Too Little, Too Late

Hey!!!

The UAW is ready to get serious about G.M.'s labor costs!!!  What a f%^$ing SCREAM!!

Talk about too little, too late.

(All you know about G.M. and the UAW is what you read in the newspapers, or heard in the media.  ALL of those stories were placed there by public relations' firms trying to spin the public one way or another.)

Far more than management, the UAW destroyed G.M. by overplaying their hand.  Well... sort of... it was going to happen anyway... but the savers and pensioners got the shaft at the expense of the UAW.

But at least they are ready to do something about it - and only 24 (business) hours before G.M. enters bankruptcy!  Talk about playing out your hand...

On a more positive note... Lee Iacoca lost his pension.  Now if the U.S. would simply take over the entire pension system and give everyone the same benefit we might actually avoid a political crisis.  Nah... we are going to bail out the Union pensions at taxpayer expense, taxpayers that have NO pension are going to be FORCED to pay for those who do.

Hell of a system

Mentatt

The End Game

What is the end game for the Obama team regarding the American economy?

I don't know if this is intentional or not, but the Obama administration is about to have the greatest reallocation of resources/income/assets in the history of mankind occur on its watch.

The budget is beyond repair.  The Fed's $300 Billion long bond purchase is only the beginning of a strategy that has no end game.  This will lead to the Fed continuing to create money out of thin air, devaluing the US$ at some point.

For Americans with debt: i.e. mortgage, car loan, credit card, etc... (pretty much describes EVERYBODY) this is wonderful news.  If the value of the US$ falls 75% so does the real amount of the debt they owe.  Of course the folks on the other side of the ledger are none too happy.  Hence the redistribution of wealth.

Forget your politics.  Doesn't matter if this is "good" or "bad".  This is going to happen.

These kinds of societal resets never go smoothly.

You heard it here first.  More soon.

Mentatt

The World's Policeman Heading Toward Retirement

The U.S. has been the world's policeman.  This no one, Left OR Right, can deny.

Not for much longer.

The U.S. Military was primarily developed as a Petroleum Protection Force for Oil in transit around the world.  That oil is going to be in shorter supply over the next decade, and the economic contraction as a result will leave the U.S. government's military budget with a double whammy - less need to protect Oil and less money to protect the remaining Oil with.

This may be a good thing, or it may be a bad thing, but it IS going to happen.  That the U.S. will not be tempted to project its former might is certainly a good thing, but risks loom large during the adjustment period.

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"All politics is local."

Really?  Not lately, or at least not as the American people that actually vote are concerned.  National elections typically turn out 25% of the adult population to vote for president, but only about 6% of the adult population votes in "local only" elections, you know, mayor, dog catcher, that sort of thing.  

This is about to change.  In the very near future you are going to care FAR MORE about who is mayor than who is president, and all of those "national issues" that people were SOOOOO passionate about?  They are going to slip from the political stage like water off a duck's back.

Good riddance.

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Think the individual states are in bad fiscal shape?  They have nothing on the cities and counties, especially the BIG cities.  Those in the worst shape are already the highest taxing states and cities: Boston and Mass.  New York City and New York.  San Francisco and Cal (my personal favorite).  The criminal way in which these entities attempted to seize the assets of others to pay off their supporters used to be shocking - and then it became business as usual.

This is not your father's muni bond market (and Oldsmobile is no more, anyway).  The first defaults will be here before you know it, and they are going to shake the bond market to its core.

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1 in 8 households with a mortgage was in arrears or in foreclosure.  And that was before the Treasury market got routed.  When mortgage rates rise from 4.5% to 5.75%, monthly payments rise nearly 20%.  I think that sounds vaguely important.  Everything hinges on housing prices.  Everything.  Increase the mortgage interest rate and you set off a chain reaction that will run through the banking system, the Treasury market, the stock market, and the US$.

Still, I think that the U.S. equity market will not likely make a new low (and I reserve the right to change my mind), though it might be close.

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Ahh... the end is nigh for G.M. as a public company.  The Mad Scientist quipped several years ago that G.M., would change its name to General Motorcycle & Moped after it went Chapter 11.  He was being optimistic.  G.M. will survive for a few years as a government charge, and then will fade to the dust bin of American history.

I grew up in a G.M. factory town, so its a sad day in Mudville.

Mentatt (at) yahoo (d0t) com

You heard it here first.

U.S. Treasuries

The U.S. Treasury market is getting the stuffing knocked out of it.

TLT, the Barclay's 20 year Treasury Fund, is off nearly 15% since the beginning of April.  To put that in perspective, if you bought a 20 year bond on 4/1/09, it will take you nearly 5 years worth of interest to get break even.  A 15% decline, or increase, in stock prices is a "correction", but in Treasuries it is simply painful.

There are several issues here.  In my opinion, the supply of debt from the U.S. Treasury has begun to overwhelm the market, and the Fed has now become the buyer of last resort.  As this process unfolds, will the Fed be able to keep long rates down?  I doubt it, and if not, then fixed mortgage rates will rise.  The housing market cannot withstand this, so the Fed will have to redouble its efforts monetizing ever more of Treasury's offerings.

