Boom2Bust.com

Back To The Trenches

After an extended Memorial Day Weekend, it’s good to be blogging again. And guess what? Boom2Bust.com turned one this past weekend!

Altered Images, “Happy Birthday” (1981)
YouTube Video Link

Unfortunately, you won’t find my very first post from that 2007 holiday weekend, as my girlfriend left a comment that I later tried to remove, but instead ended up deleting the entire post. Thanks honey…

Regrettably, being so immersed in my financial research and other projects, it’s sometimes impossible to disconnect myself completely from the work at hand. With that in mind, here are some pertinent observations “from the ground” this past weekend:

Friday- To beat the holiday traffic from Chicago, I decided to leave for Wisconsin (a favorite vacation destination of Northern Illinois residents) a little after rush hour ended. In recent years, this wouldn’t have made too much of a difference, as the area roadways got pretty busy in the days leading up to the weekend. This year, however, traffic was DEAD. Even with all the construction and lane closures. Think this might have something to do with a slowing economy and high gas prices?

Speaking of gas prices, after arriving in Burlington, Wisconsin, I watched the Chicago news while putting together a new gas grill. A TV reporter was broadcasting live from a gas station in downtown Chicago. Even though it was a holiday weekend, there was no one at the pumps. However, they did interview other drivers in the area. While everyone complained about the high price of gas, one individual in particular stood out. Angrily, this motorist claimed that the whole situation was due to rampant price gouging. If it were only than simple, I thought to myself.

Seeing that I didn’t have enough dishwashing liquid to perform a leak test on the new gas grill, I stopped by the local Menards, a home improvement retailer similar to Home Depot and Lowe’s. I’ll be honest, I haven’t been to this particular store that many times, but it sure seemed DEAD for a Friday before Memorial Day Weekend.

Saturday- With too much going on back in the Windy City, I hit the highways once again that morning. Even though I was driving in the opposite direction of holiday traffic, it still looked light in the opposite lanes. The lane closures were still in effect too. Where is everybody, I thought? Well, I was hoping they’d stay off the roads at least until I got back to my pad in the city. Thankfully, I got my wish.

Sunday- I dropped in at the local Barnes & Noble bookstore with my girlfriend. As it was located in the middle of a major mall, this place is usually hopping. Not today. As soon as we stepped inside the store, my girlfriend pointed out the small number of patrons inside. As a matter of fact, while browsing the bargain books section near the registers, I happened to overhear two store clerks talking to each other. One clerk remarked how the bookstore was so quiet today. The other one suggested that most people were probably at home working on their gardens, or at home improvement stores buying supplies. See Friday entry…

Monday- Spent my afternoon at a wake. No financial or economic observations here, although I did have an interesting experience. While downstairs in the guest lounge having some snacks and a coffee, I was looking at a nice-looking grandfather clock at the top of the stairs. About a minute after I started observing this timepiece, the glass cabinet door of the clock mysteriously came ajar and opened wide (with no human help, thank you). Surprised, and not the least bit curious, I put down my coffee, walked to the top of the stairs, and observed the clock. I noticed that the door opened and shut very easily— but I still wondered why it opened when it did.

Creepy. Which could also describe this past Memorial Day Weekend…

World’s Leading Banks React To Write-Down Pain

Rules. We’re all taught to follow them at a young age. You know how to spot someone who has real authority and influence? No, it’s not those chumps who break the rules. Rather, it’s those who change the rules of the game to fit their needs. And that’s what we are witnessing with the world’s leading banks as they confront escalating write-downs stemming from the ongoing housing and credit crisis. Earlier today I came across a post by Elizabeth MacDonald from FOXBusiness. In “Emac’s Stock Watch,” MacDonald wrote:

The world’s leading banks are demanding stock market and accounting regulators relax controversial accounting rules in order to stop the “downward spiral” of huge writedowns during the credit and housing crisis, $335b and counting…

The FT says the Institute of International Finance, an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, is promoting a plan that would let financial companies soften the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.

The IIF says: “The writedowns required under current interpretations [of the accounting rules] may be substantially in excess of any actual or reasonably probable loss on many instruments.”

