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.

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

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.

Rail Traffic Doesn't Lie

Goods are transported across the U.S. on trucks and rail cars, so keeping an eye on rail traffic and diesel fuel consumed gives you a good luck at actual, and very accurate, data.

The rail car data for crushed stone stinks...

As does the data for Lumber...

Whatever stimulus that made its way out of Washington did not go to "shovel ready" projects. I'll give you 2 1/2 guesses where they went...

Data, The War

WOW!

Just when you thought inventories of petroleum products were almost overflowing, you get data this week that 12.7 million barrels of petroleum products & crude were drawn down. Still, consumption of product, other than gasoline, is down big. This does not support the goldilocks scenario portrayed by the U.S. equity market, and a warm winter would likely portend a significant decline in distillate, and crude Oil, prices - or at least I think so... that is, unless you have a few more inventory reports like today... that would be a game changer.

I want to be long Oil for delivery out a couple years, but I really think that the probability is with lower, not higher prices, in the near term (not calculating the effects of a dust up with Iran).

Imports continue south in a big way, and demand for petroleum products is just awful here in the U.S.. That does not speak well for the near term economic picture. On the other hand, China has increased imports faster than we lost them... but, I would not put a great deal of stock in the "Chinese Miracle" just yet. They do, however, seem more interested in buying Oil than Gold.... and they have the cash....

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

It is no secret that I am a Right of Center Libertarian type, and a Registered Republican - and I am COMPLETELY opposed to ANY (further) involvement in Afghanistan and Iraq.

I am not alone (from Jack Hunter at American Conservative):

For eight long years under George W. Bush, conservatives endorsed a don’t ask, don’t tell foreign policy–they did not really ask why their country was at war and Republican leaders did not tell, or bother, Americans with any of the gory details. Missions were accomplished, we fought them over there so we didn’t have to fight them here and troops were supported by simply supporting the wars they fought, with little to no dissent. But why were we fighting? What was “victory?” How many had to die? What was the cost? Conservatives did not ask-Republican politicians did not tell.

But some Republicans are finally asking. Regarding President Obama’s decision to escalate the war in Afghanistan, columnist Reihan Salam writes: “Rep. Jason Chaffetz, a Utah Republican known for his independent streak, has made a conservative case for withdrawal.” Says Chaffetz: “Our military is not a defensive force for rough neighborhoods around the world. They are trained to be an offensive, mission-driven military force to protect the United States of America. They are not trained to be nation builders or policemen… If our mission in Afghanistan is simply to protect the populace and build the nation, then I believe the time has come to bring our troops home.”

Is Chaffetz’s position on Afghanistan a sign of things to come? Salam thinks so, writing: “my guess is that by the 2010 congressional elections, dozens of Republican candidates will be doing the same across the country.”

We can only hope. As a conservative, I have long found it perplexing that to a large extent the American Right has been defined by its enthusiasm for going to war virtually anywhere, for virtually any reason and often for no good reason.

How's that for a candid assessment?

This would be an excellent time to start bringing service folks back from all points on the globe.

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

The U.S. wealth and elite class, DOMINATED BY THE LEFT (Wall Street is NOT REPUBLICAN! It is DOMINATED by GOLDMAN SACHS, the ANTI-CHRIST, and they don't get more liberal-democrat than GOVERNMENT SACHS!), has never been so blind (IMHO) as to how bad conditions are for the "Reagan Democrats" and Small Biz Republicans on Main Street (they pretend to give a good fart about the people that are so far down and out there is no shot in h*ll of improving their lot in less then 3 generations, but the people that actually get up every morning and try to do the right thing? They dismiss them as a "bunch of nose picking, gun toting" rednecks, white trash, rubes...) and I fully expect over the next 5 years or so that economic conditions will deteriorate badly. As I have often said, I can't time my toaster oven, so don't expect me to give you any kind of firm time line - I will demure - but I give the outcome a virtual certainty. (I give it a 55% probability of a hyper-inflationary blow off, a 35% probability of a deflationary collapse, and 10% Armageddon/No problem/standard stagflation.)

I do not for 1 SECOND believe that the U.S. will reduce its spending profile - neither for social programs NOR the military budget. It then follows that the system will go Chernobyl at some point... and if you really want to time that point? Follow Oil imports, inventories, and production.