You know it is my opinion that this series of events is ineluctable.  The question is WHEN.

If this is going to unfold over the next year or 2, holding cash is going to be very bad for your health.  If not, then cash is probably a pretty good place to be in the short term.

The Treasury and Gold market will give us a pretty good indication, I would think.

BTW, the Obama budget made some pretty aggressive assumptions about the economy, and hence tax collections.  Well, those assumptions don't look so accurate at the moment.  Which could very well be why Treasuries are "sh*ting the bed" (that's technical trader speak for when a security is depreciating in value) at the moment.

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Anybody watching what is going on in Pakistan?  A nuclear armed nation with a significant Taliban movement is a recipe for disaster.  Even if the Taliban is unable to come to power in Pakistan, establishing another foothold in a region of the country would enable the Taliban to continue the fight, tweeking the nose of nuclear armed India, maintain pressure on the U.S. in Afghanistan...  Remember, these guys are in it for the long haul (they have been in a state of war since the Soviet invasion, circa 1979?), and likely feel they can outlast the political will in the West. 

Pakistan and North Korea are only the beginning of Obama's test.  I agree with reader "Coal Guy", this was not the time for an American president to try singing "Kumbaya" with the rest of the world, but that's what his constituencies wanted.

Chess should be a required study at every American Liberal Arts college.  

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The individual state government budgets in the U.S. are in horrific shape.  The vast majority of the states took their cue from California on how to handle unions, a budget, borrowing, etc... and California has been dominated by folks out of San Francisco City Hall.  Still, I am confident these folks will find a way to blame Ronald Reagan. 

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Funny, the American Left does not believe North Korea to be a threat - but Russia does.  

It would be very inconvenient for the folks that supported Obama as the "peace president", who would "bring our troops home" to actually have to make a decision to start a war of his ownership.  A nuclear war on the Korean peninsula would come about from a series of "errors", starting with NK challenging America in the first place.  Kim Jong-Il clearly does not have the same amount of respect (fear) for Obama as he had for GWB.  Some cerebrally challenged individual commented on my last post:

You are right, Jeffers. If we had elected our own psychopath to the White House, then all the other international psychopaths would have been much more impressed

when I suggested that McCain would have made the better commander in chief in these circumstances.  This is the kind of immature thinking - name calling - that suffices for abstract thought in some circles.  

Look, I am just a career analyst with OCD, so I can't help but go over this stuff again and again.  But at least I put SOME thought into it.

I have a son near draft age.  I am TERRIFIED that the unintended consequences of Obama's actions will produce more risk to young people in American than I would have been of the unintended consequences of McCain's actions.  Pretty simple, really.

"Blame". "Fault". Silly words AFTER a nuclear explosion has occurred. What matters is how a series of events led to, or prevented, a certain outcome. I have spent time in Hiroshima.  Every American should.  

It appears to me that, in the West, shouting over the opposition has replaced a sincere co-examination of the facts.

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On another note and of absolutely no consequence... to energy, that is.

I am nearly 50 years old, and have spent my career (if you can call it that) working in the financial services (disservices?) industry.  Until 5 years ago, I had little knowledge of how to work a simple hand tool effectively.  I was well-to-do enough to hire folks to fix my cars, repair my home, etc...  Then I stumbled upon the Prof. Deffeyes books and decided it would be best if I could actually do something useful myself.  

So, like every other guy in the midst of a mid-life crisis... I bought a farm in rural Tennessee (structural repairs to home and barns and fences).  And a tractor (mechanical repairs).  And a plow horse with harness (leather work).  And I grew crops, vegetable, and livestock (composting, working soil, saving seeds, planting fruit trees, vaccines for the live stock while terrified of needles), developed a wood-work shop of mostly hand tools (hand planning 8 foot rough cut oak got me in pretty good shape).

But, mostly, that kind of stuff is fun, right?  

So... recently my 8 year old pick-up truck developed holes in the roof, and rain was leaking into the cab.  I brought it to a body repair shop.  At first they wanted to replace the roof, which would have cost well over $1,000 (or $2,000, you know how that works).  When I pointed out that the truck was worth less than $6,000 and said I wanted the cheapest patch he could do... he replied $350 (before sales tax and any "problems" that arose with the job).

The Greg of 5 years ago wouldn't have blinked, and the job would have been his.  The new Greg asked his buddy for help (he has never done this, either) and with less than $50 in materials.... and less than 2 hours of my time... Viola!  We did it ourselves.

I wouldn't enter the job in the auto show, but that isn't the point, is it?

Today's quote:

A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects. - Robert A. Heinlein (my personal hero, and author of my favorite book "Stranger in a Strange Land".)

Mentatt

More Unintended Consequences

North Korea has Nuclear Weapons, and is threatening to use them.

