Goldman Sachs Oil Forecast – $90 by 2010
Just a few days after OPEC projected oil at $90 per barrel in the first quarter of 2010, Goldman Sachs today is saying essentially the same thing:
Goldman Sachs Group Inc. raised its forecast for U.S. benchmark oil by 31 percent to $85 a barrel for the end of 2009 and predicted further gains next year as demand recovers and supplies shrink.
“As the financial crisis eases, an energy shortage lies ahead,” Goldman analysts Jeffrey Currie in London and David Greely in New York said in a report e-mailed today. The bank set a 12-month price target of $90 a barrel for West Texas Intermediate crude, up from $70, and introduced a forecast of $95 for the end of 2010.
Read the Rest of the Story at Bloomberg
Look Out, Congress Has Its Back Up Over Auto Dealers …
Personally, I believe the president when he says he never wanted to be in the car business. I fully expect that the White House will unwind taxpayers from stakes in car companies long before we are completely and safely out of Uncle Sam’s positions in banks and other financial services companies.
Congress on the other hand, these guys scare me.
The great strength of Congress is that local and regional representations may be made concerning public policy. That parochial nature of the legislature is also its greatest weakness. There are some big picture things that we need members of Congress to quash their urges to consider merely on the merits of “How does this affect my district?”
Today the Senate Commerce Committee will hold hearings on U.S. auto dealers affected by right-sizing efforts underway by Chrysler and GM. Autodealers will claim something terrible has happened and Senators – especially those whose campaigns are partially funded by fat cat car salesmen – will wring their hands and agree.
If the politics stops here with a show of indignation and gnashing of teeth, we’ll be O.K. If the show gets a run in the House, then the trouble starts. Members of the House, with their ultra-parochial world view could end up with legislation attempting to reverse dealership closings by the automakers, or worse yet, extending dealers some sort of bailout. The bailouts need to remain at the macro level of the economy. All we need is 435 bailout plans for this and for that.
Reuters reports ahead of today’s hearing what the national organization representing car dealers will say:
General Motors Corp and Chrysler LLC, both bankrupt, will try on Wednesday to ease congressional concern, and in some cases anger, over their plans to slash more than 2,400 dealerships.
Members of the Senate Commerce Committee plan to grill GM Chief Executive Fritz Henderson and Chrysler President Jim Press about the lone aspect of restructuring that has triggered a broad response from Congress since dealers are nationwide.
“Rapid dealer reductions increase unemployment, threaten communities and decrease state and local tax revenue without any material corresponding decrease in an automaker’s costs,” said John McEleney, chairman of the National Automobile Dealers Association who sells vehicles made by GM, Toyota Motor Corp and Hyundai Motor Co in Iowa.
We can’t dispute what McEleney says about the economic impact of auto dealers. I’ve heard reported that the average employment of a new car dealership is around 50 to 60. The point behind the pain being felt by anyone connected with the U.S. auto industry today – from boardrooms to union halls – is that the whole system was bloated. Everyone is taking a hit. If the industry is to regain any semblance of health, everyone needs to take a hit.
Here’s hoping Congress doesn’t try to micromanage the U.S. government’s temporary investment in the auto industry. We elected the president to be the executive and too many competing interests pushing for setting aside the hard choices for interest groups will just water down the whole enterprise. What Congress should be doing is oversight. The auto dealers shouldn’t be on the Hill today, the Administration and the top management of GM should be on the Hill today explaining what this all looks like in six, twelve and 24 months.
Full Text: Fed Chairman Ben Bernanke, Testimony to Congress, June 3 – Economic Outlook
(Source: Board of Governors of the Federal Reserve)
Current economic and financial conditions and the federal budget
Before the Committee on the Budget, U.S. House of Representatives, Washington, D.C.
June 3, 2009
Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget.
Economic Developments and Outlook
The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.
OPEC Leader: Oil back to $80-90 bbl by early 2010
This isn’t surprising. OPEC producers scaled back production some time ago in the face of a supply glut brought on by the worldwide recession. OPEC’ers are basically saying, we don’t produce more until we make up for the ridiculously cheap prices over the last year or so.
From Reuters:
Oil prices could reach $80-$90 a barrel by early next year, but OPEC will not increase its output until a huge amount of over-supply has been absorbed, the group’s Secretary General said on Tuesday.
OPEC officials have been nudging up their price aspirations since Saudi Arabia’s oil minister said last week an oil price of around $75 could be achieved later this year and would not undermine a tentative global economic recovery.
“The price will go to $80-$90 maybe at the beginning of 2010,” OPEC’s Abdullah al-Badri told the Reuters Global Energy Summit.
