Stoneleigh: While I agree that speculation and the fear factor (common for commodity tops) have driven oil prices to a level from which they are likely to fall substantially (although not necessarily immediately). However, comparing oil prices to the dotcom mania and expecting the same resolution is far too simplistic. Dotcom stocks were not a strategic resource in finite supply - one that appears to be poised at or near a global production capability peak.
Tight supply and demand is not necessarily a recipe for ever-rising prices - it is more likely a recipe for high and increasing price volatility. Tightness creates conditions whereby the effects of even small events can be felt disproportionately, and those effects can also be magnified by those able to take advantage of the situation. Speculators like volatility. They don't care which way prices are moving - they make can money on movements in either direction, and their actions reflexively feedback into market expectations and the actions of other through momentum-chasing.
Both the short-term effect of speculation kicking into reverse (shorting) and the longer-term effect of demand destruction due to a collapse of purchasing power should cause oil prices to fall substantially, but there are significant factors that should also drive oil in the opposite direction. Even a perception of shortage can be enough to lead to a shift towards hoarding behaviour - in this case on a national level - which points to further aggressive actions in aid of securing national supply before others can tie up scarce resources. As the evidence of impending actual shortage is increasing, such actions are even more likely. Even a temporary reversal of tight conditions due to demand destruction is unlikely to alter this dynamic once set in motion.
Oil is power in this world. Without it, no nation's military would have a chance against those who did have an adequate supply, and they know it. To think therefore that oil prices could simply decline into oblivion like dotcom market froth is naive in the extreme. In contrast, both price retreats and advances should be expected in a world of titanic forces pulling in opposite directions, but over time the importance of oil will grow and access to it by anyone other than the wealthy and powerful will decline dramatically. Prices are therefore set to increase over the long-term, probably to levels we can scarcely conceive of today, but trying to bet on this trend in a volatile market is a dangerous game. Timing will be everything, and it will be far easier to lose a fortune than to make one.
Oil Rally Topped Dot-Com Craze in Speculators' Mania
The rally that drove oil to a record $139.12 a barrel last week surpassed the gains in Internet stocks that preceded the dot-com crash in 2000.
Crude rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001, and reached 28 record highs this year. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq Composite Index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group LLC.
The Nasdaq tumbled 78 percent from its March 2000 peak, erasing about $6 trillion of market value, as investors concluded that prices weren't supported by profits at companies such as Broadcom Corp. and Amazon.com Inc. Billionaire investor George Soros and Stephen Schork, president of Schork Group Inc., say oil is ready to tumble because prices aren't justified by supply and demand.
``There's nothing different between this mania, the dot-com mania, the real estate mania, the Dow Jones mania of the 1920s, the South Sea bubble and the Dutch tulip-bulb mania,'' said Schork, whose Villanova, Pennsylvania-based firm advises the Organization of Petroleum Exporting Countries, Wall Street firms and oil companies on the outlook for energy prices. ``History repeats itself over and over and over again.''
Lieberman bills would curb energy speculation
Institutional investors in commodities face one of their biggest threats to date in a draft Senate bill, set for airing next week, that would prohibit these traders from buying oil and other futures contracts after they reach a certain limit.
Sen. Joseph Lieberman, a Connecticut independent and former Democrat, plans to unveil this and other legislative proposals Wednesday in an effort to curb financial speculation in the commodities market, a staff member in the senator's office said Friday.
A second draft proposal would limit the size of the stake any one investor can have in the market. A third would close what's known as the "swaps loophole," the staff member said, in a reference to the ability of pension funds and other investors to build stakes in commodities by entering swaps agreements with investment banks....
.... Lieberman's proposals count as some of the most severe efforts recently considered by Congress to deflate what many lawmakers and commodities users see as the damaging influence of financial investors in the oil, gas and grains markets.
Proposals have included giving the Department of Energy the authority to gather energy-trading information from various federal agencies to more oversight of foreign-sourced trades in commodities. Some lawmakers have also proposed raising margin requirements for speculators.
The head of the House Energy and Commerce Committee vowed Thursday to strip a "veil of secrecy" from energy markets with a bill designed to close gaps in regulators' collection of data on energy trades.
Central Banks Use Flawed Macroeconomic Models
The headline summarizes the observations of economist Paul De Grauwe, who takes central banks to task for their reliance on so-called Dynamic Stochastic General Equilibrium models (DGSE). De Grauwe objects to some of the fundamental assumptions embedded in them (consumers are rational and all have the same preferences, any disruptions are the result of external shocks, as opposed, say, to internal imbalances, such as misallocation or mispricing of capital).
