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Prominent Think Tank Says Oil Supply Crunch Coming

Think high crude oil prices are history? Maybe not. In fact, one prominent European think tank is forecasting $200 a barrel within the next few years. From the BBC News (UK) website Friday:

A serious oil supply crisis is looming, which could push prices above $200 a barrel, a think tank has warned.

A “supply crunch” will affect the world market within the next five to 10 years, the Chatham House report said.

While there is plenty of oil in the ground, companies and governments were failing to invest enough to ensure production, it added.

Only a collapse in demand can stave off the looming crisis, report author Professor Paul Stevens said.

“In reality, the only possibility of avoiding such a crunch appears to be if a major recession reduces demand - and even then such an outcome may only postpone the problem,” he said in The Coming Oil Supply Crunch.

Professor Stevens, who is the Senior Research Fellow, Energy, Environment and Development Programme, at Chatham House, added:

While the forecast is controversial and extremely bullish, even allowing for some increase in capacity over the next few years, a supply crunch appears likely around 2013.

Source:

“Oil ‘could hit $200 within years’”
BBC News (UK), August 8, 2008

Doom TV

Robin Blumenthal of Barron’s Magazine talked to Nouriel Roubini, a former Treasury Department director under the Clinton administration and head of Roubini Global Economics in New York, about the accuracy of his gloomy economic forecasts that he made from several years ago. From MarketWatch Broadband:

MW: Well, you’ve certainly been a very accurate prophet of doom. All of the predictions that you made several years ago with regard to Fannie and Freddie, the collapse of the housing sector, have basically come to pass. So, where are we right now in the economic difficulties?
ROUBINI: I try to use a baseball metaphor. I would say we’re still in the second inning of a very long and protracted game in which we’ll have a pretty severe, long and protracted recession…

“Mr. Doom and Gloom”
MarketWatch Broadband Link

Source:

“Mr. Doom and Gloom”
MarketWatch Broadband
MarketWatch, August 4, 2008

The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

Washington’s Bear Hunt

From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.

First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!

Next, dollar bears were targeted. Reuters reported:

The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.

Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.

Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.

“Therefore, his options are limited — he is boxed in.”

And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:

Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:

Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.

“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.

Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!

Sources:

“Dollar Jumps on Paulson, Plosser Comments”
Reuters, July 22, 2008

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Paulson: Housing Market Could Turn Corner Soon”
CNBC, July 22, 2008

Holy Cow! Not Another Economic Forecast Devoid Of Evidence

This morning, I read a piece by Marshall Eckblad of the Dow Jones Newswires on the CNN Money website. Bank of America Corp. Chief Executive Ken Lewis shared his outlook on the U.S. economy and housing market earlier today, after which Eckblad wrote:

Chief Executive Ken Lewis said Monday that the U.S. economy would see “sluggishness” through the rest of 2008 but eventually would stabilize this year and then begin its recovery in the early part of next year. Lewis made the comments during a conference call with analysts to explain the bank’s second-quarter earnings results…

Lewis said one component of those optimistic forecasts is his projection that the peak of the housing crisis is growing closer. “We see housing price depreciation being mostly over this year, maybe going into next year,” Lewis said.

Sound familiar? It should. Consider the following from Mr. Lewis:

In an interview with Bloomberg on Tuesday, Bank of America’s Chief Executive Officer Kenneth Lewis said the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to say that the housing market will begin to improve in the next month or two, forestalling a recession, according to Bloomberg. Lewis believes that job growth will lift home prices and reinvigorate construction by early 2008.

I wrote this over a year ago on June 21, 2007.

The Wall Street Journal’s Mark Gongloff pointed out yesterday that some individuals keep calling for a turnaround in the economy, housing market, what have you, only to be proven wrong time and time again. Gongloff said:

Like Chicago Cubs fans always looking to the next season, there are analysts who have been calling for a turnaround for months despite evidence to the contrary, yelling their hearts out for what so far has been a losing cause.

According to their theory, this has all been a fever dream, a midcycle slowdown like the one the economy suffered in 1998, when stocks briefly swooned, but the technology bubble quickly went right back to inflating. This is the same crowd who dismissed the collapse of the housing market because it’s just a small part of gross domestic product and who said the subprime mortgage meltdown would be no big deal.

