The Four Kinds of Lies, cont… But first,

Quote of the day:

“Some people worry about peak oil. I worry more about peak grain.” - Niall Ferguson, Professor of History at Harvard University

As I have posted before, there are now 4 kinds of lies: Mine, yours, statistics, and OPEC’s.

Quickly, I want to discuss statistics. Today, I read that housing prices have fallen 2.8% nationally, “the worst decline since the 1930’s”. I can’t measure the aforementioned quote, but I can take the 2.8% to task.

To arrive at the “2.8%” the authors compared median prices in May 2007 to My 2006. Median is defined as the point at which 50% sold for a higher price and 50% for a lower price. All else being equal, this is as proper a method as any. But, things are not equal. The sub-prime market has imploded in the last 6 months. The buyers that the sub-prime lenders financed were disproportionally represented within the lower 50%. Removing these moves the median point higher than it would otherwise be. However, the mainstream media is more than aware of the American public’s math phobia, and were at little risk of being found out.

Let us move on to the really important liar – OPEC.

OPEC is a cartel, and cartels are of little consequence if they cannot set prices in BOTH directions (up and down). The EIA and IEA both project that OPEC’s production will grow by roughly 2.5 MILLION BARRELS PER DAY IN THE FOURTH QUARTER, but this is very, very, very unlikely. From this point forward, OPEC is likely to use one of the 2 methods of price influence that it has left in its arsenal. Jawboning. OPEC is powerless to lower prices by increasing production, a political weapon they used so effectively against the Soviet Union. They do retain the power to cut production – but only in a perfect world. Prices are now so high that there is just too much incentive to cheat for each individual member. As Dr. Ken Deffeyes of Princeton University famously quipped:

“The good news is that OPEC no longer controls oil prices. The bad news is that NO ONE controls oil prices.” (Emphasis added.)

The world market is now fully in control of oil prices, not OPEC, and when the market comes to the full realization that OPEC can no longer raise production for any meaningful length of time (which could very well come this fall with the advent of the OPEC meetings and the OECD’s call for increased production unmet), and that production will begin to decline permanently, the reaction in the financial markets will be overwhelming.

The financial markets are priced, and our economies structured upon the expectation of continuous growth in the economy, money supply, earnings, consumption, oil supplies, inflation, etc… With oil supplies decreasing rather than increasing this expectation will be replaced by the reality of an environment in which corporate earnings and economic growth will no longer be possible. In such an environment would you pay 18X earnings for a stock? Would you even pay 1X book value? I think not. Markets will have to “re-price” this new condition - that GE, Microsoft, 3M, Ford, Pfizer, etc… will not only be unable to grow their earnings, but that their earnings will go into a sort of “terminal decline”. Not only will stock prices be “adjusted” to this new condition, but the debt markets - treasury, municipal, and corporate bonds – and real estate, will get an “adjustment” as well. Did I mention the U.S. Dollar? Those of you reading my rants for the past couple of years know how I feel about the Dollar. So far, my concerns have proved well founded.

Think about the political consequences of 95 million workers opening their 401k statements post Peak Oil… seeing the aforementioned “adjustment”… and then looking for someone to blame.

No, this will not happen all at once, and as it unfolds the various and sundry special interests will do everything within their power to manipulate the less informed (and in the short term it may work to some extent) with their particular standard program of denial (remember all those groups in the 1980’s and ‘90’s working the public’s perception of global warming?). Even after this adjustment period is underway there are some things you can do to improve your personal and financial circumstances. There will be a tremendous effort to manipulate you, and not a shred of that effort will be in your best interest, as the interests will be looking to sell assets to the uninformed without which there would not be a market. Think of the South Florida developer retaining the services of a public relations firm. The PR firm’s job is to plant stories in the media to manipulate the public, the developers job is to sell units – and it is your job not to be manipulated into doing things that are not in your best interests.

Remember, the definition of money as a: medium of exchange and standard and store of value. In the permanently contracting economy of the world’s largest debtor nation, what are the impacts upon the fiat currency (the U.S. Dollar) as a store value? When the U.S. Dollar loses its hegemony, what will th U.S. trade in the world markets in exchange for imported Oil? Will you wait until these circumstances overtake you and your life’s work or will you reject the attempts to manipulate you?

Yours for a better world,

Mentatt (at) yahoo.com