Another issue that appears to be implicit in these models (and the consequences have been discussed in more detail by economist such as Axel Leijonhufvud, Richard Alford, and Tim Duy) is that the Fed views the economy as a closed system and has not made sufficient allowance for the impact of trade, particularly how cheap imports have led the central bank to misread domestic inflation (ie, excluding the trade sector) and adopt overly lax monetary policies. It seems that this mis-framing of the problem might have been aided and abetted by reliance on DGSE models.
Now it's a given that any model of a system as complex as an economy is bound to have some shortcomings. But when analyses have biases and limitations, the best approach is to use multiple methodologies and use judgment and empirical cross-checks. Over-reliance on a particular methodology too often leads users to unwittingly default to it.
Some thoughts on macroeconomic models
One of the surprising developments in macroeconomics is the systematic incorporation of the paradigm of the utility maximizing forward looking and fully informed agent into macroeconomic models. This development started with the rational expectations revolution of the 1970s, which taught us that macroeconomic models can only be accepted if agents’ expectations are consistent with the underlying model structure. The real business cycle theory (RBC) introduced the idea that macroeconomic models should be “micro-founded”, i.e. should be based on dynamic utility maximization of individuals. While RBC models had no place for price rigidities and other inertia, the New Keynesian School systematically introduced rigidities of all kinds into similar micro-founded models. These developments occurred in the ivory towers of academia for several decades until in recent years these models were implemented empirically in such a way that they have now become tools of analysis in the boardrooms of central banks. The most successful implementation of these developments are to be found in the Dynamic Stochastic General Equilibrium models (DSGE-models) that are increasingly used in central banks for policy analysis. It is no exaggeration to say that today a central bank that wishes to be respected has to have its own DSGE-model.
Market Has Irrational Expectations for the Fed: Caroline Baum
One week ago, the likelihood that the Federal Reserve would raise its benchmark interest rate at the Aug. 5 meeting was zero, according to fed funds futures prices. Yesterday, the odds were better than 65 percent.
Expectations travel faster than the speed of sound nowadays. No moorings to come unhinged here, thank you very much. This boat is drifting anchorless at sea.
The rout, or rise, in short-term interest rates this week started in Europe and worked its way across the pond. The December Eurodollar futures contract, which reflects expectations for rates in the ensuing three months, slumped 65 basis points in two days -- June 9 and 10 -- alone....
....``They are not about to do a multistep tightening,'' said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. ``If they did, it would be aborted very quickly.''
Kasriel doesn't discount the possibility of a little cosmetic tightening. ``It's conceivable they could show their inflation-fighting credentials and bump the funds rate up 25 basis points in August,'' he said. ``But I don't think they will.''
Yesterday's retail sales for May showed surprising strength, rising 1 percent. That changes the arithmetic of second-quarter gross domestic product. It doesn't change the fundamentals driving the economy.
Housing prices are falling.
The unemployment rate is rising.
Non-residential investment is slowing.
Business confidence is slumping.
The U.S. auto industry is dead.
State and local governments are cutting back.
Bank credit has been falling since March.
The Fed's monetary base is barely growing in nominal terms.
``There's no there there'' for a second-half recovery, said Bob Barbera, chief economist at ITG Inc., a New York brokerage, who expects ``an extended period of below-trend growth.''
Senators Caught in Mortgage Fallout
When Senator Kent Conrad of North Dakota wanted a mortgage for his beach house, he turned to a Washington insider, James A. Johnson, former head of Fannie Mae, the government mortgage giant, who then put the senator in touch with Angelo Mozilo, chief executive of the mortgage lender Countrywide Financial.
The ensuing telephone call between Mr. Conrad and Mr. Mozilo led to two Countrywide mortgages, including one in which the company bent its rules to give Mr. Conrad a loan.
Those loans are now among a number of Countrywide mortgages at the center of an examination into whether a number of top politicians in Washington — members of Congress, the cabinet and celebrated advisers — received favorable deals from a company whose lax lending standards are at the center of the subprime mortgage crisis.
This week, Mr. Johnson, whom Mr. Conrad turned to for help, was forced to step down as head of Senator Barack Obama’s vice-presidential selection committee in part over Countrywide home mortgage loans that Mr. Johnson had received at favorable rates.
At the center of the scrutiny is Countrywide’s “V.I.P.” program, also known as the “Friend of Angelo” program, in which Countrywide appeared to bend its lending rules for prominent people. Now, many of those receiving Countrywide home mortgages say they were not aware the company might have been working behind the scenes to give them favorable loan terms.
