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Katrina
Wednesday, August 31, 2005
Today, we depart from our normal fare of trying to make sense of what central bankers do and how this affects the rest of world. Instead, we turn our attention to Hurricane Katrina.
After the storm veered to the east just before making landfall, initial indications were hopeful that the worst-case scenario had been avoided. Recent reports, however, suggest that this optimism was premature.
As talk began to heat up as to whether this could be the "tipping point" that pushed the American economy into recession, or how these events will affect fuel prices over the Labor Day weekend and beyond, or what impact this will have on the Gulf Coast gambling industry, we began to wonder about our priorities.
When cable news studio hosts prodded on-scene reporters for casualty estimates, and we awaited the response, we wondered if, in this electronic age, we have all gone a bit mad.
We wondered how commodity indexes and energy stocks would fare as the news was reported yesterday. As levees in New Orleans failed and water rushed in seeking the lower-lying poorer areas of town, we began to lose interest in the rising prices. As the devastation in Mississippi became clear, the impact on energy sector earnings seemed to matter less.
It is not often that you hear phrases like "pushed aside the dead to reach the living" during reporting of events in the United States. America is not accustomed to this sort of catastrophe. This sort of thing normally happens in far away places.
To the locals, the events of the last few days are life threatening or life altering - to most of the rest of us it is news. News closer to home, but nonetheless news. News that may affect us.
Have we all become desensitized? Should we be less sensitive? More sensitive?
To our forefathers, death and destruction were much more common - they were desensitized to this sort of thing, and for good reason. We are desensitized for different reasons and in different ways - because it is so common and so far away - only knowable through a CRT or an LCD. Easy to turn on and off, yet so much more of it to see.
Today we question how we think about events such as this and we wonder about the future.
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8 comments:
Unbelievable tragedy.
Also, it's worth noting that there are NG units just back from Iraq helping out in the cleanup, and NG units in Iraq just learning if they even have homes to come back to.
All sympathy to those involved, but I rather doubt that it will affect housing prices in the country as a whole, at least it shouldn't. As far as oil prices are concerned, aside from short-term effects, the price should go down between now and the end of the year, based on fundamentals.
I think the point of today's post is to show respect and sympathy for those harmed by Katrina (which is to say, the whole country).
With that observation, in response to the 10:21 a.m. post, I would like to make the following arguments:
1. More than one pundit has suggested that Katrina could tip the country into recession based on $3.00 + per gallon gasoline, if nothing else. Plus, the fed is raising rates and inverting the yield curve.
Just looking at the pictures on TV should put most consumers in a funk, but if that doesn't do it, spending all that money on gasoline, plus higher interest rates on home and consumer loans, should take enough money out of people's pockets to affect negatively, among other things, retail sales. But higher gas and interest payments are going to affect consumer spending across the board.
As an aside, just in the *one day* between August 29 and August 30, regular gas at my local Valero (in the L.A., CA region) went from $2.79 to $2.83. No doubt it is higher today, though I haven't checked. If the national average for a gallon of regular hits $3.00, which is extremely likely, we in Southern California will probably be paying $3.50 +, thanks to our good friends at AQMD and the special blends their misguided air pollution regulations require.
It is also worth noting that, in the latest fed minutes, they did note how banks are starting to tighten up on lending standards (no doubt due in part to jawboning by the fed and in part to the flattening of the yeild curve, as the cost of deposits rises faster than the rates they can get on loans and "carry" becomes less profitable), and then there is that Greenspan quip at Jackson Hole about liquidity and how it can dry up quickly, and how history does not deal kindly with those who do not show appropriate respect for risk.
If high gas prices and rising interest rates do push the country into a recession, with all the debt that is out there (and not just housing debt, but car debt, and credit card debt, too) putting a damper on cash flow, and by extension job creation, then you can bet your booty real estate prices will be affected.
2. My reading indicates it is not the cost of oil, per se that Katrina negatively affects. Oil is an international market involving a relatively fungible commodity, and the things I read agree with 10:21 that fundamentals would call for a lower price of oil.
The problem is with gasoline and home heating oil refining capacity. Thanks to the NIMBYs in the rest of the country, a disproportionate amount of that is located in the gulf region in the path of Katrina (along with the LOOP, where we get a large portion of our imports). The pre-labor day driving season is just about over, so the negative affect of Katrina on gas prices should not be too bad (if $3.00 + gas can be called "not too bad"). However, home heating oil which is widely used in places like Chicago and Massachusetts, is a whole different ball game. I saw one guy on CNBC yesterday urge viewers to do whatever it takes to try to lock in home heating oil supplies and prices *now* and not wait until later, when there could be some very serious shortages, not to mention extremely high prices.
So, as one guy on CNBC put it yeaterday, this winter we could be awash in crude oil, but unable to use it due to a lack of refining capacity.
That brings up the interesting question of whether this event will cause a kind of demand spike where everyone is trying to secure their energy needs before prices go up - mostly heating oil, although I did hear about some guy in a truck pulling up to an Indiana gas station and filling up four 55-gallon drums, before filling up his truck's tank.
You never know how these things play out - sometimes it doesn't take much to upset the balance and people get a little spooked.
As one who has topped off his tank twice in the last two days, let me say that anon 11:15 makes a very good point.
Another area worth exploring is the impact on natural gas prices, a commodity which *does* affect Southern California, even if heating oil doesn't. Also, unlike oil, this is not an international market. Thanks to the lack of LNG terminals, we already pay much higher than world prices for natural gas.
Hey, this is slightly off the topic of Katrina, but I noticed something very interesting in reading a couple of the other bolgs and sites I frequent.
