Category: Economy

2011 Year in Review: Signs of an American Spring and a Fourth Turning

Extremely comprehensive review of 2011 from Dave Collum, posted on the Chris Martenson website: http://www.chrismartenson.com/blog/2011-year-review-david-collum/67586

Dave includes me in a prestigious list of truth tellers. I’m not worthy.

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year’s is no exception. Moreover, he has graciously selected CM.com as the site where it will be published in full. It’s quite longer than our usual posts, but by any measure, 2011 offered an over-abundance of ‘business as unusual’ developments to summarize. We hope you enjoy David’s colorful observations and insights, which are very much his own. — cheers, Adam]

Background 

Governments gambled on a return to growth solving all the problems. That bet has failed.

—Satyajit Das—

Every December, I write a Year in Review. Last year’s was posted at several sites including Chris Martenson’s [1]. What started as summaries posted for a couple dozen people accrued over 13,000 clicks in total last year. It elicited discussions with some interesting people and several podcasts, including a particularly enjoyable one with Chris [2]. Each begins with a highly personalized survey of my efforts to get through another year of investing. This is followed by a brief update of what is now a 32-year quest for a soft landing in retirement. These details may be instructive for some casual observers. I have been a devout follower of Austrian business cycle theory since the late 1990s and have ignored the siren call for diversification. I vigilantly monitor my progress relative to standard benchmarks. The bulk of the blog describes thoughts and ideas that are on my radar. The commentary is largely stream-of-consciousness with a few selected links that might be worth a peek. Some are flagged as “must see”. Everything else can be found here [3].

So why do people care what an organic chemist thinks about investing, economics, monetary policy, and societal moods? I can only offer a few thoughts. For starters, in 32 years of investing I had only one year in which my total wealth decreased in nominal dollars; whatever I am doing has worked. I also ride the blogs hard, am fairly good at distilling complexity down to simplicity, seem to be a congenital contrarian, and am pretty well connected (for a chemist). I am Joe Sixpack, a 99er of sorts with a growing unease.

Every year I feel like Bill Murray in ground hog day. Issues including the housing crises, hidden inflation (of a kind that even John Williams is not discussing), and interest rates have not disappeared, but I hit them hard last year and will not rehash them. I spoke of civil unrest in 2009 but not 2010. That topic has returned with a vengeance. The temptation to say “I told you so” can be irresistible. I have cordoned off a section to get it out of my system. Ad hominem attacks are reserved for jerks and morons, and I will try to avoid trite phrases of little content. I saw “risk on-risk off” so many times that I thought the Fed had hooked the markets to The Clapper. So let’s quit kicking the can down the road and get started.
 

Contents

Investing

Time for this turtle to come home.

—Mr. Wizard— 

2011 in Review.
With rebalancing achieved only by directing my savings, I changed nothing in my portfolio year over year. The total portfolio as of 12/31/11 is as follows:

Precious Metals et al.: 53%
Energy: 14%
Cash Equiv (short duration): 30%
Other: 3%

It was a turbulent year for all hard asset investors, eliciting wild oscillations in my portfolio within a 20% range. An overall return on investment (ROI) of -2% was edged out by the S&P 500 (0%) but bested Berkshire Hathaway (-5%). Precious metals (largely CEF, FSAGX, and physical metals) gyrated throughout the year but finished even over all physical and paper forms (Figure 1). Gains in gold (10%) and silver (-10%) were offset by a drop in the premium of CEF (Central Fund of Canada)—one too many shelf offerings—and profoundly disappointing results for the precious metal equities (-19%). The metals are discussed in detail below.

A basket of Fidelity-based energy and materials funds underperformed from -4 to -12%. These are represented emblematically by the XLE spider (1%) and XNG Amex natural gas index (5%) in Figure 2. My own fund foisted upon me by Cornell’s Fidelity connection (FSNGX), although 10% annualized over the decade, was total garbage this year (-7%) relative to its peers. I keep adding to an already chunky position in natural gas equities for reasons discussed in detail last year [1]; a secular global shift toward natural gas should reward patience but this year was pure patience.

These results were buffered by the cash (0%). In addition to the -2% return on investment (ROI), personal savings equivalent to 29% of my gross income added a couple more percent to sneak me into the black (1%) in units of accumulated wealth (vide infra). College tuition and a new car attenuated what would have been a stellar year for savings. Alas, such exceptions seem to appear every year.

Figure 1. Precious metal-based indices (CEF in red, XAU in green, SLV in purple, and GLD in yellow) versus the S&P 500 (in blue) for 2011.

Figure 2. Energy-based indices (XLE in green and XNG in red) versus the S&P 500 (in blue) for 2011.

32 Years in Review.
My imbalanced portfolio changed in decadal rhythms as follows:

1980-88: nothing but bonds (100%)

1988-99: classic 60:40 equities:bonds

1999-2001: cash, precious metals, shorts (minor), tobacco (minor)

2001-2011: cash, precious metals, energy, tobacco (minor)

My total wealth accumulated through a combination of savings and investment as shown in Figure 3. (I blocked out the absolute dollars.) Years ago I chose to exclude physical precious metals from my analysis using classic gold bug logic that I measure them in ounces not dollars. Over the last dozen years, however, I have steadily bought gold (with cash) a couple ounces at a time. I have been prompted to include them in all analyses.

Avoiding 1987 and 2000 equity crashes and capturing the bull market in precious metals proved fortuitous. You can see that 2008 and 2011 were the only down years. Berkshire has dropped five years since 1991.

Figure 3. Total wealth accumulated (ex-housing) versus year of employment. Absolute numbers of dollars have been omitted. Y-axis omitted intentionally.

I monitor progress by what I call a salary multiple, which is defined as the total accumulated investable wealth (excluding my house) divided by annual salary (line 22 of on the 1099 form ex capital gains). Over the 31-year period my salary rose twelve-fold, which I can fairly accurately dissect into a fourfold gain resulting from inflation and a threefold gain (relative to starting salaries of newly minted assistant professors) resulting from increasing sources of income and merit-based pay raises. My accumulated wealth normalized to the moving benchmark of a rising income is plotted versus time in Figure 4. The fluctuations visible in Figure 4 but not in Figure 3 result from income variations. A quick calculation shows that my 12-year accumulation rate beginning 01/01/00, a period in which the S&P returned almost nothing, is annualized at 12%. My five-, ten-, and fifteen-year rate of wealth accrual also beat Buffett’s. 

Figure 4. Total wealth accumulated measured as a multiple of annual salary versus years of investing.
 

Just Thoughts

More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.

—Woody Allen—

2011 may prove to be an historical turning point. In 2008 the visionary James Grant asked “Why no outrage?” [4] In the early spring of this year I sensed rage but thought maybe it was only mine. As the year progressed, however, change was in the air and protracted social crises seemed possible. Many issues owing their origins to economics seem to be metastasizing into social movements. One senses winter is coming. With rich irony, Arabs might call it American Spring. Strauss and Howe predicted it in 1996 and would call it a Fourth Turning. 
 

All the Devils Are Here

Look what they’ve done to my song, Ma. 

—Melanie—

I cannot get that refrain out of my head as I watch the markets. This year the Devils brought us a wealth of nauseating and irritating stories that made you want to hurl (both lunch and laptop.) Here are some of the highlights. Others worthy of elaboration have been allocated their own subsections.

In an op-ed, Joe Nocera (author of a book bearing the title of this section) noted that one guy is in jail as a result of the entire mortgage fiasco: he lied on a liar’s loan. By contrast, Gary Cohn, COO of Goldman Sachs testified to Congress under oath that Goldman went to the discount window only once, for a nominal sum when in reality Goldman went multiple times. I had occasion to ask Joe if Gary would get charged. “No.” Apparently, perjury in Congress is only a crime if you are lying about baseball.

Thanks to Steve Kroft’s 60 Minutes episode we found out that Congress can legally trade on all forms of insider information [5]. (It helps if you write the laws.) The frothy mix of money and politics is simply too awesome to overcome. Congress shirked its stated job of providing leadership by refusing to make even nominal budget cuts. They set up a super committee to make the cuts (and to give the lobbyists a much more focused target for their money cannons.) They failed too. I am sure the money cannons worked.

The NY Bank-Mellon (and, by the cockroach model, many more banks) got caught after a multi-decade crime spree involving back-dating of Forex trades of pension funds—that would be us folks—scalping 0.3% on every trade. I am sure they will be fined pennies on the dollar and not forced to admit guilt.

We found out this year that the SEC destroyed 18,000 files of fraud cases over many years because they were deemed “inactive”, including those emanating from the Madoff case [6]. The magnitude of this blunder, a generous term for absolute corruption, can only be appreciated when you realize that all fraud cases at the SEC are inactive. David Einhorn’s book (Fooling Some of the People; vide infra) includes horrifying tales of SEC corruption. I imagine Markopoulos’ book about Madoff is the Bible on the subject.

There was a brief glimmer of hope. Standard and Poors grew a spine and downgraded US sovereign debt. I am not sure what rating you give to sovereign debt in which the authorities have explicitly stated that they intend to deracinate creditors with inflation, but it certainly is not AAA. Of course, the CEO of S&P was promptly fired, and, in a delicious irony, was replaced by the COO of the completely insolvent Citibank.

In a wondrous moment in journalism, Bloomberg pried over 20,000 documents from the Federal Reserve using the Freedom of Information Act (FOIA). The Federal Reserve fought the suit, but then agreed to “cooperate” with the Supreme Court’s decision. How magnanimous. There emerged a cottage industry to dig nuggets from this treasure trove. We discovered, for example, that most of the $800 billion of Quantitative Easing II, money reputed to boost the US economy, went straight to European megabanks. Matt Taibbi of Rolling Stone described how a few hundred million found its way into the pockets of the wives of two Morgan Stanley executives to purchase distressed assets and shoes. The system sprang into action after Bloomberg’s score and initiated legislation that will allow the Fed to deny a document exists in an FOIA lawsuit if it should prove inconvenient. I guess that’s the FODA (Freedom of Denial Act).

I thought I could get through a year without taking a whack at Alan Greenspan, but I couldn’t let this one go. The Maestro announced that we should burn down houses to alleviate the supply problem. He seems to have forgotten what historians have written about Federally sponsored food destruction programs during the Depression to prop up prices as people went hungry. This clown destroyed lives. Could somebody at least put a sock in his face?

I try to stay non-partisan, but the White House deserves a little scorn. White House pressure to give solar cell company Solyndra $535 million dollars backfired when they went bankrupt. I remember seeing Obama’s speeches and thinking that they were shameless infomercials. I must admit that I like having an intelligent president who formulates full sentences in real time, yet distrusted him from the start for a simple reason: Nobody comes from the Chicago political machine uncorrupted. Once elected, he filled his cabinet with establishment thugs. Chief of Staff Rahm Emanuel then left to become mayor of Chicago and was replaced with the infamous mayor Daley’s son. You can’t make this stuff up.

Hank “The Hammer” Paulson has done a credible job of looking like a good guy, despite his nickname and Goldman roots. There’s no way that an environmentalist and avid bird watcher could be ruthless, right? We found out, however, that Hank had tipped off a bunch of ex-Goldman hedge fund managers about what the Fed and Treasury would be doing. Of course, Hank let guys like Buffett and Gross help design bailouts and then front run them, but a bunch of hedge fund managers? They don’t even have Congressional appointments.

I would be remiss by not noting that the investment bankers got a few IPO scalps. It’s nothing like the glory days, but they came out with Groupon (flush), Pandora (unobtainium-induced flush), and Zynga (nouveau flush). Buyers of GM and AIG, the newest GSEs, got pummeled with 50% losses this year. You should not buy what Wall Street sells.