Daily Graphic: GM Stock First Day on the Pink Sheets – GMGMQ Chart
Additional 1,000 GM Dealers to Get Axe During Bankruptcy
From McClatchy:
For the first time, Henderson said the new GM will accept 4,100 dealer contracts out of 6,000, leaving 2,100 in the old company. GM had sent letters earlier this month to 1,100 dealers, saying their contracts would be ended by late next year.
Henderson said the new GM would sign “deferred termination agreements” with most of the dealers targeted for closure, giving them up to 17 months’ notice, to ease their hardship.
The plan will allow “thousands of dealerships to survive, while providing for an orderly wind-down of those dealerships not being retained,” Henderson said. “The alternative to the exercise of sound business judgment is that the Company would liquidate — and all dealerships would cease to be GM dealerships.”
Full Text: Timothy Geithner Speech at Peking University, May 31
(Source: U.S. Dept. of the Treasury)
It is a pleasure to be back in China and to join you here today at this great university.
I first came to China, and to Peking University, in the summer of 1981 as a college student studying Mandarin. I was here with a small group of graduate and undergraduate students from across the United States. I returned the next summer to Beijing Normal University.
We studied reasonably hard, and had the privilege of working with many talented professors, some of whom are here today. As we explored this city and traveled through Eastern China, we had the chance not just to understand more about your history and your aspirations, but also to begin to see the United States through your eyes.
Full Text: White House Fact Sheet on Government’s 60% Stake in GM and Bankruptcy Plan
The Obama Administration released the following fact sheet at 10 p.m. Sunday night regarding the path forward for GM and the government as 60% owner.
Click for White House Fact Sheet on GM Bankruptcy, Government's Role
U.S. Govt Will Pony Up Another $30 Billion for a Smaller GM
It’s being reported that GM’s bankruptcy filing will occur Monday morning at 8 o’clock. MarketWatch says tonight that the feds will support the company with $30 billion through a 60 to 90 day bankruptcy period.
What I found most interesting in tonight’s story at MarketWatch was this:
As a result of this restructuring, GM will lower its break-even point to sales of 10 million cars per year. Before the restructuring, GM needed to sell about 16 million car sales a year to turn a profit.
The way I read that, GM is either downsizing by about half or cutting its costs by about that much. When you hear all the millions and billions roiling around this story, you sometimes lose the scale of things. Ten million cars per year to break even versus 16 million is a number I understand.
Of course, GM is downsizing and cutting costs. But that number brings it home — GM, for the time being will be a smaller footprint on the trail of the U.S. economy. What’s to become of that old saw, “As GM goes, so goes the nation?”
Daily Graphic – The Fast Demise of GM – Two Historical Stock Charts
Two More Dark Near Term Predictions for U.S. Economy
Uber investor Marc Faber says he’s 100 percent sure the U.S. will experience hyperinflation and economist Nouriel Roubini says that while the U.S. economy may post modest growth in six to nine months there is still a chance for a second dip beginning some time in 2010.
The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.
Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
Roubini stood by a recent article in which he mentioned the possibility of a “perfect storm” in 2010.
“There is even a risk of a double dip, a W-shaped recession at the end of next year,” he said, a combination of rising oil prices, rising public debt and increases in real interest rates, rising concerns about inflation and the expiration of a number of tax cuts in the United States.
Daily Graphic: The Incredible Shrinking FDIC Reserve Fund
The data below came from the FDIC’s Graph Book. Over thirty banks have failed this year and 25 failed last year. The Deposit Insurance Fund, the fund with which the FDIC essentially eats portions of bank failures is roughly one-fifth of its 2006 value. The chart below represents the percent of FDIC insured deposits currently in the fund. In other words, about one quarter of one percent of the FDIC’s potential total liability is in their reserve. This fund has shrunk drastically during the current recession.
IRS Tax Revenue Biggest Drop Since 1981
From USA Today:
Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. “It illustrates how severe the recession has been.”
For example, 6 million people lost jobs in the 12 months ended in April — and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.
“These are staggering numbers,” Lynch says.
Chart Source: American Institute for Economic Research
PWC: U.S. Will Adopt a ‘Bad Bank’ Plan
From MarketWatch:
The U.S. government will eventually adopt a “bad bank” plan to purchase toxic assets from struggling lenders, despite avoiding such a solution so far, accountancy firm PricewaterhouseCoopers said Wednesday.
A government “bad bank” should be set up quickly and be focused on the largest institutions, the firm explained, noting that Germany, Switzerland and Ireland have already taken this approach.