When GWB was in office, North Korea's Chia-pet leader was a bit more circumspect, and rightly so, in dealing with the West.  Now that Obama is in office, Max Leader Chia-pet appears to have taken the measure of the man and the rest of administration - and is back to serious saber rattling.  Obama just doesn't strike fear into the heart's of nuclear armed psychopaths the way GWB did and McCain likely would have.

Wouldn't it be ironic if the election of Obama, the "great healer", led another nation to use nuclear weapons?  When it comes to dealing with international maniacs inclined to mass murder, McCain was the better choice.  Oh well, at least we have a pro-abortion (a real issue, though I am staunchly anti-abortion ), pro gay marriage (a non-issue, they have no idea how lucky they are.  Marriage primarily benefits the marriage/divorce industrial complex, i.e. lawyers and "family court" judges) president.

Yes, I know, (spare me the emails, I am 500 behind), if North Korea used a nuclear weapon it would not be Obama's fault.  It WOULD be the fault of the Media, the Left, and the economic collapse, without whom he would not have been elected.

Too often I hear elitists say that there should be some intelligence or educational minimum in order to be able to vote.  I got a better one:  If you do not have children you are not mature enough to vote.

What's that have to do with anything?

Let me use an example from a contentious issue that has NOTHING to do with economics or energy - but describes perfectly how people's sense of politics, ethics, and values shift as they get older and have children.  (And this is sure to piss people off - because of its accuracy.  Soft headed and inaccurate claims - "Martians are the best dog trainers" - do not piss people off.  "Black men can jump higher than white men" really pisses people off.  I mean come on, Hollywood made a movie about the issue, remember?  "White Men Can't Jump".  We all used our inductive reasoning to come to this conclusion, but we are not allowed to say it out loud.)

The VAST MAJORITY of high school and college students (while they were students, that is) over the past 30 years were pro-choice.  Yet 51% of Americans in a recent Gallop poll were Pro-Life.  As people get older, AND HAVE CHILDREN, their views and outlooks change.  Having a front row seat to the responsibilities of being a parent and contributing citizen changes folks. 

Obama won 52% to 48%, or by 4%.  Of voters with more than 1 child, it is my bet he lost by at least 10%, and perhaps as much as 20% by voters with 2 or more children (that they actually care for and provided for.  Absentee fathers and welfare mothers are another story).

I am only pointing out my sense of American Demographics (as a former politco, this is the kind of thing we used to do).  Obama won Manhattan in New York City by over 70%.  Manhattan has the LARGEST CONCENTRATION OF PEOPLE LIVING ALONE in the U.S. (ergo, childless).  Obama lost Utah HUGE, Utah has the largest concentration of large families in the country, and Obama lost big in the South, the region with the greatest number of larger families.

In other words, being Left or Right in your middle age has much to do with your reproductive habits.  Some would argue the opposite, that your reproductive habits were shaped by being Right or Left.  Of course that argument is more than specious - it is outright silly.  If that were true, then College students of yesteryear would have the same percentage make up of Right and Left as the middle aged folks of today - and that just ain't so.

I bring all of this up to show how political operatives "work" their candidate to win elections.  And sometimes the operatives win - and America loses.

There won't be an energy crisis if Kim Jong-Il uses a nuclear weapon.  There won't be an abortion issue, or a gay marriage issue, or flag burning issue, or a freedom fries issue.  There won't be an economic crisis.

There WILL BE the greatest humanitarian crisis since the advent of the Third Reich.

But at least Obama is young, handsome, and half black... so we got that going for us.

Mentatt (at) yahoo (d0t) com

Mentatt (at) yahoo (d0t) com

G.E. Canary in a Coal Mine

I love the smell of Corporate confessions in the morning.  It smells like victory.

Readers of the AEC know that I have repeatedly pointed out G.E., which is (was?) literally 1% of the U.S. GDP, as the canary in the coal mine.  It was my view that G.E. simply will never grow in real terms, EVER AGAIN.  It then follows that there will be NO GROWTH in U.S. GDP, or world economic production.

In a no growth environment (steady state) assets that provide steady cash flow, and actually pay it to their bond and share holders instead of having an over priced dick-with-ears (but no brains... actually no, they were smart enough to rip us off) CEO, are the only game in town.  Better yet, own your own business or farm.

Why on earth would anybody pay 20 X earnings for no growth?  They won't.  Stocks are not cheap in real terms.  It is all about the US$ - deflation or inflation.

But here is the rub.

There is not enough Gold or Silver above ground for every American to "own a little Gold". There are 300 Million + Americans, and only 55 Million head of cattle, so we can't all own some cattle, and there are only 4 million or so sheep and a similar number of goats (yet there are over 100 million cats and dogs) so we can't all own some small livestock, either.  But we have Trillions of US$ in the system.

See a problem here?

Mentatt (at) yahoo (dot) com

The Word is Out

Here comes the public relations pitch to soften the blow, but in the end the greatest transfer of wealth in the history of mankind already happened - the swindle by which "The Greatest Generation" enslave and defrauded the "Baby Boomers" into paying for the the retirement comforts and healthcare of that elder generation.

