Archive for June, 2013

Mid-June 2013 Blog Update of THE GREAT DEPRESSION of DEBT

June 16, 2013

Note that my new novel “The Child Remover” is now available on Amazon as both a paperback and in a Kindle version. 

WE SHOULD INCREASE TAXES AND DOUBLE THE SEQUESTRATION AMOUNT

Why not?  After all, payroll and Social Security taxes went up substantially in January, and the $85 billion 2013 government spending cuts called the Sequester took effect at the beginning of March. Despite (or because of) those changes, things seem to be going quite well for the economy.  Look at all the good things happening. 

The Labor Department reported that 12,000 fewer Americans filed new claims for unemployment benefits last week. Jobless claims are now close to their lowest levels since 2007.  The unemployment rate has dropped from 7.9% in January to its current 7.6%.  Consumer spending also seems to be gathering steam. Retail sales jumped 0.6 percent in May, after a slight increase in April.  The Small Business Optimism Index increased 2.3 points to 94.4 last month, the highest level since May last year.  Home prices have risen at the fastest rate in seven years. Sales of previously owned homes in April hit their highest level in more than three years. The S&P 500, despite its recent drop, is up 16% since the beginning of the year.

THE GREAT FACADE

The Sentier Household Real Median Income Trends Report shows that incomes from the first of the year through April are basically unchanged.  So what is driving the perceived improvement in the economy?  It isn’t worker productivity, which gained only 0.5 percent on an annual basis in the first quarter, according to the BLS. That’s weaker than the 0.7 percent gain in 2012 or the 0.6 percent gain in 2011. Productivity is down dramatically from average annual gains of 3 percent in 2009 and 2010. 

So what is enabling all the “good news” the economy has been getting, especially the data that shows that the consumer is still hanging in there on spending.  Let’s look at the consumers’ savings rates for the first 4 months of this year, starting in January: 2.3%, 2.7%, 2.5%, and 2.5%.  These are the lowest savings rates since the end of 2007, when the recent recession was just starting.  To put this in perspective, the average savings rate between 1959 and 2013 was 6.9%.  Perhaps because the consumer feels that the economy is about to turn upward, or because they think the sequester cuts are only temporary, or because they are trying to hang on to their lifestyles no matter what, consumers have given up saving and are living for today.  NOT a prescription for a healthy economy!  The lowering of the savings rate is what is carrying the economy.  But the savings rate cannot be lowered much more, nor can the consumer ignore savings forever, so this boost to the economy is indeed temporary.

Because of this, I feel we are in for a slowdown for the short term, perhaps for a year or two.  My thoughts for a slowdown are further supported by the recent debunking of Reinhart And Rogoff’s Pro-Austerity Research, which was the rationale of many in our country who were using this study to justify harsh austerity measures, including the Sequestration.  The debunking studies were done at University of Michigan and University of Massachusetts.

WHAT WILL EVENTUALLY TAKE US OUT OF THE ECONOMIC DOLDRUMS?

The mess in The Middle East will eventually affect worldwide oil supply.  The Syrian conflict is turning sectarian, with Sunnis against Shiites.  As the balance of power sways one way or another, more and more countries with their own sectarian majorities will be entering the fray, and eventually even countries like Saudi Arabia will be affected.  And so will oil supply.  Israel, which will not allow Iran to go nuclear, will eventually use the cover of the turmoil in Syria to bomb Iran’s nuclear facilities.  And Iran can affect both oil production and transport, which they are likely to do in response to any Israel aggression against their nuclear plans.  What a mess!

The good news is the US is well on its way to oil independence.   In 2012, an increase in output of 1 million barrels a day caused net oil imports to the U.S. to drop by 930,000 barrels a day.  Oil imports are now 36 percent below their 2005 peak, BP said in its annual Statistical Review of World Energy. The expansion of both oil and natural gas production in the U.S. was the fastest in the world last year.  A lot of this increase came from unconventional sources like shale oil. 

I believe that once the US accepts that the Middle East and its oil supply are headed for disaster, support for even faster development of shale gas and oil in the US will occur.  With the recent gains in horizontal drilling, multiple direction drilling from one drill head, deep drilling under the shale, and fracking improvements, it seems that the estimates for proven shale reserves of oil and gas just keep going up almost monthly.  Believers in Peak Oil are getting to be rare birds indeed!

CAN WE GAIN FROM THIS KNOWLEDGE?

For several months I have been emphasizing how energy independence will change the future for the US and open up all sorts of scenarios, including the growth of solar and wind power and the return of manufacturing.  But now I would like to present an investment scenario on which I can be measured, much like my promoting the benefit of TIP way back in 2005.  Here is my scenario.  I have picked three stocks (of which I own shares in one) that I will track monthly.  These companies are active in drilling in the shale areas of the US.  For my measurement baseline, I will assume that someone bought $10,000 of stock of each of these companies at their closing prices on June 14, 2013.  Note that I just picked several of these companies somewhat randomly.  There are many other company options available.  The three companies and their closing share prices are as follows:

Continental Resources (CLR)   $86.31

Oasis Petroleum (OAS)   $41.37

Whiting Petroleum (WLL)   $48.07

Just for reference, if someone had bought an equal dollar amount of shares in each of these companies a year ago, they would be up 37.6% now.  But that is history.  My baseline measurement will begin at the prices on June 14, 2013.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.