And now Israel too?

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

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

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?

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..

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

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

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

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

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

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

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

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?

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

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

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.

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?

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

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

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?

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.