Tuesday, December 30, 2008

Debt, Debt everywhere, nor any credit to drink

California and New York states are now in debt up to their eyeballs.  They used some really bad assumptions about future tax revenues and now they will simply be unable to pay their bills and interest payments without a massive Federal bailout.  Ahhh, but what the heck?  These are "Blue" states, and we have a Blue Administration coming to Washington.  Is it a coincidence that the very seats of power for the Left in the U.S. control policy (and taxes and spending) in these 2 states (Ca. is the most populous state, New York is the 3rd most populous) are now insolvent.  Not A F&^%%!!ing Chance.

In my previous posts I laid out the risks to the U.S. Dollar from the Federal Budget Deficit and the Trade Deficit. - “Twin Deficits”. We might have to change the name to “The Triplets”. You see, there is another government debt lurking out there – and it is growing every day. As of today, it is estimated at $2 trillion dollars, and by some estimates, it is growing at about 7% per year. That means it will be up to $4 trillion in the middle of the next decade.

I was wrong.  It is much worse than I had thought then.  And in keeping with my recent "Ponzi"/Madoff theme...Also from the same post:

The Great American Ponzi Scheme

In order to avoid China’s 4-2-1 problem – 4 grandparents and 2 parents supported by 1 worker – the U.S. immigration policy, the “Great American Ponzi Scheme”, has imported enough young people to continue to fund the Social Security and Medicare trust funds. For a number of reasons, that is coming to a close in the near future.

Had we not had the benefit of these immigrants over the past 20 years (legal or otherwise) the Social Security and Medicare trust funds would now be in default. Still, we grow our entitlement programs at an exponential rate – but future immigration will not be there to hold up its end of the Ponzi Scheme.

A “pay as you go” system means that today’s young workers pay for today’s retirees. What happens when you have too many retirees and not enough young workers? Nothing good
Nothing good, indeed.

Obama's Trillion $ stimulus plan appears to be chock full of swimming pools, tennis courts, dog parks, African art appreciation, and other bridges to no where...  You know all that useful stuff our economy needs to get going again (hehehehehehehehehe!).  And you wonder why I am not constructive on Obama's impact on the markets?  Geesh!

Stay tuned.

Mentatt (at) yahoo (d0t) com

The Coming Manufactured Energy Crisis in Europe

Russia's economy has crashed.  Dozens of unconnected and unrelated groups are demonstrating across the vast country, protesting the loss of their jobs or decline in earnings.  The decline in energy prices has hit Russia harder than any other country.

Russia has no choice but to MANUFACTURE a Natural Gas crisis in Europe.  Russia lives and dies on the price of energy. My bet is Russia would rather live.  Russia's biggest company, Gazprom, is mired in debt and Russia cannot afford for this company to come to any more difficulty.

Maybe they will blame it on Ukraine.  Maybe they directly extort from Western Europe.  I can come up with a dozen scenarios.  Russia has no control of world Oil prices, but they sure can influence Natural Gas prices in Europe where they enjoy a near monopoly.  

Not that I have any idea how to play this in the market.  I don't.  But it is something to think about.

Mentatt (at) yahoo (d0t) com

Monday, December 29, 2008


Thanks to Roy from Long Island!

Read this article from Sharon Astyk, "Ponzi Scheme as a way of Life".  Americans really don't understand just how much of a "Ponzi Scheme" the stock market, Social Security, Medicare, banking, money supply, etc... are.  It is true, our ENTIRE financial system is a Ponzi Scheme, and anyone with even a rudimentary understanding of mathematics knows what MUST occur at the terminal point in the scheme.

I am not saying that I have a better solution at the moment.  I don't.  Ending the societal Ponzi Scheme voluntarily or involuntarily will yield the same result.  It is like jumping off the Golden Gate Bridge.  It is a beautiful day, a beautiful view, you have the wind in your hair, perfect No Cal low humidity, and then SPLAT!!!!! You hit the water and your guts pop out your ass like a (never mind, you get the visual).

And like it or not, we have ALL contributed to the scheme, and it has served us well.  Until we hit the water, that is.  Our entire political and economic effort has rightly been directed at elongating the time between the jump and the sudden stop of the Gold Gate Canon Ball.

Are we there yet?  Who knows?  But Astyk's point is well made, and worth thinking about.

Crude trades over $100, with a high of $140, and a low of $75 (I had dinner last night with FireAngel of theoildrum.com fame and he felt $165 was very possible. His calls have been nothing short of prescient, so I moved my own projection up from $130. Brave of me, no?).
I was pretty close on the upper range... not so much on the lower range.  Still, I think I was pretty close considering it was kind of hard to factor in the collapse of the international banking and credit system.  Stay tuned for my best Nostradamus imitation for 2009. 

Good Luck!

Mentatt (at) yahoo (d0t) com

Sunday, December 28, 2008

Remember When?

Remember when New York Real Estate only went up?  Well, that was then, this is now.  New York Real Estate, in REAL terms, will not be going up for the next decade or 2 (or 3).  Inventories of YEARS in the counties surrounding Manhattan, and a full year for Manhattan itself, are only going to grow longer and longer.  The data in this article only reflect the people who committed before the markets went off a cliff.  Wait till you see these numbers next year.  Wall Street is now Floor Street (as in flat on the FLOOR), and it ain't getting up again soon.  Who do you think was bidding up these properties?  City employees?  Say good night, Gracie... "Good night, Gracie".


I had this to say in my July 24, 2008 post, "Don't confuse brains with a bull market":
Home prices will continue to fall, defaults will continue to rise, and the banking system is technically insolvent. The Oil import volume into the U.S. will decline from this point forward, making the value of any property that is dependent upon cheap and abundant fuel for its egress, provisioning, and maintenance worth less and less and less, etc... This negative feedback loop will continue until all of the silly, worthless subdivisions that are standing on productive, VALUABLE farm land have been removed from the surface of the earth. The process might take 20 or 25 years to complete - but think about it: That means the "DEMAND DESTRUCTION" you hear tell about in the media regarding energy will apply to suburban and exurban housing at a rate of 4 to 5% per year.

Still think that Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citi, and the rest of these miscreants will survive? Really?

What we are witnessing is mass denial, confusion, and desperation at the Federal level. For the past 2 years we have been bombarded with attempted manipulations from the Fed, U.S. Treasury, The National Association of Realtors, etc... and myriad smaller equally desperate interest groups (nothing special about them.) The housing crisis is "contained", then housing prices were bottoming. When this did not come to pass, the "bottom is in sight" became the mantra in the Mainstream Media. And just where does the MSM get their data? From the very folks that cannot, under any circumstance, vary from the script.

It is the improper response that will do most of the damage as business as usual is not an option. Government's refusal to cut their budgets. The Individual's insistence that "THEY" will do something.

I regularly receive comments and emails from folks that seem to believe that the "rate of change" will be a rapid one. While I think that is possible, as I have posted many, many, many times before, I believe it will be a slow, steady, grinding unfolding of events. If, as I believe the most likely outcome, that U.S. oil imports go from circa 13mm barrels per day in 2007 to circa 5mm barrels in 2020, it won't be the end of the world. But it will be the end of the U.S.$, suburbia, the bulk of the value of social programs, defaults by the Pension Benefit Guarantee Corp. and Fannie & Freddie, and a litany of other issues foreseen and unforeseen.
Fannie, Freddie, Wachovia, and Washington Mutual are gone.  The Pension Benefit Guarantee Corporation is on deck, and the big social programs will be gutted before the end of the next decade.

Fannie Mai & Freddie Mac, nearly down for the count last month, survived with the help of a "standing 8 count" engineered by the finance hair club for men. It did not work, and they cannot survive. Government manipulations in free markets NEVER work. EVER. Are you listening, Mr. President-elect to be?

The head fake from the U.S. $ really spooked the leveraged folks in the commodity's markets, but some of those markets had gotten WAY ahead of themselves and now it would appear have gotten WAY behind - again.

The race to ZERO by the major currencies is still on. The U.S. $ simply must give up much of its purchasing power, and American's much of their lifestyle, if the U.S. is to balance its budget & trade deficits. There will be more head fakes along the way. If I could call them with any accuracy, would not need my day job... but the long term structural issues are there for all to see.

Housing will not be "bottoming" in 2009. It may hit bottom in 2009, or 2010, 2011, or 2012 for that matter, and stay there for 10 or 20 years. Hitting bottom and "bottoming" are 2 different things, aren't they? "Bottoming" implies a return to an upward trend in prices, an outcome I would have serious doubts about.

