I have moved my blog to:

AmericanEnergyCrisis.blogspot.com


Greg T. Jeffers

The "safe" municipal bond market might not be so "safe".

I wrote this post 1 1/2 years ago.

Considering the melt down in the municipal auction markets last week, this might

be the beginning of something big.  Or maybe not.  There are 2 sides to every trade.  A Winner, and a Loser!

The debt auction market in the U.S. is the largest Ponzi scheme in the history of the art.  As long as new buyers come along to buy out the (previous suckers) maturing bonds, everything goes swimmingly. When those buyers don't show up... well, just check out what happened in the muni auction market last week.  Buyers were not willing to commit capital to bail out the previous dimwits.  

("Dimwit" is how I would define anybody willing to hold U.S. dollar denominated debt for the paltry interest now received for holding what is essentially toilet paper.  That's just me.)

This might not be a big blow up, but that remains to be seen.  In this environment, it pays to view all credit instruments as toxic waste until proven otherwise.  

Yours for better world,

Mentatt (at) yahoo (d0t) com

Corn

The following is a guest post from Dr. Saif K. Lalani

(Disclaimer:  I am precluded from making any specific recommendations in the securities markets.  Dr. Lalani is not, and I have left his commentary intact.  The following does not constitute investment advice in any manner, shape, or form. And yes, I own corn futures personally and in the fund.)

What can 5 "Bernanke Bucks" do for you?

Corn is the largest US crop in terms of dollar value. It is one of the things we can proudly say that we export. It also happens to be one of the 4 commodities that is set to go ballistic in 2008/2009.
Why? Read on.

Our policy makers have figured out that fighting the housing crisis and coming up with a productive energy policy was not a challenge worthy enough. How indeed could they make things worse? After all they are paid for a reason right? After months of contemplating they came up with the answer. If they could make food extremely expensive (along with everything else), then they would have a real challenge worthy of their mighty incompetence. And so they did.

The US energy bill has mandated huge amounts of bio-fuels to be part of our energy mix over the next 15 years. Ethanol distilleries are being set-up to absorb more than 40% of the US corn crop this year. If that does not scare you then perhaps this will. The US is by far the largest corn producer and exporter in the world. The US is often called the Saudi Arabia of coal. Well, in oil terms the US is the equivalent of - Saudi Arabia plus Russia plus Norway plus Iran and Iraq - for corn. The US single handedly exported 70% of the world's corn in 2006. My friends, that 70% is about to disappear. There is no nation on this planet who can compensate.

According to University of Iowa, the breakeven prices for Corn planted after Soybeans is about $4.00 a bushel. For Corn planted after Corn it is about $4.35. For Soybeans it is about $8.00 a bushel.

Considering the average yield of about 150 bushels an acre for corn and 50 bushels per acre for Soybeans you have earnings per acre of about:

$150 for Corn planted after Soybeans
$100 for Corn planted after Corn
$250 for Soybeans.
At current prices.

Now in 2007 farmers planted the largest corn crop ever. So most of the corn farmers are considering planting falls in the Corn after Corn category. Sure, you can switch acres around but there aren't enough acres around unless we develop three dimensional planting. Now if you were a farmer and had planted the largest corn crop ever and had to choose based on those margins what would you choose?
And remember there is also wheat, which is far more profitable than either of these choices competing for acreage. It is also highly likely that University of Iowa's calculations for breakeven costs may be on the conservative side. As Natural Gas prices break out to the upside we may see even higher prices for Fertilizer (required by corn, especially if it is following a previous corn crop).

So here you have a commodity where you can buy the long-dated futures for $5.00 a bushel where the downside seems to be extremely limited in the medium term. In addition you have demand in China growing at 15% plus a year. Sure demand growth may slow but 5% of a large number is still significant, especially as we have no capacity to increase supplies.

Corn is also an important commodity for other reasons. It is an easy way to hedge against a dollar collapse as well. Being an international commodity, corn prices will shoot up during a dollar crisis. Corn also enjoys strong political protection as U.S. Senators from the Midwest have a vested interest in keeping farmers happy. Finally, Corn has something that gold and silver do not. Unlike the latter, corn can actually be eaten. It is hence an excellent way of hedging your rising food costs for life. Do not be dettered by the fact thqt corn has risen over 100% since 2006. Corn at $5.00 is the equivalent of gold at $500 an ounce. Corn is still 70% below its inflation adjusted all time peak of $15 a bushel. And that is using the government inflation figures, which frankly are about as useful as Jim Crammer's rants. Using real inflation figures from Shawdowstats.com corn would have to climb over $40 to exceed its previous high. With every arable piece of land being used and India and China consuming increasing amount of poultry (which requires corn feed), a perfect storm is brewing for agricultural commodities in general and corn in particular." - Dr. Saif K. Lalani

North America Oil Import Crisis 101

As my regular readers know, I believe that a structural supply/demand imbalance will have a significant impact on the prices of crude oil, natural gas, agricultural commodities, precious metals, the U.S. Dollar, and other commodities linked to the energy sector over the next several years.

The U.S. imports nearly 60% of the oil and a significant portion of the natural gas it consumes, and imports 25% - 30% (Source U.S. Department of Energy) of the world’s exported oil with less than 4.6 % (Source U.S. CIA Factbook) of the world’s population. I firmly believe that the top oil exporting nations will have less oil available to export as a result of higher domestic consumption and flat or declining production. With less imported oil available to the U.S. the supply/demand balance will be brought into equilibrium by significantly higher prices for crude oil. In the case of North American Natural Gas, the future supply picture is quite bleak, and it appears that North American production of natural gas has peaked. There is little possibility that U.S. imports of liquefied natural gas (“LNG”) will be of sufficient volume during the next 10 years to overcome the deficit in North American production.

Herewith are the numbers to support my contention:

The top 10 oil importing nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of barrels per day ("bpd") imports:

Rank Country Net Imports

1. United States   12,220,000
2. Japan                5,097,000
3. China                3,438,000
4. Germany          2,483,000
5. South Korea     2,150,000
6. France              1,893,000
7. India                 1,687,000
8. Italy                  1,558,000
9. Spain                1,555,000
10. Taiwan           942,000

Demand from China, India, and the balance of Asia, as well as the oil rich Middle East will continue to draw imports from the industrialized nations, in the Investment Managers opinion.

The top 10 oil exporting nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of exports:

Rank Country Net Exports 2006 (Barrels of oil per day)

1. Saudi Arabia     8,651,000
2. Russia               6,565,000
3. Norway             2,542,000
4. Iran                    2,542,000
5. U.A.E                 2,515,000
6. Venezuela          2,203,000
7. Kuwait               2,150,000
8. Nigeria              2,146,000
9. Algeria               1,847,000
10. Mexico             1,676,000

(All data from the U.S. Department of Energy, Energy Information Administration (“EIA”)


The oil importing nations can only import oil that the oil exporting nations export, and the EIA’s export data appears to support my (and many other folks) contention that rising domestic consumption coupled with declining production in many of the exporting nations will lead to declining aggregate oil exports – and declining oil availability for the importing nations.

One Jeffrey Brown, an independent geologist and contributor to theoildrum.com, gave the issue a brand name - "The Export Land Model".

Domestic consumption in 4 of the 5 top exporters (the exception being low population Norway, where production of Crude & Condensate (“C & C”) is in steep decline and exports have declined from 3,145,000 barrels per day in 2000 to 2,542,000 in 2006) is growing vigorously, while production appears to be plateauing or in outright decline, leaving less and less available for export, in my humble opinion. Venezuela and Mexico’s production are in steep decline, and Mexico may become a net oil importer within 5 to 10 years. The aggregate world production of C & C has declined from a peak of 74,298,000 barrels per day (“bpd”) in May 2005 to 72,512,000 bpd in August 2007, a decline of 1,756,000 bpd from peak month to most recent month. The peak year for world oil production was 2005 with world C & C production averaging 73,807,000. For 2007, average daily world C & C production is down to (click 1.1d) 973,093,000 barrels per day. Since 1950, and with the exception of the 1970’s oil embargos, world C & C supply has steadily grown by between 2% and 10% percent per year. Over the past 2 years, it has fallen by just over 2% from the peak month of May 2005. During this time prices have risen dramatically and supply has been unable to maintain its historic growth.

Demand appears to be inelastic, as since 1999, C & C prices have risen nearly 900%
(from trough to peak) and demand has increased during this time by approximately 15%.

This is not to imply that the world is “running out” of oil in the near term, but that the world will be unable to increase the amount of C & C it produces for a time, which will then be followed by a period in which C & C production will go into terminal decline. An environment of constrained oil and natural gas supply will benefit certain commodities, industries, and companies while placing other industries and companies in an extremely challenging environment. Understanding this issue might be the difference between losing your life savings to either market disruptions or hyper-inflation (or for that matter deflation, though I think in the U.S. case it would be more hyper inflation of commodities and chronic deflation in all sectors having to do with housing).