Forget Bin Laden, we got Rajaratnam! What a score for the authorities—a big-time hedge fund manager making money off leaked secrets. To top it off, he’s a foreigner, so we get a xenophobia boost. And now for the rest of the story. The guy who leaked the information—the guy who should be credited with a massive breach of trust—was Gupta. He’s a foreigner too so why did Gupta get a pass? He works for Goldman (golf clap). One can only wonder how many more breaches of trust can occur before we simply run out of trust.

Paul Krugman knows how to make friends and influence people. He incessantly pleads for another $5 trillion dollars. Please let it go. A 2002 op-ed resurfaced in which Krugman had called for Greenspan to create a housing bubble [7]. OK. It’s not a crime to be wrong (or a buffoon), but somehow they keep publishing his drivel. Krugman also suggested:

If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. [8]

Jeepers Paul: Put down the bong. This box-office-ready variant of Bastiat’s “broken window fallacy” illustrates what a complete Keynesian boob he is. He also waxed philosophically about how the East Coast earthquake in August could have stimulated the economy if only it had done more damage. Why think small? How about global thermonuclear war or an extinction-event asteroid? The earthquake quote is rumored to be a fake, but how would you know? Since socks come in pairs, put one in his face too.
 

Buffett Takes a Bath

You should thank God [for bank bailouts]…Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.

—Charlie Munger, Berkshire Hathaway—

Let ’em eat Twinkies, Charlie! (but I digress). Warren Buffett (WB) claims he decided to invest $5 billion in Bank of America while taking a bath. Total absurdity aside, the last guy who did his thinking in the bathtub single handedly destroyed the global economy with his bubbles. To pilfer Buffett’s Wright Brothers logic, we should have drowned that guy, but I digress (again). 

Buffett lost a little money this year—no big deal—but he took quite a metaphorical bath. WB is possibly the most famous and successful investor of the modern era—a world-class stock jobber, Master of Wall Street, and a hype machine. Come again? Yep. That sweet little old grandfather buying banks while eating ice cream in Dairy Queen in Too Big to Fail is a world-class hoser. In 2009 I caught Buffett in a big lie: he declared a bullishness for equities with interest rates in the basement, completely contradicting his 1999 article in Fortune Magazine declaring that rising interest rates cause secular bear markets in equities [9]. While pondering a blog denouncing this hypocrisy, I discovered Michael Lewis had scooped me by a mere 17 years. In 1992, Lewis’s Temptation of St. Warren excoriated WB; it’s quite a read [10]. I stole Michael’s title, wrote my blog, and moved on [11], but Buffett and the Buffettologists continue to irritate me.

This year WB denounced low taxes on billionaires. Sounds altruistic, but it leaves a bad taste given that his corporate attorneys protect him from taxation while fighting underpayment of Berkshires’ taxes. (Michael Vick denounces dog fighting too.) WB also helped write bailout plans for banks (including Goldman Sachs and Wells Fargo) while scooping up shares of bank stocks (including Goldman Sachs). He’s no Martha Stewart, but this smells. WB defiantly maintains that he couldn’t care less about Berkshire’s share price, yet he spent billions buying Berkshire shares above book value, which smacks of a stock pump (and it worked). He became Obama’s BFF (best friend for you non-teenagers) and then, miraculously, two of WB’s favorite companies, Wells Fargo and Moody’s, somehow managed to slither out of Federal legal actions targeting their peer banks and ratings agencies. It’s good to have friends in high places (and a reputed $10 million dollar lobbying budget.)

People around WB didn’t help his image either. His long time partner, Charlie “Let ‘Em Eat Cake” Munger, certainly displayed a tin ear with his quote. David Sokol, WB’s anointed heir apparent at Berkshire, got caught getting a little on the side to supplement his ample wealth. Of course, you can’t have Buffett’s clone look like a crook so his career at Berkshire was vaporized. Legendary hedge fund manager Michael Steinhardt beat Warren like a rented mule in a must-see interview on CNBC [12]. He said WB “conned the press”, is “thoughtless”, a “snow job”, and even implied dishonesty while WB’s pregnant groupie listened in stunned silence. When pressed about the Sokol affair, Steinhardt indicated that “it is not common for Buffett to get caught.”

Steinhardt also touched a topic that has me conflicted. Buffett and Gates have pooled their gargantuan empires—resources accrued from the miracles of American capitalism—into a single tax exempt organization of unprecedented scale (Catholic Church aside). One lobe of my brain says they are free to do as they please; another thinks that American capital should be plowed back into American soil for the next generation. I keep thinking about a strip-mining metaphor. In any event, a tax-exempt organization will be allocating this massive pile of capital for eternity (or maybe not). Let’s hope it does so efficiently and for good causes.
 

Precious Metals and Currency Wars

Gold standard supporters are lunatics and hacks

—Nouriel Roubini—

Precious metals were in a Utopian bull market for almost a decade. The early bulls lounged poolside, taking the occasional dip and enjoying returns in the high teens. It was a leisurely path to wealth. Predictably, the speculators showed up, a few at first but then in number, forcing repeated chlorine charges of the pool. The high frequency traders began playing digital Marco Polo, causing raucous turbulence. Now the market is anything but leisurely. I miss the sane days when only crazy people bought gold.

The volatility, however, is not just the traders. There were some serious shenanigans at the Chicago Mercantile Exchange (CME). They are charged with maintaining orderly markets, but apparently fell waaaay behind the curve. Five margin hikes on silver in eight days isn’t orderly; it’s a drive-by shooting. Just days later, the new Shanghai metals exchange jumped in with its own margin hike, triggering a 15% flash crash. Mysterious put buying on low volume in the wee hours of the morning while most of Asia was on extended vacation elicited serious gold sell offs. To ensure that commodity traders across the board got the memo, 60 million barrels of oil were released from the strategic petroleum reserve for no apparent reason. (Does anybody believe that actual oil entered the market place?) The message was clear: metals and commodity bulls will be dealt with severely. Those without a position in metals are braying that the bull market is over and have been energized by recent precipitous drops. Others see the margin hikes as an effort to allow an orderly retreat for big-money shorts. There may have been some serious collateral damage, however. I suspect that some of MF Global’s problems may have started from this forced selling.

So where are we, heading back to the barbequed relic era for gold or taking a pause that refreshes? I labor over this question without a definitive answer, but I suspect that we are somewhere in the middle of a secular bull. The damage looks minor when placed in perspective (Figure 5). The retail customer is not yet in the game; I have dozens of smart colleagues who listened to me squeal for a dozen years without ever buying an ounce of gold. My local coin dealer still has only 2 or 3 steady buyers kept on speed dial. Sometimes he can’t move even a couple of ounces of gold. Japan is offering gold coins with the purchase of government bonds, placing gold at the status of a free toaster oven. In what was a spectacular Twitter flame war between Rickards and Roubini, Roubini launched his “lunatic” quote (vide supra). One intrepid reporter denounced gold, indicating that “gold is unbacked whereas the dollar is backed by the US government.” (I blew a snot bubble on that one.) The symptoms of a blow-off top are absent.

Meanwhile, the supply-demand stats look great. HSBC estimates that only 0.14% of investable assets are precious metals whereas Sprott says 0.75%. Both are far cries from the 5% target of traditional portfolio theory. Central banks are buyers after decades of selling. India, Korea, Mexico, Russian, and Vietnam were visibly active. (Rumors abound that big buyers are going straight to the miners, rendering the Comex increasingly irrelevant.) Chavez repatriated his gold to Venezuela, presumably to avoid rehypothecation (vide infra). Jim Rickards is in Northern Europe at this moment discussing similar repatriations. Why would any sovereign state keep their gold elsewhere? The 500 lb gorilla, however, is China. They are rumored to have 1,000 tons of gold with a target of 8,000 tons. How do they buy 7,000 tons? They bid for it like everybody else. Chinese citizens have been encouraged to save using gold (a defacto gold standard and covert accumulation). Although the gold bugs in the US occasionally discuss confiscation, I think the Chinese proletariat are the ones being set up. Last but not least, we have charlatans running the central banks of the world. When they say they are going to debase their currencies to help their banking friends, I take them seriously.

Figure 5

With timing that would make Robert Shiller proud, Jim Rickards published Currency Wars, a carefully reasoned description of past and future mercantilism and currency debasement. The oddest thing about a currency war, however, is that you are said to win if you inflict the most damage to your own currency. This is akin to circling the wagons and shooting inward. To stretch the wild west metaphor a little further, I am reminded of the classic scene in Blazing Saddles when the sheriff (Bart) points his gun at his own head and threatens to shoot himself if anybody moves. As the logic goes, everybody debases their currency to make exports cheap and imports expensive. Of course, consumers pay up, but nobody cares about consumers. Even the Swiss—the Swiss!—debased the Swiss franc by 10% in one Draconian swoop to energize sales of army knives. I have no doubt that this form of mercantilism is driven by greed and avarice of politically connected special interest groups. Those who do not directly benefit but sign off on the ideas (economists and journalists) are cranks in my opinion. (I am not completely sure if that passes for an ad hominem attack.)

I must pay lip service to the precious metal equities. Starting in late 2010, equities and metals began diverging quite markedly as evident in Figure 1. Some argue it’s GLD sopping up demand, which I suspected at the outset was the reasoning behind its creation. My best guess, however, is that some big money players began placing spread trades by going long metals-short equities. If so, this gap will eventually narrow. Many bulls assert that the equities are dirt cheap, should be levered heavily to metal price, and will eventually soar (possibly all the way to the moon!) Despite a chunky position in these equities, I am not so sanguine. I aggressively bought tobacco stocks in early 2000 with p/e’s in the mid single digits and dividend yields of 8-12%. (My best bottom call ever paid for a college education.) The gold stocks do not look dirt cheap by that standard. The notion that there is gold in them thar hills (i.e., assets in the ground) is meaningless if these miners can’t get it out profitably. The darker possibility is that the equities are foreshadowing a downturn in the metal price. I don’t take that too seriously because markets seem pretty damned myopic. 

I can’t exit a discussion of metals without talking about silver, a bi-curious metal with both industrial demand and pornographic appeal for precious metal investors. (I have spittle dribbling down my chin as I type.) The world-renowned CPM group says that annual industrial demand (approximately 900 million ounces) exceeds mine supply by 200 million ounces. The shortfall is made up from above-ground bullion stashes accrued through the millennia and from recycling. Gold-silver price ratios of 16:1 are often cited targets based on 1:16 ratio of gold and silver in the Earth’s crust. The above-ground stashes, however, tell a very different story. Smart guys like Sprott and Martenson are now quoting 1:1 ratios of accessible above-ground supplies (1-2 billion ounces of each). It was claimed by a highly reliable source (the internet) that the global above-ground silver stash has not been this low since the 13th century. Here is the money line: an estimated 14 billion ounces of silver bullion in 1900, bullion accrued over millenia, has been gutted by 90% in one century. As we crank out solar cells, cell phones, and any other electronic devices (all of which demand silver), I gotta figure silver will have its day in the sun. (Catch that solar cell pun?) I lack the bravado to pray for dips; perpetually rising prices suit me just fine. Economic malaise or not, price discovery is coming. (OK. That was the last Game of Thrones play on words.)

Energy and Resources

The stone age didn’t end because we ran out of stones.

