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The Daily Reckoning Wednesday, September 30, 2009 Apparently, consumers aren't so sure if the crisis is over... Eight reasons to remain worried about housing... China's on it's way up; America's on it's way down... Marin Katusa with a look at strategic oil reserves...and more! The House Bounce? by Bill Bonner London, England Houses bounce too... Not much happened yesterday. The Dow fell 47 points. The newspapers attributed the reversal to surprisingly low consumer confidence numbers. Apparently, consumers aren't so sure this crisis is over. As we reported yesterday, they're saving money...maybe even at an 8% rate. Oil didn't move yesterday. Neither did gold. The Wall Street Journal reported that markets were reacting to "mixed data." That is to say, some reports were encouraging. Others were not. It was as if one weather forecaster called for a blizzard and the other for sunny skies and warm temperatures. Investors didn't know how to dress. Among the dark clouds was an item on the falloff in tax revenues. States are having a hard time balancing their books, because their tax receipts are declining. The WSJ reports that they are running 17% below last year. Since states cannot print money, they're forced to make cutbacks - typically reducing hours worked per employee as well as the total number of employees. This is a bad thing, says the report, because it increases unemployment and lowers the wage base, leading to less consumer spending. Another little cloud appeared yesterday (in addition to the consumer confidence numbers): the vacation timeshare market is collapsing at a record pace. Well, don't worry about it. We met a guy who explained the timeshare business to us. "What you're selling is a dream. You bring them to the property. You make sure they have a good time. And then you do to the numbers with them. You show them how much they save by coming to your property rather than on a typical vacation. And then you show them the other properties that they can exchange for. They think they can buy a cheap property and then exchange with an expensive timeshare. But it doesn't work that way. They get stuck in the cheap unit and the dream gets a little faded. And then, they stop coming...and then they try to sell the timeshare. Timeshares are rarely a good investment." Besides, timeshares are a small, quirky part of the housing picture anyway. The real story is in the regular housing market. There, if you believe the forecasters, it's sunny skies. House prices seem to be stabilizing. In some areas, they are going up. Of course, in some places you can get a house at half the price it sold for two years ago. That lures buyers back into the market. If we wanted a house to live in, we might be tempted too. That's why we like falling prices in housing; we get more for our money. But most people want a rising housing market. They think it makes them richer. They're likely to be disappointed. They show up at the beach with their umbrellas and sun tan lotion...just as a winter storm hits the coast. Forbes lists eight reasons to "remain worried about housing": The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000 more expensive for first-time buyers. The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-backed derivatives. What will happen when it stops? Mortgage lending standards are tightening up generally. Houses are still not cheap. Forbes cites Shiller's numbers, putting the average house 41% higher than it was in 2000. Incomes did not increase during that period; ergo, houses are still too expensive. Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market. The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, when school is out. Then, sales fall with the autumn leaves. There are still huge numbers of houses that will be foreclosed. Forbes says only 12% of option ARMs have been reset. More foreclosures will increase the supply of desperate sellers and decrease prices. There's a 'shadow inventory' hanging over the housing market; it could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilize. As they put their houses up for sale, that too will hold prices down. Some wiseacre economist has probably already come up with eight reasons why housing prices will go up. But the key thing to recall is that this is a depression...a major restructuring of the economy, not a standard post-war recession. After 64 years, the consumer has finally rung a bell. He has reached his limit. He cannot borrow more. He cannot spend more. He is finally cutting back. That fact will echo through the entire world economy...and through the US housing market...for many years. Houses, like stocks and corpses, may bounce. But they will not begin a real bull market again for a long, long time. [Another wave of mortgage defaults is headed our way - and the damage it leaves in its wake could be worse than the first time around. Learn how to protect yourself and your assets (and add to them at the same time) click here.] More news from The 5 Min. Forecast: "Never fear, GDP is on the mend!" writes Ian Mathias in today's issue of The 5. "The American economy contracted only 0.7% in the second quarter, the government finalized today. That's down from its previous projection of 1% and practically seals the deal for a positive GDP number when Uncle Sam gives his initial third quarter guess in late October. Still, this is the fourth consecutive official drop in GDP - the longest US economic losing streak since records began in 1947. The economy has contracted 3.8% since then, the deepest pullback since the Great Depression. "Paging through the fine print, there's only one outlier - one segment of blockbuster growth while the rest of the economy muddles through, at best: Federal government spending, up 11.4%. "'In some ways, the whole GDP discussion is irrelevant,' adds Chris Mayer. 