• Dear Client: Washington, Oct. 18, 2013

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1100 13th Street NW, Washington, DC 20005 • kiplinger.com • Vol. 90, No. 42
Dear Client:
Washington, Oct. 18, 2013
The shale energy boom is in full swing,
and domestic oil and gas production is soaring.
ENERGY But look beyond today’s prolific fields…
FRONTIERS N.D.’s Bakken, Eagle Ford Shale in Texas
and others responsible for recent big output gains...
To the next round of shale hot spots,
where drillers are starting to explore in earnest.
ECONOMIC FORECASTS
Already heating up: The Gulf Coast states,
especially La. Two big shale formations in the state…
the Brown Dense and the Tuscaloosa Marine…
have drillers eager to boost spending on exploration.
Chevron is pouring resources into another field,
30,000 feet deep, on the coast of the Pelican State.
And finds in the South Central U.S. In Okla.,
where Devon Energy is drilling in the Woodford Shale.
In the Cline Shale in West Texas, where Apache Corp.
is bullish. And in other promising Lone Star plays.
GDP growth
About 2.6% in ’14,
up a bit from second-half ’13
Interest rates
By end ’14, 10-year T-notes at 3.1%;
30-year mortgages, 4.85%
Inflation
2% this year;
in ’14, rising slightly to 2.25%
Unemployment
About 7.5% at year-end;
7.1% by end of ’14
Crude oil
Trading from $90 to $95/bbl.
by year-end
Trade deficit
NEW
Up another 2% in ’14,
driven by rising imports
Elsewhere in North America…big prospects:
The vast untapped shale fields of Canada,
Click here for exclusive, Web-only details
for example. Natural gas output is already surging
of these Kiplinger forecasts
and figures to head higher, thanks to development
of fields ranging across the continent from British Columbia to New Brunswick.
One especially attractive target for drillers: The Liard Basin in upper British Columbia,
especially once gas export facilities on the Pacific coast get the government’s approval
in a few years. Asian markets are eager for the surplus North America now has.
The biggest underdeveloped prize on the continent: Mexico. Though Mexico
is rich in both oil and natural gas, energy output there has been falling in recent years
as output from older fields declines. Plus Pemex, the state-run energy corporation,
lacks the technological know-how to exploit Mexico’s sprawling shale deposits.
Meanwhile, private energy companies are barred from doing business in the country.
Foreign firms will get a crack at Mexico’s vast reserves within a few years.
A proposal by the country’s president to partially privatize the oil and gas industry
will advance by late 2014 or so, after a major campaign to win over skeptical citizens.
U.S. drillers will be well positioned to take part, especially those firms
drilling in the Eagle Ford Shale, which straddles the Texas-Mexico border.
Of course, operating in new places also brings new challenges. Rig crews
will need time to perfect the process of hydraulic fracturing in unfamiliar rock layers.
The output will require pipelines. And working in Mexico will be slow at first.
But those risks are manageable and well worth the potential for profits.
Further down the road...by 2020 or so...the shale boom will spread overseas.
China, Argentina, Australia and Algeria are already sizing up their vast resources.
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page 2
Oct. 18, 2013
BUDGET
REDUX
Bipartisan negotiators won’t reach a budget deal by their Dec. 13 target.
There’s too little time and too many differences to strike a grand bargain,
and wounds from the just-ended shutdown and debt showdown will fester.
Both sides are keen to replace the automatic spending cuts of sequester.
But each party is asking for something that the other side won’t give.
Republicans want to save money by making changes in expensive entitlements…
primarily Medicare and Social Security. Democrats want to raise money instead,
mostly through higher tax rates and reductions of some cherished deductions.
Without a deal, expect another fight over the next short-term spending bill.
One key difference, though: No government shutdown come Jan. 15,
when the current temporary funding resolution expires. And no default on Feb. 7,
the projected date when Congress will need to raise the U.S. debt ceiling again.
House Speaker John Boehner (R-OH) won’t let the battles get that far.
Still, expect some anxious moments as the countdown clock nears zero.
WORLD Has the most recent U.S. flirtation with Treasury default damaged the dollar?
ECONOMY Not much. A downgrade of U.S. debt by a Chinese credit rating agency
spurred a 1% drop in the dollar’s value against the euro and yen. Still, the buck
is about 4% higher than the euro and 12% above the yen than it was on Jan. 1, 2013.
