Saturday, February 28, 2009

Past Tense

The time to have been worried about financial assets and deflation was 1 year ago.  I am sticking with my Dow 6000 bottom (unless the oil import numbers decelerate further), 650 on the S&P.
Actually, I should say that I give the probability of Dow 6000 holding a 80% probability, and a Dow 5200 a 90% probability.  

This is much like 3 card monty or "the shell game".  You gotta keep you eyes on what is coming, not what has been.

The U.S., and the rest of the world really, is between a "Rock and a Hard Place", and Obama has chosen the "Rock" (I have no idea which would have been better).

The U.S. budget will total $3.6 TRILLION, with a deficit of $1.75 TRILLION in 2009, and $1.2 TRILLION in 2010 (anybody want to bet those projected deficits will prove optimistic?), with the 2009 deficit a staggering 12.6% of GDP.  Ok so far?  

Where does the administration, Wall Street, the Media, WHOEVER propose to GET the nearly $3 TRILLION in financing we are going to need over the next 2 years?  The entire f***ing world has less than $7.4 TRILLION in reserves, and that was last year's data.  Since that time world trade has contracted briskly, and other governments have had need of their reserves to finance their OWN deficit and stimulus spending, (China alone has budgeted over $500 BILLION), so that number is surely less than $6 Trillion as i write this.

Did I mention that the U.S. will not see a budget deficit of less than $1 TRILLION at any point in the next decade or 2 (or 3)?  Or that just to get to the $1.2 TRILLION deficit in 2010, the Obama budget claims the U.S. will grow by 3.2 % in 2010, 4% in 2011, and 4.6 % in 2012?  If not, then what?  What's "Plan B"?  Look, I don't make this stuff up.  I am a career analyst and when somebody tells me a + b + c = d, I check their math.  If it does not add up, it does not add up.  

For the guys working the lights, there is only ONE lever left to pull.  They cannot borrow from Martians.  They will have to monetize some (or all ) of the national debt.  This is an absolute CERTAINTY.  The only debate is WHEN, and that WHEN just ain't that far off in the distance.

If you have been a diligent worker and saver, now is the time to take that dream vacation, climb Kilimanjaro, vist the Taj Mahal, dive into the jaws of a harem... whatever.  With whatever is left over, buy productive farmland, precious metals, livestock, timber, fishing boats, a Mine, 
 Ag futures... (you are on your own as far as timing).

This scenario will end our deflationary experience, although I can't say exactly when.  My sense is that the turn will be swift and stunning - a "shock and awe" kind of thing.  Kind of like the equity market over the past 6 months.

Good Luck!

Mentatt (at) yahoo (d0t) com

Wednesday, February 25, 2009

I Knew Bill Clinton, Bill Clinton was a friend of Mine...

Barak Obama is no Bill Clinton.

Obama might be the consummate orator.  Bill Clinton was the consummate politician (like him or not).  Obama's first month showed just how "green" (as in inexperienced) he is.  Clinton knew which way the political winds were blowing and how to triangulate his own party AND the opposition to his benefit.  Obama has been run over by Speaker Botox and Majority Leader Limp (fill in the blank), and his tacking between the sandwich board with the tag line "The End is NEAR" and last night's rah-rah shows clearly the liability of electing a "community organizer" with 4 years of Senate experience to the White House.

Obama's campaign was brilliant.  So far his governing is lacking in that department.  I sincerely hope he finds his way - and soon.

Mentatt (at) yahoo (d0t) com

Spartacus Revolts

The revolt of the American Debt Slave ("ADS") is well underway.  Spartacus would have been proud.

No matter what Obama says in his speeches, no matter what Bernake and Geitner do in the form of Monetary policy, no matter what Congress does in the form of Fiscal policy... the ADS army has crossed the Rubicon.   

When Obama spoke last night about getting "lending going again", I despaired.  I realized that the president does "get it", that credit, or lending, is the vehicle by which U.S. financial system creates money and increases (or decreases) money supply.  But the ADS army has been maxed out, and with the decline (collapse) in asset prices will actually become net savers.  Savings is under-consumption, all the "stimulus" in the world is not going to change this in the short term, and in the long term will only serve to destroy the value of the very savings the ADS is now diligently (with great sacrifice) doing.

Obama, orator though he is, cannot put the shaving cream back in the can.


The lack of hard, empirical analysis of exactly WHERE the U.S. healthcare dollar is being spent prevents us from actually doing something of value, I suspect because NO ONE in government wants to limit expensive tests, care,  and procedures.  Who wants to play G-d during the election cycle.  

Healthcare is a capital intensive/labor intensive proposition.  We do NOT have a HEALTHCARE crisis, any more than we have a HOUSING crisis.  We have a healthcare FINANCE crisis, and a housing FINANCE crisis.  The U.S. has far too many houses relative to its ability to PAY for them all - and we have far too much healthcare relative to our ability to PAY for it all.  What does the LEFT propose to do?  Point a GUN at my head (and the heads of our most productive, tax paying citizens) and threaten to shoot if I do not become more productive so that the money will be available for "universal" healthcare?