I firmly believe that rising oil prices will have multiple secondary effects including, but not limited to:

A concomitant rise in prices of all other fuel sources including coal, uranium, and Natural Gas, and;
An increase in prices of certain agricultural commodities which rely on fertilizers and pesticides, and;
A decrease in prices of certain metals which are used in infrastructure, and;
An increase in prices of certain metals used in energy related infrastructure, and;
Strengthening of the currencies of certain oil exporters versus certain oil importers.
The collapse of the U.S. Dollar.

The answer to the Falling value of the U.S. Dollar is not the other major currencies. ALL CURRENCIES CAN FALL IN VALUE TOGETHER. How? AGAINST THE THINGS THAT THEY CAN BUY. Oil, Natural Gas, Corn, Wheat, Soy Beans, Silver, Gold, Palladium, etc... will rise in price versus ALL currencies if Oil production goes into decline.

"When you find yourself in a hole, stop digging." - Anonymous

Leveraging up to expand your business will lead to disaster in this environment, as will holding U.S. dollars as a store of value (and suburban real estate).

I am of the opinion that although the average American investor is quite literate, unfortunately they are quite innumerate - so much so that the average American investor is not even capable of defining the term. With that in mind let's go to the online encyclopedia, Wikipedia.org, for a definition:

Innumerate: marked by an ignorance of mathematics and the scientific approach

If you are an investor, educate yourself and take action.  If you are innumerate, don't sweat it. You can become numerate with a little effort and a high speed connection - and rather than trusting me, another Wall Street huckster with an agenda, click the links, read my sources, and come to YOUR OWN conclusions.  But like it or not, the above numbers are as hard as rock. And there are no pipelines coming into earth from outer space, so we are going to have to live with the fact that there will be less oil available for import in the very near future.

Yours for a better world,


Mentatt (at) yahoo (d0t) com

North American Natural Gas Crisis 101

While the U.S. imports over 60% of the liquid fuels (oil and NGPL's) it requires, the U.S. only imports 1% to 2% of the Natural Gas ("NG") it requires in the form of LNG. Yes, the U.S. imports a good deal more NG from Canada by PIPELINE, but that export partner is unable to increase its NG exports to the U.S. because, it appears, from data supplied by the U.S. Department of Energy that both U.S. production and Canadian production of NG peaked in 2001.

It follows that if the U.S. wants to increase its use of NG it will have to buy it in the International markets in the form of LNG as there are no pipelines stretching under the Atlantic and Pacific oceans.

Electricity is generated from Coal, NG, Nuclear, and Hydro power (and a very small amount of Oil). If the U.S. wants to increase its electricity generation, then the U.S. must increase the use of at least one of these energy sources.

Folks, it has been years since the U.S. added a nuclear power plant, and it has been years since the U.S. has constructed significant coal fired power capacity (there have been some, but total MegaWatt capacity was insignificant). There has been a conspicuous lack of Hoover Dam projects... That leaves NG. Substantially all of the new electricity generating capacity added in the U.S. since 1996 has been NG fired.

Now, let's add it up...

No new non-NG power plants + Declining NG production in North America = Less electricity generation capacity OR an increase in LNG imports.

Any Questions? (Please! Don't confuse the distant future with the present. Of course we will build nuclear power plants - some might even come on line by 2020. Wind and Solar? Too little, too late for this round. But what do we do in the mean time?)

The problem is that in order to get the LNG tankers to land on our soil we will need:

A. The capacity in the form of LNG re-gasification terminals, and;

B. To be willing to pay a premium over other LNG importers to entice the tanker to the U.S.

Here comes "The Rub".

With Oil at $94 per barrel (that is the front month WTI as I write this, Louisiana Light is more like $98 in the spot market, so the $1.175 Billion figure is somewhat understating the issue), and importing a net figure of roughly 12.5 million barrels of oil per day, the U.S. BORROWS $1.175 BILLION each and every day of the year to fund its oil purchases.

This borrowing of money, and printing of dollars, is what is laying low the U.S. currency. Since I have laid out the case why, if anything, the U.S. will try to become MORE ENERGY DEPENDENT by increasing imports of LNG, further increasing U.S. borrowing to fund its International energy purchases, just how is it that the U.S. Dollar avoids a collapse?

Here comes the really good part...

It is the price of the marginal supply that sets the price in the market. The U.S. will have to compete with the Asian nations for the LNG and LNG is trading, right now, in some markets north of $15 per mcf. Prices in the U.S. as we speak are $8.35 (Henry Hub Spot).

While the world watches breathlessly the oil supply problem, it is at least as likely that the knock out punch, at least as far as the U.S. is concerned, will come from NG.

My associate at the Sleepy Hollow Funds, Dr. Lalani, likes to point out that the U.S. wastes tremendous amounts of electricity and could conserve greatly to ameliorate the electricity issue...

Great. Like shutting off the lights at the Empire State Building? Turning off street lights? Shutting businesses earlier? All of which WILL happen eventually.

Why not just stand the U.S. dollar up in front of a firing squad at dawn tomorrow?

Yours for a - better views of the night sky without all that pesky light pollution - world,

Mentatt (at) yahoo (d0t) com

This is hysterical!

"Oil is Little Changed as OPEC Mulls Cut to Counter Slow Demand"

I am simply embarrassed for the journalist that wrote the story.

Demand for oil in 2008 will be above 2007 demand IF THE OIL IS AVAILABLE.  If it is not available, we can't demand that which is not there.

To read this article one would think that the world was about to experience an oil GLUT.  Yet total OECD oil inventories, as measured in "days of supply" is at the lowest level in in years.

The WTI crude front month contract closed at $92.79!  Does the reporter realize that 5 years ago the OPEC price "band" for its average price for all grades was $20 to $28?  

OPEC likely cannot increase production.  Even if they could, it might be dawning on them that it is not in their best interests to do so.  If either case is true, this is it.  The U.S. economy is sitting on the oil import crisis time bomb, and the fuse is lit.  Still, even so, the sensation will not feel explosive, more like Chinese water torture. 

Of course, I could be wrong and OPEC has plenty of spare capacity... Then why are we making that huge investment to wring oil from the Tar Sands of Canada? If OPEC has so much spare capacity, why destroy the environment of Alberta, apply to build nuclear plants there (in order to cease using Natural Gas to as a heat input), drill in 7,000 feet of water and 23,000 feet of rock and earth off the coast of Brazil and the Gulf of Mexico, and use THE VERY FOOD WE EAT as fuel?  Come on, would ANYBODY do ANY OF THAT if we could just buy the Oil from OPEC?  NAFC.  (That's a technical term - Not A F%$^ Chance).

If I blew in this reporter's ear he would thank me for the change.  

Yours for a better world,

Mentatt (at) yahoo (d0t) com

My Epiphany

I spent today presenting our new hedge fund to investors.  I liken it to a Broadway actor on his  7,000th performance of "Cats".  I have said this stuff so much, I am starting to get sick of hearing it myself.  Still, each time, the presentation requires that I sit through the initial "But I thought we had plenty of Oil" or "but what about nuclear?"  And I have to patiently disabuse them of their (from my view, that is. Still, I recognize that my vision might not be completely accurate) misinformed opinions... ugh!!!

So here was my epiphany:

I was speaking with a businessman who have I great deal of respect for.  This guy was up to speed on all the issues - and was not concerned in the least.  Why not?

And then it occurred to me - He was not a trader, investor, broker, etc... His concern was payroll this friday, the health insurance bill, and the rent.  In his business, he has never been required to forecast economic conditions, interest rates, earnings... 6, 12, 18 months from now. He has never come to work and watched his life's work get destroyed because some finance minister somewhere just announced a currency devaluation, or there was an assassination, or hurricane, or locusts, drought... WHATEVER rock that people in our industry did not turn over that led to their demise (OK, I am being dramatic here, but work with me.  In our business, you are only as good as your last trade, your last quarterly performance, your last good/bad call... all of which is normal in the securities industry.  Now throw in the fact that you put essentially ALL of your assets into the portfolio... Just ask the guys at the Amaranth Hedge Funds).  No, this fellow was not a corporate CEO (those guys worry holes in their stomach, too), he was a successful private business owner.  Never in his life did he draw out a forecast past the end of this quarter.  He was too busy surviving here, and now, and living the good life.

If he were REQUIRED to draw out a 5 year plan, he might feel differently, or if he had ever lost everything he had on a bad bet, or if he had watched an entire department get walked out the front door by security guards who then unceremoniously cut up the newly departed's corporate IDs with a pair of scissors... but this was not in his experience.  He was focusing on today's sales, next week's bills, and this weekend's beer.  

And I don't blame him.  

99% of the people do not have the resources to put themselves in a position to benefit from the U.S.'s energy pickle, and the 1% that does have the needed resources might make the wrong decisions regarding how best to handle the opportunities and risks.

Maybe it IS better not to know.

Yours for a better ignorance is bliss world,

mentatt (at) yahoo (d0t) com

Wheat, Corn, & Rice are the major food staples for the world.  This is serious stuff.