I am nearly 50 years old, and I have paid in HUNDREDS OF THOUSANDS of dollars into this boondoggle.  When I began paying into the program, the age for benefits was 65, and now for people born in my year it is 67 - the government already stole 2 years of benefits from me.  Had I been born 380 or so days earlier, I would reach the attained the age for benefits 2 years earlier.  This is one of the reasons I am losing interest in being as productive as I can be - no one likes being ripped off and lied to.

If you have enough money to worry about, it is my opinion you would be better served trying to find a way to preserve what you have, invest in things that will yield you self sufficiency, and stop trying to pay more in taxes.  The system is unraveling with or without you - best for you if it does it without you.

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"Liberals frustrated on Gun, Guantanamo issues"

What are you guys, 15 years old?  Do you believe in the fu&%!ing tooth fairy?  YOUR candidates had no intention of losing power if elected by actually following your wishes - whether silly or sane.

"Close Gunatanamo"?  Man, I must have written in my posts a THOUSAND times during the election that I had a better shot of looking good in dance tights than Obama does of closing Gunatanamo in his first term.  The LAST thing the Obama Administration wants is to release a Guantanamo inmate who then goes on to blow up a New York City subway station, American Airlines Jet, or execute a high profile assassination (now wouldn't that be ironic).  Obama would go down in history as not only the first black president but also the first to be run out of D.C. on a rail.  That vote in Congress was just to give him cover.

Guns?  Not even worth discussing.  If the Left is intent on having the South and the West secede from the U.S. this is as good a place to start as any - and I am only half kidding.

There really is not much difference between Democrats and Republicans in the final analysis.  That's why these guys need to manufacture issues to blow some smoke and piss and vinegar up your skirt - gay marriage, flag burning, freedom fries, equal pay - these are the NON issues that carry elections along with Abortion (a real issue) for American politicians.  The real issues?  The pragmatists usually carry the day.

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"The Global Food Crisis:  The End of Plenty"

This piece from the august National Geographic neatly sums up why FOOD will be an even bigger issue than energy.  We don't have to drive to survive, but we do have to eat.

Americans are whistling past the graveyard on this issue.  After all, "for amber waves of grain" is in one of our national tunes, isn't it?  Yes, we do grow a great deal of corn and wheat - American's probably won't starve (unless a 1930's style drought and 1936 Heat Wave hit), but people in many other countries will and starving people will be somewhat unforgiving of "American Interests" in their countries.  Americans might not starve, but Argentine Beef, New Zealand Lamb, and Honduran Mangos might be off the menu, along with a great many other "staples".

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Gold is clearly at an inflection point - again.

If we see a break up to the $1200 range the market would be telling you, in my opinion, of an impending currency crisis.  Maybe the Fed can stave it off for a while longer, maybe it can't.  But keep your eye on this market for clues, as well as the yield on the 10, 20 and 30 year Treasury Bond.

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I have been posting to this blog for over 4 years now.  During that time the American Housing and banking system crashed, the Auto manufacturers were brought to their knees, Gold broke $1,000 and Oil broke $100.  The stock market crashed and unemployment soared.  Social Security  and Medicare wobbled.  California quaked, Florida sank, and New York went broke.  

If you think this is just a "turn in the cycle" you will deserve whatever comes your way.  There is no "cycle" anymore, or if there is it is a "new, new cycle".  The system had its "reset" button pressed, and we are in the process of "booting up" (or down).  For those of you with a pre-disposition to "stick it out" and "keep your nose to the grindstone", all you are likely to end up with is one seriously ugly nose.

Peak Oil/Peak Imports will happen sooner or later - and long before the Western financial/political system fully rights its ship.  How well you interpret the effects of this on your interests will be as plane as the nose on your face over the next decade - the last 4 years were only the warm up band.

Mentatt (at) yahoo (dot) com

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U.K. Debt Downgraded

The U.K.'s debt outlook was downgraded by S & P to "Negative" because... Get this... Wait for it...

Their nation's debt is approaching 100% of GDP!!!

Sound familiar?

The absolute numbers don't mean a good fart.  What matters for any nation (but more so for the world's reserve currency) is the percentage that the debt represents of GDP.  S & P is not going to be accused of fudging on government debt like it did on mortgage debt, but it wants to give the U.S. a heads up.

You see, debt has an interest cost.  Once the cost of interest exceeds the growth of GDP, currency devaluation is assured.  How much?  That depends on how much the government involved is willing to cut, and how much of that government fat the private sector can absorb. From Marketwatch:

Standard & Poor's affirmed the U.K.'s credit rating at AAA but lowered its outlook to negative from stable, citing the potential that government debt may equal the country's output. The worse a country's credit rating, the more expensive it is to borrow.

It is a foregone conclusion that the U.S. debt is greater than 100%, and growing with no end in sight.

