What Am I, Chopped Liver?

There are perhaps 20 continuing, intelligently presented, well thought out, worthwhile financial blogs on the web discussing the U.S. economic and financial system and the effects that U.S. Peak Oil Imports will have on said systems.

I am not trying to give these blogs a plug here, most of you know who they are.  Each and every one of them has been lambasting Washington and Wall Street about the dangers of housing and the coming of $100 plus oil or 4 or 5 years.  This Blog has operated since 2005, prior to that we distributed White Papers on the subject to our clients on these issues (not that they paid any attention either).

With the exception of Goldman Sachs and Raymond James (and yours truly) NO WALL STREET FIRMS spoke up about the coming energy "conundrum" until nearly 2008 - and NO ONE openly discussed the coming housing disaster in 2003, 2004 and 2005. ZERO.  ZIP. NADA.

Now, here comes the former Chairman of the Hair Club For Men, Alan Greenspan telling us that housing "is nowhere near the bottom".  Really?  And you came up with that assessment all by yourself?  But with all of the Fed's myriad resources, you did not see this coming 2 years ago?  Really?  

Donkey Dust!!

Bernake, Greenspan, Paulson, Jimmy Cayne (Bear Stearns), Sandy Weill (Citigroup), Stan O'Neal (Merrill Lynch), et al... with all the fu%$$! money and minions in the world, and none of them could figure this out?

Yet a bunch of unfunded, for the most part self-educated (as my very good friend Rabbi Mo Silver says: "is there any other kind?".  And where would you go to get formal training, i.e. Housing Crisis 101, Peak Oil Crisis 201?), part-time bloggers have been publishing about this for YEARS, and no one in Washington or Wall Street gives us a WHIFF of consideration until - get this - the bloody FDIC mentioned "keeping an eye on the financial bloggers", ostensibly because WE were causing panic and mistrust in the U.S. banking system.  Hey, lady!  Get a GRIP!  We didn't bring down IndyMac.  The Fed, Fannie Mae, and Freddie Mac did.  This might even be FUNNY if it weren't sooooooo sinister.

But at least the CEO of Freddie Mac received $20 MILLION in compensation to have his stock lose 80% of its value and miss every sign that the housing market was collapsing.  Cripes!  I'd have done it for $10 MM, and I look better in suit than this Jag Off.

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Wanna see the future of generous Social Programs and municipal pensions?  Just follow the saga in California.  

Look, California is already insolvent.  Within 1000 to 1,200 (and it might be in less than 365 days) days the State of California will need to shut down 1/3 to 1/2 of its workforce and programs, and many, many cities and counties will find themselves filing for Bankruptcy under Chapter 9 of U.S. Federal Bankruptcy Code.

This implosion is going to be one for the history books.  Sorry folks, but socialism really doesn't work as well as promised, especially during a significant energy crisis (just ask the former Soviet Union).  

There is no free lunch.  You can't get something for nothing.  And you can't get blood from a stone.  The energy crisis is going to make the rich much less so, and there are going to be a great deal many less of them.  So much for the "tax the rich" B.S. coming from certain members of California's legislature.

California, like the U.S., should (and will be forced to in the final analysis)  fire state employees in droves until it can meet its budget without resorting to further extortion from the tax payers, already amongst the most oppressed tax payers in the country.

This won't take long.  It will CERTAINLY occur before Mexico becomes an Oil importer - and that seminal event, the end of Mexican Oil to the U.S. just isn't that far in the future.

Like it or not. You heard it here first.  California is going to default on much of its debt, its cities are going to default on their pension obligations, and the state's social programs will be cut to the bone.  All by the end of 2012.

Arnie picked a bad time to run the train set.

Yours for a better world!

Mentatt (at) yahoo (d0t) com

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What Freaked Out Oil Yesterday?

The price of WTI Crude Oil surged over $4 yesterday.  Considering the extremely low SPECULATOR long positions in the CFTC's commitment of traders report it should not take much to get prices moving, or at least stable.

I am not willing to call a bottom to Crude going into the "shoulder period", but I would not be short either.  

From yesterday's report:

Total products supplied over the last four-week period has averaged nearly 20.2 million barrels per day, down by 2.4 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.4 million barrels per day, down by 2.4 percent from the same period last year. Distillate fuel demand has averaged about 4.2 million barrels per day over the last four weeks, up by 4.0 percent from the same period last year. Jet fuel demand is 6.8 percent lower over the last four weeks compared to the same
four-week period last year.

Total products supplied went from 20,655k barrels per day during the same 4 week period in 2007  to 20,156k barrels per days in 2008.  That is the 2.4% decline in total products the above quote mentions.  OK so far?

Ahhh... but the devil is always in the details, isn't it.?  Click the link above to the EIA report, scroll down to Table 1.  Do you see a line item for Ethanol?  Nope.  Yet it IS factored into the 20,165k supply number.  Now, in Table 1, search for the line "Other Liquids New Supply"  428k barrels per day. Notice this category had no contribution to supply in the year earlier period?  Although the EIA has been less than helpful when I called to get a breakdown, this appears to be where Ethanol is accounted for.  

(Why do I say "appears"?  Because Ethanol was being produced in the prior year period, so the year over year number is not accurate.  Further, Ethanol is counted as a "Blending Component" for Gasoline, and when you break ll products down, including blending components, you get back to the 20,165k number, hence ethanol has been included.  Still, those F%$#!!! numbers don't add up, either.  Here is a link to EIA Ethanol production data.  If anybody out there has a better read on this, I am all ears.)

Well... we all know the BTU content for Ethanol is about 35% less than that of Gasoline, by volume.  And since we are measuring in BARRELS, which is a volume measurement, if we did an apples to apples "BTU adjusted" year over year comparison of supply we would need to remove 35% of the "BTU Barrels from the 428k or 150 barrels.

BTU availability declined 3.1%, not 2.4%.

The retail gasoline buyer's market is responding to a drop in total volume supplied, and a decrease in MPG because of the ethanol blending component.  And the cash and futures market is responding to that.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Miles to Go

American's are driving less.  Total vehicle miles traveled (VMT) continues to fall.

U.S. motorists drove less for a seventh consecutive month in May, as vehicle-miles traveled on all U.S. roads fell 3.7 percent during the month from a year earlier, the Federal Highway Administration said in a report July 28. The seven-month slide is the longest downward streak since 1979.

Demand for oil and petroleum products dropped 4.3 percent in May from a year earlier to 19.7 million barrels a day, according to Energy Department data released July 28. That's 889,000 barrels a day less for the first five months of the year, compared with the same period a year earlier...

``The key consideration in the market this week has been demand destruction,'' said Christopher Bellew, senior broker at Bache Commodities Ltd. in London. ``All the warning signs about the U.S. economy have prompted speculators to reduce their exposure, so that the next layer of support is at $117.''

I continue to hear the "demand destruction" argument from members of the media.  I can't imagine why... If there was indeed demand destruction, inventories would be rising around the world, but the IEA and EIA data show that inventories are lower than one year ago.

"But oil prices are declining!  Therefore there must be demand destruction!"  July MIGHT be the first month (at the moment it is very close) where the average oil price declined month over month in over a year.  Spikes and crashes don't really matter.  The economic impact of the price of Oil depends on the AVERAGE price, not the high or low.

What is happening, in my humble opinion, is my friend Jeffery Brown's Export Land Model.  The U.S. is receiving oil imports commensurate with its ability to compete for Oil in the export market.  No more, no less.  The price of Oil at any moment reflects that reality and the point of equilibrium.  After all, the U.S. imports approximately 30% of what the exporting nations export.

I have been pounding the table on the impacts of declining total VMT in the U.S.  The effects on retailers, auto manufacturers, gas stations and car repair, education, part time workers, law enforcement and fire safety, municipal budgets, etc... are going to leave folks in disbelief.

Forget the PRICE of Oil.  Focus on the absolute AVAILABILITY of Oil.  If total VMT declines by roughly 4% (or more) for the next several years (and it will), by 2013 there will no traffic in L.A. to fight with.  Nobody at South Beach in Miami except the folks that live there.  The parking lot at your city's airport will have plenty of spots.  This is a simple X and Y graph, just plot the years on the horizon and continue the slope of the line.  Ta Da!

Now let us continue this line of logic...

Because less and less Oil is making it to U.S. shores, prices will need to rise, and economic activity will need to fall in order to ration the remaining Oil based on the highest bidder doing the most useful things with it.  So what does that mean?  Agriculture will get the fuel it needs at the expense of somebody's (everybody's) lawnmower.  Public safety will get the fuel it needs at the expense of your ability to avoid car pools.  Public sanitation gets the fuel it needs at the expense of you heating, or cooling, your entire house.  People will be FORCED to work from home, or closer to home, in order to eliminate redundancy in energy services for a home and work location, not to mention forced reduction in single car commuting.