"Feb. 11 (Bloomberg) -- Wheat futures in Chicago rose by the daily limit for a sixth day, breaching $11 a bushel for the first time as the U.S. forecast its lowest inventories in 60 years.

U.S. stockpiles will drop to 272 million bushels at the end of May, 6.8 percent less than expected a month ago and down 40 percent from the prior year, the Department of Agriculture said in a report Feb. 8. Inventories will be the lowest since 1948 when farmers grew less and shipped more wheat overseas to help countries to rebuild after World War II, economists said."

I don't make this stuff up.  We have a food production problem, an energy problem, a currency problem, a trade deficit problem, we are at war, and the voters in the American presidential race are more concerned with the symbolism of the shade of the candidates skin, the contents of their underwear, or their lack of conservative credentials than with a pesky problem like not enough food or fuel.

Call me crazy, but that just doesn't compute.  

Speaking of not computing...

The world financial markets are getting beat up, economies are hitting the skids all over the western world, and the price of Oil is having a hard time staying below $90 per barrel (as I write this the front month WTI contract is trading at $92.09 on ACCESS).  Shouldn't oil be getting killed in a recession?  The media tells me it will, CERA tells me it will, but the futures market says no.  I'm going with the guys who actually have skin in the game.

Yours for a better low carbohydrate world,

Mentatt (at) yahoo (d0t) com

The U.S. Defense Budget is Unsustainable

Sustainability is the new watchword.  Well, that and "Green".  Sit through commercial TV for an hour or so and you will see what I am talking about.

Here is something that is not sustainable under any circumstance:  Last year total military expenditures totaled $626.1 BILLION, a number that is greater than the COMBINED expenditures of the next 168 largest sovereign nation military budgets.

The U.S. Navy should be renamed the "U.S. Petroleum Protection Force" as the Navy's job is primarily to maintain security for the floating oil inventory held in world's tanker fleet.  If you added the cost of tax payer money for this fleet gasoline is already well over $6 per gallon in the U.S.

The following is from J.R. Nyquest's excellent website:

"Whatever your opinion of the War in Iraq, the most strategically significant result of the war has nothing to do with Iraq. Admiral Michael Mullen, the chairman of the Joint Chiefs of Staff, has admitted that the U.S. military commitment to Iraq and Afghanistan “may have undermined the military’s ability to fight wars against major adversaries….” The U.S. military has changed its focus, losing sight of the real enemy – the most dangerous enemy of all.

The danger from Russia and China is not well understood. To complicate matters further, there is a new, rising incompetence in Washington. There is blindness in the governing class, a lack of understanding, an unwillingness to work with facts, a falsification of meanings, and fatal disregard for historical truth. Enemies are not recognized as enemies. Subversion is not recognized as subversion. Madness goes about in the guise of political correctness.

There are, of course, flashes of truth and moments of recognition. On the night of the Feb. 5th presidential primary, Republican Senator Orrin Hatch told an interviewer that he feared America could lose the economic wherewithal to sustain its armed forces. The interviewer completely ignored the senator’s statement. It wasn’t something journalists are ready to take seriously. Even so, the senator offered up a warning. He had begun thinking about the military budget and the prospect of declining revenues. You might say that the “writing is on the wall.” The U.S. dollar is falling, the banks are in trouble, the stock market is ready to tumble, the housing bubble is bursting. What will happen to the economy? What will happen to the military?

In recent testimony, National Director of Intelligence Michael McConnell told Congress that Russia, China and OPEC could use their growing financial power to advance strategic goals damaging to U.S. national interests. According to McConnell, American intelligence was concerned “about the financial capabilities of Russia, China and OPEC countries and the potential use of their market access to exert financial leverage to political ends.” In other words: The enemy has cash, and cash can buy people and companies. " J.R. Nyquist

Senator Hatch, however you view his politics, can count. In the absence of energy inputs, the U.S. will simply be unable to sustain a military budget anywhere close to its current size and scope - which is not enough, at this moment, to protect the nation from a coordinated effort of our largest "competitors".

Why did no one in the Mainstream Media scratch their head when President Bush was rebuffed by Saudi Arabia? They were too busy scratching their politically correct butts.

The combinations and permutations of various outcomes to the U.S. energy crisis will be powerfully felt in our nation's politics in the very near future.


Yours for a better world,


mentatt (at) yahoo (d0t) com

The Rich Man's Housing Crisis

Large, expensive houses will decline in value more precipitously than utilitarian housing in an era of declining energy availability and increasing food and energy prices.

The financial markets and the credit markets have only just begun to wreak their havoc, and that havoc will impact the wealthy in ways that might be incomprehensible at this moment. But just ask any Florida homeowner of "luxury" or "executive" residences how the sale of their home is going.  The short answer is there is NO MARKET for these properties... and I in my opinion, there never will be.  Once the oil import and North American natural gas production twin crisis's hit, Corporate America is going to take a hatchet to their payroll, Wall Street is going to be renamed Floor Street, and Real Estate agents are going to skip being called "waiter!" (because restaurants will be deserted) and go right to migrant crop worker.

(Disagree with my vision?  Tell you what - I will tell you what futures contracts I am buying in the commodities market.  You take the other side of the trade.  It is a zero sum game, so whatever I lose you stand to make - or the other way around.)

At the same time the equity in your home goes to zip-ity-do-da, the source of you wealth might be headed there, too.  Own bonds?  Hyper inflation and the dollar crisis will convert them to toilet paper.  Own equities?  Better be gold miners and energy companies - the rest are circling the drain.  Own a private business?  Hope it is not leveraged, dependent on cars for customers or employees, or discretionary.  Not going to be a lot of use for the millions of financial planners, brokers, insurance salesmen (folks, I am in the financial services business - that career path is doomed), real estate agents,  lawyers, hair stylists, retailers, etc...  are any of these types your customer?  Well, they are going to have a great deal less discretionary spending money than they have now.

Someone is going to be left holding the bag.  It doesn't have to be you.

Yours for a better world

Mentatt (at) yahoo (d0t) com

Did you duck, or is that shiner something you are proud of?

The worst week for the U.S. stock market in 5 years ended with nothing resolved.

The front month WTI crude oil contract rose $3.66, finishing one of the most volatile weeks in oil trading in recent memory.  The financial press blamed the rise on the possibility that OPEC would require importer customer to pay in Euro's rather than U.S. Dollars.  

The financial press has a warped sense of cause and effect, and this report continues that trend.  The funny thing is, there just are not enough Euros around to replace the Petro-Dollar as the oil trade currency, and if there were, can you imagine the import inflation of the Persian Gulf nations?  Last time I checked, their currencies were still pegged to the U.S. Dollar...  It then follows that either; A: the press is wrong (as usual), or; B: OPEC was just jaw boning the price back to a more "acceptable" level, or; C: none of the above and it was just the Oil market reacting to an over sold condition.  I am going to go with "C" until proven otherwise.

Coal continues its meteoric rise.  Can Natural Gas be far behind?  Not likely, unless you intend to pull an Abe Lincoln and start reading by candlelight.

"And The Hits Keep Coming"...

Folks, the U.S. is literally running out of WHEAT.

The situation for corn is not much better.

Farmers will, no doubt, chase last years commodity winners, wheat and soy beans, at the expense of corn.  At some point, however, you simply don't have enough acres and available fertilizer to keep this game of musical chairs going - hence the greatest bull market in agricultural commodities since "The Flood" (you know, the one  Noah made famous).

But my long term readers knew this was coming.  The problem now is that the world MUST DO SOMETHING RIGHT NOW to avoid very real, and very serious, food shortages.

American's have this sense that it cannot happen here, and if that includes you, you would be incorrect.  It can.  It might not, it does not have to - it is not ineluctable... but it can CERTAINLY happen here.  And if this inventory trend continues it WILL HAPPEN HERE. That's it.  Either the production and inventory trend reverses... or the U.S. will experience EXTREME increases in the prices of wheat, corn, milk, eggs, bread...

It seems that the supply/demand equation of many commodities - Oil, Natural Gas, Food Grains... are balanced on the edge of a knife, and that is a tough place to stand.  Some of these are going to fall off that knife's edge - and into the abyss.

"And that's the way it is"...

Mentatt (at) yahoo (d0t) com

"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 and die gallantly. Specialization is for insects." -- Robert A. Heinlein

Couple more days like today and many investors just might feel like dying - gallantly or otherwise.


While front month Crude Oil continues to slide, later month delivery contracts are not falling very much. Front month might be down $14 from its peak, but crude for December 2010 delivery is no more than $3 or $4 from its high. Why? Lots of reasons. Here is one possibility...

Over the next several years the market, by necessity, must "discount" (take into consideration) a "Black Swan Event".

Here is a definition from Wikipedia.org:

"In Nassim Nicholas Taleb's definition, a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Taleb regards many scientific discoveries as black swans—"undirected" and unpredicted. He gives the September 11, 2001 attacks as an example of a Black Swan event."

