Wednesday, October 31, 2007

The Fed has spoken

The Federal Reserve cut interest rates today by ¼ point… blah, blah, blah… you can get that B.S. from CNBC. People read my stuff because I get to the f$#**%! point.

Here is how the headlines should read (if I were the editor).

“The Federal Reserve has decided to abandon the U.S. dollar in favor of trying to save housing. The Dollar is going down like Paris Hilton, while Oil is going to pull a Tony Soprano and blow a hole in the back of the U.S. economy’s head. As the Fed can’t save both the $ and housing, they chose housing, since homeowners vote- and foreign U.S. bond holders do not. You see, Americans wouldn’t know how to save money at gun point so there is no chance that the Fed had to concern itself with hurting the consumer’s savings – he doesn’t have any.”

My first of many bows...

Oh, and by the way, the December crude oil contract is trading at nearly $96 in aftermarket trading. $100? Don’t worry about $100 oil. Worry about $300 to $500 but not $100. Worry about empty gasoline stations. Worry about long lines at any open gas stations if the government institutes rationing (and eventually, they will, even though it is the absolute dumbest thing they could possibly do). Worry about spiraling food costs. Worry about political repercussions… just don’t worry about $100 per barrel oil, because it won’t be there for long.

I wrote my first piece on oil when the front month crossed $40 per barrel. My clients thought I had slipped a gear. I remember feeling some sense of vindication when, several months later, National Geographic ran a cover story titled “The End of Cheap Oil” for their June 2004 edition. I sent copies to friends and clients. They told their secretaries to tell me that they were not in. I learned not to bring up my oil theories until clients were with me long enough that I did not appear as a fear monger. What a difference 3 years and oil near $100 makes.

This does not mean that Oil could not experience a significant correction, it certainly could. It could also climb straight to $150 without blinking. That is why trading is such a hard way to make a living. The trend remains firmly in place, and unfortunately, “you ain’t seen nothing yet.”

Mentatt (at) yahoo (d0t) com
As I write this, the EIA crude oil inventories have just come out but the Fed’s interest rate announcement is 3 hours away.

Front month oil, which was down $3 yesterday has recouped all of those losses and then some, setting a new record today. The price action surprised me somewhat, but a good friend pointed out that even though there was a build in refined product the crude draw was the big issue.

“The refining capacity problem is sooooooo 2006” was how he explained it. The absence of a “shoulder period” this fall could mean permanent overcapacity for oil refining and shipping. Let me sum it up for the jerks we are stuck deciding amongst for President: It’s not the refineries, stupid.

It does not matter how much “wishcasting” (a take off on forecasting) Larry Kudlow, Pat Buchanan, Hillary Clinton, Al Gore, Ben Bernake, Goldman Sachs and the rest of Wall Street, CNBC etc… do. They can shout what they will from the mountaintops. This is not something that these people can spin. They cannot sweep oil supplies and inventories under the carpet. It is what it is, and it does not care if you are Republican, Democrat, Conservative, Liberal, Libertarian, etc… Kudlow was on his show last night telling people that Oil was a short (that you could make money betting it was going down – this has been his position for several years now… thankfully he is not running a portfolio for anyone, he’s just another know-nothing entertainer posing as an economist. Actually, he IS an economist; maybe he is an economist posing as an entertainer… one could go crazy trying to figure this out… just kidding). I was trying to buy some options on oil futures yesterday, and even though the front month was down $3, my bid was not hit. I should have called Larry and told him to take the other side of the trade…

Somebody should tell Larry Kudlow, et al, that while they have been saying oil is a bubble since it hit $35 in 2003 the price has nearly tripled (If oil falls back to $75 no doubt these dopes will claim vindication, meanwhile had you listened to them and went short you would have hanged yourself in your garage long ago).

Now we await the Fed.

Monday, October 29, 2007

CNBC should be ashamed

I watched, in absolute awe, the show “Kudlow & Co.” on CNBC this evening. Larry was talking about Global Warming and Peak Oil, though he can’t quite get himself to use the term “Peak Oil” (a rose by any other name…).

Rather than have guests such as Dr. David Goodstein of Cal Tech or Dr. Ken Deffeyes of Princeton University, you know someone who has actually STUDIED the problem, Kudlow did the courageous thing and had Pat Buchanan appear in their stead. The 2 proceeded to shout at the top of their lungs their view of Peak Oil and Global Warming, not once uttering a shred of empirical data. But they did so with such force and verve! I have to say, I am quite relieved. We have nothing to worry about. Larry Kudlow and Pat Buchanan said so. My bet is most of America agrees with Kudlow and Buchanan.

Oil for December delivery dropped $3 today

The front month oil futures contract has been on an unbelievable tear up nearly 50% for the year and 15 % for the week, before giving up ground the past 2 days. It is due for some profit taking. Could that profit taking bring crude down to $75 by year-end? Sure. Could we see $100 before year-end? Sure. Trading the near contracts is going to be a hard way to make a living for a while, but has been pretty good to us lately. On the longer end, the futures price never got above the low 80’s. The multi year trend of higher highs and higher lows is still very much in place and the supply/demand situation continues to support that trend. As I say time and time again: “Markets zig and zag, they don’t zig and zig”. The front month contract went from $68 to nearly $94 in less than 3 months – we are due for a zag, but you got to keep an eye on the production and inventory numbers.

The Fed's interest rate decision tomorrow could have a big impact on energy prices. If the Fed cuts more than expected, say 50 basis points, the U.S. Dollar could really react quite negatively and lift the price of Oil, and Gold, in dollars. I have no opinion on what the Fed will do, and I never will. I merely react.
Today I received an email from a friend who follows my blog. He sent my blog to his Financial Advisor, and the Advisor emailed this back to him, which he forwarded to me:

“Tell your friend he is an idiot and that why he runs a blog.

Inflation is no where close to the 1970 levels, short term interest
rates are no where near the levels they were in the 70's.

As a whole the world is less dependent on oil than it was in the 70's,
more importantly we are more diversified on where we get our oil (Not
dependent on the M.E.)

Real estate is an issue, but keep in mind of all the financing options
we have currently which were not available in the 70's (3/1, 5/1, 7/1
IO's etc......)and also keep in mind you can currently get 30 yr fixed
at 6.5%.

Now keep in mind that the S&P 500 gets more of their revenues from
overseas operations where in the 70's it was mostly dependent on the US.

I am tired of typing. Tell this guy to get his facts straight and not
use terms like ...."I believe" and "I think” “

Well, my facts are straight, and I give my sources unless it is my opinion. Then I do the correct thing and add the qualification.

Now I enjoy a good fight, and I sincerely hope this man of poise, grace, education, and intellect will indulge me.

Dear Financial Advisor (“FA”):

Under no circumstance… On my worst day, unfed, unwashed, and with no sleep - could I think as slow as you, not even if I tried.

I have a comments section, although most people just email me directly. Please, by all means, pick your poison. If you take exception with any of my conclusions and assertions please write me. I will be happy to post your comments. You will not be the first to disagree with me. The beauty of the crude oil commodity markets is that they are the ULTIMATE meritocracy. The smarter guy keeps the other guy's money.

I will be happy to let you know which contracts I am bidding for in the Commodity Futures and Options market. Since I am, what was it… an “idiot”? I will give you a tremendous opportunity - to make a great deal of money by taking advantage of my limited cerebral capacity. I will tell you what contracts in the commodities market I am trying to buy. You sell them to me; taking the other side of a trade versus an “idiot” should be like taking candy from a baby. Just to make it fair, since I am an energy bull and an “idiot” I will only take “long” positions; you can short them to me. If I am truly an “idiot”, you will get to keep all of my money. Of course, if it is you who is the “idiot”, I will get to take all of your money. Got it? Excellent. My email is:

Mentatt (at) yahoo (dot) com

I look forward to cleaning you out.

