So, what does all this latest wave of unrest mean for the markets? That depends on a lot of things. If your time horizon is a few days to a couple of weeks, it might mean something. If you’re willing to jump out of tech stocks and into oil stocks on the assumption that oil prices will pop and you’re willing to take the chance that oil prices won’t pop, then maybe it matters to you. But, if you have a reasonable time horizon that runs out over years rather than days all this probably doesn’t matter all that much.
There are little crises like the Libyan insurrection going on all the time. We managed to shake-off the Tamil uprising in Sri Lanka for nearly its entire 30-year run. We’ve blithely ignored the Oaxacan rebels in Mexico for the last dozen or so years. The Maoist guerilla insurgency in Nepal is largely unnoticed. Why is it that Libya matters? The obvious answer is oil. Libya produces roughly 2% of the world’s daily oil output. That means Libya matters, at least a little.
But, how much does it really matter? The world just happens to be awash in oil these days. We can produce almost 5 million barrels per day of oil more than we use. Some of the cheapest oil in the world is not being pumped (in Saudi Arabia) just so the price for everybody else can remain quite high. While production costs in the Athabasca tar sands are roughly $50 a barrel, some Saudi crude can be pumped for less than $10. All the Saudis need to do is flip a couple of switches and open a couple of valves and enough oil can flow to compensate the world for lost Libyan production. We don’t know if the Saudis are willing to open those valves, but they could.
Most major industrial powers today maintain a strategic oil reserve. Actually, the US was rather late to the game when we started ours in the 70s. Our Strategic Petroleum Reserve can meet US import needs for about four months. But, when you consider that the largest importer of oil to the US is Canada, followed by Mexico, we think we can hold out a little longer. The US still produces nearly 40% of our needs domestically. That number has been slipping for years and years but isn’t at zero yet. But, the point remains that we can go a long time before we run out of oil. Maybe a nice little energy crisis will get folks to rethink energy independence?
Libya is not likely to rewrite the book on the world economy. Maybe we get higher oil prices for a month or two? Maybe longer? That is not likely to upset recovery in the developing world. It would likely hurt Europe more than the US, but even there the impact would be muted. This is not a game changer, so stop acting like it is.
Remember when the riots in Greece captured the world’s attention? That was supposed to be the end of the European recovery. The austerity required to meet Europe’s budget crises was supposed to shift that part of the world into low gear. But, what happened was nowhere near as dramatic as that. Cooler heads prevailed and the crisis was averted. Libya may not succumb to cooler heads, but fairly quickly either Gadhafi will exit or the protesters will get tired of getting shot and this will end. There is a reason why this sort of crisis is called a crisis, we can’t keep doing this every day, day after day.
In short, these things come and these things go. More often than not, they just blow-over. Sometimes they stick and we’re forced to adapt to the new reality. But, very seldom does anything like Libya change the very direction of the markets, the economy or civilization itself. What we are seeing is likely just a bunch of old autocrats being replaced by newer autocrats. The only thing now is we don’t know who the new autocrats are quite yet. Stay tuned.
Issue of the Week
Sticking with the Libya thing for a bit more, we are struck by how much of the insurrection in Libya is actually a tribal battle for power. Gadhafi is a member of the Gadhafa (Qadhadfah) tribe. Many of his senior advisors, military and administration figures are also of the same or allied tribes. Only members of these tribes can get into elite military units in the Army, Air Force or Navy. This is as much as anything an inter-tribal conflict.
The tribe that dominates the oil rich south of Libya is the Zuwayya. In the east, the Hasawna and Warfalla tribes were critical to the success of the early insurrection. The Warfalla have a long history of military service in Libya and many Warfalla are among the soldiers in the army. So, surprise the soldiers are loyal to their tribe and not to the government.
As in Iraq, tribal association is a stronger bond among people than national identity. You could argue that there are no Iraqis, only several Kurdish tribes, Arab Sunni tribes and Arab Shia tribes gathered inside borders constructed by some Englishmen and Frenchmen after World War I. Saddam Hussein was a Tikriti as were many of his henchmen. The US military has found that dealing with tribal leaders is an effective way to improve relations in the area. Likely, much the same will be true in Libya.
Much of the world is still a tribal society at heart. Many of the ills in Africa can be blamed for the arbitrary borders again decided by Europeans that separated tribal populations between states or lumped unrelated tribes together in new ‘nations.’ Just because some Belgian got this far before he was stopped by some Frenchman or an Englishman, doesn’t mean that all the peoples in the Congo have to get along or don’t have tighter affiliations with folks on the other side of the border than their new countrymen. The native languages were largely squelched and the European language inserted. But the tribal allegiance lived on.