'As investors, we care about markets, and not GDP growth. There is a great fallacy out there that if the economy does well, stocks should do well (or if the economy does poorly, stocks should do poorly). Hence, too many so-called investors waste an inordinate amount of time talking about recovery, or lack thereof. "'It's possible that GDP does expand strongly. But investors could still lose. We have one glaring historical example: From 1964-1981, GDP grew 370%. And the sales of the Fortune 500 more than sextupled. Yet the Dow Jones industrial average went from 874 on Dec. 31, 1964 to 875 on Dec. 31, 1981. "'As Warren Buffett once wrote: "Now, I'm known as a long-term investor and a patient guy, but that is not my idea of a big move." "'For investors, it is all about the price paid. The really relevant question is not one of whether or not the economic recovery is real. The question is are stocks cheap enough? To answer that, you have to look at stocks and compare them with the alternatives. "'My answer is some stocks are cheap and some are not. It is hard to generalize. In my view, investing is a craft of the specific. It is in the picking of the trees in which investing skills pay off the most, not in assessing the forest. There are, undoubtedly, specific stocks that will prove nice investments over the next few years. Finding them is what we are all about.' "Want Chris' help finding 'em? In terms of bang for your buck, there's no better deal than Capital & Crisis, especially considering this limited time bundle offer." And back to Bill, with more thoughts: Our old friend Marc Faber is "highly confident" that things will turn out badly. "The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society," he writes. "We have a money-printer at the Fed," he continues, "which guarantees runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well. "Meanwhile, Paul Volcker says that China's rise merely 'highlights the relative decline of the US.'" So there you have it: China on the way up, America on the way down. That's the drama that we're watching every day, here at The Daily Reckoning. In our view, the peak of US wealth and power probably came during the period between the fall of the Berlin Wall and the fall of Lehman Bros. But there are probably a lot more shoes to drop before people are fully aware of what is going on. The way we see it, almost the entire 20th century was a mistake...a dead end. Europeans were clearly on top of the world when the century began. Then, after WWI the Europeans in America took the lead role. But WWI shook their faith in their evolving political order. Not long after, the German hyperinflation and the Great Depression shook their faith in their economic and financial order. This left a huge vacuum, which was soon filled by ruthless adventurers and ideological schemers. Much of the rest of the century...from '39 to '89...was spent in hot wars and cold wars against these Bolsheviks, Fascists, Stalinists and Maoists. In the end, the more reasonable and consensual societies of the West won the battle. But they, too, were transformed by 50 years of war and nearly a century of bad ideas. "Whoever fights monsters should see to it that in the process he does not become a monster. When you look into the abyss, the abyss also looks into you," Nietzsche warned. Looking into the abyss created by Mussolini, Hitler, Tojo, Pol Pot, and the rest, Western societies decided both to fight them...and to join them. Tax rates soared. Regulations multiplied. University professors taught socialism, Freudianism, modernism, cubism, feminism, racism...and every other 'ism' they could think of. Parents spent good money to spend their children to universities that turned them into mush-heads. And - perhaps most ominous - in the United States of America, the military grew into a greedy, grasping goliath...the very thing Eisenhower had warned against. Then, there were counter-trends in the '80s...led by Margaret Thatcher in England and Ronald Reagan in the United States. But these were mostly frauds. Top marginal tax rates were rolled back. And there were some cuts in regulatory procedures. But government spending tended to go up anyway. Worse, Ronald Reagan mistook the Soviet Union for a genuine threat and increased military spending even further to combat it. And now, the United States staggers under the weight of its eternal wars...its imperial illusions...and its everlasting efforts to provide bread and circuses. If it kept its books like a private enterprise, it would be broke. If it were a public corporation, it would be de-listed. Still, it spends and spends...and there is no stopping the spending. Trillions are spent on wars in Iraq and Afghanistan, for no apparent reason. But who complains? Too much money is at stake. There are too many lobbyists for too many industries and too many special interests involved. Military spending - even in a time when America faces no substantial challengers - cannot be rolled back. Neither can social spending. Marc Faber is right. There too, there are too many people with too many dogs in this fight. Both military and social spending will continue to expand until the empire is ruined. Until tomorrow, Bill Bonner The Daily Reckoning P.S. There is still time to set up your own 'personal bailout' - see how here. The Daily Reckoning PRESENTS: The US strategic petroleum reserve is approaching