With the Dow down from 13,500 to 12,000, it is natural to wonder how much further stocks can fall. One of my expert friends had this to say…
Think of it in P/E terms, and you’ll get your answer. If we revert to the long-run P/E mean, the S&P should be around 1000, not 1300 (where it is today). That’s assuming earnings don’t change. If earnings fall…
I thought that this estimate that stocks could still fall 25% is interesting because housing economists have been talking about a similar fall in housing prices before rents and purchase price reach their historical average ratio.
On the third hand… with King Bush II dumping money into the hands of consumers and borrowing it from the Chinese, the possibility of increased inflation and a further collapse of the dollar could mean that inflation will lift nominal corporate earnings enough to justify the current nominal price of stocks.
Speaking of inflation, movie tickets in Boston are now $10.50 each. http://www.boxofficemojo.com/about/adjuster.htm shows that movie tickets have gone from a nationwide average of $5 in 1999 to $6.82 nationwide in 2007 (of course we Bostonians prefer to spend $2000/month for studio apartments in order to have the privilege of spending $10.50 per ticket instead of $6.82). The CPI calculator on the BLS Web site shows that this is in fact growing faster than inflation; $5 in 1999 should be equal to $6.22 in 2007.
We tried to go to the movies at the theater on the Boston Common this summer. Their computer system had crashed, so they couldn’t sell tickets. It was a zoo.
If you think about gas plus parking plus tickets plus a small drink, Blockbuster DVDs by mail makes a lot of sense.
I think tickets are expensive every where. Similar prices in Hoboken, NJ and Tahoe, CA recently.
I honestly believe that $3+ a gallon fuel prices are the straw that broke the camel’s back on our present economy. I’m not too concerned with companies writing bad loans getting their clocks cleaned, that’s what is supposed to happen in a free market when people act stupidly. Fuel price is a definite issue though. When fuel goes, over the course of about five years, from about $1000 per year to $2600 per year average to heat a house and a tank of gas goes from in the $20 range to in the $50 range that money has to come from somewhere with most people. The impact is on discretionary spending which is the motor that keeps our economy humming. Most extra money people have is going to fuel. Bush’s kickback is a gimmick. It may provide a short term boost, but solves nothing.
The real answer here is to lower fuel prices by increasing supply. Congress needs to act to boost domestic oil production by opening ANWR and the Gulf to exploration and drilling. China is already drilling off our shores near Florida. Congress has addressed conservation via increased mileage requirements, now it needs to pave the way for new Nuclear plants and incentive for more refineries to be built.
The environmental movement has brought us MTBE, ethanol (net energy loss on production) and, through restrictive policies higher fuel prices. Recycling, except for aluminum, costs billions each year in energy and effort, negating any positive effect. It’s time to start dealing with these issues using our brains instead of knee jerk emotions, we can’t afford to keep heading the way we’re headed.
I for one am hunkering down for a doozy of a recession………..
Phil,
Just got finished reading the excellent article in the Feb 2008 Harpers magazine called “The Next Bubble” and it is by Eric Janszen. He believes that housing prices have to fall further. (he was predicting about a 38% decline from their peak as they return to their more historical growth rates of about what the inflation rate is)
from the article:
“The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitization, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.”
The far more interesting part of the long article is how bubbles form and he does a pretty nice job comparing the subprime crisis to the chemical industry 40 yrs ago. Back then the chemical industry dumped plenty of PCBs and pollutants into the air and water. Their theory was “the solution to pollution is dilution” meaning that the vast quantities of air and water should neutralize any harm done by the chemicals dumped. Well it didn’t and we are still dealing with the polluted lakes and poisoned groundwater and many bankers/Wall street types felt the same way that by rolling so many of these liar loans into much larger debt vehicles will make these bad loans less toxic. Janszen feels like the chemical polution, the crap loans tend to concentrate on the weakest most vulnerable parts of the financial system (the subprime market) whose collapse is the “Love Canal” of our current financial maliase.
Anyway his theory is the next bubble must support many firms and be financed by the trillions of dollars in new securities that Wall Street will create and sell and or course must be heavily enabled by favorable goverment legislation. He feels that the best candidate for the next bubble is alternative energy.
I’m off to buy some used windmills from this gentleman I met in Starbucks …..
I agree with Paul for the most part. However, drilling ANWR, the continental shelf, and more of the Gulf will only help us keep our heads above water. It will not get us ahead of the game. It will not get us off foreign oil, nor will it reduce prices.
We need to fully develop our shale oil resources in the Green River basin. That is the only way we can significantly reduce oil prices and our dependence on foreign oil in the short run.
I’m a proud global warming “denier”. Never the less, I still fully support R&D into a replacement for the internal combustion engine and oil based transportation. The only problem is that we are not going to have an effective replacement for 10-20 years, after which it will take another 10-20 years to convert the majority of the U.S. auto fleet. OPEC has already stated that it can’t keep up with world demand much longer, and while there are significant liquid petroleum deposits left in the U.S., there are not enough to offset foreign imports. There may not even be enough to prevent increases in foreign imports.
We desperately need oil for the next 40-50 years. Our shale oil is the only hope we have of maintaining our living standards until we can transition to another technology.