The average American voter is, what?  50 lbs. overweight?  75 lbs?  This very same individual is not going to vote himself/herself "free" healthcare?  We lack the discipline to see to our OWN health.  Medicare was supposed to be a forced savings method for dealing with the healthcare expenses of old age.  How'd that turn out?

There is no question that our current system is an embarrassment.  There is also no question that given our recent experience banking and socialism that there is no chance that healthcare is going to receive a free market effort in the short term.  We are on that road to socialism.  But be careful what you ask for, because you may just get it.


If this trend continues, there will never be a recovery.  In fact, this would hasten the collapse of Medicare and Social Security from the distant future to the near future.

All of the speeches in the world matter not.  Check that link every week.  That import number is THE data point.  It will tell you everything.

Good Luck!

Mentatt (at) yahoo (dot) com

Tuesday, February 24, 2009

What the Data Says

I got some email from what I can only presume to be folks of the "doomer" persuasion finding fault with my belief that an S&P 650 and Dow 6000 will be close to the bottom for THIS round (when Oil imports become problematic, and they will, that might change things somewhat).  

The Conference Board's index of leading economic indicators has risen for two months in a row.
Producer prices have increased for two straight months.

Consumer prices rose in January -- the first monthly gain in six months.

The Baltic Dry Index, which measures the cost of shipping key raw materials like copper, steel and iron, has more than doubled from its recent lows.

Existing-home sales rose in December, and participants in our weekly survey think that another rise took place in January.

Pending home sales went up in December.

Builders' confidence inched up this month.

Thanks to lower interest rates, applications for both new mortgages and refinancings of existing mortgages are rising.

Real hourly earnings rose 4.5% in December following a 3.3% increase in November.

An index of consumer expectations rose in January.

Retail sales shot up by 1% in January -- the first monthly rise since June.

The decline in consumer credit moderated in the latest month.

New orders for consumer and nonmilitary capital goods went up in January.

The ISM index of manufacturing went up last month.

The ISM index of services rose last month for the second month in a row.

The money supply is soaring, a sign that there's plenty of liquidity in the economy.

The 3-month London interbank offered rate, a measure of banks' willingness to lend to each other, has dropped to 1.2% from close to 5% a number of weeks ago.

Other measures of the state of the financial markets, like the TED spread and the 2-year swap spread are down, as well.

Prices of credit default swaps for banks have fallen from their peaks.

The corporate-bond markets are thawing out, too; some $127 billion in dollar-denominated debt was issued in January, the most for any month since last May.

Some securities on banks' books are starting to recover in value.

I find that, when trading, ignoring the data can be hazardous to my health.  Now, if the data changes, I will change my mind as well.  And my money will be on certain energy and commodity plays - i wouldn't touch stuff like lodging, REIT's, luxury goods, financials, etc... with 10 foot pole with work gloves on.

In fact, to my readers of the doomer persuasion, there is PLENTY of doom and gloom to go around.  While equities may be close to a short term bottom, commercial real estate has not priced in its swan dive, and residential properties have further to go.  

A new government report on medical costs paints a stark picture for President Barack Obama, who is expected to call for a health care overhaul in a speech Tuesday night to a joint session of Congress.

Even before lawmakers start debating how care is delivered to the American people, the report shows the economy is making the job of reform harder.

Health care costs will top $8,000 per person this year, consuming an ever-bigger slice of a shrinking economic pie, says the report by the Department of Health and Human Services, due out Tuesday.

As the recession cuts into tax receipts, Medicare's giant hospital trust fund is running out of cash more rapidly, and could become insolvent as early as 2016, the report said. That's three years sooner than previously forecast.

At the same time, the government's already large share of the nation's health care bill will keep growing.

Programs such as Medicaid are expanding to take up some of the slack as more people lose job-based coverage. And baby boomers will soon start reaching 65 and signing up for Medicare. Those trends together mean that taxpayers will be responsible for more than half of the nation's health care bill by 2016 -- just seven years from now.

"The outlook for health spending during these difficult economic times is laden with formidable challenges," said the report by statisticians at HHS. It appears in the journal Health Affairs.

The health care cost forecast did not take into account recent legislation that expanded medical coverage for children of low income working parents, and added to the government's obligations.

The report "accelerates the day of reckoning," said economist John Palmer of the Maxwell School at Syracuse University.

"It is bringing home more immediately the problematic dimensions of what we face," added Palmer, who has served as a trustee overseeing Social Security and Medicare finances. "The picture was bad enough ten years from now, but the fact that everything is accelerating gives greater impetus to be concerned about health reform."

The report found health care costs will average $8,160 this year for every man, woman and child, an increase of $356 per person from last year.

Meanwhile, the number of uninsured has risen to about 48 million, according to a new estimate by the Kaiser Family Foundation.

The government statisticians estimated that health costs will reach $13,100 per person in 2018, accounting for $1 out of every $5 spent in the economy.
In 1909 the U.S. did not have a healthcare crisis.  The reason?  People with chronic, age related disease died.  