As for talk of “de-Americanizing” the world and de-emphasizing the dollar…
issuing largely from China and echoing similar past calls from Russia and others…
It’s just wishful thinking. The fact is, there is no good alternative to the dollar
as the world’s reserve currency…used as a common denominator in trade and finance.
Without a unified state backing it up, the euro is vulnerable to regional weaknesses.
Two decades of slim Japanese economic growth hasn’t helped the yen’s cause.
China’s renminbi (the currency used in foreign transactions rather than the yuan)
isn’t a viable option as long as Beijing controls its value and restricts capital flows.
Shifting to gold puts big gold producers such as China and Australia in control.
Not much hope for a big economic boost from the rest of the world in 2014.
Global GDP isn’t likely to climb more than 3.5% at best, possibly much less
if headwinds continue to pick up. Recent improvement in Japan’s growth is at risk
from tighter fiscal policies…an increase in the country’s consumption taxes.
France and Germany are on the upswing, but euro zone growth will remain hampered
by the woes of Greece, Portugal and other peripheral members. And the pace of gains
in China is likely to remain closer to the 7%-8% neighborhood than double digits.
U.S.
Plenty of pent-up demand will help support the housing recovery in 2014
ECONOMY and beyond, helping to offset the impact from increasing mortgage rates.
Last year, 13.6% of adults aged 25 to 34 were living at home with their parents…
the highest share in over a decade and two percentage points over the historical norm.
That’s 800,000 young adults who will be in the market to buy or rent their own digs.
Expect more slow seepage than a swift flood, given high student debt levels,
the tough job market and rising mortgage rates. Years…not months…of readjustment.
Just how important is home buying to the U.S. economy? It’s worth trillions...
not just from home sales, but in state and local government revenue, sales of furniture,
appliances, etc., and the spin-off from income earned by construction crews, Realtors
and more. All told…$1.30 to $1.80 in economic activity from every $1 of housing sales.
And some state economies are more dependent than others on real estate.
It accounts for 17% to 19.5% of the economies of Fla., Ariz. and Nev., for example,
compared with only about 12% of all economic activity in Neb., Ky. and W.Va.
Remember, your subscription includes The Kiplinger Letter online
page 3
Oct. 18, 2013
SELLING 2014 promises to be another solid growth year for the advertising business.
With the Winter Olympics, World Cup soccer, a charged midterm election
and the annual bonanza of the Super Bowl, total ad spending is likely to climb by 4%,
to about $178 billion. Of course, not all media will benefit equally from the increase.
Digital ads are gaining ground on TV advertising…long the big kahuna.
A 13% increase next year in spending on online videos, social media promotions,
mobile and other digital advertising will push their share of the pie to over one-fourth
and nearly $48 billion. Mobile ad spending alone will soar by more than 50%,
as advertisers home in on consumers on the go with localized search ads, coupons, etc.
A modest 2% gain for radio ads. And print…declining an additional 2%.
Note how some businesses are using digital recording to boost revenue.
Theme parks, ski resorts, concert promoters and others are going high-tech:
Networks of stationary cameras, roaming photographers, radio frequency ID tags
and antennas enable them to deliver personalized digital mementos to customers.
Colo.-based Vail Resorts, for example, lets skiers easily find videos and photos
of themselves anywhere on the slopes, with info such as speed and distance covered.
Skiers are identified automatically by the RFID tags embedded in their lift tickets.
Firms charge for premium souvenirs, but the big payoff is in promotion
as digital pics are shared on Twitter, Facebook, etc. So they’ll give a lot away.
RFID tags are also helping retailers manage inventory and increase sales.
Tagged merchandise and accompanying software let stores track down items
moved by customers, manage online and in-store inventory and improve placement
and pricing of products. The systems will prompt retailers to relocate or cut the price
of an item gathering dust by conveying how long it’s been since a customer handled it.
Early adopters are seeing up to a 5% jump in sales, and prices of RFID tags
are falling swiftly, now only a tenth of the 2004 price…some as low as a nickel each.
TECH
A potentially transforming technology for retail: Image recognition...
now in its infancy. The Pounce app, making online shopping even easier,
is being tested by Toys“R”Us, Staples, Target and Ace Hardware. Using smart phones,
customers scan a product image in a flyer or catalog and purchase it with two clicks.