First of all, there is the very interesting discussion by Paul McCulley over at Pimco, where he talks about the fact that Greenspan is trying to raise long term interest rates (well worth reading).
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+September+2005.htm
In the course of that dissertaion, McCulley quotes extensively from Greenspan's July 20 exchange with Senator Shelby, where he talks about how this isn't your father's inverted yield curve:
And the reason, basically, is that it was a good measure in the early period when banks, commercial banks, were the major financial intermediaries. And when you had long-term interest rates rise - I should say, short-term interest rates rise relative to long-term interest rates - it usually implied a squeeze on the profitability of commercial banks because they tend to hold somewhat longer maturities on the asset side of the balance sheet than on the liability side.
And as a consequence of that, that squeeze was usually associated with an economy running into some trouble.
But we have had extraordinary new avenues of financial intermediation developed over the last decade and a half. And therefore, there are innumerable other ways in which savings can move into investment without going through the commercial banks.
Now, we head on over to "Economic Dreams -- Economic Nightmanres" (http://forestpolicy.typepad.com/economics/), where the author quotes extensively from the latest writings of Prudent Bear’s Doug Noland, where Noland compares the restrained growth of M3 (5.1%) with the explostion in lending and commercial paper since the beginning of the year:
Bank Credit rose $5.5 billion last week. Year-to-date, Bank Credit has expanded $549.5 billion, or 13.2% annualized. Securities Credit declined $11.3 billion during the week, with a year-to-date gain of $133.9 billion (11.3% ann.). Loans & Leases have expanded at a 14.3% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 17.8%. For the week, C&I loans declined $1.9 billion, while Real Estate loans expanded $7.8 billion. Real Estate loans have expanded at a 16.6% rate during the first 32 weeks of 2005 to $2.802 Trillion. Real Estate loans were up $380 billion, or 15.7%, over the past 52 weeks. For the week, Consumer loans added $1.7 billion, and Securities loans jumped $10.5 billion. Other loans dipped $1.2 billion.
Total Commercial Paper jumped $13.3 billion last week to $1.588 Trillion. Total CP has expanded $174 billion y-t-d, a rate of 19.4% (up 17.7% over the past 52 weeks). Financial CP surged $13.7 billion last week to $1.446 Trillion, with a y-t-d gain of $161.8 billion (19.9% ann.). Non-financial CP dipped $0.4 billion to $141.8 billion (up 15.0% ann. y-t-d and 9.9% over 52 wks). ...
Nolan argues on his own web site that the financial system has evolved from a "Decentralized System Dominated by Local Bankers" in which the fed could use the money supply and reserve requirements to control lending and the economy, into a securities-based Centralized Uncontrollable Credit System in which credit quality is irrelevant, bank reserve requirements and money supply play little or no role in controlling the availability of credit, and "Federal Reserve operations work mainly by aggressively manipulating rates, yield spreads and, increasingly, market perceptions," with the net result that the fed has very little control over the ever-expanding credit bubble and underlying real economy.
Today, liquidity is injected into the real economy primarily through the asset markets, as opposed to financing business spending and capital investment. During the past year, total mortgage Credit has increased a record $937 billion, ten times the increase in non-financial corporate borrowings. Our financial system has become hopelessly disposed to fueling destabilizing asset Bubbles, and our central bank steadfastly refuses to address this most critical issue.
* * *
Financial excess will manifest into over-investment in the “hot” sectors. Unbridled speculation dominates, thus we face incurable sectoral boom and bust dynamics. If it’s not technology or telecom, it will be real estate, healthcare, or energy.
* * *
I am not sure what it all means, but this is not “deflation.” In aggregate, we remain in a protracted period of enormous Credit and speculative excess, with ultra-easy Credit Availability for most individuals, companies, governments, economies, and certainly the global speculators. Moreover, this inflation is accelerating. We today face a Bubble crisis not a deflation problem. Could the bursting of these Bubbles end in a deflationary Credit collapse? Absolutely. But I want to make what I believe is an important point: While it may be possible to mitigate deflation risk with further monetary accommodation, there is absolutely no curing runaway Bubbles with only greater Credit and financial excess. It’s impossible, impossible, impossible. The Fed and The Inflationists are fighting a losing battle. They have not only misidentified the adversary, they are aggressively Arming the true Enemy.
http://www.prudentbear.com/Bear%20Case%20Library/bear_case_library_images/Contemplating_the_Evolution.pdf
So, we've traded a stable economic system in which an inverted yield curve signals an impending recession for an unstable system in which the inverted yield curve signals nothing, and the system could blow up at any time, especially if the fed cuts off the air supply (which it hasn't done and probably won't do until it is too late).
Anon 1:59,
Yes, when you piece these things together you realize that no one is steering the ship.
Much of tradional bank lending has been replaced by mortgage backed securities and everyone thinks they understand the risk. It bugs me when someone like Kudlow points at M3 and the bogus CPI numbers and says everything is fine.
And McCulley says Greenspan now has a serious credibility problem, which he can solve only by jacking short rates through the roof and inverting the curve.
But, McCulley says, Greenspan doesn't have the cojones to invert the curve and cut off the air supply. Therefore, he is really saying that Greenspan does not have the cojones to end the bubble economy, just like he didn't keep the brakes on during the '87 crash, the Mexican Peso crisis, etc.
So, do you think Greenspan will have to call the market's bluff this time just to prove McCulley wrong?
Do you think his successor will have the cojones to do it? Won't he have to in order to maintain the credibility of the fed "as an institution" and to avoid the criticism by Blinder that the Greenspan fed is a one man show?
What does that mean for the economy, once Greenspan leaves?
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