Saturday, October 27, 2007

Oil and the markets

The U.S. equity market experienced a contraction in value of biblical proportion beginning in 1973. In real dollars, it took the market 20 YEARS to recover. The catalyst was oil and currency issues (sound familiar?)

The following is from

“The stock market crash of 1973–4 was a stock market crash that lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom,[1] it was one of the worst stock market downturns in modern history.[2] The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. It was compounded by the outbreak of the 1973 oil crisis in October of that year.

In the 694 days between 11 January 1973 and 6 December 1974, the New York Stock Exchange's Dow Jones Industrial Average benchmark lost over 45% of its value, making it the seventh-worst bear market in the history of the index.[2] 1972 had been a good year for the DJIA, with gains of 15% in the twelve months. 1973 had been expected to be even better, with Time magazine reporting, just 3 days before the crash began, that it was 'shaping up as a gilt-edged year'.[3] In the two years from 1972 to 1974, the American economy slowed from 7.2% real GDP growth to -2.1% contraction, while inflation (by CPI) jumped from 3.4% in 1972 to 12.3% in 1974.[1]

Worse was the effect in the United Kingdom, and particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash.[4] From a position of 5.1% real GDP growth in 1972, the UK went into recession in 1974, with GDP falling by 1.1%.[1] At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England to bail out a number of lenders.[5] In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%.[5] However, unlike in the United States, inflation continued to rise, to 25% in 1975, giving way to the era of stagflation.
All the main stock indexes of the future G7 bottomed out between September and December 1974, having lost at least 34% of their value in nominal terms, and 43% in real terms.[1] In all cases, the recovery was a slow process. Although West Germany's market was fastest to recover, returning to the original nominal level within eighteen months, even it did not return to the same real level until June 1985.[1] The United Kingdom didn't return to the same market level until May 1987 (only a few months before the Black Monday crash), whilst the United States didn't see the same level in real terms until August 1993: over twenty years after the 1973–4 crash began.”

While the Arab oil embargo did not precipitate the market collapse, the peaking of oil production in the U.S. several years earlier and the collapse of the Bretton Woods agreement in the years just prior to 1973 probably began what the embargo most emphatically accelerated and the Iranian crisis of 1979 finished.

Fast forward to 2005-06: The world enters peak production of crude oil and condensates, and perhaps all liquids. How many years before the effects of our current currency problems and declining oil availability begin their inevitable demand destruction within the American economy? Not many, in my opinion.

“Between January and October of 1978, the Dollar lost fully 25% of its value against a basket of the currencies of its major trading partners.” The Privateer Market Letter

We are perhaps a third of the way through that decline, and I do not believe that it is an exaggeration to say that the U.S. Dollar is currently in free fall, nor do I believe that I am out of bounds in my belief that the U.S. Dollar has MUCH, MUCH, MUCH further to go in terms of declining purchasing power, particularly versus energy, metals, and agricultural commodities than it did in 1978.

So here’s the deal:

As in the 1970’s, as this energy crisis gets going the real estate downturn will morph into a full-fledged crisis. While the equity markets MIGHT head higher in NOMINAL terms (certain commodity based equities will head higher in REAL terms) due to the eruption of hyper-inflation, in real terms, and in terms of employment and compensation, the contraction within the financial services industry will be quite pronounced.

Metro New York City’s real estate prices will collapse in real terms, as will South Florida, Boston, California and other areas that had experienced out sized gains… so much so that the Federal Reserve, in an effort to protect, perhaps even save, the U.S. banking system, will aggressively devalue the U.S. currency in a bid to spare the banks from defaults on loans to properties whose values have fallen below the mortgage lien. Not that it will work – it won’t – but they will feel that they must at least try. This action will only serve to worsen commodity inflation. Think back to 1979-80: Gold, Silver, Oil… all at record prices. Yes, those prices fell back as that energy crisis subsided. This energy crisis will not subside in our lifetime.

Please understand that when I speak of real estate I do not mean just housing. Office, retail, and commercial vacancy rates will become higher than at anytime in history, and landlords will be forced to lower rents for the remaing tenents. Some properties will do well, such as agricultural and warehouse properties at railroad yards, for example. After all, farmland can always be rented to farmers, and rail shipping will survive trucking. But areas that relied on workers commuting to and from work via personal automobile will be in for some tough times. Matt Simmons of Simmons International, Wall Street’s largest investment bank to the energy industry, is fond of saying that we could “free” the workforce by allowing perhaps as many as 10 million office workers to work from home saving a great deal of gasoline, which I have no doubt will be required at some point. The question I have is what are we going to do with the office space vacated by 10 million workers? How do the property owners service the debt on those buildings? How do the banks survive those defaults? We are talking hundreds of billions of dollars here – and that is just for office space. What about gas stations, auto mechanics, parking facilities, etc… What about the merchants and vendors that serviced these “freed workers”?

The U.S. currently has over 17 MILLION vacant homes. 17 MILLION! And I do not believe that figure includes the 6.8 million second home market. So now we have 24 million vacant homes (getting to and from those 6.8 million second homes in an energy crisis requiring some kind of rationing will no longer be possible). Who is going to pay the mortgage on these properties? This is why I tell my clients that South Florida’s real estate market will likely NEVER recover. NEVER.

Unemployment will rise, perhaps spectacularly, wages will stagnate, and inflation will rage, similar to the stagflation of 1970’s, just worse. For a businessman or professional in his early to mid 50’s or younger, the new environment will be like nothing in their experience. The concept of “savings” in U.S. Dollars, or equity in a suburban home, will be laughable, a major reason that commodity prices have only just begun their ascent. Once John Q. Public figures out just how worthless their paper currency has become the scramble to exchange it for hard assets like commodity futures, bullion, land, timber, livestock, etc… will be nothing short of a deluge, like the breaking of a dam. Unfortunately, I cannot be more specific in this forum.

With the increase in inflation and unemployment (1970’s stagflation on steroids) will come overcapacity for nearly every business and industry in the U.S. If you think that means every body EXCEPT YOU, well, that will be a quick trip to bankruptcy court. Survivors will be those that DELEVERAGE their businesses. We will get through this, perhaps, but the adjustment period is going to be quite painful in economic terms. Of course, there are many variables: the political and leadership talents of our elected officials and the governments of other countries, the American people's willingness to accept that forces beyond their control is the cause of this, not the Chinese, or greedy OPEC, etc... Such variables are beyond our ability to calculate effectively.

The world economy, and the U.S. economy in particular, will contract severly. Is it a recession, a depression, or will the new environment get its own special designation? I don't know and could not possibly care less - you and I are not running for President. Therefore, this is all about you, personally. (I say this because I constantly hear people, when confronted with the energy data for the first time, say: "we should do this" and "we should do that". I always want to ask: "who's we?" And "what power do you have to enact any of your silly, arrogant, and ill conceived ideas?" Everybody's an expert.)

The 2 important financial items for You, Inc., are your income and your assets. The store of value that you choose for your assets will determine what you have left over from your efforts, and how you manage your contribution to the economy will determine your income. If your income depends on an industry that depends on cheap and abundant energy… well, let’s just say that you will need to find a new way to make a living. If your store of value is the U.S. Dollar or bonds denominated in U.S. Dollars, the purchasing value of your savings will plummet. Don’t do this to yourself. For those of you who don't think this could possibly happen, did you think it was possible for the Soviet Union to politically collapse in a matter of days? Did you think it was possible to kill 3000 Americans in lower Manhattan with a couple of passenger jets?

Life will be good, but the economic rules are changing. If you don’t deal with the change, the change will deal you out. For those that get it right, this will be like a slow pitch down the middle of the plate. For those that get it wrong, it’ll be more like 2 guys carrying you off the battle field on a stretcher. By mathematical necessity, most folks will get it wrong - and there just ain't enough stretchers.

