sandcastle in the tide

save those pennies!

2011-01-14T13:28:00.000-08:00

This "wheat ear" was passed to me by a supermarket checker. As one who appreciates old coins I put it in my nice-penny jar to save. Naturally some folks ask me what such treasures are worth. It is worth, as of Jan 14, 2011, 2.89 cents! An instant 189% return not something to scorn. The 2.89 cents is simply the melt value of the coin: the metal it is made of is worth more than its monetary value (all US pennies minted in 1982 or earlier are pure copper and have at least this value). This is because pure copper pennies have lost their seignorage value. In a well run economy that has circulating coinage, the coins should be worth more than the bullion they contain.

There is plenty of discussion these days about the possible role of gold in healthy economies, and but I want to make two points:

It is important to have a circulating coinage. An economy devoid of coins (i.e. an all digital economy, or one based entirely on credit) is simply not healthy. All creditors, of sums from the smallest to the very largest, must have the possibility of demanding settlement in coin or other form of bullion.
Copper, while it has never been called a precious metal, has historically been a very useful monetary metal, albeit for the smallest of denominations.

As a monetary metal, copper is to silver as silver is to gold. All three have their place. Those who cannot afford gold, will transact in silver, those who cannot afford silver will transact in copper.

Obama and Goldman Sachs

2010-05-02T10:43:00.000-07:00

Like most Americans, I was pleased that Goldman Sachs was charged with fraud. One of the very few things that Dems and Republicans can agree on is the perfidy of Wall Street.

But what's really going on? Is the government serious about rooting out corruption in finance? If so, lots more charges (and indictments) need to follow. This humorous post on The Exiled illustrates why that can't, and won't ever happen. Quote:

..the POTUS dropped this bombshell: “The only people who ought to fear the kind of oversight and transparency that we’re proposing are those whose conduct will fail this scrutiny.”

The Big Secret, of course, is that every living creature within a 100-mile radius of Cooper Union would fail “this scrutiny”—or that scrutiny, or any scrutiny, period. Not just in a 100-mile radius, but wherever there are still signs of economic life beating in these 50 United States, the mere whiff of scrutiny would work like nerve gas on what’s left of the economy. Because in the 21st century, fraud is as American as baseball, apple pie and Chevrolet Volts—fraud’s all we got left, Doc. Scare off the fraud with Obama’s “scrutiny,” and the entire pyramid scheme collapses in a heap of smoldering savings accounts.

It is the same-old Too Big To Fail argument that we've heard for two years, and unfortunately accurate. Our economy, multiple economies actually, if you count the the financial economy, the consumer economy, the (horribly compromised) health care economy, whatever, are all ponzi schemes, stacked and nested. It is all both Too Big To Fail and a House Of Cards at the same time. That's a very poor combination, obviously.

To get back to my hypothetical question, no, I don't think the government is serious about cleaning up the Street. They need Wall Street as much or more than anyone. America is is deep shit financially and is making desperate deals with the Federal Reserve (i.e. quantitative easing) to stay afloat. The Federal Reserve is just the biggest of the big fish on wall street. What Obama really fears is the another bank, such as Goldman, will become more powerful than the Fed. Then the government loses all control, loses the ability to say which bank must marry which bank (like a Mob godfather?), or which bank lives and which bank gets eaten, etc. They need Wall Street for all sorts of covert ops:

manipulating commodity prices
keeping the stock market propped up (the Plunge Protection Team)
paying for foreign adventures
playing the benevolent/malevolent god to obstreperous congressional districts
most of all, keeping interest rates low

All these things are very expensive. Some of these tasks are performed by the Fed, some are performed by other banks on the Fed's instruction. For example JP Morgan is thought to be the primary force for control of precious metal prices, and an expensive struggle it is, which they are slowly losing. But it is better to have a corporate bank take the risk of all those naked short silver contracts than the Fed directly. And the Fed needs to control JP Morgan.

Goldman is getting hauled out and whipped because they are too big, too arrogant, too profitable and too powerful. It has nothing to do with fraud.

Obama's just trying to establish dominance.

United States Of Big Banks

2009-12-18T13:41:00.002-08:00

I was depositing a check at my bank, Wells Fargo, and the teller wanted to up-sell me to a de-luxe account of some sort, some kind of special, VIP, for our very favorite customers sort of thing. No doubt. The delux came with no BillPay fees, which is very nice and free money orders, etc. Our conversation went like this:

Peter: the delux carries an automatic monthly transfer to a savings account, right?

Teller: that's right, we set that up right here in the branch.

Peter: $100 a month, or something?

Teller: just $75

Peter: so what's the interest rate for the savings account?

Teller: you get an introductory rate of 3.25% on the first $500 and [blah blah, more figures]

Peter: fascinating. A reverse teaser rate.

Teller: Yes, [what a great deal this, etc]

Peter: and what's the regular interest rate after the one year?

Teller: well it varies you know.

Peter: what is the rate today?

Teller: zero point one-five percent

Peter: [pause.. astonishment..] ZERO POINT ONE-FIVE PERCENT??
[voice goes up a few decibels] that's.. fifteen cents a year.. on a HUNDRED DOLLARS??

Teller: [almost inaudible] that's right

Peter: wow. WOW.
[can't believe it.. does the math again in his head] zero point one-five percent.
[looks at the teller to see if she thinks this is strange. Teller is looking at her feet.. maybe wondering if she's going to have to hit the security button]

Peter: you have Ben Bernanke to thank for that.. [realizes that this is not the place for a debate on macro economics, and quits]

Teller: can I help you with anything else?

Peter: [cheerful again] no not today, thanks!

I just wish I'd thought to point out to her that when Wells Fargo lends me money, they charge around twenty percent interest (i.e. cash advance rate) and did she think that was fair? But why bother?

Quantitative what?

2009-12-15T13:48:00.000-08:00

Quantitative easing is simply the central bank printing money out of nothing. Really just adding it to the accounts of the Federal Reserve. The chart below is hotlinked directly from the St. Louis Fed website. Note that it is still spiking straight up.

And what does it mean? It means inflation. Lots of it. Very likely out-of-control inflation.

Rude FUs from the FDIC and Office of Thrift Supervision

2009-12-13T14:56:00.000-08:00

This pisses me off so much: The Fight For WaMu Documents. It is an email from Sheila Bair, chair of the FDIC, to Jason Cave, also at the FDIC, with the subject line WAMU. It is so sensitive that it cannot be seen by the press. Just what is the FDIC hiding? And the OTS, they were far more direct: they simply told the Puget Sound Business Journal that their FOIA request was "denied in full".

All during the boom years of the 90s and 2000s, did the OTS or FDIC ever stand up to anyone, for either law or principal? I doubt it. But now they are smug and arrogant enough to send shit like this to the Puget Sound Business Journal. Beyond the insolence of our government agencies there is a very serious charge being made here: that government regulators gave WaMu to J.P. Morgan Chase ("Just the assets please, we don't want the liabilities."). They did this to keep JPM solvent. "Kyle Krol", in comments, alleges that JPM committed felonies in the process (click the link and go down). Who knows if there is any truth here, or if this is just a vindictive lawsuit? If our government is permitted to do this sort of concealment we will never know.

When us mere citizens write a check or swipe a debit card the transaction is a matter of record. And if we are indicted for some crime, or if the government just chooses to audit us (even at random), all our financial transactions may be seen. But the financial dealings of major too big to fail banks – they are far too sensitive for public scrutiny. Suppose the bank is charged with wrongdoing? No one will be permitted to see anything. If the government sides with the bank, and even conspired in the crime, what hope would the plaintiff ever have?

Pretty Boy Floyd and Jesse James were thought to be good at robbing banks in their day. They had no idea what could be done if you got the federal government to back you up.

so you own some gold stocks?

2009-12-06T22:30:00.000-08:00

maybe gold stocks will become the next boom. who knows? is gold mining the path to wealth via speculation? I don't know. I just want to make a point about political risk here.

the world is moving, inexorably, to a gold standard. but not exactly willingly, happily, or easily. the disruption this process will entail is hard to predict, or even imagine. the world will more likely be thrown violently onto a gold standard, complete with mercantilist trade principals – enforced with arms. the reason we are moving inexorably to a gold standard is that we are losing our dollar: the key currency that stitches globalized trade together. we are losing it, it is disintegrating, rotting and crumbling. and when it is gone, then fiat currency itself will be gone.

it is not like we will gain a wonderful stable monetary base – mostly we'll just gain poverty. think of what we will be losing: we'll lose our freedom to travel internationally, freedom to buy imported goods, freedom to buy on credit (these things will be virtually banned). if we american are lucky we'll retain our constitution, but not much else. we will slowly re-build our manufacturing base, and try to make the things we need, instead of buying them on credit and fake money.

but think of Mexico (as just one of numerous examples). how will Mexico deal with the loss of their oil revenue? (in case you have not heard: due to depletion Mexico will soon no longer be exporting oil, and they will also have to end domestic subsidies on fuel.) Either the Mexican government will retain control by authoritarian decrees, or the government will all but collapse under assault from drug cartels and their warlords. These are the two possible outcomes from the unrest that will result in Mexico City when the government is broke, and no international aid is available to save them.

to get back to the gold mines.. Mexico has significant mineral wealth and a developed mining industry. a mining industry that goes back many centuries. they are going to keep mining. but who will control that wealth? maybe the Mexican government, through nationalization. maybe a regional warlord will take control of certain mines. it won't be through any fair process, not democratic, not environmentally sound, and not without violence, and not traded freely on a stock exchange. and if anyone thinks the profits from gold mining will leave Mexico and find their way to the brokerage accounts of americans, they're nuts.

what about Australian gold stocks (to use one more typical example)? Australia won't slide into authoritarianism, not fractional violence. but I still don't think the profits, nor the specie, will find its way to America. it will go to China. the Chinese will be putting up the capital, once the United States Federal Reserve Notes disintegrate like so many leaves on the ground in November. the Chinese will own most of what portion of the global mining industry is not nationalized and guarded. gold bars will be shipped to Shanghai vaults, not London, New York or Toronto.

Is silver a precious metal or an industrial commodity?

2009-09-14T12:47:00.000-07:00

This is a chart of the price of silver divided by the CRB commodities index. It shows that Silver is rising strongly compared to the CRB index. All moving averages are in bullish alignment. The 200 week average is steadily climbing. Silver is outperforming the CRB. I think this indicates that silver is regaining its status as precious metal. The MACD has recently crossed over.
This might simply mean that commodities are going to crash, but silver holds its own. That would be the deflationary view. It's a question. In last fall's deflationary collapse, silver fell harder and faster than just about everything. That might change. There is less silver than gold in the world today. The bullish case for silver is stronger than ever.

View of the New Depression

2008-11-08T11:30:00.000-08:00

President-elect Barack Obama is wasting no time addressing America's, and the world's, economic crisis. His administration is naturally being compared to the Roosevelt presidency.

So, can Obama fix things? Unfortunately, he can do almost nothing to fix the economy. He can bring "change". Change is coming no matter what, but a competent and inspiring leader, which Obama seems to be, can at least steer the nation in sensible directions, instead of making it all worse. But one thing he can't do is fix it. BTW, Roosevelt wasn't able to fix much either. I am inclined to believe there is no way to fix it: the world's economies simply need to slowly build up from the ground level.

Many writers are wondering if the nation is facing a recession or a depression. Joe Nocera, in the New York Times, says America is not as bad off as it was when Roosevelt took office, "not even close", he says.

Nocera is deluded. It is far worse this time. Nocera points out that numbers for unemployment are not as bad as they were in 1933. But when Roosevelt took office it had been three terrible years since the famous stock market crash of 1928. We have only had about three months. Nocera says in the Great Depression there were far more bank failures. Joe, two more banks just failed yesterday (Franklin Bank of Texas and Security Pacific of California). But really, the number of banks failing is not the problem. The failure of thousands of local banks in the Great Depression was catastrophic for millions of Americans, but it is simply nowhere near as bad as the linked chain of derivative defaults that characterizes the current global crisis. The losses are in the trillions. This process has only begun. The real problem with Nocera's shallow analysis is that it ignores the fundamental source of America's problem: in 1933 we were self-sufficient in the three key areas:

Energy
Manufacturing
Capital

Sadly, we have none of these left today. We are broke, busted, and up shit creek. Maybe we can scrape together enough cash to fix our railroad infrastructure, as James Kunstler proposes. That would help.

For those who think the American economy is on the mend, I would refer to the weekly chart of the Philadelphia Housing Index. This is not showing any signs of turnaround. It would help to at least get a bounce here. If we break down through the lower trend line, there will be yet another shit-storm of huge defaults, and end-of-the-world panic newscasts. It will probably be big enough to bring about the State of Emergency I predicted in my last post. If we get a bounce, say up to the upper trend line, we'll have one of those delusionary interludes where we'll be sing "Happy Times Are Here Again" and Jim Cramer will start jumping up and down saying we should BUY FINANCIAL STOCKS. Don't fall for it. Not unless the housing index punches up from the upper trend line (not likely), the banking system will continue to suffer catastrophic losses every quarter.

Meanwhile, the international finance system is on the verge of systemic breakdown. I'm not talking about some secret cabal of Swiss bankers. The international finance system is what trades clear in every day for doing ordinary business. The currency of international business happens to the US Treasury Bill. T-bills are very precarious right now - they have been in a year-and-a-half rally, but have broken that rally. If treasuries collapse, we will have a US dollar crisis. This is looking increasingly likely, and is the direct result of the Fed and the Treasury selling all these bills to raise the money to bail out everyone on the whole planet who looks like they might be about to default. This will be the crisis that stops virtually all trade.

State of Emergency Coming

2008-10-10T14:24:00.000-07:00

The recent catastrophic drops in equity markets, worldwide, are the coup de grace of the whole financial debacle. Now we know: no bailout, no stimulus, nor rescue plan will save the American, nor the global economy. We have to take stock and look at what's coming to us. What does it mean for the United States of America? It means that we are a hair's width from a State of Emergency being declared. When this occurs, all banks will close for a time. When they re-open they will be practically unified under a government umbrella, with all deposits in all accounts collateralizing the whole system. There may be a new currency.

The rest of the world is through trying to save themselves by saving our butts. Now foreigners need to save themselves by isolating America. There will be no more foreign capital coming to the USA. Global market contagion has made it imperative that foreign nations protect themselves from the now toxic, sub-prime currency.

Paradoxically, one of the few things that has not plummeted in value in the past two weeks is, oddly enough, the US dollar. Unfortunately, this is not a sign of strength. The dollar has risen because all over the world people have been selling anything denominated in US dollars.

From stocks, to bonds, to real estate, everything is being sold. Selling a treasury bill (denominated in dollars) means buying dollars. And next, whoever used to have a t-bill, and now has dollars, wants to exchange the dollars for something else.. they just don't yet know what to exchange it for. But they will figure it out. Leaders of european nations and asian nations are meeting every day, trying to figure out what sort of common medium of exchange, or mediums, will replace the US dollar. It probably won't be another fiat currency. It will be some sort of gold backed currency. Russia, Germany and some Persian Gulf states have been accumulating state gold reserves in the past years. They may float their own currencies. Hopefully there is still some American gold hoarded in the vaults of Fort Knox. We will need it.

It is not just foreigners who are selling. Americans are also selling their own assets, and hoping to acquire dollars. Its called liquidation. For myself, I'm trying to sell my Mazda 3 (I'm getting no interest whatsoever). I'd rather have the dollars than the Mazda. If I do sell it, I'll try to buy some silver or gold coins with the cash.

Some commentators note that at least oil has come down in price. Actually, this is not a good sign. Do they really think that exporting nations will sell us oil for $85 a barrel? No way. They will sell it to other nations, such as asian nations, or Germany. They will sell it to the nations that have good credit. For America, cheap oil simply foretells shortages.

We will have shortages in almost every commodity soon. Gold is being priced at $850. Can you buy gold at that price? No. Can you buy gold at any price? Probably not - maybe a few ounces, and you will pay a fat premium. This is called a shortage. We will soon have shortages in the commodities we produce, not just the ones we import. I just heard from my stepmother that the fishing boats in Maine have almost all been hauled out of the water and put in storage. The fishermen can't make any money because the price of lobster is so low. A shortage of lobster is the probable result. In hard times, low prices create shortages.

A shortage in gold coins is not going to cripple the US economy - but shortages of food and fuel will. These will occur for much the same reason that shortages in precious metal have developed: the government will try to maintain current prices instead of allowing hyperinflation to occur. This will be the main reason for a state of emergency being declared. Army and national guard units will take over distribution.

Capital will be strictly controlled, and it will be almost impossible to take anything of value out of the country, and certainly not things like precious metals. Naturally there will be a black market. Speculation of all kinds will be outlawed and vilified, but will be essential. Great depression II, here we come.

Robert Reich's solution: honesty

2008-09-19T22:34:00.000-07:00

The crisis on Wall Street right now is less about solvency and about capital than it is about trust. And the real question is, How do you restore trust to a system in which, basically, nobody trusts the numbers that are supplied by big banks on securities?
—Robert Reich, interviewed on Marketplace

That's a great idea, Robert (although America probably is insolvent). We could bring a culture of honesty and fairness to Wall Street. Brilliant. However, since Wall Street has never been honest, nor fair, ever, it might be a difficult idea to implement. But I have an idea for a good way to start: the US government could set an example. The government could instruct the Bureau of Labor Statistics to produce accurate statistics instead of horseshit for a change.

First, how about an honest CPI series, instead of ridiculous fantasy numbers? Even the mainstream media is starting to report the CPI with skepticism and sometimes sarcasm. Then, we could have an honest data series for the gross domestic product! Imagine - numbers that businesses and the American people trust.

Note that none of this would cost billions of dollars. The government could just stop lying.

After that, some pretty simple, common sense finance regulation would avoid all this insane mortgage bond trouble. Twenty percent down payment for a house. No off-balance sheet liabilities for corporations (or the government). Its not that hard.

I realize that admitting we have out of control inflation, negative economic growth, and un-payable debts would send this country into the worst depression ever, but that will happen in any case. We should admit our insolvency, and start building an honest nation.

Walking around Manhattan and seeing.. Lehman Brothers

2008-09-16T04:48:00.000-07:00

My girlfriend and I were spending Monday in New York City after attending a wedding, and the only art museum open was the Modern, so that's where we went. I had heard the news about Lehman Brothers in the morning and was following the latest carnage on Wall Street, but I was mainly trying to enjoy a vacation day. After our art-touring, and looking for the mid-town subway stop we pause to gape at the most garishly lit building I've seen yet in Manhattan. It was a massive block of video display. This thing was zipping and flashing. Then I noticed that there were media crews up and down the block, with all cameras pointing to the flashing video building. I realized I was looking at Lehman Brothers!

I was of course thrilled to be looking at the eye of the financial storm. It turns out that Lehman had been in the World Trade Center, but had moved to mid-town after nine-eleven.

News reports were rather odd. NPR interviewed Gordon Steele, author of Empire Of Wealth, an very good economic history of America. Steele compared the Fed allowing Lehman to fail to the the New York banks letting Bank of the United States fail in the 1929. I don't get it. Bank of the United States was the immigrants bank. Lehman is an investment bank that caters to the ultra-rich. The failure of Bank of the United States did set off a chain reaction; a wave of bank failures across America that launched the real Great Depression, because it had far more impact of peoples lives than the more famous stock market crash. Steele wondered is Lehman's failure would set off a similar chain of events.

Other reports described how upset Lehman's employees were at being made into such a spectacle. Most of those interviewed were angry that the Fed had not bailed out Lehman. Wow. They think we should be sympathetic?

I think what is going on today is that the Fed, and the press, and the public, are realizing that bailing out this bank (i.e. Bear Stearns) or that bank is not going to solve anything. We are facing a systemic crisis. The Fed is dealing with this by exchanging credit for just about anything at its many discount windows and TAF facilities. That sure sounds like monetization to me. But it is doing this for the few bank it chooses to save. Bank of America and J.P. Morgan seem to be on the A list. Merrill Lynch and WaMu are on the shit list.

So, what next for the financial crisis? The failure of Washington Mutual is only a few days away, if things keep going at this pace. And, after the elections, we'll have accelerating inflation, probably hyper inflation.

By the way, this financial crisis affects our ability to innovate our way out of the energy crisis. We no longer have an investment banking industry to supply capital to American industry on favorable terms. There is going to be a wave of innovation for alternative energy? Which of the almost-dead banks will finance this project? European banks will prefer to finance Euro companies like Airbus and Siemens over General Electric.

Those bonds we just guaranteed, issued by Fannie and Freddy? We will have to keep making those coupon payments even when the homes they represent are no longer generating income, because the occupants have left. More monetization. Our hapless government will monetize everything they can until our dollars are well and truly worthless.

Fannie and Freddie, ad nauseum

2008-09-09T07:52:00.000-07:00

So, the goverment has taken over operation of the America's two giant, government sponsored mortgage brokers, Fannie Mae and Freddie Mac. News reports say ominously that the bailout "could cost taxpayers tens of billions of dollars".

Tens of billions? Who are they kidding? Fannie and Freddie's liabilities were in the trillions (btw, a trillion is a thousand billions). At the rate that American mortgages are defaulting, tens of billions are not going to fix anything. It's hundreds of billions if we're lucky, probably well over a trillion dollars that the government will have to pay. Remember that Fannie Mae was notoriously resistant to audits, and the SEC kept letting them postpone their statements? No one knows the true mass of the black hole at the center of the mortgage galaxy.

Supposedly the holders of GSE debt (collateralized debt obligations, mortgage backed securities, etc) are relieved that the US Treasury will guarantee the monthly interest payments on this debt. Not to worry, the freshly printed notes will keep arriving in the mailbox on schedule.. but something is different here. Think of what those bonds used to represent. All those people going to their jobs, bringing in paychecks, making mortgage payments to banks.. that was a lot of economic activity. That was the process of wealth creation. Now that those homes have foreclosed (not all of them of course, but a lot of them) and mortgages defaulted, the treasury will simple write out a check to cover the mortgage - even though the people who originally borrowed the money no longer even own the home! What economic activity does that represent? Not a lot. No equity is being accumulated, no wealth is created, or value added. The government simply prints the money. The government could try to cover the cost with increased taxes, but that would only suppress economic activity even more (not to mention cause riots). These bailouts are simply the next stepping stone to hyper-inflation.

In the end, who owns all those homes? Bond fund PIMCO does, and the government of China, which are both huge holders of Fannie and Freddie debt. These are the owners of American homes, along with many others. And if those homes go into foreclosure, the mortgages will still be paid by the USA. In soon-to-be-worthless American dollars.

The Terrible Silver Plunge

2008-08-30T18:59:00.000-07:00

For all the people like me, who believe silver and gold are real shit, as opposed to fiat currency, the recent plunge in the futures price of silver and gold, was a crime against humanity.. well not really. But this is a prevailing view of many good and smart precious metals analysts. Heck, I don't see it. I think the major banks and nations that are aligned with the U.S. dollar have a very strong interest in not seeing the precious metals soar in price. So, they try to manage the price down. No conspiracy needed other than the usual corrupt shenanigans on Wall Street. Is anything new here?

Silver is still within it's recent uptrend, and may in fact be a spectacular bargain right now.