I am not hoping for or wishing for this... this is just what the data says to me.

Beware Municipal Bonds

The municipal bond market blew up a couple of years ago. That blow us was a fart compared to the windstorm coming to that market place.

The big states, New York, California, Florida, Illinois, are in deep doo-doo. No, states cannot file for bankruptcy, but most other municipal entities can, and they make up most of the debt in the muni bond market.

I can't give specific advice in this forum (actually, that is about to change. I have withdrawn my membership in FINRA in order to concentrate on my proprietary investments - soon I will have A LOT to specifically say). I can say that, in general, Treasuries are safer than Muni's at this time.

I am in the camp that a currency crisis will happen some time in the next year or two - but it won't be the US$. My bet is that now is the time to hold US$, and that the currency crisis (Greece, Ukraine, United Kingdom, Venezuela... are all very good candidates, much better than the US$ at the moment). I have no idea of WHEN, exactly. You will know it when you see it. In that scenario, the US$ will be the beneficiary of a flight to safety - and everything else will get hurt in US$ terms, with the exception of the U.S. Treasury market.

I reserve the right to change my mind on a dime if the data comes in differently, but I can say with great confidence that the Muni market is very, very challenged at the moment.

Libertariananimal (at) gmail (d0t) com

"Child Hunger" makes front page lead article MSNBC

Although a sad state of affairs, I was thrilled to see the American "Child Hunger" issue make the front page of MSNBC today.

I get a bit of ribbing from some of my associates that the sky hasn't fallen yet... maybe not for Wall Street professionals benefitting from "Bailout Nation", but for working class families the collapse is past tense. When you can't put enough food on the table, the next step is no roof over your head.

This issue has to be attacked from all angles. 25% of all children, and 90% of African-American children will receive food stamps before adulthood! The children are innocent. The parents? Not so much. Where the h*ll is President Obama, a black man that has the political cover to call black fathers "on to the carpet" - and take responsibility. Too afraid of offending his constituency? Folks who cannot provide for themselves certainly cannot provide for their children. How do we break this cycle? If it is this bad now, when food is "cheap", what will happen if food gets "expensive"?

Our country is falling apart from within. The Taliban? Small potatoes. 17 million American children living in homes without enough food? BIG POTATOES.

Look, I was never an Obama fan... but where is the outrage from his supporters?

WTF!!??

Ethanol

I was more than a little off in my guestimate of how much ethanol the U.S. can produce from corn.

It is estimated that in 2009 4.2 Billion bushels of corn will be consumed in the manufacture of ethanol, while projected 2009 exports are 2.05 Billion. If the U.S. ceased to be a corn exporter, and we took the 2 Billion bushels and converted it to ethanol at 2.7 gallons per bushel... hmmm... 5.4 Billion gallons... divided by 42 (gallons per barrel)... 128 million barrels/365 = 352,000 additional barrels per day.

So I was off by half. Or 100%. Depending on which way you look at it. Max production of ethanol is somewhere around 1 million barrels per day. Said another way, with 9 million barrels of "blended gasoline" consumed each day, the U.S. might have the ability to replace 4% any future import decline with corn ethanol.

Of course, more corn production could be diverted toward ethanol at the expense of livestock feed, which would certainly have a deleterious effect on meat, milk, eggs, and foods processed from corn, though I doubt this will come to pass. Somewhere in there either the price of fuel brings down demand or the price of food brings down everything. Just kidding. I need to think on that some more, but there are certainly some unintended consequences.

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

I was off a little on the export percentage, too. The U.S. is 61.4% of the world corn export market, not 2/3's (I was close). If the U.S.'s contribution to the world grain market for corn evaporated this list of importers would be most impacted.

In other words, ethanol has saved our bacon in 2008 and 2009 (with help from increased domestic production of crude in 2009), and it was a one off. There is little room in the system to increase ethanol production. This also explains why gasoline consumption did not decline year over year, while vehicle miles traveled is down almost 3% from the peak in 2006 (because ethanol has only 65% of the energy, and hence miles-per-gallon, of gasoline).