I know that many will not appreciate my analysis, it isn’t what you WANT to hear. Too bad - because whatever it is, it is, and whatever it ain’t, it ain’t - it does not give a damn what we appreciate.

Yours for a better world,

Mentatt @ yahoo (d0t) com

Thursday, October 25, 2007

So much for the "Shoulder Period"

For reaseons either obvious or unknown, the "Shoulder Period", that is, the time between summer driving demand for gasoline and winter's demand for heating oil, has been called off this year. Inventories are such that it just ain't gonna happen, as heating season is almost here... that is, unless winter gets called off again (no opinion on the weather).

And as I said in an earlier post... "uh-oh"

Yours for a better world,

mentatt (at) yahoo (d0t) com
The beginning of the end of U.S. oil imports…

Net imports of liquid petroleum products into the U.S. were 12,220,000 bpd in 2006 according to the U.S. Dept. of Energy’s EIA. It is my estimation that the U.S. has entered the early stages of terminal decline in its oil imports – said plainly, imports will decline each and every year from this point forward. It does not matter who we invade, how much the price of oil rises, what conservation efforts are forced upon us – the U.S. will have less and less oil to run its economy and transportation system from now on.

Yesterday the EIA reported a “surprise” drop in U.S. inventories; certainly not a surprise to my readers, nor to any informed observer – inventories have been declining rapidly for several months now. The following is from today.

“Crude oil rose near $89 in New York after the biggest drop in U.S. imports since March caused an unexpected decline in inventories. Brent futures climbed to a record in London.

Stockpiles fell 5.3 million barrels last week to their lowest since Jan. 5 as imports plunged 13 percent, the Energy Department said yesterday. A gain of 963,000 barrels was expected, according to a Bloomberg News survey. Reports Darfur rebels attacked a Sudanese oil field and Lebanese soldiers fired on Israeli aircraft pushed prices higher today…

Imports Plunge

The decline in U.S. crude-oil stockpiles left them at 316.6 million barrels, 5 percent higher than the five-year average for the period, the department said. A week earlier, supplies were 7.8 percent higher than the five-year average.

``A lot has to do with imports that weren't there,'' said Herwin Schonewille, an oil trader with Fortis Bank NV in Brussels.
Daily crude-oil imports plunged by 1.3 million barrels to 9.1 million, the lowest since the week ended March 2. The biggest drop was on the east coast, where imports fell 667,000 barrels a day, down 32 percent from a three-year high of 2.08 million barrels a day the week before.

U.S. fuel stockpiles unexpectedly fell last week as imports of gasoline and blending components declined and refiners shut units for maintenance before winter. Refinery operating rates fell to 87.1 percent of capacity, a four-week low.
Gasoline inventories fell 1.93 million barrels to 193.8 million, 3.6 percent less than the five-year average for the period, the report showed. A 475,000-barrel gain was expected, according to the analyst survey.” - Bloomber News

Let me repeat: “A lot has to do with imports that weren’t there”. Indeed.

At some time in the near future the average American citizen (I refuse to use the term “consumer” – we are not “consumers”, we are citizens. I will rant further about this in a future post) is going to grasp the consequences of our energy situation. That 2 legs on the economic stool, housing and automobile manufacturing, are broken, with no hope of regaining their former stature. That providing necessities for themselves, and provisioning their homesteads, will become more challenging, while their economic position has become quite precarious. That our political leaders are as impotent in the face of this reality as they were in the face of Hurricane Katrina and the destruction of New Orleans.

The repercussions felt in the financial markets and the economy will likely be devastating to the point of the surreal. “Don’t just stand there, do something”.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, October 23, 2007

This is not religion…

“I just think…”, “I believe…”, “if we just…”, “all we got to do is…”

Belief and hope have no place in parachute packing, brain surgery, rock climbing, bomb-detection, land mine removal, AND ENERGY SUPPLIES. While prices speak louder than words, supply numbers speak louder than prices, as prices reflect the value of the currency used to purchase the commodity.

“Behind the rhetoric about speculators, inadequate refining capacity, and geopolitical threats there lies the fundamental fact that world oil stockpiles have begun to shrink. The IEA reports that during the 3rd quarter, OECD stockpiles fell by 33 million barrels or 360,000 b/d during a quarter when stocks normally increase by 280,000 b/d.

Outside of the US, stockpiles are near the low end of the normal range and there are fears that they will continue to drop to critical levels this winter. Beyond this there is fear that given flat production and high demand from Asia, these stocks will never be replaced.” - Tom Whipple

There is a reason oil hit $90 per barrel (my underhanded disparagement of the U.S. Dollar above notwithstanding). The recent price increase was necessary to balance the supply of oil with demand from the market place – sort of. I say “sort of” because we still have the buffer of inventories. Should that buffer begin to disappear… look out! It is lights out.

”As this unfolds, you're going to have to find alternatives that are going to do the job that oil is doing. Everyone is going to have to come to grips with this in the next two or three years. People are going to have to figure it out.'' — T. Boone Pickens at the ASPO-USA Houston Conference October 19 2007

And that begs the question: figure out what, exactly? There is no simple solution (see above “all we got to do is…”). The solution(s) is going to happen over time with a great many adjustments to myriad unforeseen consequences, the majority of which, for Americans, is going to be drastic changes in their lifestyle. Specifically, most Americans will become considerably poorer.

Dr. James Schlesinger, the first U.S. Energy Secretary, said that “Americans have to be hit over the head with a 2 X 4” to get them to make the changes needed to adjust to our energy situation.

Well, of course! Who, “on the long end of the stick” and raised in a competitive society, would agree to willingly become poorer? I don’t imagine the local convenience store would be terribly successful in selling lottery tickets for that outcome.
In a previous post I quoted the famous line “If you find yourself in a hole – stop digging”. Well, we are all in a hole here, and the only difference is the depth.

The big problem is with our assumptions… My house will build equity as I pay the mortgage… U.S. Dollars will hold value… I will always be able to drive to work/school/grocery shopping… life is fair… this outrageous student loan for a literature degree is a good investment… the stock market always goes up in the long term… I can always borrow money… Food comes from the grocery store… water comes from the tap in my kitchen… I can live off interest and social security payments…

Many (most, if not all) of these assumptions will prove invalid at some point during a period of contracting energy availability, and since ALL OF THE DATA point to NOW as the beginning of energy decline this is an excellent time to revisit your assumptions.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Monday, October 22, 2007

I received a great deal of email regarding my post as to: "why does it have to be Apocalypse"?

I did not say things would not get tough economically, especially for the poor and working class (and as an alumni of the poor and working class this really does have a special place in my heart - but this ain't about me), I merely expressed the concept that things do not have to fall into anarchy. Jeash!

As many of you know, the price of energy will be felt first in the price of food, which will be felt disproportionally on the poor and working class families.

The following is an article in its entirety from news:

Living paycheck to paycheck gets harder
By ANNE D'INNOCENZIO, AP Business WriterFri Oct 19, 7:51 PM ET

The calculus of living paycheck to paycheck in America is getting harder. What used to last four days might last half that long now. Pay the gas bill, but skip breakfast. Eat less for lunch so the kids can have a healthy dinner.

Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It's starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.

Food pantries, which distribute foodstuffs to the needy, are reporting severe shortages and reduced government funding at the very time that they are seeing a surge of new people seeking their help.

While economists debate whether the country is headed for a recession, some say the financial stress is already the worst since the last downturn at the start of this decade.

From Family Dollar to Wal-Mart, merchants have adjusted their product mix and pricing accordingly. Sales data show a marked and more prolonged drop in spending in the days before shoppers get their paychecks, when they buy only the barest essentials before splurging around payday.

