$100 a Barrel Oil, Foreclosures and a Recession on the Way

Dictator Hater
for the Corbett Report

27 November, 2007

$100.00 a barrel crude is just around the corner, as shown on Bloomberg's website here.

What does it mean for us people in the real world? According to this CNN article, not much.

One fear is that higher gas prices will lift the costs to transport all goods, whether by truck, ship or plane - and that manufacturers and retailers will respond by raising prices for consumers.

But economists say that's unlikely.

While costs to business have risen, cost for consumer goods have not posted a corresponding increase, said Drew Matus, a senior economist at Lehman Brothers.

"We haven't seen an impact," said Matus. "It's just not as significant as the shock value suggests."

As for consumer spending, Matus said high gas prices haven't had much of an impact as gasoline generally doesn't make up a huge chunk of people's disposable income.

"I think energy prices would have to be much higher in order for them to have an impact on consumer behavior," he said.

I have to ask this question. Just what planet are these economists from? The disconnect between their "analysis" and what is happening down here on planet Earth, where I happen to live, is a chasm of huge proportion. Perhaps they don't do their own grocery shopping or fuel up their own cars.

The excerpt from the article above suggests that the cost of doing business has virtually no impact on the cost of goods. Eh hem. In some areas of the country, milk is $5.00 a gallon. Orange juice at my local chain grocery store was $4.58 per half gallon two days ago. The price of a loaf of bread (the kind we like to eat and used to afford) is flirting with $4.00 a loaf.

Here's a chart on gasoline prices.

It shows, at the time of this writing a price increase of sixty-nine cents to over one dollar per gallon in the past year depending upon what city you're from. For a real treat, look at the wildly gyrating graph at the bottom of that page.

Or perhaps you remember the good ole days of 2001. This article cites gas prices at a whopping $1.70 per gallon, up 13 percent from the year before, that year being the year 2000.

How can these economists sit there and tell me that a price increase of gasoline from $1.70 to over $3.00 per gallon is not going to affect the price of goods or a normal person's lifestyle? Perhaps they simply start at whatever pricing point they wish in order to minimize the real situation.

Even so, the price of gas has not begun to reflect what I believe it is going to be. Prices at the pump are going to have to catch up to the crude prices sooner or later. Take what you will from these figures, because the economists are not going to tell you what your own common sense will.

've been reading a lot about the housing situation as I am sure the rest of you have. I was a real estate broker for 10 years and I have actually seen a real estate bubble collapse. I had the misfortune to watch this collapse in a microcosm of a U.S. Trust Territory and I'll tell you what I saw. The area in which I lived had two industries. One was real estate fueled by the Asian economy but ruled by U.S. banking laws when it came to the locals procuring loans. The other industry was the Asian tourists who came to the island. Back in the late 1980's the Japanese stock market was roaring, land prices were escalating and interest rates were low.

This was a recipe for disaster because for some reason, when people are riding a tidal wave of prosperity, they never seem to plan for a hard landing. Especially the ones who play the stock market. People were arriving from off-island with suitcases full of cash to buy property on this tiny island and thus, property values skyrocketed so high that the average locals could no longer afford to buy residential homes. This went on for a few years and everyone selling their land at inflated prices were riding high, the real estate people were riding high and so were all of the businesses, especially those that sold 20 year old Scotch and other luxury items.

And then it happened. Saddam invaded Kuwait, the Japanese stock market crashed, interest rates escalated overnight and the Japanese holding property on the island were suddenly scrambling to sell in order to make good on their debts they'd made in Japan. Things were bad, I mean really, really bad. More than one visiting Japanese businessman threw himself out of upper story hotel windows in order to attone for the bad business decisions that had bankrupted the companies they were in charge of in Japan. While this was going on, it was as if someone has suddenly taken a huge vacuum cleaner and sucked all the money out of the island's economy. It was swift and it was brutal. I watched speculators go first, those who had been riding high and had invested in overpriced condominiums and penthouses on the island. Then commerical and industrial zoned properties tanked, after that, residential prices dropped and last, but not least, raw land prices fell into the toilet. The only market that went up were rentals and after awhile, so many people had left the island, even those went through the floor from a saturated market. Properties that rented for $1500.00 per month just a couple of years previously were sitting vacant.

Along with all this went the jobs that were dependent on the real estate industry. Title companies, banks, appraisers, real estate agents and surveyors were suddenly in the doldrums. The chain reaction continued and made ripples through the tourism industry and even made its way into the shops that sold souveniers and those 20 year old bottles of Scotch I mentioned earlier. It took over ten years for this economy to recover and it is nowhere near to this day where it was in its glory. Foreclosures were rampant, speculators went from feast to famine and many people who didn't see this coming lost their homes. I remember paying $20.00 for a watermelon back in 1995, peanut butter was $8.00 for a large jar.

My advice to anyone involved in today's real estate market here in the United States (in any capacity) is to scale down and scale down now, even if you are just a homeowner living in your castle. The only way I managed to survive that crisis was by purchasing a home I could afford to live in, in the event my cushy, well paying brokerage job went by the wayside, which it did. I ditched one of my new cars and rid myself of as much debt and frills as possible. I went from an office of my own to sharing an office with another company and splitting the rent. The copy machine that cost as much as a used car was sold and the lease paid off and traded for one that was affordable. If you are in the industry and cannot bring yourself to step down from riding that high horse, you too, will find yourself sitting in the pits. If misery truly loves company and you insist on trying to sustain an unsustainable lifestyle in the face of a monetary crisis, I would bet that you will have plenty of company.

Prepare for the worst and hope for the best. This is some sage advice for all of us. Stock up on food and other necessities. Most of all, learn to live within your means. Rid yourself of as much debt as quickly as you possibly can. Consider renting out those spare bedrooms and gaining income in that way in order to get out of debt faster. Get rid of extras you don't need and use the money wisely because if what I saw back in the late 1980's and early 1990's happens here, we're all in for a bumpy ride. Many are predicting that it is going to be much worse. I hope they are wrong, but I am not willing to bet my life on it. Are you?