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Wednesday, July 16, 2008

The Devil Is In The Details

Oh, Dang! I put a column (Consider Gold & Silver Now!) to bed and it is already overtaken by events.

First this …

Global Economic Decline Appears to Be Spreading (WSJ – subscription required).

The rising risk of recession in Europe shows that despite the strength of emerging-market economies such as Russia and China, the economic downturn that began in the U.S. last year is spreading to other regions, battering hopes that the global economy might have "decoupled" just enough that the rest of the world could coast through a U.S. downturn relatively unscathed.

Sean’s view -- So why is the US dollar going down in relation to the euro and the yen today? Because we’ve got lines snaking around the block at troubled banks as customers line up to take their money out. Now that will put the fear of God into currency traders.

If you click through on that Wall Street Journal story, you’ll see they talk about emerging market economies (Russia, China, India) still going strong even as the rest of the world slows down – just as I talked about in my column.

However, this next piece of news works against what I wrote in the column …

US official to attend meeting with Iran's nuclear negotiator

A senior US diplomat will attend international nuclear talks with Iran on Saturday, marking a shift in US policy on negotiations with Tehran, a State Department official said.

Sean’s view -- If the US and Iran are talking, there is less chance of a new war in the Middle East. Still, I think the basic points of my column today are valid. I’m nervous as hell, and you should be, too.

Finally, let’s talk about yesterday’s big pullback in oil, triggered by economic fears and rumors that a big bank was selling its oil positions to cover other losses. The pullback seems likely to continue today, as tensions ease in the Middle East. Did you see how oil found support yesterday around $136? In fact, there is strong support for oil between $133.25 and $136.25. Oil will have to break below that range for me to start thinking we’ll see a good pullback.

And what would a pullback mean? $125 … $120 … or maybe a drop to that strong support line at $110? Oil would still be over $100 a barrel … making the oil and gas companies I recommend some of the most profitable companies on Earth.

And this chart shows the real story ...


Exports are flat to trending down, even as demand in the emerging markets goes up. That math leads to higher prices, even if it is a bumpy, sometimes confusing ride.

Now to answer a reader question:

Q -- I keep hearing that the speculators are not to blame – that they can’t affect the spot price. So why does the oil spot price fall big time when the futures are cashed in?

A -- No one has said that futures can't affect the spot price of crude. They very much affect the spot price. But that does not mean that speculators are to blame for the high price of oil.

Speculators affect the short term swings in the price of oil but the general trend is affected by supply and demand. When speculators bid the price too high, the fundamentals eventually pull the price back into line and the speculators that were long get burned. The opposite happens when speculators short oil and drive it down below the fair price. The shorts get burned when supply and demand pulls the price back in line. This is why it’s important not to get too wrapped up in the short-term swings in the price of crude – the longer-term trend is much more important.

In other news …

The $1.4 Trillion Question

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

Senator asks if nation's drivers should slow down

An influential Republican senator suggested Thursday that Congress might want to consider reimposing a national speed limit to save gasoline and possibly ease fuel prices.

Sen. John Warner, R-Va., asked Energy Secretary Samuel Bodman to look into what speed limit would provide optimum gasoline efficiency given current technology. He said he wants to know if the administration might support efforts in Congress to require a lower speed limit.

Where Americans will (and won't) cut back

Many Americans are leaving the car in the garage and staying on their living room couch. A whopping 50% of Americans plan to buy an HD or flat-panel TV in the next year, the study showed, with little difference between those who are hardest hit by the downturn and those who are not. Cable and satellite TV subscriptions are also way down the list on cutbacks.

Despite the expense, another thing consumers refuse to give up altogether is vacationing and travel. Even in these tough times, 59% of Americans plan to take a trip of 100 or more miles in the next six months - only slightly below the 61% average of recent years.

Downturn gains steam as inflation roars ahead

The Labor Department said wholesale inflation, driven by skyrocketing gas and food costs, rose by 9.2 percent for the 12 months ending in June -- the fastest pace since the summer of 1981, during another energy crunch.

China June auto sales up 15.35% yr-on-yr at 836,800 units

Automobile sales in China rose 15.35 pct year-on-year in June to 836,800 units, with output up 13.96 pct at 837,200 units, the China Association of Automobile Manufacturers said. The association said in a statement that passenger vehicle sales rose 4.2 pct last month from a year earlier to 588,400 units, while commercial vehicle sales were up 15.58 pct at 248,400 units. In the first half, total auto sales grew 18.52 pct from a year earlier to 5.18 units with passenger vehicle sales up 17.07 pct at 3.61 mln and sales of commercial vehicles increasing 21.98 pct to 1.57 mln units.

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