"The dead cost nothing".

This is not a problem to "solved".  This is a "condition" of life that life WILL force us to accept.  The pitch form the Left is that all we need to do is get rid of the insurance companies and nationalize healthcare... the pitch from the Right is the "Free Market".  Both groups are pathological liars, spinning and spinning their way to disaster.

The crash of these programs is well underway, and the outcome is immutable.  That won't prevent politicians and lawyers and lobbyists and "true believer" political groupees from extending the debate for their own purposes.

Good Luck!

Mentatt (at) yahoo (d0t) com

Friday, February 20, 2009

The Firing Squad

The market is going down like the proverbial "rock in a pond".

I think that it is highly probable that Citi, Bank of America, J.P. Morgan, GE, Ford, and GM will lose all equity value sometime in the next 90 days (IF GE survives it will be by cutting the dividend to ZERO - they might as well be dead given that outcome).  Considering how little market capitalization these companies have left, you might think that the this will matter little to the value of the index.

Maybe the problem is that the people are coming to the realization that the emperor has no clothes (I don't mean Obama, I mean the entire system).  

This not all bad.  If you are a typical American - no savings, working stiff - this might just be the best thing that ever happened to you.  Average folks won't be so eager to go into debt for consumer pleasures, which only enslaved them to debt repayment that benefitted 1/2 of 1% of the population.  

I came from a family on the lower end of the working class scale.  I remember getting married as a young man and trying to buy a house just north of New York City.  This is late 1980's and I am in my late 20's, mind you, and even back then the house we bought cost us $500,000 and had $12,000 PER YEAR property taxes.  I had been working since I was 14 or so, and I was a good saver, so I had the 20% down payment.  I still had a mortgage for $400k at 7.875% and taxes of $1k per month.  All I did with me life was work.  I commuted into the city for an hour, worked 10 or 11 hours and commuted home for an hour.  I was a wage slave in EVERY sense of the word.  Between income taxes and property taxes and insurance and family expenses I didn't have much left over.  Good thing I had some company stock to count on for my retirement... Oh, wait!  The company was BEAR STEARNS!!!!  SEE WHERE THIS IS GOING??!!  

So perhaps smashing house prices and property values will lower mortgage payments and property taxes.  Is that really a terrible thing?  Maybe for wealthy folks collecting payments on mortgage bonds, but not for the young family starting out.

Many things got out of balance in the system.  We need to accept that the adjustments will happen.  We need to end the entitlement mentality.


On a happier note...

At THIS moment, my bet is that the market is no more than 20% from THE bottom (and I reserve the right to change my mind and go the other way on a moment's notice) - until the Oil Import Shortages show up.  It then follows that some sectors will bottom before the index bottoms and some after, the same with individual stocks (just look at the Ag stocks).  For my money, I began to buy some energy equities that I sold during the last rally, and I will get aggressive on any big sell offs that bring the S&P below 700.  Doesn't mean I am right, but I think energy equities bottom before the market does.

How does this dove tail with my view of the Pension Blow Up?  If  we see a 650 - 700 S&P, the Pension Benefit Guarantee Corp.'s liability will be about $700 Billion.  The administration will be in the unsavory and unacceptable position of having to ask tax payers that do not have a pension to fund those that do.  This would likely spark the political crisis that I stay up at night about - too easy... so it won't happen that way.  More likely the Administration will guarantee some kind of pension for EVERYONE.  THAT will precipitate the currency crisis (the other thing that keeps me up at night), only that too is too visable.... so it won't happen that way, either.... but you get the idea.

Could the equity markets go lower than the 6000 Dow and 650 S & P lows that I envision?  Yes, but it would be difficult.  Bear market rallies will be vicious, and if you are on the right side of them they are the best feeling you can have with your clothes on.

For people approaching or in retirement, the likelihood of a further 20% decline in the equity markets should not be taken lightly.  After all, a 30% Bear Market Rally from that point would put you into the black little more than a 3 year CD at your local bank (keep any bank deposit below $250k TOTAL at any one bank).

Good Luck!

Mentatt (at) yahoo (d0t) com

Thursday, February 19, 2009

Really think you are not being Manipulated by the Media?

Take a look at's front page picture today of Alaska Governor Sarah Palin.  Of all of the photographic images available to editors... is this the least flattering?  Maybe they should have published a photo of her picking her nose.

You might hate Palin's policies or social positions.  I have a deep mistrust of fundamentalists myself.  But NO ONE can deny that she is one of the most photogenic/telegenic women in politics in generations.

So what is up with this shot that looks more like Palin's ugly twin brother?  Anyone care to wager that ALL photos of Obama will be flattering in the extreme?  I don't think we should tolerate this kind of s**t from FOX (whacky Right) or MSNBC (loonie Left).


