The Fed is not The Problem. When it comes to the financial markets… We are The Problem.

We have a Problem. Considering the amount of hot air blowing out of the talking heads today one would think that the institution that is the U.S. Federal Reserve Bank has the power to solve The Problem. Anyone may read the Federal Reserve Act of December 23, 1913. If you take the trouble to do so you will be as sure as death and taxes that the Fed cannot solve The Problem.

Like most problems, The Problem is not a uni-faceted phenomenon, or should I say is not without the subsequent problems inevitably caused by The Solution(s) - proposed, enacted, or ignored – that the Problem will eventually have.

The Problem that the U.S. financial system is experiencing is not housing, or sub-prime mortgages, P/E multiples, or consumer spending, or consumer debt, etc… these are merely symptoms of the condition that is The Problem.

The Problem is the U.S. borrows $2 billion or so each and every day to fund its current account deficit, and the preponderance of that is for the purchase of OIL (I told you there was more than a one part to this problem, and you had to have known that it would include oil). There it is. That is The Problem. The good news is that we don’t have to do one damn thing to solve The Problem, because The Solution to The Problem is going to happen without any of us having to lift one F$#&^!# finger, and boy are we NOT going to like it, not one bit.

You see, in the coming 10 or so years U.S. Oil imports are going to decline dramatically. Over the following decade Oil imports will decline to the point of the inconsequential. And that will be the end of the current account deficit, the U.S. Dollar (in international trade), the U.S. Treasury Market, the Stock Market, the Federal Budget Deficit, Medicare, Social Security, and any and all Welfare State Transfer Payments (I don’t give ONE HOOT about your political sensibilities, left or right, right or wrong, for or against, just calling them as I see them). The impacts from the previously mentioned fact of disappearing Oil imports mean all of these things.

For a family man in his 40’s this should be quite disconcerting, but not surprising. Your participation in Social Security and Medicare, while not voluntary, is quite futile. You will receive absolutely no value for your input except the warm and fuzzy feeling one gets from letting the previous generation bilk you out of the fruits of your productive years while sending your progeny off to combat zones to fight and die for the very last squirt into the toilet of imported Oil to put off the day of reckoning onto another generation of Americans, and a future American Administration and Congress for the sole purpose of allowing the previous occupants of those illustrious branches of our Federal Government to be able to say: “Not on my Watch”. The Ponzi scheme that is the American financial system is ENTIRELY built, at this moment in time, on the continued flow of cheap oil imports in exchange for dubious IOU’s backed by the full faith and credit of the world’s largest debtor nation, a country that has no intention of paying them back. The amusing thing is that we accept this grand theft as our birthright while arguing over school prayer, flag burning, gay marriage, the Ten Commandments in government buildings, french or freedom fries, and other nonsensical, contrived issues which only continues to mask the harsh reality that in doing so we are merely tightening the rubber band further for the eventual “SNAP”.

For the same family man in his 40’s, contributions into the financial system will meet a similar fate. What contributions you make now are purchases that allow some seller somewhere to liquidate. Our family man here will not have the same opportunity in the future, say in his 60’s. There will be no buyer for all (some perhaps, though I think not) of the financial assets he (you) has so assiduously accumulated over his (your) working life. Why? Because the global financial system requires an ever-increasing use of BTU’s to power exponential economic growth, something the long-term readers of this blog know to be impossible, both from a mathematical and geological point of view.

Some very smart folks in the 1970’s warned us about the mathematical certainty that infinite linear systems and finite resource endowments are mutually exclusive events, not to mention the absurdity of making war for financial interests (often called “American Interests” – though very few Americans have any interest in these “interests”), Korea, Viet Nam, Iraq, Iran… sorry, I am getting ahead of myself/country. Did the powers that were, as it were, attempt anything constructive at that time? Not a shred. And the powers that be, of our time, will they attempt anything constructive? Not if Chuck Norris and Oprah Winfrey have anything to say about it. “Problem? What Problem?”

Well, they say that no matter where you go, there you are. Here we are, indeed.


Mentatt (at) yahoo (d0t) com

“The End of Cheap Food” Cover Headline of Economist Magazine, December 10, 2007

What they should have said is “The End of Cheap Oil Means the End of Cheap Food”. Still they have come a long way since their 1999 cover story of “$5 Dollar a Barrel Oil?” That was the equivalent of the Boston Red Sox error of the century in print journalism. (I often wonder if the fellow who came up with that is in any way embarrassed. He should not be, forecasting is inherently failure prone.)

