Aug 26th, 03:20 system announcement
by IntLibber Brautigan

Economic Outlook

Energy
Oil prices continue to fall, they are now trading about $114/bbl, as US demand drops below expectations. There is some discussion by US rival Venezuela to propose cutting OPEC quotas. Oil prices were expected to have dropped more, however the present crisis in Georgia, which owns the only trans-asian oil pipeline not controlled by Russia's state-owned Gazprom (one possible reason for Russia's agression), has kept traders unsure of price direction.

It is also coming out that this summers oil bubble was primarily caused by just FOUR oil traders, futures speculators operating as straw men for Sovereign Wealth Funds operated by foreign nations (european and mideastern nations with oil wealth). While technically illegal, regulators have looked the other way, as congress considers a bill that will liberalize oil commodities markets further.

Prior to the turn of the century, only airlines, trucking companies, power companies, railroads, bus companies, and shipping companies, and other similar commodity users were permitted under law to speculate on the oil futures markets. Once congress began permitting pure speculators to trade in oil futures, prices began rising, and traders started promoting junk science theories like Peak Oil to create market scares and artificial scarcity.

At the same time, traders have funded environmentalists who lobbied congress to put US offshore areas off limits to oil drilling, to further drive up scarcity artifically. Currently known reserves in off-limits offshore areas contain enough oil to supply the US with enough oil for 100% oil independence for 60 years. They have also placed oilshale deposits off limits, deposits which hold enough oil here in the US for three centuries of oil consumption at present day levels. Now that President Bush has eliminated a presidential restriction on offshore drilling, and congress is now considering new drilling permits offshore, there is now significant downward pressure on oil prices even if newly drilled sites won't come online for 3-4 years.

At the same time, wind power, solar power, and even tidal power projects are taking advantage of high power prices and low interest rates to finance new renewables installations. Renewable power sources typically have high capital costs but low operating costs, the reverse of fossil fuel sources, and are typically only feasible to build when power costs are high and interest rates are low. This is a good time to invest in such power projects.

With dropping oil prices, disposable income will rise, meaning positive news for SL.

Financial Industry
While the bulk of the financial industry in the US remains on shaky ground, there is a boost from traders naming Lehman Brothers a takeover target, citing its high Net Asset Value, low share price, and financial health. Also, the IPO for VISA had its intended effect and provided JP Morgan and other major banks with sufficient capital to stave off problems of their own, even allowing JP Morgan to take over Bear Stearns with a federally guaranteed finance package. State-run Korea Development Bank is considering an acquisition of Lehman Brothers, while resource stocks remained weak on lower commodity prices. Exporters rose as the U.S. dollar strengthened against the major Asian currencies.

Agriculture
With grain prices remaining near historical highs of $7-10 per bushel, and the dollar remaining relatively weak, US agricultural exports are at historical highs as US farms produce near record crops. The main problem now is finding sufficient storage and shipping capacity by rail and barge to get all the grain to market.

Housing
The foreclosure rate is oft cited, however housing inventory is clearing out nicely and new construction is not taking as hard a hit as expected, but remains very low. Once new housing starts picks up again, probably by late winter, early spring, we should see the economic outlook pick up significantly.

Currency
The US Dollar continues to strengthen and likewise weaken oil prices. Few realize that much of the rise in prices, beyond speculative manipulation, has been due to dropping value of the dollar vs other currencies. Currently, a dollar is trading at 109.6560 yen and is worth $1.4788 versus the euro.

Summary
State Street Global Advisors expects a real U.S. recovery in the spring to early summer of 2009. Accordingly, the firm projects a stock market recovery in the fall or early next year. By that time, the dollar should have regained its ground and oil prices will have slipped on weak global growth. The Dow is most likely to bounce within a range that is bounded by its mid-July lows and mid-March lows. The lackluster phase is likely to continue until further clarity emerges on the macroeconomic front.

While we agree with State Street, we do expect the economy to start to pick up this fall in anticipation of the full recovery by spring. By the time oil prices have slipped below $90/bbl, new US oil capacity should begin coming online at a small rate, and US automobile users will have drastically changed their car usage habits. Expect to see 5-10% of the US market to be in hybrids, electric, or E85 vehicles by end of 2009, with that number continuing to expand. Within 5 years oil prices will have dropped to below $60/bbl for these reasons, as well as as a result of establishment of peace and full recovery of the oil industry in Iraq.