California IS the U.S.  Essentially all the social and political change in our country originates in this state.  It is home to 1 in 8 Americans.  Here's the rub:

In spite of a university system that really is the envy of public institutions everywhere, their economic policies have destroyed the state.  People are going to find the goings on in in that state surreal in the VERY near future.  Worse, California is a PERFECTOR predictor for the U.S. Remember Ben Franklin's definition of insanity?  "Doing the same thing over and over and expecting different results."  Why would any rational person think that the laws of mathematics operate at the scale of a California, but not at the scale of the entire country?  Because it is inconvenient for their political positions.  I absolutely guarantee that other "inconveniences" are going to make the former inconvenience seem even less than trivial.

There's the way it ought to be, and there's the way it is.

Good Luck!

Mentatt (at) yahoo (d0t) com

Wednesday, February 18, 2009

Another Day, Another Fraud

R. Allen Stanford, billionaire financier, was outed yesterday as Wall Street's latest fraud.  

Some may wonder why a billionaire would be willing to commit a serious financial crime and risk spending the rest of his life in prison.  Who knows?  Maybe that is how he got to be a billionaire in the first place.  The real question is this:  How much more damage to the confidence in the financial system can the public/markets bear?


If you think America's political leaders are out of touch, they pale when compared to the Media Elite.

I watched in stunned awe as MSNBC's Chris Mathews and "Morning Joe" disparaged this front page article at the Washington Post.

"Surely things aren't THAT bad.  The New York Times today does not even mention the downturn.."  WTF??!! 

America's  Talking Heads make $5 to $50 million per year!  Of course things don't seem that bad to them!  (Not to mention that people kiss their a**, fawn all over them, and follow them around like puppies - all for the glow of celebrity.)  Unfortunately, this environment is not conducive to the Talking Head's understanding of what average folk's issues are, and, for the most part, all America knows is what it hears and sees on TV.


Well, the new Housing Hail Mary from the Obama Administration is on the books.

Sorry to all you Obamaphiles out there, but this plan is DOOOOOMMMMED to failure.  See, the biggest pool of problem homes is in California nearly 35% of the U.S. eligible loans.  California is a "no recourse" state.  Folks with a mortgage there are only liable for the equity in the home should they walk away - the lender has no recourse to recoup any losses from income or other assets.  Any Californian that signs up for this program will lose that.  People are not that dumb, and even if they were this data point will be ALL OVER THE WEB in 12 hours.

The market is going to settle the value and prices of houses, not this silly bill.  It made for good theatre - more "Change We Need" (lololololololololol!!  where are those nitwits that were emailing me that Obama would end the wars and bring the troops home?!  Last time I checked, he is building up troop levels in AFGHANISTAN (of all places).  Haven't the Soviets been there done that?  Anybody notice any troops coming home from Iraq?  When exactly will Gitmo get closed?  Wanna BET??)


Howard  Davidowitz, retail analyst and quintessential New Yorker, is interviewed here... "The worst is yet to come".

Like me, Davidowitz says that America's standard of living is going to contract in devastating fashion.  "Going to?" I live in THE land of conspicuous consumption - and it is a LOT LESS conspicuous around here lately.

He has been around a long time, and is always worth a couple of minutes.  

Good Luck!

Mentatt (at) Yahoo (d0t) com

Tuesday, February 17, 2009

Denial In New York (and London, and Hong Kong, and Tokyo)

I keep CNBC on for sole purpose of sneering at the commentary.  I really should switch to The Food Channel.

The tremendous rise in the market's value over the last 20 years made rock stars out of Wall Street CEO's and CNBC bobble-heads.  But this retraction cannot be buried on page 8 in small print.

The world's big financial cities have seen the crest of the tide, and the tide's ebb is going to be brutal.  Not only will these cities NEVER regain their luster and stature, the adjustment period is going to make them an unpleasant place in which to be STUCK.  There will be a new "Escape From New York".  Folks that thought it was a good idea to spend $5 Million on a 1500 square foot apartment are going to be harshly re-taught economics & finance 101, i.e. supply and demand, balance sheet, etc...  Just as the Chinese factory workers are fleeing back to the country side from the cities, so, too, the financial services workers in New York (and London, and Honk Kong, and Tokyo... from now on I will simply say "et al") will, over time, repopulate the American landscape, leaving a trail of defaulted mortgages and Mercedes leases, unpaid credit card bills from "Scores", and pawn  receipts for the wife's jewelry that will never be reclaimed. 

There are no banks left willing to finance New York real estate, and there are certainly no cash buyers.  Ergo, we have NO IDEA what ANY of these properties are worth.  Zip. Zero. Nada. Zilch. Bupkis. Ugatz... so asking prices are more fantasy and for appearances than anything.  Over time, fantasy gives way to reality.  When properties cannot be sold, and one can't make the payments, the foreclosure process discovers the REAL value of a property.

New York depended on Wall Street and the "mortgage express".  Wall Street is no more, and the "express"was striped bare after it broke down.  Still, the city and state made promises and developed programs (and addicted people to these programs) with no thought that the gravy train, the "mortgage express", could ever jump the tracks.  The federal government can't bailout Wall Street, Detroit, the Pension System, California, New York, etc... it is going to draw the line somewhere, or the Treasury market will draw the line for the government.