capacity and that means that the federal government will fade out of the oil-buying business. Will this factor have an effect on prices? Marin Katusa explains what effect planned government buying or selling of crude oil for SPRs has on the overall market, below... A Look at Strategic Oil Reserves - Who's Buying Oil? by Marin Katusa Vancouver, British Columbia As the US strategic petroleum reserve (SPR) approaches capacity (721.5 million barrels filled out of a total possible 727 million, and will be filled by January 2010), the federal government will fade out of the oil-buying business. Some bearish traders believe that this factor can weigh in on prices, since most petroleum stocks in the United States are government-held rather than private. Bullish traders have also used the filling of the Chinese SPR as a reason that oil should go much higher. The team at Casey's Energy Opportunities believe that planned government buying or selling of crude oil for SPRs actually have very little impact in the overall market. However, an overall drawdown of worldwide inventory could put downward pressure on the price of oil. The various countries also have their particular reasons and influences in decisions to tap their reserves. So which countries are executing preparedness plans to fill their strategic reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries that consume the most oil in the world, as of 2008, the latest figures available from the BP Statistical Review of World Energy: Russia, Canada, and Saudi Arabia can leave the list, as they are net exporters of oil and thus do not actually require a strategic reserve, at least in the short term. We'll also bump Brazil, because its balance of imports is dwindling every year, and it should become a exporter before it requires a reserve. That leaves six countries to examine: The United States Not surprisingly, America has the largest strategic reserve in the world in an absolute sense. Its 727 million barrels are stored in four hollowed-out salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days' worth of imports, according to government sources. The United States government currently has plans to push this to 1 billion barrels, or about 85 days' worth of imports, which would make the reserves equivalent to those of Japan and Korea. The SPR build-up will be accomplished by expanding two of the current facilities, for an additional 113 million barrels, and (probably) building a new one in Richton, Missouri, for 160 million barrels. The Richton project has met local opposition, because it would require pumping 50 million gallons of freshwater per day from the Pascagoula River to dissolve enough salt to open up another subterranean cavern. The total cost of the program is estimated at US$3.7 billion, not including the cost to fill the reserves. Oil purchases are likely to be slow, at around 100,000 bpd (barrels per day) before 2014 and 150,000 bpd thereafter. In a real emergency, the combined American strategic and commercial reserves (the latter held by private corporations, especially refiners) may seem unnervingly thin from the perspective of energy security. Add to that the fact that the government can release them at a rate of only 4.4 million barrels per day, or about half its imports. Still, the 108 or so days' reserve it has between government and commercial sources are considered adequate by international standards. The United States has used this reserve twice in the past 20 years (Desert Storm and Hurricane Katrina) to combat severe demand or supply disruptions. It also has the luxury of importing more oil from Canada in an emergency. Scenarios that could force a sustained drawdown of reserves: Sustained hyperinflation in the United States due to actions by the Federal Reserve that causes oil-producing countries to look for better markets to sell oil. A prolonged general embargo by OPEC on the United States, forcing America to look to traditional partners such as Canada and Mexico, though they might not have sufficient oil. Another war, potentially in North Korea or Iran, requiring a large amount of oil input from America that it simply does not have. A particularly active hurricane season that knocks out a large amount of production capacity in the Gulf of Mexico, and the United States releases from the SPR to help. China China's strategic reserves began being built in 2004, when leaders in China began to realize that the country had no adequate government- controlled reserves to combat any disruptions in the supply of oil. China is a large importer and is dependent on the same sources of foreign oil as the United States. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves. China currently has four government reserves with a total reserve potential of 272 million barrels, which translates to about 30 days' consumption. Two of the four have been confirmed full, and there are rumors that all four are and that China has taken advantage of the recent precipitous drop in the price of oil to buy up. According to Chinese government sources, however, the reserves are likely not to be completely full until 2010, and 2009 buying of oil will be at around 42 million barrels. The government has also announced plans to increase the country's reserve from 30 to 100 days of consumption. The next stage of the development will call for an additional 170 million barrels in eight storage facilities. The locations of the facilities are as yet secret. In an emergency, China would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege. Scenarios that could force a sustained drawdown of reserves in China: Worldwide embargo