Sunday, September 9, 2007

“Hope Springs Eternal.” - Alexander Pope

It does seem so. Despite having been consistently lied to by our politicians, clergy, law enforcement, and the media we seem to have an unquenchable thirst for subterfuge – as long as it tells us that which we wish to believe – we seem ever willing to down still more of their harsh and harmful manipulations.

“I assure you that if there's any shortage we will supply more crude to the market, but I think the market is really stable at this time,” OPEC Secretary-General Abdalla El-Badri said in an Aug. 28 interview in Luanda, Angola.

“A little inaccuracy sometimes saves tons of explanation.” – H.H. Munro

Thank you for that Secretary El-Badri. I have a question: why is it that OPEC will not allow an open and independent audit of their oil reserves and deposits? Why does the entire world have to take the word of, and I am sorry to call you this, a politician?

“A lie has short legs.” Anonymous

America has a very free Press no matter how you argue it, and even so the U.S. federal government has several redundant oversight mechanisms – but the world is required to take at face value the word of an organization that might well (certainly) have interests in direct contravention to our own. Am I the only normal person left? Doesn’t anybody in Washington think this unacceptable?

I want to leave oil alone for a while… over the next 90 days some very hard truths are likely to become apparent, so allow me to kvetch about my other obsession – the U.S. dollar.

Maybe you noticed, maybe you didn’t, but the dollar hit a 23-year low this week. The signs were everywhere: Gold and crude oil near record highs, (these things are priced in DOLLARS) and wheat and milk making new records almost daily – and with M3 money supply growing at 13% and interest rates just over 4% (10 year Treasuries) this is a run away train on a collision course with an oil tanker. I cannot envision a scenario in which the dollar does not sag (if not outright collapse) lower than any reasonable person thought possible.

But my hating the dollar, well that’s nothing new. My clients and readers know I have been on this rant for years, and probably will be until the dollar is replaced by a new currency (think I am talking crazy? The dollar is not the first U.S. currency – the Continental was, hence the term “not worth a Continental” and in my life time “not worth a Dollar” might well be a term in common usage). Even if there is no energy shortage/crisis, the U.S dollar is going down. If an energy shortage/crisis does materialize the U.S. dollar could very well collapse in a bout of runaway inflation. What is the answer? Well there isn’t one for the dollar, but for investors… well, in my opinion it is financial suicide to own any dollar denominated investments. Hard assets, and the derivations of hard assets are the best stores of value – with the exception of most U.S. real estate (but that depends on the level of inflation; if you have enough inflation real estate will be a good store of value).

Everything depends on the energy situation. Most Americans, even rich Americans, have little in the way of liquidity (doubt this? If the wealthy have so much liquidity then why the credit crunch? ). Their source of wealth is their business, or in the case of the corporate exec, his/her stock/401k/stock options. If energy, as I assert, becomes less available to grow the economy, the problem for ALL business people becomes overcapacity (at least in the short term - long term is much more problematic). If you owned a widget factory or skyhook service company your best course of action, (not just you but for all market participants) in the face of declining demand is to SHRINK your business rather than have the entire industry in a chronic state of overcapacity. If you doubt this, just give a call to your local mortgage company or real estate brokerage.

Now let’s stay on this idea train… fearing overcapacity, businesses shed employees, increasing unemployment and tipping the economy into recession, further harming the dollar and real estate, increasing the price of oil in dollar terms. Or, by ignoring the threat of overcapacity, businesses continue to expend capital and effort in a futile attempt to grow their businesses… you get the idea. In an energy-constrained environment the economy contracts either way. This is why you are being bombarded with commentary from the Fed Chairman, the Treasury Secretary, the President, and every Tom, Dick and Harry Congressman and Senator that everything is “fine” the “economy is fundamentally sound”, and that the various financial markets will continue to provide positive returns. If they had any faith whatsoever in free and open markets, they would have kept their mouths shut instead of trying to manipulate the American people.

All of the production and consumption data point to a “divergence”, as far as the economy and the financial markets are concerned, in the very near future, in my opinion. The aggregate of the total BTU’s from liquid petroleum products, BTU’s from Natural Gas (“NG”), and, it would appear, BTU’s from Coal (although this is very difficult to calculate accurately, as none of the numbers supplied by the EIA are perfect to begin with, and with the different BTU content of the various types of coal so disparate) appear to have peaked in 2005.

The entire American economic system and the valuation of our financial markets and currency depend on ever increasing economic growth. This growth will NOT be possible without ever increasing BTU’s to produce more work within the economy. ALL of the potential incremental increase for worldwide oil production lies within OPEC and Russia…

And OPEC just told you they are not going to increase supply.

Whether OPEC can or cannot increase at this moment is really immaterial, although I believe it unlikely that OPEC could increase output by over 500k to 700k per day for any sustained period. Further, oil consumption continues apace, while discoveries continue to decline and total far less than consumption in every year for the last 2 decades. How many more years can we consume 23 Billion barrels more than we discover in a given year before production enters terminal decline? ZERO (+or- 2).

This is not to say that the equity market cannot continue to rise in NOMINAL terms, with certain commodity based equities actually rising in REAL terms – after all, the world’s central banks just injected a half trillion dollars into the system. But it does mean that your dollar-denominated investments are doomed. Yes, doomed. (In my humble opinion).

Yours for a better world,

Mentatt (at) yahoo (dot) com

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