So which came first? The chicken, or the egg? Did the economy contract from lower petroleum availability, or did availability decline because the economy did not require it? Does it really matter? Nope. Not even a little bit. What matters is the Oil import picture for 2010-2011.

Thank G-d its Wednesday!

Ah, wednesday! I love the smell of data in the morning... it smells like, like... victory.

The decline in imports into the U.S. continues apace. From today's report:

U.S. crude oil imports averaged 8.1 million barrels per day last week, down 264 thousand barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 8.5 million barrels per day, 1.4 million barrels per day below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 750 thousand barrels per day. Distillate fuel imports averaged 185 thousand barrels per day last week.

The four week period of '09 vs '08 had imports down 16.5% year over year. For the YEAR to date vs. the same period last year, imports are down 11.1%.

If it were not for the 643,000 bpd of ethanol produced in the U.S. and blended with gasoline, I believe we would be having some real trouble. I also think that ethanol is a very permanent guest at the table, and that within a few years the U.S. will be unable to export corn (the U.S. is now somewhere between 66.6% and 75% of the world export market of corn). Boy, are the Japanese gonna be p*ssed off when that comes to pass. Japan is the world's biggest corn importer, using the grain for domestic meat production. Since meat is roughly 3x the price in Japan as it is in the U.S., this should get really, really interesting.

But I digress...

How much more ethanol could we produce at a maximum? Good question. I will have a firm answer shortly, but I'll throw a guestimate out there - 2 million bpd (triple current production). The unintended consequence of which would be unacceptable, IMHO. On the other hand, had the 643k bpd of ethanol failed to show up, the consequences of that would not be so hot, either.

Ethanol and increased domestic production of crude has kept our feet out of the fire given the decline in imports. 2010 is the year in which the truth is likely to prevail. Or not. The plot thickens...

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

A commenter recently pointed out this docudrama on youtube - "The Fall of the Republic".

It is very much worth watching, if you have the time. If not, the first 30 minutes gets the point across. I would say it is 75% accurate, and 25% agenda, though whose agenda I know not. Still, I liked it, and I think the documentarian makes a good case while only slightly abusing facts and truth. Like I said, it is at least 75% accurate, and that's 100% more than what you get from the media.

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

"Americans want Government to Spend for Jobs, Send Bill to the Rich"

I regularly beat up the Liberal Elite on this sight. I should save some of my fire for the non- working poor. I got some street cred in this area of study, a PhD., as it were. There are some good reasons poor people are poor. We all know what they are, I'll spare you the lecture. But here we are. We have created a significant portion of of Americans who believe in a "free lunch".

In case they are feeling smug, I would like to point out to the American elite that all revolutions eventually eat their young.

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

That ethanol number keeps coming back to me. Something not right in the inventory data of gasoline blending components... I need to sleep on it.

Back soon.

libertariananimal (at) gmail (d0t) com

The Export Land Model

Jeffrey Brown, also known as "Westexas", of "Export Land Model" fame, stopped by the AEC earlier this weekend and left the following comment:

Saudi Arabia, the US & China (EIA Data)

The cumulative shortfall in Saudi net oil exports, between what the they would have (net) exported at the 2005 rate and what they actually (net) exported was 840 million barrels (mb), from 2006-2008 inclusive, as US oil annual oil prices went from $57 in 2005 to $100 in 2008.

On the import side, the US and China are respectively prime examples of the OECD and non-OECD responses to rising oil prices.

The cumulative shortfall between what the US would have (net) imported at the 2005 rate and what we actually (net) imported from 2006-2008 inclusive was 687 mb.

The cumulative increase between what China would have (net) imported at the 2005 rate and what they actually (net) imported from 2006-2008 inclusive was 839 mb.

So, China not only offset our cumulative decline, their increase exceeded our cumulative decline.

This pattern is what I expect to see in the future--OECD and non-OECD countries battling it out for a share of declining net oil exports, with OECD countries generally being forced to reduce their consumption. I had been expecting more of a short term decline in US demand, primarily because of large anticipated reductions in government payrolls and government services (initially local & state, with the feds joining in later), but the stimulus spending is apparently postponing that day of reckoning. But I do think that the longer it takes for another downward leg in US consumption to occur, the less impact that it will have on global net demand.