—Sheikh Ahmed Zaki Yamani, former OPEC oil minister. —

That’s a pithy phrase with no content—a duck-filled platitude—by an evasive oil minister. It is also a refuge for simpletons. I have been pondering an impending resource depletion—a profoundly consequential global event—for years now, a quest that began with the simple notion of hedging inflation. I am essentially done studying the problem and am sitting back waiting for it to play out. To those not up to speed, there are numerous books and blogs on “peak oil”. The premier presentation is Chris Martenson’s Crash Course [13]. If you don’t have three hours to listen to a vivid description of a civilization-changing process, try his one hour seminar [14]. If you don’t have an hour, then, by all means, put down this document and focus on something important. There were a few contributions to the debate this year that caught my eye. Robert Hirsch, author of The Hirsch Report presented to Congress, recently discussed our complete failure to respond to depletion-based risk [15]. Legendary money manager Jeremy Grantham wrote several reports pleading with his investors and society at large to pay attention [16]. To those who hang on Daniel Yergin’s soothing words, many believe he has lost a step or two since his glory days as author of The Prize.

I have also wondered how one will distinguish two distinctly different causal relationships: (1) a geologically mandated reduction in energy output imparting an economic malaise, and (2) an economic malaise causing decreased energy consumption. One might expect that geological constraints should cause energy prices to rise in the face of economic stagnation. The noise, however, will be deafening. Claims of evil speculators, dastardly Arabs, and stagflation will certainly precede the awareness that we are having trouble getting oil. There may also be subtle hints like when the Saudis cut production this year claiming a glut in the market while prices were rising. Does the massive spread between the price of WTI and Brent (up to $25 a barrel) have any information in it? I asked several prominent geologists and market strategists, and they were completely dismissive of WTI as an indicator of demand; Brent reflects world oil price. Of course, the media focuses on the WTI because it makes oil look cheaper.

I am pessimistic about alternative energy sources: Biofuel will destroy the soils (unless ocean-based); solar is going to be a monstrous scaling problem exacerbated by razor thin energy margins; nuclear looked promising until Fukushima set the industry into meltdown (possibly for decades); tar sands are brutal on the environment with only moderate energy margins. I am wildly bullish on natural gas-based equities as discussed extensively last year [1]. I would like gains now, but patience will be necessary as society re-engineers for a natural gas-intensive world. I hasten to add that fracking will only postpone, not eliminate, the energy depletion issues.

Europe 

If they are lucky they will manage to [push back the Greek default] for say three years. That will give the banks and insurance companies time to unload this debt—sell it off to national banks and the European Central Bank—so that when the default comes it won’t bring down the private banks and private insurance companies.

—Martin Feldstein, Former Fed Governor—

Preliminary attempts to clean it up fail as they only transfer the mess elsewhere.

—Wikipedia on the bathtub ring in The Cat in the Hat—

There is so much written on Europe it is hard to imagine adding more. I am with Kyle Bass [17] and every other bright bulb in this game: Europe must write down their debt. Of course, Greece got most of the headlines at first, but Greece has been in a perpetual default since the first debt jubilee implemented by Solon in the 7th century BC. In this most recent chapter, Goldman did their Jedi mind tricks (currency swaps) to help Greece get into the whole Euro currency regime (and repatriate some serious drachma to 85 Broad Street). That any banks ever lend to Greece is the epitome of moral hazard; these bankers should be euthanized not bailed.

Several years ago I incorrectly predicted that Spain would be the first Club Med collapse. Their real estate market was levered to the hilt, and there seems to be no Spanish translation for “mark-to-market”. I first realized they could become the Rubes of Europe—no small feat—when US banks sold toxic assets to Santander, one of Spain’s megabanks. I doubt Santander was chosen because it was so well capitalized. Some Spanish bankers probably got some personal doubloons (pocket change) for signing off on that deal. Spain is coming.

Will the monetary and fiscal cavalries save the Euro and, by proxy, Europe? Europe spent 2011 in the “buy the rumor-sell the news” mode, except there were only rumors, and the burst of confidence was always short lived. The authorities kept drawing Maginot Lines in the sand. It seems unlikely that Europe can save itself given that those needing the bailouts are precisely those expected to contribute handsomely to the bailouts. Some of the ideas were almost laughable. It was suggested that the EFSF (European Fubar Slush Fund), a piddling few hundred billion Euros largely funded by insolvent states, could be levered. The circularity of this reasoning is dizzying. They tried to ban debt downgrades (and world hunger). The Kabuki theater called “bank stress tests” offered a few minutes of stability and a great punch line: Megabank Dexia got the highest grade of all Eurobanks…and then went from hero to zero (bailed). Serious dysfunction seemed to emanate from the desire to avoid a “credit event”, a euphemism for cascading failures of credit default swaps (CDSs) that would circumnavigate the globe. (In 2008-09, US investment banks briefly delayed credit events by, quite literally, denying their existence.) Successfully negating the protection offered by CDSs may prove a cunning strategy to destroy the global CDS market. Good riddance.  

It would be unreasonable to hope for a prompt solution. The swat team charged with putting together the first Basel Accord took 18 years to get all the signatures during a period of relative calm. Coordinated actions in Europe are largely restricted to military campaigns.

What about help from outside to save the Euro? A concerted intervention by a consortium of central banks bought them some time. There have been discussions of the International Monetary Fund (IMF) fronting the money. That would be largely us, fellow Americans. There was a suggestion that the UK might help, but Prime Minister David Cameron told the rest of Europe to take a hike because the UK is flat broke. He’s not very popular, but his reasoning seems sound. The Federal Reserve is publicly saying they will not bail out Europe (again), but they’ll try (again) because they’ve got bazookas, printing presses, and a “yen” for the kinky.

Oliver Sarkozy (the brother of Merkozy) says European banking system is 4-fold bigger than the US banking system, requiring a 4 trillion bailout (0.80 Krugmans). Australian authorities told its bankers to get ready for a collapse. Europe is starting to look like the board game Risk in which players are trying to get each others’ cards. (Risk players know all too well that nobody ever wins in Europe.) Greece should ignore its bribed politicians and do a total write down. Selling assets is for drug addicts and wusses. Heaven knows Greece’s credit rating couldn’t drop lower. The nuclear option occurs when Germany opens the rumored warehouses of printed Deutschmarks and heads for the hinterlands. Aside from some Slavic carnage, Europe has been militarily calm for 60 years. The previous 3500 years, however, have been relentless tribal warfare. Bright guys are starting to speak in hushed tones of a pan-European conflict again. It could get interesting in a catastrophic sort of way. Analysts might practice typing in fetal position.
 

Federal Reserve, Bailouts, and Bank Reflations

We’re creating money because there’s not enough money in the economy.

—Rudolf von Havenstein—

I was just kidding: That wasn’t said by Havenstein of Weimar fame but rather by Mervyn King—Mervyn King!—current head of the Bank of England! What does this have to do with the Fed? They all suffer the Keynesian affliction. We are so doomed, but let’s refocus.

The Federal Reserve has really been up to no good, using the global economy as a gigantic laboratory for their cockeyed experiments. Unlike some sealed virology lab, these guys release mutant strains into the wild hoping for some positive effect. For starters, the Fed expanded the dual mandate of maximizing bank profits and triggering rampant inflation to include a third mandate of pumping asset markets. And, of course, Ben Bernanke hails from Princeton. Academics should not be allowed to handle sharp objects or run heavy machinery (like a printer) let alone be put at the helm of the global economy. This is folly at its finest.

Bank reflation is a euphemism, which loosely translated means save the banks at the expense of everybody else. When it is declared that the banks either must recapitalize or have been recapitalized, there is no large mattress from which this money comes. Existing money is already on bank balance sheets. They are being called upon to contract credit, which is a death spiral because of the debt-money supply paradox, or central banks will be forced to create more. Just ask Mervyn. Krugman may be right; we may not have inflation right now…but we will…and then he will be wrong.

Here’s my biggest gripe in a nutshell. The Fed, whether it’s a wholly owned subsidiary of the banking cartel or not, is charged with protecting the banking system. Period/full stop. The banking system is global. Period/full stop. Ergo, one does not even know if the Fed’s actions are in the best interest of the United States. Period/full stop. What is to prevent them from sending trillions to Europe, Asia, or any faraway place because bankers got themselves in trouble? Absolutely nothing; they do it relentlessly. (They even sent the missing pallets of $100 dollar bills to Iraq for Christ’s sakes!) Bloomberg’s FOIA suit showed how far off the reservation they had strayed, pumping in at least $7.7 trillion. Bernie Sanders claims the audit shows $16 trillion. The Levy Economics Institute claims numbers approaching $30 trillion. We keep hearing that we made money on the bailouts, including from General Motors! That’s an OMG/LOL/WTF all rolled into one. The $700 billion TARP was put on display for public consumption. It was designed to be paid back in the light of day. The rest of the money entered the system covertly. They saved GM during the crisis by pooling their ample toxic assets, named it Ally Bank, and bailed it. GM cost us a fortune. Bankruptcy lawyers saw alternative strategies and better outcomes as described in an Econtalk interview [18]. They are selling off assets and declaring profits (like junkies selling blood), but have a balance sheet filled with dregs. Bank of America recently dumped its enormous derivatives book into its banking subsidiary to assist the Fed with another profitable bailout in the near future. Hussman outlined in vivid detail the illegality of a number of Fed’s asset purchases [19]. (Stephen Roach had done so years earlier, but neither Stephen nor I could locate the link.)

Occasionally there is higher brain function at the Fed. Governor Poole expressed angst when they attached low interest rates to a distant date on the calendar:

I would describe the [Fed] decision on August 9 as being simply unprincipled. I know of no article, paper – professional paper in the last 25 years, 35 years perhaps, that would justify this approach to policy. All the academic research, including research within the Federal Reserve makes policy dependent on the state of the economy, not the state of the calendar. So I’m flabbergasted, makes no sense to me. [20]

We the People are suffering Stockholm Syndrome in which we are empathizing with our captors, the banking cartel. The Feds, by offering free and unlimited capital, render our hard-earned capital of no value in the market place while concurrently setting us up for destructive inflation. The 0% interest rates are placing the burden squarely on the backs of savers. The losses due to what Carmen Reinhart called “financial repression” [21] have been estimated at $400 billion per year on the treasury debt alone (not to mention secondary costs stemming from other artificially low rates). I could come to terms with such squanderous bailouts if the flaws in the system had been corrected, but they haven’t and won’t in the foreseeable future. As it stands, the diligent will continue to fund the indolent. It is oppressive, wrong, and, in the long term, destructive. An independent Federal Reserve has gone rogue with no safeguards.

Incisive journalist Evan Ambrose-Pritchard of the Telegraph asked, what will bring the bankers to heel? There is no answer yet. On an early morning Squawkbox, Joe Kernan said to Fed Governor Bullard, “I think you guys should read the Hippocratic Oath a few times.” Indeed.

MF Global and Rehypothecation: Leverage in a Fractional Reserve World

We’re pretty darn f***ed. 

—Christina Romer—

John Corzine and the MF Goldman MF Global story is big and getting bigger. Although it is an Enron-scale collapse, it reminds me more of the Refco bankruptcy—IPO in August/bankrupt in October. Unlike Refco, the Wall Street crime families are having a very difficult time burying this story because Corzine is one of the Godfathers. At first it appeared that MFG stole investors’ assets to cover its assets, but soon we were introduced to the previously arcane word “rehypothecation.” To understand this let’s begin with a definition:

hypothecate: To pledge an asset as collateral on a loan without the lender taking possession of the collateral. It especially applies to mortgages: the borrower hypothecates when he/she pledges the house as collateral for payment of the mortgage [22]

Rehypothecation is simply using the same collateral again (and again) for different loans. They are now telling us that everything at MFG may have been legal. I think there is at least one illegal part. JPM anointed itself super senior creditor by confiscating a billion or so, including allocated gold bars. Blogger Bruce Krasting may have been the first to detect their little ploy in the form of suspect reverse wire transfers [23]. (It is merely an optics problem that JPM sold the assets to George Soros.) Some are saying that claw backs will correct this, but I am not convinced.