Silver was driven down very hard and fast by two New York investment banks. Almost certainly JP Morgan was one of them. Shorting silver is one of their lines of business. They probably had help from a variety of self interested parties: central banks, hedge funds. This is how hot commodities go: up and down. However there are repercussions to such savage price manipulation. Silver miners will find it impossible to continue operating. If not forced to shut down, because they'd be running at a loss, they might chooses to inventory their production. Artificially suppressed prices are a guaranteed way to create shortages, and shortages can then persist for some time. Even the arrogant JP Morgan, flush with their vanquishment and consumption of Bear Strearns, knows that they cannot control silver for long. Instead they will reverse their position and ride the precious metals upward, as the dollar renews its own fall into oblivion. If Bernanke is thinking the New York investment bankers are his friend this month for helping drive down commodities and prop up the dollar, he is crazy. Those guys are both ruthless and desperate.

War with Iran? I don't believe it.

2008-07-18T11:26:00.000-07:00

The press seems to assume war with Iran is more and more certain. At least the western press. My father, who travels widely, tells me that virtually all Israelis now believe war with Iran is now inevitable. The prevailing assumptions are outlined in this gloomy op-ed for the New York Times:

Israel will almost surely attack Iran’s nuclear sites in the next four to seven months — and the leaders in Washington and even Tehran should hope that the attack will be successful enough to cause at least a significant delay in the Iranian production schedule, if not complete destruction, of that country’s nuclear program. Because if the attack fails, the Middle East will almost certainly face a nuclear war — either through a subsequent pre-emptive Israeli nuclear strike or a nuclear exchange shortly after Iran gets the bomb.
—Benny Morris

I guess this puts me in the optimist camp for a change. I think Morris is missing something (maybe everything would be more accurate). Israel can not hope to achieve anything by launching a unilateral war against Iran. This is because Iran is now backed by both China and Russia (and, discretely, by Japan). China and Japan depend on Iran for energy supplies. Russia is building much of Iran's new infrastructure, including military, and has many billions of rubles worth of business deals there. Iran is to Russia as Iraq is to America: Russia is fortifying Iran to secure their oil and gas supplies, much as America installed massive military bases in Iraq to secure their oil and gas. Russia has supplied Iran with Sunburn cruise missiles, which are a generation more advanced than US and Israeli cruise missiles, giving them tactical superiority. They are capable of evasive maneuvers, making them hard to defend against. These missile installations look down on the straits of Hormuz, bottleneck to the Persian Gulf oil shipments.

Of course, Iran can't win on the basis of better missiles. Over all, the Israeli and American military is far superior to Iran's. The real issue is not tactical, but strategic. Israel is backed by the USA and England, and Iran is backed by Russia and China. If a conflict starts, unless it turns into a short and quick victory for one side (unlikely), the side that will prevail will be the side with access to the most energy and capital. I'm not saying that Russia or China would attack the USA or England. Rather that those powers would employ geopolitical leverage to prevent Israel from destroying Iran, and vital Russian interests there, i.e. the oil and gas fields.

The USA and England are both on the brink of outright insolvency, and the USA is also dependent on imported energy. They are in no position to back Israel in a war. Wars are insanely expensive. England is now a net importer of energy, and their domestic supplies are in rapid depletion. Israel purchases its oil imports on the London and Russian markets. They depend on American and UK lines of credit.

Russia is not only self sufficient in energy, but can, and has demonstrated its willingness, to cut off energy from its export markets. China can do the same with capital, by simply selling part of its war chest of US Treasury bonds. China and Russia's superiority is so overwhelming that they can prevent a war from happening.

And that, I believe, is optimistic. If Iran had the bomb, I don't think Iran would nuke Israel and assume a retaliatory strike. In fact I think it is astonishing that Israel is threatening exactly that. Don't tell me that Iran is more crazy than Israel. They are both crazy. I think saner heads, i.e. Russian and Chinese, will prevail.

When push come to shove among bankers

2008-06-30T13:18:00.000-07:00

Since it is increasingly clear, reading between the lines of the business press, that there are going to be bank runs in America and other western nations, it seems prudent to wonder just how and they will occur. Bernanke himself said in February that

"There probably will be some bank failures," he said, though they are likely to be among smaller regional banks that are particularly exposed to falling property markets.

So, Bernanke expects smaller banks to fail? Aren't some of the largest investment banks heavily exposed to mortgage bond losses? I think he is suggesting some consolidation will be happening. What might occur is larger banks preying on smaller banks in cannibalistic fashion. If all banks are finding it hard to make any money and can't borrow, the larger ones, especially those with access to the Fed's "discount window" and "term auction facility", could take over pretty much any bank they want. They will of course choose the most solvent ones, which have capital on deposit. They will use that money to pay off their bad loans! Any bad loans on the consumed bank's books will not be absorbed, rather it will be disposed of by being passed off to "garbage can" banks. Jim Willie has written extensively about how JP Morgan functions as the Fed's depository of debt that must never see the light of day

Continuing in this extrapolating manner, of positing free ranging thought experiments, I'll point out another thing. This process might continue up the food chain. The big New York banks and investment houses have always assumed that the Fed has their back and wouldn't let anything truly bad happen to them. Such assumptions are true to a point. The Fed is just one more bank, albeit the biggest. The Fed is having problems of it's own. It has blown almost its whole stash of capital trying to stabilize the credit crisis, and it has failed. It can neither raise nor lower interest rates. It can only create more "dollars", of uncertain worth, but they hemorrhage out of the financial system faster than the Fed can create them. I don't think Wall Street can be too confident that the Fed has their back for ever. At some point, after much bank-failing and insolvencies have come to light, and when the Citibanks and Goldman Sachs are still struggling to survive, they might realize that the Fed is now looking at them with a hungry eye, and inventorying their balance sheets for morsels.

OK, one more thing, on banks. Suppose you are a bank with a lot of unsalvageable mortgage debt. You have no morsels of good loans, and little capital to attract predators (i.e. investors). There is no market for your shit, and you know, deep in your heart, that there never will be, and you can't raise capital from any friendly Saudi Princes. Bankruptcy is inevitable. About the only thing you can do is control the timing. Maybe you can choose a favorable moment to go out? A good time might be when a lot of other banks go down. Or when there is an international crisis. Perhaps a currency crisis! Then you will be less exposed to liability. You might even get to claim a force majeure. Corporations always think of their liability first. Will they consider their depositors in this calculus? No way. Only liability.

Schumer tells the Saudis.. something he'll apologize for

2008-04-27T09:49:00.000-07:00

Senator Charles Schumer is trying to threaten OPEC, and Saudi Arabia in particular, to get them to sell America cheaper oil.

“The Saudis have to understand this is a two-way street. We provide them weapons, our troops provide them protection, and then they rake us over the coals when it comes to oil.”— Schumer

Wow. Schumer is threatening the Arabian oil producers. The whole thing about protecting them with our weapons and troops sounds just like a mafia shakedown, with the thing about our troops being already there. Amazing. Doesn't he know that most Saudis hate the fact that US military “protects” them? Does it occur to him that Saudi Arabia could trade American protection for Chinese and Russian protection?

Doesn't he know who recently bailed out America's investment banking system? Among the participants of Citicorp's private offering of convertible preferred securities are the Kuwait Investment Authority, and His Royal Highness Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud (see Citi's own press release). Mr. Al-Waleed bin Talal is a member of the Saudi royal family, and one of the world's most successful investors.

The senator from New York, of all people, should know what's going on on wall street. He should know who now controls the huge money center banks. The large investment banks' recent preferred stock offerings were no ordinary stock offerings. These were last ditch efforts to re-capitalize America's banking infrastructure. If these offerings failed there would have been a global financial collapse. So, know that the rescue money from the Arabs did not come without conditions, far on top of the 7% coupon the preferred shares pay. The first condition would be “we control the oil now”.

An article that expands on Schumer's assumption that America can still prevail as a superpower, and gives a somewhat more logical and reasoned framework, was published last week by Chile based market analyst Clive Maund: Powerful Bullmarket In Us Stocks Looms As The Us Prepares For Global Hegemony.... Maund basically says that America now has control of Iraqi oil (because of it's permanent military installations), and, in addition, will soon secure Iran:

“The oil reserves contained within Iraq are gigantic, and thus its acquisition was a major economic and security leap forward for the United States. In addition its central position within the region and the earlier acquisition of Afghanistan make the eventual appropriation of oil-rich Iran an almost foregone conclusion... At present the US is only militarily the greatest power on earth, but in a few years it looks set to assume comprehensive hegemony of the planet, as the massive oil revenues from the spoils of the Mid-East campaigns flow in and correct the careening deficits. China will then comply with US demands or the oil tap will be swiveled in the off direction. Russia, currently blessed by an abundant supply of oil and other natural resources, should do well, but will be surrounded and eventually forced into compliance as its resources dwindle and it becomes increasingly isolated. Britain, as the 1st officer of the US in its wars of acquisition, will enjoy a privileged place at the table in an increasingly resource starved world. Israel will look on with quiet satisfaction at all of this.”

This is a fascinating thesis, and one that I disagree with. America had global hegemony. That ended last year when it became apparent that the USA is essentially insolvent. We simply don't have the time to get out of this: a domestic shitstorm of housing collapse, energy shortage and capital crises are slamming us concurrently. Far from expanding our influence in the Persian Gulf, I think we'll be forced to withdraw. Jim Willie has made a prediction on how the showdown would occur: a demonstration of Iranian firepower via a Russian Sunburn cruise missile.

“The Iran wild card cannot be dismissed. A casual observer might believe the United States Military eagerly desires an incident, even with loss of US soldier lives, provided a cause for war is achieved with Iran, for some greater good not easily understood. So far Tehran has not bitten the bait. In the wings is Russia, quietly in control of European energy supply and eyeing its odd bedfellows among the ruling mullahs. Hidden in the hills and along the shore of the Persian Gulf are oodles of Sunburn missiles, supplied by Russia, installed by Iran, aimed at US warships. The Sunburn is one generation ahead of the Tomahawk Cruise missile in the US arsenal, capable of evasive maneuvers. ”

A sunk aircraft carrier would be a convincing demonstration of power. Naturally such a blow would not go unanswered. Iran would suffer some terrible attack with probably far more loss of life. But the American generals know, as do the Iranian, Russian, and Chinese generals, that America can not prevail. With a depleted military, and without the capital to re-fit and re-build, America can no longer use its military to seize the remaining great oil prizes. Weapons and ideology can start wars, but only fuel and capital can win them.

Fortunately it need not come to warfare. The Chinese could use discreet diplomatic and financial threats to steer us away from the path of global hegemony, even though that is America's natural default stance. We'll just have to spend the money on something boring, like building public transportation. We should mention it to Schumer one of these days. And next time New York needs a little cash he might be saying “sorry!” to His Royal Highness Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud.

Lessons of the Russian Ponzi scheme

2008-04-16T13:36:00.000-07:00

This is how Wikipedia describes the Russian financial crisis of 1998:

“Prior to the culmination of the economic crisis, the GKO bonds (Russian treasury bonds) issuance policy was similar to a pyramid, or Ponzi scheme”.

A Ponzi scheme! How America gloated in 1998 at the victorious end of the cold war. We were flush with pride over the beautiful new internet, and the stock market was soaring. But America, having gone a little overboard on internet frenzy, and hoping to pull off something bigger and better, soon built the most spectacular Ponzi scheme the world had ever seen: the housing and mortgage bond Ponzi. A Ponzi to end all Ponzis.

The thing that finally drove Russia into insolvency was a peculiar problem: oil was selling too cheap. It was essential to government revenues. Now people want Russia to increase oil production for the convenience of American drivers. If Russia (or the Arabian nations) increased production, the price of oil will go down. Why would they do that? Earth to America: nobody owes you any favors. It is America that owes.

A few weeks ago I wrote that when the treasury bill market finally softens, it will be “game over” for the Fed. A strong treasury market is the only thing that is maintaining the illusion of American solvency right now. I was thinking the treasury might start to turn over in November or December (08). But almost as soon as I wrote it, the treasury chart started to look a little softer:

Well a little softness in the very strong treasury is not going to crash the dollar — yet. But what would happen if it decisively broke down out of its up-trending channel? Suppose it went into a secular bear trend, chasing the dollar to the bottom? There would be a stampede out of treasuries, that's what. We'd blame the Chinese, naturally. “Economic Warfare”, we'd shout (although American hedge funds would be selling too). The Persian Gulf states would finally give up on us. They would try to separate their economies from ours. The only question is what sellers of treasuries would buy? Euros? Rubles? Gold? All three, probably.

Don't forget that the yield on a bond moves inversely to the price. A falling price makes the yield on a bond rise. And how would an insolvent USA pay the increasing interest on its debt? Simple: not for very long. The point will come, maybe within a year, when America defaults on its debt. Just as Russia did in 1998, as a result of its own top heavy financial system, America will default. That will be the final, ignominious end of a spectacularly successful era of American history, and it's sudden collapse. Maybe it will also be a beginning? I hope so.

And now for copper's turn

2008-04-13T09:32:00.000-07:00

I don't know if other people find commodity prices as fascinating as I do, but that's why I blog after all. This chart of copper is very interesting:
Copper seems to be trying to break out to the upside. Now, when the US economy is just entering recession? There are three explanations that come to mind:

The United States' economy is no longer the world's economy. The four largest growing economies are the BRIC nations: Brazil, Russia, India and China. They accounted for 40% of global growth in 2007, and they don't need America for much these days. BRIC nation exports to the US have become relatively small portions of their economies. Brazil only 3%, Russia only 1%, India only 4%, and China only 8%. 95% of Chinese economic growth came from internal domestic demand, as wealth has grown from actual work in factories (source: Hat Trick Letter).
Copper smells hyper inflation coming. Copper is not be a precious metal, but it is priced in dollars. If you need copper to do your job or produce something, you might want to stock up. The problem that all global commodity markets are priced in dollars. Does anyone really know what the dollar is worth today (and what it will be worth next month)? And if it is hard to value the dollar, how would you ever be able to correctly price copper?
Copper production might have peaked. This is part of the “Peak Everything” theory. I don't know if this is true, actually. Copper was predicted by some to peak in 08, but the latest numbers don't bear that out, so we'll see. I still think all commodity production is ultimately linked to the availability of energy.

Greenspan begs and pleads

2008-04-12T10:04:00.000-07:00

Is there a decent way to get Alan Greenspan to shut up? The guy is out there, trying to defend his reputation, sounding increasingly desperate, pleading. A recent Financial Times editorial by Greenspan is simply embarassing: The Fed is blameless on the property bubble.

Greenspan asserts repeatedly that stronger banking regulation and oversight would not have prevented a property bubble, that it is not his fault, and that he is surprised at how bad things have become so fast, and that no Fed policy would have prevented it. Here are some pullquotes:

“Bank loan officers, in my experience, know far more about the risks and workings of their counterparties than do bank regulators.”

“Aside from far greater efforts to ferret out fraud (a long-time concern of mine), would a material tightening of regulation improve financial performance?”

What did Greenspan ever do to ‘ferret out fraud’? His whole carrer he was enthralled with innovation and productivity. He never saw any financial fraud of any kind.

“The core of the subprime problem lies with the misjudgments of the investment community.”

Not my fault, not my fault!

“I have been surprised by the fierceness of investors in retrenching from risk since August.”

Alan, you're not needed any longer. Just shut up and try not to do any more damage. You are a Knight of the British Empire, you are rich. Go away and save your dignity. You have, all your life, stood for what your believed and you prevailed. Few can say as much. Now history will provide your reputation, not squirming editorials.

what do brokerages really do with your money?

2008-04-09T18:37:00.000-07:00

We will never know the whole story of the Bear Stearns fire-sale to Morgan Stanley. There is not a lot of transparency in these things. But I have a different perspective. I think Bear Stearns was no bailout. It was a cover up.

Some indication of what might have happened if Bear had been allowed to fail was given last week when Australian brokerage Opes Prime went bankrupt. Opes Prime's laundry is seeing the light of day.

What was Opes Prime doing that resulted in their bankrupcy? It seems that some of their best customers, either hedge funds or “high net worth individuals”, were getting in trouble with their leveraged positions. They were getting shredded. Normally this would result in a simple margin call, the fund would liquidate its losing position and settle up. Things would be fine. But there might be a problem if the client's loss was very large. The worst thing that could happen is that the client would declare bankruptcy and not pay.

This is a problem because of the way modern brokerages work. All investments in brokerages these days are held in street name. None are registered to the account holder. The brokerage is the real owner of the investment. This is true for shares, contracts, derivatives, bonds, everything. This is what allows quick discount trading. The broker takes advantage of the situation to keep the securities on their books as assets. All the account holder has is a claim on those assets. On the other hand, every asset is also a liability. Just in the way a bank can be “too big to fail” for the Fed, a customer can be too big to fail for a brokerage. A large and heavily leveraged investor can take down a brokerage. If the client goes bankrupt, its liabilities become the brokerage's liabilities.

So what happened to Opes' customers? They lost everything. Not just the ones with losing positions, but any customer with a margin loan of any size, even if they were well in the black. This is because Opes pledged clients' shares as collateral for capital loans from another bank. They needed cash to keep their biggest clients solvent.

Was Opes the only brokerage in this age of widespread greed and fraud to play fast and loose with its customer's money? And, even more importantly, how would we ever know? Wall street is one of those magical self-regulating industries that needs only token oversight. Do you think the SEC cares about you or your account? I think you should assume your brokerage has pledged your shares and mutual funds as collateral for it's own needs. There is a prevalent attitude on wall street that anything goes as long as it makes money and doesn't show up in the news. But bad news is now coming out daily.

You are hanging on the end of a chain that has a series of weak links. It doesn't matter if you have a large account, small account, IRA account, mutual fund, margin or cash, or whatever. It is all registered in street name, and you are last to get paid if things go badly. If any one of various counter-parties to your brokerages' own positions defaults, your brokerage can be wiped out very fast. Or if one or more big clients turns turtle, either funds or individuals, your chain breaks. Your account can go from anything to zero overnight, not because your stocks went down but because you no longer own your shares. All you can do is take them to court. (who do your think will have the more effective legal team?) Sure you might have a strong case and a good claim. But just because someone else commited a crime, and you didn't, doesn't mean you will get your money back. In the end, if your brokerage goes down, you will be lucky to see pennies for dollars.

the price of gasoline

2008-04-05T11:38:00.000-07:00

This is a weekly chart of wholesale gasoline. Gas is currently at $2.75 a gallon (lower than the retail price by about a dollar).

Gasoline is painting itself into a corner. A quickly approaching point will cause the price to break out of this triangle. A wedge like this predicts a dramatic change. It is unlikely to hold the current price. And when it breaks out it will either go up or down. Given the scale of the chart (rather long term) it could move quite far.

This looks like a bearish rising wedge, meaning the price should break downwards, and send retail gas down well below $3.00, maybe to $2.50. That would no doubt give much needed relief to recession-strapped Americans, truckers, taxi drivers, and the whole American economy in general. But this wedge can also break upwards. Gasoline could spike to $5.00. This would be the devastating blow that crushes all hope of any quick recovery from the current recession. Even mainstream economists would start uttering the anathematic word hyper-inflation.

Maybe the truckers want to strike?

2008-03-24T15:23:00.000-07:00

There are rumors of a truckers' strike in the USA. Prominent blogger Mish writes a condescending post telling truckers to stop asking for hand outs because no one owes them a living. Well I think any working person who thinks they can improve their situation by the somewhat risky strategy of striking should go for it. Anyone who thinks they should take it on the chin for the good of Team America is crazy. But if the truckers think they can prevail in a strike they are also crazy. The economy is slowing, and transportation, especially hauling, will slow down dramatically. We have way too much trucking capacity. We need to, and will be, switching to rail and barge for everything that we can ship, except for the last few miles of delivery. BTW, cab drivers are facing similar problems:

This cab driver is so frustrated with King County (Seattle) that he is angrily calling for a strike. The strike never happened. But I think those guys have every right to do so.

A new conundrum: why would Bernanke destroy the dollar?

2008-03-15T10:38:00.000-07:00

The breathtaking speed and force of the US dollar's ongoing disintegration amazes me, even though I saw it coming years ago. But there is one thing I got utterly wrong. I wrote a post in June, 2006, in which I postulated that the Fed, then led by newly appointed Ben Bernanke, would sacrifice the equity markets in an attempt to save the dollar. I thought they'd put up more of a fight, and that the dollar would crumble over the span of several years, not the nine months since the credit crisis started last summer. I concluded my analysis with this thought:

In the end the Fed will have to try defend the dollar to support the all important treasury bond market. This is what keeps the government solvent. And if things play out this way, I wonder how how much independance our Federal Reserve will really have anyway. I wonder if China's central bank Governor Zhou Xiaochuan, and Russian central bank chairman Sergei Ignatiev are now discrete and unofficial members of the Federal Reserve, and if they will be the ones who really set monetary policy.

Clearly, things have gone differently. In the first place, the Fed has no need to defend the treasury bond market right now. With all other kinds of fixed income paper looking like poison (i.e. toxic waste CDOs, etc), the only bond that has any attraction is the T-bill. That single bright spot in the Fed's universe will not last long. Next year, or this fall, when the T-bond market turns over, then the Fed will truly be out of options. Game over.

Most amazingly, the Fed has not made the slightest effort to save the dollar as it dropped like a stone. The dollar has fallen nearly 22% since December 2005, and is currently enduring an unprecedented and very possibly ruinous breakdown.

But instead of fighting to save the dollar, the Fed is fighting with all they've got to save wall street, and it's bond and stock markets.

The dollar's problem, denied against all reason by Bernanke, is inflation. We are clearly, indisputably, in double digit inflation right now. That is consumer price inflation. And cost inflation, felt by businesses, is rising very fast, with the price of oil. The United States of America is heading down the path of the Weimar Republic, if not Zimbabwe. Could we launch into hyper-inflation any faster? I don't think so. The Fed is desperately trying to prop up real estate prices, and monetizing the bond market. They are allowing the banks not to admit their insolvency. The Fed is spraying cash at the credit problem through high pressure hoses, but the money is going directly into commodities, not into the frozen bond markets.

Are the stock and bond markets really more important than the dollar? There has never been a worldwide currency collapse, so it is hard to predict the consequences. But there have been many stock market crashes and it seems that they are survivable. Ultimately, the dollar is far more important than the stock market. It is the uber-stock, the shares in the nation itself. A nation's currency represents citizens' belief in their country. It is significant that our bills have our founding fathers' portraits. And why would the Fed destroy the only thing that they have? Their only reason for existence is to regulate dollars. If the dollar is worthless and irrelevant, so is the Fed itself.

Jim Puplava has a theory that the Fed will succeed in re-inflating markets, at enormous cost, but that will only be a very short term solution. He calls it his oreo theory:

And the best way to describe what we see happening this year – and I was trying to think of an analogy, and here it is: An Oreo cookie. Dark on the outside and a creamy filling in the inside. And what I mean by that is the first quarter is we're going to see a lot of volatility, we're going to see a lot of roughness in the market, kind of what we're seeing right now with the major average is down anywhere from 3 to 5%. We may see a 10% to 15% correction in the markets. And then we're going to see monetary reflation kick in with a vengeance.