Most companies, most governments, and most individuals are essentially basing their economic decisions on what I call the FIM--the Fantasy Island Model. On Fantasy Island, oil fields don't deplete.

In my opinion, a more realistic scenario is that oil importers worldwide, in just the past four years, have already burned through 20% to 25% of our post-2005 global cumulative supply of net oil exports.

In any case, based on our export models, governments worldwide are doing precisely the wrong thing at precisely the wrong time--by encouraging consumption, when we should be doing everything possible to discourage consumption.

(For those of you outside of the "Peak Oil" debate, Jeffrey Brown is probably the most well known Geologist on the planet with the exception of M. King Hubbard. I encourage you to Google Jeffrey Brown's stuff.)

In other words, the supply of exported Oil making its way onto the world's oceans is falling at 5 - 7% per year, but the fall in imports into the U.S. is declining faster. Given the currency and car fleet growth in Asia this makes a lot of sense.

It also means that the probability of an Oil shock and double dip recession is so high as to be near certainty sometime in the next 3 years. That does not mean Oil could not decline in price prior to that, but I don't see how another Oil shock does not harm the equity and housing markets and rough up the banks.

"Inbred Culture"

G.M.'s Whitacre says that he is promoting young executives and women to overcome that company's in bred culture.

HA!

America's elite are all one big, happy family of group-think jag offs.

Take a look at the U.S. Supreme Court over the past 30 years. The vast majority of justices come from 5 Law Schools - Harvard, Yale, Princeton, Columbia and Stamford.

Are there really no other smart people from any other walk of life?

Take a run down the Managing Director list at Goldman Sachs (and the former Bear Stearns and Lehamn Brothers). Same universities (business school rather than law school). I have some experience in the matter - once upon a time I worked for Bear Stearns.

(By luck and happenstance I got hired, though I was nothing more than a self educated wise guy. Actually Bear liked to promote the idea that they hired guys like me, they called us PSD's (Poor, Smart with a Deep desire t be rich. The Chairman coined the term and nobody wanted to argue with him) and to their credit there were a few smart, token working class guys floating around. I don't want to sound ungrateful - I was extremely well paid, and the experience I got and the connections I made I could not have recreated elsewhere - but there was still a glass ceiling of sorts for guys like me. I was the number one producer of new clients in private client services (PCS) in the firm. Numero Uno. No one even close. I knew how to make it RAIN. But you were limited in earnings potential in PCS, the big dough was in mortgage backed securities (MBS) trading and sales, and I was an ambitious young man. When I went down to see the folks in MBS, they told me I was "Not Qualified". I said "how much more qualified can I be? I produce more new business than the other 500 guys in PCS." To which Craig S. said: "I have 20 guys with MBA's from Harvard". And there it was. I was a proven rainmaker and producer, but I never summered on the Cape, I played football and boxed instead of tennis and golf, and washed dishes at the local Country Clubs instead of being a Member... Not that I expected another outcome, after all I was taking a long shot at a job EVERY Wall Street maniac wanted. The worker bees in that department were making $3 million+ per year, and the big cheese, Warren S., $20 - $30 MILLION (he eventually got fired and had to get by with $400 million or so). Not an easy position to land. But his dismissal of my accomplishments in favor of glorified, part-time group training irked the sh*t out of me. On the way out I told Craig I couldn't think as slow as him if I tried, not if I were drugged, not if I was asleep, and I would wipe the floor with his minions in chess, cross word, concentration, any intellectual competition he could think up; I never worried about "burning bridges"... I was only too willing to walk around with a can of napalm and a blow torch... and I don't think these guys were used having someone talk to them like I did.... When my boss up in PCS heard that I was trying to catch on with MBS he was furious... but when he heard what I told Craig on the way out he laughed hysterically, and all was "sort of" forgiven. I moved on to a firm that let me run the show, but without Bear's capital the opportunity was not quite the same. A few years later it seemed to me that if I wanted to be the big cheese I would have to give the job to myself and I opened my own shop. Little did I know that the MBS group at Bear Stearns were the very guys that eventually blew up the world financial system. Funny how things work out.)

Our system, corporate, legal, political, "educational" favors an entrenched ruling class in ways innumerable to count, "but the group-think" thing going on at the U.S. Supreme Court is nothing short of APPALLING. Especially since these are APPOINTED positions.