Isn’t “rehypothecation” just a shell game or Ponzi scheme by another name? Of course, but it’s also the foundation of fractional reserve banking and our increasingly fractional reserve world. Banks used to keep large reserves but with the advent of the Federal Reserve (spawned in the wee hours of December 24th in 1913), banks began shrinking reserves and relying heavily on the lender of last resort. Insurance companies are also fractionally reserved by design. The majority of pension funds are grotesquely underfunded, representing big promises backed by a very small reserves. CDSs are simply credit insurance backed by the good faith and credit of large banks [sarcasm off] whereas others are backed by two guys named Vinnie and Guido. There are still gobs of synthetic CDOs (an estimated bazillion dollars worth) backed by three mortgages in Camden, NJ that have been in default for years. The Comex is a fractional reserve gold storage (backed 2.5% against claims). The prospective for the gold ETF (GLD)—I read it—indicated that the gold is stored “in lots of places, don’t worry, shutup” (although not quite in those words.) There must be some serious hypothecating going on there too. Does anybody seriously believe a bunch of broker-dealers could sit on a pile of bullion without selling it repeatedly? Bob Pisani of CNBC recently toured the GLD gold stash, assuring investors the gold is safe and sound. Zero Hedge noted that the serial number on the bar he proudly displayed was not listed in GLD’s inventory [24].

The MF Global story is very damaging to the public psyche. It showed us that no collateral—not even fully allocated gold bars—is safe in the hands of broker-dealers. When creditors raced for the exits, the politically connected grabbed the loot and ran out the back door, leaving depositors to fend for themselves. (Depositors become junior creditors in this event.) This smash-and-grab tactic is not new. US banks did it to the Europeans during the 08-09 crisis by transferring billions out of German banks in the dead of night. You would be a fool to assume this risk is unique to MFG, and investors are catching on. I diversified my assets in 2006, not by asset class but rather by brokerage in a buckshot pattern, avoiding those active in proprietary trading.

Looking across society you see more promises than assets, setting us up for wild asset grabs going forward. This administration was handed a disastrous economy and given a political mandate for change. Instead, they followed Neville Chamberlain’s lead by appeasing the banks to assure “prosperity and peace in our time.” It’s not working this time either.
 

Nobody Saw It Coming

Experience is a wonderful thing. It enables you to recognize a mistake when you make it again.

—anonymous—

From my investing portfolio you can see that I smelled something and got out of harm’s way. Rummaging through my email box I found an email dated 5/6/02 sent to Rick Sherlund, founder of Goldman Sachs software group. I am succumbing to the dreaded blogger’s disease, the undeniable urge to yell “I told you so!” You can skip this part because it is ten years old, but I think it is a rather extraordinary document from a rank amateur and one that I am quite proud of.

The exchange began when I briefly expressed concerns, which prompted Rick to ask:

“There have always been gold bugs and doom and gloom types and they are right 
in pointing out the risks, but what is it if you put this in a balanced or
 most likely perspective that we should be most concerned about?”

My unredacted response was as follows: 

Date: Mon, 6 May 2002 11:42:02 -0700

To: “Rick Sherlund” <[email protected]>

From: “[David Collum]” [email protected]

Subject: Re:

In response to your questions, I worry most about debt, how it has been spread throughout the system, the mechanism by which it will get unwound, and whether the whole notion that one can insure against interest rate risk through derivatives is even a theoretically sound construct (let alone practically sound). Let me summarize what bugs me in general and then try to get at what’s got me jumpier than usual at the end. (In the mean time, I enjoy consolidating my ideas, the non-scientific writing, and pretending to know what I’m talking about…which isn’t new.)

General Concerns

(1) Mortgages and Refi’s. I see a lot of potential defaults in the housing market. Fannie and Freddie are growing an enormous portfolio and are moving toward the sub-prime loan market during a time of decaying economic fundamentals. Everybody rants about the refi’s being good for the economy (including the Fed) when, to me, Fannie and Freddie look like very dangerous institutions. I’m beginning to spot more main-stream thinkers articulating this concern as well. As a segway to the next point…

(2) “Short-term” Personal Debt. The “average family is looking at a $50K salary and $9K on the credit cards (on top of shrinking home equity). The resilient consumer is akin to the avalanche that has not yet fallen; it looks very tranquil. It is mathematically impossible, however, for the consumer to keep accruing debt. The average family — the heart of the bell curve — must either abruptly stop spending or declare bankruptcy (or both). I don’t think either of us can imagine the total sense of futility and denial these guys are feeling right now. I’ve got a grad student with $10K on his credit card and he keeps spending. The “resilient consumer” is on a bungee jump in which we have no idea how elastic (or strong) the bungee cord is. It is amazing to me that decades after invention of the credit card, personal debt generation has not yet plumbed some sort of equilibrium; it just keeps growing as a percentage of income.

(3) Corporate Debt. As some of these big telcos and other conglomerates start drawing down their lines of credit, the potential for a severe banking problem strikes me as quite high. Is JPM a sitting duck? Maybe. If a financial crisis like the one you guys wrote a big check for in 1998 picks up speed, JPM will be up to their butts in problems. As more corporates (WCOM) head to junk status, forcing re-balancing of bond portfolios, it seems to me that a clamp down on liquidity problems should intensify. (This may already be starting if statements by JPM are an indicator.) A number of seemingly stable companies (like GE) are, in principle, stabilizing their short-term interest rate risk (and investor jitters) by moving into the long term debt market. Best case scenario is that they have a drag on their profits for a long, long time. The problem appears to be trickier than that, however. Bill Gross has been pointing out that at least some (including GE) are doing some pretty dicey-looking derivatives trading to undue this shift and re-assume considerable interest-sensitive risk.

(4) Balance of trade. This is the hardest for me to grapple with. But if one follows the seemingly simple premise that a change in sentiment on the dollar and dollar-denominated assets could cause the foreigners to look elsewhere to put their wealth, interest rates will rise. Then we will find out what really is interest rate sensitive. Some (including Roach) suggest that the balance of trade is at levels that have historically proven to be prefaces to currency disasters. The international perspective on the value of the dollar and the possibility of a fairly large decrease naturally leads to the next topic…

(5) Inflation. As I put all this together, it is hard maintain some semblance of an outline since it is so connected. With that said and quite contrary to popular (almost universally held) opinion, I think inflation is here in a big way. The model for inflation that I find to be most credible (almost a truism) is the three-stage model: (1) rising money supply, (2) increased prices, and (3) increasing interest rates. Inflation is really stage 1 — money creation decreasing the value of existing currency. Where this money goes is a very different story. The latter two stages — rising prices and rising interest rates — are consequences. Stage 1 inflation is undeniable; all metrics of money creation point to serious inflation over the 1990’s. I’ll go a step further and suggest that stage 2 inflation (rising prices) is not under control at all either. The numbers coming out of the Fed look fictitious to me. Measuring cost per gigahertz and gigabytes, hedonic adjustments for consumption changes, and an emphasis on a basket of goods that are weighted toward imports don’t paint an accurate picture. (The motivations for why the distortions are intentional would be long, but keeping inflation-adjusted costs on federal payouts under control would be near the top of the list.) I believe that if you simply do a smell test on the cost of living, you find it’s higher than we are being told. I bet you health care costs alone account for >1% per year price increases. Salaries at the university rose 8% last year. Certainly the cost of the most important asset of all, shares of publicly traded corporations, are outrageous using numerical measures. (I stress numerical measures to distinguish them from evaluations based on optimistic projections and just plain old wishful thinking.) I think the bond guys are seeing inflation.

(6) Derivatives. The model of any insurance is to spread the risk of acute, but localized, events over a broader swath. As long as the event is local and not too bad, the system works well. The problem is that financial crises don’t have to be localized and certainly don’t have to stay small. LTCM put the system in jeopardy, causing you guys to bail them out “or lose billions of dollars in the bond market” (to quote a famous tech analyst aka you). The system seems more fragile now (especially looking at the absolute numbers on the notional value of derivatives.) Everybody seems to be insuring everybody. It’s like a group of neighbors collectively pooling their money to self-insure against floods. The banks raved about how derivatives saved their butt after the Enron fiasco; who’s butt got scorched? Any model based on a cataclysmic financial event would have to be centered on derivatives. I should add that I do not subscribe to a model based on an abrupt change (unless you call 1-3 years abrupt). I do, however, believe that this summer might be more interesting than some.

(7) Hidden costs. Any one of a number of items will put a long term drag on earnings including: options expensing, accountants getting religion, debt servicing, reversals in pension plan returns, and a slow recovery.

(8) Confidence. I own two stocks. I have fished around preferred shares, small caps, limited partnerships, commodities etc. etc. looking for investments. I see credible looking investments that I don’t buy. The harsh reality is I don’t trust what I’m seeing. I know what you’re thinking; “Of course you don’t, you’ve become a total whack job.” This is true. However, I think the average investor is catching on as well. Spitzer is gonna do damage. Buffett, Greenspan, and Gross are all going after options as being a consequence of distortions of earnings resulting corporate greed. Joe six-pack is getting an ear full now. (Joe Sixpack includes a lot of money managers who were not smart enough to get out of the Joe Sixpack classification.) The distorted realities are gonna be hard to hide as companies like WCOM and TYC sporting single digit p/e’s on the Yahoo stock board head for the toilet.

(9) The Dollar. Lord knows I don’t understand this one. I can say that dollars and dollar denominated assets look awful to me during a period of enormous money growth.

(10) Greenspan and rates. To loosely quote Gross: Greenspan is toast. He can’t raise rates to fight inflation without triggering liquidity problems. Gross suspects there are some key trigger points at some pretty low Fed rates. If inflation finally shows up on the radar screens to the point where even the paid economists can see it, we have potential for crises that will not be curable by Greenspan’s favorite toy — loose monetary policy. I’m not sure Greenspan can handle it. If you follow Buffet’s reasoning, you can understand bull and bear markets by simply watching interest rates. We are at record lows. The rate cuts have not done anything. (Worse yet, they may have done wonders and what we have now may be the result.) Historians will write a very different chapter about Greenspan than is currently being written (unless I’m wrong, of course!).

(11) Avoiding recessions. To the extent that recessions purge excesses, you can’t avoid them. Greenspan’s monetary policy is akin to a drunk with a whopping hangover taking a few drinks. It’s akin to providing stimulus to revitalize a 24-hour long Roman orgy. It’s akin to…enough similes. The recession of late purged nothing of consequence thanks to AG. I think we will discover that the bone rattling economic events of last year were not “the big one” because the pressures were not released. That is not the good news. I believe that we will begin to come to this conclusion within a few months. My concern is that we will finally test the stability of all the debt instruments described above simultaneously. Either Greenspan is flunking Econ 101 by trying to avoid the unavoidable or he sees big problems (of his own creation) and can’t fess up without exacerbating them. His efforts to achieve a soft landing, while explicitly designed to be non-Japan-like at the outset, may be quite Japan-like in the best-case (soft-landing) scenario. The Austrian economists would argue that there are a lot of ways to purge booms (sharply or slowly), but if you integrate under curve they all inflict the necessary pain.

(12) Event risk. This is a straw-man risk. I fully concede the long term consequences of non-financial events on the financial markets appear to be irrelevant. (They can act as catalysts, however, accelerating certain inevitable outcomes.)

What’s different right now? Why do I feel jumpy? This was a tough question that may have illustrated my official transcendence from bear to whack job. Here’s my best answer.

(1) Gold is rising. Gold is an irrelevant commodity as long as the price stays low. I am not a gold bug, but do believe that a rising gold price has practical and psychological consequences. It also may be a canary in the coal mine.

