Why Not?
A few days ago, Jaime was reaching for his new Rhyme game (from his Aunt Debbie) and threatening to dump the contents all over. Vivi told him not to do that. His response: “why not?”
I think it was the first time he ever used the word “why”, and upon hearing Vivi’s explanation of why he should not dump the game, his inevitable response was: “why not?”
Again, Vivi tried to explain why she didn’t want him to make a mess all over the floor and that he’d have to pick it all up if he dumped the game. His response? “WHY NOT?”
“BECAUSE MOMMY SAID SO!”
“Ok.”
Finally, a meeting of the minds on something they could agree.
The market is looking pretty ugly right now. The S&P has fallen from its high around 1550 to 1325, which represents a 14.5% drop. And while after every significant drop the MSM commentators all wonder anew if this represents a good buying opportunity into the market, another segment of market analysts keep pointing out that the average stock market drop during a recession is 30%. Ie, we’re not halfway to average yet. And few believe we are facing average difficulties currently. Thus the many predictions of a 50% or more market fall. One thing about a housing bubble burst is that it is a slow unwind. Although we are just now entering the peak of ARM resets, increased rates of ARM mortgages resetting continues well past 2010, even reaching new peaks then that will equal current rates. In other words, it is likely that the real estate business is going to be slumping for 3-5 years, probably resulting in house values dropping slowly but consistently that whole time. House turnover being so much slower than stock turnover, it doesn’t just fall catastrophically and get it over with. It lingers, and fools everyone into thinking “it must be over now”.
Unemployment has just begun ticking up, which will exacerbate the problems of debt defaults and foreclosures. Which will worsen the economy, which will lead to more unemployment, etc. And if you don’t think the economy can go into such a negative feedback loop for a protracted period of time, then you weren’t paying attention during the Great Depression. It can happen again, and right now seems at least somewhat likely. Right now, oil is at $90/barrel. If it doesn’t fall back to $70 or less soon, then gas prices will be up to around $4/gal by May. Why is that? Because the “crack spreads” are very very low right now (ie, the difference between a refineries’ cost to buy oil vs what it makes when selling the gas). It is low now during winter, when supposedly gasoline demand is “soft”. Peak gas demand season comes in late spring around memorial day, and it stays high throughout the summer. The refineries will raise their prices for the gas they produce, because their only other choice is to not produce the gas, which would result in shortages. Why is this? Because to keep up with demand in spring, refineries have to work full out, including overtime costs. Those costs aren’t supported by the current crack spread. Since shortages won’t be tolerated so easily, the only other choices are that oil comes down in price or gas goes up.
It is still possible that oil will fall in price. Saudi Arabia and OPEC probably have some extra capacity and could bring some more oil to the market. No ones for sure how much though, or for how long. Currently, however, it doesn’t sound like they want to do so. Assuming they don’t, oil is not going to come down in price, and in fact, is more likely to go up. All the more so because the fed is cutting interest rates which is resulting in a falling dollar. Now, gas at $4/gal is just another expense for the American consumer that he/she can’t afford.
Food prices are also going up radically. Recently, corn and wheat have been increasing in price at the daily limit (the markets for these items are stopped for the day when they move a certain amount in one direction). Some would tell you this is the result of higher oil prices, as oil is a component in the growing, harvesting, and transporting of food. But that is not the whole story. A bigger part of the story is that the world has been drawing down its grain supplies for 7 of the last 8 years, and are at their lowest levels in terms of Days-Of-Supply since the 70’s. And, farmers are planting more corn at the expense of wheat and barley and other grains because of the demand for ethanol. Which sort of makes it all about oil anyway, doesn’t it? To make up for a lack of oil, we are burning our food in our cars, and it is rapidly increasing the price of our food. And the price of gas is going up anyway.
So, I expect the markets to continue going south. I expect the dollar to continue to fall, the price of gold and oil to continue to go up. At some point the price of natural gas will follow suit and move from its current trading range of $6-9 to $12-18. And then all of us who heat our homes with natural gas will know the pain of those currently heating their homes with oil.
