Monday, May 31, 2010

Drill, Drill, Drill

Owing to this horrifying BP oil spill, it is now blatantly obvious to all but the thickest observers that America's addiction to oil is the greatest threat facing this country now and in the future. America has sold its soul to the oil industry and the end-game is now unfolding. What was once a secure source of energy that enabled economic growth and progress has now become a massive ball and chain that will severely inhibit all economies rigidly tied to fossil fuel infrastructure.

The threats are overwhelming, with clear linkages between the environment, the economy and national security, three areas that one would think are high priorities to policy-makers. And yet, like the 800 pound gorilla in the room, policy-makers of all stripes still walk on egg shells around the slimy oil industry, even as it sponsors global warming disinformation and fights tooth and nail for more drilling rights in the gulf, not withstanding the current environmental fiasco. Obama now looks like a total fool for having opened new areas to offshore drilling just 3 weeks before this catastrophe started, no doubt alienating a big part of his political base. Meanwhile industry tools Bobby Jindal (Governor of Louisiana) and Louisiana Congressman Charles Boustany are bent hard over opposing Obama's 6-month drilling ban which was intended to give time to investigate the root cause of the oil spill and take corrective action. It's mind boggling that these shills can't see taking 6 months to figure out what happened and how to prevent the same in the future, even as their state's fishing and tourism industries are in the process of being wiped out.

This gulf oil spill disaster is just the latest reminder that the industry as a whole is taking on greater and greater risks in its quest for oil. Rigs are operating at extreme depths using unproven methods without adequate safeguards. All appropriate regulations have been bypassed, as the necessary regulatory agencies were greased up front, assuring swift approval without adequate (any) environmental review. Speaking to an environmental attorney this past weekend, he told me that all of these deep sea rigs were approved on the premise that they posed de minimis environmental risks ! i.e. the lowest level of environmental review was required, basically a rubber stamp.

And if you think this BP gulf spill is bad, clearly this is just business as usual for the oil industry pigs who have left their greasy hoof print in every corner of the globe.

Hurricane Body Blow
Those cruel gods of reality have found a most direct way of punishing the U.S. for its oil addiction. It's a hard fact that the average hurricane is now 50% stronger than it was 40 years ago, and worse yet the occurrence of deadly category 4 and category 5 hurricanes has also increased proportionally. Although, oil industry apologists and everyday morons still deny the linkage between burning fossil fuels and environmental catastrophe, these are the types of people who will deny anything that is not in their own immediate self-interest. They are like a a 400 lb fat man who can't get out of his own way and needs every ounce of energy just to get back into the buffet line.

As for the legitimate scientific community, there is now overwhelming scientific agreement on anthropogenic (manmade) climate change. Even the American Association of Petroleum Geologists has recently shifted stance to a new "non-committal" statement, although also (finally) admitting:

"Climate change is peripheral at best to our science…. AAPG does not have credibility in that field…….and as a group we have no particular knowledge of global atmospheric geophysics".

Oh right, now they tell us, I wouldn't trust these corrupt house boys to tell me the time of day.

Back to the key point, this season NOAA expects 8-14 major hurricanes, which would make it one of the deadliest seasons ever recorded. It's not hard to predict that the growing ubiquity of these deadly hurricanes is going to eventually decimate a majority of gulf coast and Atlantic seaboard communities, causing widespread economic dislocation.

Between oil spills, rising sea levels, deforestation, desertification, droughts and recurring Katrina's, the credibility of the oil industry and its copious disinformers will eventually be lower than Wall Street's. Unfortunately that day will likely come at a time when it will be far too late to do anything of consequence about the problem. Suffice to say that by the time there is political consensus on global warming and the need for immediate action, there will be a lot of bodies buried.

The other blood-stained aspect of this oil soaked faustian bargain we have entered into, is this oil-for-souls economic/military "strategy" that has grown out of control in the Middle East. Apparently squandering hundreds of billions in oil payments to the Saudis, Iranians, Kuwaitis and other corrupt Middle Eastern regimes has not been a great idea. Come to find out, some of the hundreds of billions we gave them, was not just used to prop up puppet governments and corrupt potentates, but it also found its way into the hands of dozens if not hundreds of terrorist groups. Using armed coercion to keep these same terrorist malcontents at bay in the region hasn't been working out great either. These costly, never-ending wars in Afghanistan and Iraq have simply further hollowed out, destroyed, and otherwise destabilized those failed states which will no doubt become renewed hot beds for terrorist activism when the U.S. inevitably pulls out. That will leave the region with two very unstable and hostile nuclear armed regimes in Iran and Pakistan, augmented by two or more totally failed and anarchic states (Iraq, Afghanistan, Yemen etc.) that can be used as training bases. Essentially, it will be a nuclear-armed insane asylum, having a major axe to grind with the West and the U.S. in particular. Meanwhile, from an economic perspective, along with outsourcing, this entire oil import strategy has contributed to the total depletion of the economy and left the U.S. imminently dependent upon the generosity of foreigners for day-to-day funding and rollover of debt.

