Oil and Home Prices: Bad News for the US "Recovery"

The big news this morning is all about oil… Yes… The problems in Libya are having an even greater affect on oil prices than the problems in Egypt a couple of weeks ago. So… Let’s get to the meat, and then we can have some pudding.

OK… Yesterday, the problems with violence in the Middle-East weighed on the risk assets of currencies and metals, and for that matter, stocks certainly didn’t have a good day either… But somewhere along the road to weaker risk asset prices yesterday, we saw a turnaround… It was a “Turnaround Tuesday”! And by the end of the day (or at least the end of the day for me, as I had to leave early to go to the dentist) the currencies and metals began to rebound, and were adding value by the fist full…

So… What caused this turn around? Well… It could have been a couple of things… So, let’s go through them, and get this figured out, eh? 1. With the rising price of oil, energy prices are going to really push the inflation envelope for not just the US but for the world that imports oil… Countries like the UK and the Eurozone region, already were teetering on the side of a rate hike to combat inflation, and now this… I saw something last night that just scared the bejeebers out of me… A forecaster that said the price of oil was going to $120 (currently at $95)… Wow! If the price of oil rises and sustains $120, our economy will go right back into the dumpster, folks! And, I’ve got to tell you this on the side… I don’t like what’s going on in the Middle-East… They all claim that it’s democracy at work, and that may be, but there’s a shadow of bad things that could happen over there, that could bring this country to its knees… I know it’s been a long time, but I remember the oil embargo in the ’70s, and I also remember gas rationing… What happens when we’re living like that again, with unemployment at 23% and housing falling like a rock again?

OK, Chuck, that’s about as far back into the deep, dark closet as you should go… Now go on to #2… And that is that three Bank of England (BOE) members have swung over to the rate hike camp… Add that to the comments I told you about yesterday from European Central Bank (ECB) member, Mersch, and the sentiment for these currencies turns around on a dime! Yes, even in the face of upsetting the applecart in the Middle-East, rate differentials power over geopolitical problems… Well, in this case they are!

So… As I said at the top… The currencies and metals turned around yesterday about midday, and have not looked back. For instance… The euro (EUR) is trading over 1.37 this morning, and the Aussie dollar (AUD) which fell through parity yesterday morning, returned to parity and above. The funny thing, (of course, I don’t know if you think it’s funny or not) is that the so-called safe havens are still being bought… So that means, Swiss francs (CHF) and Japanese yen (JPY) are still high on the hit parade list of currencies that are being bought. One would think that they would be getting tarred with the same brush as the US, for these countries have the same near zero interest rate structure… But, I learned, as a young boy on the farm, not to look a gift horse in the mouth, so… I can say without hesitation that right here, right now, the dollar is getting sold against the world.

Gold returned to $1,400 yesterday, and remained above that figure overnight… Look, folks… I’ve said this many times before, and I could be wrong… But… These are uncertain times, and even more uncertain than before, and in uncertain times, you need the uncertainty hedge, a store of wealth… And you can get that from gold and silver… It may scare the bejeebers to go into the market and fork out $1,400 and more for a gold coin… If that’s so, then look to silver… Again, I could be wrong here, but for crying out loud, am I the only one that sees the goings on in the Middle-East and feel that it is not going to work out for us?

OK… Well, what direction do I go from here with the Pfennig this morning? I think I’m going to talk about the S&P/CaseShiller Home Price Index that printed yesterday… Well… In case your local or cable news failed to carry this story… The Home Price Index (HPI) fell 4.1% versus a year earlier… (or -2.4% in the composite 20-city report)… Now, I want to point out something… About a year ago, I told you that I truly expected home prices to plunge again, and thought they would fall another 10% before it was all over… Well, it’s not nearly over, folks… Home prices are going to continue to fall… How do I know? Well, I’m not clairvoyant or anything, but unless the world turns upside down, and this has all been a bad dream… The amount of inventory tells me that prices will go down… It’s simple economics… So, when you see the data that home building is rising, and everyone gets a warm and fuzzy about it, think about this… It’s just more inventory that will have to be sold, and eventually sold at much lower prices!