The New York Times ran a cover story in the Sunday Business Section 2 days ago on the mathematical certainty that oil imports into the U.S. are going to fall – although they did their best to obfuscate just enough so that their readers were left with plenty of hope for a techno fix.

Why these august publications are not capable of making the link and connecting these dots – and what it means to food prices and economic growth – is beyond me. As the volume of imported oil into the U.S. declines the rate of food inflation is more than likely to accelerate. The question is at what rate? Does a 3 % annual decline in oil imports mean a 3 % annual rise in food prices, or is it more like 30%?

It has been calculated by a number of credible sources that roughly 80% of retail price of food in the U.S. was to pay for the fossil fuel inputs of oil and natural gas into cultivating, fertilizers, pesticides, harvesting, transportation, etc… of our food. If the cost of fossil fuels doubles (not an unlikely event in my opinion) does the price of food rise 80%, or might it be more?

I prefer to believe that the market will respond quickly with more locally and personally produced food products, and if this means my neighborhood smells more like a barnyard street market in Peru than a fresh cut lawn in spring how will that affect housing values in my neighborhood? JUST KIDDING!! (about housing values in my neighborhood, pretty serious about the rest) Had you for a second… People will respond, working class and poor folks simply won’t be able to afford not to (if I may use the double negative). How else can a population with ZERO savings afford a near doubling of their food and energy costs?

Can you imagine, instead of marching for a cure for breast or prostate cancer, we have Johnny Appleseed marches for fruit trees and raspberry bushes? Al Sharpton marching for equal rights to inner city gardening space? Martha Stewart giving instruction on not just goat cheese dressing, but on milking the goat as well?

“May you live in interesting times”.


Mentatt (at) yahoo (d0t) com

Inventories

U.S. Crude oil inventories peaked this year in the week ending 7/6/07 at 352,580,000 barrels.

For the week ending 11/30/07 U.S. crude inventories stood at 305,240,000 barrels.

In 5 months U.S. inventories declined 11% (peak to trough).

Each week our friends (with friends like these who needs an enema?) in the media report the inventory decline of the week with an explanation:

• Bad weather delayed offloading of ships
• Storms in the Gulf of Mexico delayed oil deliveries
• Falling Demand (my personal favorite)
• Refinery Outages (???)
• My dog ate my inventory homework


Guys, guys, guys… I know that whatever journalism school you attended was long on style and short on statistics but even a journalist can see a trend forming here: you know, rising prices and declining inventories. You folks are supposed to be experts at ferreting out the truth, and though you have proven quite adept at calling politicians for what they are, you seem to have gone tone deaf, or your B.S. meter is on the blink, when the party at the microphone is an oil executive or Wall Street analyst/CEO. After all, these are our “best and brightest”. Look at the great job they did when they conceived the idea of mortgage-backed securities!

Of course, during this time prices rose over 40% (and rose over 800% over the past 8 years) and was again explained as:


• Demand from China and India is driving prices higher (give that journalist a cigar)
• International Politics
• Terrorism
• The decline in the value of the U.S. Dollar
• Greedy oil companies
• U.S. Energy Policy
• Greedy Speculators

In the land of the free market, maybe it is the consumer that is responsible for the price response of the supply demand equation. Did that one ever dawn on you? Maybe, just maybe, the same force is working upon the value of the dollar versus commodities, like oil for instance. Ya think?

Yours for better journalism covering the most important issue since Noah built himself a boat.

Mentatt (at) yahoo (d0t) com

Duh!!

Front page of the WSJ today has a blurb about airlines being unable to grow in 2008.

A couple of weeks ago it was the U.S. automobile manufacturers.

6 months ago it was banking.

Last year it was housing.

Exactly how do you sell more houses, cars, and airline seats if your total supply of oil is falling?

Which industry is next? I am not sure but I have some candidates:

Trucking, Shipping & Overnight Delivery
Travel & Leisure
Hotel & Hospitality
Retail

What else would the beginning stages of peak oil in the U.S. look like?

Nothing. This is exactly what it would look like. It is what it is.