"It's pretty pronounced," said Kiley Rawlins, a spokeswoman at Family Dollar. "It seems like to us, customers are running out of food products, paper towels sooner in the month."

Wal-Mart, the world's largest retailer, said the imbalance in spending before and after payday in July was the biggest it has ever seen, though the drop-off wasn't as steep in August.

And 7-Eleven says its grocery sales have jumped 12-13 percent over the past year, compared with only slight increases for non-necessities like gloves and toys. Shoppers can't afford to load up at the supermarket and are going to the most convenient places to buy emergency food items like milk and eggs.

"It even costs more to get the basics like soap and laundry detergent," said Michelle Grassia, who lives with her husband and three teenage children in the Bedford-Stuyvesant section of Brooklyn, N.Y.

Her husband's check from his job at a grocery store used to last four days. "Now, it lasts only two," she said.

To make up the difference, Grassia buys one gallon of milk a week instead of three. She sometimes skips breakfast and lunch to make sure there's enough food for her children. She cooks with a hot plate because gas is too expensive. And she depends more than ever on the bags of free vegetables and powdered milk from a local food pantry.

Grassia's story is neither new nor unique. With the fastest-rising food and energy prices since the 1980s, low-income consumers are stretching their budgets by eating cheap foods like peanut butter and pasta.

Industry analysts and some economists fear the strain will get worse as people are hit with higher home heating bills this winter and mortgage rates go up.

It's bad enough already for 85-year-old Dominica Hoffman.

She gets $1,400 a month in pension and Social Security from her days in the garment industry. After paying $500 in rent on an apartment in Pennsauken, N.J., and shelling out money for food, gas and other expenses, she's broke by the end of the month. She's had to cut fruits and vegetables from her grocery order — and that's even with financial help from her children.
"Everything is up," she said.

Many consumers, particularly those making less than $30,000 a year, are cutting spending on nutritious food like milk and vegetables, and analysts fear they're further skimping on basic medical care and other critical services.

Coupon-clipping just isn't enough.

"The reality of hunger is right here," said the Rev. Melony Samuels, director of The BedStuy Campaign against Hunger, a church-affiliated food pantry in Brooklyn.

The pantry scrambled to feed 5,000 new families over the past 12 months, up almost 70 percent from 3,000 the year before.

"I am shocked to see such numbers," Samuels said, "and I am really concerned that this is just the beginning of what we are going to see."

In the past three months, Samuels has seen more clients in higher-paying jobs — the $35,000 range — line up for food.

The Regional Food Bank of Northeastern New York, which covers 23 counties in New York State, cited a 30 percent rise in visitors in the first nine months of this year, compared with 2006.
Maureen Schnellmann, senior director of food and nutrition programs at the American Red Cross Food Pantry in Boston, reported a 30 percent increase from January through August over last year.

Until a few months ago, Dellria Seales, a home care assistant, was just getting by living with her daughter, a hairdresser, and two grandchildren in a one-bedroom apartment for $750 a month. But a knee injury in January forced her to quit her job, leaving her at the mercy of Samuels' pantry because most of her daughter's $1,200 a month income goes to rent, energy and food costs.

"I need it. Without it, we wouldn't survive," Seales said as she picked up carrots and bananas.
John Vogel, a professor at Dartmouth College's Tuck School of Business, worries that the squeeze will lead to a less nutritious diet and inadequate medical or child care.
In the meantime, rising costs show no signs of abating.

Gas prices hit a record nationwide average of $3.23 per gallon in late May before receding a little, though prices are expected to soar again later this year. Food costs have increased 4.5 percent over the past 12 months, partly because of higher fuel costs. Egg prices were 44 percent higher, while milk was up 21.3 percent over the past 12 months to nearly $4 a gallon, according to the Bureau of Labor Statistics.

The average family of four is spending anywhere from $7 to $10 extra a week — $40 more a month — on groceries alone, compared to a year ago, according to retail consultant Burt Flickinger III.

And while overall wage growth is a solid 4.1 percent over the past 12 months, economists say the increases are mostly for the top earners.

Retailers started noticing the strain in late spring and early summer as they were monitoring the spending around the paycheck cycle.

Wal-Mart and Family Dollar key on the first week of the month, when government checks like Social Security and public assistance generally hit consumers' mailboxes.

7-Eleven, whose customers are more diverse, looks at paycheck cycles in specific markets dominated by a major employer, such as General Motors in Detroit, to discern trends in shopping.
To economize, shoppers are going for less expensive food.

"They're buying more peanut butter and pasta. And they're going for hamburger meat," Flickinger, the retail consultant, said. "They're trying to outsmart the store by looking for deep discounts at the end of the month."

He said the last time he saw this was 2000-2001, when the dot-com bubble burst and the economy went into a recession after massive layoffs.

For now, low-price retailers are readjusting their merchandising and pricing.

Wal-Mart is becoming more aggressive on discounting. It announced Thursday it is expanding price cuts to 15,000 items, ranging from Motts apple juice and Progresso soups to women's fleece tops, heading into the holidays.

Family Dollar, whose food offerings were limited to candy and snacks until two years ago, has expanded its mix of groceries like fruit cups, cereal and such refrigerated items as milk and ice cream while cutting back on shoes. This summer the chain began accepting food stamps.

Food pantries are also getting creative. Samuels said her church, Full Gospel Tabernacle of Faith, just started offering free cooking classes to teach clients who are diabetic or have other health conditions how to prepare vegetables like squash. It's also offering free exercise classes.

"We are trying to make them health conscious," Samuels said. "It's not right to give them just anything. Our mantra is eat well and live well."

The energy crisis is already here for poor folks, and it will be here soon for rich folks, too. But I maintain that things do not have to fall completely apart, and that there is much that can be done, particularly on the local level.

Yours for a better world,

mentatt (at) yahoo (d0t) com

Sunday, October 21, 2007

Why does it have to be Apocalypse?

One of the biggest problems with getting the public informed and the authorities doing something constructive about our energy problem are the “Apocalyptic Crazies”. Here we have this serious energy dilemma, but instead of serious policy discussion in the political arena the powers that be have declined to tackle it. If you were a career politician, would you embrace a concept whose banner is carried by folks that see this as “The end of the world as we know it”? The expression has become so popular on the web that it is recognized as “TEOTWAWKI” quite broadly.

It is not that I have an opinion about the validity of their argument 30 years hence. It seems to me their view of the future is as probable as, if not much more probable, than the optimistic case. It is simply that accepting it as a foregone conclusion or denying it as even remotely possible seems to me to be a rather feckless public policy.

Well meaning or not, I really wish the “oil crash” crowd would keep it to a low roar. And I truly appreciate their contribution in getting the problem distributed in the blog-sphere when the main stream media would not touch it…but right now we need intelligent policy discussion, not silence, at the top of our political institutions. Thankfully, several U.S. Congressmen, former CIA Directors, and former U.S. Energy Secretaries have been raising the alarm. I hope that the “TEOTWAWKI” crowd does not drown their good sense and courage out.

Yours for a better world,

Mentatt (at) tahoo (d0t) com

Thursday, October 18, 2007

Where is OPEC with all that oil?

Oil, as measured by the WTI front month contract, closed just under $90 today. All that talk about how “the fundamentals do not support $70 per barrel oil” look a bit silly right about now.

So where is OPEC?

“OPEC cannot do much now,” Libya’s top oil official Shokri Ghanem told a news agency. “OPEC did all that it can.” – October 17, 2007

I can just hear the MoRons in Washington: “But you promised!”
(ha ha he he ha ha)… and I love that “fundamentals do not support the price” pitch. Just for fun, please publish your “fundamental analysis” that forms the basis of your claim. What “fundamentals” are we talking about? Supply? That has been in decline. Demand? Hate to tell you guys, but that has been unable to rise because of an inability to increase supply – ergo, price is the mechanism for keeping the market balanced in this commodity. Further, if the “fundamentals” do not support the rise in price, what’s up with gold, silver, wheat, corn, milk, copper, zinc, etc… over the past few years?