Commercial property values are also about to be "marked to market" in a most unsettling way.


Commodities are all about Oil. Oil, in US$ terms, is all about interest rates in the U.S. If the Fed decided to bring Oil to $80 or less, they could do it. A 5% Fed Funds rate would do the trick nicely. On the other hand, a 5% Fed Funds rate would demolish the banking industry and slaughter the housing market and bring the the U.S. into a 1930's level recession. Hardly worth the price of "cheap" Oil, wouldn't you say?

If the Fed keeps the Fed Funds rate at 2% through 2009, Oil will likely head over $150 in 2009.

On the OTHER other hand, if Oil imports into the U.S. decline by another 7.5 % in 2009 from 2008 (as they have so far in 2008 from 2007), Oil prices will likely top $150 irrespective of the Fed Funds rate.

Keep your eye on the data. And then, question the data.

Well, I was close.  My fear then was that the Fed would actually carry out their silly threats to hike interest rate to "deal with inflation".   Turns out the problem was deflation and the collapse of the banking system.  I was trying to point out that there were inputs that could (and did) slam the price of Oil... my example was the Fed, but the credit crisis worked well enough.  And my point about a 1930's style recession a steep price to pay for cheap oil was exactly the point and exactly where we are.

Guys my age (I am pushing 50) will NEVER again see the economic environment of their 30's and 40's in their productive lifetime.  Making plans contrary to this is a waste of time at best, and perhaps a waste of a life.  Remember the "New Economy" of the late 1990's (LOLOLOLOLOL)?  Well, this time their really WILL be a "New Economy", and if your skill set is tied to the Finance, Insurance and Real Estate (FIRE) economy (an economy fast receding in the rear view mirror), and I epitomize this, you better get a new skill fast, or you will be spending the rest of what we used to call "your career" talking about your glory days.  Don't ask me what that might be, I am no career counselor, but I can tell what it won't be for over 50% of the folks who were employed in the FIRE sector.

Good Luck!

Mentatt (at) yahoo (d0t) com

Where Are They Now?

During the election, I called "Foul" on silly claims by the Obama campaign regarding the American economy.  I received dozens of emails from "True Believers" asking why I was so dumb and can't I see how he will unite us, rally the US$, bring Wall Street greed to heel, cure AIDS, Tax the rich into submission and redistribute it all to the poor - a modern day, Anglo/African Robin Hood.  (Not that McCain was a single shred better).

That was when all the candidates had to do was talk.  NOW that they winner of the election has to DELIVER...

Folks, in real terms unemployment is going to be MUCH higher than 10% by the end of 2009.  And that is the small story, really.  America has over 25 MILLION small businesses at the moment.  Let us forget for the moment how many of them will fail, and as small business owners they are NOT eligible for unemployment insurance and so will not be counted, and focus on the DECLINE in earnings that these 25mm will experience.  It will be punishing.  In other words, less people will be working, and the remaining non-union workers will be making much less.  On top of this, people making a living will be forced to increase their savings.

The only corner the U.S. economy will be turning in 2009 would be going off of a cliff.  The question is is the decline in investment in productive capacity in the commodity sector going to overwhelm the decline in demand?  I am working on it...

This is no time to be a hero.  A bottom might be near in time, and far in price  - or near in price and far in time.  The divergence between Gold and Oil, and Gold and the US$ is not helping provide clarity, either.

By the end of his first term, Obama may wish he was on the outside of the tent peeing in, rather than inside and getting peed on.  Still, I wish him much success.  I just like to point out how campaigns are not in the business of speaking truths.

Mentatt (at) yahoo (d0t) com

Saturday, December 27, 2008

The Audacity of Hope

Call me a cynic, but I think the markets are hoping for a miracle from Obama.  Maybe he will even deliver (though I doubt it - at least on any time scale that would satisfy the markets).  But what happens if he doesn't?

I was speaking with my brother-in-law a couple of days ago and he accused me of being a pessimist.  Moi?!!  

There is no room for pessimism or optimism in forecasting, parachute packing, surgery, or hand grenades.  There is only preparation, research, thinking...

I think that people who can think this through AND take the action are going to prosper.  We can already see in everyday news reports what is happening to the people that did not prepare.  They are losing their homes, their cars, their jobs... think losing the family home might echo down the family line for a few generations?  My parents were children of the Great Depression.  I can tell you with great certainty going through that kind of trauma will carry through a generation or 2.  Some traumas last 5, 10, 15 generations and longer (witness slavery).

The trauma people are experiencing now is going to change their future behavior.  My bet is that consumerism, as we know (knew?) it, is dead.  The effect on the economies of the West, and the U.S. in particular, is going to be earth shaking.  For example, the U.S. has more retail space per capita than any nation on earth:

Between 1990 and 2005, the amount of retail space per capita in the U.S. doubled, from 19 to 38 square feet. In contrast, European countries generally have less than 10 square feet per person.

That the U.S. has 4 times the retail space per capita of Europe is of no small consequence, and housing and office space is in a similar vein.  The American economy was based on construction and autos until the 1990's when we threw in a little tech.  Now we don't need any more construction, and automobiles are piling up on dealer lots and at sea ports around the world.

So now the government is going to come to the rescue by creating another industry (and, they hope, another bubble for the next administration to handle) with fiscal stimulus and move the unemployed construction workers and auto workers to work in this "new" industry?  Really?  You believe that?

Not me.

But the markets and the media do believe that, and if and when things don't work out that way TSWHTF.  What are you doing to prepare for yourself and your family in case things do not work out the way the CNBC cheerleaders project?

The Mormons made the front page of MSNBC today for their peculiar habit of insisting on self reliance:
Mormons may be among the country's best prepared to weather the current economic hard times. Since the Great Depression, church leaders have preached a doctrine of self-reliance and selflessness, calling on members to plan for their own future while tending to the needs of others.

"It's a critical component of our theology," said Bishop David Burton, a senior church administrator who oversees the faith's worldwide welfare and humanitarian services programs.

Year's supply of emergency food

Members are encouraged to squirrel away a few months' worth of living expenses and stock a one-year supply of emergency food. Church handouts, classes and a Web site describe how to prepare, store and cook with emergency food supplies so nothing goes to waste.

No, let's face it. While 2009 could continue to be rocky, it can't get much worse than this, especially if Obama and the Democrats work some magic with a smoke and mirrors act to get people thinking positively.

Right now everyone is thinking negatively, and none of it is helped by our panicky government and its talk of economic meltdowns, food riots, martial law and other comments to freak out the citizenry.

See what I mean?  Why can't it get much worse?  Because it would be inconvenient?

Never mind the facts, stick with optimism!  Everything would be fine if only those jerks in government weren't so negative!  Never mind that these are real, foreseeable, and quantifiable risks that the people in government are duty bound to either prevent, prepare for, or at least warn the public about.  

Take a look at existing home sales and prices for November.  That data was noting short of worthy of sh-ting in your pants, and yet that data was from buyers who committed BEFORE the world lost $32 TRILLION in equity values, and an as yet an undeterminable amount of bond value.  Think that might have something to do with home prices in 2009?  How about the commercial real estate market?

This is all before some f$$#!! crazy despot somewhere bombs his neighbor or some nutty  fundamentalist funds a terrorist attack against a nuclear armed country like say, India.

This does not mean that at some point the government cannot destroy the US$ making markets go up in nominal terms.  It just means that that will likely be a while yet, and in any event, even if they are successful, that does not increase wealth by ONE PENNEY in real terms.

Now add all of the above to a significant decline in crude oil production due to the price declines over the next 3 years or so...

I am beginning to see the possibility of deflation ending with massive food and energy price hikes, and if you think energy security is important, it pales in comparison to food security.

And I am an optimist.

Good luck!

Mentatt (at) yahoo (d0t) com

Wednesday, December 24, 2008

Just when you think things can't get worse, they drop a piano on your head

Oil fell $3 today.  12 more days like today and oil will be at ZERO.

After we blew out of our Oil positions this past July, the commodity floor broker for our fund asked me when I would be willing to go back in.  I told him I would get excited about Oil again under $80 (we sold when the front month was about $132, on its way down from $147 although our contacts were for 2010).  At $80 he called me and said "OK, it is $80".  I told him it is still going down.  He asked me when I would be willing to take a position.  I said "when it stops going down".  He replied, "how will you know it stopped going down?"  I said, "when it starts going up".

Oil has not had an up week since then (actually, it had 1 up week).