From what I understand, the issue here is the benchmark, the ABX market index, which might not accurately depict the values for bonds backed by subprime mortgages, as it’s a “thinly traded” index that is barely two years old, according to MacDonald. She explained:

The ABX is a synthetic credit derivative index, or a basket of credit default swaps that are basically high-priced gambling bets on where investors think the direction of the underlying bonds backed by subprime mortgages are headed.

I know this is complicated, but bear with me, it’s important. The swaps in the ABX are basically bets on the prices of the 20 supposedly most liquid (not saying much) subprime mortgage-backed bond deals. It’s an understatement to say booking prices based on this index is accounting that is more art than science…

Can an index based on values for just 20 bond deals legitimately be used for an asset class approaching $1.3tn in size? An index that historically undervalues the cash bonds it purportedly represents? An index noted for its negative sentiment and one that is routinely used by short sellers to attack these securities?

Okay, fair enough. So a new benchmark is needed (easier said than done, I’m guessing). Still, that’s not a good reason for permitting the valuation of illiquid assets using historical, rather than market, prices. But, as MacDonald said, “The bankers want the moon here.” Case in point:

The IIF plan would also let banks decide whether to hold asset-backed securities for as long as they want, freed from accounting rules that would force the banks to hold them to maturity. Instead, they would be able to book these securities on the balance sheet without taking the hit to profits, and then sell them after two years.

I’m not too surprised the banking industry wants to change the rules of the game. As Mayer Amschel Bauer Rothschild, founder of the Rothschild banking empire, once said:

Give me control of a nation’s money and I care not who makes its laws.

Source:

“Bankers Cry Uncle”
Elizabeth MacDonald
FOXBusiness, May 22, 2008

Related Posts

From Investorazzi:

“George Soros Shares Economic Outlook, Warns Of Bear Market Rally”

Billionaire investor George Soros visited the London School of Economics yesterday and said recent stock market gains were the result of a “bear market rally” which would reverse course as the global credit crunch gets worse. He also painted a grim picture for the U.S. economy.

“Warren Buffet Predicts U.S. Dollar To Keep Falling”

Perhaps the real reason why the richest man in the world is looking to buy companies outside of the United States?

U.S. Energy Policy Is All Smoke And Mirrors

With the price of crude oil now well above $100, how has the U.S. government responded? Well, last week Congress voted to halt the shipment of 70,000 barrels that were being sent on a daily basis to our emergency reserve of crude oil known as the Strategic Petroleum Reserve, or SPR. Never mind that this number represents only 0.3% of the 20 million barrels consumed by Americans each and every day, and might only shave 4 to 5 cents off a gallon of gasoline according to the U.S. Energy Information Administration.

And this week? Have you ever heard anyone tell you to stick with what you’re good at? Well, of the 435 members of the U.S. House of Representatives, 158 come from the legal profession, or more than one-third of the legislative body. So, it’s not surprising that in a day where crude oil surpassed the $129 a barrel mark in trading, Congress decided to sue the Organization of Petroleum Exporting Countries. OPEC, which produces 40% of the world’s oil, is comprised of Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Qatar, the United Arab Emirates, and Venezuela. And we wonder why the rest of the world loves us so? According to the Associated Press today, the U.S. House of Representatives voted to let the U.S. Department of Justice pursue energy antitrust and price fixing cases against members of the OPEC oil “cartel.” The bill, which was approved 324 to 84, would create a special Justice Department task force to investigate energy markets to root out manipulation and unwarranted speculation. Democratic House speaker Nancy Pelosi was quoted by the Agence France-Presse as saying:

The House today with a strong bipartisan and veto-proof margin voted to hold foreign oil cartels and Big Oil accountable… Instead of using a veto threat to shield cartels and Big Oil companies from accountability, the Bush Administration should work with the Congress to protect American consumers.

However, AP reporter H. Josef Hebert noted this afternoon:

Many energy experts and legal scholars doubt that such an enforcement action would be successful.

Earlier today Bob Tippee, editor of Oil & Gas Journal, told News Radio 590 KLBJ in Austin, Texas, that:

It will work against, rather than for the interest of oil consumers. It’s a wrong move. I think it’s more of the silly policy-making we see in Washington D.C. these days…

It shows a gross misunderstanding of the oil market and OPEC’s role in it. It sets up a false dragon display. The supposition is that OPEC is producing far less than it could be producing, and that is blatantly false.