I love New York.  I grew up there, my mother's family lived in the Bronx for over 100 years. But if one is going to be poor, might as well be in Rio.

Mentatt (at) yahoo (d0t) com


Countdown to the Pension TIme Bomb Continues

1500 Dow points (plus or minus 1000) to go until Kaaaaa-BOOOOOOON!!!!!!

Talk about "the shot heard round the world".

Of course, the market could rally and save our skins... but if we see a DOW under 6,000 my bet is on massive defaults on a number of pensions, and then a bailout of the Pension Benefit Guaranteee Corp. of the U.S. Government.

Does anybody really think that taxpayers that do not have pensions will accept a taxpayer funded bailout of those that do? That the have-nots will willing fund the halves? Unfortunately, yes. They are called Democrats. I can just see Obama calling out the national guard now...


The Stimulus Plan being signed into law today is anything but. What it really is is 8 years of Demcratic frustration at being denied their place at the trough, and now they are getting theirs. Being the Obsessive/Complusive that I am... I read the document. Somebdy correct me if I am wrong, but counted $135 BILLION in new social programs that will need continued funding, and $280 BILLION in increased spending in existing social programs! How the F%$&! is that stimulus?

So much for "Change We Need".


The California Time Bomb detonated today.

The legacy of a generation of silly social and fiscal policy has overtaken the "Golden State". All of the gyrations of California's state government is just a posturing circle jerk. California will need a MASSIVE federal bailout. So, for all you tax payers in states that DID NOT have all of the "fun, fun, fun until her daddy takes the T-Bird away"... TFB, because here comes the bill.

Mentatt (at) yahoo (d0t) com

Metrics of a Pension Default

The U.S. equity market, while down 45% from its peak, still trades at a higher percentage of GDP than it did at the PEAKS of 1966 and 1973 (data point courtesy of Dr. Marc Faber).

That metric is unassailable to my mind.  The equity market will bottom much lower.  The problem is, the U.S. pension system assumed 9% growth in the equity market each and every year to infinity.  At the moment, we are missing 13 years of COMPOUNDED pension appreciation of 9%.  Should the market head to a Dow 5000, which I now think possible, we would be missing 18 years worth of that 9% compounded returns.  But the liability is still there.  The folks on the OTHER side of that balance sheet entry still want their monthly stipend.  As a matter of fact, since they fervently believed they would get it, most did not save to provide for themselves.

This ticking time bomb is going to go off relatively soon.  

Mentatt (at) yahoo (d0t) com

Thursday, February 12, 2009

A Long, Long Way From Here

This "Recession" will not be over this, year or next year, or the year after. Even if we had all the Oil we could ever need, this contraction would take a minimum of 5 years to play out - but only if the government did nothing. The more the government does to bail out banks and stimulate the economy the longer it is going to take.

If you have not sold your house, the odds of you selling it now for more than your mortgage are pretty slim (unless you are one of the few Americans that lived in the same house for decades and never refinanced - personally, I have never met one of these people). If you have any other assets left, this might (might not) be one of the last opportunities to convert those financial assets into hard assets. Above all, if you have not invested in productive farm land (it is VERY rentable), stop what you are doing, get on a plane or get in your car, and go out and look for properties to acquire.


Fairly interesting times to live in, wouldn't you say? Many of us decried "consumerism". My bet is we will miss it terribly - particularly consumers (women). In America, 85 cents of every retail $ is spent by women (Shopping and has become the NUMBER ONE past time for many American women - show me one straight man that feels the same way). I wonder if we backed out vehicles and hardware (Home Depot not computers) what that number would be... And when you consider that the top 5% of the population spends over 50% of discretionary retail spending... this very priviledged group has some serious adjusting to do. I can't even imagine being married to one of these "toxic wives" (I did not coin the term, just making the observation and the link).

Absent a prenuptual agreement professional, successful men married to these women have been enslaved by the legal system (the opposite is true for poor people where the women are enslaved by biology) - their wives are under no legal or social requirement to do ANYTHING, but at any time and for ANY reason the wife can sue for divorce and get the kids, home, half the assets, and a tidy income for life (still want to get married fellas?)... Now, dumb hubby has to come home and tell toxic wife that she must cut back her lifestyle? Boy, I will bet that's a fun conversation, (I live in Boca Raton, GROUND ZERO for the migration of toxic wives) but take heart fellas... There is much less to fight over, and there will be even less very soon. Her leverage is gone. After all, who the hell wants the house?

And what about those poor, poor divorce lawyers (on the grand scale of things a group of people only a step or 2 below child molesters)? They will be standing next to us stock brokers asking customers: "Do you want ketchup with those fries?"

Mentatt (at) yahoo (d0t) com


What the Goal REALLY Is

A Wall Street Trader friend of mine from my Bear Stearns' days called me yesterday and asked me what I thought the Administration's goal was vis a vie the bank and stimulus plans.  

I replied that I believed they were hoping the system would muddle through without a complete breakdown in the financial and political system.  He paused for a moment, and said: "I was sorta thinking that myself. A lot of guys up here (he works in Manhattan and I am in South Florida) think so, too."

