Life After Madoff

If you are an investor, odds are that you will be using a hedge fund or Registered Investment Advisor to help manage your money. The Broker/Dealer model as it existed at Smith Barney (history) or Merrill Lynch (history) has gone the way of the dinosaurs.

Investors are understandably concerned about the security of their assets, but if you follow a few simple rules odds are you will be OK - after all there are 8000 hedge funds and only a couple of Ponzi schemes.

1: A fund that uses an outside custodian will have great difficulty in pulling off a multi year scam. That's because the custodian sends a 1099r report to the IRS. When your fund files its tax return those trades have to match up, or every investor in the fund is going to get audited by the IRS. Of course, an intra year rip off is still entirely possible.

2: Get to know the fund's CPA. Call him up, make nice. Ask questions.

3: Get to know the fund's custodian. Some are well known, brand name shops like Fidelity or Goldman Sachs. Those names always give me that warm and fuzzy feeling I need to have about my money, but there are many smaller shops that are equally as secure. KNOW WHERE YOUR MONEY IS BEING HELD!

4: I don't let my investors send me all of their money. I tell them they need to have at least 1 other manager, and if they are really rich, as many as are necessary. If your fund wants every last dime you have... well, they are not considering your best interests (IMHO).

5: Desperate people do desperate things, so its best not to tempt desperate people. I can't emphasize this one enough. Is your manager a high flier? Fancy Schmancy? Have a history of litigation or unpaid bills? Signs of drug or alcohol abuse (we all know what they are)? Weekends in Vegas, showgirls, private jets, and Bentley cars? These are BAD signs. Used to be folks knew their banker and his family. Get to know yours. I am not saying the guy has to be Jimmy Stewart, but grounded, family-type-guys, living modestly are usually rational enough to understand the consequences of violating their fiduciary responsibilities (going to prison).

Just thinking out loud...

Today's Data

This is the 3rd week in a row with the U.S. experiencing BIG draw downs in Oil inventory.

In 2005 I said there was NO WAY that the U.S. would produce 1mm bpd of ethanol before a decade.... famous last words. The last 4 weeks' ethanol production in the U.S. was 787k bpd... I am willing to concede that ethanol production will crack 1mm before 2014. The significance of this cannot be understated.

The increase in domestic production in 2009, to which I earlier credited "drill, baby, drill", came ALMOST ENTIRELY from the Thunderhorse field in the U.S. Gulf of Mexico (about 300k of the 350k bpd increase in 2009). So much for "drill, baby, drill". Still, the point is that there is not another Thunderhorse out there, nor another million bpd of ethanol. These were "one offs". In 3 years, net Oil imports into the U.S. have fallen from 12.5 million bpd to 9.8 million bpd - and the decline accelerated this year, down 1.3 million bpd in 2009 alone.

Said another way, the market required nearly $73 per barrel on average to clear and balance the market - that does not argue for a declining demand issue as much as a supply constraint issue... but I am a glass half full kind of guy.

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It should be readily apparent to ANY Obama-phile of last year that our issues are systemic - no presidential personality can effect the kind of change as promised in any campaign or hoped for in the most fervent camps of believers. I do NOT believe all politicians are crooks, or all government employees evil... I believe the system takes good folks with better intentions... and then the system fails them - an it fails us, The People.

The system I am talking about is the "something for nothing" social programs that cannot now be stopped and that will absolutely cause our system to hit the "reset" button. Wasting breath on how to "fix" them is an exercise in futility - and such exercises are a bore.

Not to worry though... REAL change you can believe in is coming.

A New King!

The Chess World has a New King! Congrats to 19 year old Norwegian Magnus Carlson.

I am a recovering Chess fanatic. I know Chess lacks the popularity of Golf, Tennis, or Football (American and International)... but I can't help but wonder how much different/better our political policies would be if political leaders were trained in chess.

