Monday, June 30, 2008

The Coming South Florida Ghost Town

In addition to my farm in Middle Tennessee, I live much of the year in South Florida.

And I despair for my adopted hometown (if you can call this sprawling mess of relocated transients a town).

South Florida is entirely dependent on its airports for its economic vitality, as does Central Florida's Orlando, and the aviation business is DOOMED.  Air traffic into Florida's airports has dropped considerably, and the decline will accelerate from this point forward.  As the travel & leisure business shrivels and the extinct snowbird dies ending its requirement for South Florida healthcare the population will flee looking for employment elsewhere.

Florida has no income tax (and I am not advocating one).  It gets its revenues from sales taxes, primarily from the tourists formerly piling into Disney World, MGM, etc...  Those tourists, and their tax dollars will no longer be coming south for the winter.  Local Governments rely very heavily on property taxes, which are VERY high in proportion to the value of the (plummeting) properties.  As more and more condo and home owners abandon their negative equity homes, the fewer remaining homeowners are going to be stuck with the tax bill - right at the time that the state is going to be sucking wind on sales taxes.

I think of this every time I drive by a Bank Atlantic or Bank United branch, or the condo complex going up next to my office in downtown Boca Raton.  These banks will not survive, nor will these condo projects.  The liquidation of South Florida is underway, and will take the better part of 10 years before officials recognize what is happening, even though it is unfolding, right now, before their eyes.

Right now, the local governments are still wasting precious taxpayer money on things like busting massage parlors, road expansion (who is going to be driving on these roads?), and using SWAT teams to serve search warrant's on marijuana users and murdering them in their own homes.

In a few years they won't have enough money to pay for legitimate police and fire protection, let alone murdering longtime home owning taxpayers for smoking marijuana.

Maybe the precipitous loss of tax dollars by local, city, and state governments is not such a bad thing.

Mentatt (at) yahoo (d0t) com


I get a decent amount of email regarding my blog.

Two things stand out in my mind:

Folks on the left berate me that my focus is too pecuniary and why can't I just see that if we elect a Liberal Democrat that everything will be put right because we will subsidize alternative fuels, punish those scum bag speculators, and have rock concerts for peak oil, etc...

Folks on the right berate me that all we need to do is drill off-shore and in ANWR and all will be well.  We can drill our way to prosperity and energy independence!

These folks are the "True Believers". Forget the laws of Physics, the Laws of Thermodynamics, or simple arithmetic for that matter.  These folks are angry, they are RIGHT, and that is that.

Let me give an absurd but perfect example:

"A most widely cited factor behind the recent US wars of choice is said to be oil. "No Blood for Oil" has been a rallying cry for most of the war's opponents. While some of these opponents argue that the war is driven by the US desire for cheap oil, others claim it is prompted by Big Oil's wish for high oil prices and profits. Interestingly, most antiwar forces use both claims interchangeably without paying attention to the fact that they are diametrically-opposed assertions."

Never mind that the political folks on the left make both arguments interchangeably, and that NO ONE within their constituency quietly corrects them.  "IT IS TRUE.  WE ARE RIGHT AND YOU ARE WRONG!!!!"

Lest you think I am picking on the jerks on the Left, let me point out the manipulations and obfuscations and out right fucking lies from the opposing scumbags on the Right:

We cannot drill our way to independence.  We can ONLY drill our way to ZERO reserves.  The quicker we drill for that domestic oil the quicker it will be gone and the more disastrous the rate of change will be in the future.

But it WILL make a few guys VERY RICH.  And that is who is pulling these strings for the Jerks on the Right.

The U.S. is being destroyed by these opposing schmuks.  They represent something less than 15% of the VOTERS, and much less of the general population, but they will bring us to ruin, if we don't THINK.

Whether you are on the Left or Right, you can THINK.  You do not need to believe everything that your corner is telling you.  All politics is local.  You can make a difference at the local level.  Will your "difference" help or harm?  


Mentatt (at) yahoo (dot) com

Saturday, June 28, 2008

Market's Zig and Zag, They Don't Zig and Zig

Crude Oil at $142.

The low for 2007 was just under $50.

I can't get excited about going long Oil here (irrespective of how dumb our elected reps might be in enacting "emergency" measures to "reign in" speculation.  Duh!  I thought we the U.S. practiced free market capitalism).  Not that Oil could not go up from here, it is just that when a correction begins, it could be a real winner and at that time I would want to be able to be a buyer.

If you were hoping for an oil-led end of the world, my bet is you might have to wait a little longer.  Not to worry, though.  The U.S. housing and mortgage markets will lend a hand to you cheering doomers.  Just be patient.

Not that Oil imports will increase - they won't.  And not that the economy will improve - it won't.  Oil does not need to be $140 to demolish the U.S. economy... anything over $100 will do that job well enough.  But markets have a way of screwing the MOST people possible.  Now that COULD be the Oil shorts, or it COULD be the Oil longs... but somebody is going to get a really good ass kicking - SOON.

A first rate banking disaster could make for an interesting Oil market.  For instance... Does Oil go down more than the U.S. $ purchasing power does?  This is going to be a very interesting couple of months for those of you making a living trading in the markets.

Good Luck! (You're gonna need it)

Mentatt (at) yahoo (d0t) com

Friday, June 27, 2008

OMG! WTF! (LOL... its bette than crying)

I ask you:  Now what is Bernake and his Fed gonna do? Better yet, what fiscal policy bullets(remember, the Fed controls Monetary policy, Congress controls Fiscal policy) does the Federal Government have left?  Someone has to report the death of a loved one to the loved ones.  I am hear to tell you that, loved or not, the current system is a dead man walking.  Won't be long now till we are out gravestone shopping, and picking out a dark suit.

The U.S., as presently constituted in economic terms, simply cannot survive $140+ per barrel Oil.  Only dreamers, jerk offs, Wall Street, Hollywood, and Newt Gingrich will argue the point.  

But this is not a Court of Law.  This is reality.  What was it Ayn Rand said so brilliantly? 

"We can evade reality, but we cannot evade the consequences of evading reality."

The consequences are here, and they are pissed off.  This is not an argument that can be won, nor a jury to be hung.  Either the U.S. changes drastically, or it will collapse.

Since I think there is ZERO chance of an outright collapse, then some BIG changes are coming.  Others might argue that these changes represent collapse.  They would come under the above mentioned "jerk offs".

Yes, the U.S. currency will lose a GREAT DEAL of its purchasing power, and no, the currency will not go to zero.  The government will still require that taxes be paid in U.S. $'s and will put people in jail if they do not comply.  This is just one of the fun things governments do to support their currency - especially paper currency, or in our case computer byte currency.

So what will the adjustments be?  Will we evolve... or devolve?  What about you?  Will you wait for the government to bail you out?  Or will you take care of business on your own?  Have we lost the ability to truly provide for ourselves?  This is going to prove to be a fascinating time to be alive, if you have some stones and a sense of humor.  

I want to get off of housing and the U.S. dollar for a moment and bring you back to the realities of food and warmth (shelter).  

As the famous "Tip" O'Neal famously quipped - "All politics is local."  The political fallout of burying old folks who simply did not get out of a cold bed and subsequently died will be earth shattering - and yet will be NOTHING when compared to insufficient food supplies.  

The U.S. is more concerned with making sure we have enough OIL, hence the Strategic Petroleum Reserve, than enough food.  The U.S. does not have enough food inventories to feed our population if a significant crop failure or animal disease strikes - but we have stored plenty of Oil.  Does this make any sense to you?  Further, the U.S. USED to have a the equivalent of the SPR for food - it was called the Farmer Owned Reserve - but we got rid of it.  If you think Republican G.W. Bush is a bonehead, guess which Administration decided that food was not important enough to maintain a reserve?  Democrat William Jefferson Clinton.  And he of "Man of the People" fame... go figure.