“The crisis is about to enter a new phase where efforts to remove troubled assets from bank balance sheets must be accelerated,” PWC said. “U.S. government interventions to date have stabilized individual institutions, but have not created a functioning market and pricing mechanism and therefore have had little impact on reviving the broader markets.”
Some government initiatives have had the opposite effect, the firm added.
Daily Graphic: U.S. Imported Oil Weighs on Economy
Over at the Pickens Plan they continue to release numbers every month regarding how much oil we import into the U.S. Go check out their Oil Imports page.
Krugman Talks of Green Shoots in UAE But Says Look Out for Decade-Long Slump
From Reuters:
The world economy has avoided “utter catastrophe” and industrialized countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday.
“I will not be surprised to see world trade stabilize, world industrial production stabilize and start to grow two months from now,” Krugman told a seminar.
“I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year.”
The Princeton professor and New York Times columnist has said he fears a decade-long slump like that experienced by Japan in the 1990s.
Read the rest of the story at Reuters
Localizing the Recession: Warren, Ohio
If you need a reminder of the impact of the financial crisis and recession on ordinary people, visit the Columbus Dispatch website today for the story on Warren, Ohio and its 30 year recession.
Once dominated by the steel and auto industries, Warren, located in Northeast Ohio near the state of Pennsylvania, is a microcosm of the fall of the manufacturing midwest.
When you think back to the quality of life enjoyed by many blue collar workers from the 1950s to the 1970s – and the quality of their American-made products – it opens the door of doubt on the efficacy of buying cheap crap from China.
Changes in the practices and ethics of the big businesses who employed America’s manufacturing workers had a lot to do with our demise here in the Midwest. But, if we are to solve the problems going forward, we need to realize that the unions have had their part in the fall.
- Unemployment Rate in Trumbull County, home of Warren = 14.2%
- Poverty Rate = 14.6%
Two More Banks Fail – 3 for Week – 36 This Year
The Federal Deposit Insurance Corp. seized two banks in Illinois Friday evening.
Thirty six FDIC insured banks have failed this year, five in Illinois.
The deposits of Citizens National Bank are due to be acquired by Morton Community Bank as part of a “loss share” agreement with the FDIC. Over the weekend depositors of Citizens National may access their funds through ATMs and check writing. The FDIC estimates the cost to their Deposit Insurance Fund at $106 million.
The FDIC has entered into a purchase agreement with Midland States Bank for the assets of Strategic Capital Bank. Strategic Capital’s only office will reopen on Tuesday, following the Memorial Day holiday, as a branch of Midland States. Strategic Capital’s customers will be able to write checks and access their funds via ATM over the weekend.
Strategic Capital’s failure is expected to cost the Deposit Insurance Fund some $173 million.
Seventy percent of FDIC insured banks which have failed since 2000 have failed during the current recession.
Bernanke’s Green Shoots for Boston College Law Grads …
Federal Reserve Chairman Ben Bernanke gave the commencement address today to the Boston College School of Law’s graduating class. His speech centered on the inherent unpredictability in people’s lives and his perspective on how to deal with that. The business press was dismissed for coffee and Bernanke gave a personal speech.
There was no news to move the markets, but there was a personal sentiment on Bernanke’s own enduring confidence in the U.S. economy and his foreshadowing on some of the great challenges to be faced by the class of 2009:
You are lucky also to be living and studying in the United States. There is a lot of pessimistic talk now about the future of America’s economy and its role in the world. Such talk accompanies every period of economic weakness. The United States endured a decade-long Great Depression and returned to prosperity and global leadership. When I graduated from college in 1975, and from graduate school in 1979, the economy was sputtering, gas prices and inflation were high, and pessimism–malaise, President Carter called it–was rampant. The U.S. economy subsequently entered more than two decades of growth and prosperity. The economy will recover–it has too many fundamental strengths to be kept down for too long–and the mood will brighten.
This is not to ignore real challenges. Our society is aging, implying higher health-care costs and fiscal burdens. We need to save more as a country, to reduce global imbalances in saving and investment, and to set the stage for continued growth. Our educational system is strong in some areas, including our university system, but does not serve everyone equally well, contributing to slower growth and greater income disparities. In the diverse capacities for which your training has prepared you, many of you will play a vital role in addressing these problems, both in the public and private spheres.
Daily Graphic: Mass Layoffs During the U.S. Recession 2008-09
Statistics Source: Bureau of Labor Statistics, U.S. Department of Labor
As defined by the Dept. of Labor, a mass layoff is a situation in which 50 or more persons have filed initial claims for unemployment insurance benefits against an establishment during a consecutive 5-week period.
