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Editors Note: This report was written by a top-executive of the international petroleum industry with many years of experience. His base of operations is Latin-America, one of the world's more prolific crude oil producing areas. Due to his sensitive professional affiliations, he elected to remain anonymous.
US & Global Economies In A Nutshell
This executive summary on the current state of the Economy is made for the 21st Century manager, who needs hard data in a short and comprehensible format.
Money Supply for Jan-June 2000
M3 up 3.74 % in the 6 months (7.5 % yearly rate) from 6,477 billion to 6,719 billion (242 billion increase).
M3 average rate increased to 7.5 % from previous month's 7.1 % rate.
Productivity figures are still at a rate of 2.4 %, awaiting Q2 release.
The FED failed to raise rates by 0.25% in June 28, while they maintained a view of risk on the side of higher inflation as expected.
Systemic failure of the large speculative derivative positions of major banks and mortgage institutions is still very possible should international investors start to withdraw from the US or due to a drop in the stock market which will be exacerbated by a possible liquidity crunch like in 1998.
Possibly because of this reason, the Fed apparently has decided to inflate again the economy, though at a slower pace, in the hope of avoiding the inevitable, at least during the election period.
However, energy inflation will catch up with the system by end of Q3 as world economies continue to expand. This most likely will compound the M3 inflation effect.
Public Debt for Jan-June 2000
Lower debt from 5,776 billion to 5,685 billion. The debt remained flat during the last month, only to jump 40 billion on the last day. The treasury has apparently been servicing the growth of debt by about 25 billion during the month.
The Crude Raw materials in the producing chain have increased in price 25.15 % from June 99 to June 2000. June saw a disastrous increase of more than 6 %.
Energy Crude materials have increased in the same period 59.4 %
Commodities inflation is rampant, despite the manipulation of the precious metals markets. The CRB Index that measures Commodity inflation is up nearly 23% in the last 12 months. Please see CRB chart below:
The PPI (Producer Price Index) for Dec 99 - June 2000 average stands at 4.67 % a year. Core PPI stands at 0.86 % over the same period. The CPI (Consumer Price Index) for Dec 99 - June 2000 average stands at 3.98 % a year. Core CPI stands at 2.59 % over the same period.
Energy inflation is starting to percolate through the economic system. About 3/4 of managers surveyed expect to increase prices for their products and services in the short term. However, they are having a hard time with a discerning public to make the price increases stick.
Money Supply Inflation for Jan-June is running at 7.5 % a year. ECI Q1 (Employment Cost Indicator) was up 1.4% or 5.6 % a year.
The indications are that the Fed will keep pumping liquidity at a lower rate, while at the same time, increasing interest rates by 0.25% in August. The resultant effect of this would be to slow down a little bit the economy at the cost of much higher inflation.
The Future Inflation Gauge of the Economic Cycle Research Institute (an index that Mr. Alan Greenspan is known to monitor) weakened in June again. Its smoothed annualized growth rate dropped to 7.5% from 8.3 % in May, after 14.4% in April, 13.7% in March, 14.2% in February, 14.7% in January and 15.9% in December 1999.
Total Debt and Derivatives
Total debt for the six months from November to May 2000 was up 2.87 % (i.e. 5.74 %) yearly rate from 17,280 billion to 17,776 billion. (Fed Statistics). This puts the average debt per person at the amazing quantity of $64,650. It has been observed that this figure steadily moves up about $500 a month for the last three months before June, but during June it only increased by $150. The author believes this is a yellow warning sign in the economy's health status. Also it shows that the recent rate increases by the FED have started to work. The burden of the household debt stands at 13.6% of disposable income. This figure will most likely increase in the coming months to 14% as the raise in rates percolates through. The last time we saw these highs was the 2nd quarter of 1987. Doesn't bode well for the stock market....
Big banks continue to build their derivative positions in the gold market at an alarming rate. The US Congress has been advised by GATA so that they can start to look at the matter before a Banking Crisis develops.
Gold is unable to cross the $290 Maginot line. We will see how long it takes to the market to flank the Maginot line. Forward hedge supply is drying up drastically, with major producers reducing their hedge book via buybacks and delivering into them. The major producer players are jockeying into position with announced intention of mergers and Anglo Gold et al launched a website (GoldAvenue) to market gold and sell it via the Internet.
A huge gold paper carry trade appears to be unveiling itself and there is great danger that 85% of the long paper positions might not be able to be delivered by lack of physical gold. This will force to roll over or liquidate at a discount. This potentially could wipe out many longs. Same will happen to shorts. When gold starts to rise, they might go the same way as Ashanti and Cambior. Their paper money will evaporate and they will lose whatever assets they have when gold skyrockets. Silver has not moved, however, this is a good a time as we will get to add to inventories. It is strange that Fed officials Mr. Henderson and Mr. Pataki have been reported to talk about the need to sell American citizens gold.
What is the Fed going to do then with the worthless paper proceeds ? Burn them out through inflation, transferring the wealth of the American people to the gold buyers ? Who would these buyers be ? Would they benefit when the dollar devalues to balance the imbalances ?
The Euro after having rallied as predicted from a low of 0.88 to the dollar to 0.96 to the dollar, has stabilized in a narrow trading range close to 0.93 to the dollar.
A truce between the ECB and the FED is apparent as both refrained from hiking rates at their last opportunity. August will be critical for the FED and the ECB.
The trade deficit for May was $31 billion, up from $30.5 billion revised in April. April original figure was $30.4 billion. However, the deficit with China, Mexico and Western Europe increased a combined 2.6 billion from April figures.
The yearly projected trade deficit stands at $388 billion, down 7 billion from last month projection based on the flattening of March, April and May.
Oil still seems to be heading towards the $40 mark, despite OPEC's statements to the contrary, and Saudi's threats of pumping an additional 500,000 barrels per day. The truth is that Stocks of oil in the US, both crude and heating oil, are lower now than a year ago and consumption is higher. At the same time, most Emerging Economies are growing at a faster rate, and therefore consuming more oil.
The last incident on a long string of refineries this year has been the breakdown of a facility in Kuwait. Refineries are at 95% capacity and with numerous breakdowns due to lack of investment during the last few years. With the natural growth in consumption, it is estimated that the total export capacity of Venezuela needs to be added to the market to keep up with demand, every year. Even if the world economies slow down in 2001, the excess production capacity is just not there. All producers except Saudi, can not increase their production sensibly due to lack of exploration and drilling investment in the last 3 years. It is expected that inflation that includes energy and food will start to depart very noticeably from the so called "CORE" inflation, as it is already showing on the PPI.
"Azteca de Oro"
International Petroleum Expert
21 July 2000