Storms on the Horizon by FOMCs Richard W. Fisher

May 29, 2008

Richard W. Fisher – Federal Open Market Committee (FOMC)

Excerpt from remarks before the Commonwealth Club of California
San Francisco, California
May 28, 2008

Storms on the Horizon

Tonight, I want to talk about a different matter. In keeping with Bill Martin’s advice, I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words-“frightful storm”-deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

You might wonder why a central banker would be concerned with fiscal matters. Fiscal policy is, after all, the responsibility of the Congress, not the Federal Reserve. Congress, and Congress alone, has the power to tax and spend. From this monetary policymaker’s point of view, though, deficits matter for what we do at the Fed. There are many reasons why. Economists have found that structural deficits raise long-run interest rates, complicating the Fed’s dual mandate to develop a monetary policy that promotes sustainable, noninflationary growth. The even more disturbing dark and dirty secret about deficits-especially when they careen out of control-is that they create political pressure on central bankers to adopt looser monetary policy down the road. I will return to that shortly. First, let me give you the unvarnished facts of our nation’s fiscal predicament.

Eight years ago, our federal budget, crafted by a Democratic president and enacted by a Republican Congress, produced a fiscal surplus of $236 billion, the first surplus in almost 40 years and the highest nominal-dollar surplus in American history. While the Fed is scrupulously nonpartisan and nonpolitical, I mention this to emphasize that the deficit/debt issue knows no party and can be solved only by both parties working together. For a brief time, with surpluses projected into the future as far as the eye could see, economists and policymakers alike began to contemplate a bucolic future in which interest payments would form an ever-declining share of federal outlays, a future where Treasury bonds and debt-ceiling legislation would become dusty relics of a long-forgotten past. The Fed even had concerns about how open market operations would be conducted in a marketplace short of Treasury debt.

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Megabubble waiting for new president in 2009

May 22, 2008

‘Numbers racket’ exposes potential disaster for economy, markets

By Paul B. Farrell, MarketWatch
Last update: 10:13 a.m. EDT May 20, 2008

ARROYO GRANDE, Calif. (MarketWatch) — Remember that big ah-ha moment in the 1939 classic “The Wizard of Oz?” Dorothy wants to see the Wizard. His voice booms: “Do not arouse the wrath of the Great and Powerful Oz! Come back tomorrow!” Afraid, Lion, Tin Man, Scarecrow shake. Dorothy’s dog runs up, tugs on a curtain. She chases Toto, pulls curtain open:

“Who are you?” Dr. Marvel stutters: “Well, I – I – I am the Great and Powerful, Wizard of Oz.” Dorothy: “You are? I don’t believe you!” He replies: “No, it’s true. There’s no other Wizard except me.” Dorothy’s miffed: “Oh, you’re a very bad man!” Wizard: “Oh, no, my dear. I’m a very good man. I’m just a very bad Wizard.”

2009 Sequel: Script exposes diabolical cover-up conspiracy

Flash forward: Real life, Washington, new leaders, a new Congress, old wizardry. Be forewarned: No matter who’s elected president, America will soon see a massive statistical curtain pulled back, exposing a con game of historic proportions. And when that happens, you and I will suffer another ear-splitting global meltdown, bigger than today’s housing-credit crisis, dragging us deep into a recession and bear market for years.

Cast: New ‘leading man’ from old Nixon political machine

Yes, the lead character pulling back the curtain is none other than Kevin Phillips, a former Republican strategist for Nixon, and today America’s leading political historian. Phillips just published “Bad Money: Reckless Finance, Failed Politics & the Crisis of American Capitalism,” everything you need to know about today’s credit meltdown.

Scene 1: Numbers racket hiding behind Washington curtain

Opening shot: Phillips pulling back the curtain, exposing charlatan Wizards in a brilliant Harper’s Magazine article: “Numbers Racket: Why the economy is worse than we know.” Far worse. Buy it, read it — this is essential reading if you really want to understand the depth of today’s political as well as economic impending meltdown, and the harsh realities facing Washington, Wall Street, Corporate America, and Main Street in 2009 and beyond … harsh because we cannot cover up the truth much longer.

Scene 2: Statistics, Washington’s new WMDs, a time bomb

“If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it really is. The corruption has tainted the very measures that most shape public perception of the economy,” especially three key numbers, CPI, GDP and monthly unemployment statistics.

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Bank Stocks Cede Biggest S&P Weighting to Technology

May 21, 2008

By Elizabeth Stanton

May 21 (Bloomberg) — Bank stocks lost their position as the biggest industry group in the Standard & Poor’s 500 Index to technology companies after tumbling 31 percent since 2006.

Computer and software makers led by Microsoft Corp. and International Business Machines Corp. accounted for 16.26 percent of the benchmark for large U.S. companies based on yesterday’s closing prices. Financials, led by Bank of America Corp. and JPMorgan Chase & Co., fell to 16.19 percent.

Banks slid the most among 10 industries in the S&P 500 last year and are the worst-performing group so far in 2008, as lower U.S. real-estate prices led to losses on mortgage debt and derivatives approaching $380 billion globally.

“The earnings power of the financial sector has been impaired because of the credit crunch,” said Thomas J. Lee, chief U.S. equity strategist at JPMorgan in New York. “Technology is benefiting from a global economy that’s been expanding, particularly in emerging markets.”

As the S&P 500 has retreated 3.7 percent this year, its financial components have decreased almost 13 percent. Bear Stearns Cos. lost the most, dropping 89 percent as a run on the brokerage firm prompted the Federal Reserve to arrange a March 16 takeover by JPMorgan. The index declined 1.6 percent today.

Financial shares in the index declined almost 21 percent in 2007, their worst year since a 24 percent drop in 1990. They have plunged 31 percent since the end of 2006.

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W.House says won’t veto bill to halt oil storage

May 16, 2008

By Tom Doggett Thu May 15, 11:06 AM ET

WASHINGTON (Reuters) – The White House on Thursday dropped its resistance to putting a halt on filling the Strategic Petroleum Reserve, saying that President George W. Bush will not veto a final bill from Congress that suspends oil deliveries while crude prices are very high.

The Senate late on Wednesday approved a measure previously cleared by the House of Representatives that would stop deliveries of crude to the U.S. emergency petroleum stockpile until the price of oil fell below $75 a barrel.

U.S. oil was trading around $126 a barrel on Thursday on the New York Mercantile Exchange.

The Bush administration had rejected repeated calls from lawmakers over the last few months to stop putting oil into the stockpile. The White House said the United States needed a bigger reserve to offset any major supply disruptions, such as those caused by hurricanes or terrorist attacks.

Supporters of the legislation said the average 70,000 barrels of oil a day going into the reserve should instead be put into the market to help lower record oil and gasoline prices, possibly pushing pump costs down by as much as 25 cents a gallon.

“The gas prices are killing us,” Democratic Sen. Richard Durbin said this week during debate on the bill. “We can’t justify continuing to take oil off the market.”

However, many energy experts believe the extra 70,000 barrels would be just a drop in the bucket of the 20.5 million barrels of oil the United States consumes each day, and would have little impact on prices.

“It is such a small percentage of overall demand it won’t have much of an effect right now,” said Tom Bentz, analyst at BNP Paribas Commodity Futures Inc.

The emergency stockpile, created by Congress after the 1973-74 Arab oil embargo, holds about 703 million barrels of crude at four underground storage sites in Texas and Louisiana.

Keep Drilling

May 14, 2008

IEA: Replacing World Biofuels Would Require 1M B/D More Oil

To replace the global supply of ethanol and biodiesel-based biofuels added to the U.S. and European markets since 2005 would require an additional 1 million barrels of crude oil to be processed per day, the International Energy Agency said Tuesday.

Rising food prices have damped the political will behind biofuel policies, however, the IEA said it was unlikely biofuel targets would be scrapped in the near term.

“It is sobering to realize the amount of oil that would be needed to replace them,” said the IEA.

Global biofuels supply is expected to grow to 1.5 million barrels per day in 2008, said the report.


Brazil’s Offshore Fields

Zeihan predicts a 2012 start to production at Tupi. Technology needed to tap fields like Tupi, which sit hundreds of miles offshore beneath thousands of feet of rock, sand and salt, hasn’t been developed, he said.

Petrobras, Chevron Corp., Royal Dutch Shell Plc and Norsk Hydro ASA plan to start pumping oil from eight Brazilian fields in the next 2 1/2 years that will produce a combined 1.02 million barrels a day, enough to supply two-thirds of the crude used by U.S. East Coast refineries.


Brazil’s energy producer Petrobras on $112.7 billion expansion

As a result of these huge finds, Petrobras is looking to expand its infrastructure to meet processing requirements. This week, investment bank UBS estimated that the Tupi and Carioca finds off Brazil would need about $600 billion to develop, a massive windfall for oilfield services companies all over the world.

The offshore fields underpin Gabrielli’s plan to increase output 79 per cent by 2015 to the equivalent of 4.2 million barrels of oil. If the company maintains its current proportion of crude and natural-gas production, it will have about 3.5 million barrels of oil a day to refine.

New Stock Picks

May 8, 2008

NWPX – Pipes
CCC – Purification
INSU – Pipe rehab
LNN – Irrigation for Agriculture

Oil & Gas
CLR – Bakken
KOG – Bakken
ENB – Canadian oil pipeline
NGS – Nat Gas Service Equip (non-conventional production)
SGY – US Oil & Gas Producer
XTO – Oil & Gas Producer
CRZO – Barnett Shale
ATW – Deep water driller
RIG – Deep water driller
PBR – Brazilian Oil Producer

MEA – Scrap Metal Recycler
TWI – Ag Equipment
MOS – Fertilizer
POT – Fertilizer
MTL – Russian Mining/Steel

Brazilian Banks (Brazil’s credit rating just raised to investment grade)

ELMG – Wireless Communications/Defense (excellent weekly chart)
VISN – Chinese Mass Transit Ads (IPO off to a very strong start on major growth)
WGOV – Turbine and Electrical Controls for Alternative Energy Generation via Wind/Steam

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