We're probably going to see fiscal stimulus. So by the second and third quarter I call that the filling. You're going to see the positive sides of monetary reflation and that's going to be higher asset prices. And then, however, by the time we get to the fourth quarter of the year, you're going to see inflation come back with a vengeance and you're going to see higher bond yields, higher inflation rates so that, John, when we get into the year 2009, central banks will be back into the rate-raising mode. And by 2010 – and hold onto your seat, get your Maalox, by 2010, if things unfold the way we think, the US will experience a depression.

Puplava knows a lot more about financial markets than I do. Maybe he is right, and the global economy won't collapse this year. Right, it will collapse in 2010. That's a relief. And maybe it explains what Bernanke is doing with his hyper-inflation game. He is doing what everyone does when they get into a financial tight spot: he is desperately trying to buy some time, and hoping for a miracle. It is not working so far. But when you are desperate, hope is always free. As is printing dollars.

Eco-terrorists?

2008-03-03T11:44:00.000-08:00

The media is reporting with a very straight face the latest act of eco-terrorism. The Earth Liberation Front supposedly fire bombed a development of McMansions in Seattle suburb Woodinville. Pardon my skepticism. In the first place, the ELF is probably heavily seeded with undercover agents (which means that if they did fire-bomb Street Of Dreams we'll be seeing indictments within hours).

I hope at least that the police and FBI are not quite so credulous as the media. This developer is probably benefitting from this fire-bombing in a big way. Developers need eco terrorists right now just as much as banks need rogue traders. Maybe we'll see more of both this year?

BTW, what is the difference between arson and terrorism? It is terrorism if an activist sets a fire and arson if a developer sets a fire?

Who ever heard of monolines?

2008-02-01T14:11:00.000-08:00

The financial news has been reporting on the hard times of the monolines, or bond-insurance companies lately. Ambac and MBIA are the two biggest ones. But it is not like bond insurance has become the latest sexy business sector.

Bond insurance is like your home's foundation. If you have to think about it, it probably isn't good news.
It is not good news. The core of the monolines' business has been insuring municipal bonds. Originally this was all they did and thus the odd name (which I had never heard of, like everyone else, until recently). Like many sensible businesses that worked perfectly well, they got bored of the municipal bond insurance trade. Maybe it didn't generate 20% return on capital or some other obscene profit target? In any case they wanted a little more action, and they got it — by expanding into mortgage-security insurance. They were probably crowing about innovation..

Now they are in trouble. The problem with any insurance company is that they would be fine if a few of their policies filed claims. But suppose a whole lot of mortgage-backed securities (which are a form of bond) defaulted at the same time? There is no way they can pay all those hundreds of billions of defaulting mortgages. Of course we all know that the sub-prime mortgages are toast, and that the alt-A and prime mortgages will soon follow. But the real problem is how insolvent monolines will affect municipal bonds.

Cities and towns assume that they will be able to get cash when they need it to build schools and transportation and other infrastructure. And typically they would issue a bond, which has to be insured for it to trade in public markets. On the one hand, paying premiums to a likely insolvent insurance company seems rather stupid. On the the other hand buying a bond insured by an insolvent company seems also stupid. So, right now, simply on the suspicion that the bond-insurers are insolvent, they are probably experiencing a devastating cash flow shortfall. Business on both ends of their model will fall off very sharply if they can't inspire confidence.

The upshot is that it will be much harder for municipalities to raise cash this year, or at least until credibility can be brought back into the insurance business. This is the sort of thing that makes a recession painful and last a long time. It is a much bigger problem for most Americans than the stock market. We might see construction projects halted suddenly, bus drivers not getting paid.

Give the Ford 150 a rest, please..

2008-01-14T21:56:00.000-08:00

The North American International Auto Show is this week in Detroit. It seems that the most exciting cars that Detroit has to offer us are new versions of their flagship pickup trucks, The Dodge Ram and Ford F-150 with a herd of longhorn cattle as a selling stunt. This is stupid. The American fetish of the pickup truck is getting old. We don't need to drive all these trucks, or their cousins, the SUVs, which are cars built on truck chassis. Sure, ranchers need pickups. But Detroit is not selling that many trucks to ranchers, they are selling the image of ranching to suburban wannabes and weekend warriors.

I was actually thinking just last week that the Detroit carmakers could help us out a bit in the next few years. I hear a lot about how American innovation will save our butts in the coming recession and energy crisis. I am wondering when the innovation starts? I think a new line of fuel efficient cars would be innovative.

With the dollar lower, tight cash, and gas prices practically certain to hit $5 this year, a lot of Americans will be planning to trade down in cars. Suddenly, Priuses and diesel VWs will be lot more expensive. Ford, Chrysler and GM could sell a lot of cars if they had some that got 40 mpg. A lot of Americans could get work making such cars. We might even sell them overseas, with our cheap currency. So come on, Detroit, you can do better than the "next generation pickup".

globalization, the end game

2007-12-29T12:16:00.000-08:00

In the 1990s, the era of permanent global “free trade”, so called, or globalization, was ushered in. Local production workers everywhere, that is in America and abroad, hated it, and protested. Economists loved it because it was more “efficient”. Global trade's most charismatic promoter was probably Bill Clinton. I don't know where, but I think I read some theorist saying that globalization was a permanent beneficial change to the world's economic system. Maybe it was the same train of logic that led philosopher Francis Fukuyama to declare permanent prosperity and peace for the globe in the form of the “end of history”. History, it turns out, is now proceeding to change things at an accelerating rate. And the era of globalization will end a lot sooner than those ideolouges thought. Three powerful trends will seem to conspire to break up the world trade routes (despite the fact that a lot of wealth is created for a few powerful rich magnates and they will try to preserve this system at all costs):

Nationalization of Resources
Protectionism
Capital Controls

In the first place, we are witnessing an era of resource nationalization. Globalization was predicated on the assumption of efficient worldwide commodity markets, and such markets only function with a relative abundance of commodities. One of the curious and most exploitive of the tenants of the GATT talks (so viscously protested in Seattle in 1999) was the idea that all signatory nations had to agree to produce, and sell in open markets, any natural resources they possessed. Efficient production usually occured alongside the environmental degradation of the less wealthy nation. But that is now changing. Nations such as Bolivia, Russia, etc, are finding that they do have to power to regulate and nationalize oil, gas, and mining production.

There have been no shortages of commodities to slow down global economies for a long time, and some economists seem to think shortages are so obsolete they it couldn't possibly occur in the 21st Century. But the trend is for commodities of all kinds to rise in price and value. Scarcity of resources is the coming dynamic and free markets do not love scarcity. This will not just slow down the global trade in the resources themselves, but also affect trade in such manufactured goods which require non-local resources. China, for example, will be limited in its manufacturing by how much energy and copper it can import, now that it is no longer self sufficient. In time even American precious metal mining and energy production will need to be nationalized, if only to keep them out of the control of our creditors.

The second anti-global-trade factor is a slowly building force in the USA. It is simply the demand by citizens to support their domestic production. Protectionism. Now that the the American economy is obviously stumbling and there will be layoffs, and people losing their homes due to mortgage defaults, the government will need to do everything it can to try and keep as many people employed as possible. Even if it is not economically efficient. Social unrest will be a bigger threat than loss of cheap imports. This is the same force that was protesting against globalization in Seattle, but now they will have a much more sympathetic ear from congress. We will very likely see import quotas, tariffs and other abrogations of our trade treaty obligations.

The third trend will hit the global economy with terrible shock waves in the next two years: capital controls. Why economists assume that currency will remain freely exchangeable is baffling to me. The world now runs on fiat currency managed by central banks. This system was created to finance the gigantic economic expansions of the past half century. It is now teetering on the brink of collapse. The huge structure of artifice convinced people that paper money was as good as gold, and it was very effective in the times of plenty that the world has seen. Now that almost all central banks (Switzerland is the sole exception) are inflating their money supply at double digit rates, and the US dollar is in a death spiral, the system is doomed. The plunging dollar has created a global state of emergency: pretty much everything traded internationally is priced in dollars. If no one knows what, if anything, a dollar is worth, how do they know what anything else is worth?

Nations holding US treasury bills will be forced to sell their dollars and no county, including America, will be happy to take them in. Like destitute refugees, no nation will want to give the dollar a home. I have heard people say that because the dollar is the world's reserve currency, and no other currency will serve, it has to stay. I don't buy it. Within a very few years all fiat currency (unbacked by gold or other assets) will not be welcome in international trade. The euro can not save fiat currency either: the European Central Bank is racing America's Fed to inflate concurrently with the dollar. BTW, If you think you will always be able to own stock in that Australian mining corporation.. well I'm saying maybe not, unless you are in Australia. Soon, capital will have to stay closer to home.

This is not to say Saudi Arabia, China and other exporting nations will no longer export oil or goods. They can't do much else after all. Trade will be negotiated between nations under secret terms in guilded state department halls and embassies instead of open electronic trading bourses. Agreements will be made with armies and navies in the background, always the subtle threat of war (historically, most wars have been fought for control of resources and trade routes). Terms of trade will consist of exchanges of hard assets, military services, manufactured goods, or precious metal bullion. Barter between nations is the future of trade, and will be made to secure strategic advantage, not the best price. No nation will want to trade with its strategic rival, except under threat of war or other coercion.

a $700 trillion volcano

2007-12-19T14:50:00.000-08:00

This is a fascinating essay by Mike Whitney, published at Rense.com. Whitney explains several key items, the most important of which is how "the markets have been transformed by 'structured finance'."

What's so destructive about structured finance is that it allows the banks to create credit "out of thin air", stripping the Fed of its role as controller of the money supply. David Roache explains how this works in an excerpt from his book "New Monetarism" which appeared in the Wall Street Journal:
The reason for the exponential growth in credit, but not in broad money, was simply that banks didn't keep their loans on their books any more-and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet.

There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized."

So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks' balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt. (Wall Street Journal)
The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed there was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.

Right, money for nothing. Structured finance explains the $681 trillion value of outstanding financial derivatives out there, according to the Bank of International Settlements. Whitney's key point here is that all of this money creation is out of the Fed's control. Adjusting interest rates won't fix the problem. The Fed certainly doesn't want to try to take control of monstrous toxic pile of money either, because then it would surely blow up, not just immediately, but also in their own hands.

If some unscrupulous financiers can come up with a way to generate money out of thin air, they are probably going to choose to generate a whole lot of it, not just a little money. Especially if it is hidden from all oversight and regulation. And in theory this money is risk free. It is insured (via credit default swaps). No doubt. Those insurers will surely pay off, now that the shit is officially hitting the fan. It's not like we have a $700 trillion volcano about to explode or anything..

About time for indictments

2007-12-17T16:45:00.000-08:00

I just want to make one simple point, and it is not that complicated. I don't think anything the Federal Reserve Bank can do, this year or in the next six months anyway, can help free up the frozen credit markets. It simply has nothing to do with interest rates.

There is one thing the U.S. Justice Department could do though: a few indictments of fraud would help a lot. I know that white collar criminal cases are never quick to file or prosecute. It took years to bust the Enron executives. I certainly hope we get some soon. Angelo Mozilo of Countrywide Financial would be one good place to start. Definitely the Citibank perpetrators of the sale of the CDOs sold to the three Norwegian townships. That got a lot of press - they should be indicted. There are no doubt hundreds of people who participated in all this fraud. They should do the time. That would restore confidence in credit markets.

And now Israel too?

2007-10-17T13:31:00.000-07:00

I couldn't believe this! The always sharp Jim Willie has this amazing piece of news in his Hat Trick Letter:

Another sign of the times. The Israeli Govt has requested that all foreign aid payments and loans be delivered in euro currency. US Secy State Rice has confirmed the formal request by Israeli foreign minister Tzipi Livni. The minister cited the rapidly declining USDollar exchange rate and its disfavor. Egypt was denied a similar request recently. Rice said, “In the spirit of Yom Kippur, the United States will not hold Israel to any agreements obligating them to accept dollars as payment for their foreign aid. We will translate our obligations in euros or whatever currency that best fits Israel’s needs. We need to place our Israeli obligations at the top of our national priority list. Israel should not suffer any inconvenience due to currency fluctuations.” So the American people should not expect to receive euro payments for federal pensions or Social Security payments. They can eat cake! As for the request out of Tel Aviv, you gotta admit, that took chutzpah.

Even more astonishing is that we agreed to it. "Israel should not suffer any inconvenience", says Condi. Wow, how far and fast the mighty do fall. See America's Secretary of State grovel. Who is next in line to take pot shots at America? Nicaragua?

Saudis Say Fuck Off Dollar

2007-09-20T02:19:00.000-07:00

Wow: Saudi Arabia just told us to fuck off. Its not like we weren't asking for it. Link goes to Britain's Telegraph:

Fears of Dollar Collapse as Saudis Take Fright
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

When Bernanke drastically cut interest rates, on September 18th, ostensibly to support the American homeowner, but also to support the US mortgage industry (and what do you know it worked out pretty well for the stock market also), it sucked for the rest of the world, which has to deal with our inflation. I thought there would be a backlash, but for it to come from the Saudis first, that must sting. Bernanke is probably saying "I thought you were my friends!"

It pissed me off that we sold the fraudulent mortgage bonds overseas. I mean that we sold these stupid homes for way too much money and then packaged them into crazy bonds, that was bad enough. But then we went and sold them to foreigners - that was rude. I think Wall Street's "collateralized debt obligations" and other such trash have done for American financial credibility what Iraq did for American military credibility. That is to say wrecked it.

I don't know how much US mortgage debt the Saudis bought. But they have, I think, 800 billion in US T-bills. I read somewhere most of it is short term, too. And if we insist on flooding our markets with "liquidity", i.e. printing cash to save our own markets, and driving down the dollar (which is making 14 year lows this week), all those bond holders are going to get annoyed. They may just decide to sell off their dollars. And the Chinese, and the the Koreans and the Brits for that matter (I know Britain could use the cash right now). They may start to think it would be better if they sold first, because no one wants to be the last to sell. It could become a rout. Is it the apocalypse? No: its just the worst recession since the depression. Maybe it will be like the depression, if we don't get it together.

The problem is not just all the foreign owned treasuries, the even bigger problem is the petro-dollar itself. This is why getting the finger from Saudi Arabia, of all places, is so significant. It is a very strong signal that they will sever the riyal from the dollar for good. And if they do that, why would they want to insist on only accepting US dollars for their oil? The petro dollar has been under fierce attack for a year now, fom Russia, which sells oil for euros and rubles now, from Venezuela, from Iran, which sells for yen, and Kuwait, which pegs the dinar to a basket of currencies. The dollar is crumbling, day by day. Saudi Arabia has been one of the pillars that has supported it since the seventies. The business deals that Kissenger put together with OPEC were one of his most long reaching and successful ideas: that oil could only be traded in US dollars, anywhere. And for the most part, except the Soviet Union, this deal has held together, for the immense profit of a few super-rich families and for the American empire.

Until yesterday, that is, when Saudi Arabia said fuck you.

just say it: recession

2007-08-21T09:03:00.000-07:00

I've been following the ongoing crisis in the credit markets obsessively. This is a fascinating addition to the global picture: China's mortgage quality worse than US.

Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan (S$583 billion) of mortgage lending.
Defaults in the US subprime mortgage market now total about S$200 billion, on some S$1 trillion of loans, according to Credit Suisse.
'The quality of housing loans are much worse than the subprime loans in the United States,' Mr Yi was quoted as saying by the South China Morning Post.

Interesting. I have read elsewhere that England, Austalia and Spain have all had massive real estate appreciation bubbles. So at least we know that Americans are not the only greedy ones. But if we are expecting foreigners to bail us out (see this insightful Asia Times story), that is to say keep on financing our debt, we may have an even bigger problem. Maybe China (and Austalia, et al) will be dealing with their own liquidity problems? At present the Chinese must be relieved that their massive pile of US Treasury bonds are rising in value. But they will have to sell off their treasury book eventually, as the profitability of global trade begins to falter with the coming recession.

Recession. Lets just all say it. We should get used to it. The economy is not going to be "growing" for a while. All those American workers who are losing their jobs in the mortgage industry - are they going to find work anywhere near as well paid as the jobs they had? I don't think so. And see CNN's Job cuts at financial services firms surge. BTW, mortgage brokers also have homes with adjustable rate mortgages (like everyone else on the planet). And the construction workers, the decorators, the realtors.. they too are at risk of losing not just their jobs, but their homes. The Mexican and Latino immigants and illegals who did the unskilled labor? They will no doubt have to go home, and their families will lose their remittances. And the Wal-Marts that fed and clothed them in the USA will not get their dollars either. And there will be layoffs in retail. It is a shrinking pie now. We will all be losing our dessert, and for many, dinner too. It sucks.

I should say something positive and optimistic. Well here is one way forward: the biggest problem is that all the debt, at least coming from the USA, was mis-rated, some of it faudulently. We will need some truth and reconciliation, as well as litigation and prosecution. John Maudlin, a Wise Old Man of finance, is calling for Warren Buffet to step up to the plate:

..the rating agencies need to restore their credibility. Warren Buffett's Berkshire Hathaway owns about 19% of Moody's [a prominent bond rating agency]. I would suggest that Mr. Buffett step in take over the company (much as he did with Salomon years ago) and put his not inconsiderable credibility on the line for all future ratings and the inevitable re-ratings that are going to be done.

Suppose Buffet takes Maudlin's advice. Then all the actuaries and appraisers will have to go over all those bonds and find out what they are really worth (at least it will keep some people employed). Such a process would be slow and very painful because people will simply be told that the value of their home or condo just went down 30%. And that the chance of selling a home or condo, even with a 30% discount, this year, is very small. But it is better to know what things are worth, and then deal.

Blame the Chinese for Inflation?

2007-07-24T10:07:00.000-07:00

Highly amusing headline: The Latest Chinese Export May Be Inflation. Actually this is a smart article, by Bloomberg's Simon Kennedy and John Fraher, in spite of the flippant headline. It paints a picture of inflation as the product of years of out-of-balance globalization. Now the global economy is slowly and inevitably re-balancing:

Central bankers have harnessed the effects of low-cost production from China and other countries like India to hold down interest rates and stimulate domestic growth. The Organization for Economic Cooperation and Development in Paris estimates that globalization knocked as much as 0.2 percentage point off inflation in rich nations from 2000 to 2005, even as the world economy sped up and buoyed raw-material costs.

Now, when "inflation is above target, the cost of reducing it has been increased," said Robert Lind, chief economist at ABN AMRO Holding in London. Interest rates in Britain and the 13-country euro zone are already the highest in six years, with officials hinting that more changes may be on the way.

China is actually struggling to keep it's own economy under control, and is raising interest rates:

China reported the quickest pace of growth in a dozen years, pushing inflation to 4.4 percent in June. On Saturday, China raised its benchmark interest rate to an eight-year high of 6.84 percent.

Kennedy and Fraher give examples of central banks struggling with inflation not only from China, but also from Britain, New Zealand, and Canada.
Britain:

The Bank of England's policy makers highlighted import prices as a "growing" inflation risk and one of the reasons for this month's increase in the benchmark rate to 5.75 percent.

It is not just the cost of imported goods that troubles Mervyn King, governor of the Bank of England. On May 16 he said that British house prices were "heavily influenced by what is happening overseas, independent of U.K. monetary policy," as wealthy foreigners purchase property.

New Zealand:

Bollard, of the New Zealand central bank, is expected to raise the official cash rate to a record 8.25 percent this week, in part because overseas orders for butter and milk are pushing up dairy prices.

Canada:

The Bank of Canada this month increased its main rate for the first time in more than a year to 4.5 percent partly because of surging investment in the western province of Alberta to develop the world's largest pool of oil reserves outside the Middle East.

Hyperinflation in Zimbabwe. USA next..

2007-07-19T14:52:00.000-07:00

This business of the Fed simply printing up cash to buy the stock market is nuts. We are going the way of Zimbabwe. And nobody seems to notice, or care. As long as the stock market goes up, everything else can go to hell.

By the way, the Zimbabwe Stock Exchange is soaring much faster than the mighty Dow:

Here is a chart that shows the hyper inflation of the Zimbabwe Stock Exchange (click for a higher res image). It seems to show the ZSE's Industrial Index going from almost zero to 55 million in one year! A helpful Harare stock analyst, Shumba Seti of the African Banking Corporation, emailed me this chart and the weekly closing prices for this index for the past year. The ZSE was not actually at zero in July 19, 2006, it was at seventy thousand (70,084). One year later this index closed at thirty three million (33,582,892). This gives a year on year percentage rise of 47,818%!!! This is down considerably from its peak at July 3rd at 53,354,792 (a 76,000% rise in less than one year). The reason for the recent downturn is that Zimbabwe's authoritarian president Mugabe imposed price controls in the last week in June, a few days before the ZSE hit its peak. Price contols has had the effect of making almost all commerce other than barter impossible in the country: Zimbabwe Price Controls Wreak Havoc on Economy.

To return to America, it sounds like good news that the Dow Industrials has closed over 14,000 for the first time. Suppose it happened to close above 18,000 by year end? What's not to like? And maybe 25,000 or 30,000 the next year? Wow! But at what point would the celebrations in the NYC ballrooms turn to panic? At what point do we start to suspect there is nothing there, that these "dollars" are becoming increasingly worthless and irrelevent even as they multiply geometrically?

Some people might point out that a soaring stock market could be an inflation hedge. Perhaps. Unfortunately it is also the most un-equal distributer of wealth. This is how it works: the Fed has its Plunge Protection Team (see wiki page). They buy futures in the Dow, the S&P, and other indexes. Brokers and their automated trading programs see a fat spread between the future contract and the underlying stocks, so they buy the stock and sell the future. They get as sure a profit as is possible in this uncertain world. The stocks go up. The Fed sells the contract at a loss. This way the Fed injects money into the economy. Much of it goes directly into broker's pockets. The corporations love the flow of capital.

Does any of it trickle down to those not participating in the market? In a real, and growing economy a little bit would in fact trickle down (not that this method of economic stimulous is in any way justified). Corporations would invest in new plants, new stores, they would hire more workers. That is not happening in the USA. Corporations are buying back their own stock, buying other corporations. The market is simply feeding on itself. This is not growth. It is a dead end. The end result, in an extreme example, is for all to see: Zimbabwe. National economic collapse. There, but for a little common sense, we'll be.

USD Painting Itself Into a Corner

2007-07-04T07:52:00.000-07:00

The dollar is finding itself in a 'falling wedge' pattern. This is normally a bullish configuration, meaning it indicates that the dollar will likely break out to the upside. If it was a stock it might be a buy. Yet it can also break downwards. Read any article about the dollar, the fundamentals look horrendous. Like this one: Global Exodus From The US Dollar In Motion.

Since the Bernanke Fed discontinued the decades-old reporting of the broad M3 money supply in March of 2006, the growth rate of M3 has accelerated from an 8% rate to a sizzling 13.7% clip, its fastest in more than three decades. The Bernanke Fed is preventing borrowing rates from rising at a time of explosive loan demand for US corporate mergers and takeovers, by rapidly increasing the US money supply.