And now, $400 billion in losses and one bear market later, they’re still calling for the rosy outcome…

Maybe these individuals should pay closer attention to the evidence. Or use better evidence. Take FOXBusiness.com’s Brian Sullivan for example. This morning, he wrote “Still Looking for the Recession” morning and said:

I went to Atlantic City this weekend for my birthday and stayed at the new Water Club by Borgata…

Whoa! You lost me at Water Club by Borgata. Atlantic City’s first cosmopolitan hotel, which bills itself as “the ultimate resort destination,” charges $479 a room on Fridays and $529 on Saturdays during the summer.

Two problems with this piece of “evidence.” One, the place is new. A good number of East Coasters, like their counterparts along the Pacific, have a reputation for being trend-followers. Let me guess, the place was probably packed, right?

Two. If you can afford room rates like these, it would probably require a great deal more economic pain to cancel your stay, as opposed to what Joe Six-Pack and Suzy Soccer Mom could tolerate. I don’t think we’re at that point (yet).

From the reports I’ve been getting, wealthy Americans have been doing okay when it comes to spending and buying homes. As a matter of fact, I for one believe the purchase of high-end properties by the rich is what’s been skewing median prices upwards in some areas across the country. It’s not that the housing market is getting any better— it’s just that the rich are buying (what they see as) bargain-priced properties.

One more thing. $1,008 a weekend for a hotel room? As long-time announcer Harry Caray of the Chicago Cubs used to say, “Holy Cow!”

Sources:

“2nd UPDATE: Bank of America CEO Sees Economy Rebound In 2009”
Marshall Eckblad
CNN Money, July 21, 2008

“The Economy: How Bad Can It Get?”
Mark Gongloff
Wall Street Jorunal, July 20, 2008

“Still Looking for the Recession”
Brian Sullivan
FOXBusiness, July 21, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

Merrill Lynch Economist Warns Of Multiple U.S. Recessions

According to the Financial Post (Canada) from July 9, David Rosenberg, the chief North American economist at Merrill Lynch, is warning of the possibility of not one U.S. economic recession, but a series of them. The Post’s Jacqueline Thorpe wrote:

Rosenberg has consistently held one of the more pessimistic views on Wall Street, arguing the housing slump and credit crunch will exact a heavy toll on U.S. consumer spending. He believes the data will eventually show the recession started in January.

But he adds it’s not the peak-to-trough decline in real GDP that’s important but the duration. Trouble is, the duration could be Japanese-like (about a decade).

Just like Japan, he says a series of rolling recessions is possible for the next three to five years, making it extremely difficult to time the market. Japanese equities got trashed through the process. At the 1998 post-bubble lows, Japanese bank, construction, real estate and transport stocks were all down 80%, retail stocks were down 50%. The only place to hide was bonds, notes the bond bull.

Rosenberg told the Canadian publication:

We are nervous that we have ended up following in Japan’s footsteps due to the inept fiscal response to the problem. A temporary tax rebate from Uncle Sam to buy iPods tackles a real estate deflation and credit crunch as effectively as the LDP’s (Liberal Democratic Party) “solution” in the early 1990s to build bridges and pave river beds that nobody needed.

The Vapours, “Turning Japanese” (1980)
YouTube Video Link

Source:

“Rosenberg on strike, fed up trying to pinpoint U.S. recession”
Jacqueline Thorpe
Financial Post (Canada), July 9, 2008

Peter Schiff TV Appearances

Peter Schiff, author of the book Crash Proof: How to Profit from the Coming Economic Collapse, appeared on FOX News Saturday morning and CNBC Tuesday morning. Schiff told viewers of “Fox Bulls & Bears” that the downturn in the U.S. economy goes beyond a “slowdown.” He warned:

We’re already in a severe recession, and it’s going to get a lot worse.

Commenting on the poor performance of the U.S. stock market lately, the president of Connecticut-based Euro Pacific Capital said:

This is a bear market. We’ve been in a bear market since 2000. The market’s going a lot lower, not only in nominal terms, but in real terms.