There is also no Constitutional requirement that a Supreme Court Justice must be a lawyer. Have you ever read the U.S. Constitution? It is just not that long or complicated. Perhaps you would argue about precedent and decisions. Like what? The Dred Scot case?

But what do I know. I MUST be dumb. After all, I didn't go to Harvard.

Libertariananimal (at) gmail

Oil Price "Perfect"

Saudi Arabia’s Al-Naimi Says Oil Price Is ‘Perfect’

Yes, Mr. Al-Naimi, the price of Oil is perfect - for OPEC.

With Oil prices trading between $70 and $80 per barrel, OPEC feels that the political will necessary to develop alternative transportation infrastructure and energy supplies simply will not be there in the developed nations. "Perfect".

Trade surpluses into the Oil exporting nations are sufficient to maintain the position of the elite and placate their masses. "Perfect".

Oil prices are such that the exporting nation's elite can continue to triangulate the political pressures on them from the importing nations, and these nice folks can continue to fund all sorts of "kooks, loonies, and squalid criminals" (Ronald Reagan). "Perfect".

And if all involved would just maintain the status quo, forever, things will continue to be: "Perfect".

The sad fact is our leadership here in the U.S. and the West is simply hopping to extend the status quo until the next administration takes office, which the current one hopes is 2017, to which I answer:

NAFC. Perfect.

Libertariananimal (at) gmail

Beware the "Elvis Trade"

Regular commenter, "Lenny D" calls the early calls for the demise of the US$ the "Elvis Trade". As he said to me: "What's going to replace the US$? The Euro? The Yuan? Give me a break. The U.S.$ is a lot like Elvis.... Fat, sweaty... but still "The King".

Is this the beginning of the long awaited US$ rally? Maybe. Maybe not. It certainly bears watching.

Besides... I love calling it the "Elvis Trade"... Fat, sweaty... but still "The King" (but not for much longer).

Libertariananimal (at) gmail

Style over Substance

Today's quote from my favorite curmudgeon...

"Grown men swarm in the unemployment offices wearing sideways hats and butt-crack trousers. Why not just tattoo a message on your forehead that says: "Moron For Hire"? - James Howard Kuntsler

You gotta love Kuntsler. He's one of the few folks on the Left that I can read without going apoplectic. Well, he describes himself as a Liberal, but I think he is a Libertarian in Sheep's Clothing.

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

And speaking of love... My favorite "Progressive Libertarian", Gerry Celente, was interviewed on the Financial Sense News Hour this past weekend (hit the link and skip the first interview. Celente is very much worth listening to). Celente is THE MAN, the guy folks like me hold in awe given his track record as a forecaster... but it is the interviewer, Jim Puplava that brings up what REALLY destroyed the family farm in the U.S.

ESTATE TAXES. No, not factory farms, thought they certainly did some damage, it was the f^&%%ing U.S. (estate) tax code that destroyed the backbone of the small farming communities in the American South, Midwest, and West.

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

Matt Simmons (they don't get more Republican and establishment as Simmons, he was an important energy advisor, and contributor, to GWB), of Simmons International, in his most recent presentation at the ASPO conference published that "BEST CASE 2020, World Crude production would be 55mm to 60mm bpd" - that's down from 73 million bpd. Given that only 35 mm of world oil production is exported currently, and the exporters are increasing their domestic consumption... My bet is ZERO oil imports, outside of Canada, into the U.S. in 2020 or so.

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

Barak Obama is now a full fledged War Time president. I have no idea if he is doing the right thing or not, but I look back at the disgusting treatment GWB received by the opposition and the media, and I refuse to do likewise. Much as I oppose most of the president's policies, I support a sitting president doing what he is charged by the Constitution to do - protect us. I am glad that I am not the one making that decision.

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

Gasoline demand dropped out of the bottom last week according to the EIA (inventories of gasoline increase 5.7% in a week). Of course, this might be a "catch up" increase in inventories... though the EIA says demand increased .1% from this time last year...Nothing in the data supports the view that the U.S. industrial economy is expanding, and the Oil imports decline rate remains alarmingly high.

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

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