NOTE: Leonard will be participating
in this weekend’s Cambridge House World Investment Conference. He will be
appearing in the ‘eye-opener’ panel at 8:00 AM Sunday and will be conducting a
workshop entitled “Four Dynamic Trends - Updated June 2008” Monday at 11:00 AM
in Workshop #6. Readers are invited to attend this important, timely and
invaluable conference.
One of the interesting features of being away from
civilization for several days is reviewing the important events recorded by the
financial media which have occurred during one’s absence. This trip has been no
different and what follows is a quick summary of some of those important
considerations.
Unquestionably, the largest source of media reports
over the past few days has come from the world of petroleum. With crude prices
soaring past the $139 per barrel number at their peak (all figures US$) mark and
gasoline, diesel and heating oil prices rising accordingly, the damage to
consumers’ financial condition is beginning to truly bite.
One ominous showing of the public’s distress has
come in the form of protests by truckers who are finding it difficult to
function under the heavy burden of soaring diesel fuel costs. One Reuter’s
story informs us that in Spain and Portugal, drivers blocked access to roads and
deliveries came to a virtual halt - which has led to stoppages in other
industries, such as auto manufacturing, for lack of parts. Deliveries have also
been curtailed to retailers, sparking a rush to purchase consumer goods, a rush
which has tied up expressways in Spain, bringing chaos to transportation. In
Portugal, the lack of timely truck deliveries is beginning to produce growing
food shortages and gasoline stations have not been receiving their regular
supplies, causing several stations to run dry. Even airports were beginning to
have problems with refueling aircraft.
In the Netherlands, truck drivers threatened to
limit their speed to only 50 kph (30 mph) to protest planned raises in diesel
excise taxes. In England, truck drivers threatened to stop deliveries to Shell
stations and in France, drivers threatened a massive national strike beginning
this coming Monday.
Meanwhile, in Canada, truckers have taken the more
traditional form of protest in which they appealed to government to help pay for
their fuel expenditures, stating that the national economy would be damaged
unless the government in Ottawa provided some sort of rebate program to offset
the increases in diesel fuel costs which have amounted to 40% already this year.
On top of all that, the media blared forth with
headlines that Russia’s leading petroleum corporation, GAZPROM, added fuel to
the fire, so to speak, by predicting that prices for Crude would soar to an
astonishing $250 per barrel, probably next year. The basis of their prediction
is that production in Russia is starting to actually decline and that oil output
is not growing significantly anywhere while demand continues to expand.
As if to confirm the Gasprom statements, BP (British
Petroleum) just told Reuters that, according to their information, total world
oil production actually declined by 130,000 barrels per day during 2007, the
first production decline since 2002. In the meantime, their figures confirm
what others have noted, that continued rapidly rising demand from the huge
economies of China and India will likely more than offset some anticipated
slowdowns in Europe and North America with the net result being an increase in
total worldwide demand for the coming year. Tony Hayward, BP’s chief executive,
stated that the increase in prices was not a function of ‘rampant speculation’,
but rather a reaction to market fundamentals.
One of the effects of those rising fuel prices was
to swell the U.S. Balance of Trade deficit in April by $4.4 billion, with rising
petroleum import costs accounting for virtually the entire increase in that
deficit. We note that the rise in fuel costs has been even more rapid in May
and June, a fact which is likely to result in much higher B of T deficit figures
for those months as well - all putting downward pressure on the U.S. Dollar.
Markets had other bad news to contend with, such as
the fact that the real estate crisis continued to generate negative headlines.
In Spain, the real estate market is crashing and the Financial Times just
reported that, “…The country’s 10-year construction boom is over. It has ended
with a crash, rather than a soft landing, because the international capital that
funded the house-building spree dried up with the sub-prime mortgage crisis in
the U.S.” They also inform us that the backlog of unsold homes has been rising
rapidly and “…house sales and mortgage lending are down 40% from a year ago.”
Another story in the Wall Street Journal tells us
that property prices for skyscrapers in New York City, one of the strongest
holdouts to date regarding price declines, have now begun to fall. Deutsche
Bank is selling three of those skyscrapers which it had to repossess from the
previous owner for prices which, “…reflect a 20 to 30% decline…” from the top of
the market.
In other real estate related news, the FT also
reported that the credit crisis is spreading far beyond the original subprime
loan mess into direct loans made by middle-size banks. While the large banks
usually sold their real estate loans as (now suspect) insured-packages, smaller
banks kept theirs in their own portfolios and now, with the decline in home
prices, many of those loans, frequently made on the basis of allowing consumers
to ‘tap into’ growing equity, now exceed the value of the underlying real
estate. One Wall Street executive was quoted as saying, “…Home equity loans are
a wound on many banks’ balance sheets. They are fast becoming a serious problem
for small and large institutions.”
One other story caught our eye because it confirms
something we have felt for some time, that there is a growing distrust of
official government figures, particularly as those numbers relate to price
inflation statistics. In Argentina, economists at the Torcuato di Tella
University recently predicted inflation for the coming year at a devastating
36.5%, but the government is ‘officially’ reporting that price inflation is
proceeding at only 0.6% per month. Jorge Schvartzer, economics professor at the
University of Buenos Aires, put it simply by telling the FP that, “…it’s obvious
that the government has been manipulating the index.”
Our own observation is that governments have a
tremendous self-interest in reporting low inflation numbers since, by law, many
of their benefits contain a COLA - or “Cost of Living adjustment” clause which
means that future benefits must be increased by the rate published in official
inflation index numbers. If those numbers accurately reflected what many
observers believe to be the true rate of price inflation, those adjustments
could put unbearable pressure on future government deficits.
As if to make the inflation story even worse, the
“rain Gods” have provided additional torment in the form of drenching storms
which have flooded large portions of the American Farm Belt, causing the U.S.
D.A. to reduce crop estimates and those reduced estimates caused grain prices,
particularly for corn, to soar to all-time high levels.
So, the story is much of the same. Fundamental
information continues to deteriorate along a broad front but the government
powers-that-be assure us that the future looks bright once the present period of
difficulty is behind us. When the public believes the government, markets soar,
but when reality hits home with new negative data, they plunge.
This morning, financial markets are higher with the
Dow Industrials up by about 120 points and the TSX ahead by over 170, as of
about 9:00 AM PDT. Gold is close to unchanged near $867 with silver and
platinum modestly stronger, while base metals are mostly unchanged, with the
exception of lead which continues to weaken, now having declined to just below
80 cents per pound. Petroleum is slightly lower and the Canadian Dollar has
fallen to its lowest level in several weeks, just above 97 cents US.
The information presented above is based on data which we believe to be from
reliable sources, but the accuracy of which cannot be guaranteed. Any
opinions or predictions contained herein are those of the editor and are
likewise offered also for information purposes only.
Any investment decisions should be made only following consultation with
registered investment professionals.
