“On both sides of the Atlantic, investors, speculators, and consumers are getting worried. Lured by economic policies, they’ve borrowed too much, spent too much, and taken too many risks. So, up to the microphones step the world’s leading economists – Ben Bernanke, Mervyn King and Alistair Darling with a solution to a problem that they, more than anyone else, created. In the popular mind, they brought succor…money, that is…to those who needed it; they offered to turn the liquidity crunch into the heady wine of another boom. They offered to bail out everyone.
“But how? Of course, they have a theory. Lord Keynes let it fly many years ag Give the people a little extra money, he said, and it will “turn stones into bread.” How is this miracle performed? Where does the money come from? No one even asks. To his credit, Keynes had the good sense to suggest that government might want to run surpluses in good years so they’d have some money to let out in bad ones. This saving grace has long been forgotten, of course. Now, the money itself arises immaculately; people don’t even bother to wonder about the hanky panky that conceived it.”
October 1, 2007
To read the rest of today’s guest essay click here:
Now, more news from Short Fuse reporting from Los Angeles…
Views from the Fuse:
Well, the Dow is up over 14,000 this morning, opening up the fourth quarter with an all-time high. And this is despite a profit warning from Citigroup (NYSE:C) and lower-than-forecasted data in the manufacturing index.
We’re betting that a sense of relief that the ‘third quarter from Hell’ is over is helping push up stocks. And “dollar weakness has its benefits for stock investors too,” writes Addison in today’s issue of The 5 Min. Forecast. “At least, for the time being.”
The commodities sector is posting some major gains as well. Bloomberg reports this morning that commodities had their biggest monthly gain in 32 years, driven by wheat, crude oil and gold.
“The Fed has signaled pretty clearly that they will answer the problem of a slowing economy with greater liquidity,” said Chip Hanlon, who manages $1 billion at Delta Global Advisors, Inc. in Huntington Beach, California.
“We’re in a bullish phase for commodities.”
Of course, the tumbling greenback is a help here as well, as many investors have been seeking shelter in the commodities sector. But, as Chris Mayer points out, agricultural commodities are a driving force in this boom. A shortage of wheat has pushed the price up 22 percent, corn is up 15 percent and soybeans gained 14 percent in the last month.
Says Mr. Mayer: “The agricultural sector can thank a pair of big trends (not counting the irrational government subsidies the ag sector continues to enjoy). One of those trends is the growing economies of Asia and South America, which mean more people have money for food. The other trend is the surging demand for biofuels.”
So, boosting the price of corn is ethanol – but how much longer can we plan on this continuing? The New York Times details a stall in the corn-based alternative fuel due to a “glut.” This oversupply can be blamed on a couple things. First, it is very difficult (and expensive) to transport the fuel because it “is corrosive and soaks up water and impurities, [so] it cannot be shipped through the country’s fuel pipeline network,” reports the Times.
Also working against ethanol are stringent blending regulations and a lack of pumps at gas stations for the bio-fuel…not to mention the soaring food prices American consumers are feeling when they go out for a steak dinner, or to the market for groceries.
While U.S. officials seem undeterred by the growing concerns over ethanol…in China, they’ve been paying close attention.
AFX News Limited reports that China is putting the kibosh on “deep processing” of corn, which is the process that transforms corn into ethanol.
China is concerned about “security of food supply and the inflationary impact of biofuels, which use grain as feedstock.”
“During the early stages of the new policy, foreign companies will also be forbidden to invest in bio-ethanol production projects, and not allowed to acquire or invest in domestic bio-ethanol producers.
“The NDRC said the development of deep-processing industries was excessively rapid in some areas, and the growth of production capacity has exceeded that of corn output.”
Kevin Kerr puts it simply: “The novelty of corn-based ethanol is wearing off.”
He writes in his MarketWatch column: “The reality is that existing alternatives like nuclear, solar, wind, geothermal and others are likely to make more sense for consumers and investors.”
The talk has turned.
Same people. Same place. Same subject. But when neighbors get together in the autumn of 2007, the conversation is likely to have an entirely opposite effect. Today, as in 2005, a group gathered for drinks is likely to be astonished at how much the house down the street sold for. Two years ago, the news was received with cool pleasure… It was as if a troublesome mistress had suddenly announced that she was moving to another town; the homeowner was delighted, but he didn’t want to be too obvious about it.