Tribal allegiance is a powerful force even in the US. We continually identify with groups of people who become our artificial tribes. You’re a Democrat or Republican, a Protestant or a Catholic, of English descent or African, a Steelers fan or a Packers fan. These allegiances color your view of the world and help define right and wrong for us all.
Consumer Confidence hit 3-year highs in February according to a survey by the Conference Board. The level of 70.4 in February is a big jump from 64.8 in January. Most parts of the index rose, but the current conditions were still viewed as weak, just not quite as weak as last month. It was largely optimism about the future that led to the improvement.
Consumer Sentiment (from Reuters and the University of Michigan) likewise hit 3-year highs this month. Of course, 3-year highs are still fairly low numbers overall, but at least they are better than they were. The gain to 77.5 from 74.2 in January was better than expected and fairly broad within the index.
The S&P/Case-Shiller Home Price Index says house prices fell 1% in December. And prices fell for the year 2010 by 2.4%. Only Washington, D.C. and San Diego, California managed to see home prices rise last year overall. Every other city in the 20-city index saw prices fall.
Existing Home Sales rose in January according to the National Association of Realtors. The gain of 2.7% is the fifth rise in six months for home sales. All these numbers are seasonally adjusted, to account for normal seasonal swings in these data series. On an unadjusted basis, January sales fell nearly 30% from December. December was boosted by several prospective tax changes in some localities accelerating sales into December from January. The number of homes sold was 5.36 million at an annual rate.
But, the NAR data is being questioned by many other industry participants because they say the NAR consistently overstates the number of homes sales. The NAR uses data from multiple listing services to compile their data and that data may have been altered in recent years by combinations among multiple listing groups. The Mortgage Bankers Association argues that their data on home mortgage applications doesn’t support the number of home sales the NAR seems to find. Also, filings of deeds in local courthouses do not support the volume of transactions the NAR reports. Obviously, this is pretty boring stuff for most people, but if your career depends on the housing industry or on accurate economic numbers, you should be concerned. The NAR has promised a review of their methodology and adjustment of the data if necessary.
New Home Sales were lower at 284,000 at an annual rate.
US Gross Domestic Product for the 4th quarter was revised downward from the initial guess of 3.2% to ‘only’ 2.8%. Consumption turned out to be lower than originally estimated and government spending at the state and local level also was less than thought. Imports didn’t decline as much as thought, but business spending was higher. All in all, not a huge change from the first estimates a month ago. The weather on the Eastern seaboard last December is probably responsible for most of the correction. As we have mentioned before and will mention again, when the statisticians make that first estimate of GDP, they have a lot of data on the first month of the quarter, some on the second but almost none on the third. What they don’t have, they forecast (make up). As more data is available, they replace guesses with data. There were a lot of guesses about December that proved to be too optimistic. There will be another revision of this data at the end of March to look forward to.
This is one of those weeks that deserves some play by play. Tuesday was a bad day where the US markets had to play catch-up to the rest of the world, which was open on Monday, while we were enjoying our President’s Day Holiday. So, we got two days’ worth of bad news discounted all at once. Wednesday was just money sloshing into oil and out of nearly everything else. Unsurprisingly, the market started getting somewhat disconcerting by Thursday as weakness continued, but a rally late Thursday limited the damage. Friday’s action was counter to all that came before with modest gains in the indexes as everyone sort of came to the realization that Libya wasn’t going to be a big enough deal to disrupt the global recovery.
The major and most of the minor indexes were down for the calendar week, but probably not as badly as you might have guessed. The drops were in the range of 1.5% to 2.0% in the US and similar in most of the rest of the world. The foreign developed markets were the stand-outs with drops of less than 1% on average. They were helped by a somewhat surprising, though modest, drop in the dollar.
It was generally a good week for bonds, especially government bonds. It was a week for risk aversion by and large. But, the drop in high yield bonds wasn’t all that bad, considering. Foreign sovereign debt did pretty well as well.
Real estate securities looked to be off a smidgen. There are conflicting issues here with financial companies generally getting hurt a bit more than the general market but real estate itself seen as something of a safe haven and inflation hedge.
Commodity markets were a focus of a lot of attention. The energy pits were active with wild trading on every bit of news out of Libya. For the weak, prices were higher, but most of the damage was done in a couple of short bursts. Much of the gain in oil was offset by declines in industrial metals and agriculture as higher oil prices are viewed as a drag on world growth. Precious metals did get into the act finally after languishing through most of this crisis and Tunisia/Egypt before.
Have a great week.
Karl Schroeder, RFC, CSA
Investment Advisor Representative
Schroeder Financial Services, Inc.