Pretty crazy that a bunch of middle aged, Republican, rich (relatively, that is), overweight white guys have come to this conclusion.  These are hardly the hoping-for-the-world-to-end types you find all over the web. 



S & P under 820.  Dow Jones under 7750.

Maybe I should start a countdown to the Pension System blowup. 1,750 Dow points to go until Kaaaaaa - BOOOOMMMM!!!  

The ONLY thing the financial markets hate worse than a Republican is a Democrat.


I guess I am winding down this Blog.  In the immortal words of Dr. Ken Deffeyes of Princeton University:

"I am no longer a prophet.  I am now a historian."

We are going into the teeth of this Recession/Depression.  Hard assets are the ONLY store of value if the system goes postal.  

Focus on having fun.  When things are FUBAR, it is the only rational response.

Mentatt (at) yahoo (d0t) com

Tuesday, February 10, 2009

Something to Think About

With today's 400 point drop the Dow fell to 7,888 we are only 5 days from a complete collapse in the Pension System.

That's right.  I estimate that the Pension System would collapse at roughly a Dow 6,000, which is only 5 days of 400 point declines from here.

Of course the Market won't decline 400 points each day for the next 5 days... how about 200 points per day for the next 10... or 100 points per day for the next month...

Of course, the Federal Reserve would simply print money, monetize all our debts and buy the S & P.  Think about how that would go over for US$ holders and savers...

If you think a political crisis is out of the question you are really are not thinking this through:

With 5% unemployment the U.S. had 10% of its population receiving food assistance from the government.  Now think 10%, 12%, even 15% unemployment.  That would mean 25% to 35% of the population needing food assistance with a similar percentage being in default on the mortgage on the family home.  Now think about the populations of East L.A., East St. Louis, East New York, Detroit, Oakland, Philadelphia... these cities are barely holding it together as it is... if you think things are ferkakta now, just you wait.

I know it is hard for folks living in Scarsdale (NY), or Greenwich (CT), or Boca Raton (FL) to actually conceive that there were millions of people that were BARELY getting by BEFORE the economy took a sh*t, but now these folks are not getting by at all. 

Every political leader from President BHO on down is going to tell you "its going to take time"... and they are right, but not about what they are trying to convince you of.  It is going to take time until the Oil shoe drops,  and when it does it is a light's out issue - LITERALLY.  

But at least South Carolina law man Leon Lott wants to lock up that dangerous pot smoker, Michael Phelps... spending tens, and perhaps hundreds of thousands of $$$ to prosecute Phelps.

So we got that going for us...

Mentatt (at) yahoo (d0t) com

Oil imports by the Numbers

U.S. net "all petroleum products" imports fell 8% in 2008 from 2007.

Yes, I know we are in a recession and the argument is that the U.S. does not need to import as much Oil...  Here is why that argument falls flat...

The U.S. MUST move from a CONSUMER society/economy to a PRODUCER society/economy, complete with physical exports (to replace the financial services exports that are GONE for good) and we must actually supply our own capital (through savings).  In order to PRODUCE goods, the U.S. will need to either INCREASE its energy consumption, or transfer consumption of energy from wasteful practices (like driving an SUV 3 miles each way to a clerical job) to productive practices.

Here is the problem:

When the WORLD economy comes back, it is not going to come back evenly.  While U.S. consumption of Oil is down drastically, this is not so for WORLD Oil consumption, and the GROWTH will come from the emerging markets and the BRIC countries.  The decline in energy prices has forced the closure, some of it PERMANENT, of marginal wells and fields, ergo, WORLD OIL PRODUCTION likely peaked either in 2005 or 2007 - and that means a permanent decline in Oil imports into the U.S. likely began in late 2007 early 2008.

In the final analysis that means no U.S. economic recovery in excess of 2007 real GDP... and that mens no bottom in site for U.S. housing or banking issues. 


Everything you are hearing out of Washington is for appearances ONLY.  The President and Congress are POWERLESS to stop the discipline of the markets.

Rather than level with the American people and tell them that we will have to WORK and SAVE and finance our own capital needs, retirement needs, AND CURRENT NEEDS (social programs WILL BE profoundly curtailed) our government continues to blow sunshine up our collective skirt. Like it or not,  this is truly "The Age of Personal Responsibility".


I am absolutely certain that a political crisis will come at anytime over the next several years.  Could be today, tomorrow, next week, next year... Once the markets and the American people realize that  the various government sponsored Ponzi/Madoff schemes will not be able to deliver the reaction by the people will be overwhelming.  

I do not say this to be shrill, I do not say that I wish this to happen, only that the prescription that our leaders have concocted and articulated today by U.S. Treasury Secretary Tim Geithner is far worse than the disease, and when compounded with the liability of the U.S. entitlement programs and energy shortages will bring much of the system to its knees - primarily because the EXPECTATIONS of the people simply cannot be met.

Our leaders need to work on those expectations.  