Ikea uses Metaio’s augmented reality and image recognition software to let customers
see how a sofa will look in their living rooms. Coming improvements in the technology
mean a consumer will be able to snap a photo of someone’s shoes, for example,
identify them, find where to buy them and complete the transaction on a phone.
For manufacturers: Software that pinpoints the best locations for facilities.
Using artificial intelligence, the programs find and analyze the necessary information,
building virtual supply and logistics chains and spitting out a multitude of site options.
And an explosion of 3-D-printing technology on the horizon: Buildings
created from the ground up on-site, using 3-D printers mounted on cherry pickers
and trucks with robotic arms. 3-D-printed furniture components that come together
by themselves, with a shake of the box, using magnets and cleverly designed joins.
Swarms of printers that collaborate to make big objects. Meanwhile, General Electric
is encouraging small firms to adopt 3-D-printing tools & techniques by lending design
and other software to them. GE figures they’ll eventually buy services and equipment.
Finally, note this straight-out-of-Hollywood medical development:
Neuroengineering to treat mental illnesses, Alzheimer’s, spinal cord damage,
blindness and more. For example, using electricity and electronic chips implanted
in the brain to turn short-term memory into long-term memory. Gene therapies
to make neurons light sensitive so they can be turned on and off with targeted light
to achieve specific results. And manipulating memories to dull traumatic stress.
For instant online access and searchable archives, go to kiplinger.com/start
page 4
Oct. 18, 2013
POLITICS One big problem Vice President Joe Biden will face if he runs for president:
Obama fatigue. He’ll be tied closely to President Obama after eight years
and won’t be able to distance himself from the president the way other candidates can.
Biden also won’t have a long list of accomplishments to point to in 2016.
He’s been largely absent from budget and deficit negotiations between the White House
and lawmakers, and a bitterly divided Congress isn’t likely to push major measures
that he can stake a claim to. So his biggest achievements will be from the first term:
Helping convince Congress to narrowly pass health care and economic bailout bills.
Both are lightning rods for GOP criticism, which will be used against any Democrat.
But Biden, alone among potential presidential candidates, was directly tied to them.
Look for the Supreme Court to continue reshaping campaign finance laws.
Justices will strike down the cap on total donations an individual can make
to all federal candidates in a two-year election cycle. The maximum now: $48,600.
The Court may also wipe out the $74,600 limit on individual contributions to parties
and political action committees. The conservative majority is likely to see the case,
McCutcheon v. Federal Election Commission, as a matter of First Amendment rights.
The Court followed the free speech approach in 2010 in the Citizens United case.
In that, corporation and union PACs were cleared to make unlimited contributions.
THE
Economic sanctions are forcing Iran to rethink its nuclear strategy.
WORLD But don’t expect the U.S. to ratchet down the pressure anytime soon
unless the Tehran government demonstrates a willingness to give up its interest
in making nuclear bombs. Iran’s leaders say it will comply, but...no proof.
As in much of the rest of the Middle East, oil is at the center of the debate.
Sanctions against Iran have caused its oil revenues to plummet since 2011.
Iran still faces some internal hurdles to return to the global mainstream.
Islamic hard-liners remain strongly anti-America. But new President Hassan Rouhani
may be able to test the resolve of Islamist clerics who wield the real power inside Iran.
HEALTH Medicaid enrollment will jump next year as more states expand eligibility
CARE
under Obama’s health care law. An average enrollment increase of 12%
is likely in the District of Columbia and the 24 states taking part in the expansion.
In states that don’t sign up (mostly for political reasons), participation will rise by 5%.
Eventually, most states will opt in. The money is simply too good to pass up.
For three years, the feds will cover 100% of costs for those with incomes up to 138%
of the poverty level. Then, Uncle Sam’s contribution will phase down, to 90% in 2020.
Because of the bungled rollout of online sign-ups for Obamacare...
Plenty of finger-pointing, almost certainly accompanied by a few lost jobs.
Health and Human Services Sec. Kathleen Sebelius will probably keep her job,
but Web developers, IT contractors and managers may get the boot. The foul-ups
might have been enough to prompt a one-year delay of the law, had Republicans
not tied funding for the government to postponing Obamacare. As that played out,
Democrats dug in on the health care law, and the shutdown overshadowed the snafus.
Yours very truly,
Oct. 18, 2013
THE KIPLINGER WASHINGTON EDITORS
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