This was on today:

“However, the oil price rise has evidently nothing to do with rising gold prices,” Dhafer Al-Qahtani, co-CEO and chief investment officer at Dammam-based Arbah Capital, told Arab News.
“All indications were there about the rising oil price,” he said, adding that a major pointer was supply was not meeting rising demand. The Middle East situation is escalating in all directions involving countries like Turkey, Iraq, Iran and Syria. That’s why supply is not catching up with demand.”
“I will not be surprised if it goes up to $90 or $95 a barrel sooner than expected. Winter conditions that will boost oil demand will aggravate the situation further. In reality, production is not online with demand so supply is short and price will go higher and higher,” Al-Qahtani said.
He hinted that the rising oil price would have its impact on many other fields of economic activity. “Inflation will grow globally. There will be all-round price increase. Air travel, especially, will become costly. And there will be a renewed cry for finding a cheaper substitute or alternative energy source,” Al-Qahtani added.” Bloomberg news


Anybody notice that Steve Forbes, Daniel Yergin, Michael Lynch, et al, have all been conspicuously absent from the likes of CNBC? These were the “oil is going back to $20…then $30… then $35…” crew; apparently they have had the good sense to keep a low profile, particularly after their scathing criticisms of their intellectual betters (me, for instance). Larry Kudlow might still be flapping his gums, but not about oil. It would be too much for him to say “I was wrong, folks” (after all, he did a stretch in Washington, and those guys “may not always be right, but they are never wrong”). Hey guys, what is the value of a Ph.D. who can’t count and refuses to be corrected? I mean, there is always room for a good BS artist in every major corporation, especially for one with your establishment credentials, but you got to stop drinking your own Kool-aid. You got to stick to pontificating about stuff that people cannot measure – predicting oil prices is clearly not your thing.

OK, I am back.

The markets, including oil, zig and zag, they don’t zig and zig. Oil will likely not move in a straight line, the last several weeks not withstanding. So if and when prices retreat somewhat and the cheerleaders at CNBC announce for the 58th time that the crisis has past, don’t fall for it.

This energy crisis is at least as likely to be a slow motion train wreck as a crash. More like a python slowly squeezing the world economy until it finally notices it is getting difficult to breath. At that moment, the deluge will be unmistakable. It is not possible to predict that moment with any accuracy, but considering the price action in the oil markets it seems unlikely that it is too far away. It then follows that this might be a good time to get your house in order, get your act together, etc…

Here is a fun fact to know: If every American suddenly had reason to believe that gasoline supplies might become erratic and decided to fill up their gas tanks… there is not enough gasoline in the system to do so. Which means an even greater panic would ensue once the late arrivals showed up at the empty gas station. How do think that might play out in the stock market? In the housing and autos market?

It is something to think about.

Yours for a better world,

Mentatt (at) yahoo (d0t) com
The U.S. Dollar falls to a record low…

This will be a short rant, as my usual readers know how I feel about the prospects for the U.S. Dollar.

Oil is at a record, gold is at 27 year highs, silver is nearing a record – all as priced against the U.S. $. If you were a Canadian citizen, earning and saving Canadian Dollars you might not know what all the fuss is about because the Canadian Dollar has maintained much its value versus these commodities.

The first baby-boomer just took early-retirement, in a few years the waves of boomers hitting the medicare rocks will come crashing in. The only way to fund this stuff in the future is for the U.S. to monetize its debt (a nice way of saying print enough money to purchase all of the outstanding debt obligations).

You would be better off saving toilet paper instead of dollars. At least TP can be used as a barter item.

The U.S. Dollars decline is not a mere coincidence with the rise in oil prices. Forgetting for the moment that oil is priced in dollars, the U.S. borrows over $1.2 every business day to fund its oil purchases, and if you look up 2 paragraphs you will see that the U.S. has no intention on making good on those debts. It then follows that cash is trash (bonds too) and oil is still very, very, very cheap.

BTW, since the Fed appears to have abandoned the U.S. $ in favor of housing, it follows that hyperinflation is likely in our near future. That means the stock market should head significantly higher (over the medium to long term, no opinion about tomorrow, next week or next month…) in NOMINAL DOLLARS - We will all be rich, sort of. Unfortunately, milk will be $15 per gallon, bread $8 per loaf, and a dozen eggs $12, and a pair of those Chinese made athletic shoes will be $300.

Yours for a better world…

Mentatt (at) yahoo (d0t) com

Wednesday, October 17, 2007

“If you don’t read the newspapers, you are not informed. If you do read the newspapers, you are misinformed.” - Mark Twain

OMG! Oil, as measured by the front month WTI contract, is within striking distance of $100 per barrel! That seems to be the theme for CNBC, the WSJ, Forbes, Barrons, etc… you know, all those cheerleaders and rags that previously said there was no problem with oil supplies (the U.S. was merely obsessing about corn ethanol for humanitarian reasons).

I have some bad news for those jerks in the media. $100 is not some kind of ceiling through which oil cannot penetrate. After $100, like 10,000 on the Dow Jones Industrial Average, lies some higher, more problematic price – like $150, then $200, and eventually $300 per barrel. As my good friend “FireAngel” from the is fond of saying, the only way to change this outcome is to cut the number of gallons in a barrel of oil.

So what does $300 per barrel of oil mean to you and me? It means we have much, much less oil available to us for our lifestyle. It means:

1. New Orleans will never be rebuilt, nor will any other future major natural disaster of similar scale (are you listening Florida and California?).
2. American children born in 2007 will not need a driver’s license when they are 30.
3. Your 401k will become a 201k, and then a 101k, and then just a k…
4. Social Security and Medicare will fail.
5. America’s farm labor workforce will be 33% of the population by 2030, not the 1.5% of 2007 (Texas A&M might actually be a better bet than Harvard for junior after all).
6. Student loans will be a future credit crisis. (Borrowing $200k for a literature degree will, in retrospect, not appear to be an intelligent investment.)
7. The luxury car you now drive will be a very nice pottery holder in your garden.
8. But, your milk goat is really going to appreciate those fine leather seats, and your chickens will really enjoy perching on the engraved wood steering wheel.
9. You’ll be using dollar bills to light candles on your birthday cake because they are cheaper than matches.
10. Homes will come with only 1 zone heating and AC - your bedroom.
11. You’ll be thin again!
12. Home cooking!
13. Your wife’s depression/personality disorder, junior’s ADHD, and your alcohol problem… cured, with all that fresh air and sunshine instead of driving everywhere.
14. South Florida’s housing crisis will never be resolved.
15. The Southwest water problem will no longer be academic.
16. You won’t feel so rushed anymore. You won’t be spending time going to the gym, filling up the car, commuting…
17. No problem not fulfilling your new year’s fitness resolution as walking and biking will no longer be optional means of transportation.
18. You will care far more about who is Mayor than who is President.
19. You will get to know the neighbors, one way or another.
20. Conspicuous displays of consumption or wealth will not be good for your health.
21. The response time for 911 is going to be a great deal longer than it is now.
22. The end of Feminism, Liberalism, Conservatism, etc… these were luxuries of the cheap fossil fuel era.
23. No more keeping up with the Jones’. Keeping up will be quite enough.
24. Flush it and forget it will be replaced by compost it and fertilize with it.
25. You will never have to mow the lawn again, ‘cause your gonna need that hay.
26. You won’t have any trouble finding a parking space.
27. No more road rage, you will truly appreciate the use a of vehicle.
28. You are going to look fabulous in designer jeans while working in your garden, fixing your bike, etc…
29. Golf courses will become community gardens or farms and that home on the 9th hole will likely become a home in the Spinach field or pumpkin patch... and you will be working on your swing all right – for your hoe, your scythe, your axe…
30. The demand for lawyers, stockbrokers, accountants, insurance agents, realtors, hair -dressers, massage therapists, psychologists, etc… is going to dry up in ways I am not poetic enough to describe (and I own a brokerage firm).

