While the world, very much including Wall Street, remained transfixed last week by the spreading revolutionary fever in the Middle East and North Africa, in the great state of Wisconsin the legislature was putting on an exciting show of its own worth the populace's attention. It was a variation -- we were about to say an adult version, until we remembered that nothing to do with state legislatures anywhere can be characterized as adult -- of hide and seek. The Democrats in the state senate were doing the hiding, and the Republicans the seeking.
At issue was the attempt by the Republicans to strip civil servants of bargaining rights and by the Democrats to keep the measure from coming to a vote by vamoosing to Illinois and other foreign turf to deny their antagonists a quorum. They play rough in Wisconsin, and the Republicans sicced the state troopers on the Dems to "persuade" them to get back to what passes for work by lawmakers, so far without success.
Lending wider interest to the tussle is that governors and legislatures are notorious copycats (to put it kindly, imagination isn't their long suit), and an overwhelming urge to kneecap the public unions has flared in a number of other states. Wisconsin is kind of a preliminary bout to the main event coming up shortly in Washington, as the two sterling parties go for the jugular on whether to shut the federal government down. Now that promises to be, shall we say, interesting, especially if by some chance we wake up Saturday morning to find the whole country's been furloughed.
The conventional wisdom is that it's never going to happen, that the disputatious parties may be silly, but they aren't that silly. Let's hope it's right, but no one ever got rich betting that politicians won't do a dumb thing. And the conventional wisdom's default position is that even if the government is shut down, it won't matter. We vividly remember that in the '90s grown men so testified to Congress and lived to regret it.
Given the still-shaky recovery -- its fugitive nature was underscored by the Commerce Department's revision of last year's fourth-quarter growth to 2.8%, down from its earlier reckoning of 3.2% (quick, spare the statistician but shoot the computer) -- were Uncle Sam forced to close up shop March 5 with the expiration of funding, the effect wouldn't be ugly -- it would be downright disastrous.
Not least of the baleful consequences would be a leap in concern as to our creditworthiness among already uneasy foreign creditors. Mothballing the government undeniably would cleanse the air over Washington, but otherwise the impact is apt to be malign enough to make folks yearn for when all they had to worry about were exploding gas prices.
That just about everyone thinks the very notion of shutting down the government is far-fetched only means that should it come to pass, the shock will be all the more profound. Hey, even the wild bulls on the Street might just possibly pay heed. And if Congress temporarily regains its sanity and votes a short-term (as short as two weeks) stop-gap measure to keep the government operating, it will merely assure a recurrence of the agonizing prospect before the snows melt.
BETTER THE DEVIL YOU KNOW THAN what comes after Gaddafi. That perverse sentiment seemed to be rife among easily spooked traders (or is that redundant?) for a spell on Thursday, as they dumped sizable chunks of their oil and gold positions on rumors -- that, alas, proved to be false -- that Libya's loony leader had been shot to death. The thinking, we suppose, was that so long as Gaddafi was on the loose, the world would remain on edge, as oil prices escalated (they had briefly topped $100 a barrel), and gold lured investors with the promise of a safe haven.
In any case, such fears subsided, thanks to the canny Saudis assuring one and all they'd take the sting out of any shortage created by Libya's woes and, indeed, have been stepping up their production by some 700,000 barrels a day to help fill the gap. Somehow we recall that it was not so very long ago that Saudi officials were talking of the need for $100-a-barrel oil because of the decline in the value of the dollar, but obviously they don't want it to happen when the whole world's watching.
Our own feeling is that gold and oil are a rare species of investments that ought to be bought on dips and, just to show how magnanimous we are, you can put farmland in that treasured category as well. If nothing else, the great rebellion sweeping through the Middle East and Africa shows no sign of burning itself out. Quite the contrary, its spread appears as inexorable as its consequences are unpredictable. But the stress and uncertainty accompanying the uprisings shape up as quite favorable for gold and oil.
As our friends at Barclays Capital point out in a recent commodities research report entitled "Libya's Abyss," that beleaguered nation's production, which they estimate at upward of a million barrels a day, won't be so easy to replace. It's the kind of petroleum known as short-haul light sweet crude, which we gather is highly desirable for, among other things, its relatively low sulfur content. For all practical purposes, Barclays says, Libya is out of the world market, and while tankers already loaded may be able to clear the ports, oil exports will evaporate at worst or be severely restricted at best.
That also means that global crude spare capacity -- which started the year at 4.5 million barrels and has been gradually shrinking anyway, due to strong demand -- could fall significantly under that level with the departure of Libya from the global petro scene. As Barclays puts it, "Libya alone in one swoop would narrow spare capacity by the same degree we expected over the year as a whole due to fundamental developments."
As to where crude prices are going, Barclays reckons they will average $91 per barrel this quarter, $86 for the second quarter, $92 for the third quarter, $97 for the fourth quarter and $106 next year. Our hunch is that Barclays lads and lassies are exercising the usual British restraint, and oil will continue to flirt with $100 a barrel for the rest of the year -- and we wouldn't rule out some kind of a spike in the not-distant future.
Even at current quotes, crude is manifestly not what the doctor ordered for this less-than-robust recovery. Dave Rosenberg, of Gluskin Sheff, figures $100 crude would cut a full percentage point off gross domestic product. And should the price shoot up to, say, $120 a barrel, that would mean another point bite out of GDP.
Did we hear someone out there groan?
THE STOCK MARKET SHOOK OFF its spell of vertigo and dutifully bounced in the final session as investors put aside their jitters and got back to doing what they've grown accustomed to doing -- buying stock. Part of it no doubt was simply a touch of sellers' fatigue and some of it was short covering. Despite their reputation for having fangs and a tail, short sellers act very much like long investors (which these days means holding a stock for at least 20 minutes) and fancy taking profits in advance of a weekend that may bring who knows what kind of news.
Moreover, there were some decent economic reports to bolster investors' confidence. Weekly unemployment claims for one. Although we'd advise against getting too excited about any single week's job performance because they do take strange and unaccountable dives and leaps, depending perhaps on what the compiler has been smoking.
And some of those reports unfortunately lose their shine on further inspection. A case very much in point was Thursday's release by the Commerce Dept. of January's durable goods orders and shipments. Demand for the big-ticket stuff was up a disappointing but not terribly disturbing 2.7%. When you clean your specs and peer closely, however, you discover that all of the increase and a whole lot more came from transportation, which has a natural tendency to swing rather wildly month to month.
The shocker came in the form of orders for capital goods that business needs to expand and modernize, including, of course, all the magical implements that tech provides as well as the big bulky things that rust in the rain. The usual definition of capital goods is things that are destined to last at least three years (which seems like a lifetime these days). Orders for those precious items, once you knock off the wayward defense and transportation orders, dropped a humongous 6.9% and did so across a broad slice of the economy.
As Dave Rosenberg points out, demand for these core capex items tells you a lot about the strength of industry. It was a prominent linchpin of 2010's 15% gain in capital spending, which, in turn, helped mightily to power the recovery such as it was. Last month's drop in orders was the worst since January 2009, when the economy was up to its nostrils in recession.
The consensus estimates for GDP, as Dave points out, "are well north of 3% for the second quarter" and that doesn't quite square with the minus 12.5% "build in core capex orders this quarter." It seems obvious -- except to the cheerful crew making those forecasts -- that absent a brisk rebound in demand, the outlook for capital spending in the second quarter is something less than bright.