Short of calling this legislative body a “House Of Fools,” it appears this is yet another display of “smoke and mirrors” by Capitol Hill politicians. As with the SPR situation, the U.S. House of Representatives is only making it appear like they are doing something to deal with the energy crisis of 2008. The sad thing is, a number of Americans will probably buy into the farce. Earlier today on CNBC, legendary oil investor T. Boone Pickens, Jr., had this to say about Washington and our energy “policy”:

You’re talking about reducing taxes on gasoline for the summer? Is that an energy plan? Hell no, it’s not an energy plan. It’s no plan at all. And, you know, it’s just amazing to me what politicians focus on. They ought to step back and look at the $600 billion a year that it’s costing this country to buy oil…

Well, I still say politicians, I mean, what they think about, is getting re-elected, or getting elected, one or the other. They’re not thinking about how to solve the problems for energy in America.

Sources:

“House action targets OPEC”
H. Josef Hebert
Associated Press, May 20, 2008

“US House passes anti-OPEC bill”
Agence France-Presse, May 20, 2008

“Texas Oil Analyst Says OPEC Vote Flawed”
KLBJ News Radio, May 20, 2008

“Pickens: Oil Going to $150, So Move to Gas”
CNBC, May 20, 2008

Related Posts

Just wanted to let you know that you might want to look at two posts about “crash prophets” Marc Faber and George Soros on our sister blog, Investorazzi.com:

“Marc Faber Says Credit Crunch Not Over, Retail To Get Hit Next”

I personally think we are just starting the credit crunch and that it will get much worse over time…

I think the economy really stinks and the next sector to really get hit hard in America and elsewhere is retailing.

“George Soros Warns Of Severe Recession, Over-Priced Assets”

BBC: So, do you think we’ll see a serious recession in the United States?
SOROS: I think more serious that currently anticipated, and certainly longer. The prediction that by the end of the year we’ll be moving out of it, I think, is without foundation.

Quote For The Week

Last Wednesday, the U.S. Department of Labor reported that the consumer price index, or CPI, rose a moderate 0.2% in April. Excluding “volatile” food and energy prices, the “core” consumer price index increased only 0.1%. Over the past 12 months consumer prices are up 3.9%, with “core” inflation running at 2.3%.

In response to this “official” data, Joel Naroff, president of Naroff Economic Advisors Inc., told MarketWatch on May 14:

If you believe that inflation is under control, I have a bridge that spans the East River that I can sell you for a really good price.

Naroff was referring to the Brooklyn Bridge, and the fact that since its opening in 1883 several “salesmen” have attempted to sell the structure even though it has always been the property of the City of New York.

U.S. Senator Mocks The System

I don’t know about you, but I’m starting to get this feeling that our Senate is evolving into that “legislative” body from the Roman Empire (not Republic, mind you) and from whom they derive their name. Well, at least they’re not assassinating each other in the hallways of the Dirksen Building (at least, not yet).

However, even those among its ranks are starting to mock the establishment and its growing reputation of being out of touch with mainstream America. The Wall Street Journal’s Damian Paletta wrote a great post for the Real Time Economics blog on Wednesday about Senator Jim Bunning (R- Kentucky) and his assault on the system. Paletta said:

The Senate Banking Committee plans to vote on legislation Thursday that would create a new regulator for Fannie Mae and Freddie Mac and allow the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. Lawmakers plan to file up to 70 amendments during the committee vote, with 31 of those coming from Sen. Jim Bunning (R., Ken.).

According to a summary of all the amendments, Sen. Bunning wants:
• “to stop the bailout of the rich”
• “to prevent the bailout of illegal aliens”
• “to prevent the bailout of homeowners who used their homes as a credit card”
• “to stop the bailout of sex offenders”
• “to stop the bailout of drug offenders”

Another of Sen. Bunning’s amendments would change the name of the bill from “The Federal Housing Finance Regulatory Reform Act of 2008” to the “Bailout of Irresponsible Lenders and Borrowers Act of 2008.”

A good example of how to fight fire with fire, considering all the humorous initiatives coming from Capitol Hill these days. But, what would you expect from a Congress with an 18% approval rating, according to the latest Gallup poll?

