Decline of the Empire

Remedy du Jour -- April 30, 2011

Some great music for a nice spring day. Sade doing No Ordinary Love, Tom Petty with Stevie Nicks performing Learning To Fly, Norah Jones' live of version of Don't Know Why, and Pat Metheny's acoustic version of Last Train Home.

Enjoy.

 

 

 

 

Recovery? What Recovery?

I was reading Mish's Underwater Mortgages a Threat to Recovery; Expect No More Than 3% Growth Until Housing Recovers. He quotes from Phoenix’s Underwater Mortgages Show Weakness in Housing Threatens Recovery—

“[The weak housing market] keeps the recovery from being all that strong,” says Mark Vitner, senior economist for Wells Fargo Securities in Charlotte, North Carolina. “We don’t see how the economy can get above 3 percent growth, except for a short period of time, with housing being so deeply underwater,” he said.

In the 18 months after the recession ended in June of 2009, the economy grew at an average annual rate of 3 percent a quarter.

That's 6 consecutive quarters in which GDP growth averaged 3%. Now, contrast that with what Americans think of the "recovery" according to Gallup polling.

Graph from Tim Iacono's Still A Depression?

After 18 months of 3% GDP growth, 29% of Americans say we're experiencing a depression, while 55% of them think we're still in a recession (or a depression). Only 27% of Americans think the economy is actually growing.

We are entitled to ask: Recovery? What Recovery?

These polling results also tell you everything you need to know about the usefulness of GDP as a measurement of our economic health. Personal Consumption Expenditures, which are said to make up 70% of the economy, are well above their pre-recession 2007 levels.

Every time the O-Man tells you we are recovering, albeit too slowly for you to notice, tell him he can take his Orwellian statistical recovery and stick it where the sun never shines.

Who Can Take This Country Seriously Anymore?

Yesterday the BEA's preliminary estimate for GDP came in at 1.8% (at an annualized rate). This anemic growth was accompanied by a surge in new unemployment claims. But nobody cares about this stuff.

The really Big News was that the President released his birth certificate. The so-called "birthers", led by TV show host Donald Trump, have maintained that Obama was born in Kenya, and thus is not allowed by the constitution to serve as President. Massachusetts governor Deval Patrick, a supporter of Obama, said that questions surrounding the president’s birth represent a new low in American politics.

Patrick was appearing on his weekly segment on WTKK-FM in Boston, when he was asked by the program’s hosts, Jim Braude and Margery Eagan, whether Obama had played into Donald Trump’s hands by publicly discussing the matter of his birth certificate.

Patrick didn't take the bait. “I hope and I believe that the American people are bigger and better than this,” he said.” I hope and believe the Republican Party is bigger and better than this.”

Asked whether the so-called “birther” movement was fueled by racism, Patrick, an African-American in his second term as governor, responded: “I have no idea, but whatever it is motivating it, it feels like a new low in American politics,” he said, “particularly when you consider the enormous challenges facing this country.”

This wasn't a new low in American politics. There is no bottom. Politicians or political wannabes just can't stoop low enough anymore. And our mindless, compliant media duly reports it all every time a "new" low is reached. This is what happens when there's really nothing at stake.

The problem for the humorist is that there is simply no way to satirize it. Our politics is already a joke, and has been for as long as I can remember. You can't make a joke about a joke. Once you've crossed the line into absurd, surrealist theater, how do make it funnier?

We are nearing the beginning of an 18-month cycle of new political lows that can not be satirized. Only the November, 2012 presidential election will end our misery. I can already hear them, the intrepid reporters on NPR, CBS, The New York Times, PBS and all the rest, giving us the seemingly endless details about who's screwing who in Iowa, New Hampshire or South Carolina as the seemingly interminable horse race grinds on and on. Are these reporters really this vacuous? Yes, they are.

Perhaps suicide is not our only option.

As the media focused on the now-refuted arguments of the birthers, the President said that the origin of his miraculous birth was a distraction from the really important business at hand (video below). And what was the really important business at hand? Secretary of Defense Robert Gates is retiring, so there was an Imperial game of musical chairs.