on China due to a Chinese invasion of Taiwan. High oil prices force Chinese industries out of business, pressuring the government to keep oil prices low domestically by selling some of the reserves to domestic companies. North Korea asks for oil from China to support military action on the Korean Peninsula, and China ships it to them on the black market. Russia slows or stops its exports as part of the Russian "dominance via energy" strategy, leaving Chinese pipelines trickling and Chinese industries disrupted. "Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument." Japan/South Korea We have placed Japan and South Korea's reserves together, as the two countries have a treaty that allows them to share their strategic reserves. Resource-poor Japan has one of the world's largest strategic oil reserves, enough for 82 days of imports. State-controlled reserves are run by the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves consist of 320 million barrels in 10 different locations, which makes them second only to the United States in absolute volume. Japan's island geography means that having an emergency supply of crude oil is crucial, and the Japanese government obviously has not ignored this aspect. South Korea is in one of the global "hotspots" in the world, right beside North Korea. As the country is under an almost constant threat of war, the government has stocked up some 76 million barrels, with capacity for an additional 40 million barrels. Scenarios that could force a drawdown of reserves: Just one at this time, from two possible sources: political instability in the region caused by either the Taiwan or the Korea conundrums disrupts tanker transport, perhaps even forces them to port. India India has a small reserve it began to build in 2004. This stockpile is sufficient for perhaps only two weeks of consumption. The country eventually wants to raise this level to 45 days, though the first phase has not even been completed yet. The projects are estimated to come online in 2012, which means it has taken eight years from planning to completion. These figures imply that India will not even have a somewhat sufficient strategic reserve until 2016, given that the expansion project was approved in 2008. Germany Germany has the largest reserve in Europe and is among the top in the world as well. Its government has satisfied a federal law that regulates storage be at least 90 days' worth of net imports. More than half of the storage is in Southern Germany, where large salt caverns exist. Germany is well prepared in its strategic oil reserves, and there are no glaring factors that would force a drawdown of reserves, barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three countries in an emergency. So How Much Do the Reserves Matter? According to the US Energy Information Administration (EIA) estimates, some 2 billion barrels are held in government-owned strategic reserves around the world. Though this seems like plenty of oil, does it really impact the spot price of oil? Collectively, the answer is yes, as this volume corresponds to 23 days' worth of global consumption. If drawn down together over a short period of time, the effect on spot price could be substantial. For illustration's sake, suppose that countries collectively draw down their entire reserves over the period of a year. This rate would make up for 10% of the daily worldwide trade of crude oil, which could certainly impact price (imagine ConocoPhillips and ExxonMobil both going under at the same time). Individually, however, even China and the United States have a limited impact on the spot price of oil over a single year. If the United States' inventory were drawn over an entire year, it would only make for a 4% increase in supply. Under normal buying patterns of each country's strategic reserves, the impact is even smaller. Since China's 42-million-barrel purchase is over one year, their purchase would not even make a dent in the daily trade of oil. Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument. And from the buying side, if governments plan the filling of their strategic reserves, the impact on the spot price of oil is likely to be minimal. Perception is a tricky horse to ride, however, as we all know. Given a worldwide panic for oil à la the 1973 oil embargo, oil prices could spike in the short term, because government reserves would likely raise purchases 10% or so in a real emergency. This effect would be short lived for the foreseeable future, though, as worldwide reserves are already reaching their limits. In short, if everything goes according to "plan" by the governments, even filling a large reserve such as the Chinese SPR would have little impact on the price of oil. For SPRs to truly impact the spot price of oil, it would have to be a global situation, with war and embargo the two most likely scenarios. Even then, the impact would be mellowed by limitations on how quickly governments can either release or purchase the oil. Regards, Marin Katusa for The Daily Reckoning Editor's Note: Marin Katusa is a math prodigy and the chief investment strategist of Casey Research's Energy Division. At the age of 31, he is one of the youngest self-made multimillionaires in Canada...thanks to an algorithmic system he developed that alerts him when a company with sound fundamentals has become so undervalued that it's a screaming buy. For years, Marin has been advising Casey subscribers on the best energy picks, generating extraordinary returns. Learn how you, too, can profit from his "secret system" - click here to read more.   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.