Gas Prices And Change

The Bauman Society warns of the problems related to falling oil costs:

As you likely realize every time you pump gas into your car, the cost of fuel has dropped by about 50% over the last two years.

The Fall of Crude

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This is great news for consumers, but it’s bad news for the exploration companies extracting black gold from rocks and sand. 

And as bad as it is for those companies, it’s absolutely awful news for the states that have been collecting “severance” payments from all that oil being recovered. Oil provided a massive tax base for these states. Alaska, for example, made so much money from crude, it’s been known to pay residents an oil dividend every year.

This year, the governor said he’s going to give residents half as much as they received last year and cap the total payout to just $1,000. Yet this actually understates their problem: Alaska has a $4 billion hole to patch up thanks to lost oil-severance payments.

In an interview with MarketWatch, Alaska’s director of Office Management and Budget said: “We could close every school in the state and that still wouldn’t be enough to close the budget gap.”

While Alaska has the biggest problem, it’s not alone. Oklahoma and North Dakota each have a $1.3 billion deficit to fill. Louisiana’s is $2 billion.

So how will these budget gaps be rectified? By cutting spending and raising taxes, that’s how. That means more unemployment and less spending. In other words, these four states — which previously led the U.S. economy — will now become a drag.

That’s terrible news when the GDP of our nation is barely growing at a 1% clip. The last thing we need are more problems to hold back our economic potential.

And I’m afraid things are going to get worse before they get better. As James Dale Davidson and Charles DelValle have mentioned countless times, we are in the midst of a major shift in the global economy. The rules that were once considered “conventional wisdom” are fading away.

 All the various economies around the world are increasingly intertwining and becoming more complex. As author and historian Joseph Tainter pointed out in his book The Collapse of Complex Societies, the deeper the integration between these various economies, the more susceptible they become to a major problem.

So now, rather than wonder about what’s happening in the oil patch exclusively, we have to worry about what China’s future monetary policies will be … what Russia may do with its hoard of treasury bonds … or whether the European Union will splinter apart and push the entire globe into a new financial crisis.

We are heading full steam toward a collapse. And while we don’t have a crystal ball to tell us precisely when this will all take place, we do know that it’s inevitable. Because as every day goes by, we see more and more pieces falling apart.

All of which could mean big changes for the local real estate market...stay tuned!

Happy Investing! 

Sky is Falling

In the May 2016 issue of Esquire, author Ken Kurson states, "I believe that everything is going to shit."

The article is entitled "The End of the World: There's a storm coming. Batten down your money."

He has two major reasons for concern: 1) the Chinese economy, and 2) the global fall of oil prices.

He believes that China's economic figures were officially exaggerated. Swiss hedge fund owner/manager Felix Zulauf agrees that the situation in China is as worrisome as the 2007 US housing market. He is predicting a 15-30% decline in Chinese currency that will lead to a global recession.

The oil crisis impacts major oil countries, indeed, but keep in mind that in 2014, the US surpassed Saudi Arabia as the world's leading producer of oil. According to Kurson, the real crisis with oil prices declining is "the worldwide bank panic that is already slowly setting in as those who gave money to exploration projects start to realize they're never going to recoup their investments.

There are other indicators of economic decline. According to Bill Priest, CEO of Epoch Investment Partners, 56% of the S&P 500's 72% gain from 2012-2015 came from investors with more dollars to spend on price/earnings, due to the inflation from "quantitative easing" strategies of central banks. Fewer people are trading, more are trading on margins, and they are trading at a higher P/E ratio (the number of years it will take for a stock's earnings to pay back its price).

Formerly profitable companies like Apple are reporting declines in revenues. Bankruptcy filings in the retail sector are up, including A&P, Hancock Fabrics, and American Apparel, with others like Staples, Walmart, Sears, and Kmart closing stores. Default are also up in subprime auto loans.

Homeownership is at its lowest level since 1965. Yet prices are climbing back up, due to large volume purchases by buyers like Blackstone private hedge fund. Prices have not collapsed because interest rates are at an all-time low. What happens when interest rates get back to the normal 6-8% range? If rates went up to 7.5%, prices would have to drop 32% to maintain the same monthly payment.

James Dale Davidson warns that the 32% of the American population that are baby boomers will start retiring, and the spending and investing that generated income for the government will reverse, as boomers stop spending, start saving, and start collecting retirement funds from the government. This will have a big impact on government revenues, as boomers control 77% of the net worth in the country.

Kurson concludes, "With the second-largest economy in the world committed to artificially propping up an unstable currency while the most important commodity in the world experiences total collapse, things will get worse. And they might stay worse for a while..."

What do you think, dear Reader?

Happy Investing?

Good News Bad News

We are enjoying the greatest economy here in the Puget Sound area. However inadequate transportation planning could cut it short. There are other dark clouds on the horizon as well.

Jon Talton recently outlined a number of macroeconomic concerns in his January 30 article for the Seattle Times. China and other emerging economies dependent on Chinese investment have been struggling; oil and commodities prices have been collapsing; tech stocks may be overvalued; and there is trouble in the manufacturing sector, often a precursor to economic downturn.

The NY Times reported recently that American businesses are hoarding $1.9 trillion as a hedge against future economic turmoil.

While our tech industry has buoyed our local economy, other markets dependent on housing or manufacturing have been left behind in an uneven economic recovery. But there are several other concerns in Seattle's economy. Venture capital that fuels local tech start-ups actually declined in the fourth quarter of 2015. Boeing's employment numbers have dropped in 2015 to 79,238 employees versus more than 86,000 in 2013. Seattle risks overbuilding in its hot commercial market. Global economic slowdown has already impacted rail traffic dependent on coal and oil, and could also have significant impact on the new ports alliance between Seattle and Tacoma.

Chris Mefford, president of the research group Community Attributes, expects the metro Seattle economy to grow in 2016, albeit slower than in the past. Robert Kiyosaki has predicted a big crash in the national economy in 2016. Jason Dimond of JP Morgan Chase dismisses this possibility. The Federal Reserve puts it at a ten percent possibility; while Citigroup puts the chances at 65%.

What are you doing as an investor to prepare yourself?

Happy Investing!