Thursday, April 26, 2012

May Day 2012 Rioting Was Surprisingly Sparce

Given the high levels of youth unemployment in the North America and Europe, it is mildly surprising that May Day 2012 did not result in a wave of violent protests and riots. While there was violence and vandalism in Seattle, Montreal, and Oakland, the demonstrations were peaceful for the most part across most of Europe and North America. The efforts of anarchists to use May Day to stir up a wave of disruptive demonstrations mostly failed

There is a huge amount of rage among unemployed youth. The hordes of unemployed is a tinder box that may be unleashed in the future, but at least on May Day 2012, did not erupt.

Wednesday, April 25, 2012

Oil Prices Seem Sticky Above $100 A Barrel Despite Lessening of Iran Tension

A critical reason for the lack of growth in the economies of Europe, Japan, and the U.S. is the high cost of oil. Expensive oil serves as a tax on economic activity. Two of the primary factors getting the blame for the high cost of oil are: 1) speculators; and 2) the threat to supplies due to a potential conflict between Iran and either Israel or the U.S.

The price of a barrel of oil trading on the NY Mercantile Exchange is basically flat today at midday despite news that "Iran Considers Halting Nuclear Expansion to Avert EU Oil Ban". While it may be that traders are discounting this news as simply more posturing by Iran, it is disconcerting that it has not been a bigger market mover.

The price of oil may be permanently stuck at a price above $100 a barrel. Demand keeps increasing while supply stays flat and the cost of production goes up. Yes, lots of new sources of oil are being found or are becoming economic to produce now that oil is so pricey. However, these new sources of supply are barely keeping up with the growing demand from Asia and South America. Further, as the supply from established oil fields with low cost of production diminishes by about 5% per year, the high cost of production from new sources virtually guarantees that oil will never again drop below $80 per barrel for an extended period of time, unless there is an absolute collapse in demand. The supposed  "speculative bubble" may not exist, but simply be a function of traders foreseeing that future demand is likely to outstrip future production.

Some economists judge that the growth of economic activity in Europe, Japan, and the U.S. since WWII was largely based on the availability of cheap oil. If they are correct, it raises serious questions about how these developed economies can rekindle growth given the massive debts they have incurred and the high costs of supporting ageing populations. In addition to the high cost of oil, all three economies have self imposed incremental energy costs. Japan and Germany are paying more for electricity due to shutting down nuclear plants. In the U.S., cost efficient coal power plants are being shut down.

What will it take for Japan, Europe, and the U.S. to re-ignite economic growth despite high oil prices? Lessening of tensions with Iran may not lead to a plunge in the price of oil. Thus, given the drag on the economy from high oil prices, the agonizingly slow pace of economic growth in the U.S. of the last couple of years may be as good as it gets.


Tuesday, April 17, 2012

Should We Worry About Extreme Weather Causing Inflated Food Costs?

The cost of buying food is going up. The food-at-home Consumer Price Index (CPI) increased 4.8% in 2011. One of the factors that led to higher food prices was the weird weather. Not only was the U.S. hit with extensive flooding in the Midwest and drought in the Southwest, but changing precipitation patterns and mounting water stress cut into food production around the world.

The weather has gotten even weirder in 2012 and may lead to even bigger increases in food costs this year. The European cold snap is likely to reduce the continent's soft wheat crop by about 5%. Officials in Texas cut off irrigation water to rice farmers downstream of reservoirs depleted by the worst one-year drought in Texas history. It is the first time in its seventy-eight year history that the Lower Colorado River Authority has cut off water to farmers. In California, only 50 percent of the water requested from the State Water Project is expected to be delivered to nearly one million acres of irrigated farmland due to the lack of snow this winter.

So the question becomes, are the spate of floods and droughts just a fluke, or is extreme weather going to get worse? According to a couple of theories, the droughts and flooding are being caused by aspects of global climate change.
1) research by Jennifer Francis and Steve Vavrus suggests that warming in the Arctic is causing weather patterns in mid-latitudes to become more persistent. This persistence can lead to conditions like heat waves, cold spells, drought, flooding, and heavy snows. The researchers found that as temperatures in the Arctic warm and become closer to temperatures in lower latitudes, the waves of the jet stream tend to spread out, and west-to-east winds slow down in the upper level of the atmosphere (where storm tracks form). Both of these effects tend to slow the progression of weather patterns, which means that a weather pattern, whether hot or cold, is more likely to stick around.
2) A 4% increase in atmospheric moisture has been observed and is consistent with a warming climate.7 The increased moisture in the atmosphere is driving the shift to heavier but less frequent rains — “when it rains, it pours.” While an atmosphere that holds more moisture has greater potential to produce heavier precipitation, precipitation events also become less frequent and shorter, as it takes longer to recharge the atmosphere with moisture.9 By analogy, a larger bucket holds and dumps more water, but takes longer to refill.
If the above theories are correct, then it seems likely that the balance of 2012 will continue to feature extreme weather events. An increase in droughts and flooding would lead to further agricultural losses. And the increase in weird weather may be a long term problem. If extreme weather leads to food shortages in future years, big increases in the cost of food could become a serious problem. Thus, it seems appropriate to worry about extreme weather inflating the cost of buying food.

