Three meals or a tank of gas

Its been said by the great philosopher Arnold Rimmer on an episode of the British Sci-Fi sitcom Red Dwarf that "They say that every society is only three meals away from revolution. Deprive a culture of food for three meals, and you'll have an anarchy.". Today I would revise that to three meals or one tank of gas. For those of us that lived through the oil shocks of the 70's and 80's, you may recall the fights that broke out at filling stations between formally happy motorists, station attendants and each other over their God-given right to the unlimited supply of precious petrol.

Its no coincidence that our problems with money and credit began once world oil production peaked in 2005 or 2006, depending on how we count. The exact date is unimportant, the fact that the peak is now in the rear view mirror is devastating. World oil consumption has now surpassed production with most producing countries well past their peak, and the rest at maximum production and declining.

With no new big oil discoveries since the 1960's, discovery is way behind depletion. Competition for limited production can mean war not just at the pump, but across borders as well. Despite what clueless Americans and the idiots they send to Washington believe, the big oil companies don't control the price, or production of oil. 85 percent of oil production is in the hands of nations, not companies. Nations like Russia, Saudi Arabia Mexico and Venezuela. Countries that are consuming more of their oil production internally leaving less for export to places like the US, India and China that can't produce enough for their own population and industry.

The US is producing less than 25% of the oil we consume. Not because we don't want to, because we can't. The shock back in the 70's was when the US oil production peaked. There were plenty of countries around the world that were happy to sell us the oil we needed after a short lesson of what happens when geology meets economics from OPEC. Now the world has peaked. There's nowhere else to import from. Perhaps you should re-think that new Hummer purchase, at least until they start making a plug-in hybrid model.

Chavez seals his fate.

Regarding this story from AP, (sorry, link no longer works) It seems that among radical socialist reforms proposed by Venezuela's re-elected Hugo Chavez such as nationalizing the electricity, energy, and telecom industries he may have gone a step too far.

Chavez said "he wanted a constitutional amendment to eliminate the autonomy of the Central Bank and would soon ask the National Assembly, solidly controlled by his allies, to give him greater powers to legislate by presidential decree."

Hugo may find out the hard way who really holds the power in a nation stupid enough to allow central banking in the first place. Once a private central bank has the power to create fiat currency, literally a license to print money there is no way they will give it up.

Both Abe Lincoln and JFK tried to take the power to issue the currency back from the central banks, both learned that lesson first hand.

Its a very well kept secret, hidden in plain sight. The banking cartel is the real seat of power, greater than armies, (where do you think the money comes from to finance armies?) greater than politicians, who are just figureheads (who do you think finances the government deficit spending?). Nothing happens without money and credit, and money and credit come from the central bank.

Think you live in a democracy? or more accurately an democratic republic? Just try to do anything without the permission of those that make the money.

What Pilots Understand, or Happy Motoring!

One thing understood by aircraft pilots can be summarized by the well known saying that any landing that you can walk away from is a good landing. A great landing is one after which you can use the airplane again. All landings are crashes, its just the degree of violence that makes the difference.

The US economy is crashing and all we hear in the media is weather it will be a soft or hard landing. I humbly suggest that it doesn't matter what you call it for any other than political purposes. People are getting hurt.

Its too late to prevent this crash, but perhaps we can learn a little something and try not to make the same errors going forward. Just kidding... We haven't learned this lesson even though the pattern has been repeated throughout recorded history. I suspect that's because of the same reasons many reject the issue of limited resources. There are few people alive today that were old enough to be destroyed by the last "great" depression. And its the same with respect to Peak Oil. Oil has been abundant and virtually limitless from a consumer's standpoint longer than anyone currently alive. Remember the oil shocks of the 70's and 80's? They were short lived and political in nature, so few lessons were learned.

I hear people saying that because oil prices have retreated from their recent highs that there is no supply problem. Exxon, BP and Shell would love for you to believe that, and are spending millions to get that message out. The reality is that new supplies from recent discoveries are not replacing even the decline in production from the existing major producing fields. Producing countries are rebelling against the bully tactics of the US, and global production is declining while consumption is still increasing. The short sharp decline in prices is the result of a well timed buyers strike. Longer term, prices will increase until demand is destroyed to match declining production, taking the global economy with it.

Among the causes of lower price are that the US government was buying a lot of oil to replace what was drawn from the strategic reserve after the hurricanes of '05, even though the reserve is still at least a million barrels short. That buying has ceased now and takes a lot of demand off the market, The majors and refiners have filled every tank, bucket and tin cup with crude so they can delay new buying for a short while, and hedge funds are selling and shorting energy hard now that the price is declining.