If REAL unemployment hits 15%, which I think is quite possible, Oil could fall under $30.  That would be a hell of a price to pay for cheap oil, but it could happen.  It would mean that gasoline is down around $1 per gallon, but no one could afford it.

The depletion rate from the world's exiting fields is, according to the IEA, around 9%.  IF THAT IS TRUE, sometime in the next 36 months the U.S. would experience a significant Oil shortage irrespective of 15% unemployment (and unemployment won't stay there... Obama's team made it clear they would employ half the country to dig holes in the ground, and the other half would be employed to fill those holes back in).

The world burns 30 billion barrels of Oil per year.  2008 has been an excellent year for Oil discovery - the highest estimates I have seen is 8 billion barrels of ultimately produced Oil.  Hmmm.... if we use 30 billion per year, discover 8 billion per year, have demand decline by 4%, and deplete the world's 75 million of C & C production at 9%.... how long before the demand axis is superior to the supply access?  Not very long.  

That does not mean that Oil could not go to $20 per barrel in a deflationary spiral.  It just means that the probability is very, very low.

When the turn comes, it will be the opportunity of a life time.  Surviving until then is the problem.  Think about it:  Trading Oil from $35 to $70 is the same as last year's $75 to $150, and a lot more probable.


The Bank of Spain's Chairman sees things my way.  Nobel Laureate Paul Krugman, too.  There are too many optimists out there trying to convince you that we will turn the corner in a couple of quarters.  We MIGHT be able to re-ignite inflation and destroy the US$ in a couple of quarters (and maybe not) but in real terms we will still be sucking wind.

There ARE opportunities for investors; they just aren't where the man on the street is looking.  I will give you a hint.  Why would you buy common stock in a company when you can buy senior debt, at a discount, and get a current yield of 8, 9, 10% +...  with the added upside that if the company actually survived you would make a capital gain on the difference between the face amount of the bond and what you paid for it? And I am talking name brand companies here.  I don;t give specific advice in this forum, but if you can read this you can search these out in Moody's and Standard & Poors at your local library.

Good Luck!

Mentatt (at) yahoo (d0t) com

Tuesday, December 23, 2008

Housing Continues to Crash

The American housing market continues its free fall unabated, and as it falls, so will the banking system - AGAIN.  Don't let the bubble headed cheerleaders on CNBC fool you - todays numbers were TERMINAL for the U.S. banking system.

A 20% decline in housing prices from HERE means that the U.S. banks will need another round of capital similar in size and scope to the TARP from the Government - and the banks are already insolvent, RIGHT NOW.  We are past the "credit crisis", we have a solvency crisis.  I had this to say in my July 9, 2008 post "Armageddon and the End of Income Redistribution":

The financial stocks are melting down - trading like they are going out of business. Normally, that is when I would be buying. I would not touch this with a 10 foot pool, because I think many of them ARE going out of business, and that the shareholders in the surviving financial companies will be wiped out.

Further, if I am correct that millions of working folks have decided to go on a mortgage payment strike, don't worry about "Peak Oil". It will literally be TEOTWAWNI, though with a couple of positive hiccups here and there.

The effects on politics could hardly be more profound. As a hardcore libertarian, I look forward to the end of control of the political system by liberals and conservatives. This is the end of income redistribution (there won't be enough to worry about), the end of the pro choice/pro life debate (life will be dramtically more local, including local customs), the end of the infotainment culture (renting a movie will set you back $25 but your income won't rise a plug nikel), the end of high priced divorce lawyers (nothing to split, and people will NEED their families), not to mention the end your ability to spend ON CREDIT.

We will know soon enough: Peak Oil might have been beaten to the punch by Peak Credit.

The "Payment Strike" by American mortgage borrowers is, I FIRMLY believe, the most probable outcome BY FAR.  If so, the only way to save the banking system is to destroy the currency and print US$'s by the TRILLIONS.  In the near term we are in the grips of deflation.  If the U.S. Government's policy makers determined that that was unacceptable they could end deflation (and destroy the US$) with the stoke of a pen.  

Not to mention that this is in fact the beginning of the end of most of the big social programs.  In fact, it is all over but the shot to the head.  That is the longer term nightmare.  

Here is the near term nightmare.

Housing is still in decline.  That much is obvious.  If the buyers strike I speak of materializes it will trigger the currency/economic/commercial crisis because it will simply overwhelm the system.  We do not have the facilities to foreclose on the millions of homes, and no place for the evicted occupants to go. The "moral hazard" argument will hold true here, in that other mortgage borrowers will observe that they, too, do not have to continue to pay their mortgage...  Once this happens, the credit/mortgage debt/wage slave system is irretrievably broken.  Think Humpty-Dumpty.  This could very well lead to a political/food crisis unprecedented in American history.

So what the hell does a mortgage crisis have to do with food and politics?  Our entire system is predicated on housing/autos and the money creation (debt industry) that finances them.  What the hell do you sit on if you break 3 legs on the economy's stool?

Every nation, civilization, empire, etc... down through history is only "3 meals away from bloody revolution".  Food production in North America, and in much of the West, is an industrial enterprise... and didn't I just give you some of the possible reasons that industry and commercial activity can underperform to the point of critical shortages? Of food. Of energy. Of Medicine, etc...

Take a look at Iceland, this is as good a look into the future of many western nations, including the U.S., as one could expect.  Iceland, a homogenous nation and bereft of guns and a history of racism and other grudges (unlike the U.S.), is teetering on the edge.  This from the link above:

Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.

Unemployment might, in fact, lead to disorder, but food is issue NUMERO UNO.  If you disagree, try this experiment:

Do not eat anything tomorrow.  Drink all the water you like.  Do not eat from tonight until the morning of the day after tomorrow.  You will understand the issue ever so perfectly.

A break down of the commercial system means that the trucking system will not be working anywhere near capacity.  Our system of "Just In Time" food delivery will display the critical failure in our planning immediately - and disastrously.  

"And the folks was freaking."  - Airplane

Good luck!

Mentatt (at) yahoo (d0t) com

Forget the Recap; Look Ahead

I cannot recall being more negative on the state of the U.S. economy, and I have been quite negative for some time...

Let me state the obvious (so that I can get where I am going):

The U.S. Financial System collapsed in 2008 for all intents and purposes, and we now have a a U.S. GOVERNMENT Financial System. In 2009, the U.S. ECONOMY will collapse.  Not Armageddon, mind you... by this I mean extremely high unemployment, under consumption (savings), and contracting GDP.  While this is bad, the real risk is "Commercial Collapse".  Commercial collapse is the issue that is FREAKING our officials out.  It is the reason that U.S. Treasury Secretary feared the U.S. would have to enact MARTIAL LAW.  (Perhaps you missed that.  Well, here is one of the links in a major publication.  You can google plenty of others).

Commercial collapse would occur when small and mid sized businesses refuse to extend each other credit, i.e. when the local heating oil company will not deliver to homeowners or the local food wholesaler will not deliver to the local deli or bodega except COD (Cash On Delivery).  There are not enough Federal Reserve Notes (Dollar Bills, Cash) to facilitate a COD system.  I give this scenario a a better than 50/50 probability of unfolding, at least in part.  The Fed and Treasury are not going to sit idly by in this scenario... we would likely have a Federal Reserve Bank branch on every corner, in every McDonalds and Walmart to avert this crisis... the unintended consequence of this are mind numbing.

It may appear to the public that the Oil crisis has passed.  NOTHING in the data supports that contention, quite the contrary.  Price is not necessarily a supply data point.  Our system of credit is collapsing, killing the economy and the marginal demand for oil.  That same issue has made most new production projects uneconomical, and the intersection of that X and Y graph is not terribly difficult to foresee.

This is beyond serious.

I want to point out several paradoxes that you should be aware of.  Most of us learned of the "paradox of thrift" in economics 101 - while savings may be good for the individual, if EVERYONE saved the economy will contract by the amount of the savings in the short term.  Remember those silly fire drills when you were in grade school?  While an orderly exit from a burning building might be the best way for the GROUP to increase survivability, that same strategy might not work out for a particular individual who might be better off panicking to avoid being burned to death.  A man on the Titanic would be better off dressing like a woman and enduring ridicule. 

Got it?  Now to my point.

Government authorities, business leaders, etc... did not step up to the micro phone in 2006 and say:  "Attention.  The housing market is going to crash, bring down the banks, and cause the stock market to crash.  Good luck."  No, they said: "Housing is CONTAINED".  Otherwise, telling the truth would do more harm than good to the greater number of people, even though a few of you might have been better off.  