Countrywide's Many 'Friends'
Two U.S. senators, two former Cabinet members, and a former ambassador to the United Nations received loans from Countrywide Financial through a little-known program that waived points, lender fees, and company borrowing rules for prominent people.
Senators Christopher Dodd, Democrat from Connecticut and chairman of the Banking Committee, and Kent Conrad, Democrat from North Dakota, chairman of the Budget Committee and a member of the Finance Committee, refinanced properties through Countrywide’s “V.I.P.” program in 2003 and 2004, according to company documents and emails and a former employee familiar with the loans....
....According to company documents and emails, the V.I.P.'s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value. For V.I.P.'s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free “float-down” to the lower rate, eschewing its usual charge of half a point. Some V.I.P.'s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.
Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the “Friends of Angelo” discount, and that Mozilo had personally priced their loans.
Where's The FBI?
Is that illegal and/or directly in violation of both House and Senate rules?
The issue is not just that closing costs and points were waived - it is the "float down" provision and even a reduction in interest rate. Grab your trusty computer (e.g. Quicken) and run the difference on an amortization schedule over 30 years of a 1/4% interest rate change, then tell me what you think. The "benefit" involved here adds up to tens of thousands of dollars.
I'm not surprised by a bit of this.
Rumor is that Countrywide had an entire department that dealt with these "FOA" (Friends of Angelo) loans, and I'll bet that a few well-placed subpoenas will show that these loans were disproportionately handed out to people with political influence....
....What if a bunch of Congressfolk in fact have a bubble house and/or serially refinanced, and thus are underwater themselves? How does that change the calculus of what they're doing in Washington DC?
The bills coming out of Dodd .et.al. are allegedly intended to provide "relief" for American homeowners, never mind that the 80% of Americans got nothing out of the bubble years, did not refinance, and did not participate in the speculation but will get screwed by the debt bomb that is and will go onto the nation's balance sheet as a consequence of these "bailout" proposals!
$165 billion so far in "stimulus" has been blown on this endeavor and another $300 billion or more in Chris Dodd's bill is under consideration - for a total larding up of the public debt by nearly half a trillion dollars - to "work to fix the housing mess", at least in part.
Speculation and the Housing Bailout
The basis of the proposed legislation is the creation of a new bureaucratic process that would provide government insurance of $300 billion in new home loans for at-risk borrowers. In order to qualify for this insurance, lenders would agree to write down loan balances that are below the appraised value of the house. In agreeing to the deal, Alabama Senator Richard Shelby declared that taxpayers would not be at risk. But since government creates no wealth of its own accord, citizens are always at risk of picking up the tab for a government program either through taxation or through higher prices due to government-created money. Senator Shelby's premise about risk bearing is the start of several points of failed logic in this plan.
The factors that caused the defaulted loans in the first place still exist. The inability to make timely payments is usually the result of excessive debt exposure or loss of income, which may be due to either unemployment or divorce.
For many facing foreclosure, debt is not just confined to a single mortgage balance. In many cases, multiple loans in the form of second mortgages and equity loans were made against the hypothetical value of the property. This brings to question the part of the legislation requiring loan balances to be reduced. Does this include the balances outstanding for second- and third-tier loans? Of course, debt is not just confined to home loans. By some accounts, current credit-card debt in this country stands at over $1 trillion. It would be safe to assume that those facing foreclosure have hearty credit-card balances as a consequence of trying to make ends meet.
One of the grand fallacies about the nature of foreclosures is that the causes of the financial peril are the upward resets of interest-only real estate loans, which naturally cause the monthly payment to increase. Most believe that if these people had standard fixed mortgages, then the despair of losing their homes would be a passing nightmare. The possessive adjective "their" is itself a fallacy, since it implies a claim to ownership of property in which little or no money was invested. But the believers in this adjustable-interest-rate theory overlook the high probability that many of those in default would fare no better under a standard mortgage. For example, today a 30-year fixed mortgage with an interest rate of 6% on a principle of $250,000 would require a monthly payment of $1,490, and this figure does not include property taxes and insurance, which would increase the monthly outlay by a few hundred dollars more — an amount equal to that of the defaulted interest-only loans.
On the other side of the equation, a job loss or divorce that caused an unexpected drop in monthly household deposits is more than likely still present. New mortgage terms have absolutely no effect on one's employment or marital status. If Congress ever realizes this fact, then it would come as no surprise to see further housing legislation that would mandate the rewriting of employment contracts and marriage vows.