President President Obama has stuck with a “safe” team of leaders he knows by choosing Leon Panetta as his next defense secretary and Army General David Petraeus as director of the Central Intelligence Agency, according to analysts and former national security officials.

Panetta, the current CIA director, and Petraeus, the top U.S. commander in Afghanistan, already are part of Obama’s national security structure. If confirmed by the Senate, they will be in position to follow through on security priorities they helped form as Obama heads into an election year.

“The big message here is no change in policy, and that means a careful and centrist approach on national security issues,” said John Ullyot, who worked on the Republican staff of the Senate Armed Services Committee and is now a senior vice president at Hill & Knowlton in Washington.

A careful and centrist approach! The head of the CIA is now the head of the Defense Department and the Army's top commander is now the head of the CIA. Left-wing conspiracy theorists are going to make hay with this one. Talk about grist for the mill! We are involved in not one, not two, but three wars in predominantly Muslim countries. If that's not a careful, centrist approach, I don't know what is.

Maybe we're better off with the birthers. Who can take this country seriously anymore?

 

America's Road To Perdition

There's a sad story making the rounds which should be Front Page News in this great land of ours, but it has received scant attention. USA Today reports that Americans depend more on government aid than ever.

Americans depended more on government assistance in 2010 than at any other time in the nation's history, a USA TODAY analysis of federal data finds. The trend shows few signs of easing, even though the economic recovery is nearly 2 years old.

A record 18.3% of the nation's total personal income was a payment from the government for Social Security, Medicare, food stamps, unemployment benefits and other programs in 2010.

Wages accounted for the lowest share of income — 51.0% — since the government began keeping track in 1929...

From 1980 to 2000, government aid was roughly constant at 12.5%. The sharp increase since then — especially since the start of 2008 — reflects several changes: the expansion of health care and federal programs generally, the aging population and lingering economic problems.

Americans got an average of $7,427 in benefits each in 2010, up from an inflation-adjusted $4,763 in 2000 and $3,686 in 1990. The federal government pays about 90% of the benefits.

"What's frightening is the Baby Boomers haven't really started to retire," says University of Michigan economist Donald Grimes of the 77 million people born from 1946 through 1964 whose oldest wave turns 65 this year. "That's when the cost of Medicare will start to explode."

A radical change occurred in 2008. For the first time since 1936, government transfer payments exceeded taxes paid. Doug Hornig's First Time in 75 Years, Handouts Exceeding Taxes explains the crossover.

In raw numbers, in February of this year, households received $2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans benefits, education assistance and other cash transfers of government funds to individuals.

The same month, households paid $2.2 trillion in income, payroll, and other taxes. The difference was nearly $100 billion, or around 1% of personal income.

If you want a rough guide as to where we stand in the playing out of this recession (assuming you don't concur with the government's declaration that it's over), this chart probably serves the purpose as well as anything.

Note that the red line was below the blue one for 1931-36. If a similar period is in store this time around, then we're only about two-fifths of the way into a five-year downturn.

This data tells the story of a failed society. The Great Depression was ended by World War II, as I explained in What Are The Lessons Of 1937? What will end our troubles this time? Nothing will.

In 2011, a new Austerity is coming. Government spending will be cut because interest rates on our debt will no doubt rise in the future if we don't cut spending voluntarily. Pay no attention to Paul Krugman when he says that our borrowing costs are low, so they will remain low forever. Pay no attention to those who say the United States is not broke because we will never default on our debt, because we can borrow or print whatever we need. Such talk is completely irresponsible. The United States is effectively broke.

So here is the situation: more Americans than ever before depend on government payments to make ends meet, but the United States must cut spending sometime before the interest on its debt becomes unmanageable. I explained in To Cut Or Not To Cut — That Is The Question? that there is only one possible outcome here. By 2020, America's long transformation will be complete, we will have become a Banana Republic. And as Donald Grimes notes in the USA Today story, what is really frightening is that the Baby Boomers haven't really started retiring yet.