Chess is the ultimate meritocracy - which is probably why American presidential candidates avoid it like the plague. Every time I hear how "Brilliant" Barak Obama or Bill Clinton is, or how "brainy" Bill Bradley was (I know I am dating myself here), I want to sit them down at a chess tournament. Ah, but lawyers are the only folks bright enough to do in the American political and economic system...

Year End EIA Data

U.S. Oil Imports for 2009 are going to come in down 11.5% or so from 2008.

Total products supplied is going to come in down 4.5% or so.

You can thank Corn Ethanol and "Drill, Baby, Drill". Domestic Oil production is up 350k bpd, and ethanol is absolutely ROCKING, coming in for the past 4 weeks at 731k bpd (649k bpd for all of 2009)! With an average production increase of 150k bpd for the year.

This is a do or die year for Peak Oil, Peak Imports, and Deflation - and I am betting on all 3 for 2010. While Oil imports have peaked, I am not sure that that means Oil won't be heading down in US$ terms.

All eyes on the bond market.

Treasuries are getting their a$$ handed to them, and that has brought 30 year mortgages back over 5% (if you can actually GET a mortgage) and over 7.5% for jumbos (but no one can get a jumbo mortgage so I guess it does not matter). At these levels, housing is being seriously challenged again, and if rates were to head 50 basis points (.5%) higher - stand back! Timber!!!

I have changed my ultimate outcome from: 55% hyper-inflation, 35% deflation, 10% don't worry/be happy, to: 60% deflation, 30% hyper inflation, 10% don't worry be happy.

I won't bore you with predictions for 2010 other than to say "the truth will out".

My sincere wish for a happy, healthy, and prosperous New Year to all!

Nothing Special

My favorite curmudgeon, James H. Kuntsler, was at it again:

The other current embodiment of national character failure, Tiger Woods, golfer, has also dazzled the American public. Personally I find it much more interesting to learn that he was a really lousy tipper than that he got a lot of action on the side with opportunistic bar girls, porn stars, and other denizens of the sports-entertainment netherworld. Is it not also amusing that golf is even taken seriously as an athletic pursuit? I mean, why not pancake-flipping? Or dice? Or shooting rats at the landfill? This is the kind of knucklehead culture we have become after six decades of the softest life imaginable. Anyway, I'm not shedding any tears for Tiger. Even if all his endorsements dry up and his ex-wife takes him to the cleaners for a hundred million or so, he'll still be left with enough cash to pay for porn stars and lobster tails until the end of time, especially if he keeps his tipping policy at its current level. - James Kuntsler

I have been wanting to comment on the Tiger Woods thing, silly as it is, but I just LOVE the way Kuntsler writes...

Earth to the world's most disgusting individual - Nancy Grace:

"Men are as faithful as their options." - Chris Rock

"Women are as loyal as their options" - yours truly

Give a young man testosterone, wealth, fame, and thousands of young beautiful women willing to destroy a family for a couple of bucks.... mix thoroughly... and... Viola! Double digit mistresses (small change compared to Wilt Chamberlain) . Give a young woman a husband that fails to deliver to expectations, or delivers too much (with no pre-nup)... and Viola! A divorce attorney will magically appear and a family down the tubes.

Welcome to America.

Like it, don't like it, approve, disapprove, understand, disbelieve... the world does not give a good fart WHAT you think. The rules are the rules. The fact that Tiger has pissed so many people (women that is, come on... do you really think MEN watch Nancy Grace and Oprah?) off is just another example of misdirected energies...

1 in 8 Americans are receiving FOOD ASSISTANCE FROM THE GOVERNMENT! And a young man's inability to say "No" to temptation is the biggest story in our primary Media?

The cost of the Food Stamps Program will reach $65 Billion in 2010... Wanna bet we see $100 Billion in a couple years? We can't afford Medicare and Social Security, and here comes the third leg to complete the stool.