I have been harping on Natural Gas ("NG") lately, and with good reason (see my earlier posts). Now, apply a significant hurricane in the Gulf of Mexico, a terrorist attack, or maybe even an accident like a LNG tanker explosion and NG is $50/MMBtu instead of $8/MMBtu. No, you cannot invest in the hope that a "Black Swan Event" ("BSE") will strike, but you have to insure your portfolio because, I can assure you, a BSE will occur at some point in the future. This is one of the primary reasons portfolio theory insists that investor's diversify.

No, you can't plan on a "BSE", but you can "tilt" your portfolio into the areas that are attractive now and would hold or increase in value if one of the more likely BSE were to take place.


Mentatt (at) yahoo (d0t) com

Natural Gas at a cusp

As I write this, Natural Gas ("NG") trades at roughly a 50% discount to oil in BTU's. A better comparison would be heating oil or gasoline - finished products - because NG can be taken from the well head and burned at an electric plant or at your home. Crude cannot be used until it is processed into finished fuels. The discount might be nearly 60%.

This will not last. The U.S. Department of Energy's EIA's data shows imports from Canada in decline and U.S. production falling since 2001. Canada has no ability to export more NG in the future under any circumstances. This will force the U.S. to compete for Liquified Natural Gas ("LNG") in the world export markets, and we all know what that means: The marginal supplier sets the price - and that's if we could get it, and we can't. The supplies aren't there, the infrastructure isn't there, and the MONEY isn't there. Think about it: This would mean that the U.S. would have to issue MORE IOU's to the various international energy suppliers; that the U.S. would be MORE energy dependent on the very folks we dislike and antagonize so intensely.

Oil and North American NG prices should move to BTU parity because:
1) increased LNG usage in Asia where they are paying $15 NG equivalent
2) Increased NG usage in NG exporters (Russia, Iran etc)
3) decreased drilling for NG in North America.

A) Coal prices have set a new floor for NG.
B) At 110 per ton (current prices) NG price floor would be $9.50 in the long run.
C) Coal prices could double from here easily with Australia's mines struggling.
D) Demand for coal is growing at 8% per year in the developing world (where the population growth is).
E) Nuclear plants have a long lag time and that situation is worse.
F) Slower drilling has not fully impacted us yet. 6-18 months for full effect of slowing Canadian and US drilling.

In addition, NG is simply the best hydro carbon fuel available. Coal is an environmental nightmare we are only now awakening to. Oil imports into the U.S. are unlikely to increase by any meaningful amount, and in fact could decline precipitously at exactly the same moment that NG supplies fall (and prices rise).

Folks, this is serious stuff. I cannot give specific advice in this forum, but the opportunities are staring you directly in the face. And not just the opportunity to profit, but the opportunity to avoid significant losses. The U.S. economy cannot expand without the ability to grow the generation of electricity.

What was the last thing Mrs. Lincoln said to the President?

"Duck!"

This is, yet again, another excellent opportunity for you to do the same.


Mentatt (at) yahoo (d0t) com

Whoops!

The ISM number came in today... and it was an unmitigated disaster.

My call on escaping a recession, even in nominal terms, appears to be on very thin ice.

It is important in trading and investing to have the ability to change your mind, admit you are wrong, and regroup. Small loses are never a problem - BIG losses are the problem. Insisting that you are correct in the face of mounting evidence to the contrary will lead you to ruin.

Accordingly, it would appear that the odds of a recession, as measured by the data collecting agencies of the Federal Government, are now well above 50%. This is especially troubling because our government regularly understates the GDP deflator (inflation).

Yours for a better world,

mentatt (at) yahoo (d0t) com

"Utilities Turn From Coal to Gas, Raising Risk of Price Increase"

North American Natural Gas shortages might be here before Oil shortages, or worse - they might arrive simultaneously.

But coal is no longer the option many were led to believe.

There are tremendous opportunities in the offing, but the there are some very real economic disasters that will be visited upon us (Americans). Yes, we will be forced to "power down" over the coming decades. There will be winners and losers in the process, despite the probability that socialism creep will be the new political environment (more on that later).

I have no idea why the American Mainstream Media is so grossly misinforming the American People - but they truly are.

America has a SIGNIFICANT oil import crisis brewing, and there is simply not enough coal, natural gas, nuclear power, ethanol, gerbils on treadmills, political flatulence... to make up for the soon to be missing BTU's. Placing your hard earned assets into the companies and industries that are sure to get demolished in this environment is just plain silly. Use your common sense, and don't believe one word coming from Wall Street or CNBC.

Yours for a better post CNBC world,


Mentatt (at) yahoo (d0t) com

Finally, the housing situation is sinking in...

Read that link.  

Maybe?  No maybes... Gonna happen, no matter what... only question is the time it takes to unfold.

25% nationwide, 40% to 50% declines in markets like South Florida.

The Fed's attempt to inflate is going to work alright - just not on real estate.  It will work on commodities.

Yours for a better world.

Mentatt (at) yahoo.com

The Euro is the next sucker's bet

For those who have been reading my stuff for the last few years you know I have been telling people that the U.S. $ is doomed.  I gotta lay off the hyperbole.  

The dollar will continue to lose purchasing power, but not as fast as the Euro will from this point onward.  Keep that in mind when listening to the "international play" coming at you from Wall Street.  My good friend and fellow hedge fund manager Dr. Lalani likes the currency's of the oil exporters (with the exception of Mexico), and I couldn't agree more.  But the Euro makes up more than half the Dollar index, and any move down versus the dollar will increase the index.

Also, as I have said many, many, many times:  "Markets zig and zag, they don't zig and zig".  We have had one hell of a ZIG in precious metals (and other commodities, and one hell of  a ZAG in U.S. equities and the U.S. Dollar.  Nothing moves in a straight line.  NOTHING.  After the zig comes the zag (calling the turn is  bit tricky). If you can't call the turn, at least don't zig after a market has been zigging.  Finally, I am not suggesting that you short ANYTHING.  Shorting requires EXTREME discipline, something the average individual investor is sorely lacking in. What I am suggesting is that on any pull back in precious metals that that would be the time to add to positions.

This is not to say that I think the commodity bull has stopped running - far from it.  But silver and gold are NOTORIOUSLY volatile.  I would not be surprised to see each of them retrace 50% form their eventual highs.  The problem is calling the high, and at that I am no better than you are.

Whither Oil Prices?

U.S. oil supply and consumption data argue heavily against a U.S. recession.  Look, I don't make this stuff up.  Just click the link and look at the supply/consumption data yourself.  If the U.S. were in a recession, would year over year oil consumption 1/07 vs. 1/08 be up roughly 1.4 %? Not unless we had one REALLY big oil spill.

Further, I was the dummy that said last year we would be in a recession by the end of '07, or early '08.  I was close, but no cigar.  Recessions are caused by tight money policies of the Federal Reserve and Fiscal discipline on the part of the Federal Government.  It is an election year, and if anything, our officials cannot be accused of being tight with money or very disciplined with their spending habits.

On another note...

For every buyer, there is a seller.  They can't both be right.  Welcome to the markets - I don't care if it is stock on the NYSE, corn at the local farmer's co-op, or the corner newspaper guy. Even in positive sum markets, on any individual trade your win is somebody else's loss.

There are also 2 sides to every investment decision.  Stay with me...

The IEA claims that there is no immanent peak in oil production.  They blame the lack of production on a lack of investment... Now, I ask you: If you were an oil company, would you increase investment in exploration & production if you felt the oil was not there to be found? Would you buy your dog a kitty cat scratching post?  

Somebody get those guys at the IEA a V-8!

Yours for a better world,

mentatt (at) yahoo (d0t) com

The worst January in equities since 1970 appears to be in the books.

Folks, as you know, I am precluded from making specific recommendations in this forum.  I can speak in general terms.

The equity market is, in my opinion, going to swing up and down rather briskly, and will likely be very tough to stomach.  The problem is, the bond market (U.S. Treasuries, Don't even THINK about corporate paper) has had the greatest of runs, and his little to gain and much too lose; real estate is in shambles.  So you are stuck with with some equity exposure.  If you are of advancing years, say over 55, there are products available from and backed by the world's largest insurers that will guarantee your principal while giving you most, but not all, of the opportunity for gains.

These products have been out in the marketplace for years but have really gotten their act together recently.  Not too long ago I looked askance at them, but they have responded to the markets and are now designed to provide immediate income, a fixed "walk away date" or the ability to provide lifetime income.   And since they protect your principal like a bond, but give you some upside if the equity market goes higher, they are, in my opinion, one of the few vehicles that would benefit in an inflationary environment.  Further, as principal is guaranteed, they would not be harmed in a deflationary environment.  

There is no such thing as the "perfect investment".  Your circumstances, time horizon, tolerances, etc... are unique.  These products are not for everyone, and you should not consider them if you need to draw on them when you are under the age of 59 1/2.  

Please keep in mind that it is my view that the Fed rate cuts will lead to a lower U.S. dollar and inflation, and that in the future energy supply shortages will add fuel to the fire of market volatility.

Lastly, I am not looking for business here.  These require state by state licensing, so call your own financial advisor.  If they have any questions you can always email me.