As time goes on, the issues become far more profound.  Let us look at the year 2018, and total vehicle miles driven ("VMT") in the U.S. is down something like 50% (the rate of decline in oil imports will not follow a straight line, but will likely accelerate over time).  This is not the energy crisis of my youth.  Those 2 each lasted less than 1 year.  This energy decline will be permanent.  What will the value of single family homes, far from public transportation, be in real terms?  What will the value of your Liberal Arts education be to the market place?  What is the value of the U.S. auto fleet?  Does it even have a positive value, or is it just scrap and environmental liability?  What is to be done with office parks and towers that people no longer commute to to work in?  What about the banks that financed this stuff?

My older son, G-d willing, will be 3 years out of college in 2018.  What will he be doing for a living?  Will he even need a car, or a driver's license?  Will law enforcement have enough fuel to effectively enforce traffic compliance?  What about Ambulance service or road side repair and towing?  After all, the money to pay them comes from PROPERTY TAXES, and I just pointed out the problems for that revenue stream.

This is not doomsday stuff.  This is practical planning and proper husbanding of critical and scarce resources.  Life will go on, business will go on, the economy will go on.  Of course, we will adjust.  But why plan for a future that does not exist?

Good Luck!

Mentatt (at) yahoo (d0t) com

My Bad

The problem with trading for a living is that you get to be wrong, AND HUMBLED - a lot. Today, I fully expected that the financials would have gotten killed. I could not have been more wrong. They finished up over 8%. Then, to add insult to injury, I just sat there and looked at them - dumb founded - even though my trading partner, the Mad Scientist, had been warning me that a correction to the upside was long over due, and that perhaps the "Fortress Banks", Bank of America (the bank we feel comfortable holding our partner's money), J.P. Morgan, et al., were opportunities. Oh, well. While I am congenitally incapable of holding a bank stock for more than a couple minutes, and since the the financial index did not take out last week's highs, I guess I can be forgiven.

Trading is not like fighting with your spouse. There is no time to insist that you are right. Admit your mistakes, ASAP, and move on. Thankfully I did not have the confidence to be short (and when shorting, you REALLY must admit any error quickly or you won't have any capital left to trade with in very short order). So some of my trader's intuition was working. After all, we sold Oil rather than ride it down.

Someone out there, please, remind me that markets zig and markets zag, they don't zig and zig.

In that vein of thought, energy equities look pretty good to me. I cannot be more specific in this forum, but if you don't buy them when they are down and unloved, you cannot sell them when they are up and adored.

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I hold out no hope for a political solution to the budget, trade, US$, energy issues in the absence of a crisis. If you listen to EITHER of the presidential candidates, their proposals would lead to a $1 TRILLION+ per year budget deficit. If a courageous journalist calls them on it, their supporters scramble in to run interference. If they are caught in an outright lie, their supporters deny the lie or demur that they MUST lie in self defense. In my case I get some pretty funny, but very discouraging email. Discouraging because these folks actually BELIEVE. and you can't talk sense to a believer.

Clearly, Americans are not ready for candor from their political leaders.

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How much longer can the U.S. $ hold out? This is just one more of life's mysteries and we will have to stay tuned until we find out. It is important not to become a "believer" when investing or trading, too.

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"The damage on Wall Street is infecting all of our communities and its effects on New York state finances are devastating," the Democratic governor said in a televised address. He said he also will be "addressing the size of the state work force."

That was the Governor of New York speaking to reporters and recalling the legislature to the Capitol to address collapsing revenues.

If you think Americans are addicted to Oil, that addiction PALES in comparison to our addiction for services WE DON'T PAY FOR. We seem to insist that the rest of the world will continue to fund our deficits so that we can receive services that we have no intention of paying for. Does that sound like a sound, long term strategy to you? James Howard Kuntsler often rails about the American ideal of "getting something for nothing". Although to my knowledge, Jim has never brought this up as it applies to U.S. and state social programs, it is in this regard that he is most correct.

“Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime”—Author unknown

I am an avid gardener. From a 70 by 130 foot garden plot you would be astounded by the amount of potatoes and corn, (our calorie crops) as well as every other vegitable you could possibly put in a salad or can that my garden produces. Last year we also got enough winter wheat to keep us in bread all summer with plenty left over. This small plot also produces enough feed for our chickens to keep us in eggs and meat all year. The U.S. has had gardening programs before, most notably during the Wars I and II. Our dairy goats receive little feed other than the grass and weeds around our house (we do provide hay in winter).

Now admittedly, encouraging gardening won't work in a dense city like New York, but in the counties North of New York City (I grew up 10 miles north of the NYC border) there is an abundance of ground to work into gardens. Somehow I doubt that this will be one of the proposals coming from the Governor's office. Sharon Astyk of EnergyBuletin.Net fame, has been promotting self sufficiency in upstate New York for some time now, and has a substantial following, but I doubt the Governor will be sending out bureaucrats to review her proceedures.

No, the response will be to further the addiction for as long as possible, and then when the funding is simply no longer available, the state will cut them off without alternatives. Hell of a strategy. And the Governor is Peak Oil aware. But if he talks gardening instead of continueing to demand the funding of social programs with money the state does not have, he will be unemployed. The same folks that politically support government subsidized solar and wind are in denial about where their funding is coming from, and what they are really going to do when it is gone. Amazing.

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Everything IS relative, isn't it. Oil has fallen to $122 per barrel, and people are relieved! As if the U.S. economy can function as currently contrived on $100 + per barrel oil. It can't. The rally may be over for this cycle, but that is why they call them cycles, folks. Because the wheel turns, and the it keeps on coming. For years we have had 2 cycles per year - 2 heads and 2 shoulders. My bet is that not latter than 2 heads from now Oil will break into the $175 - $200 range. How low might it go in the shoulder period? Beats me. But there has been no resolution to the oil supply problem. The next cycle might should make for interesting blog material.

Good Luck!

Mentatt (at) yahoo (dot) com

An Important Article

Wow!  Easily one of the most important articles of the year.

If you read nothing else, read (and then re-read) this paragraph:

Step 1. Grow up, be a smart fifth grader, no cognitive dissonance!

In the political arena "cognitive dissonance" means "partisanship," a fancy term for being myopic, inflexible, blind to new ideas. You're a conservative Republican or liberal Democrat. Period. Solution: The new president better set the tone, blunt the childish bickering. However, if Wall Street stays drunk on "greed" cocktails, the chaos will continue. Why? Because like a drunken Joker, Wall Street loves chaos. Yes, Wall Street actually thrives on partisanship, chaos and gridlock. Solution: Greater transparency with any new "fancy financial instruments."

Now who would call the idealouges on the right and left "myopic, inflexible and blind to new ideas"?  

Me.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Housing by the numbers

Debt has this pesky way of lending itself to detached, critical analysis.

Merrill Lynch just sold $30.6 BILLION worth of CDO's for $6.7 Billion.  That is 22 cents on the dollar.  Congrats guys!  You old son of gun, blue blood, Harvard, chip off the old block!  Boy am I glad you guys didn't bother to recruit that pond scum coming out of the State Colleges.  Egads!  Who knows how much more you would have lost if those commoners were running the bank.

And it gets better.  Merrill had to finance 75% of the $6.7 Billion.  Is that hysterical, or what? 

Hmmmmm.... If Merrill could only get 22 cents on the dollar for their CDO portfolio, what makes the FDIC, Bernake, Paulson, and the rest of the Hair Club For Men running (ruining?) the world's most important currency/economy, think that the Washington Mutual's, Wachovia's, Lehman's etc... will get any more?

I am well aware that it is necessary to compare apples to apples, and that the average mortgage pool is worth more than 22 cents on the dollar.  If that was not true, this internet connection of mine wouldn't be working and I would have had to cook my dinner over a dung fire this evening...  Still, this just isn't a positive metric, if I may employ the use of understatement, for those considering going long the financials.

Let us assume that Merrill just sold the most toxic tranche of their position book.  I think its fair to assume that the other guys have this same toxic tranche on their books.  If the ENTIRE system is just under $12 Trillion, and the most toxic stuff is 20% of the $12T, and you can only get 22 cents on the dollar for it IF you also finance most of it it... Hmmmm..... 20% is something like $2.4 Trillion, that means a nearly $2T write down just on the really, really bad stuff.  And we cannot assume that the 80% remaining will not have some serious write downs of its own...

Holy Sh-t!  Not only is the bottom in housing not in sight, the sight of sight of the bottom is nowhere in sight.  

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This afternoon I was watching CNBC and I heard some guest describe Barak Obama as a "messianic figure" capable of of lifting the markets with his positive energy, or some B.S. like that.  

