Posts
WASHINGTON -- The Senate, jittery about a political backlash over the rising price of gasoline, voted by a veto-proof majority today to halt deliveries to the Strategic Petroleum Reserve over President Bush's objections.
I have heckled our president many times. I have not been adequately heckling The "Jittery" Senate apparently. Wasn't the SPR intended for emergencies?
"Why on earth should we be putting oil underground at a time of record high prices?" Sen. Byron Dorgan (D-N.D.), the measure's chief sponsor, argued.
The same reason I hoarded rice even as the price rose? Why can't I find any basmati rice at Costco these days? I'd buy even more. It seems I've slowly been eating what I've got. Call me silly, but I like to have emergency reserves. Any idea who else likes rice? Restaurants. It seems they lose a lot of money if they can't serve rice to customers who want it.
Here's a glimpse of the SPR. As you can clearly see, the SPR is completely responsible for the rise in oil prices. We just keep pouring more and more oil into it. That Bush is a madman (on most things perhaps, but I'm being sarcastic on this particular point).
The chart shows the SPR ("U.S. Crude Oil Ending Stocks SPR") divided by the average monthly consumption for the previous year ("U.S. Total Crude Oil and Petroleum Products Product Supplied"). If one month of supply is an economy breaker, just imagine what zero months of supply would do (as we become very desperate for each drop and the rest of the world sees it).
Source Data:
EIA: Petroleum
12 comments:
Stag,
What are the odds OPEC & Russia stop hoarding their supplies?
Maybe Saudi Arabia is becoming our surrogate central bank. They have an inflation problem AND a dollar peg. By not increasing output, they effectively hoard oil, sell oil at high prices AND create a tighter monetary policy to counter the fed.
BLAH BLAH BLAH. I think oil and and many other commodities are overpriced. Commodities were just next in line for bubblemania.
Blue Horseshoe likes Anacott Steel (the movie Wall Street, from memory)
MAB,
Peak Oil vs. Negative Real Interest Rate Commodity Boom
My concern is that it could be...
Peak Oil and Negative Real Interest Rate Commodity Boom
How could we know? I don't trust OPEC to let us know how much oil they have or don't have. If they were running out, I'm confident that they wouldn't warn us ahead of time. That being said, I have no great desire to hoard any assets that have quadrupled in price or more without knowing for sure that hyperinflation is on the way.
I looked at April's headline CPI. It is reasonably tame overall. This is in line with my own short-term inflation mood.
That being said, inflation is hitting the poor very hard. That's fairly clear when you look at the details. I will post my thoughts on that shortly.
Stag,
My best guess on commodities is that their is indeed a genuine increase in global demand. However, I also think that commodity prices have increased far beyond the amount justified by the increase in demand.
Negative real interest rates just add more speculative fuel to the fire.
The peak oil theory has some merit, but almost ALL commodity prices have soared simultaneously so I'm more than a little suspicious. Even if commodities avoid a bust, I still think from these price levels the future long term returns will be disappointing. Now that I've voiced an opinion, sit back and watch the speculators make me look like a fool for the next few years.
MAB,
The peak oil theory has some merit, but almost ALL commodity prices have soared simultaneously so I'm more than a little suspicious.
If you really, really thought it was going to be a Mad Max world, why would you hoard houses? Mad Max didn't. In fact, it seems there would be a nearly endless supply of empty houses. (Scary thought, since we seem to have a nearly endless supply of empty houses these days.)
So what about copper? Did Mad Max hoard copper? It's a global commodity. On the other hand, a great deal of copper goes into each new home. That means we have quite a supply of it should we so desire.
Are your home's copper pipes worth more than the entire property?
http://www.bloggingstocks.com/2008/04/01/are-your-homes-copper-pipes-worth-more-than-the-entire-property/
Demand for copper in China and India has boosted prices dramatically. Scrap copper sells for about $3.50 a pound, against 70 cents just three years ago. Scrap traders estimate that more than 80% of recycled copper is exported to China and India. So if a foreclosed home has, say, $5,000 worth of copper and is on the market for $100, investors could make a profit buying up the house, stripping out the copper, and selling it as scrap.