There is no way out of this dilemma, pending World War III. The government will no longer be able to afford to pay out "$2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans benefits, education assistance and other cash transfers of government funds to individuals," yet the benefits that should be paid out, according to current law, are set to rise steeply.

We have traveled far down the road to Perdition. Our squalid destination is now in sight. Many Americans are going to be pushed over a financial cliff in the next decade. And don't believe for a moment that tax cuts for the rich, accompanied by some fantasy about "trickle-down" economics, will create a boom in the private sector. Shrinking government expenditures will have predictable effects on standards of living, as the transfer/tax data shown above demonstrates. Taxes should be raised, whether there is the political "will" to do so or not. And don't hold your breath waiting for massive reductions in the Defense budget. That's the very last line item a dying Empire will cut.

This tragedy will occur for reasons that are completely independent of the favorite Doomer stories—dollar collapse and hyperinflation, massive deflation, end-of-the-world in July, another global financial crisis, peak oil, climate change, whatever—that DOTE readers are so fond of pointing out in comments on this blog and elsewhere. What is interesting to me is that DOTE is the only place (at least that I've seen) where this increasingly obvious scenario has been laid out.

Change is coming, and not for the better, regardless of whether any of the usual Doomer scenarios play out. Put that in your pipe and smoke it.

Timmy Geithner Knows Diddly-Squat

Normally, I do not react to propaganda statements from the Secretary of the Treasury. But the lies and distortions asserted by Timothy Geitner yesterday deserve a rebuttal.

Treasury Secretary Tim Geithner reiterated and defended the "strong-dollar" policy following a speech Tuesday at the Council on Foreign Relations in New York.

"Our policy has been and will always be, as long, at least, as I'm in this job, that a strong dollar is in our interest as a country," Geithner said in response to a question. "And we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners"...

Unbowed by the dollar's recent weakness — it hit its lowest level since August 2008 Tuesday -- or record-setting gold and silver prices, Geithner reiterated a now familiar theme among policymakers: The dollar's strength during the "darkest moments" of the crisis is "very encouraging," he said, and shows investors "retain fundamental confidence in the ability of the U.S. to manage" its long-term budget issues.

This is the Orwellian Lie, the Big Brother Lie, a Whopper. A "strong-dollar" policy? The very opposite is the truth. I wrote about the perils of the declining dollar only two days ago in The Dollar? We've Got That Sinking Feeling... And when I wrote that, I was late to the party. Many others have talked about the dollar's precipitous decline lately.

China has no choice but to let the Yuan appreciate to fend off the massive inflation they would face—and are facing—if they peg the RMB to the dollar. If that's not embracing a strategy of weakening our currency to gain economic advantage at the expense of our trading partners, I don't know what is. Combined with the Fed's QE2 and ZIRP (zero-interest rate policy), this is tantamount to a war on Asian exporters.

But it gets worse, if you can believe that.

Oil prices at current levels will not derail the global economic recovery, U.S. Treasury Secretary Timothy Geithner said Tuesday.

"At current levels, on its own, it won't put the recovery at risk," Geithner told an event sponsored by the Council on Foreign Relations when asked to rate oil prices as a global risk.

And that's all he said. Is that because Timmy is an expert on relationship between oil prices and recessions? Knows the literature? Knows about the "6% rule" when it comes to energy expenditures and household spending?

The combination of rising gasoline prices and the steepest increase in the cost of food in a generation is threatening to push the US economy into a recession, according to Craig Johnson, president of Customer Growth Partners. Johnson looks at the percentage of income consumers are spending on gasoline and food as a way of gauging how consumers will fare when energy prices spike.

With gas prices now standing at about $3.90 a gallon, energy costs have now passed 6 percent of spending—a level that Johnson says is a "tipping point" for consumers...

Of the six US recessions since 1970, all but the "9-11 year 2001 recession" have been linked to—if not triggered by—energy prices that crossed the 6 percent of personal consumption expenditures, he said. (During the shallow 2001 recession, energy prices had risen to about 5 percent of spending, which is higher than the long-term 4 percent share)...