Mentatt (at) yahoo (d0t) com

OPEC says market well supplied, declines to increase production

I got to hand it to the public relations folks at OPEC. They did a great job of keeping everyone off balance for the past 2 weeks. The media fell for the OPEC head fake so consistently it was embarrassing to watch. Thankfully, that’s over.

So let’s go through the scenario - OPEC meets at a time when :

• Oil prices have closed in on their all time record, rising over 50% this year alone, and up over 800% in 8 years.

• Inventories the world over have been in steep decline during the traditional “shoulder period”, the period between peak summer gasoline demand and peak winter heating demand, the time when inventories are normally building.

• In terms of “days of supply”, the only inventory number that really counts, the OECD country’s inventories are heading into the red zone.

• The world’s production of crude and condensate (“C & C”) has been flat to slightly declining for 2.5 years. Prices have doubled during this period. Spare me the lack of demand argument.

• Oil imports into the U.S. have declined for 2 years at roughly 1% per year. While oil imports have SURGED for China and India far more than the decline in U.S. imports.

• OPEC country's domestic consumption continues to rise, with projected 2008 year over year increase in demand second only to China at over 350,000 barrels per day.

• OPEC has increased production over 2 million barrels per day since 2000, but their exports have actually declined due to the increase in domestic consumption.

So, what does the gas station to the world do/say? That the world is “well supplied”.

Well, guys, that wasn’t the OECD country's point was it? No, there is no shortage of $90 per barrel oil. The problem is, the OECD countries were looking for some $50 - $60 per barrel oil, of which there seems to be an EXTREME shortage.

Note to the U.S. Department of Energy, the 2008 Presidential candidates, Congressman Bart Stupak, the iconic moron Richard Blumenthal (the Connecticut Attorney General who testified that the problem with oil prices stemmed from allowing all of the American Oil companies to merge! In other words, he proposed to solve the energy crisis by tough enforcement of the anti-trust laws, and in the process follow Eliot Spitzer’s example, and Rudy Giulliani, on how to get ahead in politics), etc…

When crude oil is $200 per barrel OPEC will again claim that the market is well supplied – and it will be! Just not with $100 per barrel oil.

So stop wasting the public’s time. OPEC is likely unable to increase production, and even if they could it would be for a very short time and not by a terribly meaningful amount. You know what you have to do, and yes the beginning stages of that discussion might well cost you your political career. Yet you ask young people to risk their lives and limbs in a war for oil while you refuse to risk only your jobs? Perhaps if politicians were shot for cowardice (the U.S. has done that to more than a few teenagers in its history, right?) we might get a better quality candidate.

The Great U.S. Energy Crisis has arrived.


Yours for a better (post fossil fuel) world,


Mentatt (at) yahoo (d0T) com

2 + 2 + 2 ≠ 7, but the market thinks it does


The IPCC’s FINAL report on climate change was clear: Cease growth in Carbon emissions within 7 years and reduce to essentially 0 all carbon emissions within 40 years or suffer horrific consequences. (Forget your politics for a moment. If you are arrogant enough to have an opinion that contradicts the IPCC report but were not invited onto the panel you are the very definition of a MORON, so please, stop reading and go find yourself a recent issue of People Magazine. It is more your speed.)

I don’t think that that was terribly hard to understand.

The Peak Oil Activist community, many of which are some of our best minds in academia, and many in the Oil industry itself, has articulated fairly convincingly that oil supplies will not continue to grow much longer, if they have not begun to contract already.

The Automobile industry, the housing industry, the “this, that, and other industry” is projecting growth out till kingdom come… in complete contravention of the simple mathematical concept “e”, or the “exponential function”, and in complete denial of the political interventions coming due to the IPCC report and the constrictions coming due to the lack of sufficient fossil fuels.

But at the moment, the financial markets believe these projections - 2+ 2 + 2 = 7. Carbon constrained + Fossil Fuel Constrained + Unlimited Industrial Growth = Business as Usual!! Yes! We can have exponential growth in automobile manufacture while cutting our carbon emissions to 0! Yes! We can have exponential growth in the world economy at precisely the time world oil supplies are in terminal decline! Remember, this logic has been brought to you by the same “best and brightest” that brought you this great reasoning: "If we bundle a thousand sub-prime mortgages together and wave our magic wand they will be magically transformed into AAA grade investment bonds."