It is very discouraging that not one of our presidential candidates has mentioned this vast resource. We can’t build the infrastructure overnight!
Daniel,
Interesting point of view. Doesn’t a lot (not most) of what is drilled up in Alaska now go directly overseas? (Japan, Korea etc) Maybe we should redirect some of that oil back here into the US. (Of course getting it refined and distributed is another problem) Is there any guarantee that any new drilling would not also go directly overseas? How much easier is it for the companies that drill and distribute the oil to just send it right out on a tanker? Or am I hopelessly uninformed?
Marshall,
It’s odd but true that the U.S. exports some of its domestically produced oil products. But the market for those products is truly global in nature. Any significant change in supply affects the price for everyone. So that situation is not as absurd as it may initially sound. I would have to research the specific reasons for those exports. Do we export some crude based on agreements made when oil prices were low? Do we export it because we lack refinery capacity? Do we get much of it back in refined form? Is it a situation where we sell our exports a little higher than some of the imports we buy due to some factor such as relative transportation costs? Is it just a stupid arrangement we should cancel to keep the oil at home? I don’t know.
Given the inland location of the Green River shale formation, and the fact that the supply would come online free of prior agreements during a time of high oil prices, I imagine most of it would be shipped and used within the U.S. But if the resource dramatically increased our daily production, as I believe it would, it’s entirely possible we would end up selling some of it to other nations. That’s not necessarily a bad thing so long as the end result is reduced foreign dependence and some stabilization of the global oil market.
It’s not an easy resource to get. But it is profitable to get at current prices, even accounting for full environmental controls to make the process as clean as possible, as well as future land restoration projects. The more I study it, the more I’m confused by the fact that our government doesn’t seem ready to make it a key part of our energy strategy. My guess is that politicians do not want to champion another fossil fuel source right now, preferring to push “alternative” fuels and technologies. That’s great, except that we’re decades away from replacing our auto fleet with something that does not run on oil. We need to survive that transition period. Preferably without price shocks and crashing economies which will only hamper our ability to pay for whatever alternative technology we need to get off oil.
Here are the numbers on the current U.S. oil situation from the CIA World Factbook.
U.S. Oil Production: 8.322 million bbl/day (2005 est.)
U.S. Oil Exports: 1.048 million bbl/day (2004)
U.S. Oil Imports: 13.15 million bbl/day (2004)
U.S. Oil Consumption: 20.8 million bbl/day (2005 est.)
If there’s one thing that scares me about the future of the U.S. economy, it’s the oil situation. It drives me nuts to see candidates sling mud at each other (i.e. Hillary and Obama) rather than discuss in detail how they are going to manage what could turn into a major, long term economic crisis.
Interesting twist to the discussion about oil and energy. As an oil geologist working in Norway I can perhaps comment a bit on this. I agree that much of the economical problems we’re facing are due to energy production not keeping up with demand (oil production has flatten out the last 3 years, but not demand). Regarding oil shales the energy return on investement (EROI) is very slim, that is, to extract one barrel of oil from shales we need to throw in almost one barrel to keep the process running. I think, however, the US navy has considered the oil shales as strategic reserves to fuel the fleet in a future with less oil.
The EROI argument (to a lesser extent) is true also for the Canadian oil sands, where natural gas is used to produce the vast amounts of steam required to push out oil from the oil sands. This process, by the way, is horrific from an environmental point of view because vast amounts of polluted water is produced. The Canadians are also considering nuclear power to fuel the process since they are soon out of natural gas.
EROI (and costs) of existing and upcoming oil reserves is also looking worse since effort is rising each day to extract the remaining oil. Global daily oil production is about 85 million barrels/day and most oil companies agrees that there is no way we’re going to produce more than 100 million barrels/day, after that production is going to fall irreversibly. It’s about time to start finding alternatives to oil and for me to find another job!
Vidar,
You are right on everything you’ve said. It takes tremendous energy to recover oil from tar sands and shale, part of the reason why oil from those sources is more expensive. (Though at today’s prices, still profitable.)
But the world’s transportation infrastructure is based on oil. It’s going to take longer than most people realize to change that. We’ve been looking at alternatives for a while now and the two best (EV and Hydrogen) are still years away from commercial viability. And then many years away from conversion of the majority of the U.S. auto fleet. Most people can’t afford to just walk out and replace all their cars tomorrow.
This is my pet peeve in this U.S. election cycle. Lately I’ve become so disillusioned with politics that sometimes I wonder if it wouldn’t be better to fire everyone and bar the two major political parties from running. Nobody on either side paid attention to this. Kind of like the growing terrorism problem. Isn’t their job to first worry about the security and stability of the nation, and then worry about other stuff? When I watch debates, I feel like I’m watching children who all need to be spanked and put down for naps.
Sorry to ramble…it’s just a sore spot with me right now.
From my German perspective, I see the dollar falling and falling – maybe down to 2:1 against the Euro. I think that’s because the dollar’s worth has never reflected the worth of the American economy – it was just the world’s currency. Now the Euro is about to steal a part of that cake.
So we have a decreasing demand for dollars, dropping your currencies external value, making your huge imports more expensive – in the end an increasing inflation for you.
And shouldn’t house prises and stock quotes in the long average rise equal to national product?
I am pretty sure, that the S&P will soon dip under 1000.