Monday, February 6, 2012

Be Happy, Do Not Worry About Looming Debt, Expensive Oil, and Extreme Weather Crises

Stocks around the world are off to their best start in 18 years. The permabears are getting massacred as they get stopped out on their short positions. My own bearish forecasts made less than two months ago are looking terribly misguided.

However, despite the good start to the year, I worry that terrible problems are just being kicked down the road. I still have a sense of dread over the headwinds the economy will face over next few years.

Debt - Europe, Japan, and the U.S. keep piling on trillions of dollars of unsustainable deficits. In Europe, the proposed austerity measures do not end the deficit spending by governments in 2012, they simply reduce the size of the budget shortfalls. The debt problem is growing by the day.

So far, Japan and the U.S. have felt minimal consequences of their profligate government spending. However, the complacency about continuing to running huge budget deficits is already coming to an end in Japan and most likely will also in the U.S. when the contentious debate over the debt limit and the Bush era tax cuts return to the headlines within less than a year

Japan's total public debt is estimated at l 1,024 trillion yen ($13.31 trillion), which means every child born in the country today comes into the world owing more than $100,000. Dwindling tax revenues cover only 40% of Japan's annual government budget, a shortfall being financed by adding even more new debt. With the tax increases and entitlement cuts that are being proposed to cut the deficit, Japan's economic future may be almost as bleak as that of the PIIGs (Portugal, Italy, Ireland, and Spain).

For now, the U.S is able to pump up the fragile economy by adding  a trillion dollars a year of fiscal stimulus via deficit spending. However, financing the expanding U.S. debt will become ever more difficult as the interest costs eat up an increasing portion of tax revenues. 

Expensive Oil - Despite the resurgence in oil production in the U.S., the world is running out of cheap oil. Newly discovered sources of oil require higher costs to extract, more time to obtain permits and construct drilling rigs, and more energy to pump the oil. Despite shrinking demand in the U.S. and Europe, global consumption will increase by 1.2 percent in 2012, according to International Energy Agency estimates. Demand in the most industrialized nations will shrink by 300,000 barrels a day, or 0.7 percent, this year, while fuel use in emerging economies will grow by 1.4 million barrels, or 3.2 percent, the agency forecasts. Regardless of new technologies, oil will be critically important as a transportation fuel and fertilizer feed stock for at least a decade. Oil is likely to continue getting more expensive simply based on demand, supply, and cost of production. Geopolitical tension in the mid-east and Nigeria may also inflate the price of oil.

Extreme Weather Events - The current debate over whether the earth's temperature has risen over the past 15 years seems misguided. Most global warming Cassandra's point to the potential for catastrophic consequences due to the rise of sea levels by 2050 if global temperatures rise by another 2 degrees Fahrenheit. However, a 2 degree rise over a 40 year period is only 0.05 degrees per year. Given the variability of weather from year to year, a 0.05 degree Fahrenheit change is not going to be very noticeable. However, the increase in extreme weather events is noticeable to anyone reading the headlines. Flash floods and droughts are increasing commonplace. The world may already have reached a tipping point in terms of extreme weather events due to an increase in water vapor in the air and the thinning of the arctic ice sheet. While no single extreme weather event can be blamed on global climate change, the almost daily occurrence of record breaking rain and snow storms seems likely due to the increase in water vapor in the atmosphere. Some believe that global climate change may be contributing to the record setting cold and snow storms in Europe. If extreme weather continues to get worse, in addition to higher food prices and the costs of cleaning up the damage, there are also likely to be significant restrictions placed on the economy by a revitalized environmental movement.

The rising markets certainly make the permabears seem wrong. Time will tell how much longer the problems of excessive debt, declining supplies of cheap oil, and increasing frequency of extreme weather events can be kicked down the road

Related Posts

1 comment: