In the general chaos Friday, oil in the largest single-day spike ever, near $140/bbl, Dow off 394 points, the only market that did not move was credit.
Mortgages are still near their 90-day high, 6.375 percent, and the 10-year T-note is still in its trading range at 3.92 percent. Long-term rates have held in belief that economic rebound, or inflation, or a weak dollar would force the Fed to raise its rate, and soon.
OK, group: a show of hands, please. We’ve got a million homes in foreclosure right now, delinquencies rising fast; we shed 45,000 jobs in May; gasoline is on the way to five bucks, $100 per fill-up; the purchasing managers’ indices were zero-growth for May; overall vehicle sales in May fell 14 percent; credit ratings were cut for Merrill, Lehman, Morgan, WaMu, Wachovia, Ambac, MBIA, MGIC, and PMI, all with negative outlook, and you think the Fed should raise the cost of money? Really?
I suppose a case could be made for quick suicide by Fed bullet instead of all that time burning expensive gas, waiting for carbon-monoxide to get me, but I’d rather take my time. If energy markets do not break, all roads lead to global recession: here, directly; other places in the aftermath of a losing fight with inflation.
My hoped-for reprieve: a break in oil. Not a big one, just a few years around $100 to let the global economy adapt. Protracted slow growth, but not a bad recession.
Chances? Excellent. Evidence for that opinion? Modest, but different.
The overriding rule: Supply and consumption of energy are elastic to price, but the elasticity takes time. It takes time and capital to find more energy, whether the same stuff or substitutes; and it takes time and capital for consumers to adjust (last month sedans were the top-selling vehicles for the first time in 16 years). Capital expenditures are further delayed by uncertainty about the future floor price for energy: only two years ago, $40 seemed an iffy bet; $80 looks solid now. Consumption adjustment has been delayed by subsidy: China, India, Iran, et al have provided oil-based fuel at or below global wholesale, only now beginning to end.
Then consider Peak Oil, a good argument. However, the Peak case has assumed a steep-sided pyramid of oil-field distribution by size, super-fields at the top, then lesser ones below. That distribution made sense with oil at $40, maybe $60, possibly $80. At $100 or more, given time, there is a lot of oil available in fields off the bottom of the size chart. And — more important — every other source of energy becomes more feasible as the price rises in dollars-per-BTU. Example: natural gas at $12.
As regular readers know, I am an escaped Okie, which means I’m a certified awl bidness expert by birth. My grandmother, a dead ringer for Ma Joad, had a great fondness for collecting dry-land farms. Why, I don’t know. The Johnson grass was useful for grazing only in desperate drought years (with unfortunate consequences for cattle: Bloating had to be relieved by ice-pick), although produce from tenant farmers got our tribe through the Depression after Granddaddy died in ’31.
In the last few weeks my cousins have gotten more oil company mail than they can read, contracts and unsolicited checks, and calls from landmen all offering — demanding — to lease mineral rights that the cousins didn’t even know they had inherited, too pitiful to be mentioned in Granny’s or their parents’ wills. My brother, marooned in Scranton, Pa., says that state is crawling with landmen bearing leases, not for coal, but drilling for gas.
I do not know at what price or in what month energy will peak (hunch: weeks), nor how far a decline might go. From the ’79 peak it took three years to break, and then collapsed 75 percent; this time I suspect a quicker break, but to plateau, not collapse.
Meantime, keep your eye on credit. Large institutions and markets stopped providing an adequate supply of credit last winter, and local and regional banks have filled the gap. Brand-new conversations with small outfits say that capital constraints are choking them, too. The Crunch is still on, leaning into inflation for the Fed.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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