Just why should we care so much about the dollar? Because it is holding the world's economy together, and by the thinnest of threads at this point. Here is a piece in the British Telegraph: Credit Crunch Will 'Shred Investment Portfolios To Ribbons'

Markets have been wobbly since the surge in yields on 10-year US Treasuries, the world's benchmark price of money. Yields have jumped 55 basis points since early May on inflation scares, the steepest rise since 1994. It infects everything; hence that ugly "double top" on Wall Street and Morgan Stanley's "triple sell signal" on equities.

Wobbles are turning to fear. Just $3bn of the $20bn junk bonds planned for issue last week were actually sold. Lenders are refusing "covenant-lite" deals for leveraged buy-outs, especially those with "toggles" that allow debtors to pay bills with fresh bonds. Carlyle, Arcelor, MISC, and US Food Services are all shelving plans to raise money. This is how a credit crunch starts.

"This is the big one: all investment portfolios will be shredded to ribbons," said Albert Edwards, from Dresdner Kleinwort.

The BIS had warned days earlier that markets were febrile: "more risk-taking, more leverage, more funding, higher prices, more collateral, and in turn, more risk-taking. The danger with such endogenous market processes is that they can, indeed must, eventually go into reverse if the fundamentals have been over-priced. Such cycles have been seen many times in the past," it said.

The last few months look like the final blow-off peak of an enormous credit balloon. Global M&A deals reached $2,278bn in the first half, up 50pc on a year. Corporate debt jumped $1,450bn, up 32pc. Private equity buy-outs reached $568.7bn, up 23pc. Collateralised debt obligations (CDOs) rose $251bn in the first quarter, double last year's record rate.

America And Mexico Face Depletion

2007-06-05T11:00:00.000-07:00

I've been listening to the debate over immigration and thinking something important is missing here. Basically I think that the USA cannot build a wall separating itself from Mexico anymore than England can separate itself from Scotland. Our two nations' destinies are closely tied together, and no wall can change that.

Anyone who has read my posts knows that I see things from an energy perspective first, and Mexico is no exception. Do Americans realize that Mexico is a major supplier of oil to the USA? In 2006 America imported more oil from Mexico than from Saudi Arabia. We bought 1.445 million barrels every day from Saudi Arabia, and 1.556 million barrels per day from Mexico. Source is the Energy Information Administration. Mexican oil powers our SUVs. Perhaps Americans could be just a little bit appreciative?

Most Mexican production comes from a single huge offshore oilfield: Cantarell, which supplies us with vast quantities of high quality light sweet crude oil. All this oil goes directly to American refineries on the Gulf of Mexico, mostly in the New Orleans area. This has been a very good deal for America. Because the oil was high quality, we were able to process it in our vintage refineries with out the major upgrades it would take to process heavy or sour oil. This means we get the refining profits. The oil is nearby, and not subject to threats or vulnerabilities from hostile nations, like passing through the Straights of Hormuz, etc.

Now the good deal is coming to an end. Cantarell is in decline, and at a rate much faster than even the pessimists anticipated. In 2006 production fell by 20% from 2005's level. This is a catastophic rate of decline, may soon plunge the Mexican state into chaos. Mexico depends on the cash from its oil production to keep functioning.

So, what would be the appropriate action for America? Bolt the door and watch TV, while Mexico has its crisis by itself? I don't think this would work. Remember globalization? Like it or not, the USA and Mexico are practically married. There is no possibility of divorce. We are stuck to each other. Another reason that we can't ignore Mexico is that we need Mexico just as much as Mexico needs us. We depend on that Mexican oil. We depend on Mexican labor. Our southern cities have huge Mexican (and other hispanic) populations, and those millions of Mexican Americans are simply not going to disappear. I simply think America and Mexico will have to face their crises together and solve their problems together. Mexico does have huge natural resources that could benefit both nations. I believe and open border, and work permit program would benefit both nations. One writer who senses the coming crisis is Dan Amoss, editor of an investment newsletter. He sent me a rather hyperbolic pitch by email, trolling for subscribers. I can't find it on his site, but I have taken the liberty of posting it here: The Dominoes of Doom Are Falling South of the Border. I certainly don't agree with all Amoss writes, but at least he does try to tie together the many scary implications of peak oil.

update: here is a news item that confirms my point that America's problems and Mexico's are inextricably linked: Border violence pushes north.
And another one: the current and ongoing housing and mortgage collapse will exacerbate all USA-Mexico tensions. Remittances from Mexican home building workers are way down:

Remittances are the financial lifeblood for millions of Mexican families and a crucial source of foreign exchange for their government. The $23 billion that maids, cooks, gardeners and others sent home last year — almost all from the U.S. — topped the amount that multinationals invested in Mexico. But fallout from the U.S. construction industry, which employs 1 in 5 Latino immigrants, is now rippling south of the border. Growth in remittances to Mexico has slowed to a trickle.

America's and Mexico's economies are fast decending into recession.

Sallie Mae Eaten by Private Equity

2007-04-16T11:50:00.000-07:00

I can't see any rationale for Sallie Mae being acquired by a private equity firm. This is a sad example of a business deal that is perfectly legal, raises no eyebrows, and seems completely straightforward to many people. But to me it smells like a corrupt society. Not like Sallie ever did smell like a bouquet of roses.. Sallie Mae is the largest provider of student loans in this country, and it was a publically traded, for profit company with some vauge assumption of government backing. In recent years, Sallie has become more and more expansionist, agressively acquiring non-profit state run student load programs. Now, like most finance corporations that have expanded too fast in boom times and now are facing economic slowdown and recession, Sallie is finding itself over-leveraged. Being vulnerable, it finds itself the takeover target of a private equity group.

I can't think of much justification for for-profit educational loans. We should have non-profit, government sponsored student loan programs. A better educated society brings benefits to the whole nation. By far the most benefit comes from improving the education of the least advantaged populations. I would think this is obvious.

To me this brings up the whole debate between efficiency of government versus private enterprise. The prevailing center-right ideology states that private enterprise is always more efficient, and therefore creates a better stucture for society. I strongly disagree with this one sided view. For an example of non-regulated private enterprise gone berserk, look at our ludicrously bad health care system. IMO, niether business nor goverment is inherently more efficient. But some enterprises are suited for private and some for public ownership. Health care and education top the list of areas that should almost always be government run, sponsored, and regulated. Transportaion would come in third place in fields that benefit from goverment control and support.

A large public sector does of course require an efficient bureaucracy to function. Just as an efficient corporate sector requires good corporate governance to function. We must always expect and demand efficiancy from government and corporations. When we have such debacles as Enron, or the Bush aministration, we must hold the criminally incompetant perpetrators accountable.

Some things just don't lend themselves to fat profits, but are required for a society to function. Could a private enterprise have built the New York subway system? No way. The interstate highways? No way. Public transportation can be a long term asset to society. We should treasure these things.

The case for public education and health care is even more clear. If we require education to be profitable, it will not be long before only the rich will get educated. It is that simple. If health care must be profiable, only the rich will be healthy. We are already seeing this in the United States: we have an enormous gulf between rich and poor. We are a class-divided nation, unhappy, unprosperous and unstable.

Divide Up Iraq: The Get Rich Quick Scheme

2007-02-08T10:10:00.000-08:00

The rising tide of bad news regarding Iraq seemed more like a tsunami yesterday. NPR covered the following stories:

Scooter Libby lying badly under oath. (Does anyone believe him?)
Independant contractor corporations (Blackwater) gone amok in Iraq, able to kill with no accountability.
A fifth helicopter shot down in three weeks. Insurgents now may be able to seal off the Green Zone, preventing any meaningful mobility of US troops in the country. This maybe a prelude to a siege at some point. Will America be so stubborn that they they ride the war right out to their own Dien Bien Phu? It is telling that we don't even seem to know who is is shooting down our helicopters. If you don't know your enemy, what chance to you have of prevailing?
Tragicomic tales of US dollars by the ton being flown into Iraq under Paul Bremer's CPA, and now it is revealed that some Americans stole some of the money. What a surprise.

Current thinking regarding Iraq is now saying that we'll need to chop up the country into at least three parts. I admit I've said as much in this blog. I mentioned it as the inevitable conclusion to our debacle. Now conservative investment newsletter writer Ned Humphrey says this in a recent post. To his credit, he does not see this is an easy or safe solution, in fact he sees more and more conflict ahead:

The trouble with this option is there would be no way to control the outcome after the division, any more than we could stop the looting after Saddam was toppled. There are substantial minorities of Sunnis in the Shi'a areas and vice versa. Baghdad is thoroughly mixed and would need to become some kind of internationally protected city-state, as the prospects of disentangling its mixture of residents is about as likely as the Pope converting to Islam.

And the Turks would definitely not be happy with the idea of an independent Kurdish state at their back, as that country's own ethnic Kurds would immediately want to join their brethren and cast off the yoke of Ankara.

The basic problem is that Iraq is not ours to divide, either from a moral or tactical perspective. America will not ultimately decide the fate of the Iraqi conflagration that it started. It is far more likely that Iraqis divide their country themselves, Yugoslavia-style, or with the so called help of Iran or Saudi Arabia. No one knows how the civil war will play out. But America will not be making the decisions.

Humphrey unfortunately goes on to suggest that Americans can make the best of a bad situation by investing in military stocks! I have to say this is a terrible idea, not just from a moral perspective, but also from financial one. The whole "who cares if we are losing Iraq as long as the S&P 500 is going up and gas is cheap" attitude, prevalent these days, astonishes me. Don't Americans know what it means to lose this war? It means we are going to have a market crash and massive inflation. Nations do not get rich by losing wars. Nations rarely get rich by winning wars for that matter. Nations can get rich by looting vanquished nations though, and Iraqis might well conclude that such is our intention, consistently supported by our actions from the beginning. When it come to nations, believe actions, not words.

We are paying some two hundred milllion dollars a day to lose this war. Of course a lot of that will go into the fat-margin profits of corporations like Halliburton, and other "security contractors" and armament manufacturers (one of Humphries' favorites is Force Protection Inc, a vehicle armoring firm) . And maybe the nominal price of stock in those corporations will appreciate. But it will not keep pace with inflation. Not by a long shot. I don't really have data or links to back this up, just a rationale and a hunch. War=inflation. That's the short version. During, and especially after, the Vietnam war we had huge inflation in America. It is coming back now. Britain had disasterous inflation after the second world war, even though they were on the winning side. Iraq was invaded largely to "secure" their oilfields. Now that oil is anything but secure, and that is sure to create inflation. Oil and the fate of our dollar are closely tied together.

I have another reason for not believing military stocks are a good investment (besides the immorality of war profiteering). I don't think there is a culture of honesty in the American corporations these days, and expecially not in corporations whose only customer is the US goverment. The system is rotten to the core. If there is money to be made it is not likely to trickle down the shareholders. I don't believe these are times to buy stocks. Stocks will peak this year and trend down for a long time. Just buy gold or silver instead, OK?

War and Peace and Bullshit

2006-11-09T21:06:00.000-08:00

Two days after the US elections there seems to be some mood of optimism in America, at least in so called Blue America. Trying hard, I can't find much to be optimistic about. The politicians can't seem to decide between not staying the course in Iraq, and not not staying the course. Since when was there a course? The biggest obstacle to admitting that the Iraq war is an utter debacle, is the unpleasant fact that we can't admit what the war was for in the first place: the war was to ensure America's access to Middle East oil. Nothing else. It is about production sharing agreements, oil service contracts, and stationing carrier groups in the Persian Gulf. All of it hiding behind a curtain of stupid rhetoric. Don't tell me about terrorism, or about how they hate our way of life, 9-11, etc.

The troops went in, they seized the oil ministry. Bush declared victory. That was supposed to be the war. Then they noticed that there were 26 million Iraqis living there. Nobody could have predicted that, I suppose. And they discovered that Iraqis are either Shiite, Sunni and Kurd. I mean did they ever give a shit about Iraq? No way. They wanted that oil.

If the now abject Republicans could admit that America is in desperate straits to ensure its oil supply, then at least we'd all recognize the problem. And what to do? Fight for oil, steal it, or change our way of life? This would be the best national debate we could have.

I am not letting the Dems off the hook, they are in as much denial as the Republicans, and more clueless. At least the Republicans understand oil (in secret). What will happen if we can't admit the truth? Well we will stay in Iraq, perpetually baffled at all the senseless violence, oblivious to our own role in it. But of course Americans can't admit any truth as disturbing as an energy supply problem. So, we'll stay in Iraq, and the violence will escalate. We will probably partition Iraq. But it won't do any good! The Shia, and the Sunnis too, will still try to get their oil back. We still won't say what's really going on. We'll call them terrorists.

Iran might see that if America can be driven out, it could benefit from Iraq's resources, and Shia Islam would triumph. Chinese capital could be available to them. The only thing American occupation will accomplish will be the unification of Islam. The Arab world will rally to support Iran and Shiite militarism.

This is the sort of war Iraq can easily escalate into. Of course America has the threat of nukes, as does Israel, its only ally in this fight. But America may find that even "escalation dominance" will not guarantee victory against a unified Islam. And nukes could be used. If anyone thinks common sense will prevail they are deluded.

Save Us, O Great Perpetual Motion Machine

2006-09-13T14:54:00.000-07:00

With energy getting more expensive it is not surprising that someone is trying to patent a perpetual motion machine. The company is Ireland-based Steorn. This is how they describe their technology:

Steorn’s technology produces free, clean and constant energy. This provides a significant range of benefits, from the convenience of never having to refuel your car or recharge your mobile phone, to a genuine solution to the need for zero emission energy production. It also provides a secure supply of energy, since the components of the technology are readily available.

The technology is in a constant state of development. The company has focused for the past three years on increasing power output and the development of test systems that allow detailed analysis to be performed.

Steorn’s technology appears to violate the ‘Principle of the Conservation of Energy’, considered by many to be the most fundamental principle in our current understanding of the universe. This principle is stated simply as ‘energy can neither be created nor destroyed, it can only change form’.

Steorn is making three claims for its technology:

The technology has a coefficient of performance greater than 100%.
The operation of the technology (i.e. the creation of energy) is not derived from the degradation of its component parts.
There is no identifiable environmental source of the energy (as might be witnessed by a cooling of ambient air temperature).
The sum of these claims is that our technology creates free energy.
—Steorn.com

Well, if you are going to defy the laws of Isaac Newton, you'd better have your shit straight. If you are cagey and making big promises and seeking investors, people will get annoyed.

Newton's laws are not eternal, Einstein showed that. And Einstein's theories are not the end either, as quantum mechanics and string theory show us virtual worlds beyond our imagining. But as for the way we live, and the way the “real” world works, I mean down here on earth anyway, where such things as money and food and clothing make a difference in our lives, then Newton still rules. Newton may not explain love and death and the afterlife, but for such issues as how to get to work on time, Newton is still king.

Mankind's problems in this age, on the cusp of catastrophic change, as our huge energy sources fail us one after another, will mainly be the scourges of war, famine and disease. Pretending that Newton was wrong, with such nutty ideas as corn-based bio-diesel, or hoping for perpetual motion machine solutions, can only be a fantasy. Newton showed us how the world worked 400 years ago, but we still haven't come to grips with the reality he showed us. At least we should be glad that it is simple, logical and fair. And when the shit hits the fan, we'll probably remember that exponential growth does not proceed indefinitely. Newton probably would have said “DUH”!

Sticking Up For Conspiracy Theorists

2006-09-12T12:57:00.000-07:00

My bother sent me this link: Professors of Paranoia?

This article, by John Gravois, staff reporter for The Chronicle Of Higher Education, won't remain online without subscription for long, but I linked anyway. It is a philosophical debunking of conspiracy theorists, basically painting them as tinfoil-hat nutjobs. This quote sums up the author's primary objections to conspiracy theories:

"One of the most common intuitive problems people have with conspiracy theories is that they require positing such complicated webs of secret actions. If the twin towers fell in a carefully orchestrated demolition shortly after being hit by planes, who set the charges? Who did the planning? And how could hundreds, if not thousands of people complicit in the murder of their own countrymen keep quiet? Usually, Occam's razor intervenes."

I simply approach 9/11 conspiracies from an opposite direction. Broad theories about what happened are not needed. But glaring holes in official explanations still need to be exposed. Not all these conspiracy theories have equal merit. The evidence that explosions brought down the twin towers seems weaker than the evidence that a cruise missile hit the pentagon. This particular theory is at least worth debating. Watch Loose Change for some highly disturbing evidence.

However, I also disagree with the above quote. I think "complicated webs of secret actions" are not so uncommon among business tycoons and governments. How did Hilter rise to power? Certainly complicated webs of secret actions (combined with demagoguery) were his method. All would-be authoritarians, in nations in every continent, are forever conspiring. The CIA, Kissenger and Pinochet conspired to take over Chile. And they did, commiting unspeakable evil in the process. For decades afterward, if you said the CIA was involved, people would think you were a nut. As for the legions who would be required to keep their mouths shut, they can be made to do only the smallest part of the plan, and so are not party to the conspiracy as a whole. If the CIA really wanted to blow up the WTC, I don't think they would find it so hard to train (and silence) a demolition team. The information that the WTC's bomb sniffing dogs were removed weeks before 911, and a number of unidentified construction crews were seen in the building is unsettling to say the least. Everything can be rationalized, and people can be made to believe that the evil deed they do is necessary and right. If Bin Laden is capable of conspiracy, then certainly Dick Cheney is also. Ambitious and ruthless men conspire.

Not to say a neoconservative led cabal did have anything to do with 9/11. I don't know. The truth is hard to find. And perhaps even harder to stomach. I am just saying don't stifle debate. I don't see the value in all the character assassinations of conspiracy theorists. Same for peak theorists. What's the point? Harper's published a particularly silly article on peak oil (not online), interviewing mainly survivalists, ridiculing their views, with minimal explanation. If the theory is stupid, don't write about it. If the theory is intriguing but flawed, expose it. Whether the theorist is eccentric is irrelevant.

gold stocks or gold coins?

2006-09-07T14:51:00.000-07:00

I can't understand all the excitement and belief in gold and silver mining stocks. Of course the theory is that mining stocks will rise faster than the price of gold. In economic hard times, gold mining stocks are supposed to be one of the few market sectors that prosper. Gold writers say the XAU and HUI (gold mining stock indexes) have to lead the spot price of gold.

I just don't agree. There are good reasons why the price of gold might rise, but gold mines might not be able to profit from that rise. It is all about cost. The costs of mining gold are all going up, and they could easily outrun the price of gold itself. Mining costs consist mainly of:

energy

raw materials, such as steel

highly skilled and specialized labor

specialized and expensive equipment

capital

Costs for all these items are rising fast. The price of base metals has been outpacing gold in recent years. Costs of capital (interest rates) are rising. Remote mining locations, usually in undeveloped nations, also increases costs for the mine. The skilled labor has to be brought onto the location, and housed and fed. The steel and equipment have to be imported and transported. Energy supply has to be secure (note that before the age of fossil fuels the energy source was usually slave labor).

A final risk to mining operations is the risk of nationalization, or psudo-nationalization. A nation hosting foreign mines on its territory might not want that operation to shut down, especially if it employs lots of local labor, or trains workers in skilled positions. But they might decide to tax the operation so that little (if any) profit leave the country.

And what would happen if, in a time of rising precious metal prices, gold mines have to shut down because they can't make a profit? The result would be a decrease in the supply of gold - thus driving prices higher. Of course not all gold mines will find it hard to profit. Some mines are more profitable than others. But the costs and risks are variable and uncertain. I'm not going to try to pick a winning gold stock. If you can pick em, or trust some gold stock guru to find them for you, maybe you'll be happy. Or not. I'd stick with shiny round coins, its so much simpler.

War and Nationalization: Children Of Depletion

2006-06-18T19:15:00.000-07:00

Depletion is the declining availability of natural resources. Wars for resources are both indicators and consequences of depletion. We are currently seeing such conflicts every month, and on every continent. Depletion demands that nations nationalize natural resource wealth. Depletion also demands that countries with precious mineral and energy resources acquire advanced weapons to defend those resources, or make strategic deals with nations that do have weapons. With treacherous circular logic, war requires nations to try to acquire strategic commodites at virtually any cost, to enable its military.

All the world's gigantic "elephant" oil fields are now in decline. This is depletion! Did anyone notice that Saudi Arabia admitted that their major legacy fields are now declining by 8% annually? This was reported by Platts news, and didn't stay live for long, but ASPO picked it up. Replacing enormous oil fields with smaller ones, at huge capital investment, will neither bring down the price of oil, nor increase supply. The largest copper mines are slowly becoming less and less productive. Depletion! Replacing big mines with smaller ones, at huge capital investment, will not bring down copper prices. The world will shortly face peak oil, peak copper, peak you-name-it. Note that we don't have to "run out" of any given commodity for it to become far more expensive, just for some mines or wells to become too expensive to operate because of declining yields, higher energy costs, and higher capital costs. If the problem is a production "bottleneck", then that is a result of depletion.

Wars and nationalization of resources will remove large sources of energy and mineral production off the open markets. This will mean that far more oil will change hands than is sold on the futures markets. Oil will be sold directly from one state oil company to another, at secret prices. Nationalization is an unstoppable trend. Venezula moved only last week to nationalize "inactive" mines. Economists and investment analysts like to suggest that if nations with oil wealth would simply let private firms come in and invest massive capital then production would rise and we would not have a peak oil problem. Whether this is true or not, it does not benefit the oil producing nation. Protecting a strategically important resource, like oil, is far more important than getting the best price and highest production for that resource.

Even the United States will be forced to nationalize its remaining mineral and energy resources someday, if only to keep them out of the hands of its creditors.

Just as every nation must now attempt to create a secure energy supply, it is just as important to deny, or limit, energy supplies to strategic rivals. A nation that must use all its available energy just to maintain its own economy is a nation that is unlikely to go to war. Economists need to start admitting that these things are not anomalies, and that depletion exists. It is the trend. It is formenting nationalization and war.

US Markets To Be Sacrificed

2006-06-13T09:03:00.000-07:00

I think we should just consider the possibility that the Fed is willing to sacrifice US stock and real estate markets to keep the dollar afloat. The Fed could easily do this with a half point rate hike next with no indication that hikes are finished. Such a policy would have the support of our creditors. The resulting fire-sale asset prices would look very attractive to cash rich foreign buyers who are wondering what the heck they can do with all the dollars they have accumulated. In the resulting recession commodity prices might soften, and international trade would be able to continue, although at depressed levels.

I know I've been ragging on the dollar for a while, predicting its ultimate collapse to near worthlessness, but lately an alternate scenario has been brooding in my mind. Suppose the dollar doesn't collapse? Maybe the Fed can save the dollar. I think this is possible, but at enormous cost.

Joe Duarte describes the increasingly worried tone of the Fed, as expressed by Fed governor Janet Yellen:

"Ms. Yellen, and the Fed are slowly coming to grips with the gravity of the situation. Her remarks show that Ms. Yellen may just be starting to come to grips with the fact that despite the potential for an economic slow down, perhaps of some significance, the Fed may have to continue to raise interest rates indefinitely, just to keep the dollar from collapsing."