What if there was not enough wheat and corn in inventory to get the population through to the next harvest?  Do you think you are going to hear about it on CNBC in some form of public broadcast?  Even if it were a SMALL POSSIBILITY, the powers that be would not mention it because hoarding is simply not an option for EVERYONE.  If EVERYONE tried to fill their gas tank in the next 12 hours, the system would run out in less time than that.  If EVERYONE tried to fill their pantries with enough food for their families for the next 6 months, we would have food riots TOMORROW.  While the same thing is true for your savings and investments, these are not nearly as important as food security.  Unfortunately, our government is not catching on in this regard.  This is up to you.

10% of the American people are now receiving food assistance in the "Food Stamps" program (although now it is a credit card, not stamps).  That number will, by estimate, likely double - or worse.  Now consider the outcome of my commercial collapse scenario and the reaction of these people.

Hope for the best.  Prepare for the worst.  Try to have fun in between.

Good luck!

Mentatt (at) yahoo (d0t) com

Friday, December 19, 2008

New Arrival

I have been a little busy these last few days and have much to say BUT...

It is with distinct pleasure that I announce the arrival of our daughter,

Kate Jacqueline

born December 18, 2008 at 10:30 am, 7 pounds, 6 ounces.

Mom and K.J. are well.


Wednesday, December 17, 2008

Here and There

Thank G-d, I am not the only person speaking out about political nobility in our Republic.  This link was front page, upper left on  MSNBC dot com this morning.

I sincerely hope Governor Paterson comes to the right decision.  


Although I have met Bernie Madoff several time over the years (I am an NASD member), I do not know him personally.  However, I almost feel that I do.  You see, I live in a wealthy enclave in South Florida where one of the local private schools had difficulty keeping up with the white collar indictments of its volunteer board members. 

Financial wealth is ephemeral at best.  All currencies eventually go to zero.  Financial markets crash.  Wars are fought.  Sh-t happens.  But once material competitiveness takes hold the infection is chronic.  I was at lunch yesterday with a friend and investor who was telling me about a family member who had a run of good fortune.  In short order, the he and his wife were driving 6 figure cars (on lease), a humongous house, full time domestic health, and, get this... his wife was taking their 10 year old daughter for facials (what does a 10 year old need with a facial?  Sorry, my working class slip is showing... I don't know what anybody needs with a $75 facial).  My friend's family member is in commercial REAL ESTATE.  Guess what his career looks like now?  This is the kind situation that leads people to STEAL, LIE, and CHEAT.  

So here was good old Bernie on his yacht, getting $50 pedicures (mind you, this is a MAN we are talking about here), and paying $400 for private golf lessons... all with money he stole from people he had befriended.  Bernie refused to admit when he was wrong.  Refused to live within his means, and destroyed his family as well as himself in the process.  You may not be sympathetic to the people he harmed, but that's not the point.  

“This town isn’t about class or culture,” said Laurence Leamer, a Palm Beach resident since 1994 and author of “Madness Under the Royal Palms: Love and Death Behind the Gates of Palm Beach,” which will be published in January. “This town is about money. Bernie was revered because he had money. If you lose your money, you’re finished.”


"If you did not accept the invitation to the wedding, don't go to the funeral" is an old Wall Street saying.  Yes, the market loved yesterday's rate cut, and; yes, the US$ is falling which might help the equity markets... but I did not go to the wedding (the recent rally), so I am not buying into the rally now.  I have been long Gold and Silver and energy equities (Oil is not helping me at the moment).  Patience.  Patience.  The Fed did not lower rates to ZERO because the sun is rising over our shoulder.

Doesn't mean that I am right, but that is what I am doing.

Good Luck.

Mentatt (at) yahoo (d0t) com

Tuesday, December 16, 2008

Spin, Spin, Spin

I continue to get sick, reading the published reports of Caroline Kennedy seeking to be appointed Senator.    Man, read this link!  You can't make up sh-t like this.  The liberal press is swooning at her feet.  Just read the articles.  You or I couldn't buy this kind of press under any circumstances.  Being the daughter of an assassinated president does not qualify her, nor does it make Ms. Kennedy more deserving.  

If Caroline Kennedy had campaigned for office and won - more power to her.  The people would have spoken.  When APPOINTING someone to high ELECTED office it would seem there are far more qualified New Yorkers than Ms. Kennedy.  

If the DNC wants to appoint her chairperson because of her fund raising prowess among the New York liberal elite - well, that is their business.  Bunch of elitist creeps anyway.  Might as well fill the slot another slapped ass rich kid (think Howard Dean).

New York State is in the midst of a financial disaster.  Many people in the state are on public assistance, and the local economy is f*&^ing doomed... Yet what the Liberal Elite tell us is that we need another Kennedy in the Senate and that this particular Kennedy is qualified because she sold a couple of books (somehow I don't think her name helped at all in selling those books... do you?).

When I read this stuff, I DESPAIR for my country.

Let us hope Governor Paterson does not continue this legacy of privilege.  There is no place for nepotism in a Democracy.

Mentatt (at) yahoo (d0t) com

Monday, December 15, 2008

This is a Democracy, not an Aristocracy

Caroline Kennedy has thrown her hat into the ring to be appointed to the U.S. Senate as the junior Senator from New York. 

Good Grief.  I am as close to vomiting as one can be without running for the bathroom.  Just read how these journalists fawn all over this poor little rich girl.

Look.  I am sure she is a nice person.  Well educated, polished, blah, blah blah.  

I have had enough of the Bushes, Clintons, Kennedys, etc... Are there really no other bright, charming, talented folks in New York?  Why don't we just get rid of this messy election process of ours and just give the Kennedy's an inherited title to the various positions of power? Duchess of New York, Baroness of Hyanis Port... something regal to go with Caroline Kennedy's well born position.

Thousands of Americans died fighting an Aristocracy as well as every other despot, dictator, goofball and squalid criminal that seem to dominate the many nations in our world, yet we seem only to happy to install our own Royalty (with the help of the media.  Remember Camelot?).

Thank you for your kind offer, Ms. Kennedy.  Nice pearls.  Sensible shoes.  But what the people of New York and the Nation need is a Senator that lacked the trust fund and opportunity as a birthright that a fine example of the upper crust such as yourself has only known.  Why do we continue to install those who have never carried a lunch bag to work to understand and legislate for the benefit of working people everywhere?

This is America.  Where people make their money the old fashioned way, they inherit it.  Ms Kennedy has some pretty impressive liberal credentials.  Want to impress me?  Give away ALL of your inherited wealth and trust funds to those less fortunate.  THEN I will be impressed.  

Out there, right now, is a Democrat who worked their way through City College, or started a business from scratch, who is not a lawyer or an investment banker or a stock broker, who has real, nitty-gritty experience, and some spine, maybe a woman, maybe a person of color, maybe a white guy war hero with balls of steel... who knows?  Whoever they are, they deserve to be the next Senator from New York far more than a pleasant former debutante with more money invested in her pearls than the average New Yorker had invested in their formal education.

Ah, but what does a working class sot like me know?  Ms. Kennedy can raise oodles of money for the Democrats.  Isn't that what this is all about?  Oh, I forgot.  We have "Change We Need" in Washington.  Another Kennedy.  Change.  Puke.

Mentatt (at) yahoo (d0t) com

Sunday, December 14, 2008

Housing Meltdown Part 2

Quote of the day....

"If we have another 20% decline in prices, we'll need another bailout of banks similar to what we just did," Susan Wachter, Professor of Real Estate, University of Pennsylvania.

I think a further 20% decline in Real Estate is (far) better than 50/50 (but I reserve the right to change my mind if the data changes).  This is the only thing that has held me back from wading into Crude Oil in the 2010 - 2012 period.  I expect I will put some money to work after January 1, but exactly when... well that's to be determined.

The amount of Oil production that has been shut in or is no longer economically viable along with depletion from existing fields will, at some point, overwhelm the loss in demand.  At that time we will likely see a spike in Oil prices.  Right on time to derail the recovery.


This Bernie Madoff story just gets weirder and weirder.  

People will need to blame someone, somewhere... the SEC, state securities regulators, the accountants... and the regulators are going to be out skinning law abiding advisors alive for not crossing a "T" or dotting and "I"... but the sad fact is: There is no way to stop a smart crook from being a smart crook.  Greed will always get to some people.  The warning signs are always there, all you gotta do is look.