Sources:

“Bunning Campaigns Against ‘Bailouts’ in Housing Bill”
Damian Paletta
Wall Street Journal (Real Time Economics blog), May 14, 2008

“Congress’ Approval Rating Ties Lowest in Gallup Records”
Lydia Saad
Gallup, May 14, 2008

George Soros Posts

Just wanted to let you know that you might want to look at the following two posts about “crash prophet” George Soros on our sister blog, Investorazzi.com:

“George Soros Warns Of Financial Crisis, Wealth Destruction” from May 15

The days of rapid financial wealth creation are over. We’re now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.

“George Soros Predicts More Economic Pain Ahead” from May 13

But despite Soros’ apocalyptic rhetoric, the Dow is hovering near 13,000 and unemployment is a relatively low 5%. Soros explains the disconnect with the tale of the man who falls off the Empire State building and thinks to himself halfway down: “So far, so good.”

“That’s where we are right now,” Soros laughs.

Sorry, George. Somehow, I just can’t seem to laugh…

Gold, Greenbacks, And Government Intervention

I remember reading a rather significant article by MarketWatch’s Peter Brimelow last fall. As someone who follows precious metals religiously, I had already been aware of the claims made by groups such as the Gold Anti-Trust Action Committee, or GATA, that the price of gold is being manipulated. However, on October 18, 2007, Brimelow let “the cat out of the bag,” so to speak, for the readers of that particular Dow Jones website. Brimelow wrote:

Nevertheless, for the longer term, the gold bug faction lead by Bill Murphy’s LeMetropole Cafe Website is cockahoop. It has long argued that the metal’s price has been repressed by what it calls “The Gold Cartel” an alliance between the official sector (central banks, the U.S. Treasury) and chosen instruments (key investment banks and co-opted bullion dealers and others) to create a financial assets boom.

Reason for rejoicing: The discovery by James Turk of the Freemarket Gold & Money Report that, as Turk puts it: “the U.S. Treasury quietly made a subtle change to its weekly reports of the U.S. International Reserve Position, which includes the U.S. Gold Reserve. This change was first made May 14… It says the U.S. Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported ‘INCLUDING GOLD DEPOSITS AND, IF APPROPRIATE, GOLD SWAPPED’ (emphasis added).

This description provides clear evidence that the U.S. Gold Reserve is in play. Gold has been removed from U.S. Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price-capping efforts. Gold placed on deposit gets loaned out by these bullion banks, and then sold into the spot market to try capping the gold price.”

Intervention, pure and simple as that. No, manipulation. Which, by the way, isn’t as conspiratorial as it sounds. Brimelow pointed out:

It may seem like an arcane point. But I remember when the idea that central banks were systematically selling gold at all was dismissed as crankishness. Yet it’s now universally acknowledged.

And why would Uncle Sam want to cap the gold price? The MarketWatch columnist wrote:

Turk’s conclusion: “This new evidence provided in the U.S. Treasury report as well as the rising gold price itself suggest to me that we are now witnessing the last scramble by the gold cartel to cap the gold price. It is a vain attempt by them, acting under the instructions of the U.S. Treasury, to make the world think the dollar is worthy of being the world’s reserve currency when in fact everyone knows that it is not. In short, the wheel has fallen off the truck. The dollar is heading for a train wreck. Use whatever metaphor you want, but the message is clear - the dollar is in serious trouble…

Fast forward to the present day. According to MarketWatch’s Laura Mandaro tonight, currency traders now suspect that American and European finance officials engaged in some “arm-twisting” at last month’s G7 meeting in an attempt to provide support to the U.S. dollar. Mandaro wrote:

Gains of 2% to 5% in the U.S. dollar from a key low point last month, combined with recent press statements from anonymous senior finance officials, have fostered suspicions that the group of industrialized nations backed up their public statements with some backdoor negotiations.

Madaro referred to an analysis of euro and dollar trades by Greg Anderson, head of foreign exchange strategy at ABN AMRO, which suggested “the U.S. and Europe may have pressured central banks from the BRIC countries– Brazil, Russia, India and China– and sovereign-wealth funds to temporarily stop converting 20% to 40% of their newly accumulated U.S. dollar-holdings to the euro.”

