrel of oil is 42 gallons, and that amount
of oil has the embodied energy of 21,000 hours of human labor. So even
at $10/hour we might value that barrel at $210,000 and consider it a
reasonable deal. Which is why I think there's a bit of room to the
upside for oil. If you doubt this, try seeding, plowing, haying, or
threshing with manual labor. Oil is a wonderful substance and has no
natural peers.

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