Saturday, January 21, 2006

Time to Worry?

If ever there was a time to be worried about the financial health of the U.S. and world economy, this is it! Multiple issues are simultaneously coming to a head and any of them could potentially set off a chain reaction in other areas and throw the U.S. into a severe recession. (I highly urge you to read the links below)

Fed Activity
Housing Bubble

The current situation with Iran will probably continue to escalate, and with already strained oil supplies (a mere 1% difference between world oil demand and world oil production & supply capacity), we could easily top $100 barrel oil and $4 gas this year.

There couldn’t be a worse time for civil unrest in Nigeria (the world’s eighth largest oil exporter). Militants have been (and promise to continue to) stage attacks against Nigerian oil facilities. They have also kidnapped and are holding oil workers hostage. Bottom line: Expect more militant activity, and reduced oil output from Nigeria. As stated above, the margin between oil supply and demand is extremely narrow and this will begin to hurt at the gas pump quite soon.

Quite a few smart folks feel that the world is beginning to reach Peak Oil. With increased worldwide oil requirements/consumption (China, India and others using more energy than ever and competing for the same energy supplies), the latest situation with IRAN and Nigeria are merely bringing the issue to light a little earlier that it otherwise would have anyway. This could be the beginning of a long-term trend for high priced energy.

NOTE1: This issue is actually bigger than oil. Natural Gas supply/demand is also strained. Last week, the LV Review Journal stated that Sierra Pacific, the provider for Nevada Power, is seeking a 30% increase in electricity prices in 2006… This is on top of major price increases in 2004 and 2005… Southwest gas has also recently increased (substantially) their rates. Bottom line: Not only will it hurt you at the gas pump; it will also hurt your monthly budget when paying to heat and power your home. (Question: why aren’t energy prices used as a part of Government’s inflation calculation statistics? Answer: because then the people could not be snowballed into believing that inflation {and the economy} is under control.)

NOTE2: When oil prices increase, our trade deficit (running > $700B in 2005) will also increase (many suggest it could reach $850B in 2006). This increase will cause a further drag on the U.S. Dollar (a decline in value), as Central Banks become increasingly leery with our massive debt and deficits, and they seek to increase diversification of their savings (into Gold, Euros, etc.). This diversification and drag of the dollar will actually exacerbate the issue for the U.S., as OPEC will require more devalued dollars for the same quantity of their tangible asset (oil), driving the trade deficit even higher. (I hope this makes sense to you folks).

Many people are beginning to believe that the Fed is running scared. In an attempt to shield their ponzi scheme from the public, the Fed has decided that M3 will cease to be published after March 2006.

With that said, we couldn’t ask for a better monetization policy executor than “Helicopter Ben”. Bottom line: Expect inflation to start screaming as tremendous amounts of new liquidity are pumped into our economic system—a futile attempt to keep the game going indefinitely.

The party may be over for real estate. Recent evidence suggests the housing market is slowing. Existing home sales are expected to fall 4.4 percent in 2006 after years of record sales, while new construction is expected to drop 6.6 percent, according to the National Association of Realtors.

The housing forecast mentioned above is based upon continued strong economic indicators. What would happen to house prices if OIL reached $90-100 a barrel? I believe it could get nasty!

Consumers, who are already strapped, would need to make difficult choices and many would have no other choice but to reign in spending. With rising interest rates and a high number of interest only mortgages, many folks will get creamed… This could cause rampant defaults, a massive number of homes on the market (people trying to get out before they get creamed), and housing prices could plummet.

Note: Consumer spending and housing have been responsible for 90% of GDP over the last 3 years. If this is taken away, the economic outlook for the U.S. is extremely bleak.

Numerous issues are currently in play—the main one being oil. If oil supplies are reduced much further, prices will skyrocket. This will be felt by the consumer (who is already stretched thin); will increase the deficit; will impact Fed policy (printing madly); will impact the dollar (decline in value) and will ultimately impact the housing bubble (which has been the main engine of our economy over the last 3 years).

Hold on to your hats folks, this could be one hell of a ride!