Tuesday, April 10, 2012

Deficits Must Not Matter -- U.S. Treasuries and Japanese Yen Both Rallying

The decline in U.S. stock prices and the increase in interest rates for the sovereign debt of Spain and Italy are getting most of the headlines today. However, it is noteworthy that the U.S. Treasury Bonds and the Japanese Yen are both rallying. The interest rate on the 10 year Treasury note dropped back below 2.0%. The Japanese Yen continued it's rally versus the U.S. dollar and closed at $0.807, a 4% jump in the past three weeks.

At least for now, traders are certainly complacent about the huge U.S. and Japanese deficits. The fact that the U.S. and Japan are projected to run the largest deficits as a percent of GDP among all world's developed countries is obviously not scaring off traders. As shown below, the deficits in the U.S. and Japan in 2012 are projected to be 9.3% and 8.9% of total GDP respectively.

Neither the U.S. nor Japan are taking any measures that will put a dent in their deficits in 2012. While continuing to run up massive deficits may lead both countries to fall off a fiscal cliff within the next few years, they obviously are considered safer haven than Europe.

Ultimately the huge deficits the U.S. and Japan are running up will matter. But given that the consequences of  unsustainable deficits may not wreck its fiscal havoc for a number of years, and traders have a very short time frame, deficits of countries that control their own currencies do not matter much for now in the bond and currency markets.

Friday, April 6, 2012

When Will Romney Slam Obama For Trillion Dollar Deficits?

The attacks that Mitt Romney has taken at President Obama so far have been no more damaging than the light jabs that fighters sometimes throw early in a boxing match. However, there is a purpose to boxers' jabs. They are using them to explore for opportunities and set up an opponent for bigger blows later in the fight. In the case of Mitt Romney, his lame attacks on Barack Obama are due to the fact that he is a weak campaigner.

Here is a message for Romney -- explain to American voters the dangers of four more years of trillion dollar deficits that a second term Obama administration would bring. Stop being so wishy washy and use justified fear mongering. The current Romney message is not connecting with voters. Romney is never going to be able to pull off a positive message the way the Ronald Reagan could. Yes, American voters would like an upbeat "shining city on a hill message", but Romney is not a strong enough campaigner to make it work for him.

The Romney campaign should go back and review tapes of Ross Perot's campaign. It is remarkable to recall that back in June, 1992, Ross Perot led the presidential popularity polls with support from 39% of respondents (versus 31% for Bush and 25% for Clinton). While part of Perot's appeal was his populist anti-establishment message, his core platform was the need for an end to U.S deficit spending. In hindsight, it seems almost hard to believe that one of his campaign infomercials drew 10.5 million viewers for a message that was loaded with economic statistics. 

The U.S. debt crisis is far more severe in 2012 than it was in 1992. There should be a lesson for U.S politicians from the popularity gained by Ross Perot. His use of charts to explain the dangers of the growing U.S. debt made the deficit math easy to understand.  And once U.S. voters understood the problem and the fact that Perot stood to address it, he gained widespread support from both conservatives and liberals. Given the incredible missteps of Perot's campaign, including dropping out of the race and then jumping back in, it seems shocking that he still ultimately received 19% of the vote on election day.

Illustrating the dangers of an Obama administration running up the U.S debt up to $20 billion during the next four years is a powerful campaign message. It is time for Romney to start using some justified fear mongering. The American voters need to understand what is at stake in this election. So far, Mitt Romney has failed to give voters a persuasive reason to vote for him. Romney needs move beyond weak jabs along the lines of Obama being "anti-business, anti-investment and anti-jobs" and start throwing some powerful uppercuts.


Monday, April 2, 2012

Why Are Gasoline Prices So High? The Japanese Nuke Shut Down Is A Contributing Factor

The high price of gasoline in the U.S. is primarily due to the high cost of oil. While there are many causes for the high cost of oil, a key factor is oil traders requiring a premium price for orders for oil in a market that is experiencing increasing demand amid concerns about supply disruptions. 

The demand for oil has been increasing in Asia as economies grow and car ownership becomes more commonplace. China has already surpassed the U.S. as the world's largest car market. The market for new car sales in India has also grown, to the point where it now is over a quarter the size of the U.S. market.

However, in addition to steady growing demand for oil throughout Asia, there has been a sharp spike in demand for oil from Japan due to shutting down nuclear power plants. Since the March 11, 2011 earthquake and tsunami that wrecked three reactors at the Fukushima plant northeast of Tokyo, Japan has shut down all but one of its 54 nuclear power plants. The country relied on nuclear sources for almost 30 percent of its electricity before the disaster. Japan has increased its oil imports for power generation by about 275,000 barrels a day .

It would be an overstatement to conclude that incremental demand from Japan of 275,000 barrels a day of oil was a primary cause of the increase in oil prices. This incremental demand only represents a fraction of the 90,000,000 billion barrels a day consumed world wide. However, it is a contributing factor to the tight supply of oil.

The Japanese economy was struggling before the tsunami hit north of Tokyo. The extra cost of importing 275,000 barrel of oil per day is one of the factors the converted the country from being an exporting powerhouse into a net importer during January, 2012. Time will tell whether Japan decides to restart its nuclear plants, but if they do so, it may offer a bit of a relief from today's high gasoline prices.

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