Yours for a better world,

mentatt (at) yahoo (d0t) com

The Fed is in full scale flight from the U.S. Dollar.  

With the latest 50 basis point cut (1/2 of a percent), the Fed Funds rate now stands at 3%, significantly lower than the headline rate of inflation (which was a lie the day it was written).

It seems that the U.S. is no longer interested in the production of anything with the exception of more asset bubbles. Tech, housing... what's next?

The U.S. energy consumption data does not support recession fears.  Consumption of total fuels is up, year over year, in the most recent 4 week period.   You see, it does not matter if you look like crap, feel like crap... what matters is how you SMELL.  So far, the consumption data says the economy smells OK, and with the Fed enthusiastically joining the ranks of the world's oldest profession... I think we squeak through.  Of course, I will continue to follow the energy supply/consumption data and report back if anything changes.

Yours for a better cheap money world,

mentatt (at) yahoo (d0t) com

This just in.... (HA!)

"The Federal Reserve may push interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974..."  

May push rates below rate of inflation?  This journalist certainly has a knack for the understatement. Assets bubbles are going to come, for sure... but they won't be were the Fed wants them.  Say hello to $200 Oil, $25 Nat Gas, $10 Gallon of Milk, $8 per dozen eggs, $35 Silver, and $2000 Gold.  Say goodbye to the value of your savings if you continue to hold them in dollars or fixed incomes securities denominated in U.S. dollars.

"BP's Global Refining Margins Sink Almost Four-Fold on High Oil"

"Folks, the lack of new refineries is soooooo 2006" - Dr. Saif Lalani.  Production of conventional crude oil is in decline, not ifs, ands, or buts.  We now have TOO MUCH refining capacity, and whenever an industry experiences overcapacity, their margins get killed.

"Yahoo to lay off 1000 workers"

Call me old fashioned... but for me to pay 30, 40, 50 times earnings for a stock, there has got to be some damned sure earnings growth in evidence, and it has to last YEARS.  Otherwise, these stocks are going down like a rock in a pond.

"Still no sign housing market hitting bottom"

WTF???!!! There are several signs of where the bottom is.  Rents are 3 to 3.5 % of the purchase price of homes in most bubble markets.  When rents get to 5 to 5.5% of median purchase price the market will see the bottom - so either rents go up by 80% or prices come down another 40%, give or take.  Any questions you jerks at the Sun Sentinel (South Florida's POS rag).  Here is another sign of a bottom:  When median income can pay for a mortgage that is 80% of the purchase price of a home.  Are these metrics really that hard to understand?  Now take the next leap.  Inflation will help those housing metrics, deflation will kill them.  Hope for inflation.  Be ready for anything, but my bet is on monetary inflation.

Folks, most things lend themselves to just a LITTLE BIT of old fashioned homework.

Check back here for a no BS assessment of the incomprehensible HS we are spoon fed from the Main Stream Media.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

The “Peak Oil” issue is now everyday, front page news

On January 22, 2008 Shell Oil CEO Jeroen van der Veer, Chief Executive issued a letter to all Shell employees about the coming of oil shortages in the near future and the challenges the company and the world faced by the constraints on energy supply and climate change.

Mr. van der Veer is not the first Oil Company CEO's to come clean, Chevron, Total, and the CEO of other companies have been willing to confront the issue, if not the immediacy, of Peak Oil.

The Wall Street Journal, which up until this past summer disparaged the theory (data) or ignored the issue has now had 4 front page articles in the last 90 days on Peak Oil.  Today, January 26, 2008 the WSJ had another front page story on Peak Oil, this one covering a "Peak Oil Aware" family in Michigan and that family's efforts to prepare for the social, economic, and political fallout of an oil shortage - AND DID SO WITHOUT MOCKING THEM!  Holy Molly!

Remember, the financial markets are "discounting mechanisms", that is they discount in the present the probability of future events.  The U.S. energy situation is starting to sink in to the Main Stream Media and the Corporate Establishment.  Significant reaction in the market place is not far behind.

I will leave you now withe the prophetic words of the
1960's singer/songwriter Bob Dylan:
(Or you can listen here)

“Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone.
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'.
For the loser now
Will be later to win
For the times they are a-changin'.

Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'.
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.

Come mothers and fathers
Throughout the land
And don't criticize
What you can't understand
Your sons and your daughters
Are beyond your command
Your old road is
Rapidly agin'.
Please get out of the new one
If you can't lend your hand
For the times they are a-changin'.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin'.
And the first one now
Will later be last
For the times they are a-changin'.” Bob Dylan’s 1964 classic “The Times They are a Changing"

Indeed.

mentatt (at) yahoo (d0t) com

A Tale of Two (Classes of) Commodities

It appears that a recession is a certainty in real terms. The government's nominal argument ain't fooling anybody.

The run in commodity prices for the near term is over, and painful corrections are likely in many commodities. Base metals are no where to be, but even precious metals and energy commodities will likely be overcome by the contraction, at least for the next several quarters.

The energy crisis is not going away, though. This is just a time out on the field. Opportunities of magnanimous proportion will present themselves. This is the time to get your ducks in a row.

The bond market has had the mother of all rallies. I could be wrong, and rates could head lower and bond prices higher, but I am not willing to make that bet at these prices (still I sold weeks ago and bond prices moved higher since then) and would prefer to hold cash.

There are now 2 kinds of commodities. Those that will rise in price as the energy shortage takes hold over the next few years - and everybody else. One group will soar, the other will humble you. Gold and SIlver? Tough call. They have had a hell of a move up, and there are not many bids around for anything. Still, Gold and Silver tend to do well in deflation AND inflation, but discretion is the better part of valor. This is no time to be a hero. That time will come.


Mentatt (at) yahoo (d0t) com

Asset prices are plunging. First Real Estate, now the world equity markets.

This looks like DEFLATION to me, and I am losing (lost) faith that the Fed can re-inflate.

Monetary deflation coupled with commodity price inflation (though commodities may not be inflating again for sometime) is about as bad as it could have been. America, welcome to Japan, circa 1990.

You will read and hear a great deal of specious cause and effect explanations from the media, for most of which the journalist engaged in perhaps 30 seconds or so of research before trumpeting their findings to the public.

Here is one cause and effect you will not see in the Main Stream Media:

The energy complex has been unable to deliver increasing amounts of BTU's in sufficient quantities to maintain economic growth.

For my money this is THE cause and effect.


Mentatt (at) yahoo (dot) com

“They’re here!’ – Poltergeist

The ghost of 1973 is here, and it is here to haunt the U.S. for a long, long, LONG, long, long time to come.

In my last post I covered U.S. population increase of about 1% per year. Since total oil supplies to the United States PEAKED in 2005 at 20,802,000 barrels per day (“bpd”) and the 2005 mid year population for the U.S. was 295,895,897 (U.S. Census Bureau data), each and every American consumed 7% of a barrel (.07) of oil per day during that year.

For the 10 months data available for 2007 U.S. mid year population was 301,621,157, and this increase population had less oil, 20,683,000 bpd available to consume – or 6.86% of a barrel of oil.

The average 2007 American had 2.4% LESS OIL available to consume than the average 2005 American. Natural Gas use and availability fell during this period, too (though this is more closely tied to wheather than oil is). Total coal availability BY VOLUME was up roughly .5% in 2007 from 2005, though it is likely that total production of coal BTU's fell as U.S. supplies are declining in BTU content.

What does it mean? That the average American lifestyle will decline until/unless this trend reverses. No matter what fiscal or monetary stimulus our government attempts. Either population falls, or per capita oil supplies increase… or our consumptive lifestyle declines.

Argue what you will as to whether this is good or bad, a blessing or a curse, for our humanity, etc…. It is without debate that the political, economic, and social impacts of this phenomenon will be felt in increasing measure over the next several years.

My bet is that the U.S. dollar’s decline versus commodities will likely be BREATH TAKING.

Yours for a better world, one way or another.


Mentatt (at) yahoo (d0t) com

The U.S. population topped 303 million this month.

In 1973, the year of Arab oil embargo, the U.S. population was just under 212,000,000.

In 1973 the U.S. consumed 17,308,000 barrels oil, and in 2006 the U.S consumed 20,687,000 barrels of oil.

In 1973 the U.S. was still using oil as a primary means of electricity generation.  In 2007 oil generated less than 8% of electricity.

Industry has substituted natural gas, nuclear, and coal fired electricity for oil to the extent possible.

The only efficiencies left to be rung out of the system:

More efficient cars.  This will have moderate impact in the short term as the installed rolling stock of vehicles cannot be replaced fast enough (to prevent);

Less total miles driven.  On average each American motorist will drive fewer miles each year from this point forward.  Pretty simple really.  There are more Americans accessing declining oil imports and domestic production.  No amount of economic stimulus, monetary or fiscal, will negate the (work and kinetic energy) laws of physics.  

