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June 20, 2013

June 20, 2013

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The Monterey Shale — Potential Economic Engine for California

Over the past year, the Monterey Shale has often been in the news, frequently with taglines plugging its revolutionary potential for reviving the California economy.  Most recently, we read an article in the Investor’s Business Daily (“California’s Recovery Just Beneath Surface,” June 3) that drew our attention to the Monterey Shale again.

The Monterey Shale:  Redux of California’s Oil Rush?

Shale.jpg
Source: The Communications Institute

California History: Oil and Gold

Although California is better-known for the Gold Rush that sparked its economic rise in the mid-19th century, it was only a generation or so later that oil became a significant driver of California’s economy.  The first viable oil field was discovered near Los Angeles in 1875.  The Kern River field, discovered in 1899, was producing more oil than the entire state of Texas by 1904.  (This field has to date produced a total of some two billion barrels of oil.)  In short, California’s economic history has been written more in oil than in gold.

Fast forward a century.  California’s conventional onshore and offshore oil production peaked and has been in decline.  But as we’ve commented in many letters, the extensive application of hydraulic fracturing (fracking) and horizontal drilling has allowed many states to revive their production of hydrocarbons and recapture some of the economic growth that accompanied their boom times…

Shale Drives North Dakota’s “Miracle”…

California Shale: Lost Opportunity…

Economic Impacts for California of Monterey Shale Exploitation: “Not Trivial”

California Shale.jpg
Source: The Communications Institute

Environmental Concerns: Allayed By Data…

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Interest Rates Up? It is Still Cheaper to Buy Than to Rent

A recent analysis in Forbes queried whether the recent rise in mortgage rates makes a difference to those deciding whether to rent or buy.  Their verdict?  It’s still much cheaper to buy than to rent, overall.  The analysis leads us to reflect a little on the market volatility occasioned by modest (some would say almost negligible) interest rate increases.

The analysis by Trulia calculated mortgage and rental costs for identical properties, including all applicable costs, taxes, tax deductions, and a 20 percent down-payment.  It came to the conclusion that on a nationwide basis that buying is on average 41 percent cheaper than renting.

Historical Perspective

Of course, local markets vary widely.  In each market there is an interest-rate “tipping point” at which it becomes cheaper to rent than to buy.  Nationally, that point is an interest rate of 10.5 percent — a rate not seen in the past 23 years.  Of course, rates were that high in the 80s, so it’s not impossible that they may be there again eventually, but we aren’t there yet — not by a long shot.  Speaking historically, interest rates are still very low:

Interest Rates: Keeping Some Perspective
Mortg.jpg
Source: FRED Economic Data, St Louis Fed

The markets are skittish about the potential tapering of Fed stimulus.  We just observe that, first, signs suggest that this tapering is not imminent (as we discuss below)…

The “Tipping Point”…

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Fed Tapering

As noted above, the rise in mortgage rates still leaves us in very moderate historical territory; and in addition, inflation is low and falling, at 1 percent.

CPI Inflation:  Bullishly Low, or Too Low?

CPI.jpg
Source: Bureau of Labor Statistics

The PPI (producers’ price index), is decelerating still more…

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Guild Basic Needs IndexTM

The May 2013 inflation data from the U.S. Bureau of Labor Statistics shows price pressures still muted

After declining the previous two months, the Consumer Price Index (CPI) edged higher by 0.1 percent in May over the month of April.  For the previous 12 months, consumer prices measured in the index rose 1.4 percent — a long way from the Federal Reserve’s 2 percent target.  On the plus side, at least the number was positive.

The downward trend in prices in recent months has been a concern of the Federal Reserve as well as some markets.  Perhaps the uptick will portend a pickup in consumer demand.  The Fed sure hopes so as they have reiterated on several occasions.  In fact, after the central bank’s two day meeting this week, Chairman Ben Bernanke confirmed that the Federal Open Market Committee sees the need for more central bank asset purchases.  The markets have been worrying about when the Fed will pare down its 85 billion a month asset buying stimulus program.

Recent unemployment and inflation indicators suggest that we are not yet at the tapering point yet; however, if the central bankers were looking at the cost of basic, essential needs like those tracked in Guild’s Basic Needs Index (GBNI), the tapering in stimulus may be nearer…if not here already.  The past year saw consumer prices rise at a 1.4 percent rate.  Meanwhile, the past year has seen the prices of certain food, clothing, shelter, and energy components rise 10.4 percent.  Ouch!  That takes a bite out of discretionary spending and savings for millions of Americans who are stuck in an environment of stagnant wage growth.

Tapering could already be here if the Fed were focusing on the rising prices for food, clothing, shelter, and energy used for cooking, heating, and transportation.
0513S GBNI.jpg

 


In this week’s Premium Global Market Commentary available to Gold Subscribers, we feature:

  • Re-Leveraging: The Good Kind

    Despite a naïve image of money creation happening when the U.S. Treasury prints physical notes and mints physical coins, most money exists not as currency, but as credit — lent into existence by the process of fractional reserve lending…

 

  • Outflows from Emerging Market Equities

    Michael Harnett of Bank of America/Merrill Lynch notes that emerging market equities and debt have seen sharp outflows in the past weeks:Weekly Outflow From Emerging Market Equities: Third Largest Ever

  • Guild’s Premium Global Market Summary 

    We discuss the markets we see are attractive.  We also discuss gold and have two updates to our recommendation tracker.

Like what you see and want more?  Gold Subscribers have full access to all premium content.  In addition, Gold Subscribers can participate on Guild’s periodic conference calls where participants can ask direct questions to Guild’s portfolio managers and research team.

Please click the button below to learn about the benefits of Gold Subscription, or contact our office at (310) 826-8600.

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