Yours for a better world,

Mentat (at) yahoo (d0t) com

Thursday, June 26, 2008

Hello? Can You Hear Me Now?

With the worst June since 1930, the Dow Jones Industrial Average is bringing the energy crisis on home.

The Fed?  There isn't enough around Viagra to put any lead in their pencil.  The Fed has been reduced to an impotent voyeur with his hands tied behind his back unable to satisfy even himself, let alone market participants, U.S. $ holders, housing, or banking.

G.M.'s stock is trading at 53 YEAR LOWS!  As in, today's share price has not been seen since 1955! The oil shocks of the 1970's could not do to G.M what the current import crisis has done.  Ford broke below the $5 mark today.  At some point very soon, it is very likely that Ford's stock will lose its ability to be used as margin collateral.  Citigroup hit a 17 year low, with Goldman Sachs putting the big C on their "conviction sell" list.  No one with more than a couple of grey matter cells to rub together should be willing to wade into the Financials at this time.

Speaking of G.M. and Ford.  I keep hearing how they "will have to be recapitalized".  Don't you believe it.  Any recapitalization will happen post bankruptcy (Dr. Lalani says that after their bankruptcy they will be renamed General Motorcycles & Mopeds), because nobody with money is going to be dumb enough to stand in front of the avalanche of liability these guys have to their morbidly obese, chain smoking, heart attack while deer hunting, fried pork rind eating, plumber's butt and beer gut retiree's healthcare bills.  Offend anyone?  Just calling 'em as I see 'em.  The UAW got into a fight with the energy crisis and the energy crisis won.  G.M. and Ford were ringside and got beat up just for watching.

(And Speaking about Financials... about 6 weeks ago Goldman had upgraded the financial sector, right about the time I began ranting that the mortgage write down mess was accelerating and would drop the Banking and Brokerage index like like a bad habit.  I received a number of emails telling me what a dummy I was and that Goldman Sachs says the financials are about to turn around.  2 Days ago Goldman retracted that unwise prognostication calling it clearly wrong.  But you know how I feel when I come to be on the "side of the majority - it is time to pause and reflect"  - Mark Twain)

You ain't seen nothing yet.  The next shoe could very well be the FINAL SHOE.  If just ONE the foreign central banks decides that they are not going to attend one of the U.S.'s upcoming Treasury auctions, or if in the aggregate they decide to cut back on their purchases, the Fed will have to step in and Monetize that debt - and it is LIGHT'S OUT for the U.S. $.  Just like that. Snap.  No do overs, no Mulligans, no second chances, no point going to the video tape.  Put a fork in it.  Your $ holdings would be toast.

Now I FIRMLY believe that this is going to happen.  The question is WHEN.  Where is Don Rumsfeld when you need him?  This is one of the great "unknowables" Rumy was so good at explaining... Anyway I would define the probability of when this way. 25% by the end of 2008.  50% by the end of 2009.  75% by the end of 2010, and 95% by the end of 2014.

There is precious little time left to do anything, if you are so inclined.

Good luck,

Mentatt (at) yahoo (dot) com

Tuesday, June 24, 2008

The U.S. Economy Is In A World Of Hurt

If you are not terrified, right now, about the prospects for the U.S. economy and its currency, you aren't paying attention.

The U.S. is in debt up to its EYEBALLS.  Policy makers have "lessened" this debt through fabricated reports of "growth", which has in truth just been plain old price inflation, and they have been doing it IN EARNEST for the past 8 years (prior to that they were still doing it, just half-heartedly).  You see, REAL INFLATION, the kind that measures wages versus the things those wages buy, was likely 20% over the past 12 months, and since 2000 has probably been 6 - 10% per year.  Where did I come up with that?  Just take a look at: 

  1. Food
  2. Gasoline
  3. Healthcare
  4. Tuition
  5. Electricity Rates
I, personally, do not give a good fart about computer equipment prices or Ipods versus stereos. I am a family man, and I can tell you first hand that our family health insurance premium has more than DOUBLED since 2001.  Well, if something DOUBLES in 7 years, the "rule of 72" says its price increases were 10% COMPOUNDED each and every year during those 7 years.  In 2000, 8 years ago, I was paying $1.25 for gasoline (now $4.40 in Florida)... That works out to what, 17% or 18% to compounded per year (too lazy to break out the calculator)?  Don't even get me going on food, property taxes, or my son's tuition bills.

The fact is, the U.S. has not been growing out of its debt, as some jerk offs argue, we have been INFLATING out of our debt (Budget and Trade, that is) as percentage of GDP, by Bullshitting about the GDP deflator.  "Inflation" masked as "Growth"  The fly in ointment is this - the U.S. has had essentially ZERO job growth outside of GOVERNMENT for the past 6 or 7 years AND has had wage growth of only a couple percent per year.  Well folks, it doesn't take an advanced degree from a ridiculously expensive institution (whose graduates FAILED to see the damage their contrived mortgage merry go round was wreaking) to grasp that if REAL inflation is 8% and wage growth is 3%, and a trade deficit of 5% of GDP, is going to catch people up short at some point.  THAT POINT IS NOW.

And this does not take into account the doubling of oil over the past 9 months or so (which we will feel in very real and disturbing ways in about 6 months).  Meanwhile, in the background:

  1. The U.S. has become the largest debtor nation in HISTORY.  
  2. The U.S. has the greatest percentage of population in prison in HISTORY.  
  3. The U.S. spends more on its military budget than any nation in HISTORY.  
  4. U.S. manufacturing as a percentage of GDP is the lowest in HISTORY.  
  5. The number of U.S. children receiving food assistance is the highest in HISTORY.  
  6. The U.S. household savings rate is the lowest in its HISTORY; conversely household debt as a percentage of income is the highest in the history of the DEVELOPED WORLD.
Here we are, entering the greatest banking crisis since the advent of the 1929 stock market crash ushered in the surreal economy of the 1930's (and fascism, nazism, socialism, etc...), and this is the the theme music playing in the background.

So here's the deal. Sometime in the near future:
  1.  The international central banks are going to go on a "buyers strike" of U.S. Treasury Bonds.  The interest rate on the long bonds will rocket and their prices will plummet. 
  2. The U.S. $ will plunge in the Foreign Exchange markets.  This will usher in extreme import inflation, tripping domestic production inflation as well.  (i.e., That $120,000 imported sports car will go to $500,000.  Now think Oil, chinese goods at Walmart, etc...)
  3. The U.S. will have no choice but to monetize its debt, selling bonds to the Federal Reserve who in turn creates the money to buy these bonds out of THIN AIR depressing the value of all of the OTHER DOLLARS (you know, the dollars you and I have diligently saved) around the world (and there are already too many of these).
This going to happen.  There is no force in the world that can stop this at this time.  We simply ran out the clock in this game of chicken.  Why now?  Oil imports have recently entered a permanent state of decline, and the U.S. system was constructed upon an ever expanding availability of cheap, imported Oil.

You have been seeing this in the price of Oil, Gold, and the value of the U.S. $ in the FOREX markets if you have been paying attention.  If you have not been paying attention, you are feeling it, RIGHT NOW, like a SCUBA diver that forgot to check his air pressure and is suddenly unable to breathe, in the form of declining purchasing power, crummy business conditions, falling home values, etc...

This is only the beginning.  Like a choking victim with no one around to perform the Heimlich Maneuver, the U.S. economy, which has slowly been asphyxiated, will now feel that process accelerating.  When it finally passes out, it will fall and smash its head on the concrete floor of our Trade and Budget deficits, Medicare & Social Security, Oil Imports, Mortgage Debt, and Military Spending.

No one is going to sort this out for you.  You are going to have to do it yourself.  

Good Luck!

Mentatt (at) yahoo (d0t) com

Monday, June 23, 2008

Politicians Cannot Count

Are Oil prices being driven by speculators?