No, this won’t happen overnight, but that is not the point. The point is that it WILL happen. Things will change, and since “for the better” or “for the worse” is an abstract I have no comment on either. Things will change and some people will be the “winners” in the new paradigm, while others will be the “losers” (sorry, more abstractions), and it is up to you to decide where it is you would like to be and what actions you plan to take to execute your plan.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Monday, October 15, 2007

“For every expert there is an equal and opposite expert” – unknown

People are always sending me this article and that quote from some “expert” on the future of oil prices. Beware the simple solution for the complex problem.

If everyone was cock sure that oil was going to $100, the price would be there, right now, as there would be no sellers at $84.50

If everyone was cock sure that oil was going to $50, the price would be there, right now, as there would be no buyers at $84.50

The reason oil is trading at $84.50 is that there are sufficient people wishing to sell to buyers willing to buy AT THAT PRICE.

This is no longer academic. I read with great amusement this “expert” and that “expert” predicting this price or that. I am always curious how much of their net worth they have placed at risk in energy commodities and equities, as well as the derivative trades in precious metals or agricultural property (not derivatives as in options, but betting on higher precious metals prices is frequently “derived” from a belief in higher energy prices as is betting on higher corn prices).

So here’s to the experts: Put your money where your mouth is. If you are correct, you will not need that tenured position any longer. You can be on the other side of the endowment solicitation. I will be taking the other side of the trade. May the smartest man win. You see, that is the beauty of the markets. The market environment is the ultimate meritocracy. The guy with the best balance of brains and chutzpah wins.

This is not to say that the front month could not trade down; considering its meteoric rise and the fact that we are heading into the “shoulder period”, well, I certainly think it could (or not). I am saying that the trend remains firmly upward, though not in a straight line. Will we break last year’s shoulder period lows? NAFC.

On another note… Do you know what the thousands of public relations firms actually do? They wine, and dine, and bribe, and drug, and solicit, and blackmail, etc… their media contacts into writing/producing articles/news segments that benefit their client – with no regard as to the accuracy of the report.

“All I know is what I read in the newspapers” - Will Rogers

Mentatt (at) yahoo (dot) com

Saturday, October 13, 2007

ust another Regression toward the Mean

The United States consumes nearly 25% of the world’s liquid petroleum resources (“oil”) yet has only 4.5 % (approximately) of the world’s population. Over the next decade or so, the U.S. will consume somewhere in the neighborhood of 10% of the world’s oil, and within 20 years, 5% of the world’s oil. Worse, the gross production of oil will also decline during the period. How can I be so sure? Because a Regression toward the Mean is a certainty, the only area up for debate is the rate of regression.

First, a definition from

“If random variables X and Y have standard deviations SX and SY and correlation coefficient ρ the slope of the regression line is given by

p x SY/SX

A consequence of this is that a change of 1 standard deviation in X is associated with a change of ρ SDs in Y. Unless X and Y are perfectly correlated ρ will be less than unity. Thus, for a given value of X the value of Y that would be predicted by the regression line is always fewer SDs from its mean than X is from its mean. Regression to the mean will occur if | ρ | < 1, so in practice it always occurs.

Note that regression toward the mean is more pronounced the less the two variables are correlated, i.e. the smaller | ρ | is.”

What are the 2 variables? U.S. oil consumption, and non-U.S. oil consumption. You disagree? You have a better chance of making an argument that pi is not 3.1415… and e is not e = 2.7182…

The funny thing, and I do this for a living, is trying to convince someone that is “certain” this is not so but who could not define pi or e – yet still has strong convictions, based on not one shred of research or hard data, on energy supplies. The late Malcolm Forbes once said that “being rich does not make a man right more often, just harder to correct”.

I received an email recently from a fellow Wall Streeter who said he did not subscribe to the “doom and gloom” of my analysis. I wrote him back:

“It matters little what you or I subscribe to. What
does matter is being correct and then placing your bets

The very words "doom and gloom" are put out there to
belittle other viewpoints of resource capacity. For
every seller there is a buyer (or we would have no
market) and only one of them is correct in their assessment of future

Further, "Doom and Gloom" cannot be measured. Oil
imports, BTU's consumed, bushels of wheat and corn -
these can all be counted and measured. If the answer on the right
side of the equals sign ( = ) translates into what
ever you call “doom and gloom” - well, the data does not
really care about your semantics...”

Correct me if I am wrong, but an overweight, hypertensive patient who dismisseshis physician’s conclusions as “doom and gloom” is a fool, no?

Let’s get back to the issue:

In other words, over the next 20 years, the U.S. will go from consuming over 20.3 million barrels per day (“bpd”), every day, to consuming less than 5 million bpd, every day. No more casual drives through the country side, no more silly car commercials, no more heating more than 1000 square feet of living space and then, only if you are very wealthy and only if the political realities are accepting of such.

A great shock is going to be felt in the markets. All of the pension liabilities, current valuations and multiples, insurance tables, medicare, social security, etc… EVERYTHING will need to be “reassessed”. A nice way of saying most financial assets will lose most of their value.

I speak only in constant U.S. dollars. I have no opinion on what reaction the U.S. Government, and its Department of Treasury and Federal Reserve Bank, might have. After all, Oil has not risen much, if at all, in price for Canadian consumers as their currency is not being devalued as is the U.S. dollar is.

Oh, and by the way. The EIA’s data for July world oil production is out. Production of crude and condensate continues to decline, India and China’s imports continue to rise, and U.S. imports continue to fall… but more on this in a future post.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Monday, October 8, 2007

A Store of Value (and I am not talking about Target)

I hate the U.S. Dollar. If you have been reading my stuff you know I have for years.

Hating the U.S. Dollar does not mean I “like” other currencies. I don’t. I like commodities, and I like certain agricultural land. I even like the equities of companies in certain commodity businesses. When I say I hate the U.S. Dollar, I don’t mean that I would want to own the Euro here, or the Mexican Peso (Ha!), or the Ruble, etc… Now there might be some currencies that I do like, but not more than commodities and I am precluded from giving specific investment advice in this forum and that would include specific currencies.

To get to the point… in 1979 the world’s currency basket lost roughly 15% of its purchasing power. In other words, all currencies lost value. There is no easy fix to this issue like “buy gold!” or “buy silver!”. After all, gold peaked in 1980 only 1 year after the “79 currency debacle and took 27 years to recover.

No, there is no silver bullet (pun intended), the rules still apply: diversify, do your homework, believe half of what you see and nothing that you hear, remember that markets zig and zag, they do not zig and zig and zig, and stay the hell away from the $#%%! Bond market. How much is the coupon yield? And what was the money supply increase? Your total real return is negative. If you need clarification, just email me…

Which brings me to China. China, China, China! I remember when it was: Japan, Japan, Japan! (I am dating myself here). Look what happened there. Now be careful. China is nearly as much at risk due to energy constraints as the U.S. is, and their banking system is a Friday the 13th sequel waiting to happen.

Meanwhile, back at the currency ranch… our trading partners will at some point try to protect their export markets, and will do so by increasing their money supply and devaluing their currency. While this might be relatively good for the dollar in the ForEx markets, it is extremely inflationary, devaluing the purchasing power of ALL currencies.

And this is your store of value?

Yours for a better world,

Mentatt (at) Yahoo (dot) com
o much said, but so little that makes sense…

The web is chock full of Peak Oil analysis: dates, decline rates, population impacts, energy prices, etc… 99% of which is doomer BS or attempted political manipulation.