And yet, for all that, the U.S. is the only major developed nation that still does not have a basic consumption tax on oil, therefore we are essentially subsidizing the entire oil industry with all of its environmental "side-effects" on top of subsidizing the entire Middle Eastern terrorist complex.

Tuesday, May 25, 2010

Idiocracy Realized

Ayn Rand would be proud. These past 50 years have been an unprecedented orgy of consumption and self-interest that would make even her blush. Granted, the economy has devolved into a Frankenstein's monster of crony capitalism with a dash of pseudo-socialism. Unfortunately the system of "pure capitalism" that she envisioned currently only exists in Milton Friedman's text books and in those parts of Latin America where it wiped out entire economies and impoverished millions. Here in America, we will get there, but these things take a bit of time.

She would be pleased to see Wall Street firms back at work, following a (very) brief hiatus, busily securitizing and liquidating the country. She would nod approvingly at a growing gap between rich and poor now back to historic levels last seen in the 1920s - further proof that altruism is indeed dead and long buried. She would note the 3 billion plus people across the globe living on less than $1/day and the 50k+ children dying each day for want of a few dollars of food and medicine. She would give a nod to our fortitude to allow these indolents to suffer the inevitable consequences of their laziness and inefficiencies.

She would highly approve of the populist tea party movement enthusiastically railing against its own interests and the "profligacy" of the current Administration, not withstanding the 30 previous years of squandered resources and deficits. Talk about closing the barn door after the horses are out. I cannot fathom the average individual taking to the street to oppose the extension of health care benefits to the unemployed, yet implicitly supporting tax cuts for the ultra wealthy, copious handouts for the Beltway bandits, troops in 140 countries, 18 aircraft carrier groups and 2 totally pointless wars. Go figure.

I also can't reconcile those who seemingly profess a belief in Judeo-Christian values while enthusiastically embracing Ayn Rand's decadent ideology of "rational self-interest". After all, Ayn Rand considered altruism to be immoral, thereby not only bastardizing the term "moral", but also taking a diametrically opposite view to that other well known Jewish philosopher.

All sarcasm aside, I don't think even Ayn Rand could get her demented mind around this current fiasco we call the economy. The fact remains that any economic system that is systematically dismembered by special interest groups will fail, be that Capitalism, Socialism, Communism or any other system we conjure up. Political operators believe that the status quo is sustainable and even desirable - this endless oscillation between one political ideology and then another, each allowing its constituent crony special interests to feast at the public trough. Yet just an ounce of honesty and decency reveals that to be a false and self-serving belief. We could completely swap out and replace the entire current batch of jokers on Capitol Hill with a completely new crew and yet obtain the same deleterious outcome, as long as special interest groups have unfettered access to public money and power.

The rest of this entry is a time capsule for the future, as a testament against the burgeoning if not fully realized Idiocracy. Following is a list of *some* of the more egregious widespread ideas and practices that years from now the survivors (if any) of the impending Dark Ages will not believe are commonly accepted both here in the U.S. and across much of the developed world:

1) Running fiscal and trade deficits for 30 years straight
(Except for a couple of years during the Clinton Administration when tax receipts from the tech bubble caused a temporary fiscal surplus )

2) Using cheap loans and low interest rates to "grow" the pseudo-economy via over-consumption and misallocation of capital, conveniently sidestepping each financial crisis by adding yet more monetary stimulus, until the entire system finally collapses in a deflationary credit collapse on a scale unprecedented in history

3) Spending Social Security and Medicare tax receipts as general revenues, thereby bankrupting the system and leaving future generations (and the Boomers) with no social safety net

4) Outsourcing an entire manufacturing base to foreign countries along with all of the accompanying managerial and engineering skills and intellectual capital, replacing these industries with Starbucks baristas, mortgage brokers, and bar tenders

5) Using homes like ATM machines

6) Paying Wall Street twenty-somethings millions of dollars to day-trade pieces of paper back and forth in a zero sum game while the real economy and real jobs are outsourced to foreigners

7) Injecting 80 million barrels of oil per day into the atmosphere and then ignoring the advice of the overwhelming number of climate scientists; preferring instead to follow the hack advice of infotainment talk show hosts, oil industry owned pseudo-scientists or Billy Bob next door who has been faithfully assimilating the Op/Ed section of the Wall Street Journal on his way to the Sports section:

- Despite hurricanes growing in force by 50% over 40 years
- Polar ice caps melting at unprecedented rates
- Acceleration in temperatures and growth in atmospheric carbon occurring at fastest rate in all of Earth's history
- Mass extinction of species occurring at fastest rate in Earth's history

8) Funding terrorist enemies in the Middle East via their wealthy oil sponsors who pretend to be our so-called allies in the war on terror, while we pretend not to notice...

