ProgNosis, or Nose Bleed

Today's report on the housing industry as not good: new housing starts dropped precipitously in October, 2006. But, who does that affect, really? Considering that most of the housing built during the last few years was second or third homes for the upper classes, or motivated by real estate speculation, most people are not directly affected by housing starts. Home prices have gone up dramatically in the last few years - there was yet another real estate bubble - which actually has an adverse impact on most households. While homeowners may feel better because the value of their property rose, in many States they are also paying higher taxes due to higher assessments made on higher values. Since insurance premiums reflect the value insured, property insurance rates also rise. For many people, high prices make moving too expensive: the inflated value of the house they sell may not be enough to cover the even more inflated cost of the house they buy. Thus, moving can increase indebtedness without increasing value received.

The worst part of a real estate bubble is its asymmetry. When housing prices fall, neither the government nor the insurance companies are willing to reduce taxes or premiums for a considerable time, if ever. Thus, the ordinary householder is left paying more for less. The rich and speculators manage to escape some of the burden of a falling market, as their speculative and vacation properties are often treated as investments, thus tax deductible. Just as the 1990s stock market bubble served to transfer wealth from marginal investors (usually, the poorest of investors) to the upper classes, the cycle of real estate boom and bust accomplishes the same purpose. In other words, wealth tends to move from weak hands to strong hands, especially in bad times. That's the way Capitalism structures economic relationships.

Apart from the real estate sector, and ignoring the Dow-Jones stock average, I believe it is important to look at overall trends. Trends that interest me are not based on financial fictions; rather, they are based on physical reality. Commodities are one of my central concerns, because many commodities are resources drawn from our natural environment. Right now, the price of oil and gas is lower than last Summer, which is not unusual: those prices are usually lower in the Fall. But to hear the Wall St. pundits, the day of  high prices are over. There is a surplus of natural gas, probably because the weather has been warmer than usual this Fall in the Eastern United States. Thus, according to punditology, natural gas is a bad investment.

Similarly, people have been driving less than expected, so there is a temporary surplus of gasoline. There is also a surplus of gasoline because OPEC has been pumping more oil than usual, a surplus of oil is stuck offshore in tankers, and refineries have not switched as much capacity as usual to heating oil because of warm conditions. Today is November 17, fully a month before the official start of Winter. Gasoline and oil prices have gone down since last summer. According to punditology, oil will not go back to $60/barrel any time soon. The official start of Spring is next March, four months off.

Gasoline prices are actually higher now than last Winter  This suggests the Spring ramp-up of gasoline prices will bring new highs, since pricing is starting from a higher low. While most pundits are predicting good things for consumers, a few oil industry old-timers think oil is headed for $100/barrel. I agree with that sort of prediction, because I think oil has peaked. My bet is on $4/gallon gasoline next summer.

I am also bullish on natural gas, because it is not just a replacement for heating oil. It is an increasing source of electricity as coal and oil burning is replaced by natural gas. Switching to natural gas is the cheapest step available to electric power generating companies. In California alone, power utilities installed scads of natural gas generators in less than a year to meet or avert power shortages during the last five years. Natural gas is a much cleaner fuel than coal or oil, so helps to reduce air pollution. There is a shortage of natural gas in the United States, a fact which will become more obvious in the event of a cold winter and drive up the price. On the other hand, natural gas is mostly methane, a greenhouse gas, which burns in oxygen to produce carbon dioxide, another greenhouse gas. Thus, eventually, natural gas (as well as oil) will not be a solution to our problems.

Prices of metals, such as copper, silver, gold and platinum, and corn have been very high. Corn is high because of ethanol demand: it is eaten by humans, animals and cars. The precious metals are used in quantity in the chemical and electronics industries. Rare earths are critical elements in a large number of alloys now commonly used. Copper and aluminum are key ingredients in almost every building and metal structure. While a slowdown in the American housing industry may bring down metal prices for a while, there is ongoing rapid development in Asia which is eating up all of those resources.

Once upon a time, the price of everything was almost entirely dependent on markets in the United States. When I was a teenager, for example, the United States produced more than 50% of all the goods made, and by itself consumed more than 25% of everything. The United States has just 5% of the world's population and still consumes double or triple of its fair share of the world's  supplies. Meanwhile, Indian and Chinese people are more aggressively demanding their fair share. Europeans, unlike the Japanese, have always been unwilling to subsidize the United States. Those facts underlie the huge foreign trade deficit, the Federal deficit and the consumer credit overhang.

The immigration and outsourcing many Americans detest and complain about is part of globalization. Globalization can be seen as world-wide leveling; i.e., a globally equalization of the distribution of goods and services. By most calculations, there are insufficient supplies of almost everything to meet the expected demands of everyone. The situation strongly suggests that the prices of oil, natural gas, corn, rice and soy beans will continue to rise, on the average and with seasonal variations, indefinitely.