The Left is quick to blame this issue on the U.S.'s absurdly high military budget - and they are 25% or so correct.  75% of the problem is the U.S. overpriced and under-worthy social programs - all courtesy of the Left.  The Left prides itself on its better understanding and acceptance of Math and Science yet they suddenly go deaf, dumb, and blind when it comes to their ideological favorites.  They can see clearly that the U.S. is "addicted" to Oil, but not that we have addicted our populations to the very social programs that are going to bury the American people alive, AND addicted us to Oil in the FIRST PLACE!  They can see clearly that there is no free energy source, but there IS a free lunch in the form of free healthcare, free food, and free housing.  I could beat the snot out of the Right, too, but last time I check, they were not in power.

Instead of  addicting the poor to unsustainable social programs, the Left should have been teaching them how to garden, and fighting local zoning boards to allow small livestock and community garden space in their neighborhoods.  Instead of fighting to increase the budget's of these unsustainable social programs, honest and passionate Lefties should have been agitating for larger budgets for state Agricultural Extension Offices to provide, tools, seeds, canning jars, food preservation and know how - instead of food stamps.

There are some incredibly admirable people on the Left doing these things RIGHT NOW.  Here is a link to Sharon Astyk's excellent blog on how and what to do to provide for oneself on a budget (you will find many worthwhile links on her blog).   Too often we toss around the word "brilliant" to describe some intellectually challenged Pop "Artist",  but here is a lady who clearly deserves the title and is willing to share it with you for free (and I will bet Ms. Astyk and I have never voted for the same presidential candidate - but does that mean that I cannot recognize her obvious and copious talents?).

Hypocrisy knows no political boundaries.  The Left lambasted GWB, Ronald Reagan , etc...  OK.  Now the Left has the keys to the Train Set.  Show us how its done.

But we already know the answer to that, don't we?  Every administration's excuse is that they inherited this, that, and the other "Problem".  All of those promises were BS promises just to get elected.  I used to work on campaigns when I was young - even held elective office once.  Both sides are as guilty as sin and too busy spending other people's money to pay off their supporters to do the Right Thing.  But we have reached a Cusp, if you Grok (if you are a Lefty that doesn't Grok Grok... hell, I am a Righty that Grok's Grok).  The social programs ARE going to fail. Maybe not tomorrow, but not that far off in the future either.  The time in between is what we have to help the folks that we addicted to these unsustainable social programs to get off that drug and get accustomed to a new way of life.  If we fail, there won't be enough prison space or bullets - though the Right will be only too happy to try to provide them.

Mentatt (at) yahoo 

Got Pension?

Tweel sent this excellent image...

The Federal Government's Pension Benefit Guarantee Corp. is going to need a bailout.  That is not news to readers of the AEC.

At some point all of the folks that don't have a pension of any sort (taxpayers) are going to get pissed at the idea that the have not's are going to get soaked to pay for the have's (government employees, union members).  It is one thing to save the entire financial system by giving the banks a bailout - it quite another to bailout one group of citizens at the expense of the others.

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I keep getting email and comments from folks who have mistakenly concluded that because I advocate farmland investment and some level of self sufficiency that I am a "Die Off Doomer".  

Not the case at all.  With each person that comes into the self sufficiency life style the threat of the "Die Off" scenario declines.   I have seen reports that 20% of single family homes in America have a kitchen garden.  Well, increase the size and number of these gardens (and ad some small livestock), and voila!  No problem.

This is not to say that the fertilizer industry's warnings should be disregarded - you would be a fool to do so.  It merely means that I am hopeful that people will do the right thing for themselves and their families.  Here in rural Tennessee I see more and more people interested in home food production and preserving and it is my sincere hope that this will continue.

I can tell you from personal experience that it is very rewarding on many levels, enjoyable, soulful, a family effort far better than board games, and will keep you fit.  Most of us live our lives in a frantic state.  Chilling out in your garden, digging in the dirt, watching your stuff mature and ripen, beats the snot out of waiting at a red light on your way to the grocery store.  

You don't need "doomer" drama to motivate and start a garden.

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Libertarianism is spreading, thankfully we haven't seen its nemesis, the Fascists rear their ugly skin head.

Here are some common sense policy ideas for cash strapped states from Mike Shedlock's excellent blog:

M1 - Cut legislative pay by 20%
M2 - Legalize Marijuana
M3 - Free all the prisoners on minor drug offenses
M4 - Privatize services starting with the prison system
M5 - Eliminate defined benefit pension plans for all new state employees

I could add a bunch of stuff to that list, but that would be a hell of a start.

Mentatt (at) yahoo (dot) com

The Collapse Cometh

I want to pound home the “Oil export market” issue.  The importing OECD nations - the U.S., Japan, Germany, and France, along with China – may only import Oil which exporting nations have exported in the first place.  I know this sounds elementary, but this is a critical item that the markets are failing to reflect.  The exporting nations are increasing their domestic consumption of Oil because their populations are increasing rapidly and those populations wish to live at the same standard of living that they see on American Television Programming – Air conditioning, appliances, cars, etc… If these exporting nations cannot increase total production of Oil more than the amount of the increase in domestic consumption it follows then that their exports decline.  It is important to mention that the price of petroleum products to the citizens of the major exporters – Saudi Arabia, Iran, Abu Dhabi, and Venezuela – is a fraction of the world market price, leaving them little incentive to curtail consumption. 