This pressure, along with signs that the European economy is struggling, could help explain why the greenback has stabilized. Mandaro suggested that analysts now suspect finance officials, especially from the United States, changed tactics around the time of the G7 meetings. The MarketWatch reporter wrote:

The Treasury Department, while officially supporting a strong dollar policy, had been content to see the dollar slide since it helps U.S. exports, analysts said. That laissez-faire approach seems to have changed in the last two months, as the U.S. government has seen the weak dollar help push up oil, agricultural and other commodity prices to record highs.

Disturbingly, some are making claims of direct government intervention in the market. However, Mandaro noted:

But many currency analysts say such a direct intervention is unlikely.

For one, the United States’ foreign exchange reserves are relatively small at about $75 billion, making dollar buy-backs little more than symbolic.

And the G7 statement, at least at the time, didn’t suggest a direct intervention was round the corner. The last time the U.S. dollar experienced a coordinated currency intervention, when European monetary authorities in September 2000 convinced other G7 members to support the then-depressed euro, the policy statement specifically mentioned the euro. This most recent time, the statement just mentioned exchange rates in general.

The United States doesn’t usually intervene: From August 1995 through December 2006, the United States only intervened twice in the foreign exchange markets.

“Last time.” “Doesn’t usually.” And what’s to say government intervention isn’t occurring this time around?

So much for the notion of “free markets.”

Sources:

“Gold bugs: ‘We told you so…’”
Peter Brimelow
MarketWatch, October 18, 2007

“Dollar rally, leaks put fresh focus on G7 meetings”
Laura Mandaro
MarketWatch, May 15, 2008

Merrill Lynch, Morgan Stanley Issue Recession Warnings

At a conference yesterday in Singapore, New York City-based financial services giant Merrill Lynch warned the U.S. economy is in a recession that will become more apparent as the year drags on. According to Channel NewsAsia yesterday:

Merrill Lynch said the world’s largest economy is already in a recession, and it expects to see a prolonged L-shaped recovery. This means the US may take a longer time to emerge from the economic doldrums….

Merrill Lynch said a key indicator of a recession is a slump in the housing market. It added that it expects the housing market in the US will see another 15-20 percent downside.

Staff from the firm said that government efforts to provide stimulus to the economy will only temporarily stem a fall in consumer spending, according to Reuters’ Kevin Lim. Merrill Lynch’s North American economist David Rosenberg told conference attendees yesterday:

I still maintain the business cycle is bigger than the government.

Rosenberg also predicted inflation in the United States would slow as consumer spending weakens, and that the Federal Reserve would cut interest rates to fight the recession. The economist warned:

No asset class security is priced today for a recession scenario.

Adding their two cents, economists from Morgan Stanley are concerned that the recession in the United States could rival the “the big five,” according to David Gaffen from the Wall Street Journal’s Market Beat blog today. Gaffen explained the “big five” were large-scale financial crises that resulted in a long-term underperformance in the respective economies. He wrote:

The long-term declines the firm looks at includes Spain in 1977 and Norway in 1987, and most recently Japan in 1992 – which they define as the worst, resulting in Japan’s so-called lost decade. Whether the current U.S. economic decline matches one of these situations, or looks more like the recent U.S. recessions “holds the key for risky asset prices,” they write.

However, Morgan Stanley economists do not agree with their Merrill Lynch counterparts when it comes to the topic of inflation. From the Market Beat post:

Morgan Stanley economists say that in this instance, inflation may not automatically recede as U.S. growth recedes. They say as a result that bonds may sell off if growth recovers in the U.S. and monetary policy remains loose, fueling price gains… “We believe that the Fed’s focus on keeping the financial crisis from sending the economy down the path of the Big Five will succeed, but lower rates and surging money growth will spill over into inflation. Bond yields are likely to follow inflation higher,” they write.