What may make matters worse this time around, is there has been a steep increase in food prices that occurred as well. In other recent recessions food costs were benign, at between 7.5 percent and 7.8 percent of spending.

This year food prices have climbed 6.5 percent since the beginning of early January, according to Consumer Growth Partners.

"The combined increase in the necessities of food and energy creates a harsh double whammy for already stressed consumers," Johnson said. The last time this happened was in the recession that lasted from 1973 to 1975.

Johnson estimates that food and energy eat up about 15 percent of consumer spending at today's prices, compared with about 12.7 percent two years ago.

Timmy knows diddly-squat about the effects of high oil prices on household spending. I'm pretty much convinced The Geithner know diddly-squats about anything that might be of concern to ordinary Americans. Thank you for The Change, Barack Obama!

What Tim Geithner knows diddly squat about that he did discuss is not as important as what Tim Geithner knows diddly squat about that he didn't discuss. And what he didn't discuss was the Housing Market, which is looking for a new bottom. The question of the day is Will US Economy Follow Housing Into a Double-Dip?

Falling home prices may threaten the economic recovery.

Home prices have been falling in many markets for several months. The most recent data from Case-Shiller show that home prices declined in every one of the 20 cities included in their index—except Detroit.

This will very likely mean that consumer spending will contract, perhaps resulting in a much more sluggish economy and more unemployment.

The connection between falling home prices and consumer spending is abundantly clear. Just last month, Karl Case, Robert Shiller and John Quigley published a study that looked at housing markets and consumption over 31 years. They found that “variations in housing market wealth have important effects on consumption.” (And, yes, the first two authors are the "Case-Shiller" guys.)

Specifically, they found that there’s a “wealth effect” from housing.

When home prices rise, consumption rises, as well. When they fall, consumption falls. What’s more, this wealth effect is even more strongly pronounced for falling prices than it is for rising prices.

Apparently, fear is a greater motivator on the savings side than joy is on the spending side.

From Calculated Risk's Case Shiller: Home Prices near post-bubble lows in February

As the clueless Secretary of the Treasury reassures us that all is well, the risks of another recession brought on by high oil prices, high food prices, and falling housing prices grow ever-larger.

When did the government become the enemy? When did it become necessary for small-time bloggers to deconstruct the lies of high—I don't mean stoned—government officials? Isn't it bad enough that we have to fend off the blood-sucking vampires on Wall Street? Its doubly bad when they are in cahoots with the mediocrities in Washington, and are very often exactly the same mediocrities. (Geithner was head of the New York Fed.) When did serving the public come to mean screwing the public?

The answer to these questions is lost in the sweep of time. The integrity of our government disappeared slowly over several decades. A lie here, another lie there, a few more bricks in the wall. Timmy Geithner knows diddly-squat, but he doesn't need to know anything. Serving the public is not his job. His job is to defend the bankers and the President he works for.

What's the old expression? With friends like this, who needs enemies?

 

The Inevitable Rise Of China?

As the American Empire declines, more and more observers are proclaiming the Rise of China, which as the story goes, will one day replace the U.S. as the world's dominant superpower. People love these kind of stories. The aging heavyweight champ, who has developed a paunch and lost his skills, is defeated by the young, lean, mean contender with a dynamite right hand. The inevitable changing of the guard. Sic Transit Gloria Mundi.

In IMF bombshell: Age of America nears end, Marketwatch's Brent Arends wants to persuade us China will surpass the United States in a scant five years.

For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China.

And it’s a lot closer than you may think.

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now. Put that in your calendar...

According to the IMF forecast, which was quietly posted on the Fund’s website just two weeks ago, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.

Most people aren’t prepared for this. They aren’t even aware it’s that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.

But they’re miscounting. They’re only comparing the gross domestic products of the two countries using current exchange rates.

That’s a largely meaningless comparison in real terms. Exchange rates change quickly. And China’s exchange rates are phony. China artificially undervalues its currency, the renminbi, through massive intervention in the markets.