Now, superimpose this on a background of asset price and monetary deflation (CPI deflation has not appeared as yet.  Our own Dr. Saif Lalani believes that if CPI deflation does not appear at the end of Q2 2009 it will never appear – as in, “if not now, when?”), economic contraction, and in the case of the U.S., the world’s largest Oil importer, increasing Oil inventories at the same time that imports have plummeted, and the illusion of a “Stress Test” by government officials that, in my opinion, used wildly overly optimistic assumptions, and a budget deficit that we feel will absolutely lead to a funding crisis for U.S. Treasuries, requiring debt monetization by the Federal Reserve, with, in our opinion, the result a currency crisis of biblical proportion.

The U.S. National Debt was $11.2 TRILLION (80% of GDP, the number that really matters) as of last week (and that number does not include the $5 Trillion of Fannie Mae and Freddie Mac debt that the U.S. is on the hook for nor the Social Security “Trust Fund”) with interest on the debt in 2008 totaling $412 Billion.  The U.S. is increasing its debt by $1.84 Trillion in 2009 and the U.S. projects that the national debt will increase to 100% of GDP - $20 Trillion by 2015 (we wouldn’t be surprised by $24 - $28 Trillion, as we view the Obama administration’s assumptions as more “wishcasting” than forecasting), with INTEREST on the debt topping $1 Trillion.

Please consider this:  Economic growth has averaged just under 3% for the past century.  Once the National Debt reaches 100% (and we are well past 100% if you add it all up), the interest alone will compound at better (perhaps FAR better) than 5% per year.  It follows then that it is impossible to grow our way out this, and if we increase taxes to pay the debt off, we will bring GDP to a negative - thereby only increasing the debt.  It appears to us that there is only one way out.  (I have searched and researched to see if anybody else has pointed this metric out - and have found none.  Could it be that I am missing something?  Miscalculating?  Feel free to comment.)

Since there is simply not enough money in the world, at the moment, for this to occur it is our opinion that a massive devaluation of the U.S. $ is in the offing through the creation of money “out of thin air” by the Federal Reserve in order to pay for the debt.

That said, in the short term deflation could fool one into thinking that this is just hysteria and histrionics on the part of some.  We think that the turn of events, when they come, will be so swift that no words here would be able to capture the “shock and awe” we feel we are in for.

The question of exactly "WHEN" this will happen is beyond my abilities, yet "when" is very important.  If the funding crisis happens before the oil import crisis then certain outcomes in the commodity market will be different than if the funding crisis happens post oil import crisis.

To my mind, ONE THING IS  A NEAR CERTAINTY - one day in the next 1,500 days your life savings is going to (mostly) evaporate.  

Mentatt (at) yahoo (d0t) com

All Work and No Blogging

All work and no Blogging make Greg a dull boy...

The rate of change has slowed considerably, leading many to conclude that the economy is "bottoming out".

It all depends on what your definition of what "bottoming out" is.

In the 2000 - 2008 U.S. "recovery" period, the only hiring was done by Governments at every level.  This means several things:  

There are not that many private sector folks left to fire.  The 600,000 jobs lost each month is going to have to come to a halt - and soon - or we would be without basic services.

Nonfarm payroll employment continued to decline in April (-539,000), and
the unemployment rate rose from 8.5 to 8.9 percent, the Bureau of Labor Sta-
tistics of the U.S. Department of Labor reported today. Since the recession
began in December 2007, 5.7 million jobs have been lost. In April, job los-
ses were large and widespread across nearly all major private-sector indus-
tries. Overall, private-sector employment fell by 611,000.

Unemployment (Household Survey Data)

The number of unemployed persons increased by 563,000 to 13.7 million in
April, and the unemployment rate rose to 8.9 percent. Over the past 12 months,
the number of unemployed persons has risen by 6.0 million, and the unemployment
rate has grown by 3.9 percentage points. (See table A-1.)

Unemployment rates rose in April for adult men (9.4 percent) and blacks
(15.0 percent). The jobless rates for adult women (7.1 percent), teenagers
(21.5 percent), whites (8.0 percent), and Hispanics (11.3 percent) were little
changed over the month. The unemployment rate for Asians was 6.6 percent in
April, not seasonally adjusted, up from 3.2 percent a year earlier. (See
tables A-1, A-2, and A-3.)

Among the unemployed, the number of job losers and persons who completed
temporary jobs rose by 571,000 in April to 8.8 million. This group has more
than doubled in size over the past 12 months. (See table A-8.)

The number of long-term unemployed (those jobless for 27 weeks or more)
increased by 498,000 to 3.7 million over the month and has risen by 2.4 mil-
lion since the start of the recession in December 2007. (See table A-9.)