Look, Barak Obama is the most charismatic politician since Bill Clinton, and he is right there in that department with Ronald Reagan and JFK.  But when I hear folks describe an Ivy League lawyer as "messianic", I start to get peptic.  Folks, I dislike GWB as much as the next guy, but If Obama had been president in 2000, 9/11 would have still taken place.  If Obama had been president in 2004, the price of oil would still have tripled between 2004 and 2008.  He seems like a nice guy, he's got a gorgeous wife, some cute kids, and he gives great speech, but unless he shuts down 1/3 of our Federal Government AND launches a MASSIVE nuclear, windmill, and solar build out on DAY 1 of his presidency the U.S. will have the same, persistent budget, trade, and energy nightmare when he leaves office compounded somewhere between 5 and 10% per year, every year of his presidency.  And the presidency is not vested with that kind of power.  So it just ain't gonna happen.

BTW, I got "outed" by a reader who said that I should get over Hillary.  How insightful - I had never mentioned my preference before.  It is true,  I would have preferred the choice to have been Hillary Clinton versus Mitt Romney.  Both have a great deal more experience than Obama and are more known quantities, and I was disgusted at the way Hillary was treated by the press and the Democratic party... Now I have the "messianic figure" or the - and this is not my moniker for McCain, I got it from one of my readers in an email - the "Cadaver".  How deliciously politically incorrect! 

Still, at this point it would take a miracle for John McCain to defeat Barak Obama in the popular vote.  The electoral vote is something else entirely. Florida, Tennessee, and Ohio will decide the election.  Everybody is else is just window dressing. 

Wouldn't it be something if we had 2 Presidents, elected back to back, that did not win the Popular vote?  Certainly something, but nothing good.

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The next president will inherit the largest increase in the price of food relative to income in several generations.  The price of milk, eggs, meat, and anything derived from corn is going to outpace wage growth for a years to come.  There is no political cure for this issue.  The break even point for farmers growing corn, wheat, and soybeans continues to outstrip ALL contingencies, and inventories continue their decline.  No amount of MONEY creation can make the wheat grow, or the corn harvest to jump into the combine.  The U.S., and the world, needs a Plan B for food even more urgently than for Oil.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Nothing but the Numbers

I took some heat for pointing out that it matter's little if the government is headed by a liberal, conservative, white, black, tough love, compassionate, homosexual, straight, etc...

Government services are going to be cut back, and nobody cares whether you like it or not, or whether you like the way the speech on the cuts was delivered. It does not matter if the president, governor, mayor, etc... has that special bedside manner. The provided link speaks of New York's first blind governor (actually the first blind governor in the U.S., never mind the circumstance that placed him there), who also happens to be African-American, Liberal and a Democrat, having to tell the citizens of New York the TRUTH - state programs in New York will need to be cut to the BONE over the next decade. New York is a VERY high tax state, the rich in that state (people with incomes over $200,000 per year) pay over 85% of state received taxes, (even if you moved it to 100% by adjusting the tax code and allowing those making under $200,000 to pay 0%, essentially living tax free) and the state cannot balance its budget.

New York depends on the financial services industry like no other state and no other industry. Now take an honest look at that industry, where it has been, where it is, and where it is going. The state services in New York have had greater funding than most of the world's countries. The people receiving these services have become quite accustomed to them. They are as addicted to these services to a greater degree than the average American is to cheap oil. It is not even close.

California, home to 1 in 8 Americans and another uber high tax, high services (and municipal pension) state is insolvent.

The political ramifications of what is about to happen in these states is nothing short of stupefying. MILLIONS of New York city residents receive food, medical, and home heating assistance from a state (some of this is born by the Feds) government on the verge of default (my educated guess is these states will default in fact after Oil has averaged $175 plus for 6 months, although it might happen sooner). Any investor holding state or local debt from New York and California has to have ROCKS in their head.

These governments, in an effort to "help" their citizens, have helped to paint them into a very miserable corner. Talk about your unintended consequences.

I have a suggestion. Every politician, political activist, regulator, bureaucrat, lawyer, etc... that is anybody associated with crafting social policy.... should volunteer for summer chess camp. Maybe then these folks would understand that EVERYTHING has a beginning game, a middle game, and an end game, and that each move along the way has a myriad of consequences that might be appealing now, but lead to crushing disaster later.

Mentatt (at) yahoo (d0t) com

Lipstick On A Pig

Last week's housing numbers were no mixed bag, despite the silly interpretations coming at you from Wall Street Broker's Chief Economists (Mouth Pieces).  

New home sales were reported slightly better than forecast.  YAY!!! Cried the Cheerleaders.

Existing home sales fell 2.6 % to their worst levels in a decade, despite an average price decline of 6.1%  (Note to Federal Data Collection Folks - nobody really believes your numbers).  Booo!  Booo! Cried the Cheerleaders. Pay no attention to that man behind the curtain!

Builder's can cut deals to move houses.  Free swimming pools, free kitchen granite tops, great financing,.. Existing home buyers usually need to sell the home for more than the mortgage.  Those who bought, or refinanced, after 2002 have been having great difficulty clearing that hurdle.

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Friday's should get really interesting for the financial markets over the next year or 2.  That is the day that the FDIC will do its seizing and liquidating.  You see, the last thing the FDIC wants to do is panic depositors.  They will do their dirty work after the news services have depopulated late in friday afternoons.  That gives depositors a couple of days to cool their heels before freaking out about the bank that holds their money.

True to form, the FDIC took over 2 more insolvent banks yesterday.  Within 18 months, the U.S. will most likely need to nationalize the banking system.  The only reason I said "most likely" instead of "definitely" is that the U.S. COULD get "lucky" and experience a round of price and wage hyper-inflation, making mortgages easier to pay for those still employed.  I just don't think that the most likely outcome.  My G-d, now I sound like one of these no account Wall Street economists... "on the other hand".  Never mind, Oil supplies will not be there in sufficient quantities necessary to save economic growth and hence home prices and hence the banks.  How can you have wage inflation if more than half the folks working are in the Real Estate, Finance, and Insurance fields, areas that will need a great deal many LESS workers in the very near future?

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Let's let up on housing and banking for a minute to laugh at the Auto Makers.  Talk about not funny.

These guys have financed MILLIONS of SUV's and pickup trucks for people that don't really need them, making assumptions about the end of lease values for these vehicles that have no correlation to the present realities.  Whoever owns this debt is DEAD.  SUNK.  GLUG.

And you know how I feel about the automakers to begin with.

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We have had our noses pushed up against the glass for so long following the energy, mortgage, and banking train wreck, that we have let the wolf into the door.  Over the next decade the big story will be grain and food inventories and supplies.  

More on this soon.

Mentatt (at) yahoo (dot) com

"Don't Confuse Brains WIth A Bull Market"

When I worked at Bear Stearns, one of my bosses had the quote "Don't confuse brains with a bull market", on his wall.  

The commodity run of the past several years has been breathtaking, almost without taking a break.  Just over 1 year ago, the Amaranth hedge fund went belly up, and in unwinding the funds positions, the creditors and clearing firm are not in the trading business, the markets got creamed.  How would it be possible to foresee extraneous events like these?  It is not possible. But it is very possible to profit from the sell off by picking up the pieces.

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The government engineered short squeeze market rally had a short shelf life, it would seem.  I guess I could make a new sign for my office that reads "Don't confuse a government patch with a real solution".

Creating a the false sensation of a "bottom" in the Financials did nothing to cure the underlying issue.  That is:

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.  

So what to do?

Life is not fair.  If you sell your suburban home, somebody else has to buy it.  That means SOMEBODY is going to be left holding the bag.  That makes this the ultimate competition, like it or not.  The Amish have a great saying:  "I would not cheat thee, I would out wit thee".

So, go forth.  Don't cheat.  Out wit.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Markets's Zig and Zag, Don't Zig and Zig (Part 23)

Well, Oil has now fallen over $20. In percentage terms that just ain't the big deal it used to be.

In a post $10 or $15 dollars ago, I said would not get interested in oil until $120 to $110.

This had to happen. Oil had come far and fast, and markets do not move in a straight line. But the energy crisis has not been called off, and Oil imports into the U.S. are not going to increase year over year EVER again.

This is not the popping of a bubble. Just go to the CFTC.gov website and review the commitment of traders reports for light sweet oil. Notice how the "non-commercial" long interest is at its lowest point in over a year? That is hardly indicative of a bubble.

Also, for a bubble to be forming, oil inventories would need to be high relative to recent history and rising. The following was from this weeks special file report from the U.S. Department of Energy's E.I.A.:

U.S. commercial crude oil inventories (excluding those in the Strategic
Petroleum Reserve) decreased by 1.6 million barrels from the previous week. At
295.3 million barrels, U.S. crude oil inventories are in the lower half of the
average range for this time of year. Total motor gasoline inventories increased
by 2.9 million barrels last week, and are just above the upper boundary of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories increased by 2.4 million barrels, and are in the upper half of the average range for this time of year. Propane/propylene inventories increased by 0.3 million barrels last week but remain below the lower limit of the average range. Total commercial petroleum inventories increased by 1.9 million barrels last week, and are in the lower half of the average range for this time of year.

