America's Oil Crunch (John Myers) / The Daily Reckoning

verfasst von - Elli -, 21.05.2003, 21:31

-->America's Oil Crunch

The Daily Reckoning

Amelia Island, Florida

Wednesday, 21 May 2003

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*** What about bonds? Can they go up more?

*** Gold keeps rising...Japanese buy bonds...

*** Real estate bubble? Gold at $3,000 an ounce...and more!

----------------------

"You're pretty sure stocks will hit epic lows before they
hit new epic highs, right?"

(We continue our auto-interrogation, after an interruption
when we were traveling.)

Yep, is our reply.

"On what do you base this guess?"

Experience, intuition and theory. Once a major top is
reached, you should expect a major bottom.

"Okay, but what about bonds? With yields at 50-year lows,
haven't bonds reached a major top? Shouldn't we sell?"

Ah...good question."Maybe" is our good answer. Bonds have
been in a major bull market for many years - as interest
rates have fallen for the last 21 years. But, unlike
stocks, the bull market in bonds has not yet topped out.
Bonds continue to rise - even while the U.S. Treasury
Secretary and Fed Reserve governors do all they can to
destroy confidence in the dollar.

Sakakibara explained it; the Fed created a bubble in the
bond market by lowering rates and pushing money into the
system. And as Eric describes below, the Japanese - either
because they are fools or geniuses - are taking advantage
of it.

Most everyone we know takes the Fed at its word and on its
record; if there's one thing the Fed can do, say they, it
is destroy the dollar. And almost all economists believe
the Fed has the tools to do the job."We have...a printing
press," Ben Bernanke confirmed last August.

"Fears of deflation are overblown," concludes an MSNBC
report. So says a"panel of prominent economists",
otherwise known as the"shadow open market committee."

Well, that does it for us here at the Daily Reckoning. If
prominent economists think this whole deflation thing is
"overblown", it must be a lead-pipe cinch that deflation
will never be a problem.

But prominent economists in Japan - notably Eisuke
Sakakibara himself - don't believe it. They've watched
deflation gradually wear down prices...despite their
efforts to inflate. And now they see a way to profit from
it - by buying America's bonds in anticipation that the
U.S. economy will follow Japan's lead.

Can bond prices continue to rise? We note that long bond
yields of 2.5% were common in the '50s. And while nominal
yields are at record lows, real yields still have room to
fall. As deflationary forces knock down prices, the
difference between the nominal yield and the real yield
widens. Even at a zero percent nominal yield, if inflation
were running at minus 3%, bond holders would still realize
a positive return of 3%. Tax-free.

Richard Bernstein of Merrill Lynch points out that,
historically, people have kept about as much of their
investment money in bonds as in stocks. Now, they are
overweighted towards stocks, with two thirds of their money
in them. By this measure, too, bonds have room to go up.

So who knows? The Japanese are buying. Usually, whether it
is golf courses, great paintings, landmark real estate or
stocks, they buy at the top...but even the Japanese are not
reliably moronic.

We'll have to wait and see...

Eric...

------------

Eric Fry in New York...

- Monday's anxiety-inducing 185-point Dow selloff inspired
very little"dip-buying" yesterday...The dips simply
refused to buy. A tepid early morning advance evaporated by
the closing bell, as the Dow and the Nasdaq fell a couple
of points each.

- We've heard all the swell reasons why investors should be
buying stocks right now. The Wall Street strategists have
told us that corporate earnings will recover in the second
half of the year and that Greenspan will keep his
omnipotent thumb on interest rates...Sounds swell! But we
are still not convinced.

- For one thing, we've noticed - without any help from the
Wall Street strategists - that Snow is raining on the
dollar's parade...which could be a big problem for the
stock market. Treasury Secretary Snow's mystifyingly stupid
efforts to"talk down" the dollar could lead to a major
loss of confidence in ALL dollar-denominated assets,
especially stocks selling for 35 times earnings. At least
the Bush Administration is consistent; its domestic
policies are as reckless and cavalier as its foreign
policies...But that's just one Republican's opinion.

