Wednesday, November 19, 2008
A friend of mine called recently to tell me that I should change the name of my blog to the "American Energy, Credit, and Financial Crisis". He forgot "Political".
The market continues to point to a recession of biblical proportions. I would not add to equity positions, even my beloved energy sector, unless you have one tough stomach. If we have the kind of contraction the equity market seems to think, Oil could be $40 - or lower - and this would be anything but bullish for the equities in the space. This is not to say that a rally could not appear out of no where.
Right now, there is no clear path. I have never been so pessimistic. The Mad Scientist thinks that that kind of negative sentiment indicates that we are close to a bottom, and as recently as last week, I thought a bottom might be at hand. Maybe so. Then the market is going to bottom without me. I will reconsider this after the new year. I see things through the eyes of a guy pushing 50. I won't give away the Mad Scientist's age, but he still has black hair.
The sad fact is that our financial system appears to literally be falling apart before our eyes - at least by my definition. I have written here several times that there is a point of no (short term) return. I don't care if the market's come back after my lifetime. The U.S. economy cannot survive in any form we might recognize with a 5,000 Dow. That level would indicate no new aggregation of capital. Companies die, just like people. We need new companies birthed to take their place in the economy. Dow 5,000 means that ain't happening, and it means the survivors are much smaller than a Dow 10,000. The impacts on employment in the U.S. would be devastating. Could small business make up the difference? Not a chance, and those jobs just don't pay nor provide the benefits that Corporate America does. We are talking about the "Third Worldization" of the U.S.A., Europe, and Japan.
This would take place over the next few years. The problem is, we still have Oil shortages coming soon to an OECD nearest you. Yes, Oil is $50 or so, and Oil could go to $20 for all I appear to know. That does not mean we will not maintain consumption very, very near (worldwide consumption, that is) to what we are consuming right now. It DOES mean that exploration and production of NEW oil fields has ceased for all intents and purposes. Take the 2, the economic crash due to the loss of our credit AND our equity markets, and throw in a perpetually worsening Oil shortage, cook and stir, and out comes Dmitri Orlov's (if you don't know Dmitri, now would be an EXCELLENT time to search the web for his paper, or order his book, on the collapse of the Soviet Union and its parallel's to the U.S.) vision of collapse for the U.S.
The U.S. is currently experiencing deflation, something that, until very recently, I thought extremely unlikely, given the U.S. ability to print money. This is the worst possible outcome given the circumstances.
And the hits keep coming...
Despite a deflationary recession, the U.S. trade deficit is still $650 BILLION +or- even though Oil import costs have crashed. Add to this the $60 Trillion in unfunded Social Security and Medicare liabilities, $2.5 TRILLION in unsecured credit card and other consumer debt, the U.S. pension system is critically underfunded (in default), the coming bankruptcy of the Big 3 Automakers, AIG ALONE consumed $150 BILLION of the TARP program, and the Fed's refusal to discuss or disclose $2 TRILLION in loans (the Fed is a privately held bank, after all... Don't believe me? Google to the rescue! The U.S. Government does not own the Federal Reserve... now the question is: Who does?), the loss of Wall Street (you might consider this no great loss...), and the Fed's explicit guarantee of the money market system... I am getting ill just writing this.
Well, add it all up.
They thought this all up at Harvard Business School. Great call, guys.
This makes a great deal of sense if economic growth is no more - which I have argued is a distinct possibility (probability). For my money, I want yields twice the average, as well as some out of the money near term covered calls for a hedge, and only in energy and precious metals (I know, a broken record).
If you don't have to staying power, patience, or belief system in the Energy conundrum we face, then the equity space is not for you.
Mentatt (at) yahoo (d0t) com
Posted by The Short Story Man at 5:38 PM