Re-read that last line; "and are in the lower half of the average range for this time of year".

No bubble here, folks. That does not mean that markets will not correct, they will (and are doing so as I write this).

I don't give investment or trading advice on this blog. I will tell you that I had sold all my Oil futures and will be buying again. As to when, well that remains to be seen. I would like to see a good washout, complete with some jackass on CNBC claiming that the bubble has burst and it is all down hill from here.

Good luck!

Mentatt (at) yahoo (dot) com

Dear number 2 Anonymous from the previous post:

I thank you for making the connection between Peak Oil and its Political Response.

We have myriad organizations and web sites dedicated to discussing the problem, and many that discuss the TECHNICAL responses. Unfortunately, little will get done without a Political solution wrapped in a technical solution inside a financial response, to paraphrase Churchill.

So here we are, at the cusp of the greatest challenge to mankind since Adam gave up a rib, and our presidential candidates are discussing everything BUT this. Why? Because THEIR constituents, the far left and the far right, have monopolized the candidates.

Warren Buffett described the situation in the U.S. in the following anecdote:

"We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits ... our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than they produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own."

The U.S. Taxpayer simply cannot support the sheer size of our federal, state, and local governments, and this is BEFORE we get to the economic compression caused by Peak Oil Imports.  This is not up for debate anymore.  Every 4 years we have to listen to 2 very intelligent presidential candidates (I don't think we EVER had a dumb guy win the nomination) stand before the nation and tell OUTRAGEOUS lies about cutting taxes (have you EVER heard of a candidate say he was going to RAISE taxed on the poor, working, and middle classes?).  Since serious deficit spending began, about the time that oil production peaked in the U.S. (my apologies in advance to the disingenuous seekers of political advantage.  This was neither Carter's fault nor Reagan's.  Neither caused the peak in U.S. oil production) no candidate, Republican, Democrat, or Independent, stepped up to the microphone and told people he was going to cut the size of the government.  It was always "I will cut taxes to the working men and women, blah, blah, blah..." 

(Please.  Spare me the "budget surplus" of the Clinton second term which was generated by the stock market bubble, not the fiscal discipline of one of best politicians of the 20th century.  Why do you deceive yourself so?)

So, here we are.  We can take this opportunity to challenge our candidates to addressing something more meaningful than "freedom fries" - or not.  Because energy shortages will hit America, and the effects on the economy, and hence our tax revenues, and hence yet again on the size of the government taxpayers can support, will be unassailable.

Yours for a better world.

Mentatt (at) yahoo (d0t) com

We Don't Get To Vote For Regulator

In the early to mid 1930's the most educated, cultured, liberal country in Europe VOTED to give up their rights and elected the NAZI party and Adolf Hitler (well, sort of. Hitler lost when he initially ran for President, but several years later, after being sworn in as Chancellor, the Nazi party won 43.9% of the parliamentary vote and the rest is history) and willingly gave up their civil, and human, rights.  Why?  Because their economy had collapsed, and the NAZI's represented "Change", complete with scapegoat, political theatre, and theme song.

Why is it that people think it can't happen here?  Everyday we are bombarded by calls for the government to "Do Something (even if its wrong)".  And just "WHO" in government do you think is going to do the "SOMETHING"?  You can vote for Mayor, President, Councilman, Congressman, Sheriff, Dog Catcher... but you can't vote for your favorite regulator.

Who is watching these $%#$$#! guys, anyway?  And if they "DECIDE" you have violated a regulation, who made them Judge, Jury, and Executioner?  Baloney, you say.  "You can have your day in court!"  Do you know ANYBODY that thinks our legal system works in a fair and balanced way for the average citizen?  The best definition I have heard for a Jury is:

"Twelve people brought together to decide who has the better lawyer(s)"; and, "Twelve people brought together to determine who has more money to fund their legal team".  

Maybe when 2 Goliath's head to Court the system works, but for John Q. Public?  Give me a break!

When did we give up our republican (small "r") democracy, anyway?  Is the President of the United States now the "Regulator in Chief"?  The Federal Communications Commission, The Environmental Protection Agency, The Federal Trade Commission, etc... these agencies are run my APPOINTEES, not elected officials, and are populated by the kind of folks you can't meet anywhere else besides the Department of Motor Vehicles (one of my PERSONAL favorites).

And whenever a regulatory agency catches too much heat from the U.S. Constitution you know what the powers that be do to address said heat?  Give the agency Law Enforcement Powers.  Do you know what an agency with Law Enforcement Powers does to justify their budget? They arrest "Evil Doers", that's what they do, and they are not too picky about the "Evil" either (think Eliot Spitzer and Rudy Giuliani.  A little fun fact to know: Giuliani arrested guys in their offices on Christmas Eve, and dragged them down the street for politically motivated "perp walk".  Guess how many of his "convictions" held up on appeal?  ZERO.  Arrests make the Front Page in Bold Type, Acquittals make page 12 under Lost and Found). Just take a hard, thoughtful, non manipulated by the media look at the Texas Department of Children & Family and their raid against the "Polygamists and Child Rapists" 3 months ago.  

Take the families of ANY 475 kids.  In that data subset you will find child abusers, drug dealers, rapists, murderers, etc...  Unfortunately, the Texas Dept. of Children & Families did not find a whole lot of that going on, no drinking, drugs, violence, etc... Underage sex?? None yet, and going by teen mother and abortion data, nothing like the subset of ANY inner city grouping of 475 kid's families under any circumstance... so they had to work the public and the media with stories of forced marriages, child rape, etc... to justify destroying the peace and well being of 475 kids and their families.  And they had folks convinced, too... but under the harsh light of day, the Dept. of C & F lost both the initial court case AND the appeal - but not before traumatizing the children and demonizing their parents.  Maybe you don't like Fundamentalist Christians.  Maybe you don't like Fundamentalist Jews, or Muslims.  I am rather secular myself, and reject most of their dogma out of hand.  So what?  But if you give some self-important REGULATOR (or worse) the budget, they are going to use that budget - and no ELECTED official of the PEOPLE is going to be following behind them doing a cost/benefit analysis of their behavior.

Now think about giving a bloody BLANK CHECK to the U.S. Treasury and unparalleled regulatory power to the Federal Reserve to "solve" the housing/mortgage crisis.  Does that sound like a good idea? How long before we have the Democratic Socialist Party calling the shots?  Or the Christian Republican Socialist Manifesto (hey, they got a Christian Democratic party in Germany)?

The Fed IS the problem!  Fannie Mae and Freddie Mac ARE the problem.  Here is the link to Congressman Ron Paul's website.  Unfortunately for America Ron Paul is not half black Democrat, or half something (spare me your "racist" accusation, my wife and children are most definitely not "White".  I loved Dmitri Orlov's observation that America's politically correct decry racism, yet nearly always marry within their race), or our next President might have actually accomplished something besides "Change".

You are going to get "Change" alright.  Spare "Change" from a lifetime of working and saving blown to pieces by the very guy that sat atop the pinnacle of capitalism while his firm baked the mortgage disaster to a perfect "WELL DONE".  And this Valentine's Day massacre of what is left of the financial system will be burying its dead long before the Agent of Change or the Aged War Hero get their hands on the train set.

Fannie Mae and Freddie Mac are not Too Big To Fail... They are Too Big To Save!

Mentatt (at) yahoo (d0t) com

Libertarianism or Fascism?

With the state of the U.S. Budget, U.S.$, and the coming U.S. oil import disaster... We have some political upheavals to look forward to.  But which way will the wind blow?

FDR Liberalism is DEAD.  There is a dead body walking around, but it is DEAD just the same.

GWB's version of Conservatism (His group, founded by Strauss, hijacked the moniker) is DEAD.  The body has already begun to stink.

The minor movements of Feminism and Race Based Preferences are going to wink out of existence without anybody even noticing them.  Sorry, Gloria Steinem, fish may not need bicycles, but women will need their families - desperately.  Biology is destiny, and thankfully so because Social Security will cease to exist in the lifetime's of most reading this.  The new "Social Security" will be the same one we have had for time immemorial - your children.  This will be so irrespective of the political sensibilities of aging, childless feminists.

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

In the permanent energy crisis, their will be no "Retirement" for the masses.  The issue will more likely be what will you do when you are too old to care for your self?  (Not that "Retirement", in the late 20th century/early 21st century American definition appears to be such a happy time.  I live in South Florida, home to the mother of all retirement populations.  I can only share with you my interpretation of of my personal observations... these retired folks do not look terribly happy to me.  To my eyes, they appear miserable.  Of course these individuals might have been miserable when they were young, so this is hardly empirical.)