- While stocks were taking a breather yesterday, gold and
government bonds both continued their bizarre, joined-at-
the-hip rally. The gold market added to Monday's hefty
$9.50 gain by advancing another $2.30 to $366.70 an ounce.

- Meanwhile, the bond market continues to dazzle and amaze.
Bonds refuse to yield...literally. The 10-year and 30-year
issues seem to yield less every day. The 10-year Treasury
note ended yesterday's trading session yielding a 45-year
low of 3.36%. The 30-year bond soared two points, pushing
its yield to a new record-low of 4.37%, compared to 4.48%
on Monday.

- The New York office of the Daily Reckoning steadfastly
believes - wrongly, so far - that the U.S. bond market is
one of the most compelling"sells" in the world of global
finance. It's conceivable, of course, that the 10-year
yield will plummet below 3% before marching higher. Heck,
the yield could fall to 2%! Nevertheless, your New York
editor would take the bet (in small quantities) that one
year from now, the 10-year Treasury yield will be higher
than it is today.

- So who's buying these things?...The Japanese?...That's
Stephanie Pomboy's theory, and it seems plausible to us.
"The action in the 30-year has Japan's fingers all over
it," observes Pomboy in her latest missive from
MacroMavens."After all, the Japanese are desperate to stem
the rise in the yen. They can accomplish this by continuing
to drop yen in the vast foreign exchange ocean or, more
effectively, they can step-up their purchases of U.S.
assets."

- Pomboy continues:"Since the Fed's gambit to debase the
dollar without simultaneously pushing interest rates higher
requires that foreigners remain a captive audience for our
soon-to-be-debauched paper, having the Japanese stick
around is most helpful. Indeed, as the largest single
holder by far of U.S. Treasury debt, they can make or break
things for the Fed." Hmmm...if Pomboy's theory is on
target, the Japanese could solidify, once and for all,
their reputation as the world's least value-conscious
investors.

- While the Japanese are busy snapping up long-dated, low-
yielding paper, America's monetary authorities are working
around the clock to insure that yen-based investors in U.S.
bonds will receive large negative returns. In other words,
they are working to debase the dollar.

- Snow, Greenspan, Bernanke and all the other members of
Washington's"Dollar Destruction Gang" behave as though it
is prudent and commendable to destroy the dollar's global
purchasing power. They behave as though it is strenuous,
noble work to destroy what preceding generations of
Americans have sacrificed and struggled to create. The
dollar did not become the world's reserve currency by
accident. Nor did it effortlessly and instantly become
"America's most successful export," as James Grant calls
it.

- The Greenspan-Snow project to weaken the dollar is like
the work of a man who lines the perimeter of his house with
kindling and firewood so that he may burn it to the ground
more easily. If the man were to succeed in burning his
house to the ground, would his family praise his hard work?
Would his children say,"Dad, this is great! Now we can
dine al fresco EVERY night! You're a genius!"?

- We think we understand the lunatic theory that motivates
the dollar-destruction project. A weak dollar, in theory,
spurs export growth while reflating the economy. We think
we understand, therefore, why the U.S. Treasury and the Fed
consider it"God's work" to crater the dollar. But we
suspect that a steep dollar decline would produce devilish
consequences for our economy...while sending the gold price
heavenward.

-------------

Bill Bonner, back on Amelia Island...

*** Steve Sjuggerud's house backs up to a golf course on
one side...the ocean is not far away on the other.

"But this is not an expensive house," Steve explained."In
fact, there really aren't many areas of the country where
house prices have gone crazy. I looked at the real estate
trends of the last 20 years and adjusted prices for
inflation. You see right away that house prices are not in
a bubble. In fact, they're more affordable than they've
been for two decades."

*** The population of Amelia Island has doubled in the last
4 years, Steve told us. But the place doesn't seem crowded.
Last night, the 'downtown' area seemed deserted.
Restaurants had few customers. There were almost no people
on the sidewalks.

"It must get busy in mid-winter," we suggested.