Later on in the show, Schiff gave a timeframe for how long he thought the bear market would last. He told viewers:

We are in a secular bear market. It’s been going on for 8 years. It’s going to go on for another 5 to 10 years.

As to where investors may want to look at putting their money, the host of the weekly radio program “Wall Street Unspun” said:

It’s [oil] probably going up to $150…

And, you know, trying to catch a falling knife in the financials? They have a long way to go down. I wouldn’t touch them…

Look at gold. You want to see a good chart, look at commodities. Look at foreign currencies.

At the conclusion of the show, Schiff predicted:

Well, this week Bernanke said the economy was going to improve and inflation was going to moderate. He was wrong on both counts. The economy is going to get a lot worse. Inflation is going to get worse. And you’ve got to get out of the dollar. It’s going to fall at least another 10%.

FOX News Appearance
YouTube Video Link

On Tuesday morning, Peter Schiff appeared on CNBC’s “Squawk Box,” and responded when asked who was responsible for the financial mess the United States has found itself in by saying:

Well, first of all, it’s the government, and when I say the government, I also mean the Federal Reserve, that has artificially kept interest rates much too low in this country, and in so doing, they’ve encouraged a culture of consumption, of borrowing to buy things. In America, we borrow to buy houses, to buy cars, to send our kids to school, to remodel our houses, to take vacations. And what we’re seeing right now is the fact that we can’t pay any of this money back. And the lenders are cutting us off, and this whole bubble economy that we have is now deflating. But it never would have existed if we had honest money. If we were on a gold standard and we had higher interest rates, we would have been saving, we would have been producing, and we wouldn’t be in this mess.

Schiff shared his views about how to avoid a financial armageddon. He said:

We need to raise interest rates dramatically. What’s that going to do? It’s probably going to bankrupt most of the financials. It’s going to bankrupt a lot companies. We’re going to have to go through a big retrenchment because we basically spent ourselves into bankruptcy. But we can’t keep trying to reflate the bubble. That’s what the Fed is doing. That’s what the stimulus is trying to do. They’re trying to get us to spend more money. That’s the problem. We’ve spent too much. So, we’re going to have to live through a severe recession. If we keep fighting it, all we’re going to have is higher inflation, higher oil prices, higher commodity prices, and eventually, we’re going to get something far worse than just a severe recession. We could have hyperinflation and a complete destruction of our currency.

You can access the 7 minute 16 second CNBC segment here.

Sources:

“Fox Bulls & Bears”
FOXNews, June 28, 2008

“Squawk Box”
CNBC, July 1, 2008

KB Home Founder: Worst Recession Since World War Two

Eli Broad, the billionaire investor who founded homebuilder KB Home, told Bloomberg yesterday that, “This is the worst period of my adult lifetime,” while speaking about the U.S. economy. Bloomberg’s Erik Holm and Anthony Massucci wrote this morning:

“This is worse than any recession we’ve had since World War II,” Broad, 75, said in an interview yesterday… “I do not think things are going to get any better” before the next president takes office in January.

Broad also shared his views on the floundering housing market. He told Bloomberg that the sale of vacant, unsold homes could take “several years.” Holm and Massucci wrote:

“The problem is, people don’t believe prices have bottomed out,” he said. “You’ve got to induce people to buy houses” with federal policies including tax incentives…

“I think housing is going to continue to have a corrosive effect on consumer psychology and the economy in general to a far greater extent than people think, or even far greater than I thought about a month or two ago,” he said.

Source:

“Broad Says U.S. Economy in Worst Recession Since World War II”
Erik Holm, Anthony Massucci
Bloomberg, July 1, 2008

Depression 2010?

The mystery of government is not how Washington works but how to make it stop.

-Unknown

I always try to tune into “Financial Sense Newshour” with Jim Puplava and John Loeffler every week. During part one of the third hour of the June 21 broadcast, Jim Puplava dropped a bomb with the following statement:

The U.S. economy, John, in my opinion, is heading into a depression by the year 2010. Now, rebuilding the country may be the only thing that brings us out of that depression. And remember, severe bear markets in depressions, as we’ve been talking about on this program, are caused by politicians. It takes a politician to turn a recession into a depression. And given the current debate, and the holes that we’ve dug ourselves in, I don’t see how we’re going to avoid this crisis. I mean, the things we’re talking about doing today, should have been done over 10 years ago.