In addition to comparing the two countries based on exchange rates, the IMF analysis also looked to the true, real-terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies [left].

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China’s.

As Arends admits later in the article, IMF forecasts are subject to change! The one thing you can depend on in any such forecast is that world output just grows and grows and grows. That's what the IMF said in 2007, too. But we need to take a closer look at China. Arends assumes China's economy will grow and grow, just as the IMF does. I last looked in on the Asian Tiger in my post Is China's Housing Bubble About To Burst? For background, read that article and links contained therein.

Evidence that China's property markets are an accident waiting to happen keeps piling up. In Beijing, home prices fell 26.7% month-over-month in March. Home transactions fell in 30 major cities by 40.5% year-over-year, and land sales all over China fell 21% quarter-over-quarter. China's housing market is looking pretty shaky.

Let's not beat around the bush—China's GDP numbers are as phony as a 3-dollar bill. The word goes out from on-high to those running the provinces: your GDP target for this quarter (or year) is such & such, and woe to those who do not make it so. Since government spending on big infrastructure projects goes directly into GDP calculations, officials in the provinces make it so by building big infrastructure projects. They build whole cities nobody lives in, or huge shopping malls nobody shops in (video below).

China's oil consumption has topped 9 million barrels-per-day in each of the last 5 months, with apparent demand coming in at 9.2 million in March according to Platts, a decrease from a near-record 9.58 million in February. It takes a lot of oil to build cities nobody lives in and huge shopping malls nobody shops in. In America we waste oil driving our cars and light trucks. In China, they waste it building gigantic but pointless infrastructure projects. And how long can China's still robust oil demand growth go on before there simply isn't enough to go around? I have predicted that we will have an oil price shock, a real one based on supply & demand, in 2013 ± 1 year.

This is the "miracle" of Chinese economic growth. Before Brent Arends proclaims the meteoric Rise of China and the End of America, perhaps he should ask himself just how long this "miracle" is likely to last.

 

The Dollar? We've Got That Sinking Feeling...

Where have you gone, Joe DiMaggio?
A nation turns its lonely eyes to you
Woo woo woo...

What's that you say, Mrs. Robinson
"Joltin Joe" has left and gone away?
Hey hey hey, hey hey hey!
   —Paul Simon, from Mrs. Robinson (The Graduate)

Just before the Easter weekend, the Wall Street Journal's Dollar's Decline Speeds Up, With Risks for U.S. spelled out the alarming decline of the dollar.

The U.S. dollar's downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.

With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.

The dollar fell nearly 1% against a broad basket of currencies this week, following a drop of similar size last week. The ICE U.S. Dollar Index closed at its lowest level since August 2008, before the financial crisis intensified...

The main driver for the dollar's decline is low interest rates in the U.S. compared with higher and rising rates abroad. Lower rates mean a lower return on cash—and the pressure from that factor could intensify next week when the Federal Reserve's rate-setting committee is expected to signal that U.S. short-term rates will likely remain near zero for many months to come. On Wednesday, Fed Chairman Ben Bernanke is scheduled to give the central bank's first-ever press conference following a policy-setting meeting.

But it is worry about the U.S. budget deficit that is intensifying the selloff. On Monday, investors were spooked by a warning from Standard & Poor's that it might take away the U.S. government's coveted AAA rating status amid concerns the Obama administration and Republicans in Congress might not be able to agree to significant reductions in the deficit.

In addition, Chinese government officials have stepped up rhetoric hinting they might diversify their $3 trillion of currency reserves away from U.S. dollars. Such a shift would chip away at what has been a substantial source of dollar-buying in recent years.

Just as Tim Geithner, Paul Krugman and other China bashers have wanted, the Chinese have allowed the Yuan to rise in value, in part to dampen their severe inflation problem.

China has in recent weeks been allowing its currency, the yuan, to appreciate steadily. This poses two challenges to the dollar.

• First, the more Beijing lets its currency rise, the less it needs to buy dollars to offset yuan strength.

• Second, other Asian countries that compete with China for exports may also allow their currencies to strengthen against the dollar.