Total Employment and the Labor Force (Household Survey Data)

The civilian labor force participation rate rose in April to 65.8 percent,
and the employment-population ratio was unchanged at 59.9 percent. The employ-
ment-population ratios for adult men and women showed little or no change over
the month. However, since December 2007, the men's ratio was down by 4.4 per-
centage points, while the women's ratio was down by 1.3 percentage points.
(See table A-1.)

In April, the number of persons working part time for economic reasons
(sometimes referred to as involuntary part-time workers) was essentially un-
changed at 8.9 million; however, the number of such workers has risen by 3.7
million over the past 12 months. (See table A-5.)

There is a big difference between having the rate of decline in employment slow, and a "recovery".  There is no "buy and hold" anything in this world.  Not even "cash".  There will likely be upside "surprises" in the employment numbers in the next 2 quarters.  I look forward to seeing how the U.S. equity market reacts to this with great anticipation.

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So.  Here we are.  Halfway through 2009.  This is "sh*t or get off the pot" time for "peak oil" and "peak imports" for the U.S.  The contango in Oil prices has come crashing in, via the increase in front month futures prices.  My bet is the curve comes in from here, perhaps brutally, and that this event, should it come to pass, might give one the opportunity of a life time.

Why now?  Peak crude Oil discovery was in 1964.  It is industry experience that fields production peaks approximately 40 years after discovery... the earth can be seen as a single "Oil field"... and we are now 45 years after the peak discovery year...

In the short term, "inventories" have been building, and that is likely to create price swings, but that has nothing to do with real, long term production capacity.  Productive capacity is an equation consisting of investment AND recoverable reserves, and the complex's budget for productive capacity has been slashed to the bone.

I have come to the opinion (and I reserve the right to change my mind on a dime) that Oil prices will not be able to supportable above, say, $120 per barrel until U.S. imports fall below 10 million barrels per day (or the US$ gets crushed).  At the moment imports are just over 12 million per day.

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Gold continues to be on of my biggest holdings, but I am going to get serious about acquiring more productive farm land and grass fed live stock in regions where it RAINS.  These investments take years to mature and come to fruition, and considering the very plain warnings we have been getting from the fertilizer industry, my bet is that this is going to be a VERY comfortable place to be in the future.  If you have cash, this might be the best long term investment you could possibly make.  Farm land is very rentable, and there are no calls from the tenant in the middle of the night over a leaky toilet.  

Gold might be more convenient, but farm land pays current income while it holds its intrinsic value.  Commercial real estate only holds value if, and it is a big IF, the property has rent paying tenants.  

The vacancy rate on productive farm land in the U.S. is essentially ZERO.  There is a good reason for this.

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Watching the Democrats in Washington is making me ill.  Am I the only guy that sees that the ONLY thing that matters to these guys is the next election?  That they would be willing to pander ANYTHING to get those votes - payoff the unions at the expense of contract law and property rights, expand the deficit with silly assumptions, etc...

This was CHANGE?

Mentatt (at) yahoo (D0t) com

Nothing but the Numbers

I got a call tonight from the Mad Scientist.  I wished he would have called somebody else.

You see, we have both been watching the debacle in the U.S. Treasury market and the Obama Budget and thinking the same thing:

"There is not enough money in the world to fund the deficit".

Only, the Mad Scientist ("MS") had to go and quantify the issue.  My word, but I will bet he is a hell of a fun first date.  I keep meaning to ask his wife.

Anyway, as MS wanted to ruin my night - which I was doing quite well on my own - I made the mistake of answering the phone:

"Hello?"

"Do you know how much the interest on the U.S. Debt was in 2008?"

"Oh, hey dude.  Wassup?"

"$412 Billion".

"How's the weather up in Calgary?  Been raining like a bitch here."

"The OMB just upped the 2009 budget deficit to $1.84 TRILLION this morning."

"Hold on man, the baby just puked on me..."

"If the 10 year + rates should hit 6%, and that would only be a first stop, you are talking about coming up on $1 TRILLION just for interest, and that is before we take into consideration declining revenues and the bailouts of California, New York, Florida, Mass., etc..."

"Oh, sh*t, these diapers don't fit... Honey?!"

"Are you listening to me?"

"I am trying to ignore you."

"Alright, smart ass, if the market freaks out about a $14 Billion funding, what is going to happen next September when the U.S. is going to need $31 Billion each and every DAY?"

"Is that a rhetorical question?"

"There isn't enough money in the freaking world to fund the U.S. Treasury market.  Do you know what that means?!"

Yes, MS, I do know what it means.

Stay tuned.  This might be slower than last year's credit crisis, but it will be a whole lot bigger.

Mentatt (at) yahoo (d0t) com

The U.S. $

The U.S.$ has been in a stealth decline, though there has been nothing stealthy about the Bond market smash up.

A decline in the value of the US$ (Inflation) would explain part of the equity rally, as well as the bond market's debacle.

Tough stuff to put your mind around.

Crystal Ball in the Shop

Before I get into my rant, here is a link to the Spring 2009 Farm update.

OK.  I am ready to kvetch...

Keep your eye on the inventory data (if you aren't sure why it is so important just google it and start reading...), because we are certainly getting some conflicting information.  