Here is a hard truth: There is little to nothing that 95% (I pulled that number out of the air) of the American population can do to try and control their own destiny in post PO America. Some of the remaining 5% is so wealthy that it matters little what they do. It is the upper middle and professional classes that have the most to lose and the best opportunity to make adjustments.

First things first: If you are doing it, stop reading “doomer porn”. How does it help your position to read BS written by people who are HOPING for disaster? OK, I will admit they may eventually be proven correct. So what? How does that improve YOUR circumstances? No more so than knowing you have high cholesterol and high blood pressure… if you don’t/won’t do anything about it. I could make a good argument that it would be better to not know so that you could live the time you have left with peace of mind.

Action works. Planning works. Having the means makes life much easier.

If you have a few bucks and the capacity for abstract thought (these don’t always go together; I know a lot of successful folks that became successful precisely because they had zero capacity for abstract thought – sometimes sheer force of will carries the day) it is time to educate yourself in the commodities futures markets, precious metals, as well as agricultural land. I know, these have already risen a great deal, and no, you have not “missed the boat”. An understanding of the risks facing the US $ would help, too. I could give you my opinions and strategies, but then you would ignore these as just more BS from some huckster (and you may be correct), and besides I am on the learning curve here, too. No, you have to do the research yourself. Opportunities abound in the energy futures market. I am constantly amazed when I read postings from some of the smartest guys in the world on this issue – and then see that they have not taken a position in the market that will pay off in spades if they are correct. is full of these guys. They have been dead right on the price of oil for 3 years, and they should be multi-millionaires – but they forgot to put their money where their minds are. And they have excellent minds.

Many investors living in urban centers like my own South Florida wrongly assume that ALL real estate markets did a face plant. Farmland has been the number 1 performing asset class in real estate for at least the past 2 years, and maybe 3. Can you imagine the look on a Boca Raton local’s face when you told him you were buying cornfields back in 2005? He might have tried not to laugh in your face, but he probably would have failed. Still, the last laugh always belongs to the better-informed investor, because for every buyer there is a seller – and ONLY ONE OF THEM IS RIGHT.

So let’s talk about real estate/land investing. The hot spot for years and years has been the sun belt of the U.S. Southwest. We have built cities for millions of people in places that have no water. In the history of mankind, has this ever been done before? NEVER. From Mesopotamia to Egypt to London to New York … the one thing every major city (well, except maybe Atlanta) had in common is that it was built around a supply of water. We NEED water, among other things. In America, people have migrated over the past 40 years from arable, temperate, regions with adequate water to places that would not exist without air conditioning and significant food and water transportation inputs. Now while these inputs will likely be available for some time to come, their availability is going to contract, and that will affect the market price for those inputs that will stagger the occupants.

Let me digress for a moment to address those in doubt about this outcome. In any closed system, the consumption of all inputs is directly correlated to amount of energy available to create, transport, store, and consume the input, and it does not matter if it’s a clan of beavers in a mountain lake or 4 million inhabitants of metro Phoenix. For the beavers the energy input is solar evaporation bringing rain to higher elevations that replenish the lake. If less rain falls, the lake (a closed system) will contract. If aggregate BTU availability to North America (a closed system) contracts then inputs relying on energy (i.e. water, AC, sewage treatment, garbage removal) contract – no exceptions.

The man who bought my neighbor’s house in South Florida 2 years ago as an investment curses the day he ever saw the place. It has been vacant for most of the 2 years, he can’t sell it, and he can’t rent it for anything near his costs. I remember him walking around the property with pride on closing day. Markets are like that. The market is pricing good farmland in the Great Lakes region at a significant discount, and desert property at a significant premium because the market participants are not including in their calculations a significant energy shortage/crisis/problem/issue (in my not so humble opinion) and are overvaluing some amenities like the soon to be grassless golf course, and undervaluing other amenities, like access to sufficient fresh water (is that really an amenity?). Markets are like that (from the department of redundancy department).

Forget the Miami condo on Biscayne Bay – they are doomed, and irrespective of what you read in the local paper or hear from the media they are not coming back any time soon. Farmland can always be rented to farmers, and it holds its value even when the local currency does not. What was considered wealth before stocks, bonds, and other financial instruments? Land, livestock, precious metals, goods, timber, etc… much of this stuff still trades in the futures market, just in case you aren’t interested in having a herd of cattle in your backyard, and these futures, when liquidated, would likely hold their purchasing power in an environment of a declining U.S. $ (and you know how I feel about the U.S. $). Land does not trade like gold and oil so you will have to get your hands dirty here.

Real hiccups from energy indigestion could be felt at any moment, and then again, maybe not for a couple years. If I knew which day exactly I wouldn’t need my day gig. But, as I said before - “markets are like that” - things can change so fast that once the change begins, you can’t take advantage of it. And therein lies the rub.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Saturday, October 6, 2007

I received an email today from a rather bright young fellow who asked me how long it would be before Wall Street is looking forward to the EIA monthly world oil production numbers the way the look forward to the various reports coming out of the U.S. Department of Commerce, et al.

An excellent point; and to answer your question… soon, I would imagine.

Taking this to its next logical step… it would seem that at that time wealth, power, and money would flow in different directions than is now the case. At this time, Wall Street still appears willing to pay a premium for “growth” (of earnings I presume), after all, the average multiple for tech stocks is what? 40X? What multiple will they command when growth appears to no longer be possible? 4X? 3X? And what of the value of the long term bonds and other debt instruments of the airlines, auto manufacturers, mortgage lenders, Investment Banks, etc… if the long term view is one of perpetual energy descent? What are the legal, legislative, and political implications of this magnitude of defaults? It hurts my head to try and wrap my mind around this.

The EIA’s own data show a substantial decline in oil imports for the U.S. from 2006 to 2007, nearly 3%. If I read the data correctly, it would appear that for the month over month September 2006 to September 2007 imports declined nearly 7%! That might explain the remarkable drop in crude inventories and finished products of late. If this trend should continue, and I am not saying that it will or won’t, this winter will be somewhat problematic – at least for CERA & Daniel Yergin, Michael Lynch, Steve Forbes, Larry Kudlow… (Actually, I think these guys have been pounded into submission at this point. I just can’t help myself.) as well as for folks who heat their home’s with oil. For the moment, a BTU of Natural Gas (“NG”) is half the price of a BTU of oil, but that will change.

I want to stress how fast markets can change – sometimes overnight – and this is just the kind of data point change that can demolish the best quant model money can buy. So watch the data carefully, have a plan, and a plan B, and don’t deny to yourself what your own eyes are seeing.

Forget the production numbers (sort of). Pay extremely close attention to the import numbers, tanker rates and traffic, and the value of the U.S.$ versus not only the dollar index (remember, our trading partners will eventually try to protect their export markets by printing and devaluing thier own currency just as the U.S. has done) but versus precious metals as these will be far more telling than gross world production.

I know this sounds pecuniary… but I am not running for office nor do I pretend to have a macro solution(s). I am far more interested in the potential micro solution(s), which has/have a much greater potential for success.

Mentatt (at) yahoo (d0t) com
My wife just returned home from her native Japan with 2 data points I thought I would share with you:

1. Plastic grocery bags are no longer free
2. Garbage service in the Tokyo to Osaka megalopolis is no longer one size fits all. You pay by volume and weight.

Japan has little to no oil, natural gas, or coal. Plastic bags are derived from crude oil, and landfill space is at a premium making the garbage fee a no-brainer.

For those American’s who have never been to Japan (not talking about visiting a western style hotel), the first time is always an eye opener.

