Wednesday, November 19, 2008

Nothing Doing

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.

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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.


Good Luck!

Mentatt (at) yahoo (d0t) com









6 comments:

bureaucrat said...

With regard to your mad scientist thinking that "when everything looks the blackest, that is a signal of a bottom", I would suggest that the timing of such observations/predictions is now a bit less reliable due to the Internet, and the speed by which information revolves around the world. When did everyone realize we were in a bad economy? This last fall, I would guess. When did I realize it? One year ago, when I came to the conclusion the deflationists (Mish, Schiff, etc.) on the Internet were right. I moved my retirement balance to Treasuries (nice move, Bureaucrat). But it does call into quesiton when is: the MSM realizing the blackness, when do others (like me) realize the blackness, and how many others are wrong about the blackness. It makes the mad scientist's observation a bit less reliable. Nor do I think anyone sees where the next bubble is gonna come from .. yet. There is nothing to bring this economy up right now. Deflations are that way.

Donal Lang said...

Hey Greg

My, you are in a cheery mood... ;-)

In my view we need to look at before; before we built this financial pack of cards, before we all got rich from huge amounts of cheap oil, and before the stock market was filled up with banks, retailers and 'service' companies. Then it was about real production, investment in infrastructure (remember investment, before it turned into gambling?)and 'normal' profits and returns.

But the path from here back to there will surely be a rocky one. Not least as there are twice as many people on the Earth now as then.

But hey! Let's look on the bright side!

Anonymous said...

I'm still down with Eric Janzen's two-step disinflation then inflation cycle (aka Ka-Poom Theory), so far he hasn't missed a beat in years.

On the plus side, an actual legal black market has developed for physical possession of precious metals, with spot market prices artificially low and zero deliverable at that price (they will sell you a piece of paper promising some one day, maybe), while Ebay and similar shows actual physical deliverable prices to be 50% to 100% higher that.
For instance, Kitco silver is $9/oz, while rolls of Maple Leafs, Eagles, Pesos and Philharmonics are going for $18/oz.

A black market occurs when the state mandates a price for a commodity that cannot be produced, bought, sold or had for that price – usually a ploy to make state-reported economic figures look better. The inexorable result is that the price of the commodity will rise beyond the official price to the point where producer and consumer are willing to do business in the shade. (Ask any Venezuelan about the posted price and the real price of a gallon of milk.) Reverse black markets also occur- cigarette and booze taxes are prime examples. Indian tribes in Idaho do a land-office business selling cigarettes to Washington State residents at a discount to Washington's draconian tobacco taxes.

Markets, just like non-Potomac water, seek the path of resistance. Black markets exist only courtesy of artificial social policy. Chavez can claim he's got the world's lowest price for milk, on paper, even as Venezuelans pay as much or more as anybody else. Likewise, Washington State can claim its reducing smoking thanks to its high tariffs on tobacco, when in fact all it's done is send the tobacco buyers to Idaho. But I digress.

What is to the empiricist quite absurd is why anyone would want to buy (and hassle with) overpriced physical gold and silver when he could participate in paper spot-price action on the ETFs. Why indeed?

Would you rather have $600 dollars of Winchester stock, or a $600 Winchester? Bet I know the answer.

Greg T. Jeffers said...

After today's market, my gloomy perspective appears warranted.

We MAY be, literally, a week, 2 weeks, or a month from a financial meltdown. Or it might not happen. THe sad fact is that the probability is SO high that I do not appear crazy for discussing it.

The "Peak Oil' disaster is here, without benefit of Oil shortages. As it turned out, Mish Shedlock's "Peak Credit" thesis was DEAD on.

bureaucrat said...

The mainstream finance & government people in Washington, Wall Street and every high-rise in America are doing everything they possibly can to stop this debacle, except doing the only thing that will end it: acknowledge that they/we/I did something very wrong financially, take the losses, allow GM et al to go bankrupt, let credit disappear for awhile, and start to rebuild. That is the only way deflations end (NBC News for the very first time tonight spoke the 'deflation' word!!!) Time and bankruptcies. Admit defeat, never allow those damn Republicans (and Dodd and Frank)
near the money again, and just give it time. Start over.

Anonymous said...

Right you are Bureaucrat.
Ah, but for some reason we just can't let go of the old, the failed, the outdated, the hallucinated, the artfully constructed artifice.
Instead, gotta' keep failed businesses and business models on tax and printing press dollar life support, a zombie economy, grounded in baseless faith and early stages of grief (denial, anger, & bargaining).
As Bones McCoy used to say on Star Trek, in an apologetic tone, "It's dead, Jim." We should let it go and sweep up the pieces afterwards.
Sad really. It won't change the facts.