After the stock market crash in 2000 I decided that in order to survive, we would have to cut our overhead to the bone (talk about bad timing... I opened my Broker/Dealer in late October of 1998, less than 17 months before the crash).  I was leasing space from my former employer Bear Stearns in a AAA office building Boca Ration and had a substantial head count.  In less than 90 days of the March 2000 sell off, we had cut head count 80% and moved into some pretty unimpressive office space (actually, it was nothing short of gross).  A long time client came to see me (this guy was right out of a Seinfeld episode and we told him so), looked around and said "the new space does not exactly engender confidence" that we were going to remain in business.  As it turned out, out of the nearly 20 small Member Firms that rented space from Bear Stearns Boca Raton office in March of 2000, only 2 of us have survived (Kaplan & Co was the other survivor and he has thrived as well), and we did it by pulling a Godfather and "going to the mattresses".  

Bernie Madoff decided to keep up appearances.  Rather than scale his business back to reflect market conditions Bernie continued to work over the community that identified with him, that trusted, that supported him because he was an arrogant, schmaltzy, showy, ego maniac, scum bag.  His clients were bamboozaled by the show. Warren Buffet lives in a modest house in Omaha, buys his suits off the rack and wears a Mickey Mouse watch.  Bernie Madoff lived in a $10 million Manhattan apartment, wore only custom suits from Italy and London, and he and his wife had a jewelry collection that was the envy of the crowned heads of Europe.  

Notice something here?

 I am absolutely positive that when the investigations are concluded that they will find that this fraud began in earnest with the 2000 market crash and was finished off with the 2008 market crash.  To survive in the environment Wall Street has found itself in over the last decade you were either:  Quick, Dead, or a Crook.

Bernie Madoff decided to be a Crook.  He could have decided to be Dead, but instead decided to Kill his investors.


The US$ has had a monster rally, but that rally appears to be long in the tooth.  I will be the first to admit that I did not foresee the monster rally the US$ had up until late November. I had good company... Boone Pickens,Warren Buffet, Goldman Sachs, Morgan Stanley... Bear market rallies are like that.  Don't over stay your welcome.

Good Luck!

Mentatt (at) yahoo (dot) com

Saturday, December 13, 2008

More on Food

Quote of the day:

"If you like foreign oil, you're going to love foreign food." Shawn Coburn, Farmer in California's San Joaquin Valley.

California is on the verge of a political crisis, and at the risk of sounding shrill, maybe even revolution. The state simply cannot continue to fund its liabilities with the tax proceeds of its economy, irrespective of how many emergency sessions the legislature is called into. Central planning didn't work in the former Soviet Union, and it won't work in the People's Republic of Berkley, either.  MASSIVE cuts in services are in the cards for California.   Add to this the unintended consequence of an unevenly distributed population on our political framework - resulting in California (population nearly 40 MILLION) receiving the same representation in the U.S. Senate as Wyoming (population nearly 500 THOUSAND).  Does anybody think that this will remain acceptable with Californians when the population reaches 50, 60, or 100 MILLION? Or even that it is acceptable now?  I love and value the freedoms and protections granted me by our Constitution, but I cannot envision that our founder's contemplated this issue.

California supplies the vast majority of the rest of the country's vegetables (not speaking of Corn & Wheat). Unfortunately, California has a water crisis that would be nearly impossible to solve even if level headed, rational folks were setting policy, but this is the Left Coast. Level headed pragmatists are in short supply.

Water policy is just one of a number of insurmountable issues facing the political stability of the region.  DNA wins all wars.  The area of the world now known as China has been invaded and conquered dozens of times over the last 5 or 6 millennia, and each time the conquerers were BRED out of existence by the Chinese.  In the long run, China ALWAYS won.  The conquerers took local wives and in a generation or 2, it was all over.  In the end, it is who and what the population identifies with that carries the day, as any student of Apartheid South Africa will attest to (Israel has far more to fear from being "demographiced" out of existence, rather than over run in a conventional war.  Some cultures have successfully maintained their identities over the centuries by developing cultural methods of controlling their women's reproductive options - i.e., head scarves and burkas for Muslims, matrilineal descent and dietary restrictions for Jews.  It is hard to meet other people if you are precluded from eating with them).  In the absence of assimilation, or in the presence of groups that resist assimilation at all costs, the potential for conflict must be recognized. 

It would be hard to argue that the boarder regions of states such as California or Texas populations identify more with U.S. than Mexico and Latin America.  I am not arguing for or against this phenomenon, merely pointing out the historical and social significance this reality holds.  

Now add an economy or currency or food system in collapse and you have certainly a match within reach of the tinder.

But at least we saved the endangered Delta smelt.  So we got that going for us.

Sorry. That got away from me.  The point is that NONE of our SPECIAL INTERESTS willingly engage in any sort of Cost/Benefit analysis.  That would include environmentalists and polluting corporations alike.  When it comes to how we manage our food supply, be VERY careful what you ask for - you may get it.

Mentatt (at) yahoo (d0t) com

Friday, December 12, 2008


I received this in an email today (I am still VERY behind in responding, and my wife is due to deliver sometime in the next couple of days so I will likely remain behind...)

In 1923, Who Was?
1 President of the largest steel company?
2. President of the largest gas company?
3. President of the New York stock Exchange?
4. Greatest wheat speculator?
5. President of the Bank of International Settlement?
6. Great Bear of Wall Street?

These men were considered to be the most successful of their day.
Now, 85 years later, the history book asks us, if we know what ultimately became of them.
The Answers:

1. The president of the largest steel company, Charles Schwab, died a pauper.
2. The president of the largest gas company, Edward Hopson, went insane.
3. The president of the NYSE, Richard Whitney, was released from prison to die at home.
4. The greatest wheat speculator, Arthur Cooger, died abroad, penniless.
5. The president of the Bank of International Settlement shot himself.
6 The Great Bear of Wall Street, Cosabee Livermore, also committed suicide However, in that same year, 1923, the PGA Champion and the winner of the most important golf tournament of the day, the US Open, was Gene Sarazen.

What became of him?
He played golf until he was 92, Died in 1999 at the age of 95,
And was financially secure at the time of his death.
The Moral of the story: Screw work - Play golf.

From S.P. in Florida

While I don't play golf, this reflects my sentiments, exactly. Life is short so enjoy!

Mentatt (at) yahoo (d0t) com

Americans Ain't Driving

"Drivers clocked 9 billion fewer miles on the nation's roads in October even while gas prices were dropping, suggesting a downturn in driving that began a year ago is attributable to more than just energy costs."

I have been beating this drum for 2 years. Irrespective of the price... You can't burn fuel that is not there! Oil availability to the U.S. declined over 5% last year. No MATTER WHAT the price is, that means we were going to use less during that period. The question now is:

Will the decline in availabilty continue? We don't have to debate it. 2008 is over. Another couple of quarters of data that continue the trend would be game, set, match.

That does not mean that Oil prices would spike again in early 2009, but it wouldn't hurt Oil prices, either. We gotta wait for more data.

Good Luck!

Mentatt (at) yahoo (com)

Wall Street's Latest Ponzi Scheme

The "Legendary" Bernard Madoff, and the firm that bears his name, has just been implicated in the biggest swindle of investor money in the history of Wall Street.  

There will be others.

Here's the deal.

Ego maniac, schmaltzy, big shots living in $10 million apartments and taking helicopters to their beach house in the Hamptons cannot cut their personal overhead as quickly as the market can cut the revenues and their net worth down to size.  In order to keep up appearances they are forced to steal money.  At first, I am sure, it was just a "loan", then a couple of mis-marks for the books, then they try to trade their way back.  Unfortunately, these guys confused brains with a Bull or Bear market, and then find out they really aren't as smart as the last market direction was making them look.

Too bad for their investors.


The market today seems unhappy that the Government is holding the Big 3's feet to the fire.  If you were buying stocks thinking that this bailout was going to save the day, you are sorely disappointed.  If you are trading, you better be very disciplined, and overnight risk should be concern number 1.

BTW, the Big 3 will need to be restructured in bankruptcy... the only question is will it be a prepackaged bankruptcy or not?  The average American taxpayer does not have a healthcare package and retirement package anything like the average Auto worker - it will be politically untenable for Senators outside the of the Great Lakes region.


NO ONE is going to continue to pay on a mortgage that will take 5, 10, or 15 years to get to positive equity.  NO ONE.  Not your local Boy Scout Leader, Priest, Police Chief, Piano Player in the local whore house...  NO ONE.

Deflation will not yield to inflation until the housing market bottoms.

Good Luck!

Mentatt (at) yahoo (d0t) com

Thursday, December 11, 2008

Gonna have to change the name of the Blog

A couple of months ago a reader sent me an email that I needed to change my Blog's name to the "American Energy & Credit Crisis".