Two years ago, he went out and celebrated his good fortune by up-grading his kitchen, putting in granite countertops, and buying one of those huge, expensive refrigerators that leaks on the floor. Now, when the phone is silent at the granite countertop shop, it is he who isn’t calling. He’s heard that the house down the street sold for less than the price two years ago. Bummer. Two years of price gains wiped out. And the neighbors say the Schultzes are getting ready to sell…and the Morrisons still haven’t gotten a bid on their place. And if Mrs. Butler finds out about Mr. Butler and Miss O’Flanaghan…well…it will be splitsville for them…and another house on the block up for sale.
According to the Case/Shiller numbers, the average sale price was down 3.5% across 20 large U.S. cities, through June. But that was before the summer. And according to the homebuilders, it was in August that things really started to go bad.
Lennar (NYSE:LEN) says it can no longer sell houses at a profit in many areas. Final sales are off 40% from a year ago. No wonder. There are 4.5 million houses for sale nationwide – almost twice as many as early 2005. And futures trading, based on the Case/Shiller index, imply that housing prices will continue falling until 2010.
It is hard to imagine how consumer spending can hold up. There are only three sources of cash for most consumers: savings, wages, or credit. As to savings, forget about it. And wages are going nowhere. That leaves credit. He’s been living on credit for years, but it was credit secured by rising house prices. As his house went up in price, he was able to ‘extract’ some of his additional equity, known as Mortgage Equity Withdrawal, or MEW. While the property market was purring along, MEW equaled about as much as the entire sum of GDP growth. Now, that source is gone too.
Almost inescapable result number 1: the consumer will have to spend less. Almost inescapable result number 2: the economy will go into recession.
Consumer spending is more than 70% of the U.S. economy. No economy in history ever depended so much on it. And if consumers stop spending, either something has to take up the slack…or the economy goes into recession.
Alan “Bubbles” Greenspan has been going around the world, promoting his book…which, in a roundabout way, promotes our book. Amazon.com has paired Greenspan’s memoir, In the Age of Turbulence with our latest missive, written with co-author Lila Rajiva, Mobs, Messiahs and Markets. He’s been telling interviewers around the globe that the odds of a recession for the United States are increasing. Uh…yes…
What could take up the slack? Business spending? The latest reports show the rate of business spending – new plant, equipment, ‘durable goods’ – going down, not up. But what would you expect? Why increase production when consumers can’t buy?
Another possible source is government. The feds have no money either, but as Ben Bernanke once put it, they “have a little technology called a printing press.” Ah yes…that is a long story too…
But for the moment, the pols think they are better off preaching the gospel of budget cutting (more about that below too…).
Recession? “Yes” is our guess.
*** What’s this? Michael Bloomberg is in England. He spoke to the Conservative Party conference in Blackpool, and sounded like a presidential contender.
We have wondered when Republicans would begin to act like conservatives again. We don’t know Bloomberg, but he sounded like one this weekend. Of the Republicans, he said this:
“Too many of them want to run up enormous deficits and hope that some way, somehow – someone else will pay for it. That’s not conservatism – that’s alchemy, or, if you like, lunacy.”
The 65-year-old added: “In New York , the economic uncertainty our two countries face today is beginning to feel similar to the economic downturn we experienced six years ago – but this time, the stakes are higher because more people owe more debt and so do our governments.
“The sun is rising on our borrowing bacchanalia and pretending otherwise will only make the recovery slower and more painful.”
He went on to outline four principles of responsible government:
“First, improve the quality of life that residents and visitors experience. Second, stick to fiscally responsible principles.
“Third, invest in projects that will unleash and incentivise private sector investment – and that will both leverage and diversify the economy.
“And fourth, provide strong leadership that is based on independent problem-solving, not partisan politics, and that is not afraid to tackle the toughest problems.”
*** Meanwhile, Alan Greenspan is promoting his new book – The Age of Turbulence. He told the BBC that the odds of recession were increasing. Hey, he can read the headlines as well as we can!
We went into Waterstone’s bookstore near Piccadilly yesterday. There, at the entry, was Greenspan’s book. We looked around for our own book – Mobs, Messiahs, and Markets, written with co-author Lila Rajiva. It was nowhere to be seen. Finally, we asked at the desk.
“How do you spell that author’s name? Doesn’t ring a bell…” asked the clerk.
“B…o…n…n…e…r, great writer…very perceptive…love his stuff…”
“Oh, we have three copies…they’re up on the fourth floor…in the accounting section,” came the reply.
Yikes, we’ll never sell any books that way.
But the book trade is a sorry business. It is mostly a celebrity game, as near as we can tell. If you want to sell a book, dear reader, you have to spend a lot of time promoting it…hosting book signing parties…schmoozing reviewers…doing interviews…talking, talking, talking.
