As we head toward the fiscal cliff and the markets from gold to bonds to stocks to oil start to price in a recession, the question becomes, just whose recession is it anyway? Is this going to be a Democratic recession or a Republican recession? Today President Obama may give a bit of a view on this fiscal cliff hanger in what could become a defining moment for the success or failure of his second term. Now some thought I was a little hard on the President and Harry Reid, even after Mr. Reid’s comments about a tax increase mandate, but in reality I was trying to point out the dangers of that rigid position especially when it comes to the implementation of a carbon tax that would drive an already struggling middle class into economic oblivion.
No matter who won the Presidency there would be worries about going over the so-called fiscal cliff. I had previously predicted that if Governor Mitt Romney had won, the stock market would have tanked as it would become clear that the QE bubble world of infinitely low interest rates would be coming to an end. The market would start to price in the return to high interest rates and there is no doubt the markets would feel the withdrawal pains of coming off that sugar high. Yet at the same time business’s that are sitting on record hoards of cash might be scared into making long-term investments as the rates to fund those long term projects would make it more expensive down the road. Potential real estate investors may choose to not wait to buy as the fear that rates will rise and they may miss their opportunity of cheap money. Banks may start to make loans again as they might be able to make more money by lending then playing the spread.
Whether I am right or wrong on that count at this point really does not matter. President Obama is President and it is his responsibility to lead, especially as the warning signs are clear that inaction means another painful recession. Even the non-partisan Congressional Budget Office is warning that failure to compromise on tax hikes and spending cuts would slash a whopping 3% off of the gross domestic product and drive the unemployment rate back up to 9.1%. They said that raising taxes on the so called rich would lower economic output by a small 0.1% but at the same time would wipe out about 200,000 jobs. Wiping out all of the Bush tax cuts would lower GDP output by 1.4% and about 1.8% next year. Wiping out temporary payroll tax cuts and unemployment would cost us 800,000 jobs.
If you look at the automatic spending cuts on defense and non-defense spending, economic output would fall by 0.4% and slash about 400,000. Temporary payroll tax cuts and unemployment benefits expire reduces end-of-2013 output by 0.7% and jobs by 800,000. The CBO says that to reduce the deficit entirely via tax increases would require a 20% rise in government revenues. Now while that may seem impossible, it may not be if the President focuses on energy.
Instead of a carbon tax, why not give the energy industry the chance to transform this economy? We are sitting on the biggest potential economic boom this country may see in decades and we need to move beyond ideology and old out dated thinking. Jack Welch of GE said that fracking can be bigger than the internet boom and he is right. The Technology boom that powered the go-go 90s can power our economy today. Instead of standing in the way of progress let’s allow the energy industries to drill, build pipelines. Let’s export energy and use these new technologies to power our economy forward today! The world envies our technology and our massive supply of oil and natural gas! Let’s build the cars and trucks of the future! Natural gas cars and trucks, lets burn the cleanest burning fossil fuel in the universe! We can’t give into the negative belief that we can’t grow our way out of this recession because YES WE CAN! We have the making of the biggest economic boom in decades if we choose to embrace it.
Take the leashes off and the tax revenue from all of these projects will erase our deficit as long as we hold the line on spending! Sure fix the tax code but don’t use it to divide us because at the end of the day this is not a Democratic or Republican recession, it will be an American recession! This is a recession that will hurt our friends and neighbors. There is a better solution that can end our economic pain. Let’s let the energy industry create the high paying jobs today! Not jobs for 25 years down the road. Let’s not impose punitive taxes on energy and carbon, but incentivize it. This is our best chance to replace high paying jobs that were wiped away after the housing bubble.
Drone On! As reported by Jennifer Booton reporting for Fox Business Network News:
An unarmed, unmanned U.S. drone flying in international airspace was fired on by Iran last week, Pentagon officials confirmed on Thursday, highlighting mounting tensions between the two countries. The move's ultimate impact on oil prices will depend on several factors, analysts said. “When geopolitical tensions increase, prices tend to rebound due to the simple fact that there is close to no spare capacity,” said Olivier Jakob, founder and managing director of Swiss-based Petromatrix.
Oil traders aren’t forecasting much of a bullish rally from the attack, though, saying tightening sanctions on the oil producer that halved the country’s oil exports this year have already been priced into the market, easing supply-side pressures on the West. Oil traded slightly higher on Thursday, settling up 0.77% to $85.09 a barrel. Crude is still off about 22.48% from its 52-week high of $106.77 from February and is down 13.90% year-to-date. While oil prices ticked up about 35 cents following initial headlines of the attack on the drone, the modest buying slowed once the Pentagon confirmed the attack occurred late last week.
Of Thursday’s reaction in the oil markets, Jeff Mower, editor in chief of Platts’ Oilgram price report, said the market “may have just shrugged it off.”
“The truth of the matter is from an oil standpoint, if indeed this were a live story, we might have seen a bigger reaction, but given it happened a few days ago, it’s not a big deal,” said Phil Flynn, a futures account executive for the Price Futures Group and author of The Energy Report.
U.S. and European sanctions on Iran have choked the country’s oil revenue, an effort by the Western nations to pressure the Middle Eastern country to stall uranium enrichment, a key component in building nuclear weapons. Geopolitical tensions, particularly in the Middle East, tend to cause dramatic moves in oil prices amid supply fears.
In 2007, for example, when Iran seized members of Britain’s Royal Navy after claiming they had been in Iran’s territorial waters, oil spiked to a three-month high. However, Flynn said the market is “better supplied than it was back then,” which provides the oil market the flexibility to bounce back or ignore potential supply disruptions. And with oil sanctions on Iran this year already crippling the nation’s exports, western oil consumers have largely replaced Iranian oil, meaning the drone attack may not have as critical impact on the market as it might have a few years ago, Flynn said.
Any direction prices take in reaction to last week’s drone strike will depend on a number of factors, including whether further oil sanctions against Iran are enacted or whether the U.S. responds to the attack militarily or otherwise. “I think [the market] has priced in the loss of Iranian exports to a large degree,” Mower said. “But that’s not to say it can’t have an impact down the road.”
In its announcement Thursday, the Pentagon said Iran fired on an unarmed U.S. drone last week that had been flying over the Arabian Sea in international airspace about 16 nautical miles off the coast of Kuwait. The U.S. said it was never in Iranian airspace and that the drone was conducting “routine surveillance.”
Despite being fired at twice and pursued by two Iranian jets for a short time, the drone was never hit. Pentagon spokesman George Little said the U.S. has protested to the Iranians and when asked how the U.S. could respond, he said there are a wide range of options. When asked whether it should be considered an act of war, though, Little said he didn’t want to get into “legal characterizations.”
The U.S. also unleashed a new round of financial sanctions against Iran on Thursday, the first since President Barack Obama won reelection earlier this week. The AP is reporting that “A prominent Iranian parliament member said Friday that a U.S. drone violated Iran's airspace a week ago, when the Pentagon says it was fired on. The U.S. maintains the pilotless craft was over international waters. The AP is also reporting that a senior Israeli official says Iran has diverted some of its enriched uranium from military to civilian use, thereby slowing down a push for nuclear arms by some eight months. Defense Minister Ehud Barak says this has extended what Israel considers to be a timeframe for Iran to attain an atomic bomb "until the spring or summer."
Gas rationing in New York as the nor’easters mercifully passes. Oil still worried about demand destruction. Worries over Europe and worries about a US recession is weighing on prices. We may see some Friday short covering but the market is still looking very weak. Nat Gas could not sustain a rally after a supportive report. Warm weather and demand destruction could be setting us up for the next leg down.