Monday Readings - Energy, the Dollar, Central Europe Farms, and Public Storage Auctions

Today, we'll focus on energy/oil, the dollar, sad affects from the home bust, and what I contend will be the best long term investment - undervalued farm land (and it's not in the USA)

As our President trots with hat in hand to Saudia Arabia to ask them to pleeeeeaaseee open the spigots.... the NYTimes asks What Can we Do about Rising Oil Prices? Not Much

• With gasoline closing in on $4 a gallon, Washington is awash in proposals to bring down prices — once more turning the energy debate into political football.
• There have been calls for a gasoline tax “holiday” this summer, cries to force OPEC to pump more oil (or else!), appeals by President Bush to allow “environmentally friendly” drilling in Alaska’s Arctic National Wildlife Refuge, and demands to tax Big Oil’s billion-dollar-plus profits.
• But what can the White House, Congress or competing presidential candidates do to reduce gas prices in the near term? The short answer, alas, is not much.
• No industrialized economy is as reliant on oil, or as obsessed with gasoline prices, as the United States, the world’s biggest consumer of oil. But the oil market is largely immune to Washington’s machinations, and prices have more than quadrupled over the last six years for reasons that are increasingly disconnected from what happens in the United States.
• In the long term, there are only two ways to reduce prices: boost supplies or reduce demand. The country’s energy policy does exactly the opposite: it encourages consumption by keeping energy taxes low and discourages exploiting new supplies because of environmental concerns and not-in-my-backyard political objections.
• Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation, estimated that the nation’s oil import bill would probably reach $450 billion this year, up from $120 billion in 2002. “Our energy policy is bankrupt,” he said. “It is not prudent any more to ignore the supply side of the equation.”

So my "World of Shortages" thesis is beginning to pick up into the mainstream - more and more people are finally realizing the US is not the end all and be all; that there is a global competition for resources. Sadly, if we dropped everything today and put together a coherent energy policy (what I call a Manhattan Project II) it would still take 4-7 years to really make serious inroads - and the time between "now" and "then" will be filled with serious strains for many. But don't you worry folks, our leadership won't be working on a coherent strategy - they will be fighting, pointing fingers, and continuing their typical incompetence. So we'll keep pushing out solutions down the road a few more years. Even if we wanted to do nuclear for example... the Wall Street Journal reports the New Wave of Nuclear Plants Faces High Costs

• A new generation of nuclear power plants is on the drawing boards in the U.S., but the projected cost is causing some sticker shock: $5 billion to $12 billion a plant, double to quadruple earlier rough estimates.
• Nuclear plants haven't been built in meaningful numbers in the U.S. since the 1980s. Part of the cost escalation is bad luck. Plants are being proposed in a period of skyrocketing costs for commodities such as cement, steel and copper; amid a growing shortage of skilled labor; and against the backdrop of a shrunken supplier network for the industry. (as opposed to say if we built them maybe a decade ago? No, that would take proactive action - we are a reactive country; only after the emergency is here will we act)
• The price escalation is sobering because the industry and regulators have worked hard to make development more efficient, in hopes of eliminating problems that in the past produced harrowing cost overruns.

Last, we finish off the energy section with an interesting story in the NYTimes: As Gazprom Goes, So Goes Russia

• Gazprom certainly had reason to party: its chairman, Dmitri A. Medvedev, was riding high on the Russian campaign trail as the hand-picked successor of President Vladimir V. Putin. Although Gazprom forked over a handsome sum to book Ms. Turner and Deep Purple, Mr. Medvedev’s favorite band, the opportunity for the company, the world’s biggest producer of natural gas, to have its own man installed as Russia’s next leader was priceless.
• .... his ascent confirms that in today’s Russia, the line separating big business and the state is becoming so fine that it’s almost nonexistent.
• It’s hard to overemphasize Gazprom’s role in the Russian economy. It’s a sprawling company that raked in $91 billion last year; it employs 432,000 people, pays taxes equal to 20 percent of the Russian budget and has subsidiaries in industries as disparate as farming and aviation.
• If crude oil and natural gas are considered together, Gazprom’s combined daily production of energy is greater than that of Saudi Arabia.
• Now that Russia is seeking to reclaim the geopolitical clout it had in Soviet days, it is wielding its vast energy resources, rather than missiles, to reassert itself. More often than not, its most potent artillery is Gazprom itself.

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Two stories on the dollar....

NYTimes: The Dollar - Shrinkable but (so far) Unsinkable

• If the United States were any other country, these would surely be days of panic and austerity in Washington. With debts spiraling higher, a trade deficit exceeding $700 billion a year, and its currency plunging for years, the government would be forced to cut spending and jack up interest rates in a frantic bid to attract investment.
• For more than half a century, Americans have enjoyed a unique privilege in the global economy: The dollar has been the world’s dominant currency, the money used in most transactions and the repository for the national savings of many countries, including China, Japan and Saudi Arabia.
• Virtually limitless demand for American government bonds has supported the dollar’s value, and kept domestic interest rates down. Americans have been emboldened to spend in blissful disregard of their debts, secure that foreigners would always supply finance.
• But what are the chances that a day of reckoning is coming, when the dollar would be so weak that America would have to play by the rules that apply to every other country? Recent signs do suggest some fraying in the American relationship with its many foreign creditors. The balance of trade has gotten so lopsided and the question marks hovering over the American economy so thick that some foreign governments are beginning to hedge their bets on the dollar.
• For Americans, losing that status could be painful, sending interest rates higher and raising the costs of buying homes and cars. A country that has been operating with essentially unlimited credit might have learn to live within a budget. (the horror)

