Saturday, August 13, 2005

The Imminent Recession

I'm sure you have realized it, but filling up your gas tank is costing a lot more today than it did even two weeks ago, and 60% more than a year ago. Even in Houston, the energy capital of the world, prices were hitting over 3.00/gal at selective stations yesterday. Nationally the gas price news was overshadowed by the release of the 9/11 tapes, but there was an constant national murmur and low to high level bitching about the price of gas. This was accompanied with major anger directed at the oil companies, the vast majority of the public believing that the reason for the high gas prices was Exxon screwing them.

The reality, of course, is that there is a dearth of supply to match demand worldwide for oil. The price has been moving inexorably up, in the attempt to find a tipping point for demand. What is the world wide price for oil that dampens demand enough so that supply can keep up. What we are talking about is a worldwide slowdown in global economic activity - i.e. a global recession. William F. Buckley wrote about this scenario yesterday. (Buckley, one of the original Country Club Conservative commentators, actually thinks for himself rather than spewing Rove's talking points ad nauseum)

Commuters suddenly forced to pay double for a gallon of gas begin to brown-bag their lunches, inching away from restaurants and sandwich shops. Americans who can still afford a vacation go on shorter trips, putting a major dent in the tourist industry. Trucking companies hauling everything from wines and spirits to furniture to automobile parts impose a hefty surcharge on shippers, who pass it on to their customers, who then pass it further down the line to the retail buyer if they can.

The crunch forces many independent truckers to sell their rigs, playing havoc with both cross-country and local shipping. Higher fuel costs send the U.S. Postal Service deeper into the red and threaten the survival of rival package shippers FedEx and UPS. With the break-even point for airlines a distant memory at $31 a barrel and carriers already operating with skeleton staffs, sharp fare boosts are the only option. Traffic spirals into a tailspin, and one airline after another declares bankruptcy.

But of course, oil is vital to everything from plastic picnic forks to printer's ink to asphalt. Manufacturers raise prices across the board, and potholes go unfilled in city streets around the nation. At first, municipal and factory employees lose overtime, then they are laid off or fired outright.

Foodstuffs of every kind -- from beef in the butcher case to fresh fruits and vegetables in the produce aisle, to milk and cheese in the dairy section -- reflect the higher costs incurred by growers and shoppers.

Runaway prices on just about everything take the Federal Reserve Board by surprise. Determined to keep interest rates low and dulled by their own assurances that inflation is somnolent, the Federal Reserve's governors are ill-prepared for the economic crisis. The Fed belatedly boosts interest rates a full 2 percentage points.

The heretofore unheard-of move jams on the economic brakes so swiftly and so sharply that you can almost smell the stink of burning rubber. Higher mortgage rates stop would-be home buyers dead in their tracks and cast a pall over the building industry. The real-estate market crashes almost overnight, wiping out billions of dollars of paper profits and putting holders of adjustable-rate mortgages and home-equity loans in peril. Foreclosures and tax-default auctions become common, consumer spending dries up, and soon the entire world is in a recession.

All I would say to any of you all who have assets in the broader stock market (broad based mutual funds, etc.) beware of the next few days, weeks, and months. Cash is a safe option for a while.