I guess it all comes down to China. Since I believe they are desperately attempting to recreate our Great Depression (commodity prices fell off the side of the cliff), I find it very hard to hoard what they are using.
When our housing market fell apart, the lumber hoarders cried.
January 10, 2008
Lumber prices hit 5-year low, cutbacks seen
http://www.reuters.com/article/reutersEdge/idUSN1019864220080110
North American lumber mills are just now restarting production after being down for the Christmas and New Year's holidays. But many of those mills have shut down again because of the low prices and poor demand.
If China's economy falls apart, will the copper hoarders cry? I think there's a very good chance they will.
No sir, I'd prefer to make my inflation bet purely on the overall CPI these days through TIPS. I'm somewhat protected against inflation (based on my spending habits) and can actually root for 0% inflation (or even slight deflation). I'd pay less taxes.
Stag,
For me it's helpful to think in ten year periods. Ten years ago, the U.S. stock market was a wealth machine. The best and brightest wanted to work for internet companies and telecom giants. The U.S. dollar was king and Greenspan was a genious. Emerging markets, commodities, even treasuries were viewed as very poor investments. Russia was bankrupt and OPEC was the gang that couldn't shoot straight.
Ten years hence, and it turns out the sure things weren't such sure things after all. Even stanger, the sure losers turned out to be huge winners. Go figure.
Lets go back to the early 1980s. Interest rates were sky high, the stock market was forever going to be a bust and America had seen its best days. We couldn't compete with the Japanese and many were worried that they would buy up all our prized real estate. GE sent all its finest young executives to Japan to learn the secrets of success. And the first shall be last - once again.
I could go on, but you get the picture.
I'll take my advice from history, not some ding bat wall street shill. I don't like emerging markets or commodities here. And in ten years, I suspect a lot of other people won't like them either. But who knows, in ten years maybe I'll buy a condo in Shanghai or a manmade island in Dubai. They'll be on sale then.
MAB,
Warren Buffett bought silver long before I did. He also sold long before I bought. I just didn't know that second part, lol.
In 2006, it was going parabolic. I said enough is enough and exited. That very weekend Buffett told the world the rest of his silver story.
I bought too early, I sold too early. Other than that it was a perfect trade. - Warren Buffett
I remember sighing in relief that I sold earlier that week. I'd been holding it for a year and a half. It would have been a very unpleasant weekend for me.
I made ~60% (after fees but before taxes) on silver and all I was really trying to do was just keep up with inflation (that's a lot of years worth). I bought under $7 an ounce and sold for about $11 an ounce. It continued to climb parabolically and then finally crashed.
Nobody told me there would be a 2nd parabola though, lol.
In any event, I thought I was getting a great price selling at $11.
When I bought silver I did it with the understanding that when I sold it I'd be done. The fees to buy and sell run about 3% each way (6% round trip). I also knew I'd be tempted to want to buy it again. I know I would have been tempted in the late 1970s. I just can't do it.
I stocked up on extra aluminum foil that I know I will someday need, but that's about as far as I'll go these days when it comes to hoarding. If I won't personally use it, I don't want it. At some point, anything else feels way too much like searching for a greater fool.
Truth be known, when I was buying silver I felt like a greater fool. $7 was a lot back then. It was at the top of its long-term trading range and I had to convince myself that it could break through the barrier (not that I use technical analysis, it was purely a gut call based on my stagflationary outlook).
What's bugging me is that many of the "investments" that have worked the best over the past ten years aren't even really investments. Gold, silver, ore, oil, real estate - seems like an investment in or a hedge against inflation. Supply & demand aside, the intrinsic value of a commodity doesn't change.
If inflation is the best investment, we're really in a lot of trouble - all these promises we've made won't be kept.
Everybody reads the same investment papers. That makes it hard to be average. I follow the Yale & Havard's portfolios. They did great during the tech bust due to investments in private equity, real estate, hedge funds, commodities & international equities. Studies were published, new models were developed and low and behold booms ensued. It's likely the low hanging fruit has already been picked.
I still see low returns across the board over the next decade.