Unfortunately, Wall Street is now counting on an end to rate hikes. Money managers have been saying for the last six months that the Fed has to be near the end of its rate raising cycle. They were saying "one and done" in December, or, in the worst case, then they would endure "two and through". Quarter point rate hikes that is. Since then we've had two rate hikes and they are not through. The horrible possibility of more rate hikes, or even the truly terrible, unspeakable thought of accelerated hikes (half a point instead of a quarter), has not been considered. If you are working on Wall Street, managing over a billion dollars and have a staff of traders, then you probably see the American financial markets as the center of the world, the key to prosperity and stability, the one thing that must be preserved at all cost. But the world is changing.

It has been said, by Jim Puplava and company, that the Fed "walks a fine line". They risk a dollar crisis and runaway inflation if they lower rates, and a real estate and stock market crash if they raise interest rates. Now it looks like they will have to choose one or the other. There is no such line that will avoid both these catastrophes, rather it is choose which one is the lesser of two evils. And hope that energy shortages or political crises don't bring us both. If the Fed keeps doing what it is doing, that is raise rates by one quarter point at every meeting, we will almost certainly get both a dollar crisis and market crashes. They can't simply stay the course because:

a) Central bankers around the world are getting very anxious about the dollar. Soon the Fed will not be able to withstand the combined attacks from currency speculators, Vladimir Putin, and Hugo Chavez.

b) The stock and real estate markets are clearly showing the strain from rising interest rates and energy prices. A crash is only a matter of time anyway. Markets around the world have all fallen heavily lately, but the American markets have only fallen in the single digits so far.

In the end the Fed will have to try defend the dollar to support the all important treasury bond market. This is what keeps the government solvent. And if things play out this way, I wonder how how much independance our Federal Reserve will really have anyway. I wonder if China's central bank Governor Zhou Xiaochuan, and Russian central bank chairman Sergei Ignatiev are now discrete and unofficial members of the Federal Reserve, and if they will be the ones who really set monetary policy.

Commodity Deflation? Not Likely.

2006-05-22T15:38:00.000-07:00

If the dollar collapses (say it corrects on the USX index down to the 70s) who knows what that will do to commodities? Commodities are priced internationally in dollars. It will throw the markets into utter confusion if no one really knows what a dollar is worth (if anything). Could commodity markets be created in other currencies? Yes, but these markets will be regional markets, not global ones.

Several writers, including MorganStanley's august Stephen Roach, have been making the case that commodity prices are in an unsustainable bubble. A correspondant emailed me an (unlinkable) Wall Street Journal article about money manager and commodity trader Dwight Anderson now tentatively bearish on commodities.

Anderson simply says demand will drop (i.e. a global recessionary slowdown?) and supply will kick in. Roach says commodities will drop because (a) China can't continue to grow so fast and (b) it "looks like a bubble in commodities", and that speculators are pushing the market.

I totally agree with Roach's first point about China having to slow down, but I'm not convinced the result will be falling commodity prices. Commodities priced how? In dollars or in gold? The dollar looks very weak and is being attacked on all fronts now. China and Russia both want to increase state gold reserves. Multiple energy trading markets are proposed, several to tade in alternative currencies to the dollar. Norway intends to sell oil only for euros. Russia will sell their huge energy and mineral commodity surpluses only in rubles soon.

The euro doesn't look strong enough to float global trade, and the European Central Bank doesn't want the doomed role of managing the enormous monetary inflation required. In several years time we may have several regional currencies, all similar to the euro. China and Japan are now negotiating the creation of a pan-asian currency. This is very significant. The pan-asian, the euro, the ruble, the loonie could all survive, with none needing to be the One Big Global Reserve Currency. I predict a South American currency (the Che Guevara!?) will launch also. The US dollar will be simply irrelevant. Gold will be very important, functioning as the ultimate meta-commodity, that all currencies and commodities are judged against. Because it is expensive to move and store, especially over long distances, it will create a worldwide recession. With regional currecies dominating trade, most commodity markets will be regional in scope.

It is very hard to predict the cost of producing any particular commodity. One reason is that a large portion of the cost of mining or wellhead production is the energy needed for that production. Energy is extremely volatile in price, and generally surging upward. Look at the dirt cheap natural gas we have now. Look at the high oil. These conditions could so easily reverse, or both could easily rise. Some commodities need lots of natural gas for production, some need lots of diesel fuel. Some can use either, and can switch as needed. Everything that goes into pricing is a moving target, including the dollar itself. But mostly, the dollar is moving down and energy moving up. So these things will drive commodities strongly upward, even as demand for commodities softens.

The other problem with Roach and Anderson's analyses is that neither of them factor, or even acknowledge, the existence of depletion. The largest copper mines are slowly becoming less and less productive. Depletion! Replacing big mines with smaller ones, at huge capital investment, will not bring down copper prices. The world will shortly face peak oil, peak gold, you name it. We don't have to "run out" of any commodity for it to become far more expensive, just for some mines or wells to become too expensive to operate because of declining yields, higher energy costs, and higher capital costs.

And wars. And nationalization. These are the children of depletion. They will remove large sources of production off of open markets. Nationalization is an unstoppable trend. Protecting a strategically important resource will become even more important than getting the best price and highest production for that resource. I predict even the United States will nationalize mineral and energy resources someday, if only to keep them out of the hands of our creditors. Wars for resources and nationalization are both indicators and consequences of depletion. We are seeing these things every day, on every continent. War requires nations to try to acquire strategic commodites at virtually any cost, or risk defeat.

Economists need to start admitting that these things are not anomalies, and that depletion exists. It is the trend. It is formenting nationalization and war. So, even if China goes into recession, I think it is possible for some commodities to rise in price, even relative to gold. Commodities will trade regionally, not globally. Some commodites may rise astronomically, in places, if there is a shortage.

Friedman is optimistic. So what?

2006-05-19T11:02:00.000-07:00

Here is a long quote from Thomas L. Friedman's recent column, published behind the New York Times' firewall:

“I was recently interviewing Ramalinga Raju, chairman of India's Satyam Computer Services. Satyam is one of India's top firms doing outsourced work from America, and Mr. Raju told me how Satyam had just started outsourcing some of its American work to Indian villages. The outsourcee has become the outsourcer.

Mr. Raju said: "We told ourselves: if business process outsourcing can be done from cities in India to support cities in the developed world, why can't it be done by villages in India to support cities in India. ... Things like processing employee records can be done from anywhere, so there is no reason it can't be done from a village." Satyam began with two villages a year ago and plans to scale up to 150.

There is enough bandwidth now, even reaching big Indian villages, to parcel out this work, and the villagers are very eager. "The attrition level is low, and the commitment levels high," Mr. Raju said. "It is a way of breathing economic life into villages." It gives educated villagers a chance to stay on the land, he said, and not have to migrate to the cities.

A short time later I was interviewing Katie Jacobs Stanton, a senior product manager at Google, and Krishna Bharat, founder of Google's India lab. They told me that Google had just launched Google Finance, but what was interesting was that Google Finance was entirely conceived by the Google team in India and then Google engineers from around the world fed into that team — rather than the project's being driven by Google headquarters in Silicon Valley.

If more countries can get just a few basic things right — enough telecom and bandwidth so their people can get connected; steadily improving education; decent, corruption-free economic governance; and the rule of law — and we can find more sources of clean energy, there is every reason for optimism that we could see even faster global growth in this century, with many more people lifted out of poverty.”

Friedman sees the global economy optimistically all right. But what is America's role in it (other than consumption, over consumption, and conspicuous consumption)? That Indian employee records processing firm that is planning huge expansion — whose employee records will they be processing anyway? Probably employees from the surging industrial economies of the world: China, Eastern Europe, Brazil, and India itself. US payrolls are not expanding.

Then Friedman talks about Google, how Google is employing not only engineering teams in India, but also project management and business developement. No doubt their payroll is done in India, and the rest of the admin. If the legal team is not largely Indian, it will be soon, with enormous cost saving. There does not need to be very much of the company left in America at all. If I were in Google senior management I might be getting a little nervous. The higher up the corparate ladder you go, the bigger the cost savings of outsourcing. And at some point the center of gravity of the company shifts from California to Bangalore.

When an American firm hires Indian labor, that is an Indian payroll, not a US one. The paycheck is made out in rupees, cashed in India, drawn from an Indian bank. The Indian economy benefits, not the US economy. The global economy won't look nearly so rosy if we are shut out of it. We have un-competitive labor, over-priced real estate, ludicrous executive compensation, a failing currency, and an infrastructure designed to waste the maximum amount of energy. It will be hard for America to participate. I don't think it is pessimistic to point out that these facts.

Its not that I think Friedman is wrong about globalization that bugs me, but that he doesn't see an urgent need for America to get its shit together and fix its dire problems. He casually notes the need to find new sources of energy, without any sense of the risk or high stakes involved. The whole optimism vs pessimism thing is annoying anyway. Niether one is logical.

US Dollar Faces The Firing Squad

2006-05-17T11:56:00.000-07:00

Ben Bernanke's Federal Reserve has lost control of the dollar. Even long time friends of the dollar, like the IMF, have turned against it. Imagine how it would work if the entire world used Weimar reichmarks to trade goods and commodities? How about Zimbabwean dollars? Laughable, except that it is very real.

In the past 6 weeks the dollar has been falling like a bomb. We are awaiting the crash when it hits the ground. This is the real nuclear bunker buster, and it is aimed at us, not Iran. Gold has been accelerating it's climb. If we had the power to stop it we would.

Vladimir Putin has said Russia will soon require payment for their energy exports in rubles, not dollars. This is the trend. Norway says it will sell only in euros soon. China, Japan and most other asian nations are now negotiating the terms of a pan-asian currency, similar to the euro. I personally predict a South American regional currency to launch. The Chinese have also stated they will quadruple their gold reserves, from 600 to 2500 tons. This is a shot across the bow of the US Federal Reserve. Resource nationalization, of base and precious metals, and energy, is spreading worldwide. Colombia announced nationalization of its oil fields only yesterday, joining with Venezuela and Bolivia. Some day even the United States will have to nationalize mines and energy fields on US soil and waters. This will be an attempt to stay solvent, and defend our remaining resource wealth from foreign ownership.

These ominous signs point to huge shifts in the global economy that have barely begun to affect our daily lives, but will soon. There are only two options. One is an organized dis-assembly of the global economy, as governments come to grips with the fact that the US dollar can no longer function as the world reserve currency. Nations can find fixes, substitutes for the US dollar, work-arounds, etc, but it will take years. In that time the entire global order will shift. This will not be a slight change, more like a 180 degree re-alignment.

The other option is panic selling, driven by some crisis such as war or catastrophe, where foreign nations are forced to liquidate US treasury bills, or endure default. We should hope for the first option. Few things are certain, except one, and that is that none of the coming changes will benefit the United States.

Ideology and armaments fight wars, but fuel and money win them

2006-05-07T18:38:00.000-07:00

I have hope that war with Iran will not happen. For the simple reason that Iran is already to strong to attack. I suppose it is possible for Israel to attack Iran, even though the Israeli generals must know that it would be a doomed enterprise. Much like the Japanese generals who launched the first strike on Pearl Harbor even though they knew it would bring ruin to Japan. Optimism may make no more sense than pessimism, but I still have hope there won't be another war.

Iran now has all the power that they have been seeking for so long. They have tough friends, in Russia and China. Israel may have advanced military hardware, but it is not enough. They are vulnerable to oil supply disruption. I don't know what the state of their finances are, but with America and Britain both as close to bankruptcy as they are, how can Israel go to war? Israel has always relied on US and British financial backing (credit) and energy supplies.

In the 1980s Russia had a lot of highly advanced military hardware. When they went broke, they were not able to use it, and it didn't do them any good. Britain went into WWI when it was technically bankrupt, although few knew it. They were only able to fight because they had the US to bankroll them, and supply fuel.

Now it is Russia, China, and Iran that have lots of cash and fuel supplies. No matter who wins the initial skirmish, they will eventually prevail. The Central Asian nations, Kyrgystan and Kazakhstan, etc, also have critical energy resources and are strategically important. Russia, China, and Iran are building a huge integrated pipeline network, for both oil and gas, and it crosses all over Central Asia. It feeds China, and Europe, and soon India. These nations' futures are linked and they will support each other. Europe, including Britain, is now utterly dependent on Russian natural gas, and Russia can cut this supply line, as Putin recently demonstrated. All energy importing nations are counting on receiving a slice of the Kazakh oil pie (although there is clearly not enough to go around). So, I believe no European nation can support a US/Israeli attack on Iran. India is waiting in line, hoping to receive Iranian and Kazakh oil and gas. They won't support the US. Australia is having fiscal pressures of its own, similar to the balance of trade problems, and real estate bubble problems that the US has. They have made important energy deals to supply liquified natural gas to China. Australia will not support us. South America will not support us either, gloat is more likely.

As for Israel, I do think they are in trouble, and they won't be able to fight their way out of it. For that matter, Taiwan is also in trouble. We will not be able to defend them either when China finally comes to retrieve her “stray province”. The world is changing. People should deal, not fight.

Oil Trading In Weimar Reichmarks?

2006-05-04T10:30:00.000-07:00

News item: Iran Oil Bourse Next Week. This issue does not go away. I quote:

Oil Minister Kazem Vaziri Hamaneh said on Wednesday that the establishment of Oil Stock Exchange is in its final stage and the bourse will be launched in Iran in the next week...

It does not go away because it is part of the worldwide trend. Not just Iran, but also Dubai, Qatar, and Norway are among the countries that are planning to open energy trading bourses. Both Qatar and Dubai have stated they will trade in US dollars. Norway prefers Euros, and seems to have the support of Russia. It looks like the days when Britain and the USA were the only market makers in oil (and other commodities) are nearly over.

These new bourses are not in themselves an immediate threat to the dollar. The dollar is heading for a train wreck all on its own. The new bourses may be part of a solution. Not a solution from the United States' perspective, but a solution for the rest of the world. If there is a dollar crisis, it will throw the whole global commodities trading system into crisis. They will have to switch to either euros or gold, no matter what governments prefer. Imagine that the Reichmarks of Weimar Germany were the worldwide trading currency. And that Weimar was trying to bully the globe into supporting it.

Could a dollar crisis be averted? Yes. If the USA immediately withdrew its foreign military forces, and launched a crash energy conservation program. Obviously this sort of thing will not happen. I don't have much confidence in the euro either. The ECB inflated the Euro supply at 8% last year, about the same as the US dollar. The pound inflated at 12%! Thus gold will regain status as the de facto world currency.

Peak oil and peak money?

2006-05-02T15:58:00.000-07:00

Capital flight has begun. See it in the commodities boom. Real stuff is looking a lot more solid than virtual stuff these days. The US dollar index is falling. It is going down compared to other currencies, such as the Yen, the Pound, the Euro. But they are all losing purchasing power too, because of their own inflation.

The innovation of fiat currency only became possible because of the huge supplies of energy that became available in the 20th century. Paper money was tried many times before throughout history, but only in times of national emergency (like war) and it always resulted in depression afterwards. The rapid economic expansion of the 20th C was powered by cheap energy, and it made fiat currency possible. Both are historical anomalies.

The oil-driven economic expansion needed fiat currency. With gold backed currency, the huge sums of capital required in the industrial and information age economies would not have been available. This is because gold production could not be expanded as fast as the economy. Cheap energy and fiat money go together, and they will peak and decline together. We are clearly seeing this. Right now capital is so cheap they are practically giving it away. Interest rates for banks are negative. The interest banks pay on a loan, from the Fed, or from the Japanese central bank, is less than the real rate of inflation. And the central banks make this cheap cash available in vitually unlimited quantities.

The interest we suckers pay on a loan is far higher of course. No wonder banks have so much cash to lend. No wonder they pass out credit cards like sticks of bubble gum, and call us at dinner time asking if we would like a few grand to remodel our kitchens. This high pressure cash machine (that we call the global economy) works beautifully as it expands. Thus the Keynesian dictum that a central bank can, and must, inflate the money supply only as fast as the economy grows. But now the machine is running out of gas. The economy can no longer grow without a cheap energy supply. How the economists can think that the growth can go on forever baffles me.

Interest rates, in all currencies, are on a rising trend, as they try in vain to keep up with accelerating price inflation. High rates and high debt will make banking very unprofitable. In the coming depression it will be nearly impossible for anyone to get a loan for anything. Energy costs and food costs will rise at a hyperbolic rate. The oil will be gone. The money will be gone.

Yay! $100 checks all around!

2006-04-30T09:27:00.000-07:00

The congressional proposal to mitigate American citizens' high cost of gas by passing out $100 checks to all taxpayers is the clearest, most explicit example of Bernanke's "helicopter money" policy yet. How much cash is this anyway? On the web I see that in 2003, there were almost 140 million US federal tax returns filed. Lets round that up to 150 million for 2005. If every taxpayer gets $100, that is $15 billion. So, this is not a huge factor compared to the entire US economy. It could have a significant effect on the K-mart set. But it would have no effect at all on the high income end of the economy. Maybe the best thing you can say about this policy is that it reduces income disparity instead of exacerbating it.

So why not issue $100 checks monthly? How about $1000 checks? What difference would it make anyway? The Fed can issue as many bucks as it pleases, at virtually no cost. Unfortunately, the more checks they issue, beyond the token $100, the faster prices will inflate. Capital flight, from dollars to gold, will accelerate. The Fed generally prefers to distribute dollars in the form of debt, rather than passing out party favors. Debt is a the rationalization for money creation.

No one seems to notice that there is more to energy-cost inflation than oil company profits and geopolitical issues. There is also the issue of US government's, and governments' worldwide, monetary inflation. If the US inflates the US dollar supply by 8% in one year (they did this in 2005), that alone will drive up the price of oil by 8%. Oil is priced in US dollars! As the dolllar goes down, oil goes up. On top of that we have a geopolitical oil shortage.

Since a month ago, when the Fed stopped publishing the M3 money supply numbers we don't know how much the Fed is inflating. The $15 billion they propose to pass out to mitigate gas prices won't, by itself, inflate oil much. Rather, oil price inflation (property inflation, insurance premium inflation, gold price inflation, you-name-it inflation) is caused by governments around the globe frantically pumping cash into the banking system in a desperate effort to keep the international trade system flowing. This money spreads everywhere, via the easy-credit pipeline. All those credit card offers we get in the mail? The money they are offering to lend us comes from the Fed. They badly want us to go out and spend.

Its easy to inflate the money supply. Much harder to inflate the oil supply.

Shiny new oil refinery in Yuma? Nope.

2006-04-20T09:12:00.000-07:00

Thanks to Cyberedoubt for this link on an american oil refinery that won't be built for the lack of a guaranteed supply of crude oil. After Katrina I was blogging that the Gulf of Mexico refining complex would not be rebuilt. And this is why. Of course the residents of Yuma, AZ, might be glad that the refinery that supplies American gasoline will probably be in Mexico instead of their own back yard.
But if this business issue becomes a trend, it represents another huge loss for America. Refining is an essential industrial manufacturing process. If we cede that industry to other countries we are dependent on them to supply our gasoline. They get the refining margins, not us. They get the fat manufacturing paychecks. And why shouldn't they? They have the oil. They should get the value added profit of selling consumer products, instead of crude oil.
And for America? Since we can no longer make cars profiably, nor gasoline, maybe we should consider the idea that our way of life, which consists of driving the SUV to the mall, isn't working out so well.

2006-04-17T21:16:00.000-07:00

I have been told that I express an illogical glee in my notes on peak oil. No doubt this sounds very disturbing.

I can't help it! The globe has reached the stage of tragi-comedy. Religious buffoons are threatening each other with nuclear bombs. They brazenly censor science. They print money and believe themselves rich. We are returning to the dark ages, the inquisition, and the crusades. I conclude that the human race learns nothing in the end. Mighty civilizations are fated to repeat the same sad follies that have brought them to ruin, again and again, since the age of Sumer.

A Short Rant This Evening

2006-04-12T22:31:00.000-07:00

There will be no shortage of blame at least. We will hear lots of “there'd be plenty of oil if it weren't for those damn enviro-freaks preventing us from drilling” or “we'd have all the oil we need if the hateful Iranians would just let us come in and run things”.

Meanwhile, the real problem, inexorably falling EROEI, is so subtle and gradual that people don't notice it. A constant series of political crises captures our attention. These crises will make it very hard to make sensible long term choices.

Iran is a case in point. Iran and the USA are intent on facing off in confrontation. They seem to have lost site of the fact that war would destroy lots of critical energy infrastructure. It might be very hard to bring Iranian oil production back after the massive bombing campaign they are talking about. They can't even get Iraq to produce oil. The Iraqi oil facilities were the only thing they cared about protecting all along, but it didn't even work! And now they want to do Iran also???? WTF??!!

Daniel Gross Fearlessly Faces Down The Gold Bugs

2006-04-11T21:59:00.000-07:00

I have to admire Daniel Gross, Slate's retrograde, believes-the-CPI-is-accurate, all-is-prosperous, economist. He has come out with a column describing how demand for gold will fall this year, and the price for gold will tumble from its current high of $600 per ounce. It takes chutzpah to be so contrarian. The big fund money is now moving strongly into commodities, gold included. Investment advisors Keith Rabin and Scott McDonald describe the current mood in an editorial for 321 Energy:

The major financial institutions have finally begun to shift their orientation from one that disparaged the resource market as one inhabited by quirky “gold bugs”, survivalists, old-timers and those not wise enough to recognize the unchallenged appeal of technology and other sectors investors came to know and love in the 1990s. Today, these institutions appear to be slowly realizing the rise of commodities, metals and energy is not likely to be a short-term phenomenon, but rather one that will endure so long as global growth and demographic trends continue at anywhere close to present levels. We have seen this change reflected in numerous conversations with fund managers, bankers and other financial professionals in recent months.

So why does Gross think gold will fall? He says that the largest demand for gold comes from Asian jewelry buying. Chinese and Indians are heavy buyers of 22 carat gold jewelry, not just as adornment, but also as a store of wealth. Gross asserts that Asians, being "poorer", can't afford to buy gold at today's inflated prices. They will slack off on buying the stuff. Gross also maintains that they will sell the gold they own, which will enter the "recycled" gold market on the supply side. This increased supply, and reduced demand, will start gold on a downward path.

A gold bug myself, I find this logic baffling. Asians like to save large portions of their income. They see gold as a store of wealth and an investment. Won't a rising gold price encourage them to keep buying it? A rising housing market encourages more people to buy houses. A rising stock market gets more people buying stocks. I think the Asian retail gold market will increase volume, not shrink. And if there is a worldwide recession? After some initial liquidation, I think gold buying will resume. The Japanese have only increased their astonishing saving rate (approx. 25%) right through their deflationary recession.

Another thing that bothers me about Gross' column is the quick association of "Asian" and "poor". I'm not being politically correct here, I just think it is wildly off base. There are a lot of Asians who are getting fabulously rich these days. The Asian standard of living is going up, as Americans' is trending down. Per capita, we may still have more money than they do, but we have huge debts. They have savings — in gold. If anyone will be forced to liquidate assets this year, it will likely be Americans who can't pay their mortgages, not Asians who can't afford $600 gold.