It is not likely possible for inflation adjusted non-internet retail sales to come back in this environment, for example.  If the consumer is 2/3 of the U.S. economy, and the consumer is experiencing: declining access to credit, increasing energy and food costs, and has ZERO savings, and is now constricted in his/her transportation opportunities, how does the U.S. economy come again to experience real economic growth?  Corporate spending you say?  The effects of declining transportation fuels will hot corporate America at least as hard as consumer America, but more on that in a future post.

A good friend of mine likes to say that driving around in circles does not increase GDP.  Maybe. But less circle driving is certainly bad news for the auto industry, the fast food industry, retailers, rubber and glass producers, lawyers for drunk drivers, etc...

If the U.S. has seen peak oil imports, then the U.S. will see peak (real) economic growth soon, if it is not past tense (I say "soon" because there are still great efficiencies to be rung out of our wasteful use of electricity - I would not be long Utilities).  If this is true, and it is very, very possible, we can expect tough times for Wall Street and Banking to be a permanent condition.  This is not to say that we will not have vicious rallies in the markets.  We will.  Nor that hyper inflation could not drive the market up in NOMINAL terms. It could.  

Still, your wallet will not be fooled.

Hmmmm....  

Yours for a better world,

mentatt (at) yahoo (d0t) com

Here's a fun fact to know...

The U.S. Dollar as measured against other currencies by way of the Dollar Index closed today at 76.23.  In December of 2007 the Dollar index hit a low of about 74.50.  With me?

Well... in the last 4 weeks the dollar rose 3% versus the various international currencies yet fell over 10% versus gold and silver.  Hmmmm...  Perhaps the various central banks are willing to debase their currencies, too...  Hmmmmm...

Can you say "Hyper-inflation" boys and girls?  HI PER IN FLAY SHUN!! Very Good!!

Yours for a better post debt driven reserve system of currency world.

Mentatt (at) yahoo (d0t) com

“A recession is when your neighbor loses his job. A depression is when you lose your job.”

Is the U.S. in a recession? In real terms, probably. In nominal terms (you know, the kind of data reported by the U.S. Commerce Department), I doubt it.

The government understates the rate of U.S. price inflation. The headline numbers as reported by the U.S. Federal Government for 2007 of 4.1% for retail inflation and 6.3% for wholesale inflation defy credulity.

Before your eyes glaze over, here is the deal. If the economy experiences 0% REAL growth, and inflation of 7%, if the government reports inflation of 4% they can claim 3% in GDP growth. Got that? If the same methodology of collecting and reporting inflation data are employed in the future, we may have a year in which unemployment rises to 10%, and GDP grew by 10% (which is what the U.S. is likely to experience as oil imports decline and the price of oil rises).

Gold and silver are telling you a great deal about where THEY think inflation is.

The stock market is telling you a great deal about what they think REAL economic growth will be for 2008.

Yet the Federal Reserve chairman told Congress that the Fed sees the economy continuing to grow in 2008.

And thanks to the wonders of data massaging and nominal reporting THEY CAN ALL BE RIGHT!!

Confused? You are meant to be. Now go be a good little consumer and borrow some money, order up a double frapa-poofy, swishy-weenie, mocha chino, and watch some T.V. programming interspersed with commercials extolling you to EAT! DRIVE! DIET!
AHHHH!!! The good life…

Yours for a better - post-consumer, non-obese, black coffee drinking, living within your means, real men don’t eat quiche (or how to spell it for that matter) - world.

Inflation at the wholesale level for 2007 rose a the fastest pace in 26 years.

The sad thing is that the U.S. Federal Government understates the measure of inflation in no uncertain terms.  Which is why gold, silver, oil, natural gas, wheat, corn, etc... continue to soar and give the lie to the data coming out of that den of iniquity commonly known as Washington, D.C.

Retail sales took an "unexpected" fall (clearly the journalists calling this unexpected have not been reading up and researching here) of ".4".  Yea, and pigs fly!  REAL Inflation was most likely somewhere between 7% and 9%... if "sales" fell .4, and that would include the RETAIL PRICE OF GASOLINE, THE REAL FALL WAS MUCH WORSE!!!

Another country heard from, Wall Street's own Jim Kramer tells us that the Federal Reserve could have prevented the markets woes with a stroke of its interest rate pen.  Earth to Jim:  If the U.S. cannot expand its consumption of BTU's (energy) no amount of stimulus is going to spur growth within our borders (actually any growth spurred by said spurious activity would happen in Saudi Arabia, Iran, Venezuela, etc...).  Folk's, one way or another you are going to have to come to terms with this issue.

Speaking of Wall Street... Anyone notice who our "best and brightest" had to go hat in handfor capital to keep their ships afloat?  The folks that sell us our oil.  They have so many of our dollars that these "Sovereign Wealth Funds" (fancy words for "Dictatorships of Countries Endowed with Oil") have nothing to lose in propping up our banking system, lest those dollars become worthless even faster than they would have left to the Fed's devices.

Meanwhile, General Motors rolled over and and has admitted that the end of oil is in sight and that ethanol is just a stop gap.  I wonder if the pension manager's know what that means?

The U.S. dollar is at real risk of a full fledged catastrophe.  I don't know what will precipitate it, but at any time in the next 1000 days we could see a move in the American currency that would jar the American people out of their consumptive/political/societal stupor.

Stay awake.  This movie is just getting good.

Yours for a better world,

mentatt (at) yahoo (d0t) com

This is funny...

``Outside of oil, the trade deficit is moving in the right direction,'' said Russell Price, senior economist at H&R Block Financial Advisors in Detroit.

That is right out of the macbre joke: "Other than that, Mrs. Lincoln, how was the play?"

Earth to Mr. Price: 

There IS nothing "outside of oil" as applied to the U.S. Trade Deficit.  

Clearly, Mr. Price is an economist that skimped on his history studies.  The U.S. was at one time the largest CREDITOR nation the world had ever seen.  That began to change when the U.S. went from OIL EXPORTER to OIL IMPORTER.  By the time the U.S. Oil production began to decline in earnest in the early 1970's, the U.S. was on its way to becoming, what we are in fact today, the largest DEBTOR nation the world had ever seen.  And the only HOPE for our trade deficit is this:

When the oil exporting nations no longer have oil to export the U.S. won't go into debt to buy oil anymore.  That's the cure.  When there is no oil left to buy.  

Talk about a cure that is worse than the disease!

Yours for a better post B.S. world,

Mentatt (at) yahoo (d0t) com

The following is a guest post by Dr. Saif Lalani, Vanderbilt University. He wrote this article after sharing a cup of coffee with my 14 year old son and I at a Nashville Starbucks... Hysterical!
_________________________________________

$2100 a barrel Frappucino

Frappucino prices today hit an all time high by decisively crossing the $2100 a barrel mark. Prices at the Frappucino pump crossed $4.25 for about 300 ml (A barrel contains about 160,000ml). Widespread shortages of both chocolate and strawberry flavors were reported. The recent surge has been attributed to increased consumption in both China and India. China's imports rose a whopping 18% over last year as its sugar and caffeine needs exceeded domestic production. People were irate over the latest rise.

“This is not a non-renewable, difficult to extract, indispensable commodity like oil. We are still being charged 20 times as much” said Amy Potter. Amy plans to cut back on her discretionary Frappucino consumption as much as she can. “I FRAP-POOL with my husband whenever I can. We buy an extra-large and share rather than buy 2 small cups. But there is only so much you can cut back.”

The White House urged FPEC (Frappucino producing and Exporting Companies) to increase production to cool the overheated market. It is believed that SA i.e. Starbucks is the only one with significant spare capacity. “The market is adequately supplied” said CEO Howard Schultz. “The increase in prices is due to a lack of customers.” “It is” explained the CEO “exactly like the oil market where prices are going up due to a lack of refinery capacity (i.e. customers of oil). Basic Economics 101.”

Frappucino analysts however point to other factors . “Speculators are the prime culprit. At least $1,500 a barrel is coming due to speculation.” said Michael Lynch. “ The real problem” said Fadel Gheit “is a lack of blending capacity for the heavy gunky sour milk. We are running low on light sweet milk.” Daniel Yergin of CFRA said that prices were being influenced by below-udder rather than above-udder factors. Other economists blamed the low interest rates for causing a bubble in prices. “The fed needs to understand how the weak dollar is increasing prices” said John Cain author of “Why Bernanke Bucks don't buy you much at Starbucks”. Geopolitics is another issue. 25 Cows were brutally killed in the latest attack in Finland. The FOE (friends of earth) Group who blame methane from cows as being the principal reason for Global Warming took credit for this massacre. In Iraq the standoff between the 2 major cow sects over grazing pastures got worse. The 2 sects were unhappy with the proposed division with each insisting that the grass was clearly greener on the other side.

Senator Stupak held a special session in the senate where he proposed a gouging investigation. “Friends, we cannot allow our citizens to be robbed in broad daylight like this. A barrel of milk with enough sugar and chocolate costs about $125. The rest is pure profit. I propose we levy a windfall profits tax and use the money to give tax cuts to the oil industry which charges us so little for a way superior and essential product.”