Moody's may cut Lehman's 'A1' rating on ouster of CFO
Moody's Investors Service on Friday placed Lehman Brothers Holdings' A1 rating on review for a possible downgrade. The move follows Lehman's announcement that Chief Financial Officer Erin Callan is leaving. The ratings agency noted that although the purpose of the management change appears to be an effort to assure accountability for its losses and to strengthen risk and financial controls, the decision may, in fact, further erode investor confidence. Moody's review will focus on the degree to which Lehman's various franchises have been affected by recent market conditions and on potential further write-downs within Lehman's residential and commercial mortgage portfolios. Signs of franchise erosion or additional losses are likely to result in a downgrade, it warned.
AIG Faces New York State Review on Swaps Accounting
American International Group Inc., the world's largest insurer, faces scrutiny from New York's top insurance regulator over the accounting of credit-default swaps that wiped out profit for two quarters.
``We've had a fairly extensive conversation with their senior managers on that topic,'' David Neustadt, a spokesman for New York Insurance Superintendent Eric Dinallo, said today in an interview. ``We're planning some additional review.''
The examination adds to pressure on Chief Executive Officer Martin Sullivan, who faces investors demanding his replacement after the company lost 41 percent of its value this year. Sullivan in December downplayed the potential for losses tied to U.S. housing before saying in February that AIG's auditor found a ``material weakness'' in its accounting. He then reported two record quarterly losses totaling more than $12 billion.
Banks turn to Future Fund for cash
Cash-strapped banks are tapping Australia's sovereign wealth fund to raise new finance as traditional sources of funding dry up in the ongoing global credit crisis.
ANZ Bank, the country's third-biggest lender by assets, has raised about $500 million in term funding from the Future Fund, an industry source said today.
The Future Fund, Australia's largest single investment fund with $60 billion in assets, was set up by the government to cover public service pension liabilities. Its assets are set to grow to about $148 billion by 2020.
"My understanding is that all Australian banks have done transactions with (the Future Fund). If you want debt in your portfolio, having some bank term debt is not a bad option, particularly given that you are getting more attractive spreads,'' said one industry source, who declined to be identified.
Scab' driver burned in his lorry as European protests against high fuel prices turn violent
Violence has flared across Europe as hauliers, fishermen and taxi drivers protest against rising fuel prices they say are crippling their industries.
Some of the worst outbreaks were seen in Spain where prime minister José Luis Rodriguez pledged 'zero tolerance' of any disruption by 90,000 striking lorry drivers.
His warning came after a driver breaking the strike was burned when his lorry was set on fire.
A British father and his son feared for their lives when a mob of Spanish truckers hurled rocks at their van.
David Copestake, 40, and son Dylan, 12, were pelted as they drove on a dual carriageway.
Mr Copestake, who has a chain of estate agencies in London, said: 'It was terrifying. One rock smashed into the windscreen heading straight for my head.'
Spain's road system was returning to normal after the interior ministry ordered police to get tough.
The government has reached a deal with most of Spain's hauliers on relief from rising costs.
In Portugal, lorry drivers agreed to lift road blocks after their union accepted a deal with their government.
But it followed the death of a man near Lisbon on a picket line.
In France, hauliers mounted protest drives on motorways.
Protests have now gone worldwide, with the Philippines and Thailand also seeing angry workers taking to the streets.
Spain appears to have been worst hit, with lorry drivers on either side of the dispute paying with their lives.
The Corporate State and the Subversion of Democracy
I used to live in a country called America. It was not a perfect country, God knows, especially if you were African-American or Native American or of Japanese descent in World War II or poor or gay or a woman or an immigrant, but it was a country I loved and honored. This country gave me hope that it could be better. It paid its workers wages that were envied around the world. It made sure these workers, thanks to labor unions and champions of the working class in the Democratic Party and the press, had health benefits and pensions. It offered good public education. It honored basic democratic values and held in regard the rule of law, including international law, and respect for human rights. It had social programs from Head Start to welfare to Social Security to take care of the weakest among us, the mentally ill, the elderly and the destitute. It had a system of government that, however flawed, was dedicated to protecting the interests of its citizens. It offered the possibility of democratic change. It had a media that was diverse and endowed with the integrity to give a voice to all segments of society, including those beyond our borders, to impart to us unpleasant truths, to challenge the powerful, to explain ourselves to ourselves. I am not blind to the imperfections of this America, or the failures to always meet these ideals at home and abroad. I spent 20 years of my life in Latin America, Africa, the Middle East and the Balkans as a foreign correspondent reporting in countries where crimes and injustices were committed in our name, whether during the Contra war in Nicaragua or the brutalization of the Palestinians by Israeli occupation forces. But there was much that was good and decent and honorable in our country. And there was hope.
