Denial (revisited)

How would I describe the market action today?  The market's tried to shrug off news bad enough to scare the snot out of Frankenstein.  Then they came to their senses.  The Mad Scientist thinks things are not as bad as media describes, while I think things are much worse than they appear.  That's how market's work, for every buyer there is a seller - and only one of them gets to be right.  

Merrill's analyst freaked the market out today by saying $25 oil was possible next year.  You bet its possible.  Oil is the lifeblood of the economy, and the world economy is bleeding, profusely, from every orifice in its allegorical body.  Merrill mentioned that $25 was possible IF China entered recession.  IF?  We will be lucky if China is not in the midst of a F&^%$##! revolution this time next year, never mind a recession.  

$25 oil is very possible, but $40 accomplishes the same thing - the destablization of a number of regimes around the world.  Think Saudi Arabia can withstand $40 Oil?  Mexico?  Russia? Venezuela?   Let the House of Saud fall and oil might trade in a $25 - $250 range in a week.

Life's funny sometimes.  The Mad Scientist pointed out to me that while we thought the world would end in fire, it appears now to be ice.  Go figure.

Every action has unintended consequences, as we are witnessing first hand.  It does not matter how we got here (although I could make a strong argument).  We are "HERE":  in a subsidized form of capitalism employing a fractional reserve system for money creation.  The collateral for that money creation/lending is homes, a buildings, and vehicles (for the most part).  These collateral items have been expanded into critical overcapacity, and now that collateral base is deflating, and along with it our ability to create money.  So the Fed and the Treasury have stepped into to fight this phenomenon - known as deflation - and they will fail.  Rather I should say they will not succeed until it is too late, and the unintended consequences of that are an entirely different discussion.

The point is, that the U.S. and world economy is going to get a great deal worse before it gets better.  A great deal worse.  

There will come a point, and believe me... that moment will not be readily apparent, when Oil will have reached its apogee in this cycle.  The slope of the futures delivery contracts should flatten, maybe even reach backwardation (currently Oil is in contango for about 50% in 24 months - UNHEARD of.  Then again everything about this market is unheard of).  Until then, it is time to survive, and hope that some other "black swan" event does not materialize to f%$# up the plan.

The price of Oil in the front month contract reflects underlying economic activity (read this excellent link by career CIA analyst Tom Whipple.  Tom and I seem to see things in the same light so no point repeating it here).  No one could have imagined just 4 months ago how quickly our economy would self-destruct.  I don't think most can imagine just how much more it will do so, and I worry that I am not negative enough, or may be I see ghosts and goblins where there aren't any.  Still, I think discretion is the better part of valor for the rest of the 2008 and Q 1 2009.

Mentatt (at) yahoo (d0t) com