Stephenson Home Meet Stephenson Stephenson Commentary Stephenson Videos Stephenson Media Stephenson Blog Stephenson Commodities Stephenson Book Press Stephenson Speaking Stephenson Contact
flash
 
Commodity Investing Shell Shocked
 
Recent Tweets
 

Economics: The Saudi Oil Floor
New York: September 19, 2005
By John R. Stephenson

It's hard to turn on TV these days without a sobering reminder of the devastation to the Gulf Coast region from Hurricane Katrina. Now, there is another worry that has started to grow in the minds of the savings-starved U.S. consumer — high gas prices. More and more, consumers are filling up less and less as the affects of a hurricane that knocked 14 percent of U.S. refining capacity offline takes aim at consumers' pocket books. With gas prices front-page news, the growing problems of struggling world supply, surging demand and insufficient refining capacity are getting their due. Meanwhile, the economic cheerleaders proclaim the resilience of the U.S. economy which has so far shrugged off $40, $50 and $60 oil prices. One wonders if hurricane Katrina and its economic impact might not be the tipping point for a savings-short U.S. economy.

While the bills are still being tabulated from the largest natural disaster to beset the U.S., one thing is clear — it's going to be expensive. According to the Associated Press , the cost for disaster relief, massive environmental clean up and repair are certain to top $200 billion and "the final accounting could approach the more than $300 billion spent in four years to fight in Afghanistan and Iraq." With the politically charged climate that the administration is currently facing, a solution at any price mindset has taken hold, which is likely to ensure that the costs continue to spiral out of control. This additional expenditure comes at a time when the government is already running a negative net savings rate of -2.1% of GNP — not to mention the costs of the ongoing war on terror, in which there is no end in sight.

But more worrisome is the state of U.S. consumers who have stretched themselves thin in their ever-increasing pursuit of consumption. Not since the Great Depression of the 1930's has the savings rate for consumers plunged so dramatically — hitting a low of -.6% this past July. With the consumer tapped out and the government stretched thin, could corporations be the saving grace for an economy that seems increasingly to be running on fumes? Not likely. It appears as if corporate profit margins have peaked and faced with rising labor and energy costs, it is unlikely that they can fill the savings gap necessary to continue to the economic party.

With the war on terror continuing to soldier on, a natural disaster on the home front which will likely be a fiscal calamity of its own making and an indebted U.S. consumer continuing to lead the spending charge in a U.S. centric world, what is the likely endgame? Hard to say. But it is unlikely that U.S. consumers, even when faced with higher gas prices, will do anything but try and defend their lifestyles making it increasingly likely that the U.S. savings rate will continue to fall into negative territory. The likely financiers of this fiasco? The usual suspects, Asian and European treasuries who have continued to buy up our bonds in spite of the massive current account deficit (exports less imports) that we have continued to rack-up which has now reached an eye-popping 6.4% of GDP on its way to piercing the 7% barrier. Never before has this economy done so much with so little.

Increasingly, we are becoming reliant on the kindness of strangers as we continue to spend, rather than save and invest. With the Federal Reserve (U.S. central bank) aiding and abetting the consumption party (through a low interest rate policy), the U.S. has been transformed from a nation of savers and investors into a nation of spenders who, increasingly, are utilizing the savings of others as well as the sky-high value of first equities and then housing to continue the spending binge. By borrowing against the inflated value of their stock and bond portfolios as well as their homes, the U.S. consumer has been able to consume at a record pace. But all of this has come at a price. There no longer is a safety cushion of savings and investment in America to adequately withstand the economic shocks and repercussions from natural or man-made disasters such as Hurricane Katrina, which devastated the southern Gulf States.

In a global economy, the repercussions of shocks and disasters is no longer a local matter. In an interlinked world, the changing fortunes of one country can have a dramatic impact on the fortunes of others. In a U.S. centric world, changing fortunes at home can have a dramatic impact on that of our major trading partners. And few countries are more levered to a fickle U.S. consumer than China. According to the International Monetary Fund, Asia ex-Japan is the world's fastest growing region — accounting for fully 28% of world gross domestic product ("GDP"). But much of that growth is dependent on selling inexpensive manufactured goods to the U.S. consumer. If high gas prices in the U.S. were to cause the American consumer to retrench, it could send the Chinese economy into a tailspin. This could further weaken the whole Asian supply chain which is dependent on growth from China for its own economic well-being sending shock waves through to the economies of Korea, Malaysia, Taiwan and Hong Kong.

Another worry? — a slowdown in the free and easy access that the U.S. has enjoyed to the world's excess savings pool. The reason? An economic recovery in Germany and Japan. With an economic expansion in the second and third largest economies in the world, their excess savings will be needed for investment at home. This could present a problem for a savings starved America which is dependent on absorbing savings from around the world to fuel growth at home since Japan and Germany collectively represent 56 percent of the world's surplus saving. Even Alan Greenspan (chairman of the U.S. Federal Reserve) in his swan song address of a few weeks ago has acknowledged the growing problem of our asset-dependent society when he commented that "history has not dealt kindly" with investors who have gone too far in "accepting lower compensation for risk" on their asset holdings (i.e. houses, stocks and bonds).

Floods, disease, war and rising gasoline prices are a volatile mix at the best of times. But in a nation that is running a massive current account deficit (6.7% of GDP) and where consumers are borrowing against their homes to continue the economic party, this has left America with precious little maneuvering room. Without the capacity domestically to fund and support infrastructure and other programs vital for its future, the economic tipping point for the U.S. and possibly the world economy may be close at hand, if not from Katrina, then quite possibly from the next disaster to wash up on our shores.

Increasingly, the world economy continues to muddle along as we leap from one potential disaster to another. Just when the music will stop and the economic house of cards will come tumbling down is hard to say. So far, all the angels have managed to continue to dance on the head of a pin. But as Katrina and the resultant oil shock has made clear, continued spending from the U.S. is a pre-requisite for good economic health. Will the U.S. consumer continue to shrug off higher gas prices and continue to spend? Who knows? But when the breakdown in the world economic order happens, when the U.S. consumer raises the white flag, the results will be dramatic. The U.S. dollar will drop, gold will soar and oil, an already hot commodity, might just have to cool off a little.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
Join Me
Twitter
YouTube
Facebook
 
Home | Meet John | Commentary | Videos | Media | Blog | Commodities | Book Press | Speaking | Contact
© 2011 - 2012 John Stephenson. All Rights Reserved