Not according to data from the U.S. Government's Commodities & Futures Tradding Commission.

As of 7/31/07: (Right off of the CFTC website):


Long - 264,395 Short - 136,904

One year later 6/17/08 (Again, right off the CFTC website):


Long - 203,806 Short - 191,094

There it is, complete with links.

Ok, you say... There is WHAT?

Non-Commercials are the "Speculators" you hear tell about, and in a year they have lowered their net long positions from 130,000 barrels or so to 12,000 barrels or so. (Just subtract short from long to get your net).

During this time that the "Speculators" were deleveraging by 90%!!!!! The Price of OIL DOUBLED!!!!!


Mentatt (at) yahoo (d0t) com

P.S. If Congress is going to disregard the CFTC's data, why are we paying for it?

No Appreciation

According to a report from Credit Suisse, investor's have "No Appreciation" for the consequences of oil trading above $130 for the past 3 weeks.

Investors haven't fully appreciated the effects of crude oil's price surge, Stuart Pearson and Arndt Ellinghorst, London- based Credit Suisse analysts, wrote
in a note to clients today. The analysts said they expect European automotive-industry earnings in 2009 to fall by 5 percent, versus a consensus estimate of a 12 percent increase. ``Only a few industry executives and financial-market observers have ever experienced such a dramatic worsening of the external environment,'' the analysts wrote. ``Some players might even end up loss-making.''

Au Contraire, messurs Pearson and Ellinghorst: I think investors in American financial, auto, and airline stocks have a very PAINFUL appreciation of the high price of Oil. So, in honor of George Carlin, I will make a few observations and predictions on the Human Condition American:
  1. Detroit is doomed. 50/50 at least one of the big Auto manufacturers enters bankruptcy by 12/09, 75/25 they both are in bankruptcy by 12/10.
  2. The fallout from this destroys the presidency of whoever wins in November. In conjunction with these bankruptcy filings, the U.S. Pension Benefit Guarantee Corporation, along with Fannie Mai, Freddie Mac, and FHA, are all in DEEP crisis before 12/10. DEEP, DEEP, DEEP CRISIS.
  3. Several Big Banks and Brokerage firms will fail. The first Big Failure will be acquired or merged a la Bear Stearns. The second failure will not be so lucky. Nor the third (nor the fourth).
  4. Multiple compression (fancy Wall Street speak for declining declining P/E valuations) will be quite stark in the formerly big multiple names. Why would anybody pay 40 times earnings for a company that will cannot grow? If the company benefits from hyperinflation (price, not monetary). There will be precious few of these.
  5. The failure rate for small businesses will set a new record.
  6. Food prices will rise by 15% to 25% in 2009.
  7. The Chinese Yuan will appreciate substantially against the U.S. $.
  8. New York City Real Estate prices will fall, HARD. Mortgage defaults will challange banks in this market greatly (my nod to understatement).
  9. Total Vehicle Miles Traveled will continue to fall 3% to 8% per year.

Feel free to hold me to this. Let us see how I do. Please feel free to peruse my old posts to see how I have done in the past.

BTW, I wish I could be more specific, and name names of companies I thought would fail. For the most part I must remain very general, or it will appear that I am giving investment advice, or worse, that I am trying to influence prices of issues I own. Still, there are not too many auto manufaturers in Detroit, and as a disclosure, at this moment I have no position in them.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

George Denis Patrick Carlin (May 12, 1937 – June 22, 2008)

It is a sad day here at the American Energy Crisis.

American comedian, social critic, and keen observer of the Human condition, George Carlin, has died.

For those of you reading my blog over the years, though you might have missed it, George Carlin was the individual I quoted most.


Sunday, June 22, 2008

Continuing Down Memory Lane

I have been looking through old post's to see how my prognostications have worked out.

"It is interesting to note that Mr. Rosenberg is concerned with Deflation at a time that the Federal Reserve is concerned with Inflation. Could it be that we are in a period of commodity inflation and wage deflation? If so, where will the convergence/divergence take place to correct the imbalance, and give us an opportunity to profit? I don’t give specific strategies in this forum (but I do have an opinion), I merely point out macro trends that your local newspaper usually misses."

When I wrote that in 2005, the jerks on CNBC, Kudlow and Kernan come to mind, were trying to convince you that commodities were in a bubble.  Good thing you did not short them, eh?

A Stroll Down Memory Lane

I wrote the post 11 months ago...

At that time Oil was trading in the $70's!!!  And the credit crisis had not gummed up the market... in fact Bear Stearns stock was trading near $100 per share.

What a difference a year makes, and;

Just wait till next year...

Mentatt (at) yahoo (dot) com

Saturday, June 21, 2008

Well, well, well...

Judging by the continued decline in the banking and brokerage stocks, Investors clearly do not believe Fed Chairman Bernake, Treasury Secretary Paulson, the talking heads at CNBC, or any of the Wall Street hucksters.

I wrote this 7 months ago, imploring folks not to listen to the Larry Kudlow's of the world.

Had you followed Larry's advice at that time, and went short Oil and long the banks, you would have lost nearly 100% of your capital (in a paired trade).  Getting investment advice from the Boob Tube is like getting marriage advice from your divorced mother-in-law.

Back soon on housing and banking (look out below!!!!)

Mentatt (at) yahoo (d0t) com 

Friday, June 20, 2008

Empty Homes and Empty Wallets and Idle Hands

The number of vacant homes in the U.S. is reported at 18.6 million units.

Yea, and facelifts make people look younger.
The number of vacant homes, in my opinion, probably tops 25 million and could approach 30 million. I arrived at this by taking the NAR data point of 18.6 million and extrapolating a "Liars Loan" figure of at least 6 million mortgages where the applicant lied on their application that they intended to live in the home, when in fact they were speculating. I would be willing to bet that between Florida and California alone that the number of empty home owned by speculators that lied about their intentions tops 3 million units.

None of these homes are going to sell anywhere close to their mortgage debt.


Oil pricecs rise, the economy contracts further, the 25,000,000 homes are foreclosed on, each for $100,000 loss.

Hmmm... 25,000,000 x 100,000 = 2,500,000,000,000 or $2.5 Trillion!!!

Yea, I know it won't work out in such round numbers, maybe the average loss on the 25million vacant homes is only $50,000... then again, maybe they cannot sell them at any price and the write down is $250,000 per home.

Don't beat me about the gross oversimplication of this, I got it, I got it, already! But sometimes simple models really do work rather well....

Just a thought....

Mentatt (at) yahoo (d0t) com

Thursday, June 19, 2008

"Double Tongued"

"Double Tongued" is how the politically correct members of the financial press are describing the US$ posturing of Treasury Secretary Hank Paulson.

For those of you old enough to remember the Lone Ranger series... "man speak with forked tongue, kemo sabe" comes to mind. Double tongued = forked tongue in all but "polite" company. Paulson says publicly that he supports a "strong dollar" policy to, among other things, keep down the price of oil and other imports. Yet he has been castigating China to let their currency appreciate. Which is it? A strong $ or a strong Yuan?

(Folks, it is either one or the other, you can't have a strong $ policy regarding oil and a strong Yuan policy to make U.S. domestic manufacturing more competitive, and; the U.S. can't cure its trade deficit and still enjoy cheap motor fuel! You can't have your cake and eat it, too.)

Let me answer for Secretary Paulson: It is all about the Yuan.

I think China has, once again, played their cards very well. The Chinese have $1 Trillion in U.S. $'s in their reserves. How best to get the must bang for these bucks? Perhaps decrease the subsidy for oil to their citizens while at the same time allowing their currency to rise versus the petro dollar?... that would actually help their net trade position when oil imports are taken into account while forcing their economy to improve production versus energy consumption (if any of you think this is not correct please email me). After all, the Chinese must realize what happens to the value of the US$ if Oil reaches the $150 - $200 per barrel range (At least, I think they do).