Saudis suddenly see the benefits of peak oil

2006-04-06T14:15:00.000-07:00

My friend Mary sent me this link: Demand May Outpace Saudi Oil Capacity. Mary writes:

"this is one of the more chilling things I've read in a while. Why? Because the Saudis have always been publically in bold denial about peak oil, and now all of a sudden they're crying uncle. It really brought it home to me in a stark way. I have been reading about peak oil for a long time but it has always seemed kind of abstract to me, almost theoretical. Now it seems real. The quotes that some of these Saudis make are astonishing. A real eye opener."

Then I saw this, a true conspiracy theory by Huffington contributor Raymond Learsey: Oil Prices Being Pushed Ever Higher By Manipulating Oil Futures Trading. Learsey's thesis is that Saudi Arabian speculation is behind the recent rise in oil, not any fundemental supply and demand issue. It does fit rather nicely with the shift in official Saudi statements. However conspiratorial it sounds, I think it is neither unlikely nor incompatible with peak oil (although Learsey presents no evidence for his theory). Peak oil, or just the perception of peak oil, creates the market conditions in which manipulation is possible.

All commodity producers hope and dream of controlling the price of their commodity, preferably in a smooth uptrend. But they can only do that in sellers' markets. Powerful commodity consumers hope to control the price downward. Sometimes the opposing forces balance out, but if they don't, then one side can be said to control (manipulate) the market. Industrial nations, led by the USA, successfully drove the prices for practically all commodities down for decades in the 1980s and 1990s. It was in their interest to do so and they did. Central banks wanted gold to go down. They were able to do that. I see this as normal.

But now it is a sellers' market for oil and most other commodities. I would assume that the Saudis are manipulating oil! And so are the Norwegians, the Venezuelans, the Texans, and anyone else who wants to pile on for a quick buck.

It is important to recognize that pushing oil up is also a backhanded way to push the dollar down. Is oil worth more? Or is the dollar worth less? Same difference!

Disastrous Fall In Energy Prices?

2006-04-01T01:20:00.000-08:00

In the current race to break up the globalized economy, between peak oil and peak capital, the money sure looks like it will run out first. There is more to this interaction that we hear about.

The housing bubble is leading this process and seems to be popping right now. I think the consequences, for this year, will be far more severe than anything peak oil is likely to deal out. I don't see how we can have a soft landing. America is already in a recession, but for the faked GDP numbers, and we are running only on freshly printed cash from the Fed. So, after the inevitable market crash, sparked by a bankruptcies in GM, Ford, Fannie Mae, and many others, our economy will come to a near complete halt. This will surely create market crashes and recessions in China and many other countries. It is a huge world of dominoes out there, all set to knock each other down. The massive and impenetrable business of derivatives, originally created to share and minimize risk, has been perverted for the sole purpose of maximizing profits. If any of the huge derivative based hedge funds fall down that will make the financial depression far worse.

The real estate and inflated currency boom is not only in the USA. Australia, Britain, and much of Europe and Asia are enjoying similar monetary free-for-alls.

The short term effect will be falling energy prices! Oil back down to $40 or $50. The reason is that we are at peak and therefore by definition pumping more oil than ever. There is a huge vested infrastructure in oil, gas etc. They have to try to keep pumping to pay their rising capital costs.

Demand may not fall so much in the USA because it is built in structurally. But in Asia they have not been heavy consumers of energy very long. They can conserve by getting the bicycles out, far easier than we can. Given the Asian propensity to save money in a crisis, Asian energy demand will plummet.

The real problem with this scenario is that it will make the capital-intensive process of developing an alternative energy infrastructure impossible to finance due to unprofitability. As almost everything will be impossible to finance anyway.

Then, as the dollar and other currencies continue to bounce down the road to utter worthlessness, commodities (such as oil) will rise in price. But only because the fiat currency is worth so much less, and because it will be so hard to raise the capital to produce the commodities, not because there is any more demand for them. I am just saying I think we'll run out of money before we run out of oil.

Waiting To Jump Into Real Estate? Sorry To Tell You This..

2006-03-03T21:15:00.000-08:00

Suppose that you want to buy a house, but you are waiting for the bubble to pop. You are hoping that prices will go down 20% and then you'll jump in and buy. But suppose when home values do go down 20% you find that no one, not one single bank, will lend you anything. Suppose several banks have already gone under and there are not that many to choose from anyway. Suppose that all the surviving banks can do the math: that they will most likely lose tens of thousands on any loan they write, on top of the huge portfolio of bad loans they already have. This scenario is not so unlikely. It happened in Japan not too long ago after a very similar real estate bubble to ours. I am not talking about some vauge possible future event. I am predicting banks to be in serious trouble, and a near complete halt in lending in 2006. The real estate bonanza is over and gone!

And why would this dreadful scenario come to pass? Because interest rates are inverted. They are unlikely to come back. A continued inverted yield curve will completely wreck the home mortgage business, making virtually all lending unprofitable. This inversion has been building for a long time, and seems to be a long cycle trend. It is very likely to invert more deeply. The reason that the mortgage business will end is that banks borrow short term to get the cash to lend to buy houses. The mortgage itself is a long term loan. To be profitable, there has to be a good spread between the long and short lending rates.

Now think what will happen to Americans when they not only can't get mortgages, but they can't get LOCs on the houses they do own, and they can't even get a lousy 20% interest rate credit card. Americans may be addicted to oil, but they are heavily addicted to credit. Commerce comes to a halt. Businesses close up. Plywood on the storefronts.

This is depression, folks. Very few houses get bought or sold (very little of anything gets bought or sold). When houses do sell, they go for all cash to the real estate barons who are just waiting for the chance. Or maybe a seller will accept a monthly payment plan from you. A few ounces of gold will make a useful down payment.

What Happens When Oil Trades In Mongolian Tugriks

2006-03-02T07:33:00.000-08:00

“Suppose oil is traded only in Mongolian tugriks. So, you take your currency to the forex, exchange it for some tugriks and buy all the oil you need – and then the seller immediately converts tugriks to euros or yuans or whatever. Net benefit for Mongolia? Exactly zero. What difference does it make? It seems to me that as oil exchange currency the US dollar is no more more significant than a subway token.” —abb1, writing a comment on blog Crooked Timber

This post brings up the very good question: what difference does it make what currency oil trades in, anyway? So, lets follow the admittedly absurd proposition that oil may only be traded in tugriks. A single crude oil contract (one thousand barrels) is worth almost 62 thousand bucks today. That converts to 73.5 million tugriks. Given a week or two, a banker might be able to come up with that sum. Don't forget that currencies are commodities, subject to supply and demand equations like any other. Some have a vary large, liquid market with small spreads between buy and sell quotes, others, like tugriks, don't. Maybe a Canadian mining and exploration company would want a lot of tugriks now and then. But overall, it is not a huge market.

How many oil contracts can the tugrik support? Total supply is not that large: M2 in 2004 is 847 billion tugriks (stats here). That will buy only 11 thousand oil contracts. Clearly, if the world traded oil only in tugriks, the Mongolian central bank would have to get busy issuing bonds. Bankers all over the world could buy these bonds and lend out the cash to those who want to buy oil. Mongolia would have to issue a lot of bonds. This amount of cash would completely change Mongolia as a nation, because many of those petro-tugriks would come back to Mongolia. What would the Saudi princes do with their tugriks? They would probably buy beautiful ranches in Mongolia and breed racehorses (they probably already do that). Canadian oil-sand barons, Venezuelan oil rich bureaucrats, Russian KGB tycoons, all would have mountains of tugriks. Eventually that Mongolian cash would come home to roost like loyal hunting falcons on the high steppes of Asia. Because if the oil sellers don't buy Mongolian property with the tugriks, then they will have to sell them - the principal buyer would be the Mongolian central bank.

Mongolia would be flooded with their own cash. Real estate values would soar, stock market values in Ulan Bator would skyrocket. Domestic industries such as mining, farming and manufacturing, would produce so little money in comparison to the huge currency trade that they would be declared unprofitable and irrelevant. Because the money would come in through international banks instead of broad based domestic industry, it would be an extremely unequal distribution of wealth. This is not unlike what has happened to the United States in recent decades. But the US economy, being the world's largest, can absorb such huge quantities of money much better than the tiny economy of Mongolia.

The real question in my mind is why does oil have to be traded in a single currency? It was Henry Kissenger who formalized an agreement with OPEC, that in return for military protection, OPEC would agree to trade oil only in dollars. Kissenger foresaw the long term structural benefits to this arrangement. It need not be so. A sensible system would be to peg oil to gold. Oil exporters could ask for bullion, or, for countries that have stable currencies, could accept any national money at the rate gold trades for in that currency. Since every nation needs oil, it makes sense to trade it in a way that is internationally equitable.

Where Will Oil Trade: New York? London? Tehran?

2006-02-27T09:22:00.000-08:00

Jerome a Paris has written an unusually forceful article denouncing the many doom and gloom scenarios that predict that an Iranian Oil Bourse (IOB) will bring the US dollar to its knees and starve western nations of oil. An article with a similar conclusion was written by Iranian academic Bahman Aghai Diba for the Persian Journal. These pieces insist that Iran lacks the legal and financial infrastructure to host international trading in oil.

These writers are missing a key point. They are assuming that oil will continue to trade freely, albeit perhaps at a much higher price. They assume that liquidity and transparancy will endure in the oil markets. But there may come a time when geologically driven oil shortages dry up liquidity in the oil markets. There may come a time when politically driven resource competition creates shortages in the oil markets. Liquidity will disappear when sellers in New York and London cannot guarantee delivery. It stands to reason that commodity markets function best, with great liquidity, when there is a plentiful supply of goods to trade. If there is a shortage, much less of that commodity will end up on the auction block. This is especially true for strategically critical commodities such as oil.

It hardly needs to be repeated that China is the most powerful buyer of commodities, and it has the biggest checkbook. Russia and Iran are key suppliers. These three countries are now the big shots at the poker table. The big shots do not have any commitment to open markets. They prefer backroom deals, made for strategic advantage, rather than securing the best price. One reason oil producing nations like Iran and Russia would have for keeping oil markets closed would be to exclude buyers they don't like. For example Americans.

America can still acquire oil, but only to the extent that other nations agree to finance its debt. Or America can use its military to try to secure its oil supply by threat, invasion or occupation. The American military itself consumes vast amounts of oil. Reducing American oil supplies would increase other nations' security (the nations that feel threatened by us) more than any military upgrade they could achieve. Note that it is in neither Russia's nor China's interest to cut off American oil supplies, nor bankrupt the USA. What is in their interest is that we are no longer a military super power.

It seems logical that China, Iran, and Russia will choose to set up an oil trading bourse, in Iran or elsewhere, that trades in Euros, or perhaps gold. Access to their market will be by invitation only. Private speculators, rude Americans, and those who don't honor Islam will be among the many who will be shut out of the party. Security, dispute resolution, and payment and delivery issues will not be settled in courts of law, but by the blessing and decree of the KGB, or the Iranian Revolutionary Council, or some such body.

Whether or not the Iranian Oil Bourse gets off the ground, don't expect the USA and Britain to be able to control oil trading much longer. They simply don't have the oil to trade.

Alien Vs Predator

2006-02-16T22:09:00.000-08:00

"Chevron's water rights for its DeBeque, Colo., shale oil project are leased, not sold, to the city of Las Vegas for drinking water. How will Las Vegas replace that in the future when Chevron won't extend the lease?" -- anonymous, via Byron King

This is funny! I was blogging about the stupidity and unsustainability of Las Vegas last year. Then I was blogging about a ludicrous shale oil boondoggle . Well it turns out that a significant part of Las Vegas' water supply come from water rights to the Colorado River that are owned by Chevron Oil. Chevron aquired the water rights when it bought a shale oil project! I read about this in a Whiskey & Gunpowder mail by Byron King. So I'm imagining two of the most wasteful, environmentally damaging enterprises, Vegas and oil shale production, fighting over water rights. Lets just hope they both lose and we start to think about sustainability. Fat chance.

Employment in Depletion

2006-02-15T12:48:00.000-08:00

This is astounding. I quote from Paul Craig Roberts:

In the last five years, US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.

The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is “the envy of the world.” Communications equipment lost 43% of its workforce. Semiconductors and electronic components lost 37% of its workforce. The workforce in computers and electronic products declined 30%. Electrical equipment and appliances lost 25% of its employees. The workforce in motor vehicles and parts declined 12%. Furniture and related products lost 17% of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43%. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 15%. Even manufacturers of beverages and tobacco products experienced a 7% shrinkage in jobs.

The knowledge jobs that were supposed to take the place of lost manufacturing jobs in the globalized “new economy” never appeared. The information sector lost 17% of its jobs, with the telecommunications work force declining by 25%. Even wholesale and retail trade lost jobs. Despite massive new accounting burdens imposed by Sarbanes-Oxley, accounting and bookkeeping employment shrank by 4%. Computer systems design and related lost 9% of its jobs. Today there are 209,000 fewer managerial and supervisory jobs than 5 years ago.

Original here at Counterpunch
I wonder if this is accurate? When the real estate bubble finally pops, will we wake up to the fact that we are not just beginning an economic depression, but that we are in the middle of one?

living in candyland

2006-02-11T10:28:00.000-08:00

I find myself in a constant state of analysis and scepticism of society.

I look around me, I see the strip malls, the multiplicity of Starbucks, the credit cards, and I think: all is an illusion. Americans are living in Candyland now, and the candy will soon wash away in the rain. This city, and every city, will be full of empty stores in some number of years time, rotting evidence of our stupidity, waste and hubris. It is hard to watch history's largest train wreck occur, in slow motion, right before your eyes. It could be avoided, but instead we choose to charge full speed into the catastrophe of the Greatest Ever Depression.

What to do? My advice: buy gold and silver coins, get a sewing machine, get a garden. Make friends with your neighbors.

Latino vs Black

2006-02-10T12:35:00.000-08:00

When times get tough, how quickly we descend into tribalism.
Another racial brawl breaks out Friday at LA jail
This is much like the type of social unrest Kunstler predicts for the USA on the downslope of peak oil. Don't think ethnic violence is unusual, or limited to jails. Read in Jared Diamond's Collapse about how resource scarcity caused the ethnic violence and genocide in Rwanda. All people can become viscious when threatened. How long did it take in New Orleans? Three days. White "deputies" with shotguns on a bridge were defending their town against a percieved invasion of mostly black refugees from New Orleans.

It is not gloomy to say it, these are facts

2006-02-09T10:26:00.000-08:00

I look to the great depression as a model for the next ten, twenty years. Gardening and sewing will be helpful, both of which I like to do, although I'm sloppy at both.

But there are big differences between the 30s and now. Back then we were self sufficient in energy, capital, and manufacturing. That was then. Now we have nothing. Except massive liabilities. It is not gloomy to say it, these are facts. Now I'll move on to some doom and gloom.

A friend said she'd lost the sense of impending doom that she had last summer. Sure. Energy and food are both cheap right now. Adjusted for the CPI, gasoline is close to its historical mean, and far cheaper than it was in the 1980s. As soon as prices go up, which is about as inevitable as anything, then a general sense of crisis will come back. I did appreciate Bush mentioning energy in his speech, economics of ethanol notwithstanding. Just because energy prices are at a temporary lull doesn't mean we should be complacent. And food! People have no idea. Corn is $2.30 for a 45 pound bushel! Just think about it, that is crazy. When corn goes to $6, and then $10, then see how many people are talking about ethanol and bio diesel. Hyperbolic rises in cotton, sugar, and wheat are also on their way. Food prices will hurt even more than energy prices, especially for low income people.

When gloomy, my friend considers moving to Idaho. I'm not convinced Idaho is a better place to be than Seattle. No way. Living around all those red-state wing nuts? Yelling "FAG" at me from their pickups?

Of course, if the gulf stream breaks up, at the same time that oil peaks and the dollar collapses (note that these things will exacerbate each other) it may just be game over. But lets not get ourselves down about this. Hey what's fate is fate. Oh, I forgot: pandemic bird flu might be another factor that could wipe us out..

George Bush on biomass

2006-02-02T15:07:00.000-08:00

I don't often agree with our faux-Texan prez, but when he said that sawgrass, (and other low grade, high cellulose biomass products) could reduce our dependence on liquid fuel imports by 75% by 2025, well I thought that was pretty absurd. So did this analysis from the Christian Science Monitor. But then I thought maybe Bush is right after all, but probably not in the way he was thinking.

First off, I think peak oil is immanently upon us. The moment when this becomes accepted as unassailable fact will come when Saudi Arabia announces that the Gwahar oil field, the world's largest, is in irreversible decline. This will be similar to Kuwait's December '05 admission that their giant field, Burgan, is in decline. Saudi Arabia's announcement, which is close at hand, I believe, will be the world-changing event. But no matter when peak oil crosses the line from conspiracy theorist, malthusian doom to simple, obvious global reality, by 2025, we should assume and plan for a critical energy shortage. This is George Bush's date, not mine. I believe that our crisis will come much sooner: probably by 2010 the USA will be in a state of semi permanent energy crisis.

But looking 19 years ahead to 2025, we will be importing no oil from the middle east, simply because the middle east will be running thin on oil. Nations can go from energy exporters to energy importers very quickly. Indonesia made the switch in 2005. If the Middle East exports oil, it will go to China. Byron King makes this point in his essay The 75% Solution. The point being that today biomass looks pretty scrawny in comparison to gasoline. By 2025, gasoline, and owning one's own car, will exist mainly in our memories. Gasoline will be available only to military and government elites. But some vehicles will need to keep running, especially trucks and tractors and trains. Diesel will be available for commercial use, but it will be very expensive, with limited production coming from Canadian tar sands. But contrary to the Christian Science Monitor's writer's article, you can run your car on biomass, and at times when fuel has been scarce, many people have done exactly that. The equipment is simple and cheap.

Look at historical examples of severe fuel crisis. In parts of the world, there was virtually no civilian fuel available during world war II. In Scandinavia, Russia, and Australia fuel was unavailable at any price. The way that people in these countries found most expedient to keep cars running, and, significantly, agricultural production moving, was to install simple wood gasifiers on their vehicles. These cars can run directly on wood chips, compressed sawdust pellets, charcoal, etc. Here's another example. And a Seattle Times article about a backyard welder who built a gasifier to make a wood burning truck.

So, I'm thinking even the paltry amounts of money Bush proposed would go a long way in refining and publicizing this simple, proven method for operating vehicles on biomass. I imagine high cellulose products like sawgrass, compressed into pellets, or wood chips made from brush wood, would be more efficient to burn in a gasifier than try to distill into alcohol. Or, high-cellulose materials can be made into charcoal to make a more powerful fuel. These high cellulose biomass sources do not require nearly as much cultivation or fertilizer as corn. Most importantly, a local energy economy can be made from such biomass sources without huge sums of capital. Small producers can manufacture wood chips and pellets. Small shops can make gasifiers and install them. If we find that it is hard to raise the capital to build fleets of gigantic LNG tankers and the terminals to recieve them, then we may find that small biomass producers are not only a good way to keep people and goods moving, but also a good way to employ people.

Unfortunately, Bush cares in no way for energy efficiency. The research cash he spoke of will go either as hand outs to politically connected agribusiness corporations, or publicists posing as scientists to spin crises in favor of the republican agenda.

Kuwait's oil reserves

2006-01-27T09:55:00.000-08:00

Kuwait has let it be known, through the mouthpiece of an oil industry newsletter, the Petroleum Intelligence Weekly, that its oil reserves are less than half of what had been previously stated. Last week Kuwait possessed 99 billion barrels of oil. This week it has only 48 billion barrels. As Byron King points out in his newsletter Whiskey and Gunpowder, this amounts to a 5% reduction in global oil reserves.

Of course it has been suspected for many years that OPEC countries' oil reserves have been over stated by 50%. This is the first official confirmation. If Saudi Arabia follows suit, it will confirm (Saudi oil magnates' nemesis) Matthew Simmons' thesis that the Saudi kingdom is near peak also.

Why is it in OPEC nations' interest to restate their reserves now? Maybe because times have changed. When these countries overstated their reserves, it was a buyers market in oil. Oil producers were suffering from falling energy prices. A larger reserve base meant a larger production quota, and greater revenue.

Now things are different. All OPEC countries are finding it hard to meet their production quotas for light oil. This stuff has become extremely valuable all of a sudden. Countries that possess large reserves of it have to think about defending their territory against the possibility of invasion. It would be safer to emphasize how little oil a small nation has, rather than how much.

It has also become clear that faster production means that a smaller percentage of the entire oilfeild will be recoverable in the end. Slower production preserves the geological integrity of the oilfeild. Few countries now are trying to maximize their production. Nations are now trying to steward their natural resources carefully, not sell them off as quickly as possible.

Import dependant countries, like the USA, Japan, China, Europe are making increasingly desperate pleas for more oil production, which are mostly going unheard. China is backing up its pleading with very large cash and military protection offers. The USA is mainly backing up its pleading with threat of invasion. When asked, the Saudis typically announce that they will increase production, but they never do. Instead they offer heavy sour oil, of which there is a glut on the maket, and few refineries can process.

I bet more coutries will follow Kuwait's lead in restating official reserves this year.

strife at the plateau of oil production

2006-01-26T11:13:00.000-08:00

Peak oil is not just about how much oil is produced, but also:
1. who gets it
2. who finances it, and in what currency

Strategic power is forcefully shifting east, to Russia, Iran and China. Jim Willie just wrote a killer essay on the geopolitics of oil. I quote Willie on why the USA cannot attack Iran to control its oil fields, like it did to Iraq:

The Iranian Oil Exchange challenges the Petro-Dollar. This time it is different. Iran aint Iraq. Iran has two big friends who have a good memory of recent heavy-handed dealings. When the United States invaded Iraq, established the reconstruction, and began to install a new government, it did so with little resistance. In the process two big events took place, not mentioned much by the lapdog US press & media. Russia got screwed out of multiple billion$ in Iraqi debt. China got screwed out of multiple billion$ in large energy contracts for Iranian oil & gas....

By enlisting Russian and Chinese assistance militarily, Iran has won some effective defense. Clearly, Russia is the key participant, but not without China supplying key Silkworm missiles themselves. Recall Putin is a master chess player. Russia recently announced the sale of world class missile systems to Iran. Be sure that overtaking Iraq was akin to taking the lunch pail from a 7-yr old boy sitting for a school bus. Overtaking Iran bears no resemblance to Iraq. Iran has over 70 million people, as opposed to Iraq's 23 million. Iran has no easy borders and no friendly neighbor for the US to base an attack. The "shock & awe" was mere target practice and an exercise of advanced weaponry on largely undefended sites...

If oil does not actually peak in the next five years, but production follows a bumpy plateau, the key question will be "who gets it"? If the USA gets less and China gets more, then there will be a major change in the relative prosperity of those nations. Also, Putin's Russia is becoming very strong, controlling most of Europe's access to energy.

If the worldwide banking and trading markets shift to Euros, which is something Putin wants, this could bring severe changes also. Our bankers would probably lend us enough cash to stay solvent, but require reductions in our defense budget..

innovation is overrated..

2006-01-25T12:27:00.000-08:00

In the business pages I read companies bragging about innovation, ad nauseum. Their own innovation of course. Most ludicrous of all is Microsoft. Microsoft says innovation is their one true "core competancy". Bill Gates even says his position in the company is "chief innovator". Naturally companies can be expected to brag and bluster, but Microsoft innovative?