So many people are looking to our GOVERNMENT for answers to the oil crisis, the budget crisis, the mortgage crisis, etc... "We should do this.  They should do that." I wonder when it will occur to the very folks that think government is/has the answer....  Exactly WHO got us into this fine mess in the first place?  And exactly what resources do they suggest the government use to get us out?  The U.S. is in DEBT up to its eyeballs.  Our citizens actually believe that they are ENTITLED, regardless of how poorly they have led their own lives, to a retirement, of at LEAST 20 years of nonproductive consumption, fully funded for their healthcare and their material needs.

Go ahead!  Gain as much weight as you want!  Diabetes?  Bad back?  Erectile dysfunction?  Not to worry, the government (our new Lord) will provide. You don't have to wear a condom!  Drink and drive, its fun!  Smoke!  We'll take care of your healthcare bills.  Can't work (or just don't feel like it)?  No problem, we will send you a disability check.  Can't save money? Bad credit?  Poor work history?  No problem!  We'll give you a mortgage with NO MONEY DOWN!  And if you can't pay?  NO PROBLEM!   It wasn't your fault ANYWAY!  It was those scum bag speculators... Congress will fund a NEW program to keep you in your home with money they don't have, borrowed from people they have no intention of paying back, and if those pesky lenders want the money back we will simply bomb them into the stone age or devalue the currency and STEAL it from them.

All to fund programs supported politically by people who claim they HATE war!!!  Give peace a chance!!! But fund our social programs or "we will g-d damn bomb ya" (George Carlin), or steal the food right out of your mouth.  To make ourselves FEEL better about all of this, we will send a couple of young people over to your neck of the woods in Peace Corps garb.  (I received an email today from a reader with this quote:) 

 

"Sometimes we are so caught up in
who's right and who's wrong
that we forget
what's right and wrong."  - Unknown, but Thanks, Lane!

Folks, we are going to have to get over this, one way or another.  Phil Graham is correct.  We HAVE become a nation of WHINERS.  Where the F$#@@! is John Wayne?  The end of the Oil Age is the beginning of the Age of Personal Responsibility.

(Here comes the email railing me about "Corporate Welfare".  Brother, I am going to cover the disgusting way that corporations have evolved  in another post... but to accuse them of being the BENEFICIARY of the government's largess "is what is known as being STUNNINGLY full of shit" (again George Carlin.  I seem to be channeling George today.)  Government has steered corporations to what they are today precisely because they are just SO PERFECT a machine for extracting income taxes from the masses, which is then used to create these silly programs and "American Interests" that need to be defended in the first place.  Corporations are the funding source for EVERYTHING good and bad in the system. Think about it, the money AIN'T coming from single mothers, hitchhiking hippies, college students, or the Rev. Al Sharpton.)

How is it that the NeoJerks stole the 'Conservative" mantle, and nobody noticed?  How is it that the South was controlled by the Racist Democrats during the 1950's and '60s, but now they call themselves Conservative Republicans?  How is it that the Northeast, you know, the political descendants of the Authors of the Bill of Rights, went from "Patrician Republican" to "Liberal Democrat"?  Are the Republicans the Party of Lincoln or the party of G.W. Bush?  Are the Democrats the party of Ralph Nader or George Wallace?

Folks, these are just labels, and the little meaning that they had just got SQUASHED by the new political realities of what is likely to be the Mother of All Recessions perpetrated against a people that have become dependent on government to guide them through their average day.

So what will it be?  

San Francisco confiscatory liberalism is DEAD.  Bush and Cheney's silly foray into outrageous spending has bankrupted the nation - whatever political movement they represented, call it what you will, is DEAD.  Both movements lay bled out at the hands of the Oil Depression.

Will we devolve into a fascist state in which the masses gladly give up what civil rights they have left in order to make a run at the status quo?  Or will we accept our responsibilities and keep our individual liberties and fight for the liberties we lost?

Mentatt (at) yahoo (d0t) com

Oh, My Aching Head!

Well, the U.S. Federal Government has spoken, and they have clearly decided to throw anything and everything at Fannie Mai, Freddie Mac, and the Banks.

Don't fight them - yet.  Unless you have the capacity of a Jimmy Rogers, don't try to be a hero.  We all know what happens to heros.

Still, the government's action begs the question:  What the heck are they going to do about the U.S. $?  Considering the massive selloff in EVERYTHING compared to where it was just 3 weeks ago, the standout performance by the precious metals is nothing short of glaring.  Still, "markets zig and zag, they don't zig and zig".  

Just over 2 weeks ago I posted this, saying that I could not get excited about Oil at $142.  Oil is $130, and I am still not excited about it.  Now $120 might get my attention, and at $110 I would get hot and bothered...

Merrill Lynch, Microsoft, and Google all reported less than expected earnings after the close.  Should make for an interesting day tomorrow considering the 500 point rally of the past 2 days.  Short covering rallies are not new Bull markets.

--------------------------------------

It appears the Administration has come to the conclusion that a military engagement with Iran would be counterproductive, if I may use the understatement.  Oil coming out of the Middle East is going to decline over the coming decades.  NO ONE disputes this.  If a shooting war over Oil that won't be there in the future can be prevented until the oil isn't there, there would not be anything to fight over at that point, now would there?  Perhaps Obama's position of dialogue does not appear as silly as it was presented to be by the Administration.  (By the way, I am a McCain supporter.  I am just calling them as I see them.)  The idea that the U.S. can win an Oil war in the Middle East should now clearly be seen as folly.  Maintaining the viability of shipping lanes, oil fields, docks, tankers, loading platforms, etc... so if someone is fighting to maintain the flow of oil, they better do it at the negotiating table.  Now if you are fighting to prevent a nuclear event... well, that is a different matter entirely.  If you think not, take your happy ass to Hiroshima and walk the grounds and museum.  

------------------------------------------------------------------------

If the FDIC is concerned about system wide failure, shouldn't you be?  Here is the deal.  The following is a list of folks and entities that really don't matter (as applied to the slow motion train wreck of the banking system).  Ready?

1. The U.S. Treasury
2. The U.S. Federal Reserve Bank
3. The U.S. Congress
4. The Administration
5. The FDIC
6. The SEC
7. Ben Bernake, Hank Paulson, et al...
8. Barnie Frank, Chuckie (Cheese( Schumer), Nancy Pelosi, Barbara Boxer, Dick Cheney, "pick your own personal boogey man" et al...

Here is what does matter:

HOME PRICES!!!!!!!!!  (Trumpets Blair!!!)

If home prices go UP, the banks are in the clear as their assets will perform.

If home prices continue DOWN, the banks are in deep, deep doo-doo, the government will be forced into some kind of (Mortgage) Resolution Trust Company operation (I know I am dating myself here) and if they succeed in straitening the system out it will be at the expense of the U.S.$.

The rest is just NOISE.

Mentatt (at) yahoo (d0t) com

The Real 800 Gorilla In The Room

In the circle jerk that is Washington D.C., there are a number of "monkeys on your back" - Oil, the Trade Deficit, the Budget Deficit, Social Security, etc...

They all pale in comparison to THE 800 pound gorilla - Housing Prices.

All of the huffing and puffing, sucking and blowing, and running to and fro - complete with the public histrionics of Tweedle Dee and Tweedle Dumb - means nothing.

Future home prices in nominal dollars mean EVERYTHING. There is NO OTHER ISSUE.

If home prices were to rise, the banks would not be in trouble. If home prices fall, most banks with mortgage exposure as their primary "asset" will not survive.

NOW, Therefore, ending short sales by decree, nationalizing Fannie and Freddie, publicly hanging speculators, even lowering the Fed Funds interest rate, will do as much good as sending every man, woman, and child in the U.S.A. a check for $1 million (or $10mm, or $100mm), ... though I suspect the latter will be infinately more popular (and just as silly).

THERE IS NOTHING ELSE. It is all about home prices. Americans have cashed out the equity in their homes, took a vacation, installed some granite counter tops in kitchens they are too busy to cook in, and bought a $10,000 (before prices dropped) HD flat screen T.V.'s to watch reruns of Giligans Island on. The banks have no money to lend, consumers have no cash for down payments, food and fuel price increase will make accumulating said down payment a time consuming endeavor, foreclosures are putting HUGE supply onto the market, and inventories of unsold homes would take over 5 YEARS to clear and return to traditional levels of inventory.

Now I ask you, given all of the above, which way DO YOU think home prices are headed?


Mentatt (at) yahoo (d0t) com

How Many Bullets Does The Government Have Left

By ending all short sales in the weak financial companies, the SEC has put themselves in a very unussual spot.