Now even that name would be passe.

The financial collapse heard round the world has put off the energy crisis for a year or 2, may be even 3. A shrinking economy derails the need to expand energy production. IT DOES NOT DERAIL THE NEED TO EXPAND FOOD PRODUCTION.

IF the population expands, AND/OR the population wishes to consume more meat/Then the world needs to increase its supply of grains. Financial market conditions are giving farmers great incentive to plant less. The entire Federal Government is busy looking at the Big 3/problem of the day while the Wolf sneaks in the door.


Us or them.

Russia is on the verge of COLLAPSE - AGAIN. Well, as an American, it was better them than us. Oil was going to King either Russia or the U.S. and destroy the other, and in the long run Oil will probably wipe the floor with both countries. This round went to the U.S.

This has given the U.S. a unique opportunity, and has presented a significant challenge. The U.S. is the MOST LEVERAGED NATION in the world to Oil prices. While the price is down and supplies are plentiful, this is the moment to invest in electrified rail transportation, educate our population, build nuclear plants, wind and solar farms, enact new zoning regs, etc... to redefine our living arrangements.

Is it going to happen? NAFC.


"U.S. household wealth fell from July to September by the most on record as property values and stock prices tumbled, Federal Reserve Data Show."

This process is going to continue over the course of the next decade leaving the economic landscape of 2020 almost unrecognizable to folks in their 30's, 40's and 50's.

This is the time to invest in yourself - your small business or professional practice - and to be EXTREMELY frugal. Those of you that know me know I drive an 8 year old truck (my wife drives a 3 year old Ford Minivan with NO extras) but mostly I bike around town. I can afford to drive whatever I want, but I am as frugal as a "Scottsman that has been stripped of his charity". We have a religious belief against wearing jewelry, and I have not been in a clothing store in years (for me, socks and underwear come from Costco). I would rather drag my butt through 6 miles of broken glass than have a car loan, credit card debt, or a mortgage. I am not preaching. I am merely pointing out a system of values that will help you buy your life back from the world. I look at every "monthly payment" - cell phone, cable TV, etc... with a jaundiced eye of malevolence. I do spend a fortune on private school, tutors, and private lesons for my children, and will continue to do so with my last dime. Frugal as I am, I feel like a live like a King. I surf, train jiu-jitsu, bike ride, garden, etc... PLAYTIME... endlessly.  Most of my hobbies cost very little to indulge.

Read this excellent link. It is the first chapter of the book "The Millionaire Next Door". If you are already a Millionaire, good for you - now stay that way by being frugal. If you are not, this is as good a guide as any I have seen. The problem in the future is how you STORE your wealth.  Somehow I think financial assets are going to come up short for our purposes.  Your business will be an important store of value.

Whatever you do,  DO NOT listen to the talking heads on CNBC!!  These folks are deluding themselves and trying to delude you.  EVERYONE on Wall Street talks his book 24/7!!  Most would lie for a dime if the truth paid a dollar.  And people speaking for the government are in the business of trying to generate CONFIDENCE - not truth.  Ever hear the term "con man" (as in "confidence)?  

Opportunities abound, but you won't get tipped off by the folks on CNBC.

Good Luck!!

Mentatt (at) yahoo (d0t) com

Wednesday, December 10, 2008

Good Stuff

I got a couple of emails from readers and friends worth quoting...

"1 year ago RBS paid $100bn for ABN Amro.

 For this amount it could now buy:
 Citibank $22.5bn
 Morgan Stanley $10.5bn
 Goldman Sachs $21bn
 Merrill Lynch $12.3bn
 Deutsche Bank $13bn
 Barclays $12.7bn
 And still have $8bn change......
with which you  would be able to pick  up GM, Ford, Chrysler and the Honda F1 Team &  sponsor Lance in his 9th  Tour de France!!!"


"You've jogged dormant memories with your mentioning your garden in your blog. When I was very young my paternal grandmother had a small backyard garden at her home in Fort Green, Brooklyn, where she grew most of our vegetables. My job was to follow the iceman's horse drawn wagon about and, with a wiskbroom and pan, collect the horse manure to fertilize that garden."

Stan G

I believe we have arrived at the destination Jefferson warned us about.
Jefferson in some cases could be called a prophet.

When we get piled upon one another in large cities, as in Europe, we shall become as corrupt as Europe .
Thomas Jefferson

The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.
Thomas Jefferson

It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.
Thomas Jefferson

I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.
Thomas Jefferson

My reading of history convinces me that most bad government results from too much government.
Thomas Jefferson

No free man shall ever be debarred the use of arms.
Thomas Jefferson

The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in government.
Thomas Jefferson

The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.
Thomas Jefferson

To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.
Thomas Jefferson

Very Interesting Quote

In light of the present financial crisis, it's interesting to read what Thomas Jefferson said in 1802:

'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.'

From FM

Monday, December 8, 2008

My Previous Post

I have received a number of emails regarding my last post.  My apologies if I don't get back.  I have been home ill, and I am 400 (no exaggeration) or so emails behind as it is.

People had much to say about anarchy.  I don't know why.  I don't think that is much of a risk.  I guess the link to Gerald Celente's stuff got some folks riled up.  Celente has an incredible track record, and I am not dismissing him outright - but I wanted to point out what is happening in Detroit and other cities around the country.  

We have 10% of the U.S. population on food assistance.  If the economy contracts further, and that appears to be a foregone conclusion, that percentage is SURE to rise.  So it would seem to me that inner city homesteaders, truck farms, and vegetable gardens were a fantastically positive sign.

The contraction in the economy has taken the pressure off of agricultural prices because of the decline in diesel, natural gas, and fertilizer prices.  This is a two edged sword.  Declining crop prices lead to declining plantings, which leads to future declines in harvests until such time as economic equilibrium is met for the FARMERS.  Notice I said "FARMERS", not consumers.  If economic equilibrium for the farmers does not equate to equilibrium for food supplies and consumers needs, its is the consumer who loses.  This is what the USDA was founded for.  To make sure the farmer's x and y graph took the consumer's x and y graph into consideration through farm subsidies.  Did I mention that the ability to get credit affects the farm economy just as much as "Main Street"?  And that any failing here could lead to some incredible consequences?  Of course, I always look at this from the investment side... but I can't help notice that when you are talking FOOD, their are significant political and social liabilities and issues as well.

Celente thinks we will be experiencing rioting for food by 2012.  I don't deny the possibility.  I do think, however, that the greatest liability for this is in the working class cities - LIKE DETROIT.  If cities like Detroit can remake their urban landscapes into mini farms, dairies, and orchards, it seems that Celente's vision does not have to be our future.

This is not to say that megalopolis's like New York Metro or the Washington to Boston Corridor could support themselves this way - they cannot.  Population will by necessity be redistributed.  

For food supply issues, it is the rate of change that matters.  Unfortunately, world inventories of wheat, corn, and rice are insufficient to handle a fast rate of change.

It is what it is.

Mentatt (at) yahoo (d0t) com

Not the Messiah

Equities are at a 1 month high, and it happened in a couple of sessions.  Short covering, hopes for a new president, and bailouts are not the stuff of a sustainable market advance.  That does not mean that a blistering rally is not underway - nor does it mean that a retest in short order is not possible.  

The markets are not for the weak of heart at the moment.  If you are a disciplined trader, this might be a good time to go to work (emphasis on MIGHT).  If you are not, and by that I mean that you are not good at taking losses AND knowing when you have reached your targets in the event you are right... this market is not for you.  

Good luck!


While the media decries what it sees in Detroit, I am elated!

No not the fact the the Big 3 are on the ropes, and homes cannot be sold for $1.

I am speaking about poor folks doing something constructive to provide for themselves (and I really applaud the efforts of those people that have been helping the citizens of Detroit in this effort).  Several reports have been made of the fact that food producing gardens had been springing up all over Detroit in abandoned and empty lots.  Many of my readers may not know that I am an avid gardener, and I own a family farm in Middle Tennessee where my family spends its spring and summer and harvest.  In a half acre garden we grow enough vegetables to keep us in corn, potatoes, tomatoes, broccoli, peppers, spinach, kale, eggplant, etc... for most of the year.  We also produce all of our eggs and milk on the farm, as well as most of our meat.

There are 30 million Americans receiving food stamp assistance.  Said assistance will keep a family alive, but not necessarily with the best nutrition possible.  I am beyond thrilled to see these reports (thank you kenny in Washington for the links).  Purchasing Organic produce is out of financial reach for people living on assistance, GROWING it is not.  Everything about the endeavor is a positive for the folks in Detroit.  Better nutrition, something to do an be proud of, family time, etc... THIS is what a governments SHOULD be doing for people.