My own take, and it's a major outlier view is one day America will default on it's debt. Our debt will rise to the point that (at current pace) it will one day surpass a level we could ever service it - think of a day when the interest ALONE is larger than GDP. Meaning our entire economic output could be spent on interest payments; and that would leave nothing for anything else. So we default - we say, oops - that's never going to happen again, and away we go with a clean state. We look awful in the eyes of the world but really what else is new :) This is the path we are heading in 2-3 decades. Much like a bankrupt company we'd have a new slate and could then begin running up new debt with promises it would never happen again. Plus if you are upset, hey who has the world's strongest military.

But enough about that - the Wall Street Journal says the "Steady" Dollar Tempers Many of the "Weak" Dollar plays that have been so profitable

• For years, the dollar has been the sick man of the currency world, particularly when compared with the euro. Now, it looks like the illness isn't terminal, which could affect a variety of investment strategies that have thrived on the dollar's decline.
• At $1.5483 to the euro, the dollar is up about 3% from its all-time low against the European currency reached in late April. (woo hoo, break out the champagne! 3% off all time low - the strong dollar is BACK)
• No one expects the dollar to make a dramatic recovery. But if it stabilizes, that could eventually remove a tailwind for some companies and investments. A weaker dollar has juiced returns for U.S. investors in overseas stocks and bonds. Moreover, foreign profits among U.S. multinationals have translated into bigger gains at home. If the dollar steadies, such benefits would recede. (be careful what you ask for, this is all that is saving Wall Street's pumpkin)

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Now for a very interesting WSJ story on attempts to buy up farmland in the other great global food basket - Russia/Ukraine/former satellite states of USSR - I think this asset class will be a tremendous investment over a 30-40 year time frame as arable land disappears across the globe due to climate/urbanization - but you'll have to check the blog in 3 decades to see if I'm correct.

• The vast collectives that fed the Soviet Union are now a patchwork of tiny gardens, fields and vacant lots. But combined, they could help feed the world: Russia, Kazakhstan and Ukraine have fertile yet untilled land the size of Idaho.
• If someone could just stitch the land back together and create modern farms, agronomists say, the vast spaces north and east of the Black Sea could generate an extra 115 million metric tons of wheat per year -- 20% of the world's current production.
• Richard Spinks is trying to do just that. The 41-year-old Briton has literally been going door-to-door, leasing small plots of land from hundreds of thousands of poor farmers in western Ukraine. His company, Landkom International PLC, has planted wheat, barley and rapeseed on a combined 25,000 acres. Landkom expects to reap its first big harvest this fall.
• .... as technology gains have slowed, the search for additional arable land has intensified. That's created an opening for entrepreneurs with visions of re-collectivizing the land in former communist countries and rebooting production.

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Last, just a downer story from the NYTimes - we don't think about all the implications of the housing bust but just like we have foreclosures on homes, we now have "auctions" on people's stuff in public storage. A very sad state we have gotten ourselves in. Oh well, the key thing is the past 5 years we have enriched 100s of the top NYC bankers, and create multi millionaires out of them to create these toxic waste dumps of faulty mortgage loans. And that's really the important thing to come out of our capitalist system (you know, capitalist on the way up, socialist on the way down). And when said multi millionaires fall on hard times, our tax dollars and Federal Reserve are waiting in the wings to keep them propped up - unlike those silly peons who have public storage. Always a silver lining; the great American transfer of wealth continues i.e. the "anti-Robin Hood" country.

• The foreclosure crisis is hitting yet another American locale: the self-storage center.
• As they lose their homes, people are turning to these humble cinderblock and sheet-metal boxes to store their stuff. But some people cannot keep up with their storage bills any better than they could handle their mortgage payments, and storage companies are auctioning off their property for a pittance.
• The auctioneer, Blair Auction & Appraisal, has been conducting sales at self-storage facilities in the Midwest for more than a decade. “If a site used to have 10 auctions, these days it has 15 or 20,” said Wayne Blair, the owner. At one site in Detroit, he auctioned off the contents of 45 units.
• Bill Martin, a 50-year-old former manager in the technology industry, lost his house in the Southern California community of Lake Forest last August. “Storage has my hopes in it,” said Mr. Martin, who sleeps on a foldout bed in his mother’s guest room. “I don’t tell anyone this, but at least once a week I go over and look at my couch, my refrigerator, my TV stand, my mattress and realize I did have a life, and maybe there’s a way to go back to it.” (just sad)

Well folks, it is just a sad state - grown men in the Midwest needing to move back home to make ends meet [Jan 16: Interesting Human Economic Toll Piece in NYTimes], now grown men in the West Coast... the pooring of America continues... living standards continue to erode for many who don't have much of a voice - slowly but surely [Do the Bottom 80% of Americans Stand a Chance]

I eagerly await the "trickle down" economics theory to begin working for the vast majority in this country (I believe that theory is, cut taxes for the ultra wealthy so they can create new businesses full of $9-$11 service jobs for the rest of society). So far, not so good... "trickle on" yes... "trickle down" - not so much. We'll just have to wait patiently for the point where social acrimony reached a tipping point.