I know I should be careful, and not offend someone by goring their personal sacred cow (as I recently did over dinner with friends and clients when I had the ill manner to say that the declining Dollar (and rising Euro) would not save South Florida's housing market with oodles of Europeans buying properties in South Florida).

As sure as 2 + 2 + 2 ≠ 7, the markets will figure this one out, too. And there will be hell to pay. I just can’t tell you when, exactly. I CAN tell you it is not “if” but “when”, just not “exactly” when. The myriad doom and gloomers, and other curmudgeons, keep predicting the date of this “collapse” and that “meltdown”, using what statistical model for their forecast I know not – and neither do they. I enjoy James Howard Kuntsler's work as much as the next guy, but has shown no marked ability at calling market (if I may risk the use of understatement) tops. Though he will eventually and most certainly be correct, it may be years until that time.

But I am speaking to you, not those guys. So let me ask you a something(s):

What date, exactly, did you first start to use a computer? (uh, 1984) What date did it dawn on you that it was a life changing development? (uh, 1984) Now, WHAT DATE, EXACTLY, DID YOU BUY MICROSOFT AND INTEL STOCK AND TELL EVERYBODY THAT CAME NEAR YOU THAT THEY SHOULD BUY SHARES IN THESE COMPANIES? (uh, I never bought the stock, or: I bought these stocks in 1999, just before the market crashed.) Or maybe you were to young to take advantage of those life changing opportunities that you were faced with everyday. So, what about Google? (I TOTALLY missed Google).

Here’s your second chance. Don’t blow it.


Mentatt (at) yahoo (d0t) com

Connect the dots

One of my favorite bloggers, Professor Joseph Dancy of the SMU School of Law pointed out the following agricultural data points recently:

“The boom in biofuels is boosting demand and constraining food supplies; 20% of the US corn crop is already used to produce ethanol. Agricultural commodities are the subject of a growing battle between energy demands and food demands of the world’s population. The UN's World Food Organization predicts that demand for biofuels will grow by 170% in the next three years.

Wheat prices surged to record highs last month. Expectations are that rising global demand for U.S. wheat will deplete inventories, leaving them at the lowest level in three decades. Wheat prices on the Chicago Board of Trade topped $9 a bushel for the first time ever.

The U.S. Department of Agriculture cut its estimate of Australia's wheat crop to 21 million metric tons from last month's estimate of 23 million tons. Australia was expected to be the world’s second largest wheat exporter. The USDA’s estimate of Canada’s wheat crop also declined 5.6 percent last month.

The USDA raised its’ forecast of expected wheat exports as foreign buyers are flocking to the U.S. The world market expects poor harvests in major producing regions, and rising demand from industrializing nations such as China.

The USDA estimates crop-year ending stocks of wheat will fall to 362 million metric tons in 2007- 2008, down from 456 million metric tons a year earlier. This is the lowest inventory level since 1973-1974.

Ukraine was the world's seventh-biggest wheat exporter last year. The Ukraine government said it will restrict grain exports last month to moderate domestic food price increases.

Russia, last year's third-largest wheat exporter behind the U.S. and Canada, said it may impose a 10 percent export tax on the grain in November and a 30 percent export duty on barley.

Global wheat inventory stockpiles at the end of June in the five biggest-exporting countries fell to 107 million tons, a 34-year low. Wheat was the fourth-biggest U.S. crop in 2006, behind corn, soybeans and hay, according to government data.
The higher wheat prices have increased the cost of staple foods such as bread and pasta. Higher pasta prices prompted consumer groups in Italy to launch a one-day boycott of pasta last month. Prices there have soared as much as 20 per cent over the last several months.

Corn prices hit a three-month high last month after China signaled that it could become a net importer for the first time in more a decade. One of the world's four biggest corn exporters last year, China will encourage more imports of the grain, and discourage domestic output of crop-based fuels, in an attempt to keep food inflation under control.

The amount of U.S. lands planted in corn has increased 18.5 percent this year, from 78.3 million acres last year to 92.9 million acres. The USDA forecast that fertilizer use should increase by 5 percent overall, with use on corn up 9.5 percent.

The USDA is forecasting record fertilizer expenditures for 2007. Fertilizer accounts for roughly 20% of a corn farmer’s operating cost.