Sources:

“Merill Lynch says US in recession, but Asia to remain strong on consumer spending”
Channel NewsAsia (Singapore), May 14, 2008

“Tax rebate won’t stem U.S. recession: Merrill”
Kevin Lim
Reuters, May 14, 2008

“Regular Recession, or a Larger Disaster?”
David Gaffen
Wall Street Journal (Market Beat blog), May 15, 2008

FHA Chief Shoots Down Housing Bailout Bill

Here’s another great piece that was suggested to me. As you may have heard already, the U.S. House of Representatives passed a bill last week that would enable struggling mortgage holders to refinance into more affordable loans guaranteed by Uncle Sam. The legislation, spearheaded by House Financial Services Chairman Barney Frank, would require a significant expansion of the Federal Housing Administration (FHA). Well, according to Luke Mullins of U.S. News & World Report, FHA Commissioner Brian Montgomery is a bit leery of the proposal (understatement of the year). Mullins wrote yesterday in “FHA Chief Criticizes Rescue Plan”:

Montgomery expressed his opposition to the legislation recently passed by the House:

As one colleague described it, it is “on steroids” because it throws sound underwriting out the window. It moves us toward a federalization of the mortgage market, forces taxpayers to pay for bad loans, and doubles FHA’s portfolio, adding hundreds of thousands of risky loans in a Byzantine process that will take years to sort out and create a regulatory nightmare.

Besides risking the wrath of the powers-that-be in our nation’s capital, I must admit that I’m impressed that he said this within a room full of real estate agents at the National Association of Realtors Midyear Legislative Meetings and Trade Expo. I haven’t seen an obit for him, so besides a few claw marks, I’m assuming Montgomery survived the ordeal.

You can access Mullins’ piece here.

Alan Greenspan: No Longer An American Idol?

It sure is funny how Wall Street and investors around the world used to fixate on former Federal Reserve Chairman Alan Greenspan. Every word, every action of the economist was scrutinized to no end as if correctly deciphering it would mean untold riches. Conducting this process was all the more impressive considering the man spoke in a language which came to be known as Greenspeak. And when the markets were down or a financial crisis reared its ugly head? “No problem,” said those on The Street, “The Maestro will fix it.”

“Scapegoat?”

Nowadays, the line forms out the door when it comes to the number of critics of the once-revered economist. And just what is it that everyone’s so angry about? Plenty, Adam Kritzer would say in “6 Ways Greenspan Caused the Current Economic Crisis,” which appeared on CurrencyTrading.net back on May 1. Someone suggested the piece to me, and I’m passing it along as well.

You can access Kritzer’s article here.

Congress Approves National Colosseum

Not really. But Capitol Hill politicians might as well allocate funds to build one, complete with chariot races and gladiators to keep us happy, considering the way they’re pandering to the masses these days. When Congress only has a 20% approval rating (Gallup), what else would you expect? Something like what happened today. Hoping to sooth the economic pain (and gain the electoral support) of Joe Six-Pack and Suzy Soccer Mom, both the U.S. Senate and House of Representatives, in a direct challenge to President Bush, voted to temporarily halt the shipment of thousands of barrels of oil a day into the government’s emergency reserve. The Strategic Petroleum Reserve, a system of underground salt domes on the Gulf Coast, was created by the U.S. government in the seventies as a precaution against major interruptions of oil supplies. With 701 million barrels in storage, it is currently 97% full, yet the equivalent of only two months of oil imports.

The Senate voted 97 to 1 in favor of suspending the shipments, which average about 70,000 barrels a day, until the end of the 2008. Only Senator Wayne Allard of Colorado voted against the measure. Presidential hopefuls Barack Obama and Hillary Rodham Clinton also voted to halt the shipments as well. John McCain was not present for the vote. Mirroring the same bipartisan support as in the Senate, the House voted 385 to 25 in favor of halting the program.

For some time now, Congress has wanted to tinker with the SPR, jawboning on and on about how curbing deliveries to and/or drawing from the emergency reserve (by the way, what part of “emergency” don’t you get?) can ease tight oil supplies, curb market speculation, and possibly lower crude oil prices. Case in point. MSNBC’s John Schoen wrote back on May 19, 2004 (that’s right, 4 years ago):

With oil prices stuck above $40 a barrel, attention has turned to the U.S. Strategic Petroleum Reserve, a vast stockpile of oil stored underground that the U.S. continues to add to. While Democrats call for releasing some of those reserves to help ease oil prices, President Bush Wednesday repeated his long-standing position that the stockpile should only be used in the event of a critical cutoff of fuel needed to maintain the country’s national defense…

“Since the price of oil is so closely tied to inventory levels, filling the SPR under these market conditions both depletes private sector inventories and pushes up prices for America’s consumers,” said Sen. Carl Levin, D-Mich., in a floor speech in April defending an amendment to defer SPR purchases.

