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Market
Comment - The Wealth Effect
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In
our opinion, the biggest economic consequence of the collapse of housing prices
is what economists call “the wealth effect”.
For several years homeowners enjoyed the financial benefit of a housing
bubble. Prices got out of control
on the upside, and like any bubble, were bound to burst.
As the main asset of most Americans has declined precipitously in value
in the past two years folks are beginning to look at a much weaker personal
balance sheets. In many cases homeowners could owe more than their house is
worth. Inevitably this decline in
wealth leads to less consumer spending and ultimately risks a recession.
Therefore, the catalyst for all the economic chaos rests largely with the
rout in housing. Will it get worse?
Is this near a bottom? All good questions but few know the real answer.
We have a feeling that things may get worse for several more months.
The inventory of single-family homes is near record highs in most areas
of the country –even Manhattan! It’s
going to take some time to work down these record inventories before home prices
stabilize. To be sure, this has
been a severe economic blow to the economy and will likely continue to do so for
the foreseeable future. While
personal wealth has been decreasing, inflation has been rearing its ugly head.
Leading the inflationary express in the increase in gasoline prices.
We never thought we would live to see “daily” prices hikes in gas
like we are now experiencing. Some experts predict that gas may reach $10 a
gallon! If that happened social upheaval would likely be the result.
However, we strongly doubt we will get to that level.
At some point, the economic theory of “elasticity” will come into
play and we suspect that will be at a level well below $10 a gallon. Demand will
ultimately slacken and in order to sell the product the price of oil and
gasoline will have to come down. To
be sure, it will come down from these record levels but not before doing
significant longer-term damage to many consumers and thus the economy. While
fuel costs are increasing so has been the basic need of life –food.
Anyone who shops in supermarkets on a regular basis are aware of the high
prices compared to even six-months ago. The rise in prices of the basic needs
of every day life is severely crippling discretionary spending.
Although the economy is not “officially” in a recession it sure feels
like one, even if the media does tend to exaggerate how bad things are.
Indeed, it’s rather remarkable that with all the mentioned negative
factors mentioned the economy is not tanking! So
too for the stock market. The
recent April rally in stock prices has in or view defied the economic outlook
and looks very tenuous and suspect from where we sit.
April was for a welcome change but we are not convinced the rally has any
staying power, and we could well be heading for rough summer. Posted May 10, 2008
The Future of Nuclear Power As record -breaking heat grips the country this summer the issue of the future supply of electricity is of vital concern. It is clear to me that in order to have reliable electric power supplies in the future the United States must embrace more nuclear power plants. In a past life in Wall Street I was an electric utility industry analyst for over ten years. Much of that time was in the mid- 1970’s when nuclear power was riding high as the preferred way to generate power. After it all, it was much cheaper than oil or coal generation and more environmentally friendly. Capital costs were higher but utilities had very little trouble raising money in the corridors of Wall Street. Then came the Three Mile Island incident in 1979 and the enthusiasm for nuclear power in the United States waned, even though there were no victims or environmental impacts. At the time, however, gas and oil prices were falling. When the Chernobyl explosion occurred in the Ukraine in 1986 with its radioactive fallout in Europe, nuclear reactor projects were set aside everywhere in the United States and in other countries. Still nuclear power is an important part of electricity generation in the United States producing about 20% of total U.S. demand for electricity –outranked only by coal, which accounts for about 50%. In 31 states, 103 licensed nuclear reactors are operating at an average load factor of more than 90% an increase of 54 percent since 1980. The high load factor is proof of the nuclear industry’s successful efforts to increase power generation to meet higher demand, though nuclear power capacity has not increased much in the past ten years. Almost all of existing nuclear rectors were built in the 1970’s. However, there are signs that interest in nuclear power is gaining strength. So far, 11 new reactors have been announced, including units by Constellation Energy, Duke Power and Progress Energy. Given that the licensing process takes four to five years, construction could start on these plants by 2010. Today nuclear power is still the most inexpensive way to generate electricity. The kilowatts generated by nuclear power costs 40% less than that of coal and 30% less than that of natural gas. Additionally, the Energy Policy Act passed by Congress in August 2005 lays the groundwork leading to the necessary investment. This bill, called an “energy strategy for the 21st century” by the Bush Administration, was budgeted at $12.3 billion over 10 years to modernize and step up power generation and distribution from domestic energy sources, with special focus on diversifying sources in favor of nuclear power and renewable energies. The Energy Policy Act provides substantial incentives to the nuclear power industry, such as government backed loans for up to 80% of the cost of projects. John Attalienti August 4, 2006
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