Actually, that last line was not entirely fair.  In Tennessee, we have a University of Tennessee Agricultural Extension Office, and most states have a similar program, that will come to your home, perform free soil analysis, provide planting schedules for your locale, and such other advice as you might need to get going.  I cannot begin to tell you how impressed I was with our extension office.

Recently, Gerald Celente, the CEO of Trends Research Institute published his views about food shortages in the U.S. by 2012.  You may not know this guy's work, but folks on Wall Street have been following him for years.  I gotta say, "when Celente talks, people listen". His abilty to connect the dots is unsurpassed.  Still,  I am somewhat more hopeful than Celente, and the reports coming out of Detroit supports that hope.  People will react, and if our local and state governments handle this well - and most states have an extension office ready, willing, and able - there is no reason for the U.S. with its relatively less densely population to land mass to sink to this outcome.  Actually, there is ONE reason - DENIAL.  But I think folks will get over that pretty quickly

When I was a kid in the 1960's I spent a month every summer with my Grandmother and my Aunt in South Philadelphia.  It was as "inner-city" as it got... we played stick ball in front of Gramma's row house, we had pinball, and I settled disputes with my cousins in a dual - each opponent was armed with 2 pieces of sandpaper.  The guy who lost all the skin on his nose first lost the dispute.  This was working class, inner city at its most.  And people had chickens nd rabbits in their backyards (and they weren't pets), vegetable gardens, and a guy with a horse drawn cart that came by selling produce, milk, and butter from not very far away.  Another uncle lived next to a cemetery that was right next to a small dairy operation - right in the middle of South Philly.  

Detroit is not to be pitied, and in any event they will be copied sooner or later.

Mentatt (at) yahoo (dot) com

Markets are always right

I have been as sick as a dog for over a week now, and in my absence the market appears to be coming out of its nose dive - at least for the time being.

Don't fight the trend, but don't overstay your welcome, either.  

I like, Gold, Silver, Corn, and even Oil, though I will have NO patience for anything but Gold.  I still am hoping for a flattening of the Oil delivery curve - but there is no place for hope in investing and trading.

I have an advantage in that my partner, the Mad Scientist, and I can smack each other around when we get stuck in a rut.  Lately he has been smacking me, and in my delirium (it is hard to think when you are this under the weather) I missed this last couple day rally.  Well, that happens in Bear market rallies.  BTW, Bear rallies can be vicious.  Just don't get caught standing on air like Wyle E. Coyote.

If you are not much a trader, it is OK not to play.

Mentatt (at) yahoo (d0t) com

Saturday, December 6, 2008

"I am from the Government and I am here to help you" -LOLOLOLOLOLOLOL

"We aim to have votes next week on a responsible plan to help the millions of Americans who rely on a healthy auto industry for their livelihoods," Senate Majority Leader Harry Reid said in a statement today.

While they are at it, I say they should repeal Death and Taxes. Hey, that has as much of a chance to happen as a healthy auto industry.


A Boston Area State Trooper gave a speeding ticket to a couple on the way to the hospital - the wife was in labor and gave birth to a healthy baby girl 5 hours later. No word on the name of the Nazi that gave them the ticket. I think an example should be made out of him, for putting the lives of the mother and child in danger... but he will probably get a commendation from his SS superiors. How these guys live with themselves is beyond me.


A Connecticut man has been in prison for 20 years, with 40 to go, convicted of a murder that it now appears was the work of a registered sex offender.  Thank G-d we pay our taxes and have the Constitution and all those nice folks in law enforcement and justice to protect us.


Here comes my PERSONAL favorite:

Where is the Left now?  Didn't you guys support this guy?  How can it be ANY HELP WHATSOEVER for the energy crisis and the climate crisis to build more roads?  HAHAHAHAHAHAHAHA!  

Where is the outrage?

I told you this would happen.  We need ELECTRIC RAIL.  We need water transport.  We need a lot of things, maybe even windmills for all I know, but we certainly do not need to build out ANYMORE infrastructure to run private automobiles with.

Earth to Mr. President-elect:

We have a buyers strike on cars in the U.S.  Notice anything that the Big 3 have been saying?  We don't need as many miles of roads because we won't be driving as many total vehicle miles as we used to, and freight is going to make its way on to trains and ships irrespective of the "Trucker's Lobby".  Get a grip.

This was just today's news.  I just wanted to make the point that our government has run amok.  Our economy is collapsing, our energy security is a disaster, our grain inventories are frightening... no problem!  We'll just distract everybody by lynching OJ Simpson!  He had it coming, anyway!  (BTW... do you know what OJ's Las Vegas trial and imprisonment is going to cost the very broke State of Nevada?  Millions!  Boy, I feel so much safer with that septuagenarian behind bars for 33 years.  And I just get a warm and fuzzy feeling knowing that my federal, state, & local governments know how to spend my hard earned tax dollars... WHEH! What a relief.)

This is the very definition of fiddling while Rome burns.

Menatt (at) yahoo (d0t) com

Rallies are to be sold into.

Friday, December 5, 2008

Pessimism Justified

Employers cut over 500k jobs in November.  This is only the 4th time that the 500k number was breached in a single month.

Our system is based upon confidence, and confidence in the system is evaporating.  It is impossible to predict ANYTHING at this time with any level of accuracy.  We simply do not know what the policy response is going to be, not to mention that this could not have come at a worse time - during the transition from one administration to another.

You see, the Democratically controlled Congress has no incentive to work with the current administration.  They can lay the blame for everything at the current administration's feet.  Not that this team has shown much talent in any event.  Our timing sucks.

Everything that the Fed has done over the past 90 days tells me that Bernake & Co. are TERRIFIED by what they see in the housing market.  Everything that I see in Oil market TERRIFIES me (auto sales fall 40% year over year... who the heck needs oil in that environment?).

This will create the greatest opportunity EVER in the history of capitalism - at some point.  We gotta get to that point in one piece.  As some of my readers have pointed out to me, there is NO safe haven.  Not even cash.  Turns out, even with all of the U.S. profligate spending that US$ WAS the place to be over the past 5 months.  Of course, the US$ had been in decline for 5 years... it then follows that a rally would not be an unreasonable expectation... except nearly every big shot investor/money manager/hedgie missed it completely... (sigh)

Let me briefly explain the opportunity.  The energy complex is the largest industry in the world.  Nothing else comes close.  The energy complex has collapsed as a result of the credit/financial crisis.  The industry has shut in virtually all of its marginal production, and raising capital for future explorations and production ventures IS NOT AN OPTION at this time and for the next several years (I know I am speaking in absolutes here... and nothing is  absolute... just trying to make a point).  It then follows that as world oil production was on a plateau for several years with rising prices and rising capital availability, that with prices declining and credit/financing dried up that production will decline until it meets demand once again.  Sometime shortly thereafter, the energy crisis will be upon us in all its glory.  This event will be a king maker for some and doomsday for others.  I know what camp I want to be in.

Good Luck!

Mentatt (at) yahoo (d0t) com

Thursday, December 4, 2008

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

Geared Up, but Going Down

The world wide auto industry has the capacity to produce 100 million vehicles per year.  In 2008, the auto industry just might sell 50 million vehicles.  This conundrum, known as "over-capacity" cannot be cured by government bailout.  Period, end of story.

A rose will bloom,
it then will fade
So does a youth.
So does the fairest maid. - Nino Rota

The auto industry, in fact EVERY industry, has geared up for growth that never showed up. Said growth will never show up again for autos.  The bloom is off this rose, and it ain't never coming back.

There will be many, many, many hearings on Capitol Hill in the coming years.  All of it hot air, and nothing more than a distraction.

Mentatt (at) yahoo (d0t) com

Wednesday, December 3, 2008


Housing/Autos.  For years, the production data of these dominated the American economic landscape.  Then came the Tech bubble.  Housing/Autos were so "Old Economy".  The Internet was going to change everything - and it did.  We began our search for our next house and our next car on the Internet. 

Then the tech bubble burst and the market crash of 2000/01 was on.  The Fed decided to pay for one bubble with another bubble, and Housing/Autos once again ruled the day.  Only this time there is no market big enough to blow a bubble in that can pay for the one that just popped.

Today it was reported that the U.S. treasury plans to lower 30 year mortgage rates to 4.5% by buying mortgages guaranteed by Fannie and Freddie in the market place.  Welcome to the REAL BANK OF AMERICA!!  This effort will have less result than a good fart in a stiff breeze.