Mentatt (at) yahoo (d0t) com

Sunday, February 8, 2009

No Battle Plan Survives Contact With The Enemy

I have been posting to this blog (originally titled Mentatt) since 2005, primarily for the benefit of friends, family, Wall Street associates, and investors in our funds.  Prior to the blog I published a white paper newsletter that began in 2004.

I was inspired to write to express my concern that certain imbalances in our economic system, particularly in energy, real estate, and banking would lead to a crisis of sorts.  That crisis is here, and is well underway.

(Give me a moment, I am going somewhere with this.)

While fully admitting that forecasting is failure prone, I felt there was little to lose.  I began by telling my investors in late 2005 early 2006 that in real terms they should focus on losing less than everybody else - that we were ALL going to be made poorer over the next decade due to a collapse in the value of everything.  We had a lot of it right, and some of it wrong.  I do not write this to "toot my horn" if you will, only to lay out what strategies we took then, what worked and what didn't, and what to do NOW.

Unlike some of the other sites dedicated to "Peak Oil" mine was not a "doomer" position.  I targeted my commentary to middle aged family men with a net worth between $2 and $20 million, which pretty much describes my investors and Wall Street acquaintances (if you are a woman, single, gay, extremely wealthy or dirt poor, etc.. you are more than welcome to communicate with me - you just were not my target audience).  After all, I view the decade 2005 to 2015 as TRIAGE.  Most folks are in no position to do anything about it (expectant); the top segment has enough resources to get to the end of their lives without going hungry or homeless (routine); but the middle group, the 50 year old professional with a $3 million net worth, 2.3 kids, wife, dog, etc... (priority) he CAN do something and he NEEDS to do something.

Back then I thought that the best approach was to sell the family home and rent, hold Gold and Silver, Energy Equities, Farm Land, Crude Oil, and to pay down any debt.

Well, it was not the perfect portfolio, but it would have held an investor's head above water, and you would have missed the collapse in housing prices.  Energy equities have retreated back to their 2005 prices, so if you bought in 2006 you lost money (what's worse, the exploration & production companies look a bit rich with the commodity price being where it is, so those losses might get worse before they get better).  Silver and Crude Oil are right back to where they were in early 2006, so nothing much to take a bow about there either.   Gold and Farm Land have risen in price.

On the other hand things could have been worse.  By going long Gold and short their house and breaking even on the balance, one would have been much better off than holding your house and keeping your life's savings in stocks and corporate bonds.  Also, my readers were implored to stay clear of banks and financials, retailers, home builders and the emerging markets.  Avoiding loses is the name of the game.

As I said, no battle plan survives contact with the enemy.  The performance of the US$ has been, to me, somewhat surprising.  Or at least it was.  Some of the "deflationists" correctly called the impact of the dramatic contraction in credit - Deflation (hence their name).  So, my view of the US$ was a fly in MY forecast ointment - on a price adjusted basis the US$ finished 2008 roughly where it finished 2005 and 2006.  The again, versus Gold the US$ has performed as I expected.

I would call the 2005 - 2008 period Phase I (How many phases we have depends on how you want to define them).  Phase I displayed the inability of the system to provide a return on capital.  Phase II, circa 2009 - 2012 will, in my opinion, display the inability of the system to continue to expand in real terms.  

Think about what I just said - the period 2009 - 2012 will "display the inability of the system to continue to expand in real terms."  That is not to say that nominal "growth" cannot occur, nor that real growth off of a steep drop cannot occur.  It DOES mean that 2007 may have been the peak for world economic production.  

Because our system is so complex, the end of future growth has dire implications for ALL of our society's Ponzi/Madoff schemes - Medicare, Social Security, Medicaid, the Food Stamp Program, Temporary Assistance to Needy Families (commonly called Welfare), Unemployment Insurance, Farm Subsidies, State Social Services, Student Loan Programs, to name a few sponsored by government, but also the U.S. Financial Markets.  (By far the most important complex system that could really get kerbolixed in all of this is the production of food.  I have covered this ad nauseum in many previous posts, so I will spare you the repetition.  The risk is real, and inevitable.)  

Money is politics and politics is money.  Who prints money anyway?  Governments!  The U.S. economy, 25% of the world's economy, is in full scale meltdown - and our political and business leaders are hanging their hat on $750 Billion - $1 Trillion in a stimulus package to save/rescue a $14 Trillion economy with $4 Trillion in mortgage write downs alone?  What do you think?

What if the stimulus package doesn't work as promised?  Have you heard of any "Plan B"?  All I have heard is "its got to work" or "it better work".

I won't bore you with WHY I think the stimulus plan will not work as promised.  Suffice it to say that I believe the plan will fail.  Medicare will fail.  Social Security will fail. The Pension System will fail.  Unemployment insurance will fail (actually, unemployment insurance is already failing).  Maybe Natural Gas will take the place of Heating Oil.  If not, one winter soon we will have to contend with insufficient supplies of heating fuels.

One or more of these will likely fail before the end of 2012 (my bet is on the Pension System).  

This brings me to where I am going with this post.