Few people understand the correlation between energy and fiat currency such as the US dollar and every other world currency in existence today. Fiat currency is created by the issuance of debt. In order for the scheme to continue there must be ever increasing debt, just to create enough money to pay the interest on the previously issued debt. Do you see where this is going? in order to create growth, energy is required in increasing volume. If there is less energy available there is less growth, resulting in less borrowing, and the interest cannot be paid. When the interest cannot be paid, default on the existing "house of cards" debt collapses, taking the currency and the economy with it. There must be increasing energy available or the whole thing blows up.

I believe what we are seeing are not normal cyclical energy market fluctuations, but the energy markets starting to wobble. The wobble will increase in amplitude and frequency until the obvious becomes apparent, and the population awakens to energy reality. Until then, Happy Motoring!

When the VIX is low...

Take your money and Go. When the VIX is high, then you buy. That's how the saying goes anyhow.



You can see from the chart comparing the S&P 500 index to the VIX, the Volatility index, that when the VIX is low its time to get out. Its a pretty good correlation that when volatility is high stocks move up, so why are stocks moving up and the VIX is scraping bottom? For the same reason I have sat out this rally since May. Its fake. Its electioneering, a bear trap, and in typical wall street doublespeak, a bear trap is not a trap set for a bear, its a trap set by a bear.

When will it tip over? Conventional wisdom would predict it will last until the election. But if you believe that, would you wait until then or would you cash out ahead of the crowd?

As Yogi Berra has astutely pointed out, "its hard to make predictions, especially about the future". I'm staying on the sidelines and watching. If the market charges ahead, I missed a good rally, if it tanks, I've avoided a beating. As a chaotic system driven by emotion the only thing for sure is that something will happen... it always does.

What if they gave a recession and nobody came?

Consumers continue spending despite running out of money. One major difference between this recession and previous serious recessions is the availability of easy credit. In the past we didn't all have a wallet full of credit cards and home equity lines of credit like we do now, and I suspect this is what is keeping spending going despite declining real wages, increased property taxes and insurance costs, inflated food, energy and housing costs and a negative savings rate in the US.

If we continue purchasing and borrowing, how long can we keep the economic balls in the air? Obviously at least this long and probably for a while longer.

With newly available 50 year mortgages, perhaps we can push our debt beyond the grave. In that case we all win, sort of. The way money is created by being loaned into existance, I suspect the lenders, having none of their own money at risk are happy collecting interest payments, and don't even have the slightest expectation that the principal will ever be repaid. Why should they?

Only a few years ago many home buyers were able to get a 15 year fixed rate mortgage instead of the more traditional 30 year. Going with the 15 was a little more expensive monthly, but knocked off 15 years of payments, a much better deal for the borrower.

There is absolutely no reason anyone should enslave themselves to a bank for 50 years. If your only way to get into a house is a 50 year debt, get an apartment, a tent or a hollow log, but don't get a 50 year mortgage.

So what happened to the affordable 15 year?
The same thing that happened to tech stocks in the late '90s. Irrational exuberance. Home prices are as overpriced as were the dot comms. Add rising interest rates and the result is unaffordable housing.

Just for fun, let's pretend we want to buy a $200,000 house. If we use a 6% fixed interest rate the house will cost a total of $304,000 with a 15 year loan, $432,000 with a 30 year or $632,000 with a 50 year!

So save your pennies. and when sellers realize that to sell they will have to give up some of that "paper wealth" they thought they had eared, prices will come back to earth. That's when you buy with a good 'ol 15 year note.

Hungarians revolt in the streets after 2 years of government economic lies revealed: When will America get it?

An article in the Guardian Unlimited tells the story of Hungarian citizens so outraged when it was revealed that the government has been lying about the economy for the past one and a half to two years they took to the streets and demanded the Prime Minister quit.

In the US and many other countries the governments have been lying about the economy for pretty much forever, and it gets worse with every report. The data puked out to the media is so patently false, its amazing they can say it with a straight face.

The US economy is by any real measure clearly in recession right now. The GDP is negative, Inflation is running somewhere between 8% and 11%, unemployment figures have been so twisted for so long any number is meaningless. When will we pour into the streets in a general strike and demand the truth? I'll put it on my "things to do" list, right after "learn Hungarian".

WooHoo! Get the Champagne!