(2) The corporate problems in companies like WCOM — supposedly real, big-cap companies — seem unabated. I suspect that disruptions in the debt market must be glaring at this point. JPM is tightening its lending best I can tell. Greenspan has no tricks left. (Of course, he can start buying equities as one of the other Fed governors suggested. Then I’m gonna join a militia.)

(3) Issues number (1)-(11) noted above would be highly manageable problems and easily placed in a “balanced perspective” if they occur in relative isolation. However, it seems (“feels”) like they are coming to a head simultaneously. The risks are highly correlated. This is why economic models based on Gaussian curves fall apart right when you need them the most and you get your butt whipped by fat tails.

In conclusion, you may stop talking to me when I tell you this, but key events that turned me bearish include:

(1) In 1997, you said during reunion weekend that companies not yet starting their y2k fixes may be too late. (Now there was a chapter I’d like to forget.) That was the moment that I began looking at the market through a different lens. (2) In 1998 (or 99), we discussed the LTCM crisis and you explained to me why you guys bailed them out. I saw an analogy with the Cuban Missile crisis that I couldn’t shake; another ratchet clicked. As an aside, in that same conversation, I suggested that going off the gold standard may have sent us on a long slow descent into a monetary mess. I believe the garbled grunt you made was an agreement at least with the principle.

Since then, I have been trying to understand the market as a series of interconnected parts constituting either (1) a complex web with great stability, or (2) a house of cards with great fragility. I guess it depends on how you look at it.

So here we are nearly three pages further and ten years later: Is it true that nobody saw this coming? Let’s put this notion to rest. And with that as a segue, many are seeing the next phase of this crisis coming too…
 

Apocalypse Now—The Sequel: A Casting Call for Colonel Kurtz

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final or total catastrophe of the currency system involved.

—Ludwig von Mises—

Precious few people were taking cover in 1999 nor even in 2006. That is not true today. The old doomers (James Grant, Doug Noland, Bill Bonner, Kevin Phillips, David Tice, Stephen Roach, Doug Cliggott…) have largely not changed their views. Thanks to the detailed analysis of Joe Nocera and Bethany McLean in All the Devils Are Here we find that even the old guard within the ratings agencies and mortgage lending machines saw it coming (and then were sent to pasture.) They also describe how Fed Governor Gramlich tried, albeit unforcefully, to alert Greenspan and remind us how Josh Rosner was all over the subprime crisis in the late 90’s.

There is a gaggle of new Prophets of Doom speaking apocalyptically, and they have some serious street creds. There are measured voices, like that of Mohammad El-Erian, quietly telling us the future will be downsized. But in this putative sequel to Apocalypse Now, who should play Colonel Kurtz, the quirky character driven to the point of madness by the horror of it all? The rogues gallery is listed below. The links are worth a click.

Kyle Bass, Founder and CEO of Hayman Capital. Kyle would have been featured in Lewis’s The Big Short, but Lewis thought he was way too Kurtz-like and left him on the cutting room floor. Lewis recanted in Boomerang, featuring Bass’s dire view of the sovereign debt crisis. A 2011 panel discussion is a must-see, inspiring one my colleagues to start accumulating gold that day [17]. (I was viewer #302; there have been 100,000 now.)

Ann Barnhardt, CEO of commodities trading firm Barnhardt Capital Management. Ann raised some eyebrows when she returned all of her clients money explaining that MF Global has shown that their money is no longer safe in the system. An interview reveals she is livid but not nuts [25].

Charles Biderman, CEO of TrimTabs. The CEO of a company best known for following the flows of money within asset classes previously had announced that the Fed overtly propped the market. This year he announced that the European bank collapses will be accompanied by a “…spiral type collapse of the equity markets, probably with prices approaching the March 2009 lows” [26].

Dylan Ratigan, CNBC. Dylan is the only mainstream network guy willing to call out the liars and felons and crooks (oh my) for their misdeeds [27]. I think he is currently casting for the role of Howard Beale in the sequel to Network.

Paul B. Farrell, Marketwatch and former Morgan Stanley. Paul is the real deal, the original Colonel Kurtz, Paul Craig Roberts’s twin separated at birth. He has morphed from mainstream Wall Street guy to a character out of Road Warrior. His writings at Marketwatch are not for the feint of heart [28].

David Rosenberg, Gluskin Sheff and ex-Merrill Lynch. As one of the big-gun economists on Wall Street, “Rosie’s” casual claims that we are currently in the middle of another Depression are provocative [29].

Larry Lindsey, former Federal Reserve Governor. In a recent interview on CNBC, Larry broke from the script when he noted that the US debt problem places us “about three years behind Italy” in the race to economic and monetary collapse [30]. (I also remember his ramblings in Fed minutes from years ago muttering about Greenspan’s screwy thinking with phrases like “we shall see”.)

Niall Ferguson, Harvard’s market historian and author of Ascent of Money. Niall warns of the coming collapse of the American Empire using vivid Thomas Cole metaphors [31]. He also warns that British Empire analogies—an interminable slide into endless tea parties—is optimistic, instead preferring a short-duration collapse as often happens in metastable systems.

Kenneth Rogoff, Harvard economist and author of This Time It’s Different. As the world’s most well known expert on sovereign defaults, one must pause when Professor Rogoff questions the durability of capitalism [32].

David Stockman, Reagan’s Director of Office and Budget Management. As Reagan’s wunder kid and current Wall Street insider, David witnessed the entire American boom. He now tells an altogether different story of debt and degradation [33].

Jim Quinn, TheBurningPlatform.com and asset manager. Jim is a militant predictor of societal unrest and the onset of a crisis phase and proponent of Strauss and Howe’s thesis in The Fourth Turning. (My review of the book is there [34]).

Paul Craig Roberts, Former Assistant Secretary of the Treasury under Ronald Reagan. (See Paul B. Farrell.) This Paul has been writing of the decline in the American Empire for years [35].

Jeremy Grantham, Founder of GMO. Jeremy, one of the white-haired visionaries with $150 billion under management, sees a host of problems, including low equity prices and dire resource shortages. His resource analyses are must reads [16].

Ray Dalio, Founder and CEO of Bridgewater Associates. The camera shy manager of one of the largest hedge funds in the world painted a particularly bleak picture for Charlie Rose [36].

Chris Whalen, managing director of Institutional Risk Analytics and author of inflation. Chris is a brilliant credit and bank analyst. He suggests both privately and publicly that we may be setting up for a pan-European armed conflict [37].

Felix Zulauf, participant at the elite Barron’s Round Table. Felix sees 2012 ushering in multiple departures from the Euro, civil unrest, possible revolutionary behavior, and excessive money printing, all described in a King World News interview [38].

The Durden Octuplets, Zero Hedge. Another hat tip to the multiple personalities at Zero Hedge. These guys are miles ahead of the mainstream media, offering a unique window into the world of finance and politics—a must-track site for all [39].

James Howard Kunstler, author and peak oil theorist. Jim is a prolific author with an eye on resource depletion and societal decay [40]. With remarkable dexterity and unique irreverence, he has wrapped his ample brain around the financial consequences.

The e-Trade Baby. In a sea of talking Bernank Bears and Hitler parodies, I found this e-Trade Baby (spoof) to be particularly poignant [41].

The Constitution and the Fourth Estate

I have a right, even a duty, to resist, with violence or civil disobedience. You should pray I choose the latter.

—The Great Debaters—

Government is a living, breathing organism that exists to perpetuate itself. There is nothing that says evolution must create a pleasing government better suited to individual liberties. History paints an altogether different picture. Possibly the single largest selection pressure is money. It has always bought political favor. When our government was a few percent of GDP and the industrialists were buying favors while building a nation, government had little power to wield. When money commandeers the machinery of a huge government, however, you have a monstrously expensive and intractable problem.

We should be particularly nervous as money commandeers the press. The media is a critical mechanism by which we transmit freedom of speech: it is an essential tool of a democracy. Mainstream media has collapsed like a dream sequence in Inception. Fox News gets a disproportionate share of the blame. The blogosphere discovered that Roger Ailes’s formulated his plan for Fox News in the 1970’s. It sounds very Orwellian but so what? Different news agencies are privately owned and, consequently, have different angles. The problem I see is that they all appear to be captured. With a remarkable regularity, The Daily Show includes montages in which the different news anchors parrot identical talking points. A severe affliction that first appeared during the 2008 presidential election—Ron Paul Blindness—continues unabated. He’s rocking in Iowa—some claim he’s leading at this moment—but the press want no part of it. Both he and Howard Dean do not fit somebody’s image of a viable candidate. Only journalists with editorial control seem to provide a fair treatment. I find credible news comes from some of the most unlikely sources: Russia Today, Al Jazeera, Asia Times, the London-based Telegraph, Zero Hedge, Rolling Stone, Vanity Fair, and, of course, The Daily Show. That’s pathetic. Thank God for the internet.

At a more micro level, a number of stories caught my libertarian eye and rubbed some nerves raw:

(1) A number of us read former money manager Martin Armstrong’s monetary missives hand published from jail. He was freed this year. Martin was held for a contempt of court charge for 7 years, 5.5 years beyond the legal limit. As he was about to be sprung free, he was finally charged with the original crime (which he seems to have been guilty of) and incarcerated for another 4 years. I would have dismissed the details as internet legend if it had not been told by Pulitzer Prize winning journalist Gretchen Morgenson [42].

(2) A wingnut named Bernard von NotHaus was arrested in 2009 and his assets confiscated because he dared to mint silver coins and recommended people use them for legal tender. This was not counterfeiting, only competition…but not anymore. He was convicted and faces up to 15 years in prison [43]. Utah and several other states, however, have picked up and advanced the ball by passing precious metal legal tender laws. I believe there are significant tax benefits (no gains on inflationary appreciation) when using gold as legal tender, which causes angst in the Halls of Power.

(3) Sergey Aleynikov was given an eight year sentence for stealing software that netted him precisely $0 [44]. His 2009 arrest within hours after the theft must have set a record for the FBI. The real crime was heinous: he stole the software from Goldman. At his arraignment, Goldman’s attorney requested Sergey be held without bail, asserting that he could “use the software to manipulate markets.” That was a world record for the fastest confession from a non-defendant.

(4) Spyware showed up in the Nasdaq to monitor trades. There have been no indictments; it’s all just Wall Street hijinks (or somebody is Too Big to Jail.)

(5) The highest court in Indiana ruled that a guy could not defend himself against a forced, warrantless entry into his house. How does one distinguish the authorities from the criminals?

(6) JP Morgan donated $4.6 million to the police department in NYC just as the Wall Street protests picked up speed. They are taking cues from Roman emperors who would immediately bribe the Praetorian Guard to insure allegiance.

(7) Louisiana banned cash transactions for used goods. If you remove cash from the system, every transaction will go through banks mandatorily. I’m sure they’ll keep the fees low (or not). All snickering aside: Cash is a civil liberty. It was protected in metallic form under the constitution until 1933, at which point the Supreme Court decided restricting the money supply infringed upon the civil liberties of the money printers.

(8) The Senate passed a law by a vote of 91:9 to allow US citizens to be detained indefinitely without trial if they are suspected to be involved in terrorist activities. The House passed it subsequently. Let me be blunt here: the perpetrators of this law are treasonous. They should be tried with full access to the courts. If you lock me up for saying this, you had best throw away the key. Jefferson was credited with the following:

The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.

 

I am well aware that fertilizing the tree of liberty is not a resume-boosting career path and not easy for us old guys.
 

Where to From Here? 

Never in the history of the world has there been a situation so bad that the government can’t make it worse.