"Not really," Steve replied."It's pretty quiet here all
year round."

*** The decline in the dollar so far, opined John Snow over
the weekend, has been"really fairly moderate." To many
observers, this suggested that U.S. monetary officials
expected more. Maybe they even wanted more. For weren't
they now saying that a moderate decline in the U.S. dollar
would be good for the economy?

George Soros and other currency speculators hit the bid,
selling dollars, and thus giving the U.S. Treasury
Secretary what he seemed to be asking for.

Snow had spoken honestly at the G8 meeting in Europe. He
gave his views of a strong dollar as one in which people
had faith, not necessarily one in which they wanted to
store their wealth.

"The problem is," explains Bill Fleckenstein,"you cannot
get your currency to go down a little bit to where you want
it, and then assume it will stop there. Once these things
are put into motion, they always go longer than you think
possible, and they always overshoot. I think we have an
incredibly dangerous period in front of us, as our
financial, economic, and balance sheet situation is far
riskier than the last time we had a dollar crisis, which
was in 1987. The economy was overheating then. Now I
believe it's getting set to contract. The world is swimming
in dollars. We have a monstrous amount of debt outstanding.
The size of our trade deficit, $1.5 billion a day, is just
gargantuan. Plus, we've got trillions of dollars' worth of
derivatives exposure. So, if you wanted to set the stage
for a potential dramatic accident, it's been set.

"I can only shake my head at the economic folly of the last
seven or eight years as we have tried to speculate our way
to prosperity. So many people have been misled into
thinking the policies were all good or manageable. How this
all plays out is not yet knowable, but it's a given that we
face financial and economic turmoil. When one's own
government, against a backdrop of precarious fundamentals,
stands up and says,"Sell our currency," which is basically
what Snow did, it's a recipe for disaster."

***"Gold should be at about $700 right now," estimated
analyst Paul Van Eeden at yesterday's private conference.
"$3000 an ounce is more like it," added my old friend, Doug
Casey.

---------------------

The Daily Reckoning PRESENTS: As the situation in the Mid
East becomes less and less clear, the future of energy
prices grows, conversely, more and more certain."Prepare
to profit from a volatile bull market in crude oil,"
advises John Myers."Even if the Middle East somehow
manages to become an oasis of tranquility and harmony, the
bull market in oil is just beginning..."


AMERICA'S OIL CRUNCH
By John Myers

There is a new Middle East taking shape - one filled with
Muslim extremism, teetering sheikdoms, and perhaps falling
governments. It is a Middle East that could send oil prices
soaring.

The recent bombing in Saudi Arabia underscores just how
shaky this region is - an area that holds two-thirds of the
world's oil. And while America's occupation of Iraq may
have given Wall Street a temporary high, the hangover could
be devastating. We anticipate a hangover that features
stubbornly high oil and natural gas prices.

Many investors will recall that high energy prices were a
major part of the equation that made the 1970s one of the
worst decades on record for stock investors. Well... the
oil market of 2003 may not be so different from the oil
market of 1973. One important difference, however, is that
the United States relies far more heavily on foreign energy
supplies today than it did 30 years ago...and that's not a
good thing.

In his book, Jihad vs. McWorld, Benjamin R. Barber writes:
"The world still spins on the energy of fossil fuels - non-
recyclable and irreplaceable. The United States represents
an especially foreboding case study, for here is one of the
world's richest countries using up its own resources in an
orgy of consumption that's reflected neither in elevated
living standards nor in proportionately larger GDP. Nor
have we learned much from two major crises in supply and
our ever more debilitating dependency on foreign oil..."

The United States is a geological pincushion. More oil
wells have been drilled in the continental United States
than the rest of the world combined. Yet, U.S. oil
production continues to decline with each year, resulting
in less and less domestic production.

Consider the following facts:

* The United States accounts for less than 4 percent of the
world's oil production, but consumes more than 30 percent
of world oil supplies.