Upper middle-class Japanese typically have just one bathroom in their home. The home is perhaps 1000 square feet, frequently with 3 floors, and because space is at such a premium many homes have a compact circular staircase. The Japanese are tidy folks, never wearing their shoes in their homes, and are big on solar power – as a disinfectant. They would prefer, if possible, to place their bedding and sheet, pillows, clothes, etc… out in direct sunlight as a means of keeping pathogens at bay. Clothes dryers are not the universal item that they are in America.

The most striking anecdote I can share has to do with their husbanding of energy resources. At the end of the day many Japanese will retire to their “Ofuro”, combination shower, steam, bath (but no toilet, that is in a separate room/closet) room. After a good wash and spritz, it is customary to soak in a large tub of hot water; however, when they are finished they do not waste the energy in the tub of hot water – they use it to wash clothes, for hot water bottles, etc… the Japanese would no more waste this energy source than tramp through their mother-in-law’s house with muddy boots on.

And, of course, many middle class Japanese do not have cars. Manhattanites (and former Manhattanites like yours truly) can relate to this, but not so the rest of America.

America can look toward its trading partners and see the waves coming in. It won’t be many years before Americans are billed for their garbage by the pound, their auto insurance by the mile, and their carbon emissions by volume, and this will have a profound impact on our way of life

Even the Wall Street Journal, who just last year was snickering at us “Peak Oil types”, has had the temerity to run an article this past week on the impacts of $100 oil:

“How well could the world economy survive $100 a barrel?”
 According to the Journal, “The answer is quite well — so long as several conditions still hold true. The price rise would probably have to be gradual. Inflation couldn't get so bad as to force big interest-rate hikes. Oil-rich nations would need to pump their profits back into U.S. and European economies.” WSJ

Just over 3 years ago, when oil was in the $40’s, I wrote a letter to Larry Kudlow at CNBC that he and Steve Forbes, Michael Lynch, et al., were all wet and that they were completely uninformed as to our energy prospects; my comments were met with derision and mockery. A little crow can be good for the digestive system. Larry, eat hearty.

Look, as the WSJ tacitly admits, $100 per barrel oil is a foregone conclusion - and I believe that the world economy could handle $100 per barrel oil with barely a sniff. But it is not the PRICE of oil that will derail the economy (although given enough time it would, it just isn’t going to get that much time) it is the amount of oil AVAILABLE to the world economy that is the problem.

So, here you are, a middle-aged, self-made man of means - what do you do?

There are 2 key issues as I see it: your personal balance sheet and your income.

What is the source of your wealth? Do you build solar self-sufficient dwellings or do you sell cars? Is your business located at the proverbial beach right in front of the Tsunami? If it is, and that would be most of us (me, too), how can you best transition your future business prospects? If you were looking for pat answers, sorry, I don’t have them. You will have to figure that out for yourself. If you don’t address these issues now, you risk joining the wreckage of the homebuilders, real estate brokers, and mortgage loan officers (and if you think these businesses are just in a cyclical downturn, then by all means, now is the time to enter these industries. Please let me know, I would like to use you as a control group). It is a wonderful thing being in a business with large barriers to entry in a growing industry within an expanding economy… it is quite something else to be in a business in an industry suffering from overcapacity within a contracting economy. To get a handle on the difference you would need to find some greybeard who was in business from 1974 to 1983 or hit the history books…

What is your store of value? You know, like savings, stocks and bonds, real estate, etc… where do you store your unconsumed production? A continual/perpetual oil supply decline will wreak havoc on the purchasing power of the U.S.$, versus not only other currencies (imports) but domestically produced goods and services as well. Will your income/business be there to service the debt on your balance sheet? If not, whatever equity is there won’t be there for long.

It is my firm belief that you must have a strategy other than hoping or “wishing on a star” because we are running out of time. The energy crisis is here, and it couldn’t care less if you believe it or not, and once you are FORCED to believe, it will be too late.
This is sort of a repeat of the housing market in South Florida. In late 2004 and early 2005 we were advising clients that this was going to end badly, and that one was better off being too early than too late. Then along comes July 4, 2005 (or so), and like someone hit the switch, we went from seller’s market, to buyer’s market, to no market. You couldn’t get out at ANY price that was better than foreclosure. It is now over 2 years later and only NOW do market participants get the picture, but only as they stare foreclosure and bankruptcy in the face.

This is not a forum for advice, as I am precluded from making specific recommendations in this blog. Please feel free to email me.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Thursday, October 4, 2007

Problem Solved.

I got a call yesterday from a friend and reader of my meanderings. He works at a large trading firm and one of the traders there called him to point out that, while I might be correct on the price of oil, what do I have to say now that the stock market did not crash?

When did I say it would crash? Never in my life… Actually, if the Fed continues to flood the system with money the market can rise to infinity – you just can’t buy anything with the money you receive when you sell your stocks. The important thing to remember is that some organizations and corporations are going to benefit from the energy situation, and others are going to be harmed. If you can figure out the “who”, well, you will do just fine. I cannot comment on that in this forum.
But, really. That is not why the trader called my buddy; he called to gloat. The market is telling him that I’ve got it all wrong - so there.

Here is a quote from my favorite curmudgeon, James Howard Kuntsler:

“Okay, here’s the big problem in America; we made this unfortunate set of choices to create the drive-in utopia, the happy-motoring utopia. America’s oil consumption is the greatest misallocation of resources in the history of the world. We’re not going to be able to continue this living arrangement and that makes it, by definition, the greatest misallocation of resources in the history of the world.

But we like things the way they are. So we will not change our behavior until conditions force us to change. We Americans have put so much of our resources, so much of our wealth, so much of our spirit into constructing and assembling this energy-intensive infrastructure for daily life, that we can’t imagine letting go of it.

But get this; no combination of alternative fuels or systems for running them will allow us to run Walt Disney World, Wal-Mart, and the interstate highway system. We’re not going to run those things on any combination of solar, wind, nuclear, bio-fuel, used French fried potato oil, dark matter, or all the other things that we’re wishing for, or even a substantial fraction of it.

I’m not against alternative fuels or making investment in alternative systems. But what you need to know is we’ll probably be disappointed in what they can actually do for us. They can do things for us, but not the things that we’re wishing they can do for us. One of the main implications of “the long emergency,” therefore, is that we’re going to have to downscale everything we do. So the 3,000-mile Cesar salad will not be with us that much longer.”

Actually, in some respects, Mr. Kuntsler is an optimist.

The data continue to point to a 2005 peak in production. The market’s price signals have led me to call “Peak Oil” in past tense. Still the media and the relatively informed continue to debate the “when” of Peak Oil. It might be very entertaining, it might be even sell a little advertising, and it certainly will keep billing up at the public relations firms – it being their duty to manipulate the stories in the media for the benefit of their clients – but it is absolutely not relevant anymore. That peak has arrived or will arrive soon is far less relevant than the fact that it will arrive – no matter what. It is the preparations that matter… The following is a quote from an ingenious blogger commenting on the Association for the Study of Peak Oil.

“This is not only bad for the public discourse, but IMHO, it isn't very good for ASPO, either. Because they risk being rendered obsolete by their own data. ASPO has done the important work of establishing dates and reserves, but shortly, if their own estimates are right, when peak oil is will be an established, documentable fact - if it isn't already. And while ASPO will then have the satisfaction of being right, it will also have the problem of being irrelevant, if it hasn't taken a lead on the next step - where do we go from here?” - SHARON ASTYK

And there is NO satisfaction in being right – the satisfaction comes from being prepared. This is not a debate you can win, a college you can get into, nor a fair maiden’s hand to capture. It just is what it is – the most important event in modern history, and it doesn’t come with instruction manuals, accredited institutions to educate us on the solutions, or a spokesperson. “Wishing on a star” won’t help.

“If you find yourself in a hole, stop digging” – unknown

Yours for a better world,

Mentatt (at) yahoo (dot) com