—Henry Morganthau Jr., 1939—

We have a massive global debt problem that will take years to unwind. Some think it is a zero-sum game, but I disagree. The World is blanketed with people fully aware of what has been promised to them but oblivious to their share of the tab. The average tax payer in the US, for example, is unaware that they owe $30,000 simply to pay off the state pension liabilities to some average tax payers. Larry Kotlikoff, the undisputed World’s expert on unfunded liabilities, estimates there are $211 trillion [45]. This is approximately $2 million per taxpayer. Do you think taxpayers have budgeted for that one?

Let’s go off shore. Billions of nouveau capitalists in the emerging world are expecting the American Dream, but who will provide all those goods and services? Americans? The problem is one of a massive misalignment of perception and reality on a global scale. Years ago I wrote a blog on this and believe that it still rings true [46]. This impending deleveraging will occur in the face of massively aging populations in the industrialized world. Demographic shifts are considered a profound determinant of future economic activity.

The student loan crisis may seem small when compared with these global issues, but it’s a big one for us. The current graduates are starting out in a hole from which it will be difficult to exit. Discharging debts seems distasteful, but so do decades of undischargeable debt with ballooning penalties hanging over a large portion of a generation. I worry, however, about the select group of really brainy folks expected to change the world. Think Steve Jobs. Some will be forced to work for corporations to get a paycheck and “three squares a day” rather than forge off into the great unknown and create wealth on monstrous scales. How many of those guys do you need to divert down a more conservative path before you hurt the economy? Possibly just a couple.

The democratization of the markets provided a cornerstone to this malaise we face. We replaced defined benefit plans with defined contribution plans, which, in conjunction with the wildly popular index funds, moved both the risk and oversight responsibility from titanic pension managers to countless millions of individuals. This sounds great so far, but there was nobody of any clout to watch the store. The shareholders have, in practice, no say whatsoever over corporate governance. This, I believe, is the root cause of the considerable corporate malfeasance. CEOs began stacking corporate boards with friends and boards appointed their friends as CEOs, all sharing the one common belief that compensation, not returns to shareholders, should be maximized. It opened the floodgates of greed and avarice. I had occasion to present this blasphemous notion to John Bogle—the creator of index funds—and he agreed. Knock me over with a feather.

Wealth disparity (for want of a better term) is at record levels. Of course, even mention of that will cause those with wealth to fear an imminent government-based wealth redistribution that can’t possibly work well (because government can’t possibly work well.) There are pragmatic issues independent of moral concerns, however, that should not be dismissed. A well-oiled economy distributes wealth in ways that may seem unfair to some but are efficient. I suspect there are hallmarks—characteristic distributions—that are emblematic of growing wealth and prosperity. A decades-long growing disparity is probably not one of those hallmarks. The clock is ticking.

The populace is beginning to wake up to this reality. Unrest began with one incredibly flammable Tunisian. While on foreign shores, we gave it cute names like “Arab Spring”. When unrest migrated to London it became decidedly less refreshing. Social change has now washed up on US shores superficially as Occupy Wall Street (OWS). At its inception, OWS appeared almost comical, but somehow it simply would not go away despite efforts to dismiss it by those attempting to preserve the status quo. Take a volatile mix of young adults—the demographic at the center of all revolutionary social movements—add a little pepper spray, stir it with some Billy clubs, post videos on YouTube, and you have the beginnings of social upheaval. OWS is said to be a highly disjointed group with no common denominator or even well-formulated gripes. I completely disagree. Admittedly, some are asking to be relieved of pain from self-inflicted wounds, but there is one theme: They all perceive that the system has become decidedly unfair. It’s not about equal opportunity; wealth and power necessarily accrue disproportionate opportunities. We all work hard to give our kids an edge. It is about a perceived absence of opportunity for a growing segment of the population. It would be incorrect to do a head count at street level and conclude the movement is small. Millions are watching from the comfort of their homes and offices in what I believe is silent support. This movement could get legs as it percolates up through the social strata.

Figure 6

Strauss and Howe’s predicted Fourth Turning crisis phase may have arrived. But there is already a nasty mood in the air. Watch the following soccer video [47]. The hooligan runs around the field and, when grabbed by the police, gets roughed up a little. The players and fans beat the tar out of the police. Something has changed. Some think maybe it started on 9/11. This may be true for Iraqis, but not for us because we dusted ourselves off and moved along. Others say it was the financial crisis. Closer but that is still not quite right. I think the societal rollover occurred when the financial crisis arrived and abated, yet absolutely nothing changed. We are in a big hole as illustrated by US employment stats in Figure 6. If this recovery stalls, promptly unplug all fans.

To reduce my concerns to traders jargon, I look at the S&P 500 over decades and ask: Is that a head and shoulders formation? Is that just an equity index, or is there something more ominous lurking? One should be concerned because traders know that a head and shoulders eventually gives way to knees and toes (knees and toes).


Books

An educated mind can entertain a thought without accepting it.

—Aristotle—

For those who made it this far—avid readers to say the least—I’d like to offer thoughts on what books shaped my thinking. Despite an overdose on crisis books for over a decade (beginning with crisis foreshadowing books), I succumbed to the temptation a few more times. The following are the notable ones:

All the Devils Are Here: The Hidden History of the Financial Crisis by McLean and Nocera.
This is a particularly poignant slice through this interminable crisis by describing the slow, methodical mutations that morphed the key players—the ratings agencies, mortgage brokers, investment banks, politicians, and GSEs—into destructive forces. It offers a great view of the mortgage world. McLean and Nocera deftly illustrate how any barrier can be removed or corrupted given enough political influence, financial resources, and persistence. One also realizes, however, that regulation and enforcement would be like enforcing drug laws at Woodstock.

Fooling Some of the People All of the Time by David Einhorn.
After an hour meeting with the author, I read this 2008-vintage book to understand the inscrutable guy and was blessed with much more. Einhorn tells a horrifying tale of a multi-year effort to short Allied Capital, a highly corrupt financial institution. The complete and utter failure of the system to cleanse this cancer reveals the corruption within the SEC, politics, the press, and even the Small Business Administration. The take home message for me was that Markopoulos was defenseless against Bernie Madoff and the SEC.

The Fourth Turning by Strauss and Howe.
This 1996 cult favorite discusses Kondratiev-like generational cycles and predicted the onset of a protracted (several decade) cathartic crisis—a so-called fourth turning—coming in…wait for it…2005-10. Although the social science may be a little soggy, their logic seemed secure and their predictions about the arrival of the crisis phase proved hauntingly prescient.

Currency Wars by James Rickards.
This treatise describing chaos in the currency markets arrived on the bookshelves just as tremors shook Europe’s foundations, fiat currencies came under fire, and central bankers furiously fought to debase their currencies. The book may serve as a roadmap going forward. He describes the growing sense that we are working toward some variant of the gold standard…the hard way. Excellent timing, Jim. The only part of his book I had a gripe with was about SDRs (special drawing rights). Jim makes a case for SDRs in the global currency system of the future. Through the eyes of an amateur, SDRs look like an über fiat currency of some New World Order. They could name this currency “the crock.”

The Collapse of Complex Societies by Joseph Tainter.
As an anthropologist Tainter takes a look at several complex societies that collapsed (underwent marked simplification). It has a similar feel to Jared Diamond’s Collapse but is more scholarly. Hat tip to Rickards for recommending this one.

Inflated: How Money and Debt Built the American Dream by Chris Whalen.
Despite the title, Whalen describes the monetary and fiscal history of the United States. It is a very nice, admittedly typo-rich, treatise of the slow march to the dollar’s current status as the reserve currency. I inferred that reserve currency status is a suicide mission. I followed up on this point with Chris but wasn’t sure I got the answer.

Endgame: The End of the Debt Supercycle and How It Changes Everything by John Mauldin.
John’s 2004 book, Bull’s-eye Investing, described in lurid detail why we were headed for trouble. My only criticism was that he said markets would get so crazy that we would all need hedge fund managers, whereas I thought investors would simply take cover. In Endgame, he paints a similarly vivid picture of how we are now completely toast. He dredges up every ounce of his ample optimism to describe admittedly ugly paths out of the mess. Sorry John, but your critique was way too convincing; we’re toast.

Boomerang: Travels in the New Third World by Michael Lewis.
Lewis returns to his style exemplified in Liar’s Poker with hysterical descriptions of how those zany Europeans have managed to completely self destruct (suicide by two shots to the head). Some will recognize content from articles written in Vanity Fair. Lewis is a hoot.

Unbroken: A World War II Story of Survival, Resilience, and Redemption by Lauren Hillenbrand.
This has nothing to do with markets but is brilliant. Hillenbrand describes the truly extraordinary progression of Louis Zamperini from directionless hooligan to world-class distance runner, WWII bombardier, world-record holder of survival in a rubber raft (47 days), Japanese POW under the “tutelage” of the 18th ranked Japanese war criminal, and a lifetime of salvation and healing. It’s gripping.

For those with a particularly cynical view of the American Dream, you might try the writings of octogenarian Peter Dale Scott of Berkeley. As a youngster, he began studying drug cartels, only to discover nefarious influences by Western powers. (Recall the BCCI scandal?) His writings about Deep Politics, the pipes and infrastructure embedded deeply beneath the familiar political structures, are scholarly, thoroughly referenced, void of hyperbole, and terrifying to those with an Aristotelian ability to entertain disturbing ideas. I have just begun American War Machine. For those who call this “conspiracy theory” with derision in your voice, you betcha. Trillions of dollars and the quest for resources would never find a way to corrupt the system (head slap), and building 7 fell due to fire [48].

Acknowledgement

I have had the pleasure of exchanging ideas with money and hedge fund managers, academic and Wall Street economists, journalists, authors, bloggers, geologists, peak oil theorists, Federal regulators and TARP overseers, central bankers, and historians, some of whom are mentioned above, and many in the fever swamps called chatboards. I am exceedingly grateful.

– David Collum

David B. Collum is a professor of Chemistry and Chemical Biology at Cornell University. In addition to his academic interests, Dave authors an annual macroeconomic assessment. 