Consider this scenario: The Yuan appreciates big time versus the US$, say 100% (I think this is a serious underestmate of the Yuan's potential). If the Chinese make no adjustment to their fuel subsidies, doesn't this lower the price of fuel by 50% IN THE BIG MARGINAL CONSUMER? Won't that put Oil demand in China into overdrive? And wouldn't that further squeeze world Oil markets, and particularly U.S. Oil imports, driving the U.S.$ precipitously off the proverbial cliff? If anybody has any good intelligence on this please let me know.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

"We don't do favors, we collect debts"

That little bit of Mafia wisdom did not come from the Mafia. It predates Machiovelli. The Roman Empire knew it well, though it likely predates them, as well.

It seems then, that an ancient culture such as the Chinese would be so remiss as to not think things through.

I am speaking of the nonsense being paraded around the news wires and proferred by our talking head sages that Treasury Secretary Hank Paulson's trip to China yielded the great favor of the the Chinese Government to decrease subsidies for Oil, Natural Gas, Coal & Electricity, hence raising the price for the Chinese consumer and slowing demand growth.

I am going to go out on a limb here... and ASSUME that the Chinese actually know their chess and think several steps ahead. You can be sure that the folks at the NSA, DOD and the CIA do, despite the belief by the jerks on the extremes of American politics that EVERYBODY in Government is an idiot (I reserve that designation for our elected officials/lawyers who only think about how to survive the next election - maybe they are not so much dumb as self-interested. Wait - didn't we elect them to serve OUR interests? Oh, never mind...). The Chinese were in the position of strength and surely knew that Paulson would come, hat in hand, for help. As for the Chinese, you can be sure that they did NOTHING that was not in their best interests (0r their opinion thereof), and would certainly make use of said interest in diplomatic endeavors as well as China's internal affairs.

All importers must, at some point, end their subsidies on imported fuel oil. That it has gone on as long as it has in China and India is somewhat of a surprise, but the real meassure in this instance is "price" not "time", perhpas I should say "as far" instead. How does it benefit China to continue to import Oil at $140, or "what if" $200, per barrel? Why would they prefer to subsidize their citizens rather than take their US$ reserves and buy "barrels in the ground" (reserves)? NAFC.

This bears watching. If the Chinese government wanted to destroy demand unilaterally, they could do it in (in my opinion). If it is their intention to reign in demand growth, they could do that, too. The effects on world oil prices between these 2 positions is BIG. HUGE. LAAARRGGE!

This is a very important development and deserves serious consideration. "Hoping" and/or "wishing" will not help. Deep thought and correct action is everything when trading. Feel free to email me your thoughts on this... idea flow is going to be very important on this one.

Good Luck!

Mentatt (at) yahoo (dot) com

Wednesday, June 18, 2008

Here Come The Heavyweights

Paulson & Company's John Paulson (no relation to the Treasury Secretary) says bank write downs may reach $1.3 Trillion.

The one reason I think he is incorrect, and admittedly he is the smarter guy in the space, is that he is not taking declining Oil imports into consideration.  

If there was no Oil import crisis in the offing, I think the ultimate write downs could have come in between $1 - $1.3 Trillion.  After a good flush, and some gratuitous money creation, and a couple of public hangings... our system, given enough Oil at reasonable prices and given the US$ status as the only potential reserve currency for at least sometime, could have pulled it off.  
But then there was Oil.


Royal Bank of Scotland says look out below!  The following came off one of the Wall Street newswires and was sent to me by one of my former desk mate's from my Bear Stearns days:

"Royal Bank of Scotland issues global stock and credit crash alert - Daily Telegraph : Daily Telegraph reports the Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyzes the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist. A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets... RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets. "I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names. Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate... US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit. The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said. "The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said."

I don't know if I would pull a Moses here and say that I was terribly sure that this would transpire in 90 days... I WOULD be willing to say 20% probability in 90 days, 50% probability within 12 months, and 90% probability within 24 months, and I just did.

Good luck!

Mentatt (at) yahoo (d0t) com

Monday, June 16, 2008

Bernake Blinks on The Budget (Deficit)

Things are coming fast a furious now. I have been freaking about the Medicare/Social Security trainwreck for years in this Blog... now I have some influential company:

The Fed Chairman just blinked in the bright light of the freight train coming at the economy in the form of the Budget Deficit. Medicare, Social Security, the Military Budget and now the cost of oil in an overleveraged fractional reserve banking system of which housing is THE symptom but only PART of the disease... this is truly spiraling out of control.
  1. If the price of oil does not turn around - NOW - the U.S. economy will certainly experience a SEVERE recession starting sometime in Q2 or Q3, if you believe the Government's economic B.S. (and I do not), and may well have begun in earnest.
  2. If the price of oil should rise to the $200 range (I am talking averages here, not peaks), it is light's OUT for the industrial economies and doomsday for the U.S. This would not mean a "severe recession", but an unprecedented period of economic contraction that historians would have to come up with a new name for - "Depression" would not do it justice.
  3. Irrespective of Oil prices in the short run, Medicare and Social Security are long term commitments and the Oil crisis is NOT GOING AWAY - EVER. So no matter what, the intersection of those 2 lines is going to leave a burn hole in your graph notebook.
  4. If Oil prices do fall much below $100, it will most likely be as a result of an energy caused economic dislocation.

I keep going over and over this (I manage peoples money for a living)... just what could fix, or should I say "extend", this mother of all ponzi schemes? So far, nothing comes to mind.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Saturday, June 14, 2008

Wall Street's Poor Vision

The problem is their credit analysts are not speaking to non Wall Street (read independent) energy analysts. These guys are talking $1 Trillion in write downs for Wall Street? I wonder if that is just the Investment Banks CDO/CMO portfolios they are talking about? IF every thing was hunky dory in Oil supply land, and; IF housing had not out of music in the great musical chairs game, and; IF Wall Street had another sector to turn to to replace the fees from mortgages, and; IF Detroit (the auto industry) were not going up in a puff of smoke... we would still have to concern ourselves with the negative feedback loops coming from:
  1. Increased Energy Costs
  2. Falling Energy Availability
  3. Increasing Values for the Chinese Yuan (increasing the rate of 1 and 2 as the price of energy to the Chinese falls in their currency driving up demand)
  4. Increasing defaults, which in turn increases supply of houses for sale, hurting prices
  5. Decreased economic activity ( oming from 1 and 2(, which decreases demand, hurting prices
The Fed is not going to sit by idlely while the housing market takes the country off a cliff. They will inflate something, ANYTHING, wildly, and in so doing destroy the value of the $. The Fed may, in my opinion inflate everything EXCEPT the one thing they need to inflate - and that is domestic wages. If they inflate commodity prices further and are unsuccessful in inflating U.S. wages....
More coming soon...
Mentatt (at) yahoo (d0t) com

An UNCANNY Grasp of the Obvious...

The G-8 Ministers got together over the past several days, and get this - They say the world economy faces "headwinds" from the price of OIL and FOOD! WOW! Way to go out on a limb! Listen to this drivel:

``The world economy continues to face uncertainty and downside risks persist,''
the officials said in a statement after meeting today in Osaka, Japan.
``Elevated commodity prices, especially of oil and food, pose a serious

Now I ask you: Did these miscreants add ANYTHING of value to their countries or the world at large? Not a shred. The cost in energy, security, and provisioning to gather these jerks in spot to the tax payers of the world is just a never ending rip off of poor people. Just who are these worthless individuals? Members of their country's elite - with backgrounds for the most part in the Law and Classical Economics uniquely unsuited to be of the slightest help in Energy and Agriculture, the problem areas they themselves have identified - but there you have it. They are, in fact, quite qualified to "monitier the situation" and be "very concerned". Thank goodness! I fee much better knowing that these folks are monitering and concerned.