What if the stocks don't rally? What if they just keep going down and blowing up?

Our resident mad scientist says that with Wells Fargo's better than expected earnings, and the SEC decree, we could see a big rally in the financials.

Maybe.

But what the heck are they going to do if the rally fails to materialize? Get Congressional authorization to buy any and all financial equities that the Treasury sees fit?

I don't know... I gotta think about this some more... but SOMETHING just ain't kosher.


Good Luck!

Mentatt (at) yahoo (d0t) com

The Knee Bone is Connected to the Thigh Bone

Well, well, well... where are we?

G.M. has eliminated its dividend. It is the first time since 1922 that G.M. has not paid a dividend.

The SEC has enacted "emergency measures" to stop ALL short sales of Fannie Mae and Freddie Mac, as well as many other financial companies like Lehman Brothers.  Government sponsored market manipulation hardly engenders confidence.  While the Government was at it, they also began a witch hunt for "evil doers" and are subpoenaing brokerage firms and hedge funds looking for someone to execute in public (the mob ALWAYS loves that).

Consumer inflation is reported at its worst in 26 years.  Wholesale inflation was reported for June at nearly 10%!! And we all know how accurate these numbers are...

It was reported this morning that, GET THIS, Fannie Mae and Freddie Mac MAY cut their dividends.   MAY?  MIGHT?   HAHAHAHAHAHHAHAHAHA! Oh, G-d! That one KILLS me.

Washington Mutual, National City Bank, Wachovia Bank, and MANY, MANY are on the ropes.  But President Bush say's the financial system is "Basically Sound", so we got that going for us.

Remember Bernake's silly threat to RAISE interest rates?  That was SOOOOOO 3 weeks ago!

Newspaper Advertising is collapsing (and no, internet ads are not making up for it). 

U.S. Home foreclosures rose 53% in June, year over year.  

The U.S. Dollar is down so low it could walk under a Nickel without bending over.

Gold & Silver (real money), are near multi decade highs.

And that's the way it was,

Yours for a better world,

Mentat (at) Yahoo (dot) com

Connect The Dots

With the financial, energy and political world coming apart at the seams, I think it is time to "connect the dots". Shall we?

I used to get a decent amount of "fan email". Lately, I have been getting hate email. You see, I simply pointed out that if you are actually rooting for the energy crisis to bring capitalism to its knees (I am not. I am a stone cold capitalist. It is not incompatible to me to make money on the energy crisis. Markets solve at least as many problems they create, the folks that interfere with market mechanisms might want to take a hard look in the mirror and see if they can say the same about themselves with a straight face), you are also rooting for the slaughter of the "Goose That Laid The Golden Egg". You see, the lack of Oil will harm the rich, corporations, small business, and the self employed financially. They, in turn will pay less taxes which in turn fund the state and federal social programs - Medicare, Medicaid, Disability, Unemployment, Food Assistance, Farm Subsidies, etc.... Less funding = less program. No funding = no funding. Why is it so offensive for me to state the bloody obvious?

I pointed out that the funding for social programs was going to dry up like Paris Hilton left in the Vegas sun. I was wrong. I should have said that the funding has been drying up in REAL dollars for several years now, and that the "rate of change" would now accelerate greatly.

It seems that most of us agree that the Federal Government is LYING about the rate of price inflation. Well..... if that is true (and it is), then the COLA (Cost of Living Adjustments) in the social programs are smaller (much smaller) than rate of inflation.

So let us take a number. Any number. Just kidding. I think that the U.S. understates price inflation by 8% per year, and has for 3, perhaps 4 years. In real terms the dollars received by beneficiaries of the social programs has declined by .92x.92x.92 (78% of what they were receiving) and maybe x.92 again (72% of what they were receiving). unfortunately, even with this deception, these programs are breaking the bank (literally) and the federal budget. Only now, as anyone with an internet connection can see for themselves, the funding for our profligate homes and cars is not there (because the economic production is not there. "They" were willing to fund us for a the last couple of decades, but that has come to an end). If you doubt this, just take a good look at a couple of REALLY SILLY social programs - Fannie Mae and Freddie Mac.

Peak oil means = "Peak Credit", "Peak Social Programs", "Peak Military Expenditure", "Peak Prison Population", "Peak Food", "Peak Fresh Water", "Peak Government". Not one of these phenomenom care about your, or my, political sensibilities. Zero. None at all. Not even a little bit.

Good Luck!

Mentatt (at) yahoo (d0t) com

So Much For Full Faith & Credit

Well, "they" (the Treasury, the Fed, and our elected officials) floated the - "have the Treasury/Taxpayer backstop the mortgage and housing market - baloon.

I wonder what is next?

The Financial index, as meassured by the Spiders ("XLF") was down 4.55% today to $17.83. I had posted that anything below $17 should be viewed as Armageddon...

Washinton Mutual and National City are closing in a ZERO. How much money does the FDIC have? Not enough to cover these 2 and 10 more like them - and there will be 10 more like them, probably by year end.

All of this has moved MUCH, MUCH faster than even my most dire posts. Housing is in FREEFALL, and no amount of government intervention is going to prop it back up.

I think the really SCARY thing for supporters of BIG GOVERNMENT is the realization by the masses that most of the services we got from government were overpriced, over-hyped, non-essential, inefficient, wasteful B.S. that people wanted as long as they did not actually have to PAY for any of it. The free lunch is over - and you are going to pay through the nose. The quicker we can shut down these agencies and "benefits" the better off we will be. But your local, state, and federal governments will fight back. They LIKE those exalted positions, ridiculous benefits, and no workd jobs. Wouldn't you?

Good Luck!

Mentatt (at) yahoo (d0t) com

"Crossing the Rubicon"

Well, they did it.

The U.S. Treasury has now assumed the full liability for Fannie and Freddie's liabilities in the market. Books will be written as to how the U.S. Federal GOvernment got into the hedge fund business (after all, Freddie and Fannie are nothing more than mortgage hedge funds). This was the proverbial "rock and a hard place", especially in an election year.

Paulson has asked Congress, and it will be rubber stamped, for "authority to buy unlimited stakes in and lend to the companies", and for the Federal Reserve to assume increased regulatory oversight. "UNLIMITED"!!!! And not just guaranteeing the debt, but equity, too!! I would like to welcome the U.S. taxpayer as the new landlord of last resort.

Hank Paulson and Ben Bernake have been, and will continue to be, blindsided by the size and scope of housing's decline. The price of American homes is going to retreat to a certain level, roughly 3X, of family income. That means most of the homes in California, Florida, Metro New York, Las Vegas, Arizona, etc... are going to lose more than half of their peak value in real dollars. No power in the universe can change this, certainly not the U.S. Treasury or the Federal Reserve. Let me remind you that it was this dynamic duo that just 18 months ago said that the housing crisis was "CONTAINED".

But I digress.

The "powers that be" soiled their underwear on friday, and rightly so. This is their attempt to clean up the mess in their pants. Unfortunately, this is a temporary patch, perhaps something that gets us through the election, or perhaps not.

The ironic thing is that the American taxpayer has just been called in to bail out Saudi Arabia's sovreign wealth fund, China's Central Bank, and other sophisticated, international investors that currently hold more than half of Fannie and Freddie's debt. How is that ironic? Glad you asked.

The Federal Reserve and the U.S. Treasury are now partners in the cluster fuck that is the U.S. Housing and Mortgage market. What would happen to housing, and the U.S. Treasury's investment in Fannie and Freddie if the Federal Reserve were to hike interest rates to stave off inflation or to come to the rescue of the U.S. $? The defaults would be so high that Fannie and Freddie's mortgage losses piled onto the Government's debt might DOUBLE, or at least increase by half, the National Debt - With all of its concomitant effects on the U.S. $. The Federal Reserve has just abdicated from its role to maintain the currency and price stability in favor of the U.S. housing market and the debt holders of Fannie Mae and Freddy Mac.

By taking this action the Fed and U.S. Treasury have just ABANDONED the U.S.$ to the DUST BIN OF HISTORY.

mentatt (at) yahoo (dot) com

Markets's Zig and Zag, Don't Zig and Zig (Again)

I got some email asking me if it was time to cover shorts on Fannie and Freddie.  

Disclaimer: I never told anybody to short them in the first place!  I do not give specific advice or trading strategy in this forum.  That said...

The easy money has been made on Fannie and Freddie's rapid decline.  From here, it could go either way.  Flipping a coin is not the best of trading strategies.  Remember that line from the movie "Scarface"?  "Never underestimate the OTHER GUY'S greed!!!!"  Well, in policy issues affecting the markets it should be rephrased as:

"Never underestimate the other guy's stupidity!!!"  