As the Mad Scientist likes to remind me:  Are retailers inventories EVER going to be built back up?  NAFC.

Now a steepening of the yield curve should be very good for banks... unless higher long rates hurt housing further.

The stock market is a "Leading Economic Indicator", and right now it is indicating an immanent recovery.  Should said recovery not be in the offing, a correction could be pretty brutal.  Still, everything, EVERYTHING is priced in NOMINAL dollars (or currency).  Are the central banks already successful in re-inflating?  Because that is what the equity market seems to believe.  Though I disagree, that does not mean I guarantee that I am correct.

The equity rally was fueled by "shorts" that bet big and had to cover.  When these guys are done getting their heads squeezed off the truth of it will out.  I lacked conviction, so I did not bet either way very big.  My funds are up on the year, though not by much, and I intend to keep it that way.  Thankfully, I was not so sure of myself, or I would have been one of those "shorts" who now appear as pimple puss all over the proverbial mirror.

There is a time and a price element at work.  That there was going to be a rally off of the bottom was a "when" not an "if", but CALLING the "when" took  courage, and there where a few head fakes along the way.  Could this be a "V" recovery? Anything is possible, but I would bet big against it.

No matter what, nothing is a "long term" hold.  If you are wrong, be gone.

Mentatt (at) yahoo (d0t) com

The Bigger Market

The Bond market dwarf's the stock market, and in the last 2 weeks the long bond has declined in price, oh, about 3 year's worth of interest.

In 2009, the 20 to 30 year T-bond values have dropped over 25% - a loss of "wealth" at least 10X the increase in wealth from the last 6 week stock rally. 

Did I mention that when bond prices fall yields move higher?

This is no picnic for the mortgage and housing market.  Mortgages are priced off of the 10 year T-Bond.  A 100 basis point rise in yield (1%) would be disastrous for housing.

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"Consumer Credit drops by Record."

Hmmm....

Why would any business build up inventories again at this time?  Why ever?

And isn't that the reasoning behind most economist's view that we are nearing the end of the contraction?  Because folks will need to replace "stuff" that they have worn out?  Isn't that the way it has always worked?

A funny thing about cycles is that they don't go on forever.

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Over the past 5 American Administrations, "Yes!" men have been telling our presidents that we (the U.S.) could "grow our way out of our deficit problem".  

Yea?  And how's that been working out for you guys?  Yet, we are hearing the exact same bulls**t from this Administration.  Look, I expect nothing less.  But you, YOU, gotta be taking your own steps to protect your own ass.  

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"The Rate of Change".  Remember that one?

The rate of change in the economy over the past year has been breathtaking.  Of course that rate of change is going to slow - if it did not we would be living in f**king caves before the end 2010.  

No, we have a problem.  Our current system is currently very terribly flawed - politically, socially, economically, and financially - but it is not going to unravel anytime soon. 

Over the next 10 to 15 years?  I give that a "definite maybe".  And I think that if I were wrong on that, it would be sooner - not later.

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My late father used to say:  "Believe nothing of what you hear, and only half of what you see for yourself, and you will be alright".

Excellent advice for the times...

mentatt (at) yahoo (d0t) com

I'm Back

Posting has been a bit light, what with the spring planting season on the farm, and nasty cold that my toddler brought home...

But I just can't take it anymore!  I am mad as hell and I am not going to take it anymore... The "Stress Test" of the banks was and is a sham.  In order to do said "Stress Test", much like projecting the Federal Budget Deficit, one needs to make "assumptions".  The assumptions used for the "Stress Test" where laughable and indefensible.

The U.S. and much of the world is still in the grips of economic contraction, and at the moment it is difficult to tell what the near term risk is: Continued deflation, or a turn toward no-messing-around inflation.  When the turn comes, and I won't be able to see it any better than you, said inflation will need some new adjectives that I am not poetic enough to name here.

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Insiders are selling their stock, hand over fist.

China has "cancelled America's Credit Card.

American banks are finding it more attractive to demolish finished homes than try to sell them.

Foreclosures are going to get MUCH worse before they get better.

And now the Boyz tell us that the "Stress Test" results showed that 10 of the 19 banks will need to raise capital.  

They are going to raise capital alright - from their bond holders.  The U.S. Taxpayer simply can't take it anymore.  

So what is it that the stock market is seeing that I am missing?  I know, the market is ALWAYS right, right?

That is, until it isn't.

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You, and I, are being bombarded with a public relations neutron bomb that will destroy your money and leave you alive to regret it.  "Green shoots" - Mainstream Media.  "Mustard Seeds"- CNBC's Larry Kudlow.

My response to these dirt bags?

"Drop Dead" - Mentatt (at) yahoo (d0t) com

"Life on the Farm is Kind of Laid Back..."

On April 29, we had 2 goats, 4 kittens, and dozens of chicks birthed on the farm.
Our fencing crew, with the forman in the foreground...

Peaches are setting

The Jeffers Farm
Mom and the terrors.
with the ever present T-Bone