This is the very reason why NOTHING will get done before it is too late. We continue to employ superannuated jerkoffs with little capacity to imagine the possibilities - and an even greater reluctance to embrace the probable.

I remember a famous quote from the 9/11 inquries into who was to blame at the Federal Level for the security lapse: "This was a failure of imagination" - as is the response of the U.S. Federal Government to the certainty of the coming energy and food debacle.


Iran just told the world to go scratch. Again.

The only country capable of really doing something about it is the U.S. Not Israel. Not Saudi Arabia. Nor China, India, Pakistan. The U.S., and much of the West, is in a uniquely bad spot here. We have some real dummies in the West that would rather have a Nuclear Armed Iran than take action. The only group more hypocritical than the Crazed Right in America is the Looney Left. Usualy led by establishment Hollywood, "stars" like Barbara Streisand, Warren Beatty, and Steven Spielberg et al, all of whom conduct PROFLIGATE energy lifestyles that absolutely require the continueance of the U.S. war machine!!! Hey Babs! Park the jet with pink cushioned toilet seat so that you can take a deuce comfortably and fly coach! 10,000 gallons in jet fuel just so you can have some privacy while you take a crap is out of bounds! If you did park the jet, among other things you could do, our politicos would not be under the kind of pressure that ends up with working class kids getting their legs blown off in Oil wars! Any questions?

The Looney Left is ok with their hero's ways, for reasons that remain unclear to me, but ARE ok with a mad man of Hitleresque proportions within reach of a nuclear weapon. Is it me, or is this freaking MADNESS? Or do the Hollywood types envision a series of concerts like Farm Aid... only this one will be called "Nuke Aid, to assist the poor victims of the Nuclear Blast. Now stay tuned MTV viewers and we'll tell you how all this affects Madonna's upcoming 50th birthday tour!"

You see, I think we could prevent Iran from getting a nuclear weapon and avoid a military confrontation with them. But that won't happen if the San Francisco mindset pervades our diplomacy. The only way diplomacy works is if the consequnces of its failure are too gruesome to consider.

The Law of Unintended Consequences applies to Liberals and Conservatives alike.

Back to housing later today...

Mentatt (at) yahoo (d0t) com

Friday, June 13, 2008

One of my readers sent these links:

At December 31, 2007, our total mortgage portfolio, which includes our retained portfolio and credit guarantee portfolio, was $2.1 trillion, while the total U.S. residential mortgage debt outstanding, which includes single-family and multifamily loans, was approximately $11.8 trillion.

With $11.8 trillion, the remaining $3 trillion is held on the books of the investment banks as well as the CDO and CMO markets.

These entities comprise the the $11.8 trillion mortgage market (by face value).  

Let's suppose a $3 trillion dollar write down, 25% of the value of the mortgages outstanding. I would suppose that that would be more concentrated within the commercial and investment banks, as the GSE's (Fannie Mai and Freddie Mac) have higher lending standards and their average mortgagor more equity in their homes (again, I think... anybody have any data countering that best guess?).  The balance of write offs between the GSE and the others would have to be done on  best guess basis...  not that I think it REALLY matters.

Getting shot in the head with a .44 Magnum makes a bigger mess and a more dramatic presentation at the morgue than does a .38 Special... but the victim is just as dead.

Reports are coming in in which analysts are suggesting that a 50% decline in home values in much of the formerly hot markets is quite possible.  (That would make a 25% write down on the mortgage face value a very reasonable assumption). For the most part the only analysts I have any faith in is me, and our resident mad scientist, the good Dr. Lalani... but in this case the guys are using some of the very reasonable metrics regarding price to income that I would use.  And, as you know, I think those income assumptions are going to have to come down, HARD.  

More to come.

Mentatt (at) yahoo (d0t) com

Foreclosures Rise 48% in May

The evidence continues to pile up regarding the housing/mortgage lending crisis and its effects on the banking system.

Foreclosures add to inventory and crowd out regular sales, Michelle Meyer and Ethan Harris, economists at Lehman Brothers Holdings Inc. in New York, wrote in a report yesterday. Foreclosures will account for 30 percent of national home sales this year as 1.2 million foreclosed single-family homes will eventually enter the market, they said. They estimate that foreclosed properties, which typically sell for about 20 percent less than other homes, will depress home prices by 6 percent.
30% ?  Really?  (And why is it you guys can see this now, but not when you were raking in bizzilions in trading ad underwriting fees for mortgage securities)  Does that include short sales (Deals made before the foreclosure process with the cooperation of the homeowner)?  Does that include technical defaults that the mortgage servicers have not foreclosed because there are no buyers in those markets (Detroit, Vegas, South Florida, etc...)?  NOPE!!!

The report has some particularly amusing anecdotes:

``The risk is that an adverse feedback loop will develop, in which problems in the housing market undercut the economy, causing even more stress in the housing and mortgage markets,'' Meyer and Harris wrote.

YA THINK?  Take out the first 4 words in the above quote, and then add a little color to the rest of their dry prose, shake, bake and outcomes the banking collapse.

BTW, Dearest readers, Thank you for some very helpful links to hard, telling, and informative data.  Please keep those coming (Now if I can just get folks to STOP sending me opinion/puff pieces designed to manipulate the unwashed).

More soon.  

Mentatt (at) yahoo (d0t) com

Thursday, June 12, 2008

Fractional Reserve System

I was out meeting investors yesterday, and telling them my view of housing and the banking system.  I was somewhat stunned to realize that some of these very well educated, and very wealthy businessmen did not understand how money is created in the Fractional Reserve System that the U.S. employs.
(Please go to the previous link if you are in need of a refresher course.)

As I began to relay my concerns I was met with the same derision I faced in 2004 and 2005 when I had the poor taste to point out that Oil was going to $100+ and the housing market was going to sh-t the bed.  However, once I got through on the creation of money in our system, it seemed some light bulbs were indeed going off in their heads.

If energy costs stay at the these or higher levels, the housing crisis and trade deficit, which was terrible at $80 per barrel and $2.75 per gallon, will be demonstrably worse at $135 and $4.15 respectively.   If energy prices, and hence the trade deficit, continue higher my contention is that the system would begin to breakdown that much faster.

Banks create money by making loans.  Most loans made by commercial banks are backed by assets, or collateralized by Real Estate - and the value of Real Estate is in free fall at the moment. (Please don't confuse your anecdotal experience with the empirical evidence.  The inventory of unsold homes and excess commercial space is growing fast.)  

The incentive for homeowners to pay their mortgage falls with the any increase in the price of fuel to get to and from the home, and with any increase in unemployment.  Once the resale price falls below the mortgage on any household experiencing a serious illness, a divorce, or a job loss, that home is on the fast track to foreclosure.

In my $250 per barrel scenario, the number of homes this happens to will be in the $millions, with losses in the $trillions.  

A reader was kind enough to email me and point out that the 90% of the mortgage market going to the GSE's was recent business, not the overall portfolio.  Thanks, that is correct. 

2 things:  
  1. The source I linked noted that Fannie Mai and Freddy Mac had gone from 40% to 80% of the market.  Clearly, when the portfolio they hold from when they were 40% of the market is just that - 40%.  The point is that the REST of the market place has conceded this business to the government.
  2. It is the packaged CDO's that the banks and brokers are holding that are destroying their valuation in the market place.  If the GSE's were in fact holding 90% of the paper going back to 2002s, it would be the GSE's that would be in free fall.
The banks are, for the most part, trading under "Book Value".  The market is not dumb, and the market knows that these banks are leveraged 25 to 1 to VERY questionable "assets".  If these assets are mispriced/mismarked by just 4% THE BANKS ARE TECHNICALLY INSOLVENT.