The problem is larger than an annoying business buzword. It is a philosophical assumption that innovation is always good, that there is no downside, that there is no cost nor drawback to innovation. A free lunch. Society, and particularly progress, depends on innovation. It is a freight train that can not slow down. If it did, then the unthinkable would have to be thought. The freight train of progress must, by definition, make the world a better place. Technology is widely admired. The myth is that it will make our lives easier and give us more free time. Like an ad for a handheld computer, showing a person in office attire using a gadget at the beach - technology has set the person free! The reality is exactly the opposite. Nobody goes to the beach more often because innovative technology has given them more free time. Innovation means working more hours, not less. We also assume that innovation is that proverbial rising tide that floats all boats. That everyone will benefit. But inconveniently, disparity of wealth is growing, not shrinking. The technocrats' answer is of course: more innovation.

We should be aware of what is lost with innovation. That is tradition. In America we are accustomed to despise tradition, we are so eager to replace it with something better, a more profitable, faster, bigger thing or way of doing. Accounting standards are a good example. Enron was among the companies that was applauded for innovative accounting in the 1990s. When Enron fell apart the innovation was relabled: fraud. The same thing might be said for fiat currency itself some day. It was a wonderful thing. Until it crashed. Then we might think there was a good reason that money was, traditionally, made from silver and gold.

I love it!!

2006-01-20T19:27:00.000-08:00

"The market rout came as energy prices surged and as key technology stocks disappointed"
- MarketWatch

Not Shale Oil Again!!

2006-01-11T14:39:00.000-08:00

I bet we'll be hearing more about shale oil, or Kerogen, this year. Canadian Tar Sand had a very profitable year in '05, thanks to a massive marketing campaign to promote Canada as the Saudi Arabia of the future. This year Colorado's shale will want some of that action. Really, all kerogen has going for it is that it is American. So, we can at least dream of energy independence. And some people will want to invest in that. I've thought for a while that it won't work, for a shortage of water, for one, and a very low return on energy.

Now Shell Oil has a particularly preposterous, and seductively innovative, plan to produce oil from shale. They intend to heat Colorado earth to 650 degrees F, from the surface to 1000 feet down, and let it cook for three or four years. This will turn the kerogen into light free-flowing oil! Lots of natural gas is also produced, which can be recovered, and many bi-products, which are mostly toxic. So that the oil doesn't escape (and pollute groundwater) they plan to construct a "freeze wall". This is a huge box of frozen earth that contains the boiling earth. They plan to do this for up to 1000 square miles!

Its hard to even imagine the environmental consequences of such madness. I read about this scheme in Dan Denning's Strategic Investment newsletter (I would link, but it is subscription only). My first reaction was that this would never work out, so why worry? But then I thought of all the people who are desperate to find the "next energy source", and the people who are desperate to achieve "energy independence", and the people who are simply desperate to get rich on any scheme no matter how stupid. And then I thought of how easily Shell and other oil companies will be able to raise billions of dollars just by making classy presentations (they will make presentations to everyone except the hapless residents of the shale country, who will have their land and health taken from them). And then the oil companies will have to do something with the dollars that they raise. They will have to go make a gigantic mess in Colorado. They will destroy what little, and very precious, groundwater there is in those high arid plains. Then naturally the whole thing will go bankrupt amid financial scandals.

So I just hope, as it becomes more obvious that we are facing peak energy, and we look to the future, and as our dollar starts its long final slide to irrelevance, that we do sensible things with the last of our capital and energy, not blow it on a dangerously idiotic shale oil boondoggle. Lets think about re-building America's rail system. There is a lot that we could fix in this country. No need to boil up Colorado.

Inflation in 2006

2006-01-09T11:24:00.000-08:00

In the current Newsweek issue (January 9), Robert J. Samuelson says that 2006 will be a boring but moderately prosperous year IF nothing very bad happens to the US economy. Then he goes on to list 5 things that could derail the economy and send presumably it into recession. The five things are:

Housing goes bust

The dollar crashes

General Motors files for bankruptcy

Oil jumps to $85 a barrel

The yield curve inverts
He did not see the need to ponder what would happen if all five things happen in the coming year. The all seem likely to me anyway. Except maybe the last item - I have no idea if yield curve will invert (I have tried to figure this one out. All it says to me is that the Fed is not in control. They want to raise interest rates, but they can only raise the short term rate, and the long term rate, set by the market, remains stubbornly low). But a housing market bust? virtually certain. The re-finance industry will come to a complete halt. Oil going to $85? Also near certain. And if a dollar buys that much less oil, and the liquidity in housing dissapears, then yes, the dollar will fall.

There are some other dark clouds on the horizon that Samuelson didn't mention. War with Iran. This is looking more and more likely. Can there be anything more threatening? This would be the very worst thing at the worst time.

A dark horse that no one seems to be thinking about is that commodity price inflation will spread from oil to such basic goods as corn, cotton, and soybeans. For now people seem to take it for granted that grains and other soft commodities will always be available at very cheap prices. I mean $2.20 for 50 pounds of corn??? I think corn will double this year and then double again next year. And corn is used to make many thousands of products. Same for soybeans. For years now the prices of these commodities have been held down by globalization: cheap production could always be found somewhere, like Brazil, Eastern Europe, if not America or Canada. But now the key factor in agricultural production is fuel and fertilizer (which is linked to natural gas) prices. These costs are going up worldwide, giving a very stong inflationary push to the dollar.

On Strike!

2005-12-20T12:20:00.000-08:00

I was just talking to my brother Steve, who lives in New York City, about the transit workers' strike. He was saying how great it was to see so many people out bicycling and rollerblading to work, but that it was also a big pain in the ass. He did not support the transit workers, by any means. After telling me the basic outlines of the union demands, he made a convincing argument that it was an unfair stike by greedy workers. I have not heard the whole situation and I'm not making a judgement, but for the moment lets assume that yes, NYC transit workers are greedy.

So what? Did greed become a shameful thing in America all of a sudden? If so, is it bad to be a greedy rich person, or is it only bad to be a greedy blue collar person? We are so accustomed to huge gains in wealth and capital for the already rich, and so accustomed to the working person working longer hours for less pay and threatened with layoff, that we have lost all perspective. The investment manager being rewarded with 50 million dollars for a years work is fêted, but the transit worker demanding better wages is villified. There is no fundamental reason why some should be paid one thousand times what others are paid - and this is a very large part of the problems this country faces. Steve tells me that NYC cops start out at $25,000/year. That seems amazingly low. I wonder what grade school teachers get?

Many transit jobs are highly specialized, such as maintaining rail cars and underground track. I know that rail freight company Burlington Northern is struggling to keep its track in shape, and trains are running at capacity. Rail workers are hard to find right now. If new workers are hard to find and train, then that would give the current union employees lots of bargaining power. Since the NYC transit system cannot be moved offshore to China, then NYC will simply have to settle at a disadvantage. Transit workers may well gain higher pay, better benefits, and status. In this country status always comes with money.

But will the NYC transit union get away with their stike, and successfully improve workers' contracts? Unions have had very little real power in decades, and stikes rarely pay off. If the tables do turn, and blue collar unions come back into an age of power, then I don't see any reason to expect them not to be "greedy", I would expect them to try to get as much as they can, since that has been the American way for generations.

P.S. I should add that stikes are, by definition, symptoms of a disfunctional economy. Strikes crippled Boeing in the 1990s (not that Boeing deserves any sympathy). Strikes rarely produce economic benefits for societies. But for what its worth, it is better to have strikes than riots, which is what we'll be getting next if things don't get more equitable.

The Scourge Of The Supernote

2005-11-28T20:38:00.000-08:00

A couple months ago I first heard the term "supernote" in an NPR broadcast. I don't have a link to that, but here is a recent story that sums up the issue pretty well: U.S. Allegations Of North Korean Counterfeiting Emerge. The trouble is that foreign counterfeiters are producing virtually perfect $100 bills. Does anyone else find this amusing?
I wonder what really is the problem? Those unscrupulous, wantonly capitalistic asians printing up our money, purely for their own profit, and creating monetary inflation? Surely, this will not stand!
Well actually no printing press, no matter how fast, could possibly create monetary inflation in the US dollar. Presses can only make $100 bills. The US Federal Reserve creates dollars by the tens of billions, just by pushing buttons on their secure keyboards. And they do, every week. These are T-bills of course, that require no printing. But perhaps the problem is not really the extra dollars floating through wallets worldwide, but the principal of the thing? Creating money should be carefully controlled, and only done by most intelligent and visionary experts, such as Alan Greenspan. Money should not be made just because someone wants a little extra cash, like if someone needed to pay for a war..
Or maybe there is a different reason that these supernotes are so scary: the problem is that it threatens American pride that those Koreans can make something higher quality, and at cheaper cost than our own Yankee mint. It is painful to think that America no longer has the world's finest manufacturing industry. Yeah right.
Seriously, this could be one of those growing-pains-of-globalization issues. An economist might say "Sure a few employees at the mint might be hurt, but see how much better off we'll all be with those fine Korean made dollars".
Maybe we should just say "Thanks, for printing up the bucks" and let them counterfeit. Especially while they are still doing it for free!

Energy Conservation??

2005-11-21T12:19:00.000-08:00

When I bring up peak oil issues with people who are not generally obsessed with the topic the conversation often turns to energy conservation. This makes me pessimistic, because I hear conservation discussed as if there is no downside, no pain. The fact is that the flip side of conservation is recession: they come together.

The American economy is based on three things; consumption, over-consumption, and conspicuous consumption. There is no easy slowing down for us. Our economic growth, and ironically, our much admired "productivity", consists of pure full bore spending. Our republican cabal realizes this, that is why they do not want conservation. Conservation means fewer large houses in suburban developements, less shopping, less driving. It is not about turning off the water when you brush your teeth.

And when I hear about local economies, I get even more pessimistic. Our economy is based on shipping virtually everything we need from China. We are screwed if this becomes unprofitable. If this business model falls apart we will have NO economy at all. It will take many years to have any sort of local, or national, economy. And these years will be years of economic depression. Take Wal Mart as an example. I hear practically every day how much Wal Mart is hated, how it is destroying America, etc. So, would we rather Wal Mart became unprofitable, and started to close down stores, and lay off people? They are the largest employer in America, even if they do suck. And Wal Mart can't easily scale back, their whole business model is based on massive economy of scale, huge parking lots, people driving in from wherever. If Wal-Mart goes into the red, America goes into depression. We may be able to build a national, and local economy, but it will take decades, and we will have depression.

Gold and Oil

2005-10-24T10:05:00.001-07:00

The reason I see precious metals coming back, is that the whole idea of fiat currency seems to be closly linked with cheap energy. As energy peaks, fiat currency will peak.

When huge supplies of cheap energy were discovered, in the form of crude oil gushing out of the earth all through the first half of the 20th century, massive economic and population expansion was possible - but only with a concurrent expansion of capital. With the gold standard basically keeping the money supply fixed, capital could not rise along with the new energy supplies. With abandonment of the gold standard, and the innovation of endlessly expandable fiat currency, the means of global civilization's recent hyperbolic expansion arrived. Continuing this thought, it seems to me that most of the problems of the past century were actually caused because monetary expansion could be accomplished simply by decree, but energy expansion was not quite so simple. So in many times and places, there have been shortages of energy (either political or geological), but any government could increase currency supply at will.

More on rebuilding gulf oil infrastructure

2005-09-30T10:30:00.000-07:00

Nearly all of gulf of Mexico oil and 80% of gas production, is "shut in" at present. This is adds up to 28% of total U.S. oil output and 14% of total U.S. natural gas output, according to a Whisky and Gunpowder report. And thanks to Whiskey and Gunpowder for this spectacular graphic of the capsized platform Typhoon!

It will not be possible to simply repair, rebuild and replace all the damaged infrastructure. It will all have to be redesigned and re-engineered from scratch, to a higher, and much more expensive, standard.

Here is why: The Houston Chronicle reports that that gulf oil infrastructure was built and insured for a "hundred year storm". It turns out that a hundred year storm, an oil industry definition, was basically equivalent to a category 2 to 3 hurricane. This is clearly insufficient and uninsurable now. To build to withstand a category 5 hurricane, platforms have to be build much higher and stronger, requiring more steel and more labor.

We may find that the capital to build all that stuff is not so easy to raise. Even the giant oil companies don't seem eager to spend their profits on last year's energy systems. For example, why would you build a new, state of the art refinery if you'll have to be begging for access to crude feestocks (of unknown quality) from foreign sources? As for production, the best fields will no doubt be brought back to production, but there must have been many gulf oil fields that were declining or approaching decline. These won't pencil out any longer.

The federal government has the greatest interest in getting Gulf production back online, and they will only be able to make that happen with federal financing and guarantees. The capital will have to come from foreign sources. Will other nations be eager to finance our energy infrastructure?

Maybe not:
a) all we do is waste our gas on SUVs - this is not a good return on capital
b) other nations are scrambling to build and secure their own energy supplies, at great expense
c) we have a huge and threatening military. Reducing our energy availability would de-power our military capability

So, I believe the gulf of Mexico won't ever come back to its pre-Katrina production level. How much will be brought back? Heck if I know.

Las Vegas Will Be Next

2005-09-17T07:36:00.000-07:00

After Katrina there was a lot of people looking at New Orleans, saying "what a place to put a city, what were they thinking"? And now our President promises to spend unspecified hundereds of billions of dollars to re-build it. Well we can only hope that a safer city can be built. Above sea level at least. But New Orleans is not the only American city placed in the bullseye of catastrophe. Look at the American southwest, and most ludicrous of all, Las Vegas.

This post has been brewing in my mind ever since the hurricane, but was suddenly spurred by the news that MGM Mirage is planning "a $5 billion mixed-use monster on the Las Vegas Strip that will boast 18 million square feet of casino, hotel, condominium and retail space."

I know that it is easy to take pot shots at Vegas. But this is insane (read it here). Vegas will dry up and die, Bellagio, New York New York, all of it. It will not die in 3 days by flood, but it will happen over the span of 2 years, by fuel shortage, drought and monetary collapse. I'll try to stay calm and itemize my outrage and objections.

1) Being a resort town, everyone coming to Vegas has to fly across the desert. Did anyone notice that two more airlines just went bankrupt? Flying around the country will not be so simple soon. No one will hop on a plane for a spontaneous weekend of gambling.

2) Las Vegas' high rise hotels must be some of the most intensive energy and water use buildings ever. Fuel, electricity, and water will soon become prohibitive. The American southwest is dangerously drought prone. Global warming will bring drought to the southwest just as surely as it brings catastrophic hurricanes to the Gulf of Mississippi. There will be no source of water: all alternatives require large amounts of energy. Of course a drought and energy shortage will not affect only Las Vegas. Every city, from LA to San Diego, Phoenix, Santa Fe, and Denver, will suffer.

3) From a macro economic perspective, casinos don't add anything to the economy. They produce no value. They take money, albeit in an highly entertaining manner, they don't actually make it. When the Fed is spraying cheap dollars everywhere, you can benefit with a quarter million line of credit from your house. Then, sure it sounds like fun to go to Vegas and throw hundred away dollar bills while the lights flash and bells ring. But Americans won't have those throw-away dollars anymore. They will be spending it all on filling their gas tanks, paying health insurance, electricity and grocery bills.

So where will all those people, the actual citizens of Las Vegas, go? I think our federal and state governments should start preparing for mass migrations. The dust bowl all over again.

Natural Gas Depletion

2005-09-15T14:12:00.000-07:00

In the kitchen of my family's summer cabin, where we have a propane tank to run the stove, you can cook, until all of a sudden the flame dims and its gone. Gas fields are like that - gone all of a sudden. With oil fields you can install a pump jack, and when oil is gone you can let it rest every other day, or something, and a little oil will squeeze out for a long time. My understanding is that gas is different, when its gone its gone.

The undersea pipelines off the gulf coast are worrisome. We have no idea of the extent of the damage. I read in the NYT about how the pipelines are made to be sort of 'disposable', in that they are automatically shut in places, with breakage links built in. The idea being you can't make them invulnerable to damage, but you can make them cheaper and easier to repair.
Or that’s my interpretation from here:
http://www.nytimes.com/2005/09/15/business/15gulf.html
This is a very interesting article, BTW, on how the gulf energy infrastructure will rebuild.
But huge underwater mudslides are a big deal. Suppose a wellhead is buried? I bet they'd have to re-drill.

I wonder what we'd do in this country with no adequate natural gas supply. I think we'd make synthetic gas from coal, or crude oil, much like Seattle's defunct gasworks (now gasworks park) did. It would be very expensive, but we need to keep those pipelines filled, stoves lit, houses warm, etc. But the electric generation from gas? That’s different - I wonder if it will be economical to run them on synthetic gas at all? And where else will we get electricity? Nukes maybe? We don't seem to have the time - gas will run out before we can get enough plants built. We don't have the money either - the US dollar will devalue soon, and we have no savings at all, as a nation.

We can import some gas in LNG tankers, but that is another huge energy infrastructure we'd have to build, and it only makes us MORE dependent on foreign countries for our energy supply.

Katrina Is An Economic Turning Point For The USA, And Therefore The Globe

2005-09-02T09:21:00.000-07:00

This headline is a quote from the post below, I thought I'd elaborate on it. According to Matt Simmons and others, Saudi Arabia is the key producer of crude oil, and when Saudi oil production peaks, then the world peaks. The USA has the same role, but for dollars, as Saudi arabia has for oil. The world's economies have been growing on the supply of cheap credit that the USA is able to continually issue. Other countries issue bonds such as our treasury bills, but USA debt is the big one. US dollars are also the world's reserve currency and at present the only currency that international trades in oil can be made. So, oil and dollars are closely linked, in an inverse relationship. As the price of oil goes inexorably up, the value of dollars goes down.

The supply of dollars is about to peak, much as the oil supply is about to peak. There is little the US goverment (specifically the Federal Reserve Bank) can do about it. The Fed will not be able to flood the globe with cheap credit for ever. Lower rates, raise rates, issue more bonds, fewer bonds - it does not matter. Hyperinflation is fast approaching, and this is the depletion of money. Hyperinflation of the dollar is no different from the Saudis not be able to flood the globe with cheap oil for ever. Note that although the USA can issue more bonds we don't have the domestic captital to buy them. We depend on other countries to do that.

The best source of info on the US dollar crisis is FinancialSense.com.

And how will Katrina affect the US economy in such a drastic way? The US economy is not sound, by any means. The US stock market is overloaded with real estate debt. With no manufacturing base, and not self sufficient in energy or capital, we don't even have the resources we had in the Great Depression. September and October are generally the months when the stock market has major corrections and crashes. The combination of insurance losses and energy supply disruptions could easily tip the balance of the market and send us falling into recession. With a recession, will there be any way to avoid a real estate collapse? If we do hold on, then I can't believe there will be any economic growth. The best we can hope for economically will be economic stagnation, while inflation gradually gathers steam. If America's economic growth (entirely real estate driven) falters, then global economic growth stops also.

New Orleans is Gone

2005-09-01T22:59:00.000-07:00

I have been in shock for the past 2 days. I cannot quite take in all the news from Louisiana and Mississippi. But at this point I am sure that Katrina is a very important event - not a world changing event in itself, but a turning point, an event that triggers many cultural and economic shifts that are ready and waiting. 9/11 was a politcal turning point, Katrina is bigger, it is a economic turning point for the USA, and therefore the globe.

Mayor Ray Nagins of New Orleans was saying it would be six months at least before they would get the city dried out and citizens could return. Well of course he has to say that, he doesn't get it yet. I don't think those people are ever going to get back. New Orleans is gone for good. Maybe they will save a bit of the french quarter as a little tourist village. Global warming destroyed New Orleans, and it is not going to cool down. Is the Army Corps of Engineers going to rebuild the levee and seawall system so half a million people can live below sea level? So they can sit and wait for the next category 4 hurricane? As the temperature in the gulf rises year by year? As the sea level itself is rising? This is very hard to believe. Who would insure it? They will probably build a new city on higher ground somewhere. I don't know the geography of the region. and all those smaller port towns, the ones destroyed will not be re-built. Towns not distroyed are living on borrowed time, and rising insurance rates, or the impossibility of getting coverage, will eventually make ghost towns of them.

The worst thing is that New Orleans will probably lose much of its industrial base as well. The many oil refineries surrounding the city, they were built in the 1950s through 1970s. They are obselete. They were built to process light sweet crude into relatively high sulfur gas and deisel. Now fuel standards are stricter, and crude feedstocks are dirtier. These refineries are barely profitable, inefficient, rust belt relics. They would require massive investment to upgrade them to process heavy sour crude. Oil companies might decide that the gulf coast is not the safest place to refine fuel, if the plants have to shut down for two weeks per year on account of hurricanes. Each mothballed refinery will become a toxic waste site.

And what about the drilling rigs out on the coast? No doubt one way or another, oil companies will find a way to get to that oil and gas, but it simply can't be business as usual. Oil production will not cease, but it will decline faster due to hurricane risk. Not all the wells in the gulf are equally profitable, and the recent dramatic increase in hurricane force changes the equations. Wells in or approaching decline will probably not be rebuilt. Oil rigs and platforms have taken enormous losses to hurricanes in the past two years and the ones that are rebuilt will have to be made very safe. This cost billions, and takes years. I keep reading about manpower shortages in the oil industry. Gulf shipyards that build and repair oil rigs are subject to hurricane risk. Probably only the most profitable rigs will be rebuilt, many will be abandoned.

All this will cause shortages in gas and oil, and refined fuels. Fuel will be very expensive. Katrina will jumpstart America's energy crisis.

The Fate Of Canada's Tar Sands

2005-08-06T19:35:00.000-07:00

I keep pondering the fate of Canada's tar sands. I do not wonder if they will save North America from a debilitating energy crisis. Nothing can avert that. But can they be mined and refined profitably in any way? The process of heating all that sand just to get heavy, high sulfur, sludgy oil, and then trying to make gasoline out of the oil, seems like a losing proposition.

I know that Syncrude does make nice gasoline out of tar sands now, and that they like to say that they can make a profit if the the price of crude oil is anywhere above $30/barrel. Syncrude naturally like investors to think it is that simple. Syncrude likes the hundreds of billions of investment dollars being thrown at tar sand projects these days. But can they make gasoline if natural gas goes to $14 faster than oil goes to $120? I doubt it. Not profitably, anyway. Natural gas is both highly volitile in price and prone to very sudden depletions. North America will run out of it soon.

But maybe this will happen: tar sand will be processed into dirty, high sulfur, and very expensive deisel oil. It will be produced in big iron tanks with crude, polluting, low cost technology, such as burning wood. Why would anyone buy such fuel? Because there will not be any gasoline on the market. Any gas that the US does manage to import, at huge expense, will go to military and goverment elites. Jet fuel will be the rarest of all commodities.

All transportation fuels will be expensive, so only the most economical forms of transport will be used. There will be a functional rail system again. To cross an ocean, people will travel by ship.

On Corporate Debt

2005-08-02T16:46:00.000-07:00

A currency trader corresponant wrote:

I am not sure where you get your figures on corporate indebtedness but everything I have read points to the relative health of corporate balance sheets.

