Research Zeitgeist: Gas, Food, Lodging
Gas, Food, Lodging. These three essentials of American life are the hot topics at Research Recap this week.
While current surging oil prices may be fueled in part by speculation and short-term supply-demand imbalances, longer-term trends offer little hope of a return to the days of cheap and plentiful oil supplies. Even the usually optimistic International Energy Agency now is expected to sharply reduce its oil supply projection, according to the Wall Street Journal.
Consistently high energy prices will only add to the upward pressure on world food prices, which are causing increasing problems, especially in the developing world where they make up a larger part of total income. The Food and Agriculture Organization will publish its latest Food Outlook next week, but a preview already released is not encouraging.
Higher energy and food prices of course will only add to inflationary pressures. You know it has become a hot topic when it becomes the cover story in The Economist. The magazine empahises the danger of inflationary tendencies in emerging economies.
This does not seem to be discouraging PIMCO’s Bill Gross from looking abroad for investment opportunities. Arguing that the US inflation rate is currently understated, Gross believes emerging market countries with economies like Brazil, Russia, India and China are “obvious choices for investment dollars.”
In his June Investment Outlook, Gross details his rationale for an understated US inflation and writes that if correctly calculated (in his view), the resulting higher US inflation rate “would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.”
Always one to put his money where his mouth is, Gross has moved PIMCO heavily into mortgage debt, but steering clear of “subprime garbage.” He sees this as a good bet now that the Federal government is implicitly guaranteeing Fannie Mae and Freddie Mac.
He’ll certainly want to avoid the 2007 vintage of the garbage harvest. Standard & Poor’s says mortgage securities backed by subprime, Alt-A and Prime Jumbo loans from that year have the highest ever default rates for their age.
News from the Office of Federal Housing Enterprise Oversight that house sales prices were down 1.7 percent in the first quarter surely will not help matters. OFHEO said prices fell 3.1 percent from a year earlier, the sharpest year-on-year decline in the index’s 17-year history.
And the debt problem is not limited to mortgages. Our most popular post this week was Moody’s US Credit Card Industry Moving into Uncharted Territory, which detailed rising delinquencies in the credit card sector. Moody’s US Commercial Real Estate Prices Down Sharply in March was also popular.
Otherwise, it was a miserable week for Moody’s, starting with the revelation in the Financial Times that it overvalued some exotic structured finance instruments and ending with the painful irony of being put on CreditWatch by rival S&P. Moody’s new COO Michel Madelain has work cut out to restore the firm’s stock-in-trade, its credibility, already diminished by the subprime meltdown.
Research Recap Quote of the Week:
Eighty-five million barrels of oil a day is all the world can produce and the demand is 87 million. It’s just that simple. – T. Boone Pickens
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