In point of opinion (rather than fact) my bet is that the asset values of the banks portfolios are over stated by 20 to 40% - or $2 Trillion to $4 Trillion.  Since the banks HAD equity of $1.1 Trillion at year end 2007, wrote down $350 Billion and raised $150 Billion... "Houston, we have a problem".

I think that is what you are seeing in the pricing of their stock values in the market, and I think you ain't seen nothing yet (provided the price of Oil does not collapse.  If Oil were to trade back to say $50, the banks and the home owners could very possibly get through this).  "Az nischt - iz nischt"  If not... then not!

More tomorrow....

Mentatt (at) yahoo (d0t) com

Socialism Doesn't Work

Part II in a series on the coming banking collapse

The Government Sponsored Entities: Fannie Mai, Fredy Mac are now 80% of the U.S. mortgage market.
With the decay of credit quality and the exodus of money from the mortgage industry that began last year, many of the biggest mortgage lenders have scaled back their businesses or shut down entirely.

Freddie Mac and its fellow GSE Fannie Mae are now financing more than 80 percent of all mortgages in the U.S., up from 40 percent a year ago.
Please keep in mind that the FHA guarantees another 10% of the mortgage market.  Got it?

That means the U.S. FEDERAL GOVERNMENT holds the paper on 90% of the U.S. 1 to 4 family home market.

If these mortgages were solid investments, wouldn't the FREE MARKET be in for more than 10%?

Check back later as I continue to make my case... That the U.S. banking system is likely to collapse if the energy crisis is not ameliorated somehow, and with it the U.S. $

Any INFORMED commentary or hard data would be welcome, my email is

Mentatt (at) yahoo (d0t) com

Nothing is certain... but...

There is no guarantee of anything.  Oil prices could go down, and oil supplies could go up.  Anything is possible - though I doubt this scenario in the extreme.

So let us play a little "What If", shall we?

"What If" my contention that Oil imports into the U.S. decline by 5 % to 15 % for the next 12 years until oil imports are only coming in from Canada, and; domestic production continues to decline at 2 % to 3% per year until there is NO MORE (I will be long dead when the NO MORE comes to pass, but I will be here during the worst of the impacts from the decline)?  What if...?

If so, this year will be better economically than next year, and next year will be better than the year after, and so on.... and I would think this process continues until the imports stop and many adjustments have been made.  So this year's crummy economy is going to be remembered fondly.

If so, the number of transaction in the Real Estate market will fall, continuously, for many years.  Every divorce, job loss, or illness will end up in a foreclosure or a tax sale - as the homeowner will not be able to SELL the home.  The effects on the banking industry and the U.S. $ is sure.  Neither survives and a new system and currency would need to be reconstituted. 

If so, the unemployment issuing from the Home Depot's, home builders, appliance retailers and manufacturers, to the landscape folks would overwhelm any government sponsored program.  Please reread the above paragraph again on job loss and foreclosure.

If so, the number of new cars sold would plummet to essentially Zero.  Auto supply, repair, maintenance, etc... is a HUGE portion of the U.S. economy.  The dislocations will be surreal.  The unemployment issuing from the sector would overwhelm any government sponsored program.  Please reread the paragraph above the previous paragraph yet again on job loss and foreclosure.

Retailers?  Dentists? Real Estate & Insurance Brokers? The Local Deli?  Just shake and repeat.

The number of homes that actually SELL will decline from now on.  For the most part, where ever you are now is where you are going to be.  At some point the banks will stop foreclosing, and that will be the end of the story.  $11 trillion or so in mortgage debt will have no value.

The collapse will come from the banking system, which creates money in our economy.  The political and social repercussions of such an outcome I will leave for you to imagine.

And if my "What If?" comes to pass,  I don't see how the mortgage market initiated banking collapse does not destroy the value of the U.S. $ COMPLETELY, and since ALL of the import/export data for oil supports the "What If", I think you have to take this seriously, really seriously.

So, for the next couple of posts, I am going to put up some numbers and link my sources, sort of like a "peer review".  PLEASE!  Find holes in my assertions!  If my analysis is incorrect, by all means - SHOW ME WHERE I ERRED - but please don't give me the usual Wall Street salesman's brushoff of "I just don't believe it".  BELIEF is not a legitimate analytical tool.

Back to you soon.

Mentatt (at) yahoo (d0t com  

Wednesday, June 11, 2008

"The Worst Is Behind Us" - Richard Fuld

Two month's ago, Lehman Brothers' career-man-CEO, Richard Fuld, threw his hat in the ring for author of "most ridiculous, bald faced attempt to manipulate and misinform" since Ben Bernake and Henry Paulson's "the decline in housing is contained" circle jerk of 2 years ago.

Well, DICK... if "The Worst Is Behind Us", why did Lehman need to raise another $6 BILLION in capital?  And, by the way, DICK, ...  have you noticed that Lehman has lost more than $6 BILLION in market capitalization in just a couple of days?  Actually, DICK, Lehman Brothers has lost over $13 BILLION in market capitalization in less than 5 weeks.

Still, DICK,  I am sure your board will be more than generous for your efforts in missing the housing crisis, the spike in oil, the collapse of the U.S. $ and blowing away tens of billions of dollars in shareholder value.  After all, the corporate board's of directors were MORE than generous when Stan O'Neal (Merrill Lynch) and Charles Prince (Citigroup) performed similarly.  After all, you guys deserve it - you did go to the right schools for part-time training 30 years ago.  That CERTAINLY qualifies you and makes you deserving of a 9 figure exit package.

Mentatt (at) yahoo (d0t) com

Tuesday, June 10, 2008

The End is Near - For Ford Motor Company

The only thing standing between Ford Motor Company and a Federal Bankruptcy filing is an addled 91 year old Billionaire whose brain is clearly not getting enough oxygen.

Unfortunately for the employees and pensioners of Ford, Kerkorian is a mere speed bump between here and bankruptcy court. I am curious as to who gets there first: G.M. or Ford? American Airlines or United Airlines?

That the end is in sight for some of America's most storied corporations is fairly obvious to anyone with a capacity for abstract thought and an absence of American T.V. programming. Total Vehicle Miles Traveled is declining and will continue to do so - FROM THIS POINT FORWARD. We have enough vehicles on the road RIGHT NOW to finish off the future fuel available for indivdual motorists. So why build even another car? The auto industry has to deny the future, much as a terminal cancer patient must deny the future - but car buyers do not - AND WILL NOT. It is not long before the public figures out that any car they buy today will outlive its fuel supply. Their reaction will be swift and sure. They will stop buying new cars powered by gasoline and diesel with an internal combustion engine. I know I am not going to buy a new car given the outlook. Would you buy a new car?

Ford and G.M. don't make to 2010 before filing for bankruptcy. The effects on the pension system and the debt markets will be freaky deaky (That's technical speak for severe dislocations).


The mortgage debt market continues its slide into oblivion.

The backlog of homes in the U.S. WILL NOT CLEAR before they take the banking system down in a crisis far worse than the Savings and Loan debacle of the early '90's. No amount of sunny speeches from the Treasury or the Federal Reserve is going to change this. By next year, Oil could very well be over $200 per barrel - giving the U.S. a trade deficit of well over $1 Trillion. How very well over? Very, Very VERY well over $1 Trillion. Import inflation is going to rattle the fillings out of what is left of Wall Street's teeth when the housing market really starts to go. So don't listen to those Wall Street jerks. IT IS different this time. We have a serious energy shortage for which their are NO answers.

So here's what I am gonna do:

I am going to get rid of every American $ I have. I am going to own precious metals, Oil and Natural Gas futures, and agricultural property and commodities... Then I am going to take a vacation. Have lunch with my wife or my friends everyday. Take my toddler swimming every afternoon, and watch my older son play baseball. Enjoy good meals, and a good night's sleep. I am going to exercise, ride my horses, and work in my garden, surf when the waves are up, and go swimming when they are not.