These "guys", our federal politicians and regulators, operate in a framework of:  React under pressure, compromise to get something done, then empower the incompetent appointee or mean spirited regulator to repair an intractable problem thereby creating an entire new set of problems to be "addressed" in the future, react under pressure, etc.... repeat ad nauseum. 

You don't know if a bailout is coming or what the format is...

Of course, they could both plummet to ZERO at any time.  However, it is all about the risk/reward ratio.

How's that for non committal, wishy-washy, mealy mouthed B.S.? Maybe I should go back to New York and work on Wall Street as a "Strategist"... whatever the hell that is.

Finally, if I write that I think something is going to blow up, don't take that as investment or trading advice.  I have been known (just ask the Mad Scientist) to change my mind several times, going long and then short, sometimes several times per day.  For example, I missed the trade on Freddie friday, but I might have gone long for a couple of ours when the squeeze showed up had I been paying attention.

And if you are not the kind of person that can admit a mistake QUICKLY, you have no business trading.  It is easy to be on a winning trade.  Anybody can take a quick profit. Can you take a quick loss?  If not, Rambo, don't trade.

Good luck!

Mentatt (at) yahoo (d0t) com

A Big Bank Goes Down

IndyMac, a 32 Billion in assets thrift, was seized by the FDIC this afternoon.  It was the second largest bank failure in HISTORY.

IndyMac is only the first of several BIG bank failures to come (and there will be HUNDREDS of regional bank failures).

There are 2 mean edges to this economic sword.  The failures are going to blow up the purchasing power of the U.S. $ while at the same time the U.S. economy's primary source of private employment, the "FIRE" economy (of Eric Jansen fame) - Finance, Real Estate & Insurance - is briskly contracting.  

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Why not just give everybody a home?  That strategy worked out great for the Soviet Union, right?  Sorry... wrong universe.

There are so many bills to "keep Americans in their homes"  working their way through Congress it is hard to keep them all straight.   Forget it, you can't.  The ONE THING I can tell you WITH CERTAINTY - They ain't doing it for the home owner's benefit.  They are trying to salvage the "wealth" of the nation, and they are quite OK with ENSLAVING the American people if necessary in order to keep them tied to the mortgage yoke.  But people are NOT dumb when it comes to what is in their personal best financial interests (ever hear one of Howard Stern's shows where he asks a bunch of strippers who the Chief Justice of the Supreme Court is, or who the Vice President or the Speaker of the House is, and not ONE of them can answer, but ask them how many lap dances they have to do to pay their rent and they all answer in less than 1 second?), and it just is not in their best interests to keep paying a higher monthly payment than if they just walked away.  After all, there IS NO equity to be built up in homes for years to come.

Most of these bills are coming from the Left.  Strange, but keeping folks in these houses at those mortgage balances does not benefit "The People", it benefits CEO's at Goldman, Merril, Lehman, Bank of America, etc...  Tell you what fellas, please don't look out for MY best interests.  With friends like these who needs an ENEMA?

Lastly, if you are really and truly in favor of helping the common man, write your Congressman and tell him we need to abolish Fannie Mae and Freddie Mac.  Last time I checked, their mission was to make housing AFFORDABLE for Americans.  HAHAHAHAHAHAHAHAHA! LOLOLOLOLOLOL!!!!!!  Is that a SCREAM, or what?

"And the hits keep coming"...

So Fannie Mae and Freddie Mac, socialist machinations from our Psychitzophrenic past, given a limited mandate by Congress to keep housing affordable (HAHAHAHA!! sorry, that just KILLS me), not only fails to help the common man in THAT regard, but to add terminal illness to injury, will likely end up as the cause of the FINAL collapse of the purchasing power of the U.S. $ (price inflation), and as we all know, price inflation is a BLESSING to the haves, (at least in the beginning of the cycle) and a nightmare for the have nots.  But at least the have nots don't know, for the most part, what is happening to them.  

So they got that going for them.

And the beat goes on...

Mentatt (at) yahoo (d0t) com

Fannie Mae Chart vs WTI Chart

I got an email today from one of my favorite "Peaknics", Jeffrey Brown (otherwise known as Westexas to fellow Peaknics).

It was a one liner:

"Fannie Mae stock price versus WTI crude price from May, 2007 forward"

For ease of comparison to the folks at home I used "USO" for oil and "FNM" for Fannie's stock price.

Click here to see the chart.

Thanks for the headsup Jeff!

Mentatt (at) yahoo (d0t) com

The Debate Is Over

Having VIP after VIP step up to the microphone all over Washington, D.C. and Wall Street and LIE clearly does not work to placate the markets.

YOU CANNOT SWEEP FANNIE MAE & FREDDIE MAC UNDER THE PROVERBIAL RUG!!!

The U.S. economy is falling apart, and Oil prices continues to climb (I guess I better get re-excited about Oil, because clearly, Oil doe not give a good fart about the U.S. economy at the moment).

What are the odds that Fannie Mae, Freddie Mac, Ford, GM, Bear Stearns, Lehman Brothers, Wachovia, Washington Mutual, etc... would meet their end at the same time? Seems likely there is a catalyst at work here... hmmmm... Not enough Oil to run the economy in the perpetual growth that these companies, and the system at large, required?

You can still take action. While most people are going to get crushed by this financial avalanche, you don't have to be among them. This would be an excellent time to step off the tracks and avoid that oncoming train. Conversely, if you are stuck, broke, etc... you might as well enjoy the intellectual stimulation. After all, this is a once in a lifetime event.

Good Luck!

Mentatt (at) yahoo (d0t) com

Dollar Crisis Could Be Imminent

The New York Times is reporting that the Federal Government will take over Fannie Mae and Freddie Mac and place them in a "conservatorship".   

Please keep in mind that by doing so, the Federal Government might also explicitly guarantee Fannie & Freddie's mortgage liabilities, effectively DOUBLING OVERNIGHT the size of the National Debt!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Holly Molly, Batman!!!!!!!

Herb Stein famously quipped "anything that can't go on forever, won't", and it appears that our system of piling debt onto the economic system is coming to a screeching halt.

But let me ask you something.

The top 20 peak oil aware financial blogs on the web have ALL been incredibly accurate in their analysis of this, and have been shouting into the wind for years.  Yet every sell side analyst on Wall Street (with the exception of CIBC's Rubin), every regulator, every presidential candidate, Alan Greenspan, Ben Bernake, Hank Paulson, etc... missed this completely.

Wouldn't we be better off firing all those folks and hiring the blogsphere brain trust in their place?

Just wondering.

Mentatt (at) yahoo (dot) com

Confirmation

If Fannie & Freddie were not in danger of failing, you would not be hearing from Congress that they are too important to fail.

What these jerks are actually saying is that Fannie and Freddy must not fail before the November election.  The liabilities associated with using tax payer money to continue this very, very dumb  idea are immense, and the unintended consequences might be more than the system can bear.  

Here you are, a foreign central bank (believe me, they are watching this with GREAT interest).  Are you going to be willing to continue to fund the U.S. Budget Deficit by buying U.S. Treasury debt if the U.S. tries to bail out Fannie & Freddy with taxpayer (read much bigger deficits)?  Really?  At the same level?  If not, then what?

The "what" in question is either the monetization of the debt by the Federal Reserve, or if the Fed refuses (remember, they actually COULD refuse to do so), then the country would go through an emergency shut down of services and employees.  

Now, let us work out a time frame for all of this...

None of this will happen overnight, within a week, or some other very short period of time where this would be "Breaking News" with everyone crowded around the T.V.  That just ain't how it works.

Just look at Lehman Brothers.  Lehman has over 26,000 full time employees.  More than half are in Metro New York City.  Lehman's employee's have lost most of the value of their shares, but they still have a job (for now) and their savings, etc...  Even if Lehman went bust TOMORROW, most of their employees will be able to make their next mortgage payment.  But over time, with the mortgage trading business nothing more than a dead body in the room and only thing to debate is what time it will start to stink, these formerly well paid folks will not be so well paid, and will find similar employment opportunities sorely lacking.  Their personal crisis will hit 6, 12, or 18 months out, and it is the aggregation of millions of these personal crisis's across the country that will make headlines in a year or 2 when we are in the grip of the worst economic period in U.S. history.  This has often been aptly described as a "Slow Motion Train Wreck".

Fannie Mae has only 5,700 full time employees, but the multiplier effect from their collapse would be incalculable.

Now, certain events can move this into overdrive.  A failed Treasury auction, an interruption in Oil supplies, really, a really stupid policy response...

I get many emails asking me "what to do?".  Sorry, too many individual circumstances to help there.  I have tried to try to focus on "what not to do".

Good Luck!

Mentatt (at) yahoo (dot) com

I Didn't Do It!!!

Look, when I said Fannie & Freddie were gonna fail... I didn't mean by next friday! Yes, the government will bail them out, and no, the bailout won't work.