 

Links  

1. http://www.chrismartenson.com/forum/david-b-collums-2010-year-review/50352?#comment-99043

2. http://www.chrismartenson.com/blog/mappi…

3. http://lmgtfy.com/?q=How+do+I+google+something%3F

4. http://online.wsj.com/article/SB121642367125066615.html

5. http://www.cbsnews.com/8301-18560_162-57323527/congress-exempt-from-insider-trading-laws/?tag=currentVideoInfo;videoMetaInfo

6. http://finance.yahoo.com/news/SEC-says-i…

7. http://www.businessinsider.com/krugman-in-02-greenspan-needs-to-create-a-housing-bubble-2009-6

8. http://www.huffingtonpost.com/2011/08/15/paul-krugman-fake-alien-invasion_n_926995.html

9. http://money.cnn.com/magazines/fortune/f…

10. http://www.retro.ms11.net/LewisBuffett.pdf

11. http://www.financialsensearchive.com/editorials/collum/2009/0129.html

12. http://www.youtube.com/watch?v=RPZHWLlCNB4

13. http://www.chrismartenson.com/crashcourse/chapter-1-three-beliefs

14. http://www.zerohedge.com/news/chris-martenson-lecture-why-next-20-years-will-be-marked-collapse-exponential-function

15. http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/12/15/robert-l-hirsch-phd/we-are-staring-directly-into-energy-storm-in-next-2-3-years

16. https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IICeBY%2bw647w%2b
8yc1qw89rRWuey6UVkZcqOnBQRhvyPRCnLyVzPUi0O5g1UqS1NM%2fpFFF8Fngaxz44dhmRat65AjEMJq
CcCI5t%2fq7KUqhLxzPuhOAOHRHA1u

17. http://www.youtube.com/watch?v=5V3kpKzd-Yw

18. http://www.econtalk.org/archives/2011/07/skeel_on_bankru.html

19. http://www.hussmanfunds.com/wmc/wmc111010.htm

20. http://www.zerohedge.com/news/former-fed-official-poole-sees-risk-astonishing-rise-inflation

21. http://www.imf.org/external/pubs/ft/fandd/2011/06/reinhart.htm

22. http://financial-dictionary.thefreedictionary.com/Pledging

23. http://brucekrasting.blogspot.com/2011/12/on-corzine-and-question-re-ms-i-watched.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BruceKrasting+%28Bruce+Krasting%29

24. http://www.zerohedge.com/news/some-observations-bob-pisanis-visit-glds-vault

25. http://www.netcastdaily.com/broadcast/fsn2011-1201-1.mp3

26. http://www.zerohedge.com/news/inevitable-spiral-equity-collapse-bidermans-better-early-late-call-sell-strength

27. http://www.dylanratigan.com/2011/08/09/dylan-ratigan-mad-as-hell-his-epic-network-moment/

28. http://wallstreetwarzone.com/

29. http://www.zerohedge.com/news/david-rosenberg-depression-ecb-mf-global-canary-coalmine-all-surprise-ending

30. http://video.cnbc.com/gallery/?video=3000059875

31. http://www.niallferguson.com/site/FERG/Templates/GeneralArticle.aspx?pageid=439&cc=GB

32. http://www.project-syndicate.org/commentary/rogoff87/English

33. http://media.chrismartenson.com/audio/david-stockman-2011-09-30.mp3

34. http://www.theburningplatform.com/?p=1568

35. http://www.lewrockwell.com/roberts/roberts-arch.html

36. http://www.charlierose.com/view/interview/11957

37. http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/12/21_Chris_Whalen.html

38. http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/12/12_Felix_Zulauf.html

39. http://www.zerohedge.com/

40. http://kunstler.com/blog/

41. http://www.youtube.com/watch?v=AYrpROr9Gmk

42. http://www.nytimes.com/2007/02/16/business/16jail.html?pagewanted=all

43. http://en.wikipedia.org/wiki/Liberty_Dollar

44. http://www.loansafe.org/former-goldman-sachs-computer-programmer-gets-97-months-to-prison-for-stealing-companies-computer-code

45. http://www.npr.org/2011/08/06/139027615/a-national-debt-of-14-trillion-try-211-trillion

46. http://adserver.financialsense.com/editorials/collum/2009/0120.html

47. http://dailybail.com/home/revenge-police-brutality-handled-in-the-right-way.html

48. http://www.youtube.com/watch?v=bWorDrTC0Qg

SUBURBAN SPIRAL OF SUFFERING

Everyone knows about the poverty in our urban war zones. I’ve detailed the squalor of West Philly for three years on this blog. What you don’t hear too much about is the rapidly spreading poverty in suburbia. You need to look closer to find it, but it is there. I’m always observing while driving around my community. The hottest new retailers in the suburbs are SPACE AVAILABLE and VACANCY. Strip malls across suburbia have more empty stores than operating stores. You notice large single family homes with overgrown front lawns. You notice that home repairs are being deferred. You see nice houses sitting vacant for years.

There are millions of people still living in homes while not having made a mortgage payment in two years. A million people fell off the unemployment rolls after using up their 99 weeks in the past year. Food banks are booming. Manna on Mainstreet in Lansdale, near my home, had to move to a location three times the size of its former location. I do feel sorry for people who have caught a bad break. My favorite Christmas gift from Avalon was a note saying that a contribution to Manna on Mainstreet had been made in my name.

The people I don’t feel sorry for are those who bought twice as much house as they could afford and now are reaping what they sowed. I don’t feel sorry for those who borrowed against their houses so they could take exotic vacations and drive the latest BMW. In suburbia it is virtually impossible to distinguish between those who deserve help and those who deserve to get it good and hard. We have a stealth depression, as food stamps, unemployment compensation, and welfare payments are all done electronically. No lines. No evidence of suffering. We’ve really improved our depressions.

America’s Dirty Little Housing Secret Is Rocking The Suburbs

Michelle Hirsch, The Fiscal Times

For years, the food pantry in Crystal Lake, Ill., a bedroom community 50 miles west of Chicago, has catered to the suburban area’s poor, homeless and unemployed.

But Cate Williams, the head of the pantry, has noticed a striking change in the makeup of the needy in the past year or two.

Some families that once pulled down six-figure incomes and drove flashy cars are now turning to the pantry for help.

A few of them donated food and money to the pantry before their luck soured, according to Williams.

“People will shyly say to me, ‘You know, I used to give money and food to you guys. Now I need your help,’” Williams told The Fiscal Times last week. “Most of the folks we see now are people who never took a handout before. They were comfortable, able to feed themselves, to keep gas in the car, and keep a nice roof over their head.”

Suburbia always had its share of low-income families and the poor, but the sharp surge in suburban poverty is beginning to grab the attention of demographers, government officials and social service advocates.

The past decade has marked the most significant rise in poverty in modern times. One in six people in the U.S. are poor, according to the latest census data, compared to one-in-ten Americans in 2004. This surge in the percentage of the poor is fueling concerns about a growing disparity between the rich and poor — the 99 percent versus the 1 percent in the parlance of the Occupy Wall Street movement.

But contrary to stereotypes that the worst of poverty is centered in urban areas or isolated rural areas and Appalachia, the suburbs have been hit hardest in recent years, an analysis of census data reveals. “If you take a drive through the suburbs and look at the strip mall vacancies, the ‘For Sale’ signs, and the growing lines at unemployment offices and social services providers, you’d have to be blind not to see the economic crisis is hitting home in a way these areas have never experienced,” said Donna Cooper, a senior fellow at the Center for American Progress, a progressive think tank.

In the wake of the Great Recession, poverty rolls are rising at a more rapid pace in the suburbs than in cities or rural communities. Between 2000 and 2010, the number of suburban households below the poverty line increased by 53 percent, compared to a 23 percent increase in poor households in urban areas, according to a Brookings Institution analysis of census data.

Last year, there were 2.7 million more suburban households below the federal poverty level than urban households, according to the Bureau of Labor Statistics. That was the first time on record that America’s cities didn’t contain the highest absolute number of households living in poverty. There are many reasons for the dramatic turnabout in the geographic profile of poverty.

While many once depressed urban areas are being revitalized in an effort to draw in more affluent residents, other areas are attracting lower-income families who have moved to the suburbs in search of more affordable housing and better schools. This shift in low-income families to the suburbs coincided with a move of low-wage, low-skilled jobs to those same suburban areas between the 1970s and early 2000s, experts say.

Meanwhile, the introduction of new commerce and high-cost housing in the urban neighborhoods pushed overall prices upward, providing added incentive for low-income people to head for the suburbs.

“These are families that were living on the edge in the city, but in many cases over the last 20 to 30 years, regained some stability when they found affordable housing in the suburbs,” said Cooper. “Now, the economy tanks, they lose their jobs, they’re poor, and they’re out in the suburbs on the edge once again.”

Both urban and suburban America were badly hammered by the financial meltdown and recession, leading to stubbornly high unemployment, widespread foreclosures and “underwater” homes, high food and gas prices and sharp cutbacks in government and private social services. But the overall impact has been worse in suburban areas, because many low-skilled jobs disappeared along with the plants and businesses that once provided employment. Other companies shifted their business strategy towards developing a high-skill, high-tech labor force.

To be sure, the picture of poverty in American suburbs is an uneven one. According to the census analysis, some suburban regions took bigger economic hits than others. Poverty rolls increased 121.8 percent in the Atlanta suburbs between 2000 and 2010, compared to a 6.8 percent increase in the city. Chicago and Seattle saw similarly large suburban-urban splits in poverty. The poverty rate increased by 76.3 percent in the Chicago suburbs compared to only 9.7 percent in the city during that period. In Seattle, the number of people living below the poverty line rose 74.4 percent in the suburbs versus 26.1 percent in the city proper over the decade.

The 10-year surge in suburban poverty is putting enormous budgetary pressure on county and local governments and non-profits, which are struggling to meet a rising demand for social services, counseling and financial assistance. The number of students qualifying for subsidized lunches in Conyers, an Atlanta suburb, grew by 63 percent this year, compared with a 46 percent increase in 2006. Many suburban areas of Columbus, Ohio have also seen their subsidized lunch enrollment more than double over the past five years, the Columbus Post Dispatch reported earlier this year.

This post originally appeared in The Fiscal Times.

Read more: http://www.thefiscaltimes.com/Articles/2011/12/27/Americas-Best-Kept-Secret-Rising-Suburban-Poverty.aspx#page1#ixzz1i3ikOb8K

2011 – CATCH-22 YEAR IN REVIEW

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

 

I published my predictions for 2011 on January 3, 2011 in my article 2011 – The Year of Catch-22. Humans evidently enjoy being embarrassed by how pitiful they are at predicting the future, because we continue to do it year after year. The mainstream media pundits don’t dare look back at their predictions or the predictions of the Wall Street shills that parade on CNBC and get quoted in the Wall Street Journal, eternally predicting 10% to 15% stock market gains. The multi-millionaire Wall Street strategists like the spawn of the squid, Abbey Joseph Cohen, have used all of their Ivy League brain power to predict at least a 10% stock price gain every year since 1999. The S&P 500 stood at 1,272 on January 6, 1999. As of this writing it currently stands at 1,261. ZERO appreciation over the last twelve years.

The Wall Street mantra of stocks for the long run is beginning to get a little stale. If Abbey Joseph Cohen had been right for the last twelve years, the S&P 500 would be 4,000. For this level of accuracy, she is paid millions. Her 2011 prediction of 1,500 only missed by16%. The S&P 500 began the year at 1,258 and hasn’t budged. The lowest prediction from the Wall Street shysters at the outset of the year was 1,333, with the majority between 1,400 and 1,500.

The same Wall Street clowns are now being quoted in the mainstream media predicting a 10% to 15% increase in stock prices in 2012, despite the fact we are headed back into recession, China’s property bubble has burst, and Europe teeters on the brink of dissolution. They lie on behalf of their Too Big To Tell the Truth employers by declaring stocks undervalued, when honest analysts such as Jeremy Grantham, John Hussman and Robert Shiller truthfully report that stocks are overvalued and will provide pitiful returns over the next year and the next decade.

I will take my chances with a few predictions for 2012 after reviewing my lack of foresight regarding 2011. I declared 2011 the year of Catch-22 because no matter what happened, it would not translate into a positive result for the American people. This was my thesis:

The United States and its leaders are stuck in their own Catch 22. They need the economy to improve in order to generate jobs, but the economy can only improve if people have jobs. They need the economy to recover in order to improve our deficit situation, but if the economy really recovers long term interest rates will increase, further depressing the housing market and increasing the interest expense burden for the US, therefore increasing the deficit. A recovering economy would result in more production and consumption, which would result in more oil consumption driving the price above $100 per barrel, therefore depressing the economy. Americans must save for their retirements as 10,000 Baby Boomers turn 65 every day, but if the savings rate goes back to 10%, the economy will collapse due to lack of consumption. Consumer expenditures account for 71% of GDP and need to revert back to 65% for the US to have a balanced sustainable economy, but a reduction in consumer spending will push the US back into recession, reducing tax revenues and increasing deficits. You can see why Catch 22 is the theme for 2011.