You gotta know when to fish, and when to cut bait. This tsunami is going to come down on us like a freight train (that is not a light at the end of the tunnel, its that darn train). I have been extoling folks to get their house in order. This may be your last opportunity.

Good Luck!

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Monday, June 9, 2008

What, exactly, is on the other side of the =?

This B.S. coming out of the Kingdom of Saudi Arabia just kills me.

What fundamentals are they talking about?  

1 barrel of Oil has ALWAYS equaled 1 barrel of Oil.  Pretty simple really.  We are comparing apples and apples.  OK so far?

$1 from January 1968 DOES NOT equal 1$ in January 2008.  That would be comparing apples and oranges.  

So, I ask the Saudi Oil Minister again - WHAT fundamentals?  The fundamentals of the US$?  If you are comparing Oil and $'s, and the supply of oil is stagnant, but the supply of $'s doubles... doesn't the price of Oil in $'s double (all else being equal)?  Ah... but here's where it gets tricky... Oil has never cost more in exchange for Gold.  What about Oil to Corn? Or Wheat? The point is, the analysis of the "fundamentals" on which oil trades is in serious flux at the moment, and I suspect that these different commodities and currencies are going to stretch a great deal, and in more than one direction, before an equilibrium is reached.  And the Saudi Oil Minister? He has much less of an idea as to what that is than your average workaday trader doing an honest bit of homework.


Housing has doomed banking.

Housing ain't coming back until the backlog of unsold homes clears.  I hear numbers thrown around by the NAR... 4.4 years of inventory... 4.8 years of inventory... B.S.!  They don't have a clue what is hanging out there.  

In the formerly hot markets... Las Vegas, California, Florida, D.C., Atlanta, etc... the only deals getting done are out of foreclosure - and for prices that, if extrapolated for ALL of the homes now in arrears or held by folks with no equity, means that ALL of the equity in the banking industry is no more.  That is what you are seeing in the price action of the Banks & Brokers, which, as measured by the XLF, hit a closing and intraday low today.

The market has spoken.

Mentatt (at) yahoo (d0t) com

Sunday, June 8, 2008

Stuck in Suburbia

Bloomberg news is reporting that the value of homes with the long commutes is dropping faster than homes that are closer in to town and employment.  Wow!  Ya think?

It used to be that "you drove until you qualified for a mortgage".  The folks that followed that strategy are now fatter and poorer than they might otherwise have been.  More time commuting means less exercise and steeper declines in home values.  Americans are going to get a new mantra to live by: "More square feet does not increase the quality of your life."


Now the Saudi's are calling for an Oil Summit.  I have just one question for the Crown Prince and Aramco:

If you guys are still the swing producer, why can't you swing production and swing the price of Oil down? (and why would you want to?) Why would the swing producer need to call a meeting of Oil producers and consumers if there was plenty of Oil in the system and prices were unjustified? (ok, that's more than 1)  The ONLY reason to call in the importers is to TELL THEM to CONSERVE!  That the producers can't keep up with their demand!  What the hell else would the exporters want to talk with the importers about?

Folks, there is no shortage of $134 per barrel oil.  There is an EXTREME shortage of $80 per barrel oil at the moment.  Want to know why oil is $134? (again, that was a rhetorical question) Because that is the price necessary to balance supply and demand in the market.  Oil is not pilling up in bulk storage around the world, like houses for sale in the U.S.  The oil market is CLEARING.  That means there are enough BUYERS willing to pay that market price to enough SELLERS so that inventories are not building nor drawing down too quickly for the market to react.  Of course, this could change...


Food prices are going much higher next year, no matter what the pathological liars might try to convince you of.  The price of corn is "price input" NUMERO UNO for eggs, meat, and dairy, and is a big component of all that nasty stuff you probably should not be eating.  

Speaking of which, I have a question for the Moe Rons in D.C.  Since those scumbag speculators are the bad guys driving up the price of Oil, are they also the bad guys driving up the price of food?  Maybe we should stop speculating in food prices.  Sure - if you want to cause mass famine.  The jerks in D.C. know this.  It is one thing to blame faceless speculators for oil prices; it is another thing altogether to try that trick with agricultural commodities.  One consequence of which would be a severe decline in supplies of wheat, corn, soy beans, rice, etc... as it will likely lead to lower oil supplies as well.  Ya see folks, if it WEREN'T for these sky high oil prices, oil production would be lower than it is - and we would likely have out right shortages.  Beware lawyers/politicians bearing practical solutions (have you seen how our court system works?).


Lehman Brothers leads the way down.  The mortgage money pipeline coming into Manhattan from every City, small town and village in America has been shut down.  In 3 years, the last of the big investment banks will have merged into history.  RIP.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Saturday, June 7, 2008

Self Serving Denial

Oil prices EXPLODED this week, and 

U.S. Energy Secretary Sam Bodman was out lecturing the world on Oil!

As George Carlin would say:  "That is what someone might call being STUNNINGLY full of sh-t!"

From the above link:

"Nations should fight rising oil prices by cutting subsidies and vastly increasing investment in energy, while oil-producing countries need to ramp up output and divulge more information about how much they produce, the U.S. energy secretary said Saturday."

Let me translate:  Oil EXPORTERS should charge their citizens world MARKET rates for Oil so that the U.S., with 4.65 % of the world's population can continue to consume 25% of the world's oil!  Look, I am a capitalist pig out to exploit the masses American... and PROUD to be one... BUT!  Earth to Secretary Bodman:  There is NOTHING you can do that is going to change the very simple fact that within a decade or so the U.S., with 5% of the world's population will be consuming only 5% of the world's oil!  That's it!  Live with it!  Now, here is what you establishment dimwits in D.C. need to do:
  1. Declare an IMMEDIATE moratorium on ALL road and airport building and expansion.
  2. Begin an IMMEDIATE work project to construct a functioning electric train system between the big cities.
  3. Shut down ALL private and corporate jet and yacht use by enacting HUGE taxes on the fuel to power these things.  It is going to be very hard, politically, to explain why 50,000 poor senior citizens FROZE TO DEATH one winter soon, while others are too "important" to fly coach. Steven Spielberg's comfort is not as important as the WWII vet with 2 purple hearts living in a mobile home in Wisconsin and freezing his ass off.
  4. Create tax incentives to encourage more agricultural production in the Northeast. This is where the population is.  In order to cut food miles, food will have to be grown there, or we will have to move the people out.  Take your pick.  The more food produced using organic methods, the less risk we place on our system.  We need to produce more food absent fertilizers.
  5. Revamp our silly justice system.  I don't care if Eliot Spitzer got it for free or paid $5000 for it (although I love the smell of former prosecutor cooking in the morning).  For those that do care, send them the bill for the investigation, the energy the investigation consumed, and Justice Department Lawyer salaries.  We don't have a choice anymore.  We are going to have to decriminalize many distasteful things, and let the cards fall where they may.  We simply will not have the money OR the Oil to keep 2 million people in prison for non violent crimes.
  6. De-regulate and SHRINK the F---king government for goodness sake!!!  Government employees are a burden on the rest of us - and we are about to be severely overburdened with other problems.  We need a budget surplus, and we have a budget deficit.  What exactly does the Department of Education do?  Not much, going by student test scores for math and science.
  7. Decrease the number of slots in Law Schools by 75%!!  Why does the U.S. have the highest percentage of lawyers per capita in the WORLD?  (no offense to you lawyers, I feel the same about stock brokers and investment bankers, yours truly's chosen profession).  Stop the litigation wave, before it begins.  
  8. Shrink the size of the military while you still have the money and the fuel to bring them back home.  Tell Europe and Japan to pay for their own defense.  Stop fighting over something that is going to disappear soon anyway.
Now folks, I firmly we believe that our Government will do none of the above, at least not until it is too late.  You are going to have to take care of yourselves and your family on your own.