Over the last year the price of eggs went up by 33.7 percent, whole milk 31.1 percent, and navel oranges were up by 13.6 percent in the U.S. according to a government report. Other dramatic increases included fresh chicken up by 8.4 percent, apples up by 8.7 percent, and dried beans up by 11.5 percent.

Barley prices in Winnipeg, Canada, gained 41 percent in the past year on increased demand for animal feed and for brewing beer. Canada is one of the world's biggest barley producers. Corn has gained 53 percent in that market as demand for grain-based ethanol surged.

Driven by a combination of trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the last two years. There are reports of cows being stolen from Wisconsin dairy farms.

Developing countries face serious social unrest as they struggle to cope with soaring food prices, the United Nations’ top agriculture official warned last month. While food may be less than 10 per cent of the household budget in the developed world, in poorer countries it is 65 per cent.

The USDA is expecting a record breaking year for agricultural exports from the U.S. Exports are expected to reach a record $79 billion in fiscal year 2007, topping the old record set the previous year. USDA says sales are expected to reach another record in 2008.

The value of all U.S. crop production this year is forecast to rise 14 percent from 2006, to $136.2 billion. The value of production from cattle, hogs, chickens and eggs will increase 18 percent, to a record $140.2 billion

Rising prices for livestock and grains should push U.S. net farm income to a record high in 2007, 48 percent greater than a year earlier according to the USDA. Farm income is expected to rise to $87.1 billion from $59 billion last year. "This is a great time to be a farmer," said Christopher Hurt, an economist at Purdue University in West Lafayette, Ind. "Farming may be the healthiest sector of the economy."

A rise in agricultural income could boost sales of farm machinery, seeds, and farmers will also be able to afford more fertilizer according to agricultural economists.

A boost in farm income this year has accelerated agricultural equipment sales according to representatives of the equipment manufacturing industry. Combine sales are up so far this year by nearly 9 percent according to Russ Green, president of Caterpillar’s North American operations. “Obviously there is reason for optimism,” Green said. “Usually 14-18 months after an upturn in commodity prices we’ll see an upturn in equipment sales.”

Ag Equipment Newsletter, a publication for agricultural equipment marketers, in its Sept. 15 issue reported results of its annual survey of North American equipment dealers, noting, “It’s difficult to find a product category that dealers aren’t enthused about next year.” From Joseph Dancy

Professor Dancy is not offering opinions here, just reporting the facts as they are in the agricultural commodities markets.
Enough of the facts; let’s move on to the really important issue: My opinion.

(Just kidding. Remember that commercial for the “Real Yellow Pages” a decade or 2 ago? Under the heading “Headcases” the scene cut to a hip New York City party, and one character leans over to the person she is talking to and says: “Enough about me, darling. Let’s talk about you. What do YOU think of my new hairdo?”)

Well, I am only partially kidding. In any event, it is my assertion that most, if not all of the changes noted above have been brought about by the increased costs of fertilizer, pesticides, diesel for farm equipment, as well as transportation fuel to ship foodstuffs across continents and oceans to the final consumer. The trend “is what it is” and for investors “the trend is your friend”. Of course, for poor folks here and the world over, this trend is no friend. Any impartial analysis of world Wheat inventories and supplies would not the analyst with a warm and fuzzy feeling as it applies to actually feeding people. Though investors that have been long Wheat might feel warm and fuzzy about the positive impact on one’s portfolio.
There is little or no additional acreage available with which to increase industrial production levels of Wheat, Corn, Soy Beans and other grains. Increasing acreage in one means decreasing acreage in another, and we know how musical chairs works out in the end. There are only two ways to increase the amount harvested: Increase crop yield per acre and/or increase acreage planted.

My argument stands that while this is no Armageddon, it is no walk in the park, either. As these trends compound like interest on a mortgage, or creep up on you like the Alternate Minimum Tax, even in wealthy countries like the U.S. people will have to respond (or else it would be Armageddon).

What will the response be? Good question – and perhaps a very complicated, difficult answer. Or maybe as simple as an increase of a couple percent in local food production per year until, 40 years or so hence, nearly all food supplies are produced regionally. I think the simple answer is the most likely outcome, and that is why I believe the energy crisis, while brutal economically, will not be the Apocalypse.

Mentatt (at) yahoo (d0t) com