Presidential hopeful Hillary Clinton promised to do just that if elected. Others such as Senator John Edwards proposed increasing production of other sources of caffeine such as chocolate and green tea. A growing number of alarmists however feel that the world has reached Peak-Frappucino. “The world is consuming more Frappucino than it is producing.” said Matthew Simmons, author of the book Twilight in the Cafeteria, “The era of cheap Frappucinos is over”, he added. Starbucks, however dismissed such claims, saying that it could meet increased demand for the next 50 years. Jeffery Brown said that Starbucks employees will be consuming its entire production within 15 years leaving it with nothing to export. Legendary investor T Boone Pickens seemed to agree with Starbucks. In a move that shocked the markets T. Boone Pickens sold his Frappucino contracts and bought oil contracts. “Oil and Frappucino will one day be the same price. Whether it is at $500 a barrel each or $4000 a barrel each I do not know.”

This article is dedicated to Matthew Simmons for his untiring work in trying to educate the world about how cheap oil really is and how big a problem we have. To Jeffery Brown for his “Export Land Model” work which the WSJ just recently saw the light on. To Stuart Staniford for bringing to bear his enormous intellect on the peak oil problem. To oilycassandra (Youtube Profile) who has given a whole new meaning to the term “education at all costs”. And finally to all those others who have endured criticism and ridicule in trying to help others understand, and have carried on the good fight. "

“Men are at a disadvantage when we argue with our women cause we have a need to make sense” - Comedian Chris Rock

Argue the sexist nature of that comment all you’d like. It sums up my problem with the inventory report (or “petroleum propaganda report”) we get every Wednesday from our Federal Government.


I am at a disadvantage when assessing the U.S. Department of Energy’s inventory report, because I, too, have a need to make sense.

Here was the HEADLINE REPORT:

Crude Oil inventories declined 6.8 million barrels

Gasoline inventories rose 5.22 million barrels

Distillate inventories rose 1.52 million barrels

OK, to John Q. Public it would seem reasonable to conclude inventories went nowhere. The system drew down some crude and built an equivalent amount of finished products. No problem, right?

Wrong. If you take the time to read and analyze the report, something John Q. Public simply will not do, but compulsives like me will happily do so, you will find that, surprise, surprise, our government fudges numbers so that they fit nice-nice in the headlines.

Buried in the text of the “special report” you will find this annoying little statement, paragraph 3:

"U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 6.8 million barrels compared to the previous week. At 282.8 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 5.3 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories increased by 1.5 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 3.2 million barrels last week. Total commercial petroleum inventories decreased by 8.1 million barrels last week, and are in the bottom half of the average range for this time of year." EIA weekly petroleum report, link above


NOW READ THE LAST LINE FROM THE ABOVE PARAGRAPH AGAIN. Got it?

Well, if crude oil was drawn down nearly equally to the build in gasoline and distillates (diesel and heating oil) what’s up with the 8.1 million barrel decline for the week?

And so, I did the absurd, and actually had the temerity to go line by line in the report… What a concept, right? I mean would a reporter at the Wall Street Journal or the New York Times do such a silly thing? Nope, and that is why the U.S. is going to get blindsided by this - For the simple reason that our journalists in the mainstream media are so innumerate that they are intimidated by a little basic arithmetic and a spreadsheet.

So here’s the deal.

3 million of the 8.1 million draw was propane. No big deal (unless you heat with propane like most of rural America) as this is not a transportation fuel.

The other 5 million barrels was spread around in “Other Oil”, “Residual Oil”, and “Unfinished Oil”.

So why not just combine Crude Oil with these other categories and report that as your headline number? I am sure there is a logical explanation, like for the convenience of the folks assembling the data, or for politicians in the middle of a tough primary fight, or for the benefit of professional traders (versus the little guy), and I am sure that is all very reasonable.

It is important to point out that the consumption data do NOT POINT TO RECESSION. I have argued in this forum several weeks ago that we will not enter recession this year if: The Federal Reserve cuts interest rates aggressively, and; the oil import picture does not decline. The data shows an increase in availability of oil and an even greater increase in consumption. Of course, therein lies the rub against my argument. Imports will have to rise to avoid recession. If they do not, all bets are off - no matter what the Fed does.

Lastly, the accuracy of the data in general is questionable at best, but it is the best we have. Unfortunately, that is not good enough. We might trip over a significant shortage in the very near future. There is a minimum volume of oil in the system below which we cannot go without going into spot shortage situations.  How soon?  Months, not years. This is by no means a certainty, but a significant probability.  You heard it hear first (and I am not hoping for any particular outcome.  I just call them as I see them and I use a calculator because I have little faith in the claims of others.  If you doubt my reports, I have given you the links to the various sites that I used as my sources).


Mentatt (at) yahoo (dot) com

It ain’t just housing


I got an email from a regular reader linking me to an article regarding Highway Revenue Bonds. FYI, these are bonds issued my municipalities that are repaid through the revenue received from users of the project. A good example would be water and sewer revenue bonds (which are pretty safe in terms of default… people living in the burbs really aren’t looking for that rustic outhouse look just yet).

But Revenue Bonds for a highway project? A project that PROJECTS a 30-year payback period IF, and only IF, there is exponential growth in the use of the highway? How do you think that is going to work out in an oil-constricted future? Hell, 20 years from now I sincerely doubt much demand for toll roads.

By the way, let me toot my horn for a moment…

Last summer I wrote about a future credit crisis – Student Loans. Seen Sallie Mai’s stock price lately?

Just another of those unintended consequences. The Federal Government gets the great idea to provide loans to college students. So what do colleges do? Raise tuition, give faculty compensation that substantially exceeds the rate of wage inflation, pass the expense on to the students, because now they can “afford” it (by means of going into debt. If this sounds vaguely familiar to the housing crisis and easy credit, well, that is only because it is the same damn thing).

Making loans easily available often drives up the price of the financed commodity, to the substantial detriment of the participants. Just ask a South Florida homeowner.

Yours for a better not-so-easy-credit world

Mentatt (at) yahoo (d0t) com

A Nation of Realtors

The U.S. has become a nation of realtors, stockbrokers (like yours truly), lawyers, bankers, loan officers, and day traders.

The housing crisis is telling us loud and clear:

"Get a real job!!"

Yours for a better world,

Mentatt (at) yahoo (d0t) com

The U.S. Housing Market, “Another Fine Mess” – Laurel & Hardy


Remember David Lereah? The chief economist for the National Association of Realtors from 2001 to 2007 earned the nickname “Baghdad Bob” for his consistently optimistic projections for residential real estate, even publishing 2 books about why prices would continue higher (2005) and why the market won’t crash (2006). Great work, Dave, and kudos to the American mainstream media (“MSM”) for using this MoRon as a source to help bury the American public alive with debt.

Mr. Lereah got to the top in his profession by telling people what they wanted to hear. Perhaps I need to take a lesson from this jerk. Daniel Yergin, too, but I digress…

The Federal Reserve Bank has but one client: The U.S. Banking system.

The U.S. Banking system is entirely dependent upon one market: The U.S. mortgage market (residential and commercial).

(If A = B, and B = C: Then A = C)

And

The median family income must exceed the mortgage requirement of the median family home (however you define it) in order to amortize the loan.

The market rent for commercial space must be sufficient to amortize the carrying costs and debt service of land costs and improvements or the property is on the fast track to foreclosure.

Any rational analysis of housing and incomes would lead to the conclusion that many markets, totaling tens of MILLIONS of homes, must decline in market price by 50% in order to bring median income and median home price into equilibrium, or that NOMINAL median income must rise at least 100%(!), or some combination of the 2. This is where the Fed comes in. IF: the Fed can inflate the money supply; and, IF that increase liquidity can be directed toward real estate, the U.S. MIGHT be able to avert a significant banking/housing/economic disaster. Even IF the Fed is successful in inflating the money supply (devaluing the U.S. $ further) it seems reasonable to conclude that not ALL of that new supply would flow into Real Estate (after all this is not a command economy). Some, if not all might find its way into other asset classes. It appears this is happening as we speak with Gold and Oil prices rising by over 1/3 since the summer credit crisis began and the world’s central banks began their liquidity injections.

You see, it does not matter that the average home in America has 30% or 40% equity - as I have heard it argued that it would take a HUGE decline in home values before the equity in U.S. banks, about $1.1 trillion, is wiped out because of this cushion. The U.S. mortgage market is in excess of $11 trillion, with 2/3 of that for 1 to 4 family homes, or $7.3 trillion, the preponderance of this is in the HIGH price homes (not the number of homes but the number of DOLLARS) and these markets are taking the biggest hit. South Florida, California, and other coastal zones that were hot in the boom will be taking 30%, 40%, and sometime 50% hits to home values. It is not a big reach to say that it is entirely possible that all $1.1 trillion of “equity” of the U.S. banking industry might be a thing of the past.

Remember, I am speaking in NOMINAL dollars. If the Fed is able to inflate the money supply and funnel these dollars into the Real Estate market disaster might be averted. Then again, it might not be averted either.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

“Always drink upstream from the herd” - Old Country Saying

My friends love to tease me about my response to anything they quote to me from the mainstream media (“MSM”) – “Propaganda!” is my usual response.