The country I live in today uses the same words to describe itself, the same patriotic symbols and iconography, the same national myths, but only the shell remains. America, the country of my birth, the country that formed and shaped me, the country of my father, my father’s father, and his father’s father, stretching back to the generations of my family that were here for the country’s founding, is so diminished as to be nearly unrecognizable. I do not know if this America will return, even as I pray and work and strive for its return. The “consent of the governed” has become an empty phrase. Our textbooks on political science are obsolete. Our state, our nation, has been hijacked by oligarchs, corporations and a narrow, selfish political elite, a small and privileged group which governs on behalf of moneyed interests. We are undergoing, as John Ralston Saul wrote, “a coup d’etat in slow motion.” We are being impoverished—legally, economically, spiritually and politically. And unless we soon reverse this tide, unless we wrest the state away from corporate hands, we will be sucked into the dark and turbulent world of globalization where there are only masters and serfs, where the American dream will be no more than that—a dream, where those who work hard for a living can no longer earn a decent wage to sustain themselves or their families, whether in sweat shops in China or the decaying rust belt of Ohio, where democratic dissent is condemned as treason and ruthlessly silenced.
Why is Capitalism Failing Us?
Thus, capitalism is unstable. It powerfully tends toward overproduction as competing employers try to get a share of the profit, but then more is produced than employed and self employed people can afford to buy. They may need the product, food for example, but they cannot afford to buy it. So plants shut down, employees lose jobs, farmers also cannot sell their products and a depression results.
Human beings were shocked and startled by the Great Depression of 1929, particularly so, capitalist employers. Capitalists learned, even if we did not, that capitalism simply would not function without public money. U.S. capitalist employers remained without profit making opportunities for 14 years until World War II, despite the public expenditures of the New Deal. The vast public expenditures of WWII, primed the pump of capitalism. Billions and Billions of dollars of public money have sustained capitalism and avoided stagnation from 1940 to date. We now have:
* $49 trillion in interest-bearing debts, according to the U.S. Federal Reserve Board …
* $50 trillion in federal contingency debts, according to the Government Accountability Office (GAO), and …
* $164 trillion in derivatives, according to the U.S. Comptroller of the Currency (OCC).
That’s a grand total of $263 trillion in debts and obligations, twenty times more than the total size of the entire U.S. economy.
Despite this massive public expenditure, our capitalism remains always on the brink of stagnation.
What do we mean by “stagnation?” It means absence of profit making opportunities, too much productive capacity, and much unemployment.
The huge unmet consumer needs that had built up during the depression and WWII, provided profit making opportunities until around 1970. Capitalist employers were determined that no future depression would again lay them low. All capitalists thus enthusiastically supported the vast public expenditures for defense during the Cold War from 1946 to 1990, the Korean War, and the War in Viet Nam. We are now spending $1 Trillion per year on the Iraq War
Despite all of this, capitalism remains fragile, prone to stagnation, and desperately dependent upon contribution of public tax money or borrowed money to keep it going. If there had not been this public taxpayer support of capitalism, there would have been another depression or to some solution like the Germans adopted in 1933.
Ireland Derails a Bid to Recast Europe’s Rules
Europe was thrown into political turmoil on Friday by Ireland’s rejection of the Lisbon Treaty, a painstakingly negotiated blueprint for consolidating the European Union’s power and streamlining its increasingly unwieldy bureaucracy.
The defeat of the treaty, by a margin of 53.4 percent to 46.6 percent, was the result of a highly organized “no” campaign that had played to Irish voters’ deepest visceral fears about the European Union. For all its benefits, many people in Ireland and in Europe feel that the union is remote, undemocratic and ever more inclined to strip its smaller members of the right to make their own laws and decide their own futures.
The repercussions of Friday’s vote are enormous. To take effect, the treaty must be ratified by all 27 members of the European Union. So the defeat by a single country, even one as small as Ireland, has the potential effect of stopping the whole thing cold.
Reacting with frustration to the vote, other European countries said they would try to press ahead for a way to make the Lisbon Treaty work after all and would discuss the matter when their leaders meet in Brussels next week.
But if they fail, the union would have to find some other method of adjusting institutionally to the addition of 12 new members since 2004, a rapid growth raising difficulties the treaty was intended to address. It will also have to come to terms with the vexing reality that, as important as the union is to their daily lives, many ordinary Europeans still feel alienated from it and confused by how it works.