More recently, New York Democratic Sen. Charles Schumer has introduced an amendment to draw 1 million barrels a day from the reserve for the next 30 days.

“Joey, do you like movies about gladiators?”

And Congress’ assertions that curbing shipments to and/or drawing from the SPR could help with our supply problems, dampen speculation, and lower oil prices? Wrong, wrong, and wrong, according to the experts (or, at least, people who know what they’re talking about). Regarding the supply problem, the 70,000 barrels that are being sent to the reserve on a daily basis represents only 0.3% of the 20 million barrels consumed by Americans each and every day. 0.3%? Can anyone tell me how this could possibly help alleviate tight supplies? Regarding the perception that high oil prices are caused by speculators, legendary energy investor T. Boone Pickens told attendees at the Oklahoma State University’s Energy Conference on April 23:

Only 5 percent of oil is in the commodity pool. If you did run it up, it would be briefly. Speculators cannot move it that much.

He would know. Finally, a number of politicians believe (or want us to believe) that halting shipments and even drawing from the SPR will somehow lower oil prices. CNN Money’s Steve Hargreaves wrote today:

A statement from Speaker of the House Nancy Pelosi, D-Calif., said it could bring down gas prices by as much as 24 cents a gallon.

Or so she claims. The CNN Money staff writer also wrote:

The U.S. Energy Information Administration predicts oil prices would fall by only about $2 a barrel - or shave 4 to 5 cents a gallon off the price of gas - if the president suspended deliveries to the SPR.

“It’s a very small amount” of oil going into the reserve, said EIA oil market analyst Doug MacIntyre. “And it’s very transparent to the market.”

Should I believe House Speaker Pelosi or the EIA? Tough call, right?

Here’s something to think about. A possible explanation for the high price of crude oil is that global demand is running at 87 million barrels per day, while the global oil supply is at 85 million barrels per day. Furthermore, while older oil fields are starting to go dry, no suitable replacements are being found. Finally, even though the U.S. economy is slowing, for every 1 barrel of reduced American demand there are 14 barrels of increased demand from developing countries like China, India, and Brazil.

Oh, but this just in…

“Middle East Oil Cut Off By Coordinated Attacks Throughout Region” and “Gulf Oil Infrastructure Destroyed By Category 5 Hurricane”

Well done. Thanks for saving me that nickel.

Sources:

“Senate votes to halt oil reserve shipments”
H. Josef Hebert
Associated Press, May 13, 2008

“House votes to stop adding to oil stockpile”
Tom Doggett
Reuters (UK), May 13, 2008

“Debate flares over strategic oil stockpiles”
John W. Schoen
MSNBC, May 19, 2004

“Oil stockpile a drop in the bucket”
Steve Hargreaves
CNN Money, May 13, 2008

“Pickens: Oil to go to $150 a barrel”
Jerry Shottenkirk
Journal Record, April 24, 2008

‘Enormous Losses’ At U.S. And European Banks Still Not Recognized

$329.2 billion. That’s what financial institutions worldwide have recorded in credit losses and write-downs since the beginning of 2007. And Carlyle Group Chairman David Rubenstein is saying that banks and financial institutions in the United States and Europe still have “enormous losses” from bad loans they haven’t yet recognized, according to Bloomberg’s Alison Fitzgerald and Ryan J. Donmoyer earlier today. At a meeting of the Institute for Education Public Policy Roundtable in Washington, Rubenstein said that it will take at least a year before all losses are accounted for, and some financial institutions may fail.

A domestic policy advisor to President Jimmy Carter, Rubenstein said that sovereign wealth funds may not ride to the rescue of problem institutions this time around. He explained that the funds are more cautious these days after losing $25 billion on their investments in struggling banks and securities firms worldwide. Rubenstein noted that of the $60 billion of capital provided by sovereign funds to financial institutions last fall, these investments are now only worth around $35 billion.

Source:

“Rubenstein Says ‘Enormous’ Bank Losses Unrecognized (Update2)”
Alison Fitzgerald, Ryan J. Donmoyer
Bloomberg, May 13, 2008