Good luck.

Mentatt (at) yahoo (d0t) com

Thursday, June 5, 2008

The Fall of the House of Saud

Saudi Arabia might soon be just plain old Arabia. When that comes to pass, $150 oil will look cheap indeed.

Influential members of the nation's political ranks are calling for cuts in oil production, not increases as the U.S. has asked for.

"The price of oil under ground is actually higher than its current market price because it will become a unique commodity by time and demand will continue to rise because of a steady growth in the world's population," Marri told Alriyadh.

"The level of oil production in Saudi Arabia must be linked to the country's actual development and financial needs not to market prices and the need of foreign consumer. It is not wise to sap this resource just to satisfy the demand of foreign markets. Therefore, we need to revise our oil production policy before it is too late. Preserving our oil reserves is better than investing our financial surpluses which could lead to inflation."

You see, some Saudi's are smart enough to prefer to hold their oil in the ground, rather than worthless paper currencies in the bank. If the Crown Prince does not handle this astutely, he might meet his own end at the wrong end of a sword. For years, no soul living in the Kingdom, or the Oil dependent West, was willing to state the obvious - "The Emporer Has No Clothes" - THERE IS NO REPLACEMENT FOR OIL. That the West's silly claim - "if Oil went too high the efficient markets would bring on alternatives to Oil" - was some EXCELLENT propaganda but when put to the test failed quickly and utterly.

(The funny thing is, I will STILL get 3 calls this week from friends and clients about something they saw on T.V. proclaiming a car that runs on water and gets 35 miles to gallon and goes from 0 to 60 in 6.3 seconds and has a chick magnet bigger than yours... and then I have to pop their bubble with: "Well, if that's true, why didn't oil fall to ZERO in the markets today?")

Sorry, I am back. Saudi Arabia, perhaps soon just Arabia, holds the world's economy in its hands. When, not if, the House of Saud falls, no one will hold what is left of the world's economy in its hands.

Mentatt (at) yahoo (d0t) com

Wednesday, June 4, 2008

And How Was Your Day?

Oil inventory data was provided on schedule today by the U.S. Department of Energy's EIA and the 9.7 million barrels that were, what was their word?  "Temporarily" delayed?  Have stayed that way.  Total commercial inventories were up 200k with crude having a big draw and gasoline and diesel having an offsetting build.  In any event oil sold off - it would seem the market is more concerned with product builds than crude draws.  Perhaps if this were to keep up we would have ZERO crude and huge supplies of gasoline and diesel.

While we cannot be sure that trend would continue, I am betting that it does, and that we have begun a permanent decline in imported oil into the U.S., and a permanent decline in total vehicle mile traveled averaging something on the order of 5% per year.

In a conversation earlier today with one of the partners in my fund I mentioned what the impacts this outcome might be to him personally:

  1. By the end of 2010 traffic would be down 15% from 2007.
  2. Gasoline prices would be high enough to force most of his employees to use public transportation by year end 2010.  
  3. It was likely that he would be riding the bus too, out of necessity.
  4. The bus service is so unreliable as to be almost unusable.
  5. That his business relies on consumers and housing and those sectors are doomed.
  6. His business, as he knows it, is doomed.  Businesses that shed their marginal people and focus on their most productive will survive.  Those that discount the probability of the new reality likely won't be around long enough to argue the point.
  7. By the end of 2010, the reality that no hydrogen, ethanol, bio-diesel, tooth fairies, etc... had made up for the loss of petroleum supplies, and the STARK reality of the future would be staring us down.  The reaction in the financial markets to this is profound.
  8. Electricity rates were going to explode, doing a double whammy on the South Florida McMansion Market - driving to and from them has become too costly to maintain and supply them, and cooling them sufficiently to enjoy all that extra room was going to impossible, and not just because of electricity rates.  RATIONING of electricity will make its way onto the scene sometime before 2015.
  9. Airline travel will be prohibitively expensive for weekend getaways by 2012, driving the last nail in the coffin of second home markets - like South Florida - and evacuating 5 million people out of South Florida for a hurricane will not be possible.  Myanmar ring a bell?
  10. The value of his dollar denominated assets would plummet.
He responded that he hates talking to me and that he "hopes" my analysis is wrong.  I respond that hope has nothing to do with it, it is all in the BTU's.  He tells me to drop dead, politely, and goes back about his business as if we had been talking about the weather.

And the beat goes on...

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, June 3, 2008

Treacherous Markets

Last week the U.S. Department of Energy E.I.A. reported that total commercial inventories inventories fell by 9.7 million barrels.  The E.I.A. also took the highly unusual step of claiming to know WHY this had happened: (just read paragraph 3 in its entirety)

"The drop was due to temporary delays in crude oil tanker off-loadings on the Gulf Coast."

Really?  OK, maybe that IS the reason. If so, it seems reasonable that if the delays were "temporary" (the question then is how is "temporary" defined.  As Steven Wright says - "anywhere is walking distance if you have the time.") then the 9.7 million was simply delayed for a day or 2, and will show up the following week.  So, should we be expecting a 9.7 million barrel gain tomorrow?  It seems to me that that was what the EIA was suggesting.  Or is there going to be a permanent fog setting up shop in the Houston ship channel?  My bet is the 9.7 million does not show up tomorrow.  If it does, my hat goes off to a government agency that actually got it right.


It has been reported that G.M. is considering dropping its Hummer line of ridiculous vehicles.  Now there's a surprise.  You mean American drivers are not going to be interested in driving 6000 lbs of steel around, at 8 miles per gallon, to pick up the kids at soccer practice?  Who'd a thunk it?  GM pays tens of millions of dollars to corporate jerk offs to come up with this kind of strategic planning?  Want to bet those strategists went to Harvard Business School?  Nobody there saw higher energy prices KILLING their franchise?  UGHUGGHGHGH!!!!!


Speaking of the "What the F*^$! am I paying you for department"...

Standard & Poors FINALLY downgraded the big investment banks to within sight of junk status.  S & P, dripping egg from the face and suffering from foot in mouth disease likely will not be pulling any punches in the future.  Institutions holding mortgage paper are doomed.  Investors holding mortgage paper are doomed.  ANYBODY holding mortgage paper is doomed.  If you think housing is bad NOW... just consider that that market started to "sh-t the bed" (that is technical Wall Street speak for a market entering a prolonged period of significant contraction) long before oil broke $75 per barrel.  Think about it: Debtors were defaulting on their mortgages over $300, $400, maybe $500 per month too much payment.  Now throw in a $300, $400, or $500 monthly increase in total energy costs (gasoline, heating fuel, electricity) for the same homeowner...  Might as well hand them a rope, a couple of razor blades, and a bottle of sleeping pills.  As for the poor suckers left holding the mortgage paper... that paper is just dead men walking looking for their final resting place.


What a terrible time to be old, poor, and heat your home with heating oil.  Hell, its going to be tough being young, fabulous, and rich if you heat your home with heating oil.   At $4.50 per gallon, those McMansions folks were buying during the latest housing boom look like good bets for the scrap heap.  Does anybody over the age of say, 7 really think that folks are going to pay the mortgage on a house they cannot afford to heat?  Gee, I wonder what that means for Lehman Brothers, and the rest of the mortgage complex.  Me?  I would prefer to slam my finger (or any other appendage you can think of) in a SUV door repeatedly than be long THAT sector.

So here we are:  Airlines are raising prices and cutting capacity and services,  the auto manufacturers are closing plants building SUVs and Pickups, and the white elephant oversized homes are going to blot the landscape, abandoned because their occupants could not make the heat payment, let along the mortgage payment.

Now I ask you: What else would the beginning of the FINAL energy crisis look like?

Yours for a better world,

Mentatt (at) yahoo (d0t) com