Washington has been pushing Beijing to let the yuan rise against the dollar and other currencies, in order, among other things, to help reduce the U.S. trade deficit. But a continued decline in the value of the dollar is a double-edged sword for the U.S. economy.

It's a "double-edged sword" for our economy because the weakening dollar raises the price of imported goods for Americans, including the price of oil. That's the Bad News. The Good News, we've always been told by Krugman and the rest, is that a weaker dollar supports American exports.

A weaker dollar is a boon for U.S. exporters by making their goods more competitively priced. This has been a tailwind for technology companies and manufacturers, a bright spot in the otherwise slow economic recovery.

Since the recovery started in the third quarter of 2009, exports have contributed about 1.4 percentage points to the nation's 3.0% annualized growth rate, marking trade's biggest share of growth over an 18-month stretch on record.

There is a source of comfort, the Journal's Tom Lauricella tells us.

One source of comfort for the government is that the dollar's decline has been orderly. Against a broad basket of currencies, the dollar is down 9.1% from a year ago. In 2003 and 2004—a period of very low interest rates engineered by Mr. Bernanke's predecessor, Alan Greenspan—it registered annual declines of closer to 10%.

An orderly decline. That makes me feel better! I think this is a good time to throw in the long-term dollar chart, don't you?

There is little doubt that a weak dollar is the "unofficial" policy of the Treasury and the Federal Reserve. Even as I write this, I can hear the feverish, fearful cries of the Dollar Collapsers, the Gold Bugs, the Hyperinflationistas, and many others calling out to me, telling me in no uncertain terms to buy gold, silver, oil, corn, wheat—anything with tangible value I can get my hands on. But like the vast majority of Americans, I am not in position financially to buy any of these things. I must use dollars. As CNBC tells me, if I don't like a weak dollar, I might as well get used to it. Get used to it?

In short, as trader Dennis Gartman noted Thursday, "the rout of the US dollar" is in full effect.

"Panic dollar selling is setting in," Gartman, a hedge fund manager and author of "The Gartman Letter," wrote in his daily commentary. "This may carry farther than any of us dream of or, worse, have nightmares of."

How low can it go?

Rick Bensignor, chief market strategist at Dahlman Rose in New York, said the dollar index, which measures the greenback against a basket of select other global currencies, has scant technical support "that has any meaning" between its present level and the historical low of 70.70...

Food prices also are on a steady climb higher. In both cases, a weak dollar is at least somewhat to blame as it drives commodities, which are priced in dollars and therefore cheaper and more attractive to speculators in the global marketplace.

But the stock market has enjoyed the weak dollar.

The Standard & Poor's 500 and the dollar have had almost a perfectly inverse relationship this year, with the stock index gaining just over 6 percent in 2011 and the dollar losing 6.5 percent.

Thus we have the usual story. The predominantly wealthy investors in the stock market are thriving, while the rest of us seek shelter from the storm. And what if those crafty Chinese start dumping dollars—they're holding over 3,000,000,000,000 of them—like there's no tomorrow? And who will buy our Treasury bonds? And why do I have this sinking feeling? Why am I filled with unsettling, nebulous feelings of impending ruin? I hope our esteemed Fed chairman, Dr. Ben Bernanke, will address these questions during his upcoming Wednesday press conference. Like the rest of you, I hang on his every word

How low can the dollar go?  I think we're about to find out.

DOTE's Easter Break

Today is Easter Sunday, surely a slow day on the intertubes. If you're in limbo today, here are some amusing but enlightening videos to watch. Normal programming will resume tomorrow.

 

 

 

 

Remedy du Jour -- April 23, 2011

When the weather gets warmer, my musical mood shifts. It's time to get a groove on! So today we've got a selection of what is awkwardly referred to as jazz-funk or jazz-fusion. This genre was born in the 1970s and continues to this day. Jazz-fusion got its start when "pure" jazz lost its popularity after the middle-1960s. Rock & Roll was here to stay.

