December, Thursday 15, 2011

DOW +45 = 11868
SPX +3 = 1215
NAS =1 = 2541
10 YR YLD +.01 = 1.91
OIL –1.52 = 93.43
GOLD – 5.90 = 1571.60
SILV +.32 = 29.38
PLAT-16.00 = 1409.00

The war is over. Everything that can be said about this tragedy has been said, many times over. Nevertheless, it seems appropriate to note the officially announced end of the war.

After nearly nine years, 4,500 American dead and 32,000 wounded, and a price tag of approximately $3 trillion dollars, the war in Iraq is officially over. The death toll for Iraqi combatants and civilians is somewhere between 100,000 and one-million.

Defense Secretary Leon Pannetta said today: "We spilled a lot of blood there, but all of that has not been in vain. It's been to achieve a mission making that country sovereign and independent and able to govern and secure itself."

I never quite understood the mission in Iraq; the troops did their job; they did everything they were asked to do and more, but I’m not sure the mission was ever truly clear. But it’s over now. No pronouncement of victory, no cheers. There will still be about 150 American soldiers and there will be about 5,000 private security contractors and 16,000 State Department employees working around the US embassies. So, the war may be over but the work is unfinished.

And what about the spoils of war? Exxon Mobil and Royal Dutch Shell were awarded early contracts to develop oilfields but there has been very little investment from other American companies. Companies from Turkey, Iran, China, South Korea, Italy, France, and other Arab states have invested in non-oil sectors ranging from transportation to telecommunications to construction.

 Iraq signed oil production contracts with international oil companies with the goal of increasing its oil output from about 2.4 million barrels a day in 2009 to as much as 12 million barrels a day within six years. So far, output has risen to 2.7 million barrels of oil per day.

The initial production estimates are now considered as unrealistically optimistic and they’ve been revised down to between seven and eight million barrels per day in about five or six years. Still, that might be enough to ease global supplies and provide the Iraqi government with much needed funds for reconstruction. Currently, Iraq exports about 500,000 barrels of oil per day to the US. The untapped oilfields are massive – the second largest in the world – think of them as a strategic petroleum reserve 9just in case you’re wondering why 20,000 civilian employees will remain in Iraq).

Just getting the troops and equipment out of Iraq has been a massive undertaking; If you put all the gear in Iraq into trucks and line them up in a single convoy, he said it would stretch 1,963 miles - from Washington, D.C. to El Paso.

More than 33,000 soldiers will come home from Afghanistan by the end of next summer. That final end is still at least as far away as 2014. But any hint that the United States may finally be bringing a close to its military involvement in Afghanistan is to be applauded, and not just because of the prospect that fewer lives will be lost. There are also the cold hard economic facts. 

I haven’t heard much talk lately, but it has been difficult ot pay for the wars. At a time of high unemployment and multi-trillion dollar budget deficits, we might catch a break by saving a few billion a week.

Wars are expensive. Peace is supposed to pay a dividend — the notion that an end to war in Afghanistan and Iraq (and Libya and Yemen) could result in a reallocation of funds from military conflict to pressing domestic priorities, such as ailing state and local government budgets, job creation, healthcare and infrastructural development. Remember the balanced budgets of the late 1990’s – that never would have happened during a time of war – much less two wars.

But let’s not get ahead of ourselves. This peace dividend isn’t going to result in a budget surplus any time soon. And there’s no guarantee that money saved in Afghanistan will be directly applied to any domestic priorities. There is absolutely no guarantee that money spent to build Iraq will be used to rebuild American roads, or railroads, or schools, or airports, or electric grid. The most likely outcome is that any savings from a drawdown on the war effort are applied directly to the budget deficit. The hole dug by tax cuts and the depression and rising healthcare costs is too deep for us to expect any rescue from peace dividend manna from heaven. 

Still, for a government that spends 40% more than it takes in, and runs a deficit in the vicinity of 10% of the Gross Domestic Product, and carries enormous off-balance sheet liabilities in the tens of trillions of dollars, and suffers from an effectively broken political machine – hey, a peace dividend is a good thing; every bit helps.

Now let’s add to that equation the possibility that Iraqi oil exports ramp up slightly, and just because it’s sunny today and I’m felling good, let’s toss in the idea that the Bakken oil fields start producing, and let’s imagine there is NOT going to be another BP-type oil spill for at least a couple more years, and let’s imagine that the new Libyan government (whatever it might look like) says thanks to their NATO defenders by keeping a lid on oil prices, and let’s just dream for a moment that oil prices drop down to less than $80 a barrel. And the price at the pump drops under $2.50 per gallon.

