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.

I had this to say in my November 18, 2006 post:

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

Hysterical!

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.

Last year, I made this prognostication about Oil prices for 2008.

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

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".

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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.

In my August 19, 2008 post I wrote:

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.

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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...

"Senior economic advisor warns of 10%+ unemployment by the end of 2009."    

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

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.

But the Wall Street cheerleaders will have none of it.

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

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.

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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