So, I realized I needed to look deeper in to corporate debt. The figures I uncovered are revealing. As for where I get my numbers, I just look them up on my brokerage site — harrisdirect. The number that caught my eye is the figure for the S&P 500: 1.08. 108% of equity! Also, the S&P has a P/E of 20 [these are the most recent figures. Debt is actually trending down, from 110% in March. But the P/E is trending up, from 17 in March]. Normal corporate debt should be around 1/3 of equity. And in an era of rising interest rates, companies should pay down debt.

Much of the S&P 500's debt is related to housing and real estate: fannie mae and freddie mac are high on the list of topheavy S&P components. Fannie is at 23 times equity, Freddie is 16. Wow. Goodyear is a proposterous 105 (I double checked this, it is real). Of course we can ask who needs Goodyear, when we can buy better tires from Asia? Goodyear is just another rust belt relic. Goodbye, blimp. All of the american auto sector is heavily indebt, for that matter. But Fannie and freddie, if they turn turtle, we are in very big trouble. Of course the government would want to bail them out. But with what money? Fannie Mae’s debt adds up to almost a trillion bucks. Can even the USA float bonds that size? America's entire national debt is 8 trillion.

Looking up the numbers of the dow components, many of the large caps on the dow have normal to negligible debt. Disney, Home depot, Wal mart, Merck, and DuPont are all OK. Exxon, swimming in oil-revenue cash, has almost no debt at all. Others are outrageously overloaded: Citigroup is 1.9, GE, 1.89. Of course one could argue that fannie and freddie naturally have high debt, their business is to buy mortgage debt. And because homeowners are the last to default, it is relativly safe. But two things have changed:
a) people are buying homes on short-term speculation.
b) if homeowners' variable rate mortgages go up to a level that they cannot pay, and they don't have enough equity in the house to sell, then they will default.
Another problem with the banks' and mortgage companies' debt is they they have swollen to a huge proportion of the market. The manufacturing sector has practically no equity any more. There is no sector of the market that can hold up if the home-debt bubble collapses, because real estate is almost the whole market.

Timely Oil Refinery Fires

2005-07-30T10:14:00.000-07:00

MSNBC has a feature about multiple small fires impeding production at oil refineries and offshore production platforms:
Refinery fires push oil prices back above $60.
This sure reminds me of all the well timed problems that west coast power generating plants were having during the California electricity crisis.

Trade Deficit Narrows? Really?

2005-07-13T09:46:00.000-07:00

WASHINGTON (MarketWatch) -- Stronger demand for U.S. products overseas and lower energy costs at home helped to reduce the trade deficit in May, the Commerce Department said Wednesday. The trade deficit narrowed 2.8% in May to $55.3 billion, and was below the consensus forecast of Wall Street economists of $57.0 billion

This is interesting news, and, if true, is a contradiction of my bearish view of the US economy and the UD dollar. But how do we know if it is true? We do know that the Bush administration has been leaning on all federal agencies to publish whatever figures and news suit their political ends. Global warming is denied, the Consumer Price Index is a farce (read this page by Jim Puplava's for the details). Economic projections, the various rationales for waging war, all of it is simply made up to suit the Republican agenda.
Is there any way to verify the commerce department's trade deficit numbers? Trillions of dollars trade on the FX markets on the basis if this information.

Will Unconventional Oil Make Up The Shortage?

2005-07-07T10:20:00.000-07:00

Such sources [from unconventional fields] will account for 30% of all supplies in 2010, up from just 10% in 1990, according to CERA. ExxonMobil figures the world contains some 7 trillion bbl. of heavy oil, oil sands, and shale-oil reserves alone, an amount roughly equal to those of all conventional reserves. If just 20% of those were recovered, ExxonMobil figures that would top the 1 trillion bbl. of conventional oil produced on the planet to date. If numbers like that prove to be accurate, today's worries over oil supplies could seem like a distant memory in just a few short years.
Original here at Businessweek

The above optimistic picture is painted by Daniel Yergin's Cambridge Energy Research Associates. I am very skeptical. Heavy oil, it is true, has a future, but we'll have to invest billions in a whole new refinery infrastructure. Ditto for the new Liquid Natural Gas freighter terminals I keep hearing about. Even if we could build all this stuff, our economy as we know it won't run on unconventional oil, it requires cheap, abundant oil.

As for oil (tar) sands, yes the fuel is there, but it is vastly more expensive to extract than oil conveniently gushing out of the earth. Shale oil is even harder to extract than tar sand. There will be energy available, but only at prices that we have not yet begun to see. This is because much of the cost of producing these fuels (sand and shale) goes to energy. for example, to liquify the tar in Canadian tar sands, they need to heat the sand with steam. The steam is made by boiling water with natural gas. If the cost of gas goes up faster than the price they get for the synthetic oil, then the tar sands will simply be unprofitable, and production will shut down. Roberts, in the End Of Oil, and Heinberg in The Party's Over, make this point repeatedly: a nation's energy infrastructure must be profitable for it to work. Only Nazi Germany has been able to make much synthetic oil in the past, and it was made possible by using slave labor. Note that this oil did not really drive Germany's economy; only its military got the fuel.

But we won't be able to build all that infrastructure stuff anyway. The amounts of capital needed will not be so easy to get when the supply of dollars finally starts to dry up. If we do get some of it built it will be very hard to pay off.

Parallel to oil, dollars will "peak" very soon, sending this country, and much of the globe with it, into inflationary depression. (Or deflationary depression, depending on the reaction of nations' central banks.) A tsunami of bankruptcies and defaults will sweep the globe. The world's economy is dependent on a supply of cheap abundant dollars just as much as cheap abundant oil. Note that the S&P 500 has negative equity: long term corporate debt is 110% of the value all outstanding shares. Personal debt, government, municipal debt, real estate values, these are pretty much the same story; an unsustainable house of cards that keeps growing taller. The Fed will not be able to flood the world with credit forever. When the money runs out and debts have to be paid, not just re-financed, we will not be able to raise the vast amounts of capital necessary to build the new LNG freighter temminals, heavy oil refineries, nukes, methane hydrate rigs, etc. The idea that we can, at this last minute, re-build our energy infrastructure from scratch is a fantasy. It is too late!

That’s why I think we'll have mules and oxen, and wood-burning tractors, powering our farms in 20 or even 10 years: they don't require a centralized infrastructure.

As for transportaion, the best we'll be able to afford, and run, will be a railroad system. For overseas travel, we'll be going by ship. Freighters will improve their finances by carrying passengers as well as cargo, and some cruise ships may be able to convert to ocean liners.

By the way, you really can run your car, or tractor, on wood chips! And reasonably cleanly, too. During WWII, in Scandinavia and Australia, and other places that had no fuel at all, that’s how vehicles ran. Look up producer gas on google.

In the future, because fuel will be so much more expensive and capital hard to come by, our economy will contract. This is the hardest thing, as Americans, that we need to face. Growth is over.

US vs China business war

2005-07-05T20:28:00.000-07:00

MSNBC published, from the Washington Post, an story about just how pissed China is about the US congress not wanting to Unocal to be sold to a Chinese oil company.
http://www.msnbc.msn.com/id/8465660/
This sounds like pretty strong language for diplomacy. If the US government persists in trying to block the sale of Unocal's energy assets, especially the 70% of Unocal's properties located in Asia, expect China to retaliate in spectacular fashion. China holds a winning hand in this business war. All they need to do is start dumping some of their vast treasury bill holdings. Then watch the credit markets panic and interest rates leap.
Probably, this will not happen. A little backroom diplomacy - and congress will realize that 'free trade' is more important than energy independance. One way or another, China will aquire Unocal, or at least the Asian oil and gas holdings.

James Howard Kunstler

2005-06-09T21:49:00.000-07:00

I just heard Kunstler speak for his book tour for The Long Emergency. He is a very intense guy with a funny and sarcastic wit. He has an energy that tends to fly pretty wildly. I have not read his books, so I am just giving my impressions. The Long Emergency is on my reading list, however. He gave an amusing characterization of the USA of the near future, when rapid inflations floods our economy. He said the America will be like NASCAR Nation meets the Weimar Republic. But then he said we should not be too worried about what the federal goverment might do, because they will hardly be able to answer the phone.

I find this odd. I would not underestimate the capacity for a bankrupt nations to become authoritarian. Look at North Korea, although they always were authoritarian. But famine and energy shortages didn't change that. And the Weimar Republic, which led to Nazism. We may find the Republican party installing John Bolton as president some day. He would be our own Saddam.

"America is Over" - Michael Ventura

2005-06-08T10:50:00.000-07:00

Michael Ventura makes an interesting point about the US transitioning down from militaristic superpower status. After explaining that the US will need to rebuild its transportation and energy infrastructure at a time when it has nearly gone broke, he writes:

There's only one section of our economy that has that kind of money: the military budget. The U.S. now spends more on its military than all other nations combined. A sane transit to a post-automobile America will require a massive shift from military to infrastructure spending. That shift would be supported by our bankers in China and Europe (that is, they would continue to finance our debt) because it's in their interests that we regain economic viability. What's not in their interests is that we remain a military superpower.

This is in a column for the Austin Chronicle: $4 a Gallon. This article is the best single, concise explanation of America's position in the world today.

history's biggest economic bust: China

2005-06-06T22:11:00.000-07:00

I read every single day about China becoming the great economic and probably military power of the the 21st Century. This will no doubt happen, I do not dispute it. But I do not think they will have a smooth ride to superpower status. No country can sustain large scale, rapid economic growth without periodic recessions and/or depressions. America had plenty during its acendency. It is a fundamental aspect of the business cycle. Right now China is enjoying history's most massive economic boom. It follows that they will endure history's largest recession. China is intricately tied to US debt and economic growth. Peak oil is probably going to force a disruption in world trade, either this year of in 2006, then China's growth will come to a halt.

I believe China will regain momentum, but it will be as the center of a world-dominant Asia, and it will take a long time to build such an economy.

will there be US currency controls?

2005-06-06T21:57:00.000-07:00

Jim Rogers, the commodities investment guru, predicts that at some point in the near future, the US goverment will impose currency controls. No doubt this would occur after a US dollar collapse. He doesn't say this in his books, but he mentioned it in an interview with Fortune magazine, January '05. With currency controls, investments in foreign securities, bonds, commodities and currencies may be resticted or banned. The point will be that the United States will try to keep US dollars from fleeing to safer shores. Like Italy had in the 70s.

If this happens, Americans' best inflation defense will be a stash of gold in the basement. We can only hope they don't make gold ownership illegal. In any case, goodbye to the high tech banking system. If the big international banks collapse, they will have brought it on themselves, with their preposterous derivatives and hedge funds.

I've put some of my kids' custodial funds into 1 ounce gold coins. I chose Canadian maple leafs, because they are pure gold, not an alloy. I expect that the USA will impose currency contols. Export of dollars and gold will be banned. Gold will be legally bought and sold only by the US government.

o canada!

2005-06-06T13:18:00.000-07:00

For several years now I have had some foreign stocks that are easy to buy on the NYSE, in the form of ADRs. I would rather buy Canadian stocks or bonds directly, on the Toronto Stock Exchange, but they don't make this easy. Few US brokerages will trade in Toronto. And to get an account with a Canadian brokerage you need to be a Canadian resident. The three Canadian companies I ended up choosing are Petro-Canada, Imperial Oil, and Potash Corp (a fertilizer company).

Why Canadian stocks? United States debt levels and the US housing bubble makes me think that US equities are not a good thing to own right now. Assuming that the US dollar will continue to erode, and is at risk of a large, sudden devaluation, I tried to figure out which currencies are most likely to hold value. Four of the world's major, floating currencies are said to be closely linked with their nation's natural resource assets: New Zealand dollar, Australian dollar, South African rand, and the Canadian dollar. In an era of commodity inflation, in which we are now in the middle of, these currencies should appreciate. These currencies might be able to withstand the global flood of inflation. But New Zealand just seems to small and isolated. And Australia seems to have severe environmental problems. South Africa doesn't have much oil. I might buy some of their gold krugerrands, though. and it would be hard to keep up with the news in South Africa.
But Canada - that is a different story. They have huge natural resouce reserves, and good access to the 2 biggest markets for their resources: The USA and China. They have a resonably stable government (I am glad I have not heard about Quebecois secession lately). The have a well run banking system, a free press, and they are close by. I can hear the "News From Canada" on NPR.

So, if you buy a Canadian oil company, the stock can go up two ways:
a) if the price of oil goes up
b) if the Canadian dollar appreciates against the US dollar

I think both these things are likely. They are also very much linked: US dollars are petro-dollars. They are linked to the price of oil, because oil is always traded in US dollars.

BTW, Henry Groppe is an oil analyst who is very bullish on Canadian oil. Read this: Oil Forecasting Legend Paints Dire Energy Picture
At the bottom of this page he says:

...Groppe’s favourite group is the Canadian oil patch. “We would classify Canada as perhaps possessing the most attractive combination of circumstances for energy investment of any place in the world. It is only a quarter as intensely drilled and exploited as the United States” and “I suspect that in the next several years the oil sands reserves will be raised to be higher than Saudi Arabia’s.” In that same vein, Groppe predicts “within 10 years we have Canada as being the largest non-OPEC producer in the world outside of Russia.”

The man puts his money where his mouth is, and says that “90% of all of my equity investment assets are in energy, and 65% of that is Canadian.” He also says, “We think there is still a good long run ahead with the kinds of prices that we see”, which should be a positive, and somewhat comforting for investors in the area, considering Groppe’s enviable and unmatched oil forecasting record, both in longevity and accuracy.

commodities trading

2005-06-06T11:47:00.000-07:00

I have liquidated my Goldman Sachs postion. I switched to crude oil and gold contracts for my commodity portfolio. The trouble with the Goldman Sachs Index is:

a) You can't buy long term contracts. They are available for only a few months forward. That is, in June, the farthest out contract you can buy is for August. If you believe there will be long term inflation in virtually all commodities, it does not make sense to place such a short term position.

b) The only decent liquidity is in the front month.

The upshot of this is that you have to roll over your position every month, which is stressful and can be hazarous to your balance. The oil and gold contracts are better for a small investor, who doesn't want to be day trading. They are very liquid. You can buy them years out if you prefer. And the contract size is smaller than the Goldman Sachs, so you are not putting as much of your capital in one contract.

But I liked the idea of the Goldman Sachs Index, it seemed to represent a reasonable cross section of the global economy.

shipping security

2005-05-31T10:16:00.000-07:00

It has often been noted that internatioanal trade will become more costly as the price of shipping fuel increases. I believe another factor will also increase shipping costs: security. A loaded oil tanker is worth a huge amount of money these days. The largest tankers hold around 2 million barrels of oil, with an ultimate worth of a hundred million dollars. No doubt a supertanker full of oil is very closely watched by satellite based security systems. Exxon is not going to let a few thugs in speedboats steal their tankers. But terrorists might well hope to blow one up. And security does not come cheap.

And what about bulk carriers? A loaded bulk carrier with a cargo of 20,000 tons of soybeans is worth 5 million dollars for the cargo alone, with far lower security than a huge tanker. Bulk carriers are often registered under a flag of convenience, like Liberia, to a small company based in the Virgin Islands, with a crew from a different country, say Korea, and leased to an international shipping company, and insured somewhere else. Cargo manifests and ships registration papers can be forged. We might see another resurgence in high seas piracy, like we did around 2000-2001.

US dollars are melting away

2005-05-29T14:58:00.000-07:00

In this Financial Sense audio file Credit Collapse and Will The Dollar Hold? Douglas C. Noland makes a very interesting point. The US economy, after transitioning from a manufacturing economy, and then to a service economy, has now become a financial products economy. Most of our GDP, he says, is from profits from real estate loans, and from 'hybrid financial instraments' such as derivitives and structured trades.

The derivatives thing reminds me of Enron, but on a vastly larger scale. Enron was a well run, if aggressive, oil and gas company. Then they sold off all their oil and gas properties to raise the capital to create a Virtual Energy Marketplace. and they set up their business to be so complex that no one could figure out what they were really doing. And of course the executives turned out to be crooks. Well this sounds similare to 'hybrid financial instraments' to me. If it is so complicated that no one really knows where the money is coming from or going to, and all you can see is that there sure is a lot of it sloshing around, then beware.

BTW, I own shares in one of Enron's old discarded oil and gas businesses: EOG resources. It is the only US stock I own at this point. I think it is still a well run energy company. They have significant oil reserves, and, even better, significant gas reserves.

unregulated capitalism

2005-05-29T14:47:00.000-07:00

I believe that American style anything-goes capitalism is a disaster, every bit as damaging to society as centrally controlled communist economies. The best economic system is a well-regulated capitalism. I know this is hard to achieve and hard to even contemplate for those who think that goverment regulation is a road to tyranny. I remember reading in the Old Testament somewhere that one of the ancient nations, possibly Sumer, prospered with the benefit of an efficient bureaucracy. Those who believe that private industry is inherently more efficient that bureaucracy need only to look at the USA health care system: a self-perpetuating gordian knot of insurance firms, HMOs, and drug companies. Very little of the money we spend on health care seems to go to health care.

Government regulations are especially important regarding production and use of scarce resouces. Ancient Japan saved itself from economic collapse from deforestation, by strict regulation concerning logging, according to Jared Diamond, in his book Collapse. A Norwegian friend informed me that centuries ago the Norwegian king imposed strict fishing controls, and preserved Norway's fisheries for centuries. No doubt these regulations were extremely unpopular. They are the sort of painful choices America must make soon to stave off economic collapse.

amusingly hypocritical

2005-05-29T14:22:00.000-07:00

I find American laisez faire capitalism to be amusingly hypocritical. Enterpreneurial enthusiasts love 'disruptive innovation', at least as long as they are not the ones whose business is disrupted, they think predatory mergers and acquisitions are just part of the game. The think 'crony capitalism' is something found in other countries. But then when energy or other commodity prices go up they start complaining about obscene profits. But the simple fact is that every commodity producer, of any commodity anywhere, dreams of controlling the market, high prices and pricing power for that commodity. Fisherman dream of high prices for fish, oil producers dream of high prices for oil.

US fuel efficiency

2005-05-04T09:00:00.000-07:00

Improving the fuel efficiency of american vehicles is the single most important first step the US could take to turn away from the ruinous dual path of peak oil and global warming. When I heard that President Bush advocated improving CAFE standards, in his April address to the nation, I thought this was a change, possibly a piece of sanity from a government that seems to live on another planet. Unfortunately, this was, as usual, pure and dangerously misleading bullshit from the Bush administration.
Bush proposed increasing fuel efficiency to save 340,000 barrels of oil a day. This would be a modest improvement. But what the policy really proposes is to increase CAFE standards for SUVs from 20.7 mpg to 21 mpg. That doesn't sound so impressive. And, according to the National Highway Traffic Safety Administration, this change would save at most 9,400 barrels per day. Reporters asked people at the NHTSA about the white house's 340,000 barrel figure and they had no explanation.
the story, on MSNBC, is here: White House policy does little to save fuel
It seems that there is no lie, no matter how large or small, petty or how audatious, that Bush and company are not willing to use if it furthers their narrow minded, pro-business agenda.

F. William Engdahl and other reading

2005-05-01T21:05:00.000-07:00

Last year, I started on the train of thought that led me to publish this blog. I stumbled on some articles by F. William Engdahl. Reading these three essays stunned me into an eventual realization that the human society is at a crucial turning point and it looks very much like a drastic, and probably irreversable turn for the worse.

www.mindfully.org/Energy/2004/Iraq-Peak-Oil6aug04.htm
About how soon we are approaching a world energy crisis

www.proliberty.com/observer/20040808.htm
Abut the US real estate bubble and US debt, and how that will cause the collapse of the dollar

www.proliberty.com/observer/20031001.htm
A long article about how maintaining America's dominant position requires ever more imperialist force. Interesting points about the IMF, and the occupation of Iraq.

Seeking more information, I have also read two books on peak oil:

The Party's Over, by Richard Heinberg

The End of Oil, by Paul Roberts.
Heinberg is by far the most pessimistic author I've read, he is a Cassandra bearing dreadful prophesy. He sees the energy crisis that will come with the end of plentiful oil as inevitable, and the consequenses devastaing. In several decades time, most nations will not be able to maintain universal public electricty grids. What electric resources will be available, will only be for military and government elites. Over the next hundred years or so, the population of the earth will fall drastically, to the level it was at before industrial, petrochemical-based, fertilizer became available: it will fall to 1/4 of what it is now. And it will fall by the means that population usually falls, by disease, famine, and warfare.

Roberts sees a glimmer of hope for the energy supply of the globe. by smart government management of resources, nations may be able to transition to natural gas as a bridge fuel, and finally to renewables. Coal will probably always be available for some uses.

The way I see it, per capita available energy will have to fall drastically, no matter what sort of society we have in the future. (Per capita available energy seems to be the crucial metric that charts the rise and fall of civilization. for a numerical explanation of this, called the Olduvai Gorge theory, see this page: The Peak of World Oil Production.) We may devolve to a coal burning, early industrial society, or a "green" society with wind, biomass, and solar energy to supplementing our remaining fossil fuel. But these systems will not be able to support anywhere near the current earth population. No alternative energy source (with the possible exception of nuclear fusion) has the energy concentration, portability, and huge volumes that oil has givien us. We may also devolve to a feudal, pre-industrial society. It is not out of the question that the human race might be extinct in 100 years.

I don't believe that there will be a single computer functioning on Earth in 100 years time. Even in the most optimistic senario, this level of technology will be unsupportable. The problem that makes me most pessimistic, is that all the economic analysis doesn't take into account the many disruptive effects of global warming, which now looks every bit as inevitable as a peak oil energy crisis.

(A strange footnote: assuming human society survives, future historians will look back on history, and they will have a pretty good record of what happened until about the mid 1990s, when most information becomes electronic. All computer data will be lost when the electical grids go dark, and the factories no longer manufacture hi tech parts to keep old computers running. Historians of the 22nd Century may well wonder "What The Fuck Happened"?)

I have also read a fascinating book on how societies disintergrate, or, alternately, how they survive societal crisis and prosper anew. If societies made intelligent choices that enabled them to survive, the choices were always about careful conservation and government management of resources, and population controls. The book is Collapse, by Jared Diamond

oil refining

2005-04-28T16:24:00.000-07:00

Saudi Crown Prince Abdullah said that high gas prices in the US are the result of of lack of refining capability in the US.

This may or may not be true right now. I am wondering if something similar to the California electicity crisis of a few years back is going on in oil refining, with oil companies deliberatly letting refineries suffer breakdowns in order to profit from a shortage.

But long term will be different. There will be refining over-capacity, which is why even huge multinational oil companies (which make huge profits refining oil) are reluctant to build new plants. My point is that there are going to be oil shortages as many oil exporting countries' output peaks. Indonesia, Mexico, and the North sea nations may choose to use their remaining oil domestically, instead of sending it abroad (according to Richard Heinberg, author of The Party's Over, this may be in violation of WTA rules and may spark intense trade disputes). China may gain control, economically or militarily, over some Indonesian oil, much as the USA has been doing for decades.
So, some refineries will be sitting idle becuase they can't get the oil they they were built to process. More capacity may be needed to process heavy oils, but this will require huge investments. It is a lot harder to refine heavy oil, and a lot more polluting.