In Waterstone’s, for example, there are two big posters – one of Bill Clinton…the other of Jane Fonda. Both are scheduled to appear in the bookstore to sign copies. Clinton’s oeuvre is a book with a positively beatific photo of Clinton on the cover; we thought he looked strangely like Mother Teresa. The book’s title: “Giving.” We didn’t see Fonda’s tome…but it must have been there somewhere, selling millions of copies.
*** This weekend Elizabeth came to London with Edward and we all went to see “Spamalot” – a musical based on the Monty Python film, The Holy Grail. Tickets were about 40 pounds each – for ‘Grand Circle,’ which was so high above the stage we thought be might need oxygen. We used to like to come to London for the inexpensive theatre – well, about 20 years ago. At today’s exchange rate, 5 people times 40 pounds at $2/pound = $400! Oh la la.
The play was very light, and very noisy…but amusing. Then, we wandered down to Chinatown for dinner.
Even at midnight, the streets of Soho are crowded with revelers and drunks. It is not unusually to see someone throwing up in the corner…or worse. Most of the people out at night are young – in their 20s…maybe 30s. But a surprising number are older people…often holding hands…boisterously laughing and having a good time.
Dinner was about the same price as the theatre. The bill came to almost 200 pounds – including wine and coffee. Not bad, really, as long as you are thinking in pounds. Don’t allow yourself to adjust to dollars, or you’ll get depressed.
We are enjoying our new life as a middle-aged ‘metrosexual.’ We’re not sure exactly what that is…but it seems to describe a very fluid, urban lifestyle…full of theatre outings…dinners…drinks…and taxi rides. It only has three major disadvantages: cirrhosis of the liver, sleep deprivation syndrome, and bankruptcy.
After Saturday’s late night, we roused the girls on Sunday morning and got to St. Michael’s church. It was Michaelmas; that is, St. Michael’s day, traditionally marking the first term in school after the summer holiday. Our favorite priest, Peter Mullen, gave a typically direct and puissant account of himself, explaining the futility of trying to describe how the world ends. The world ends for each of us when we die, he said…or words to that effect. But it is impossible for the human brain to know exactly what happens next.
Nowadays, people think they know so much more. They think they can see apocalypse coming; they call it global warming.
But in the old days, they had to use their imaginations. So, much of the apocryphal literature is full of wild images, written by people who were at the end of their tethers, trying to describe what it could be like. They talked of golden cities descending from the heavens…and of women “clothed in the sun.” But we are not meant to take these things literally, Peter insisted.
Peter did not go into it, but we thought of all the simpleton atheists, who are as chumped by a lack of imagination as the slobbering believers. “God does not exist,” they announce in triumph. He cannot exist because we know from modern physics that a city cannot float in the air!
After the service, we met friends for lunch along the Thames. The luncheon discussion was gay and carefree…but thoughtful too. One of our friends ran a commodity brokerage company in Geneva. Now, he has become an activist…a provocateur…for the free market.
“You know,” he said, “so much of this discussion of global climate change is completely irrational. It is more like a religious discussion than a scientific one. People – especially young people – think that some things are right and some things are wrong. There are a lot of people who think it is morally wrong to drive a Hummer, for example. It is not a question of cost/benefit ratios…or of trying to figure out whether it really makes sense. It is simply wrong.
“But I read recently an interesting study. The author tried to figure out how much environmental damage is done by Hummers…compared to socially-responsible cars, like that hybrid, the Prius.
“What he found was that it was not nearly as simple as you think. The Hummer is made of old technology – heavy steel. It is fairly easy to make…with existing plant and equipment…and the manufacturing process does fairly little environmental damage. And then, when it is worn out, it is easy to recycle; it is just a big lump of metal, after all.
“The Prius relies on newer technology. It’s made of a lot of composite materials, which apparently are very hard to deal with environmentally…and almost impossible to recycle. Plus, the process of building these things takes a lot of capital…and a lot of resources…all of which have environmental effects.
“The advantage of the Prius is that it takes less fuel to run per mile. Over time, the Prius is more environmentally friendly. But, at least according to this study, you have to run the Prius for 10 years before you are even. That is, it takes 10 years before the amount of environmental damage caused by the gas-guzzling Hummer catches up with the damage done by the Prius.”
When we were ready to go, we found that the lunch had been so well watered that we could barely stagger home and fall into bed. Then, scarcely an hour later, we were up again – dashing across the millennium bridge to a wine bar.
But our new life in London is being interrupted. Tonight, we’re off to South America.
The Daily Reckoning