MAB,
I still see low returns across the board over the next decade.
More people have joined the 10 year camp since January. I locked in a 1.655% real yield then and now it is just 1.44%.
I'm also in the 20 year camp as you may recall. We've had some defections. I locked in a 1.807% real yield in January (big bet) and it is now 2.02%. That's roughly a 4% opportunity cost loss (since I'm holding until maturity).
If real yields are low for a decade (as you suggest and I believe) then in 10 years even my 1.8% real rate is going to be looking pretty darned good. Real yield expectations should be thoroughly crushed by by then and would probably overshoot.
That 1.2% real yield (tax deferred) on January's I-Bonds was a major victory compared to the 0% real yields offered now. Hopefully, they'll bounce up a bit by late 2009 (as I procrastinate my next purchase as long as humanly possible on the thought that 0% is the floor).
In any event, real yields are far more volatile than inflation expectations. The herd rushes back and forth between fear and greed far more than it does when shopping at the grocery store (at least so far).
I really don't lose any sleep over real yields in my TIPS though. Taxes on those real yields should inflation rise is another matter altogether though.
Dream Weaver - 1976
http://www.youtube.com/watch?v=gOlspoBcwsU
Cross the highways of fantasy
Help me to forget today's pain
Stag,
I figure U.S. stocks will post 4% to 6% annualized returns over the next decade. With a 2% real yield and 3.5% inflation you should get that with TIPS. And they are a much safer investment too.
That said, I like the tax advantages of the stock market. That's why I never sold my equity funds. I did stop adding new money though. Had I had more conviction, I would have exited during the tech boom and then re-entered. But tax rates were a bit higher then and I didn't have the 20/20 hindsight I have today.
FWIW, I've been ignoring the experts. My retirment account is heavy with fixed income (tax deferred). My after tax money is in equities (low fee, low turnover and low taxes). All the new money I'm saving (not much these days) is on the sidelines - or so I thought. My short term bond fund actually had Bear Stearns paper. A lot of other bank paper too. Investment grade they said. I was cursing myself for not going with all short term treasuries. It's not like I didn't know better.
No doubt they will change the tax rules to rain on my parade some day.
MAB,
I have no risk tolerance any more. Not having a job and managing to ride out the dotcom bubble relatively unscathed did that to me (my investments kept up with CDs once all the smoke cleared). The market expects to see me return. I doubt very much I will. I wonder how many others are like me or will be like me once they retire.
My inbox is filled with spam from my stock brokers and the theme is always the same. Here's today's.
Pack more power into your trading strategy
I'm almost there. I'd pack rat more power (electricity) if I could. It's still relatively cheap (compared to oil anyway). I'm just not sure they like my strategy. I've only made a couple of trades since defecting from ETRADE and one of them was free (sold some of my TIP fund to buy TIPS directly). They claim I'll be getting market insight from industry professionals such as Guy Adami, from CNBC's Fast Money. Oh how they must love that show as a brokerage earning money on each trade.
Meanwhile, I'm told I need medication.
It’s the Year of the Rat — pack rat, that is
http://www1.arguscourier.com/article/20080508/COMMUNITY/249987130
You may have seen the show on “Dr. Phil” last week on hoarders. While this is very much a psychological problem that requires medical (and mental) treatment, this is a wider spread illness than most would suspect.
Quick! Medicate me before I manage to completely protect a small portion of my nest egg from government taxes, brokerage fees, investment fees, and inflation! ;)
Stag,
I have no risk tolerance any more.
There could be more to it. Schwab recommended this fund for my short term needs during the Greenspan 1% FFR era. I also know of people in my town that got trapped in auction rate securities. AAA. Hardly. The fed really has been encouraging risky behavior. So few will benefit.
http://finance.yahoo.com/echarts?s=SWYSX#chart2:symbol=swysx;range=19991212,20080514;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on
I don't think I'm any more risk averse today than in the past. But I'm not buying real estate. I'm also not buying stocks or chasing after extra yield.
If it ain't there, it ain't there. I need to get paid to take risk.
Nice chart MAB. It deserves its own post. That's really something.
Post a Comment