So… Did the people that got surveyed by the Consumer Conference Board, just crawl out from under a rock? Consumer confidence hit a 3-year high this month… Now, I understand that the stock market weighs heavily in this formula… And in this case, those that believe that this stock market rally has garnered them great wealth, had better sit down and have a glass of warm milk… Settle down, and let me tell you a little story about quantitative easing, and what it has done for the stock market, and then, let me remind you that in June, quantitative easing ends… What will support stock prices then? Oh! You don’t care to be told about QE supporting stocks… OK, it’s your money… Your life… Hello? Conference Board? This is Chuck Butler, I would like to state that I AM NOT CONFIDENT!

OK… ECB President, Jean-Claude Trichet, is going to speak today, and the markets are thinking that he will give them a hint about the ECB meeting next week… I don’t know where they get off thinking that he would do that, I mean, has he ever hinted to us in the past five years? But, maybe he will, you never know, eh?

On the other side of the coin, there are two Fed Heads that will speak today… And you can always count on Fed Heads like Messrs Hoenig, and Plosser to tell us what’s on their respective minds! Hoenig and Plosser are known as hawks… and I bet if you were a fly on the CABAL’s (Fed’s) meeting room walls, you would have heard them blast Big Ben Bernanke about QE2… And keeping interest rates near zero… And buying bonds through the back door… But to save face, and look like the CABAL is in it together, we don’t hear any of that… But, that’s just two dissenters… They need to have more Fed Heads to follow them down the anti-Bernanke road…

The New Zealand dollar/kiwi (NZD), continues to lag most other rallying currencies, as the damage of their earthquake near Christchurch, gets evaluated… There were rumors overnight that the Reserve Bank of New Zealand (RBNZ) was going to cut their official cash rate in their attempt to ease the recovery… But, those rumors proved to be not true, at least for now… The kiwi’s are strong people, and they will bounce back from this… The good thing about the NZ economy is that it’s mostly agriculture, dairy, lumber and wool… None of those would be affected directly by the earthquake…

Did you see that Japan posted a Trade Deficit last month? WOW! Now that’s something that doesn’t happen every month… In fact, the last time it happened was in March of 2009… I can tell you right now, that the Japanese government won’t have any more months of deficits without attempting to get the Japanese yen weaker to help those export prices… I would think that that with the rising interest rate thoughts going around the markets, and Japan remaining at near zero, that the thought I had about the return of the carry trade would be enough to weaken the yen, without government intervention… But, we’ll have to wait-n-see, eh?

Then there was this… From The Washington Post

The daunting tower of national, state and local debt in the United States will reach a level this year unmatched just after World War II and already exceeds the size of the entire economy, according to government estimates. But any similarity between 1946 and now ends there. The US debt levels tumbled in the years after World War II, but today they are still climbing and even deep cuts in spending won’t completely change that for several years.

But today the US economy is in a polar opposite condition. The labor force is aging, US manufacturing often lags behind Asian and European rivals, households are in hock up to their eyeballs, and consumer appetite for goods is tepid. In addition, inflation is tame and government spending locked into entitlement programs and debt service that will be hard or impossible to alter.

Ken Rogoff, Harvard Economist added, “We’re not growing like we were after World War II, so the amount of debt you can bear and the trajectory are much worse.”

I know, I know, I’ve told you all this before so many times… But I thought you might like to hear it from a source other than me…

To recap… It was a Turnaround Tuesday yesterday, with the currencies and metals rebounding from their early morning sell off. The price of oil is hanging over us like the Sword of Damocles, and one forecaster has it going to and sustaining $120… If that happens, the nascent recoveries of the US and Europe will be squashed! Remember, Libya has oil, Egypt doesn’t… They just control the canal… Japan posted a trade deficit for the first time in 22 months. The US S&P/CaseShiller Home Price Index fell out of bed again, but consumer confidence hit a three-year high! What are those people thinking?

Chuck Butler
for The Daily Reckoning

The Daily Reckoning