Source:

“Financial Sense Newshour”
Third Hour, Part One
June 21, 2008, Broadcast
FinancialSense.com

Morgan Stanley’s Chief U.S. Economist Says Recession Is Here

Richard Berner, Morgan Stanley’s chief U.S. economist, said yesterday at a public finance and pension fund conference in Illinois that the United States is in a mild recession. Berner added that the U.S. housing crisis still has “a long way to go” because of excess supply and caution by both lenders and potential homebuyers. The 2007 winner of the William F. Butler Award for excellence in business economics also warned of an elevated inflation threat which should pressure corporate earnings, contribute to market volatility, and feed a relatively steep yield curve, according to Reuters’ Karen Pierog. She wrote:

U.S. consumers are facing a perfect storm of eroded housing prices, higher energy and food prices and a weaker employment picture, Berner said…

As for energy, Berner said finite supply in the face of rising global demand will keep the price per barrel of oil high.

“My guess is in the next two to three years the equilibrium price will still be north of a hundred bucks,” he said.

Gray’s Papaya, NYC
Source: The Baltimore Snacker

Source:

“Mild recession, modest recovery for US - Morgan Stanley”
Karen Pierog
Reuters, June 2, 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

JPMorgan Chase CEO Says ‘Recession Just Started’

Jamie Dimon, CEO of JPMorgan Chase & Co., shared some good and bad news with attendees at a conference in New York City today. The good news? Dimon believed the credit crisis was three-quarters over. And the bad? The head of the global financial services firm warned:

Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession… The recession just started.

Not only is a U.S. recession beginning, but it has the potential for being a nasty one. Dimon was quoted by the Associated Press as saying:

We don’t know if it’s going to be mild or severe. We’re thinking there’s a third of a chance that it’s going to be pretty bad… closer to the 1982 recession than the very mild recessions we had in 2001 and 1990.

Source:

“JPMorgan Chase CEO: recession is just beginning”
Associated Press, May 12, 2008

State Governments Battered By Slowing Economy

Earlier today, Bloomberg’s William Selway reported that state governments are projecting a $26 billion shortfall in the next budget year as the slowing economy erodes tax receipts, according to a national survey. The National Conference of State Legislatures study found:

With a few exceptions, state finances are deteriorating, in some cases considerably…

If the national economy continues to struggle and indeed falls into recession, the state fiscal situation will worsen.

While economists argue over whether or not the U.S. economy is in a recession, the group said:

Whether or not the national economy is in recession — a subject of ongoing debate — is almost beside the point for some states because their fiscal situations have declined so much that they appear to be in recession.

According to the survey, deficits are forecast in 23 states for the 2009 budget year. 16 states, including California and Florida, were forced to deal with shortfalls of $11.7 billion that appeared after their spending plans were already set. 33 states say they are concerned about the outlook for the coming year. Not surprisingly, states that benefited most from the housing boom are now seeing the most pain. The widest deficits for next year, measured as a percentage of the budget, are in Arizona, Nevada, California, Alabama, and Florida.

And how do the states plan to deal with the budget shortfalls? Selway wrote:

At least 16 states will respond to their shortfalls by cutting back spending, according to the report. At least eight, including California, are considering moves to raise taxes or fees. Massachusetts is considering a $1 per pack increase in the cigarette tax to raise $175 million, the report said. New York lawmakers balanced next year’s budget in part with a $1.25 per pack cigarette tax boost.

Others are looking at selling assets or using bonds sales to pay for projects. Illinois may sell its lottery, while Maine is looking at selling surplus land. Nevada is considering using bonds, instead of general fund money, for capital works.

More “pole taxes” to come?

Source:

“U.S. States ‘Deteriorating’ as Slump Curbs Taxes, Lawmakers Say”
William Selway
Bloomberg, April 25, 2008