In order to reach new audiences, jazz or funk musicians blended these styles using electric instruments. The Fender Rhodes electric piano defined the new sound. Jazz-funk was always tweener music, always an outcast. Pure jazz lovers disdained its lack of purity. It was too complex (and boring) for pop fans. Where was the formulatic vocal and hook? But some of us still love it.

Today we'll start out with Herbie Hancock's Cantaloupe Island, featuring Pat Metheny. After that we've got Jeff Lorber and George Duke doing Tune 88. Following that George Duke, Lee Ritenour and Marcus Miller fill it up with It's On. Finally, the same group does Wes Bound. 

 

 

 

 

Saturday Oil Report -- April 23, 2011

The Nymex price stands at $112.29 over the Easter weekend, with Brent at $125.41. AAA Fuel Gauge puts the national average gasoline price at $3.856, which puts us on track for $4/gallon in early May. These prices are very high, and are no doubt affecting the "recovery" in ways that may not show up in official government statistics until some months from now. I won't raise the alarm level until I see convincing evidence of a genuine price shock driven by market fundamentals.

Oil Alarm Level — Orange

For wise members of the species Homo sapiens, oil is like money—they are completely incapable of having a rational discussion about it. Views of the situation are driven by unfettered self-interest. Lies abound. Thus almost all the reasons offered for why the oil price is what it is, or why the price moves this way or that way from day to day, are total bullshit. These are my conclusions after years of watching the oil markets, but lately, things have gotten completely out of hand.

Human irrationality (or corruption) was especially egregious this week. President Obama directed his attorney general Eric Holder to launch a probe looking for fraud or price manipulation in the oil and gasoline markets. He wants to look like he's doing something. Or maybe being a Good Liberal, he wants to investigate the oil company fraud that surely must underlie any increase in the oil price. To his credit, the O-Man has resisted efforts to tap the strategic petroleum reserve.

Now, if Obama really wanted to do something, he could pressure the CFTC to impose position limits on paper speculators in the market, as the Dodd-Frank bill directed them to do. There will never be a better time to do that than right now. But nobody talks about limiting paper contracts held because doing so would interfere with the trading profits of the big banks—JPMorgan Chase, Goldman Sachs, Morgan Stanley, HSBC, UBS, and BOA-Merrill Lynch. Read U.S. Consumers Have Big Banks To Blame For High Gasoline Prices. And then read The Real Reason Why Gas Prices Are Soaring.

And then there was this gem Saudis Slash Output, Say Market Oversupplied—

Saudi Arabia's oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices...

Consumers have urged the exporters' group to pump more crude to put a cap on oil, which surged to more than $127 a barrel this month, its highest level in 2 1/2 years amid unrest in North Africa and the Middle East.

"The market is overbalanced ... Our production in February was 9.125 million barrels per day (bpd), in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied," Naimi told reporters.

Two Saudi-based industry sources told Reuters last week the kingdom had cut output due to poor demand, prompting selling by traders who saw it as a sign of a well-supplied market.

But crude rebounded later in the week on optimism about the state of the U.S. economy.

Optimism about the U.S. economy? Is your bullshit detector in the Red Zone yet? The very same economy that is being driven to its knees by high oil prices? Jesus wept.

And you know what? The Saudis are right! Or at least, there is no evidence they are wrong. Even IEA head Nobuo Tanaka, who looks out for the best interests of the oil consuming nations, is unwilling to say the market is undersupplied.

Oil markets were well supplied for now, but producer group OPEC would need to be prepared to boost output in June or July as European refineries come back online after seasonal maintenance and as Japan begins reconstruction in the wake of its devastating earthquake and tsunami last month, Tanaka said.

Thus "consumers" can yell until they are blue in the face that OPEC should raise production, but it won't affect the price they're paying, which is driven by bank-run trading and ETFs (index trading), and hedging against the falling dollar. The average monthly crude price for April will only be a few bucks higher than it was in March, whether Saudi Arabia does or does not produce those 800,000 barrels per day.

And so it goes, day after day, more nonsense than you can shake a stick at. I may discontinue these Saturday reports. It's just too discouraging to report on this stuff.