Unfortunately, it is not just the MSM that is taking shortcuts with the public’s relative “informedness” or lack there of, the various federal agencies charged with data collection and reporting should be charged with dereliction of duty. Under no circumstance is unemployment 5% or inflation 3%, under no circumstance is housing going to “bottom” in 2008, under no circumstance is ethanol or hydrogen going to replace the missing BTU’s from the decline in hydrocarbons, and under no circumstance is any agency of the federal government or any major corporation going to come clean on these issues until our media gets its head out of its ass and into the sunshine.

OPEC is a case study in pathological deception. OPEC would have you believe that they can pump as much oil as they wish but that the problem with high oil prices has to do with refineries, speculators, violence in Nigeria, the U.S. Housing Crisis and hem lines in Paris this spring.  

The U.S. Department of Energy's EIA has gotten into the act.  On the same day as the Iowa Presidential Caucus, the EIA reported that crude oil stocks fell by just over 4 million barrels per day, but not to worry folks because most of that was represented on the other side of the production pipeline by an increase in distillates and gasoline.  OK, now let's go to the video tape, or the EIA website,  Just click the link directly above.  Notice that net petroleum stocks not including the SPR declined by over 7 million barrels for the week?  Notice at the bottom of the page that "unfinished oil" declined over 2 million barrels?  What exactly is "unfinished oil"?  Isn't crude unfinished?  Couldn't those 2.2 million barrels have made it into the headline number as 6.2 million barrels of crude oil were drawn down from inventories?

If you believe what the MSM, Corporate America, and our Government spoon feed the masses, well, by all means, blow all of the sunshine up your skirt that turns you on.  That does not change the 1 salient issue:  Oil imports into the U.S.  Nothing else matters.  If 2008 sees a decline of over 2% from 2007 as happened in 2007 from 2006, all the finger pointing, first black/woman presidents, gay sex bathroom stings, invasions, hydrogen skateboards, dyslexic poets and double jointed porn stars won't be enough to distract the legions of the great unwashed from being really, really, really pissed off.  Not to mention selling their stocks and walking away from their mortgages and credit cards.  Maybe we make it into 2009 before a nasty round of hyper-inflation, and then again maybe we don't.  There is a reason why gold is at $860 an ounce, oil near $100, and wheat (WHEAT!  You know the Staff of Life!) nearly tripled in 2007, and it ain't because the folks in charge are telling you the truth.

Propaganda?  No, folks we left propaganda behind some time ago - this is more like the Funny Papers meets Truth, Justice and the American Way!

Yours for a better world,

mentatt (at) yahoo (d0t) com

“It don't take a genius to spot a goat in a flock of sheep” – Old Country Saying

$100! Oil, that is, traded at or above $100 today after surging nearly $4 on for no particular reason (other than the fact that our collective oil problem is sinking in through the shield of denial).

Well, trumpets did not blare, the wheels did not come off the economy, and the world didn’t come to an end. $100, $98, $96… there just isn’t enough difference between these prices to make today anything special or enough pain at these prices to retard demand. Here’s the deal: OPEC and the U.S. are no longer in charge of oil demand, distribution, or price. The U.S. will consume EVERY DROP it can get its hands on, irrespective of price, and that price will be set in a very competitive world market. U.S. crude and refined product imports declined 2% in 2007 from 2006, and that trend is going to continue in the short term and then accelerate. Also it is worth mentioning that while total availability of oil fell, the total usage rose slightly. This was possible by drawing down our inventories. These inventories muffled what would have been a true explosion in oil prices, and that explosion has only been delayed, not permanently denied.

Now, let us use our capacity for abstract thought…
What other commodities are likely to surge in price (in dollar terms) in reaction to oil? You can make a lot of money if you pay attention here - or you could lose your life savings if you listen to the droning bullshit coming from cheese-doodles-for-brains Financial Planners, Advisors, Money Managers or whatever the f&%@#!$ these jerks are calling themselves these days.

Oil is going higher. The U.S. imports Oil. The U.S. runs a massive trade deficit. The U.S. has no choice but to continue to run this deficit for as long as the sellers of oil will take their phony IOU’s. This means the U.S. $ is DOOMED. Any questions?

Sorry… that got away from me. You are still going to need U.S. Dollars (if you live in the U.S.) to pay taxes and to pay your bills. Let me restate by saying that the U.S. $’s purchasing power is going to decline fairly dramatically over the next several years. You will know what I mean when milk is $10 per gallon, gasoline is $8 per gallon, bread is $6 per loaf and a dozen eggs is 9 buckaroos. That is my measure of doomed.

If you want to hold the value of your life’s work in a doomed currency I want to wish you the best of luck with your vow of poverty (and chastity; everything has its price – no tickie no laundry)


Yours for a better $100 plus per barrel of oil world,


Mentatt (at) yahoo (d0t) com

The following is a guest post by my good friend Dr. Saif K. Lalani of Vanderbilt University

MONETARY POLICY IN THE ERA OF PEAK OIL
by Saif Lalani
December 28, 2007



It is now clear now to anyone with at least a double digit I.Q. that the world oil production is at or near its maximum potential. Peak Oil will bring with it a host of new problems for the world's central banks. Rest assured that they do not have a Plan B to deal with ever rising prices of food and energy. With the way they are currently handling the housing crisis it does not seem that they even have a Plan A.

At some point in the near future the world's central banks will have to learn the difference between Geology and Economics. To my knowledge there are no central bankers with a major in one and a minor in the other. Absurd? Not really. Since oil is the lifeblood that keeps the world rolling one would hope that someone currently in power would have been enchanted with these two fields of study. (BTW the protagonists in the timeless classic “Atlas Shrugged” majored in 2 such apparently conflicting fields, Physics and Philosophy simultaneously). One teaches that the well once dry is dry. The other teaches that if we stand in front of the dry well with a large enough check, things can change. Hence their inability to understand the intractability of the problem.

There are currently 2 major schools of thought on how Peak oil will affect prices of things in general, the major concern for central banks. The first is that since oil is so essential for production and transportation of almost all things, the prices of everything will head to the stratosphere. The second and not so popular version is that once businesses acknowledge peak oil, spending and hiring will “collapse” resulting in deflationary forces that will match and even exceed the downward march in oil availability. I personally believe that we will have massive inflation in prices of everything essential and massive deflation in everything discretionary.

So what should the central bankers endeavor to do during the coming turbulent times?

Lets start as all physicians do. First, do no harm. Sounds quite simple but it isn't. Central bankers have egos as large as football fields. They think they can save the housing market, stock market, solve the energy crisis, cure cancer, make it rain and part the seas by slightly tweaking interest rates. Central banks need to understand what they can and what they cannot control. Trying to save sprawling suburbs with 0% interest rate policy is probably going to be less effective than trying to arrange good public transportation preferably in the form of electrified rail.

Second, publicly acknowledge peak oil. Do not put some technocrap spin on it. Tell it for what it is. Can you imagine the progress we would have made if one prominent central banker would have said this even 2-3 years back? Prepare the world for hardship. It is going to come regardless what they may say.

Third, ensure that loans are available for energy projects with a positive EROEI (energy returned on energy invested). Peak oil is likely to stress the banking sector to levels unseen since the great depression. Remember extremes can occur in both directions. Whereas once banks thought it made sense to extend no documentation loans to people to buy insanely expensive properties, they may not even fund good sound energy projects in the future. The fed and other central banks could in this case lend directly to fund such projects. Since energy prices would be the main reason for unemployment and inflation this would fall within their mandate. It is important to stress that positive EROEI is very important otherwise every action will just lead us into a deeper hole. They would likely need help with assessing EROEI but should have no problem in obtaining such help.

Fourth, do not attempt to rescue the dying industries. Detroit automakers, airlines and travel and tourism in general will come under increasing stress. The first 2 could not make money when oil was under $20 a barrel and will certainly not be able to survive for long without help in the future. There will be increasing pressure to “do something” about it. The Fed must resist the urge to help out. No rescue package for airline bonds or GM's junk paper will make an iota of a difference in the long run. Might as well fund an extra geothermal project with the money.

Finally it is paramount that we have honesty in statistics. The fed and other central banks need to report correct unadjusted inflation and GDP statistics. This will allow us to assess the actual impact of the problem and effects of the solutions we may try to implement.

I would like to end by thanking the central banks for making it a truly wonderful and entertaining

12 days of Christmas

On the 12th day of Christmas look what my true dove brought for me
Mortgage lenders with just no brains
Angry Crammer who never informs but always entertains
Never ending one time write-downs
Bank CEOS moonlighting as clowns
Surging food grain prices
Unsolvable housing crisis
Falling US dollar
Restaurant portions that keep getting smaller
3 rate cuts that messed up things
Gold prices that got wings
Double prices for milk and cream
And a C.P.I. report that said this was all just a bad dream.

Happy New Year to All


This post has been used by permission. © Saif K. Lalani