The crazy thing is this: Women and children make up the vast majority of those receiving food assistance. Maybe these single mothers would be better served working a garden patch with the baby in a papoose and having their cable disconnected so that they can't watch Nancy Grace and Oprah Winfrey. OMG! Did I JUST SAY THAT??!!

You bet.

Our society is coming apart, and not because hard working folks get rich as a result of their efforts or because of the Oil crisis (it ain't even happened yet). We are breaking down because 70% of Americans think it is acceptable to be &*^&%!! OBESE (hey, why not? Health care is a "right"). What does that say about personal responsibility? We are breaking down because 90% of black kids will need food stamps - what does that say about black fathers? We are breaking down because women have a "right" to divorce their husband without cause, holding him in a life of involuntary servitude (and now no one wants to get married), and to terminate the life of an unborn child - what ever happened to the fairer sex? We are breaking down because our politicians are willing to look the other way as the survivors of Wall Street's cluster f*ck empty the tax payers pockets with bonuses that would have made Mike Milken blush. Everybody is a victim, and nobody is responsible - but we have 10X the number of lawyers per capita the next largest industrial economy has, all too willing to get these victims their day in court... so we got that going for us. I could go on and on. The American Left has taken a shovel full of dirt out from under the foundation of America for over 70 years - and now that we are about to tip over their cronies in the Media pander to them with their claim that they "inherited" this mess. Don't get me wrong. The "Right" were anything but once they got in office.

WTF???

"The first casualty of War is Truth."

It Is WHat It Is

It is what it is, and we are where we are.

If 3 or 4 years ago, you were a believer and made your moves... out of equities and into metals, Oil, farmland, and bonds... out of debt, and into a low over head lifestyle... learned some new skills, etc... good for you. 99% of the doomers reading my stuff (as well as Mish, Archdruid, LATOC, Sharon Astyk, Dmitri Orlov, Gene Logsdon, Jim Kuntsler, etc...) took ZERO action. ZERO. Why'd they bother to read? Cheap entertainment? I guess they call it "doomer porn" for good reason.

Anyway, where ever you are, that's where you are likely/going to be. So make your adjustments in place.

What little the governments could do, they have done. They put an airbag up in front of the crash, but the unwinding of debt worldwide will continue apace for the next several years, and Oil imports into the Western Industrial nations, particularly the U.S., will continue their decline. Whether the first REAL oil shock hits in 2012 or 2015 (it won't be any later) isn't really that important, is it? (Wanna know why almost ALL forecasts on Oil production and/or imports you find anywhere on the Web usually have a 3 year window as a margin of error? Because the distribution of production, and this is magnified for imports, is distributed on a bell graph, and 3 years worth of data is roughly 100 Billion barrels of Oil... if Hubbert's theory is even remotely correct, that 100 Billion barrels is all the margin of error any model needs.)

Not long ago I though the rate of change would be manageable - now I don't think so. I think my rate of change interpretation was far too anecdotal and too much of my personal experience - and I think ethanol's role, as well as increased domestic production of Crude and NG softened the blow in the U.S.. It follows then that since I think these were a "one off", a one time event, at the conclusion of the event the rate of change will once again take on its prior characteristics.

While inventories of Oil in the West might be very high at this moment... that does NOT change the export capacities of the exporting nations in the future. NOT ONE LITTLE BIT. Prices CAN go lower in the short term, and that event has nothing to do with future capacities.

Oil exports can either flat line, continue their rate of decline, or hit an air pocket over the next 18 months to 3 years. It won't matter, within 3 years I give it a 75% probability that the U.S. is rationing gasoline and heating oil, 90% within 5 years.

The next 5 to 10 years are going to be surreal for Americans, although for those that have already been broken in the first waves of this things likely appear surreal right now.

Unfortunately, you ain't seen nothing yet.

So far, the consequences have ONLY been economic. In the future there will be political consequences in the West, and especially in the U.S., that I cannot begin to fathom (actually I can, but I think Dmitri Orlov has covered this very nicely and I prefer to let the other guy sound shrill).