And now let’s imagine that those bright boys and girls in the central banks, and the government, and other seats of power actually learned something from the near global economic meltdown of 2008, and they are taking effective steps to prevent a European version of an economic meltdown. I’m not crazy enough to think they’ll actually fix the problems in Europe but maybe they can crank up the printing press and they can buy enough bonds to whet the appetite of the bond vigilantes; maybe they can cobble some sort of bailout fund that can keep the Euro banks afloat, or maybe they’ll nationalize a few; and maybe they figure out a way to use bailing wire and superglue to keep the European Union from unraveling for a couple of years.

And since I’m letting my imagination dance, how about if the Justice Department actually arrested one or two of the big bank CEO’s and televised a perp walk – hands cuffed, eyes averted – just tossed their butts in jail– why nothing would brighten the overall disposition of the average American citizen more than seeing a bankster booked into the old gray bar hotel.

And imagine if the downtrodden masses could actually find jobs. Imagine if the new claims for jobless benefits dropped to a three-and-a-half year low of just 366,000 – Well, that actually happened today.

And if we had this great harmonic convergence, where all the stars aligned, well the stock market would be looking pretty undervalued.  The price to earnings ratio, or P/E of the S&P 500 is right about 12, which is fairly low. Eleven years ago, the P/E was around 30. And with bond yields next to nothing and with interest rates really next to nothing you have to think that money flows where its treated best, that money will move toward the highest potential returns.  Of course this is working off the idea that American corporations still use honest valuations – and if you believe that one – ooh look it’s a uncorn.

And if everything is lined up just perfect, then our biggest problem would be…  inflation. Of course, one of the lessons we learned in 2008 was that the idea of containing a crisis may be so much wishful thinking – and if everything isn’t lined up just perfect then we could be looking at a really rough 2012.

We all know that the housing market crashed about 5 years ago, and it has been steadily eroding since then, which is pretty terrible, but the reality is that it’s even worse than you thought.  The national Association of Realtors, the NAR, releases a monthly report that tracks existing home sales. And they made a mistake. Far fewer homes have been sold over the past five years than previously estimated. NAR said it plans to downwardly revise sales of previously-owned homes going back to 2007; they’ll do this when they release the next report on Dec. 21. They won’t say how big the problem is exactly but they say the revision will be meaningful.

The database NAR uses to track existing home sales, the Multiple Listing Service (MLS), has led the real estate agency to over-count existing home sales.

The MLS database only includes home sales listed by realtors, and excludes homes listed by owners, providing a very narrow view of the market. And because more people are using realtors to list their homes instead of selling them independently, realtor-listed sales numbers have become artificially inflated.  Also, some of the assumptions NAR used in calculating its data have become outdated, since they were based on 2000 Census data.

NAR data is the benchmark for existing home sales and the data is used by the Department of Housing and Urban Development, and other governmental agencies, and banks, and economists, and the Treasury, and the Federal Reserve. Some day we’ll claw our way out of this depression, but not this week.

Maybe, just maybe, the Euro doesn’t collapse, but what if it does? A couple of ideas on this possibility:

The implosion of the euro would produce a period of economic pain, panic, and instability, he says that shock wouldn’t last as long as some predict (18, maybe 24 months), before companies and governments picked up and moved on. And because many euro countries would be starting anew after having brushed off huge amounts of debt through various degrees of default,  the post-euro economies could be re-constructed on more solid fiscal foundations. Another consequence of such default would be freeing economies and governments from control of the “oligarchy” of mega-rich investors whose fortunes and interests drive and shape bond markets—and whose gain through safe government securities have influenced political leaders into building up huge public debt in the first place. A purge would be hard and grim work, but at least leave enough of a clean structure to rebuild from.

That would be the better case scenario. A slightly more difficult scenario might unfold like this:

A run on the banks by depositors would bring down the banking system of the departing country overnight.  Companies and private households would not have access to cash and they certainly couldn’t get loans.

The state, or states would be bankrupt as well. Financial markets would deny it access to funding.
A new currency, once it is introduced, would depreciate by between 30% and 50%, which would multiply the government’s debts.
The depreciation would lead to imported inflation and trigger trade union demand for compensation, setting off a hyperinflationary spiral.
The bankruptcies of banks in Southern Europe would bring about the downfall of their northern counterparts because the latter have lent them large sums of money in the belief that monetary union would last forever.
Anticipating an appreciation, huge capital flows would drive up the newEruo or the new Deutschemark or the new whatever. Many medium-size companies would become uncompetitive overnight.