The U.S.$ will become more valuable for as long as deflation lasts.  The questions are:  When will the U.S. Federal Government get desperate enough to monetize its debt?  How much "Stimulus" and "Bail Out" money will the government print?  There are only 2 ways to pay that back:  Raise taxes or devalue the currency.

The runaway train that is the U.S. entitlement system is going to crash headlong into the Oil import crisis, if you doubt this just take a hard look at California. Most of the assets that comprise our "wealth" are going to depreciate further (some assets will appreciate, at least nominally).  Unfortunately, if you did not make your move in 2006 you lost most of the equity in your home, and if you held corporate bonds and stocks you lost roughly 40% of your financial assets.  If you HAD a $2 million net worth then, you are lucky if you have half that now.  This process is going to continue until, over the next 10 years, you have little to nothing left if you do not make some adjustments.  If you are going to do nothing, you would be better served (IMHO) to take your life savings and spend it all on wine, women, and song - since you are going to be broke anyway might as well have a good time.

A currency crisis, a political crisis, an energy crisis, and a food crisis are, in my opinion, a foregone conclusion over the next 5 years or so.  I wish I had a better word than "crisis", as it gets so overused that it loses its descriptive powers.  

I skipped my usual prognostication on energy prices and precious metals prices for 2009.  In the environment I just described I find doing so superfluous.  Same with the US$.  We will all have to react to the data as it comes in, and then not deny what our eyes are seeing.

Mentatt (at) yahoo (d0t) com

Thursday, February 5, 2009

"Catastrophe"? What happened to "Hope" and "Change"

President Obama is having a much tougher time of it than Candidate Obama or President-elect Obama.  See, as president, he actually has to govern.  Symbolism just does not cut it in his capacity as commander-in-chief and chief executive.  

I am afraid that being black, or young, or handsome, or having the cutest kids on the planet, etc... just doesn't cut it.  In the final analysis, we just elected a freshman Senator to the presidency at a critical moment.  This just isn't a school prayer/gay marriage/run for a cure moment.  We have very real, and very immanent issues, and this stimulus package is an EMBARRASSMENT.  

But let us speak plainly... none of Obama's supporters have read the document, but they will ferociously defend their hero.

What is even MORE curious, I continue to see sound bites of the looney left bashing GW Bush and Dick Cheney!  Get over it!  They are OUT!  You WON!! Now you gotta deliver.

And therein lies the rub...

No one could deliver.

This is what our friend and retired career CIA analyst Tom Whipple had to say about the politics of telling folks that things might not turn out as promised:
We are having an election for Governor in Virginia this year and, as could be expected, inboxes and mail slots are already filling with messages from the candidates.

Most of the messages, naturally enough, concern the economic downturn and promise to increase jobs and restore economic growth - for running on anything less upbeat this year is likely to be a surefire looser. There is no way that people are as yet ready to vote for prophets who talk about increasing troubles ahead and peak anything. Talk of the end of the American dream and the need to hunker down and prepare for hard times ahead is just not in the cards at the minute.

However, we are living in one of those rare occasions when foretelling the future - at least in a general way -- seems unusually easy. All indicators say the global economy will continue to spiral down. This could last for a year, or two or three, but also could last for decades. Think about the South after the American Civil War - it took nearly a century to get going again. If we are lucky some of the "stimulating" that is going on might make things look better for awhile, but this is bound to be short-lived. Without major structural changes to the world's economy, the increasing demand for oil and other forms of energy will send energy prices right back through the last summer's highs and the downward spiral will start all over again.
Our political leaders are going to have to level with the American people at some point.


No, not on their bond interest payments...  The state is issuing IOU's to their citizens and vendors. Can bond payments be far behind?  NAFC.

Let us put this in perspective:  California is home to 1 in 8 Americans, ergo 1/8 of America's state government has defaulted, and New York is 12 to 18 months behind.

Please keep in mind that the California wing of the Democratic party DOMINATES that party and the Federal Government, just as surely as the South's Republicans dominate their party.  Both of these groups are lamentable at BEST, and downright f***ing dangerous at worst.

California is the 7th or 8th largest economy in the WORLD.  The mentality and values of TPTB in California have led the state to fiscal RUIN.  These are the very folks that just wrote the Stimulus Bill.

Good Grief!!


Bill Gross, PIMCO fund manager had this to say:

Government borrowing will probably reach $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.

Speculation has risen that China, which holds $681.9 billion of Treasuries as the single largest investor in U.S. debt, may stop or slow the purchases of U.S. debt as its own economic growth slows.

“To the extent that the Chinese and others do not have the necessary funds, someone has to buy them,” Gross said. “It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets.”
The crash in the markets during the last couple of months was the "beginning of the end".  When (I think there is NO IF) the scenario described above by Gross comes to pass, I would describe that as the "middle of the end".  I hope it is ways off, but it might occur sometime in 2009.  

Still, the equity market could have a significant rally between here and there.  

In any event, this is sure to be interesting.

Good Luck!

Mentatt (at) yahoo (dot) com