Jason Schenker's Economic Forecasts for the Year: "Dude, Where's My Gas?"
Jason Schenker of Prestige Economics had some great insights into some of the challenges that lie ahead for the US economy, which are listed below.
1. Growth is going up. Markets responded with decreases as US growth rates are lower but rates for 2012 are raised for US and Japan. The things to keep in mind is that global growth rates remain unchanged, while interest rates are poised to rise. Thus, the second order impact is that the cost of doing business is going to increase, and the cost to finance the US debt is going to increase. The price of money is going up.
2. With respect to Ben Bernanke’s statements, the markets reaction is as follows:
a. Commodity prices will get higher (OK).
b. Commodity prices will drive up inflation (OK).
c. Commodity price increases are transitory and will eventually flatten out (Doubtful!)
d. Inflationary pressures will also flatten out so the Fed does not need to take action (Doubtful!)
The challenge in this case is that the Fed will NOT be able to raise rates as they did in 2008 and the $20T in Treasury debts (not counting entitlements) will need to be re-financed at higher rates. This hurts the US budget in a major way, so the Fed is in a default position of NOT being able to raise rates. In many respects, 2008 was the peak of the business cycle and 2011 is the first year of the upward business cycle. So what would make us believe commodity prices would go down if we are at the beginning of a business cycle? One thing we could see is to force consumers to hold Treasuries as part of the pension funds, mandated by the US.
3. Taking this further – if the Fed can’t renegotiate rates quickly and we have a poor credit rating the dollar will go down further. This could be a dead cat bounce – and after the bounce the cat is still dead. The dollar will NEVER be this strong again for some years to come, and taxes will never be this low. As a result, it is highly likely that mortgage deductions for a second home will go away very soon. When that happens, home prices will take another hit
4. US Debt and liabilities could be growth stoppers. US debt will affect AAA credits. Because the government refuses to impact entitlements, there is a high probability that rating agencies are behind the curve when rating the treasury. So it is highly likely we will see downgrades on US treasury notes.
5. The price of crude is up 23% since January in the US but is up less than 13% in Euro terms! This will be a tougher situation for domestic US growth and represents a lot of upside risk. The US will not be the only one to face downgrades. When there was recent turmoil in the US economy the dollar was NOT viewed as a flight to Quality. For the first time in a long time, the dollar didn’t get a bounce but the Euro did in a time of global instability. What is the prognosis for the dollar? Between the global recession, low Fed rates, rising US debt, the prospect of further monetary policy will weigh on greenback.
6. The Arab Spring will further have a impact on the price of oil. First-order impacts are that oil and gas supplies from Libya are disrupted, Speculators pile into energy markets, driving up prices, and contagion fears are in play. Even if the Mideast situation is resolved, oil will stay at $150 to $200/bbl, freight and shipping prices will continue to remain high, gas will continue to risk, and hydro-carbon related manufacturing inputs will drive prices higher.
7. The Japanese Quake and tsunami will also have some important effects. Nuclear power is disrupted in Japan, so a first order impact is that demand for LNG and prices for LNG will go up. The Libyan disruption will also drive natural gas prices in Europe higher. Aluminum smelters are highly dependent on gas, so aluminum prices are also likely to rise, as well as aluminum substitutes such as low-grade steel and tin.
8. Similarly, nickel and stainless steel will continue to see high demand, so prices are also likely to continue getting higher. There is only 50 years of nickel demand left on the earth! That is very bullish! Physical commodities are bought and not sold! There is a pull on demand that is very real! But they have to buy oil, and metal and plastic. In addition, nuclear contaminated steel can’t be used, and the rebuilding effort in Japan will also increase the demand for steel globally.
9. People talk a lot about natural gas being a solution to the energy crisis and the sustainability issues. True – there is a LOT of natural gas – and lots of shale gas – and ten times that amount of gas globally. However to get that gas to market in the US, an estimate was made by INGA about eight years ago that it would cost 175B to produce transport and supply pipelines. And nickel high alloy steel is required for these pipelines. And since the price of nickel has not doubled, the cost has risen to $350B. And if we not think about the length of time to construct this, it will likely be more like $3-7 trillion to build that infrastructure. Yet people ask why it isn’t happening more quickly….(hence the comment – “dude, where’s my gas?”)
10. As far as nuclear energy – there is potentially huge demand for nuclear, but with the issue in Japan, many brownfield nuclear development projects on hold. And if you see previously slated Greenfield nuclear not come to fruition and delayed, the cost of these will also continue to rise as the price of steel and nickel goes up. In addition, the cost of upgrading the existing set of natural gas pipeline infrastructure will be massive, as many of these were installed over 50 years ago and need to be re-fitted. These represent massive infrastructure costs.
11. Alternative energy. Different projects have different returns. They like to see an ROI in a 3 year window. Alternative energies are not economical. On the power side – many of them will not be. Many are NOT financially viable at current prices. For hydro batteries they use nickel. If we look at ethanol production – they use water. They were very concerned with of sand and water and fragging requirements for sand and water for gas wells. So we will see water prices go up – and a lot is required. Solar is a big question mark.
These and other comments Jason made provided our participants with a lot to consider!