But I wouldn't be popping that cork quite yet. While the market threw a wild party on the news that the Fed only raised the overnight rate by a quarter point, the hint that they may be able to "pause" really lit the fuse. Of course, the small fact that the Fed and every tout and con artist on Wall Street has been saying this for a year seems to have escaped notice. Hmmm.

What's really going on, and it has become grossly obvious lately is the global stock markets are running purely on artificial liquidity supplied constantly, but unevenly by the Central Banks. When there's an injection of cash, the markets rally. when the magic spigot is closed and the liquidity dries up, the markets drop. Most recently the cash injection from the Bank of Japan (BOJ), Japan's Central Bank has been calling the shots. Its no coincidence that when the BOJ announced in the middle of May that the they would begin raising rates the markets tanked. As long as the cash injections keep coming from one central bank or another this addict will keep stumbling along, but when the dope runs out, its going to be a painful withdrawal.

US no longer calling the shots
With so many creditor nations around the world catching on to the the reality that the US is hopelessly overextended, and the dollar is loosing value again, is it a surprise that they are shifting their reserves out of dollars and into gold, silver and better currencies like the euro and the Canadian dollar? Not that the euro is any great shakes, in many ways its a worse fiat currency than the dollar, but at least lately it has been stronger. Its like comparing one turd to another, they're still both turds. The Canadian dollar has been the shining star, approaching 9/10ths of a USD. For most of my life its been around 7/10ths. Canada has, and exports a lot of gas, oil, timber, and valuable metals. A commodity mother lode, and the two thirds of the world that is really growing, China and India, need a lot of commodities. In contrast, the US is an exporter of dollars, a game that is getting pretty old.

The GDP Myth
The Gross Domestic Product numbers were reported the other day and for the past 3 years have averaged 3.5%. Of course we know that the numbers are juiced up to make the economy look better for whatever idiots are in charge at the moment. Even if we fell off the turnip truck yesterday and accept the official numbers, the problem is that GDP is figured in dollars. Now we know the dollar has lost around 20% to currency inflation alone in the last three years, uh... real GDP is negative. In other words, the USA is loosing ground while the government is telling us its "strong" and "growing". Now, subtract the real CPI, Consumer price Index, which is running around 6-8% and as the startled George Kastanza on Seinfeld once blurted, Shrinkage! The US economy is shrinking at a terrifying rate while the population is growing and has now almost 300 million people.

The Economy Doesn't Have Anti-Lock Brakes
If Big Ben Bernanke sees inflation, which is impossible not to see, and the gentle quarter point tap tap tap, 17 taps even, clearly hasn't worked, like most inexperienced drivers he's likely to stomp the pedal to the floor and throw us off the cliff, or into the mountainside. And soon Hank Paulson also will be jigging the markets. Will it matter? As my friend Chris says, "You can't polish a turd". The Fed will continue to raise rates to stay ahead of the other central banks. Somebody is going to be sacrificed. The dollar and the massive forign debt holders or US adjustable rate mortgagees, the old and the poor, Just like always.

Russians Make Good on their Promise

As I mentioned in a previous article, Russia began selling oil, oil products and gold on their stock market Thursday. There's nothing unusual about that except the sales are in Rubles, not the US Dollar (USD). While it won't turn the world upside down overnight, it adds to the significant shift away from the USD happening all around the world. Simply put, this reduces the demand for, and therefore the value of the Dollar.

Boing
The Dollar has had a bit of a bounce in the last few weeks after a serious dive that was probably overdone. The bounce back is typical of overdone moves in all the markets and I suspect the downward trend will resume once currency traders get their heads wrapped around the flurry of events we have seen in the last month. Every industry has its own lingo and finance is no exception. The snap back at the end of a big down move is called a "dead cat bounce" because even a dead cat will bounce if thrown down onto the pavement hard enough. Don't be fooled by these bounces, there's more pain ahead. Looking at a chart, these bounces look like a fish hook, and they catch a lot of unwise buyers who jump in too soon.

Late to the Party
When it comes to investing or trading in the markets, I believe in taking a queue from the hip and fashionable. Arrive late to the party and leave early. Leave the risky discomfort of showing up before anything is really happening and the direction of the party can be ascertained. If you pull up in front of the house and there a row of rusty beaters along the curb, keep moving. Leave before the fights and puking starts, and avoid the ugly scene and last minute lurch. Get in when things are going well, make your bets and get out before things start falling apart. Easier said than done, I know.