Wall Street has been sifting through the
horrific reports out of the Gulf of Mexico. Their rose-colored glasses allowed
them to see positives amongst the human and economic destruction: The stimulus
of rebuilding, the Fed pausing, cheaper oil. BusinessWeek notes the Street has been
There were significant tribulations to be
overcome before Katrina hit, and the storm’s devastation only adds to
Consider these sources of economic pressure:
• Oil prices are up almost 300% from their post 9/11 lows, and have more
than doubled since January 2004. Thanks to the demand side of the occasion, the
economy has been struggling under the costs. To quote Joan McCullough, the
supply disruption adds a “double whammy to prices.”
• The Consumer is stretched fairly thin. Inflation
continues to snarl; the days
of easy cash
out refis are behind
us. The catalyst for the next round of consumer spending is becoming
increasingly hard to see. At the least, I can suggest what it will not be: a
significant increases in wages (See the recent Census
Bureau report) or a new
spurt in hiring. A recent
Manpower survey of execs taken before Katrina implied more of the same –
lackluster hiring, best described as “lumpy,” with
strong regional variance.
• The Federal Deficit, already booming thanks to the unencumbered
profligacy of single party rule*, now looks to soar above half
a trillion dollars for 2005; And the budget for 2006 is widely expected to
be even worse.
• The War in Iraq, and all the costs associated thereto, has not gone away.
Our March 2003 prediction
for a final tab of a trillion dollars is looking increasingly prescient.
Katrina may have blown War coverage off the front pages, but the financial
burdens of this endeavor still remains a heavy one.
(Speaking of which) Off Balance Sheet funding: Since we’re
discussing these, let me remind you that a significant chunk of Federal
spending is so far “Off Balance Sheet” that it would make the CFO of
Enron blush. Its not just the war in Iraq funded via special legislation;
The other major expense is FEMA. This “Emergency” spending on an ad
hoc basis makes the deficit appear smaller than it really is.
Perhaps it’s a coping mechanism, a form of gallows humor that encourages Investors to see positives in the face of awful destruction. Regardless, it needs to be taken in context – as it points out that markets are not perfectly efficient, and can be as fallible as its Traders.
* Save your emails; this isn’t a political statement, but rather is
an historical observation.
It doesn’t matter which party is in power, but when
it’s but a single, dominant party without a counter-balancing opposition, we end
up with excessive spending.
But don’t believe me, you can look it up
yourselves. Or, for a typical example, see this article: No-Bid
Contracts Win Katrina Work
Could someone explain how the “Stimulus” of repairing destroyed capital goods in the wake of Katrina works?
I thought replacing a destroyed factory, for example, meant you can’t build a new factory and get extra output?
Unless someone can explain this to me, I think I’ll fund my retirement by smashing the windows in my house and putting sugar in my car’s gas tank.
Hard for me to see what’s keeping the dollar up here.
What do you think of the “peak spending” theory of baby boomers? That is, people tend to spend the most at around age 48, and then spending begins to decline. Could all this lack of savings, buying the last-big house and furnishing it, be the last hurrah from the baby boomers?
In any case, higher oil prices aren’t inflationary. How much has oil gone up? Inflation exists, but it’s low. I don’t think retailers have pricing power to jack up prices. Have you seen how cheap LCDs, TVs, Computer, et al are getting?
HH Gwin iii, this of course is Bastiat’s theory of “that which is seen and that which is not seen” and his example of the broken window. One way of thinking about it is as a wealth effect – repairing New Orleans may generate GDP but it merely offsets the loss of wealth – as would putting sugar in your tank.
Gallows humor it is. If everything that can go wrong, does go wrong, then the future must be brighter.
I do wonder how much wealth was destroyed by Katrina. Looks like it was largely depreciated. In that case, this *is* the new factory.
The SPR was being filled at an accelerated rate (before Katrina). The increase in the rate of SPR buys explains half of the domestic increase in the demand for oil. The other half comes from all the white kids in the baby-boomlet getting their driver’s liscense. This half was unavoidable and predicatble going on 16 years. The SPR part is just the administration using your tax dollars to support their good friends’ profitability. Isn’t that nice. The weekly EIA.DOE.GOV petroleum report covers the SPR buying. Live birth-rates by ethnicity comes from the Census.
Frank — The SPR is tiny compared to national consumption — and, it was scheduled to be filled by now — I recall how numerous Oil Bears had claimed Oil would top out when the SPR was done.
What of CHina? They just startedf an SPR, Japan an Russia are considering expanding theirs, and several European countries want one also.
The number that caught my eye today was distillate inventories down 1.1m bbl.
This is the one to watch, in my book. Going to be very expensive to heat those new houses if we get a harsh winter.
With Bush’s polling numbers where they sit right now, a couple thousand people freeze to death this winter and we’ll be back to a Carter-era “misery index.”
You hit it the nail on the head, 06-08 is not going to be pretty unless something very positive happens.
The last two days, mixed retail sales reports, couple this with last weeks consumer credit downturn, and todays Philly Fed.
The fed showed +2.2% growth, falling far short of the expected 13.3% rise and a 17.5% prior read.
Taken together this data indicates an oil price shock latency which is starting to effect the economy.
And my CPI comments today are just the tip of the iceberg. We need to bust the CPI fraud wide open.