* Since 1970, U.S. crude oil production has declined by
nearly 50 percent, falling from 11.3 million barrels per
day (mb/d) to 6.1 mb/d. Over the past few years, U.S.
production is declining at a rate of 4 percent per year.

* Since 1970, U.S. oil reserves have fallen by more than 40
percent, or from 38 billion barrels to 22 billion barrels.

* The average oil well in the continental United States
pumps about 300 b/d. The average well in the Middle East
produces 10,000 b/d.

* Of the 530,000 operating oil wells in the U.S. in 2000,
78 percent were"stripper wells," each of which produced
less than 10 barrels per day. These wells accounted for 0.3
billion barrels of production in 2000, or about 15 percent
of total U.S. crude oil production.

* The last elephant oil field (more than a billion barrels)
discovered in the United States was in Prudhoe Bay, Alaska,
which elevated U.S. crude production for nearly two
decades. Now, as Prudhoe Bay empties out, domestic crude
production is set for a steep decline.

* For the Lower 48 States, the apex in the oil discovery
rate was hit in 1957. U.S. proven oil reserves peaked five
years later in 1962. Another decade later, U.S. oil
production peaked. Since then, America has come to depend
on ever-greater amounts of foreign oil.

"Oil reserves have fallen so far to the point that annual
U.S. oil consumption is now equivalent to about 1/4 of
total proven reserves," writes the Hubbert Peak of Oil
Production (http://www.hubbertpeak.com/us/)."This means
that, if the U.S. had to supply its own oil, and no new
discoveries occurred, its oil would be gone in four years!
By importing 55 percent of its oil, the inevitable is being
postponed. But for how long can this continue?"

Indefinitely, as long as the U.S. government can guarantee
available and cheap oil supplies delivered from the Middle
East. If it cannot, then the United States faces severe
challenges for the future.

America is heavily addicted to foreign crude oil. Of the 78
mb/d that the world consumes in petroleum, the United
States siphons off almost 20 mb/d. Even though new
technologies have reduced petroleum use on a per-capita
basis for the United States, our SUV-loving population
consumes ever-increasing amounts of oil. With America's
largest oil pools in severe decline and little expectation
that any significant oil fields remain to be discovered,
the United States is quickly heading towards a future where
it will import two-thirds of the petroleum it burns.

Oil dependency also means that the U.S. is vulnerable to
supply interruptions from Mid East wars or striking oil
workers. How high will the oil price go? That, too, depends
largely on what happens in the Middle East.

The signs are not promising. Saddam Hussein was a cruel
leader, but for many years the United States tolerated him
because, in a perverse way, he helped stabilize the region.
And a stable Middle East is an oil-producing Middle East.
With him gone, the United States must try to create
stability in the region. This will probably prove to be an
impossible task. After all, the American peacekeeping
mission was driven out of Beirut. How can we hope to bring
stability twenty years later to Iraq?

During the 1991 Gulf War, oil prices rose above $40 a
barrel. Adjusted for inflation (as measured by changes in
the Consumer Price Index), $40 in 1991 translates to about
$60 in 2003. Civil strife in the Arab world could propel
oil prices above $50 a barrel range. Large-scale civil
strife in Saudi Arabia, could send the oil price rocketing
as high as $100 a barrel.

Skyrocketing oil prices would bring far more harm than good
to the economies of the world. But there is a silver
lining: investors can profit from rising oil prices. Even
if the Middle East somehow manages to become an oasis of
tranquility and harmony, the bull market in oil is just
beginning. Global oil supplies are running down - even in
the OPEC countries - while global demand continues to
escalate.

We hope that the smoldering geopolitical bonfires in the
Middle East do not erupt into a conflagration. We hope for
peace in the region, but we do not expect it. So we suggest
you prepare your portfolio for escalating civil strife and
terrorist activity in the Middle East. Prepare to profit
from a volatile bull market in crude oil by buying a basket
of carefully selected oil and gas stocks.


Regards,

John Myers,
For the Daily Reckoning

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• America's Oil Crunch (John Myers) / The Daily Reckoning - - Elli -, 21.05.2003, 21:31