The U.S. is overcome with capacity - we have excess capacity to build cars, and now we have far more than we need; we have excess capacity to build houses, and now we have far too many of these as well.  All of this as a result of reckless monetary policy designed to put off paying for the last disaster/bubble.  The only solution is TIME.  Time will wear out those excess homes and cars.  (To wear out all of those cars we need to increase the fuel supply.  Good luck with that.)

Meanwhile, it is somewhat disconcerting that our political & business leaders have no idea where our grain inventories are, and what has to take place to assure food security.  The decline in Oil prices has taken the heat off of ethanol in the media.  However, the decline in Oil prices has not yielded an increase in Oil supplies to the U.S.  With Mexico, the U.S.'s third largest supplier of Crude oil experiencing significant declines in Oil production the U.S. may well need ALL of the ethanol it can get its hands on in 2010.  That means the 2009 harvest had better be perfect (remember, we don't manufacture corn... we GROW it.  There is only one growing season per year in the Northern Hemisphere). Spring planting is still some months away, but if fertilizer prices and usage are any indication (and I think they are the only other consideration besides acreage that farmers can plan - they can't control weather) the 2009 harvest won't overwhelm the storage bins under any circumstance.  If there is a drought or other natural challenge things could get real interesting, real fast.

Total Corn acres planted increased by 17 million in 2007 from 2006, declined by 8 million or so in 2008, and will decline once again in 2009 (corn cannot be continuously planted in the same soil as each successive year yields decline precipitously.  Even with heavy fertilizer use, "corn after corn after corn, 3 years of consecutive corn planting in a field will yield about 50% less per acre in the 3rd year than the 1st year).  Farmers must do plan their plantings based on market conditions AND field conditions and neither is an exact science.  The important number to Policy Makers should be the days of supply left over from the previous year at the beginning of the harvest.  These grain inventory numbers for corn and wheat are at their lowest in terms of days of supply since 1974.  Somehow I think that that bit of data is vaguely important - yet I don't hear the President-elect's incoming team talking about it much.  Money talks.  What does Food do?

Feeding everyone is easy in September, just after the harvest, but if you don't have anything left over from the previous year prior to the harvest... well, people might get antsy. 

So I like the grains, especially corn and wheat.  

Good Luck!

Mentatt (at) yahoo (d0t) com

Auto Makers

Detroit is doomed.

We can slow the rate of change initially maybe, but that is about it.  

And can we finally stop deluding ourselves about the VOLT electric car?  If it was anything near what many believe, GM would be worth more than Exxon.  Instead, it is worth less than Kmart.

It would be cheaper for the U.S. Federal Government to just BUY Toyota (market cap $96B) and Honda (market cap $72B) than to fix G.M, Ford, and Chrysler... they are going to need well over $150B before this is all said and done.

And it will NOT change the fact that we are running out of fuel to run our domestic fleet with.  THAT is the issue that needs to be addressed.  Problem is, the last politician that brought that up got fired (Jimmy Carter), so don't hold your breath.

The deflation problem might get solved in 3 months or 3 years, we will have to wait for more data.  Here we are, heroically saving a patient with a heart transplant.  Problem is, he needs a lung transplant, too, and we are running out of lungs.

The 10 year collapse has begun in earnest.  There will certainly be an ebb and flow of the economic tides during this period, but make no mistake:  We cannot bailout ourselves past the coming oil shortages, and we cannot make any headway whatsoever on the alternative fuel front while the credit crisis drags on - and drag on it will.  (The Port Authority of NY and NJ received NO BIDS for today's offering.  Gee, I wonder why?  Would you buy bonds in high tax and spend states that depend on the financial services industry?  Not unless you had rocks in your head.)

But if that is true why is Oil going down?

We only need Oil if we have a growing economy... have you seen one of those around lately?  If one shows up again, or tries to, Oil will once again cross $100 with ease.  The only way Oil crosses $200 and then $300 is when REAL shortages develop.  The U.S. economy will have continuous collapses if it exports $500 Billion + in exchange for Oil.  When the VOLUME of Oil imported goes down, the price can be maintained at those lofty levels - and not before.  Keep your eye on imports.

Good Luck!

Mentatt (at) yahoo (d0t) com

Brick by Brick

I love to read Dmitri Orlov's work.  Very clever guy.  When asked when the "collapse" he foresees will occur, he demurely said:

I always decline to give a specific answer, because, you see, as soon as you get one specific prediction wrong, there goes your entire reputation. One reasonable way of thinking about the timing is to say that collapse can occur at different times for different people. You may never quite know that collapse has happened, but you will know that it has happened to you personally, or to your family, or to your town. The big picture may not come together until much later, thanks to the efforts of historians. Individually, we may never know what hit us, and, as a group, we may never agree on any one answer. Look at the collapse of the USSR: some people are still arguing over why exactly it happened.

How true.

I spent the holidays with family back in my hometown.  Orlov's words echoed in my ears the entire time.  I ran into dozens of old friends from my school days at the various holiday parties and functions - and in listening to these folks and the impact of the financial crisis I was dumbfounded by how many white, educated, middle aged people were for all intents and purposes DESTITUTE.

The story seemed to have a common thread - divorce.  It went something like this:

During the 1995 -2005 period many people of my age prospered.  Of course, no one can remain satisfied for long... so rather than tolerate each other, couples decided to divorce (I am being politically correct here, and I should not be: In each case the wife filed for divorce).  Initially, everything was fine.  Hey, if I got the house, car, and a monthly stipend of $10,000, I'd be fine (and in that scenario, what is her incentive to remain married?), too.

Ah, but the "best laid plans of mice and men"....

I imagined, while listening to these stories, that perhaps the individual (ok, in these cases they were all men) on paying side might lose his incentive to work hard - you can't get blood from a stone - long before the economy started to go off of a cliff.  You see, these folks likely had little in the way of SAVINGS.  Big house with a big mortgage, leased cars, company stock, 401k, etc... but remember: This is Metro New York.  If Hubby worked for Lehman or Bear Stearns his life savings went kaput, and even if he did not, it is likely his fortunes are tied to Wall Street in some way.

Now we have the sad case of the 40 something divorcee with 2 kids losing her home, moving into a cramped apartment and having her monthly stipend reduced to $1,500.  Egads!  She is going to have to go back to WORK.  Him, too, and not at his former salary.  Talk about an adjustment.

Just consider for a moment that a couple with a $1mm net worth will pay nearly 20% of that in legal fees during the divorce, and now they have 2 households to pay for.  Well, the lawyers took their $200k, and the market crash took the other $800k, and the economy took their jobs...  

So what's this gotta do with Orlov's explanation of  "timing"?  The "Wall" is not going (I hope) to come crashing down - it is much more likely to come down "brick by brick".  What really matters is your brick.  Once your "Brick" comes out of the "Wall", it is not very likely to get back in (especially if you are in your late 40's or early 50's).  Life can, and given enough time will, be humbling.  Divorce is the last thing you need in a time like this.  Get along with your significant other - you need them and the rest of your family - more than you know.  Besides, if you have kids, you are stuck with them anyway.

If you are a divorce lawyer, now would be an excellent time to head back to Dental School. 

Mentatt (at) yahoo (d0t) com

Monday, December 1, 2008

Higher Education

The next disaster (or one of the next disasters) will be the student loan market.

WE, the People, have convinced young folks to go into debt up to their EYE BALLS to become highly educated and credentialed Shakespearean scholers, Massage Therepists, Woman's studies, Art Appreciation, etc... unfortunately for the these students, the market does not and will not need their new "skill set" and will place no monetary value on the education.

But Sallie Mae will want their loans repaid.

If you are a parent with children coming of age and getting ready for college, don't let the system destroy your savings or enslave your kids. The price of a "college education" has exceeded the rae of inflation by 3X or 4X for decades - PRECISELY because of the availability of student loans (the same thing that happened in the housing market). If those loans were not there, those colleges would not have gotten away with this outrageous escalation in their "fees" (tuition).

The massive receission we are facing, and the subsequent energy crisis, will obviate the need for a degree in "Massage Therapy". The best values will be in technical degrees from public institutions. In a 10 to 20% unemployment world, things will be very different than you have been led to believe.

Don't fall for it. If you have the money you would be better off GIVING it to your kids for a downpayment on a house rather than the increased tuition at a private school rather than public school. If your kid has to go into debt... Not at gun point.

Mentatt (at) yahoo (d0t) com