9) Fighting two endless and pointless wars in the same region.
(Small hint for policy-makers: The war on terror can't be won; terrorism is a method of warfare, not a specific instance of war, uh duh!)

10) Electing a drug-addled, alcoholic, 'C' student, draft dodging dilettante and Alzheimer-ridden B-actor to the most powerful political office on the planet. More generally, electing smooth talking salesmen with no history of accomplishment who spend half their time campaigning and the other half of the time making fancy speeches promising the impossible.

11) Pumping our children full of factory junk food toxic waste while obesity and diabetes rates skyrocket amongst the young, all in the name of "consumer choice" i.e. the trojan horse for selling more corporate crap

12) Vastly overpaying country club CEOs tens and hundreds of millions of dollar to layoff millions of workers, outsource the most productive part of the economy, and otherwise drive the country into depression. Meanwhile, minimum wage is a measly $7.25, lower than it was in 1974 adjusted for inflation (i.e. 1974 equivalent is ~$10).

13) Producing an overwhelming preponderance of ESPN-addled boy-men too preoccupied with sports games and Xbox to notice the world disintegrating around them.

14) Using 5x as much resources as the average person on the planet and believing this to be a sustainable and scalable way of life, even when confronted with $147/barrel oil

Friday, May 7, 2010

Tsunami Alert

This week was a harbinger for the near future. The financial crisis and riots in Greece are just the canary in the coal mine for the impending global credit panic and ensuing anarchy that will make 2008 seem like a picnic. Just as the collapse of New Century financial and two Bear Stearns hedge funds was the harbinger of the subprime crisis (totally ignored by Wall Street and the media) so too, Greece is advance warning of this next much deadlier stage of the unrelenting credit crisis. It will likely only take one sovereign default to trigger an avalanche of defaults among all countries that have borrowed heavily and rely on accommodating credit markets to rollover their debt e.g. Spain, Portugal, Italy, Ireland, UK, Japan and a host of Eastern European countries.

The Elliot Waves now show that we are at the forefront of the biggest market decline in U.S. history, aka "Primary 3" (P3). Primary 1 was the market decline that started in 2007 and ended in March 2009 wiping out over 55% of market value. Primary 2 was this past year's countertrend rally. P3 will reassert the downtrend and take the markets far below the P1 low, potentially erasing the past 40 years of stock market gains, according to EWI. Before you dismiss these folks and Elliot Wave Theory itself out of hand as "financial astrology", bear in mind that while their timing was early, they called for a major top in 2007, they precisely called the low in 2009 (to the week), and now have been early (as have I) for calling a top here in 2010. If they are right now again, then that would prove the overwhelming majority of financial forecasters to be drastically wrong once again, and the early timing of the call will be rendered wholly irrelevant by the sheer magnitude of the decline.

Initially here the markets *may* stair-step their way down, as investors continue to "buy the dip", however, the inevitable flight from risky assets will likely cause a cascading panic crash. Yesterday was a small taste of just such a crash, as the market lost ~7% in about 10 minutes and then quickly recovered. We were told that this was a "trading glitch", except there is still no proof of any erroneous trade. The fact is there was no glitch, the mini-crash was simply a function of sellers overwhelming buyers. It was a one-sided market to the downside, which is exactly what we should expect after a year long Fed sponsored liquidity-driven rally intended to prop up Wall Street and propagate the illusion of recovery. Computer trading programs further contributed the problem as up to 70% of market trading volume is now controlled by automated trading programs. Many of these programs use technical (price) indicators to determine the current direction of the market and then drive momentum in the direction of the prevailing trend. Now that the trend has turned down, these programs are clearly exacerbating downside momentum.

Contributing to the inevitable panic will be the realization that the Fed and Governments are powerless to do anything, since they already squandered their resources in 2008 bailing out the investor/speculator class at the expense of the Middle Class. This time there will be no bailouts, not only because they will be politically unobtainable, but also because the scale of the market collapse will dwarf government/Fed resources.

As expected, U.S. Government Treasuries were a safe haven and long-dated Treasuries massively outperformed even beyond my expectations. Already Nassim Taleb's "no brainer" strategy of shorting Treasuries has turned out instead to be a "no brain" strategy. I can't imagine recommending shorting an asset that has proven to be a safe haven throughout the past weeks' turmoil. That is a boneheaded move, even by Ph.D standards. Yes, Gold held up well also, but as I have explained before, I don't see gold being a liquid safe haven during extreme deflation, as the amount of dollars in circulation will collapse, causing the prices of all things dollar denominated to fall. Further to the point, the U.S. dollar screamed higher against all other major currencies (except JPY), which caused further turmoil in the markets, as Wall Street's hot money (hedge funds etc.) are still clearly positioned for the "reflation" trade (short dollar, long commodities, cyclicals, emerging markets).

In short, if you have not already stocked up on food and ammunition, now would be a good time to do so, post haste.