Here is a link to the Financial Sense News Hour for this week. Skip to the 3rd interview, about 29 minutes into the MP3 download, and listen to Larry Ortega from Logi Management, the hedge fund shop that Jeffrey Brown has associated himself with. He makes an EXCELLENT point that whet we are seeing in the markets and economy are business models that are breaking down as Oil constrains them. He then goes on to point out the likelihood of business models in the food distribution system breaking down. I used to poke fun at the doomers because I always felt there would be enough Oil to run tractors and NG for fertilizer (for several generations)... I HADN'T thought about the business model, capital requirements, energy distribution, etc... of the long range trucking of farm product. That is not a question of ALL or NONE, but a question of enough to support the model. After reflecting on this for the evening, I think he is very correct. I am getting warmer and fuzzier about farmland investment near metro centers east of the Mississippi the more I think about this...

If you have the means, there are opportunities in all of this. If you don't, the best thing you can do is adjust in place and try to enjoy your life. I think back to regular commenter "Kathy" and her take on life in or near the inner cities... very poignant...

More soon.

Securitization is Dead, or Why High End Housing and the Banks are Turds

The $1+ Million home. It used to be what Americans aspired to.

Now, those million $ homes are a noose around people's necks (the link is to an article about a professional, single mother from Westchester County, NY living in a former multi million dollar home and working in Manhattan, and just scraping by on $300,000 per year... I wish it were a cautionary tale... now it is merely standard circumstances). The banks, the homeowners, Wall Streets economists, the Fed, etc... are all in denial about this simple fact: The securitization market that funded these silly consumer items is down for the count, and will not be back in my life time (if ever).

(A brief explanation of the securitization market: The banks are nothing more than servicers of these mortgages - they accept payment and make sure that that payment is divided up amongst the suckers that bought bonds backed by trauches of these mortgages. These suckers WERE the securitization market - and they have been demolished financially. Once bitten, twice shy as it were.)

There is ZERO financing available for these properties - and we built gazillions of them - the supply/demand circumstances could not be worse. I listen patiently (and with no small amount of sadness) when I listen to folks speaking of the "equity" they believe they have left in these "White Elephants". The sad fact is that they are upside down - they owe more than the house is worth - and many of these homes actually have ZERO or negative value. Sound preposterous? 5 years from now, these properties will remain unsold, and many will be abandoned, if I am correct. I think that that is pretty much the definition of "ZERO or negative value". But the outrageous property taxes will continue to wipe out the inhabitants.

This is the tidal wave that is still to come, the tidal wave that will absolutely, positively wipe the floor with those holding the paper. As of yet, no one has marked these to market - because THERE IS NO MARKET. Measuring the number of HOUSES is silly... measuring the amount of aggregate mortgages defaulted is the issue. 25, $200,000 houses = 1, $5,000,000 house as far as the system is concerned. The number of Mansions and McMansions that are going into default is truly fantastic. Did I say "going to default"? Sorry, many have already defaulted, and the banks and mortgage holders are not foreclosing because they KNOW that there is no one out there to sell the property to.

Here in South Florida, home of the mortgaged mansion, we have thousands upon thousands of these properties that have not seen a mortgage payment in years - yet the mortgages are being carried on the books of the servicing companies at full value. This is also true in commercial mortgages.

The credit crisis is still very much with us. Just try and get a $1 Million+ mortgage. Fannie and Freddie won't do it. Bank of America, JP Morgan Chase, and Citi (HAHAHA!!) won't do it. GMAC won't do it. AIG (LOL!!) won't do it... I think you get the idea.

Mortgage rates might be cheap - if you could get a loan. But the only loans getting done are being backed by FHA, and they are not guaranteeing $1 Million+ mortgages (and they are the next bailout in any event).

The stimulus monies found their way easily into liquid markets like commodity and equities. Small business? Where 2/3's of America's new jobs come from? Not so much.