The Braintrust, our own Dr. Lalani called me today and said if Lehman Brothers goes any lower, they are going to have to change their name to Lehman Brother, the other Brother will need to be let go...

Lehman does not survive this, and if they are smart, they will realize that there is room for ONE MORE Bear Stearns-like forced merger. The next institution (or 2, or even 3) will just have to fail.

GM & Ford, Fannie & Freddie, Bear & Lehman, American & United Airlines, wanna know who is next? What about Fedex and UPS?

A short covering rally is over due, and the Mad Scientist says that Gold is showing us that liquidity is being pumped into the system again. That liquidity is going to go somewhere, and is going to continue to sink the U.S.$.

Good Luck!


Mentatt (at) yahoo (d0t) com

The blood letting will continue.

"Fannie Mae, Freddie Mac Insolvent"

Uh-Oh....

For Federal Reserve Bank President Bill Poole says Fannie Mae and Freddie Mac are insolvent.

This guy has been saying, correctly, for years that we should strip Fannie & Freddy of their implied Government guarantees.  

I guess he won't be on anybody's short list for Vice-President.

Mentatt (at) yahoo (d0t) com

RIP Fannie Mae & Freddy Mac

Fannie Mae and Freddy Mac, the 2 Government Sponsored Entities created by act of Congress to purchase home mortgage paper ostensibly to "encourage" home ownership will be nationalized by year end 2008, in my humble opinion.

Chalk up another of those "unintended consequences".  It took a long time for Fannie and Freddy to destroy the U.S. economy, but they got the job done.

How, you ask?  Absent Fannie and Freddy, the U.S. economy would have had to do something PRODUCTIVE, like manufacture something, improve something, or transport something... instead, the U.S. decided to build houses.  Instead of shipyards in New York and the other major seaports, we've got waterfront condos.  We built a system, the suburbs and the single family home sub-division, whereby 4.5% of the world's population consumed 25% of the world's oil.

Ah, but it SEEMED like a good idea at the time.

Next up:  Sallie Mae. Another unintended consequence, in a long history of unintended consequences... we now have LEGIONS of young folks in debt up to their EYEBALLS to fund an education in, get this, LIBERAL ARTS!!  Just what we needed, another Shakespearean scholar or Art Appreciator  with $200,000 in student loans to repay.  All they really needed was a bloody well free library card, but the system convinced them otherwise... not that it matters, these indentured servants will not be able to pay the system back in any event.

The hyper-inflation of advanced education tuition is a direct result of the customer's (the student) ability to BORROW.  Fannie & Freddy did this to the homeowner.

Getting back to Freddie and Fannie...

Nationalization means that the housing price collapse is just getting going, and that the American tax payer is on the hook for a goodly portion of Fannie and Freddy's $5+ TRILLION mortgage portfolio.  Working class single mom's are going to be paying for multi million dollar homes in locals these ladies would never, ever have seen in their lifetimes!  Way to go Goldman Sachs, Lehman Brothers, and Bear Stearns senior managements of the past 2o years!  You guys single handedly (actually that is not entirely fair, as there was an enabling legion of borrowers that wanted to be Rich and Famous without actually having to succeed at anything, by borrowing their way to the top) did what Nazi Germany, Imperial Japan, and the Soviet Union, among others could not accomplish - you have brought the U.S. to ruin.

Any wonder that Gold & Silver were going up today while the rest of the financial world was coming to an end?  On the other hand, who in their right mind was bidding up the Long Bond?  Go figure.

But what comes around, goes around.  The collapse in New York City real estate is going to knock the front teeth out of the last one standing in the portfolio of Wall Street's "best and brightest".  

There is plenty of blame to go around. But don't worry; some politically ambitious, scum bag prosecutor (Elliot Spitzer?) will publicly filet a couple of sacrificial lambs to satisfy the Great Unwashed.

And the beat goes on.

Mentatt (at) yahoo (d0t) com

Armageddon and the End of Income Redistribution

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

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

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

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

Good Luck!


Mentatt (at) yahoo (d0t) com

Lies: Mine, Yours, and Statistics

The EIA was out in force today, informing the American public that the average price per barrel of oil in 2008 would be $127, and that DEMAND would fall by 400,000 barrels per day. 

The EIA continues to frame the issue in DEMAND terms.  They are being disingenuous, to be kind.  To be informative and accurate, the EIA SHOULD HAVE framed the issue this way:

"Oil SUPPLIES are expected to fall by 400,000 barrels this year."  

Rather than the propaganda:

"Oil DEMAND is expected to fall by 400,000 barrels this year."

DEMAND can NEVER exceed SUPPLY, as used and defined by the subject matter.  And since the SUPPLY of oil is going down, the DEMAND for oil must also head down with PRICE as the mechanism for bringing the two into equilibrium.

Now, if inventories were PILING UP, then perhaps the EIA would be correct in using the DEMAND argument.  In fact, inventories are down year over year.  Once again, the EIA obfuscates the real meaning behind the data.

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I have received an inordinate amount of email haranguing me about my audacity in challenging the conventional and politically correct views on funding social programs, healthcare, housing, etc...

Once upon a time, I was a healthcare finance analyst.  In fact, I ran a million dollar a year practice doing so in New York for the better part of a decade (to be fair, in addition to several other hats I would wear on a daily basis).  

Yet the emails I received were from folks that I feel confident had very little experience as an analyst whatsoever, and absolutely nothing in the area under discussion.

I have noticed a few things about my fellow Americans -  Every single one of them will tell you, with a face as serious as a heart attack that:

1. That they are very good drivers, far above average (The entire set of any data pool cannot, by mathematical necessity, be above average).
2. That they are excellent lovers (again, certainly above average - please refer to 1).
3. That they/we could solve the most contentious, intractable issues imaginable.
4. And that they have received all of the pertinent data on whatever the issue - healthcare, social security,  abortion, taxation, guns, flag burning, freedom fries, gay marriage (to bring up a few of the manufactured, yet somehow contentious issues), the drinking age or age of consent, crime and punishment, energy, etc... - and that they understand the issue perfectly and succinctly and that the data was delivered to them by a pure and unbiased, unfiltered and altruistic data source with absolutely no agenda, and that their own personal experience during their formative years has had no influence in the formation of beliefs based upon the aforementioned angelic data feed.

And, of course I am as guilty as the next.  But at least I know I am full of shit. 

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Just over a week ago, on June 28, I posted this article that Oil at $142 did not turn me on.  Well, Oil is $136 and I am still not excited to add to it here.  As I said before, Oil could certainly head straight to $165, or right back to $120.  That risk/reward ratio does not turn me on.  A 20% or 30% decline might peak my interest in adding long positions.  Of course, I might miss the next leg up.  But for me, this is not academic (or political).  This is how I make a living.

My fellow analyst and fund manager, our own mad scientist Dr. Lalani pointed out to me today that having Oil over $100, let alone $136, was like throwing gasoline (pun intended) on the fire of the exporting countries economies.  For every bit of economic pain high prices cause in the U.S., they cause an equal and opposite amount of joy in the export economies.

Still, no market, not even oil during the greatest and last oil crisis mankind will ever know, moves in a straight line (with the possible exception of the U.S. housing market).

Good luck!

Mentatt (at) yahoo (d0t) com

The Gravy Train is Dead

All things related to Housing and Mortgages  - Fannie Mai, Freddie Mac, Citigroup, Lehman Brothers, Bank of America, etc... got killed AGAIN today.  But ESPECIALLY Fannie Mai and Freddie Mac.  Last month, I began a series on just how bad housing was going to get.  The market is telling you that that train, the one that was coming, is here.

Here is what I think is going on...

I think millions of mortgage holders have figured out in the past couple of months that:

1.  They can't sell their home.
2.  They have negative equity.
3.  They are not going to have any equity for years and years and years.
4.  And all they have to do to get a year or 2 (or even 3) of FREE rent is:  NOT PAY THE MORTGAGE OR THE TAXES.

They know that the mortgage holders are in no position to take physical possession of the property, and that they could not maintain these homes if they did.  

The number of borrowers taking this position is overwhelming the system, and I think this is what you are seeing in the stock price of the financial companies in the market place.

As energy and food prices continue their spiral, these homes will by necessity be abandoned.  The financial shock if this scenario is even close to accurate will bring the U.S. economy into an economic contractionary period not seen since the 1930's.  I think the issue now is the "rate of change", and my money is on an acceleration in the decline of tax dollars, decline in employment, decline in home prices, and decline in energy availability.

I prefer precious metals and would avoid U.S. $ denominated assets where possible.

Oh, and by the way, the ability to get ANY new program funded, or more money for existing programs, is over.  The Age of Personal Responsibility is here.

Good luck!

Mentatt (at) yahoo (dot) com