And the Death of Common Sense
By Marc L. Flaster
NEW YORK New York (Texas Insider Report) OIL OIL EVERYWHERE and not a drop to drink! But there is more than a drop with
no place to be stored!!
Who would have thunk it. Cheap oil has tilted the
geopolitical power balance in the world toward the U.S. and away from Russia and the Middle East.
Just look at some of recent events that could not have happened without the U.S. feeling that it could flex its muscle without worrying about a retaliatory restraint in energy supplies:
Sanctions on Iran to bring them to the bargaining table on nuclear programs that could lead to another nation with the capability to develop a nuclear bomb.
Sanctions on Russia as a criticism and restraint for their aggression into the Ukraine.
Devastation to Venezuela which had raised a flag to support Cuba and any other Communist leaning country when there was an abundance in their coffers.
Revision of Iraq as an important player in world energy markets while the Kurds finally have access to supplies that are worth less than they need to survive as a separate nation.
A whole re-evaluation of OPEC as a block resource price setter for crude oil.
Some Other Interesting Facts to Note
- The dollar is strong against all our major trading nations
- Oil in world markets has fallen 35 in price over the past 12 months
- The Russian ruble has fallen 30 against the dollar
- Saudi Arabia needs $99 oil to balance its budget this year; the state is the largest employer as well as offering a heavy subsidy in refined products for the masses;
- Iran needs $140 oil to balance its budget
- Venezuela needs $117 oil to balance its budget
- At $100 oil revenues provided 40 of the Russian budget
- Mexico has invited the five largest oil companies in the US to come and help Pemex manage its oil interests and develop the tremendous proven reserves
- China imports 60 of its oil and with an economy in the sinkhole these savings could soften the damage
- Japan imports all its energy needs and with nuclear off the table oil and coal prices weakening are a welcome relief
- Switzerland shrinks its gold reserves to protect its currency as prices weaken
- Industrial commodity prices continue to fall as output increases to generate foreign exchange for those in need.
And to make this wonderful change in the tug of war in world politics we have a President who is bent on conservation alternative energy development whatever the cost and myopic concentration on global warming. A fools nightmare!!!
To add insult to injury to the notion of global warming the Arctic Express that just blasted through our continent dropped 7 feet of snow on Buffalo NY . Man has had better success putting a man on the moon and now an intergalactic module on a comet speeding through space 300 million miles away than dealing with the local weather.
Take two aspirin and call me in the morning!
Lowering our gaze back to more earthly matters
Our exulted Fed governors met last in October and the minutes of that meeting were just released. (You may need more than 2 aspirin to take this commentary any further.)
Firstly they found that the measures of inflation were completely separate from the goings on in the energy markets. Too much volatility they said. Secondly they saw no connection between the economic weakness in Europe and Asia and the performance of the US economy. They were sure that the evidence will show that more people are finding jobs temporary or longer and that the nation was approaching the bridge to full employment.
On the other side of the cue card was this amazing statement: They still planned to hold short-term interest rates near zero for a considerable period of time. And why was that? INFLATION or rather the lack of it. After 6 years of the Q/E pump priming experiment inflation has failed to show its fiery head.
With the threat of DIS-inflation now more real than apparent they are holding fast to their theories yet to be confirmed in practice that monetary ease will float the boat.
Not only has this strategy failed here but in Europe as well. Italy and Spain have fallen back recording negative growth Germany is just barely positive and France and the rest are marginally neutral.
Property prices have hit a ceiling all over the world. Even here in NYC. Although the numbers are still mind-blowing the top has been reached. Supply has caught up and surpassed demand. There are only so many capable and willing to spend $50-100 million for an exceptional view of your neighbors terrace.
With interest rates at bargain levels and lending machines cranked to get the juice flowing there is still activity but the flippers are feeling the pain. That goes for all levels of the property markets. In Phoenix the early birds are putting their finds back on the market and finding few if any takers.
You would think that lower costs at the pump would spur retail sales. If Black Friday is any indication of the mood of the consumer you had better think again. In fact the only place where money is being spent with reckless abandon is at the auto lot. Sales this year may set records; and fuel economy is low on the list of priorities.
What sells today is software convenience luxury and space. Over 52 of all motor vehicle sales are made up of SUVs and pick-up trucks. Ford had a better idea with its aluminum based F-150 and it is going to create a riot at the lot.
Congress the States and Taxes
Since the tax on gasoline at the pump is considered regressive a rise in that rate to supplement Federal or State revenues is unlikely. Raising the minimum wage should come under the same umbrella but politically it is an expedient vote getter.
Like a case of pneumonia the temperature for passage is rising state by state. Passage of an increase at the Federal level is a certainty. The impact on employment will move like a Hawaiian lava flow destroying job opportunities while raising the cost for everyone just to benefit a few.
A reminder of just how our Congress works to promote the general welfare. The CFPB created by Congress with a free hand to lord over the land without oversight has just published a revised set of rules to protect the homeowner from experiencing the reality of their enthusiastic plunge into the mortgage world of responsible debt that they were unqualified to participate in. (A new kind of a NINJA Warrior created by an act of Congress.)
Now an overburdened debtor can purchase the foreclosed home at the up-side-down mortgaged market price and be free of the debtor burden. And whom may I ask is going to lend them the money? Why Uncle Sam of course. All this is contributing to sluggish home sales in the face of subterranean interest rates. Just like the Presidents siren call for collage for everyone as a latch-key to the road for success home ownership is not for everyone.
Can we be saved? More than likely not. Credit is the life blood of any economy. Between Dodd/Frank and Basel III the oversight is so intensive that lenders can barely breathe without explaining documenting modeling back testing and establishing an audit trail on almost every decision. And the intensity is redundant. So passing through the portal once does not exempt the lender from being exposed to all this drudgery all over again.
Next thing you will know coins will be worth their weight again.
Today we mourn the passing of a beloved old friend Common Sense
In closing I offer a commentary that appeared in the London Times earlier this year (modified for brevity):
Common Sense had been with us for many years. No one knows for sure how old he was since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as:
- Knowing when to come in out from the rain;
- Why the early bird gets the worm;
- Reminding us that life isnt always fair;
- And maybe just maybe it was my fault.
Common Sense lived by simple sound financial policies: dont spend more than you earn; and reliable strategies: adults not children are in charge.
His health began to deteriorate rapidly when:
- Well-intentioned but overbearing regulations were set in place;
- When criminals received better treatment than their victims;
- When a burglar could sue you for assault; and
- When a woman failed to realize that a steaming cup of coffee was hot.
Common Sense was preceded in death by: Truth and Trust Discretion Responsibility and Reason.
Not many attended his funeral because so few realized that he was gone.
As we enter this holiday season a warm and thought filled wish for good cheer to you and your family.
Marc L. Flaster has advised financial institutions in balance sheet management for over 35 years and is a founding principal of Sandler ONeill Partners L.P.
The views expressed in this article do not necessarily reflect the opinions of any client or organization with which Marc L. Flaster might be affiliated. Readers are advised to complete their own due diligence and analysis.