My predictions for 2011 were as follows:

  • The first half of 2011 is guaranteed to give the appearance of recovery. The lame-duck Congress ”compromise” will pump hundreds of billions of borrowed dollars into the economy. The continuation of unemployment benefits for 99 weeks (supposedly to help employment) and the 2% payroll tax cut will goose consumer spending. Ben Bernanke and his QE2 stimulus for poor Wall Street bankers is pumping $75 billion per month ($3 to $4 billion per day) directly into the stock market. Since Ben gave Wall Street the all clear signal in late August, the NASDAQ has soared 25%. Despite the fact that there are 362,000 less Americans employed than were employed in August 2010, the mainstream media will continue to tout the jobs recovery. The goal of all these efforts is to boost confidence and spending. Everything being done by those in power has the seeds of its own destruction built in. The Catch 22 will assert itself in the 2nd half of 2011.

The payroll tax cut, extension of unemployment benefits and Bernanke’s gift to Wall Street criminal banks did nothing to help real Americans in the real world. The government manipulated GDP has languished between 0.4% and 1.8% in the first three quarters of 2011. Using a true measure of inflation, as detailed by John Williams at www.shadowstats.com, GDP has remained at a recessionary level of -2% to -3%.

 

Easy Ben accomplished his goal of pumping up the stock market with his QE2 gift to Wall Street bankers during the first six months of 2011, with the S&P 500 peaking at 1,364 in late April. The market began to fall the second Ben stopped handing Jamie Dimon and his friends $4 billion per day, with the market dropping 18% in three months. The market has risen back near the breakeven level for the year based on Ben’s promise to keep interest rates at zero forever and the hope of QE3.

  • A new perfect storm is brewing for housing in 2011 and will not subside until late 2012. You may have thought those bad mortgages had been all written off. You would be wrong. There will be in excess of $200 billion of adjustable rate mortgages that reset between 2011 and 2012, with in excess of $125 billion being the dreaded Alt-A mortgages. This is a recipe for millions of new foreclosures.

The brainless twits on CNBC will dutifully report the number of completed foreclosure sales plunged by 24% in 2011, giving the impression to their non-critical thinking viewership that all is well on the housing front. What they will fail to point out is that the number of foreclosures in process went up in 2011 and now stands 59% ABOVE the level in 2009 at the height of our recession. The reason that completed foreclosures have fallen is twofold. The criminal Wall Street banks can’t prove they hold the mortgage notes on hundreds of thousands of homes and they have a few legal issues related to the massive robo-signing fraud they committed. Kicking old ladies and Iraq War veterans out into the street using fraudulent documentation has caused the Wall Street Too Evil To Believe Banks some public relations issues. Secondly, the Wall Street Plutocrats have these mortgage loans valued at 100% on their balance sheets due to the FASB gift of mark to fantasy accounting rules. Foreclosing actually reveals their assets to be overvalued by at least 50%. This may explain why millions of Americans are still in their homes after not making a mortgage payment for two years, as detailed by economist Tom Lawler:

Given the number of loans either seriously delinquent or in the process of foreclosure at the beginning of the year, the number of completed foreclosure sales in 2011 is almost absurdly low, reflecting the complete screw-up of the mortgage servicing industry, and the resulting dramatic slowdown in foreclosure resolutions. As of the end of October, 2011 LPS estimated that there were 1.759 million seriously delinquent loans with the average number of days delinquent at 388 (compared to 192 days in January 2008), and there were 2.210 million loans in the foreclosure process that had been on average delinquent for 631 days.

Completed Foreclosure Sales And Short Sales/DILs (thousands, estimates)
  2008 2009 2010 2011(E)
Completed Foreclosure Sales 914 949 1,070 815
Owner-occupied N.A. N.A. 785 608
Non-owner-occupied N.A. N.A. 285 207
Short Sales/DILs 105 270 354 380
Foreclosures plus Short Sales/DILs 1,019 1,219 1,424 1,195
Outstanding first liens: Jan-08 Jan-09 Jan-10 Jan-11
Seriously Delinquent (90+) 1,016 1,983 3,061 2,168
In Process of Foreclosure 860 1,386 2,110 2,203
 
The concerted effort to not complete foreclosures did nothing to slow the continued descent in home prices. As you can see in the chart below from http://www.calculatedriskblog.com/, real home prices will have fallen another 5% in 2011. Obama and his minions threw $50 billion of your tax dollars at the housing market in 2009 – 2010 with tax credits, loan modification programs, homebuilder tax loss carry-backs, and a myriad of other Keynesian claptrap solutions. They succeeded in pissing your tax dollars down the toilet as prices have declined another 12% in the last 18 months. Prices have fallen 42% nationally since 2006. I wonder who missed the boat on that development?
 
“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.” – Ben Bernanke – July 2005
 
 

There are approximately 48.5 million homes with mortgages in the United States and 10.7 million of them have negative equity. Another 2.4 million have less than 5% equity. Considering it costs more than 5% in closing costs to sell a house that means 27% of home occupiers with a mortgage are trapped like rats in a cage. With 2.2 million foreclosures still in the pipeline and a looming recession, home prices will continue to fall another 10% to 20% over the next two years and one third of all home occupiers will be underwater. That sounds like a recipe for 10% to 15% stock market gains.

  • Quantitative easing has benefited only Wall Street bankers and the 1% wealthiest Americans. The $1.4 trillion of toxic mortgage backed securities on The Fed’s balance sheet are worth less than $700 billion. How will they unload this toxic waste? The Treasuries they have bought drop in value as interest rates rise. Quantitative easing’s Catch 22 is that it can never be unwound without destroying the Fed and the US economy.

Bennie and his Inkjets did a bang up job in 2011. He was able to expand his balance sheet from $2.47 trillion to $2.95 trillion in twelve short months. According to Ben and his Federal Reserve friends, increasing your balance sheet by $480 billion isn’t really printing money out of thin air and handing it to their Wall Street owners for free, so they can prop up the stock market and enrich their executives. Ben is now leveraged 57 to 1. He should move to Europe, where this level of leverage is commonplace. In comparison, Lehman Brothers and Bear Stearns were leveraged 40 to 1 when they went belly up.

There is absolutely no way that Ben Bernanke could ever reduce the Federal Reserve balance sheet to the pre-crisis level without destroying the U.S. economy. He knows that and will never sell off those toxic mortgage assets. Not only won’t he reduce the Fed balance sheet, but by mid-2012 he will institute QE3 and buy another $600 billion of mortgage debt. His hubris knows no bounds, as his reckless illegal actions thus far have not driven interest rates sky high – YET. He has only destroyed the finances of senior citizens, savers and people who eat food and use gasoline. He will surely go down in history, but not the way he envisions.

  • The rise in oil to $91 a barrel will not be a top. The Catch-22 of a declining dollar is that prices of all imported goods go up. If the dollar falls another 10%, the price of oil will rise above $120 a barrel and push the economy back into recession.

As Bernanke printed like a drunken sailor during the first six months of 2011, the USD fell by 9% and the price of oil did exactly as expected, rising to a peak above $125. The NATO “intervention” in Libya also added a few bucks to the price of a barrel of sweet crude.

                  DXY

One-Year Chart for DOLLAR INDEX SPOT (DXY:IND)

The complete implosion of Europe and the ensuing weakness of the Euro have given the false impression that the U.S. dollar is a safe haven. The USD has regained its losses and will end the year exactly as it started versus a Euro heavy basket of world currencies. With annual deficits equaling 10% of GDP, a national debt now exceeding 100% of GDP, and Ben Bernanke in perpetual printing mode, the USD is destined to reach its intrinsic value of zero. With Brent crude still above $108 a barrel, employment still weak, and double digit food and energy inflation slowing consumer spending, the ECRI knows a recession during 2012 is baked in the cake.  

 

  • The imminent collapse of the European Union as Greece, Ireland, Portugal and Spain are effectively bankrupt. Spain is the size of the other three countries combined and has a 20% unemployment rate. The Germans are losing patience with these spendthrift countries. Debt does matter.

It seems I was wrong about Europe. It turned out to be much worse than anyone envisioned, with Italy now the likely fuse that blows the whole thing sky high. The ECB has made Ben Bernanke look like a lightweight by increasing their balance sheet by 44% to over $3.5 trillion in a futile effort to solve a debt crisis with more debt. It seems central bankers are programmed to print until the very end (see Weimar). The European Union will not survive 2012. Too many countries, too much government debt, too many zombie banks, too many bureaucrats, too much austerity rammed down the throats of citizens, and not enough honesty or reality based solutions.

  • State and local governments were able to put off hard choices for another year, as Washington DC handed out hundreds of billions in pork. California will have a $19 billion budget deficit; Illinois will have a $17 billion budget deficit; New Jersey will have a $10.5 billion budget deficit; New York will have a $9 billion budget deficit. A US Congress filled with Tea Party newcomers will refuse to bailout these spendthrift states. Substantial government employee layoffs are a lock.

State and local governments have laid off 535,000 workers since 2008. With borrowed Federal government stimulus handouts evaporating into thin air during 2011 – 2012, this total will reach 800,000 by the end of the next year. The U.S. Postal Service will do their part by cutting 28,000 jobs in 2012, even though they need to cut 100,000. States and municipalities based their budgets on the revenues produced by the fake debt driven housing boom from 2003 – 2007. The tax revenue dried up, but the union jobs added are a gift that keeps on costing taxpayers billions. States and localities can’t print, so layoffs will continue.   

 

  • There is a growing probability that China will experience a hard landing as their own quantitative easing has resulted in inflation surging to a 28 month high of 5.1%, with food inflation skyrocketing to 11.7%. Poor families spend up to half of their income on food. Rapidly rising prices severely burden poor people and can spark civil unrest if too many of them can’t afford food.

According to official government statistics China’s economy continued to boom in 2011. But, of course Chinese government reports make the BLS look honest. The fact is the Chinese stock market has fallen 28% since April as the property bubble deflates. If their economy has truly grown at an annual rate of 8% to 10% over the last five years, why is their stock market down 62% from its 2007 high?

   SHANGHAI INDEX

One-Year Chart for Shanghai Stock Exchange Composite Index (SHCOMP:IND)

The price inflation in food and energy prices, along with the property bubble bursting has led to breakouts of civil unrest across China. China’s two biggest markets – Europe & the United States – are in or near recession and are buying less of their crap. They can only build so many vacant cities and shopping malls to create the appearance of growth. The hard landing is about to get harder in 2012.

  • The Tea Party members of Congress are likely to cause as much trouble for Republicans as Democrats. If they decide to make a stand on raising the debt ceiling early in 2011, all hell could break loose in the debt and stock markets. 

It seems I got the timing wrong on this prediction, but the August showdown was a doozy. The threat of a government shutdown resulted in the stock market collapsing by 18% in a matter of weeks in August. Our beloved politicians then came up with another bullshit non-solution by creating a commission which, after months of negotiations, failed to do anything. The $1.2 trillion of automatic spending cuts will never happen. The slime that inhabit the hallowed halls of Congress will pretend to cut, while actually increasing spending. And so it goes. The stock market has risen from its October low based on Easy Ben’s assurances to keep interest rates at zero forever and the anticipation of QE3 in the new year.

  • Will the consensus forecast of a growing economy, rising corporate profits, 10% to 15% stock market gains, 2 million new jobs, and a housing recovery come true in 2011? No it will not. By mid-year confidence in Ben’s master plan will wane.

Corporate profits did rise, mostly due to Ben Bernanke providing free money to the Wall Street Mega-Banks so they could generate risk free profits on the backs of senior citizens getting .15% on their savings. It also helps when the same Wall Street banks can make accounting entries declaring that future loan losses will be minimal and the toxic mortgages on their books aren’t really worthless. Who knew accountants could do so much for America? Abbey Joseph Cohen only missed her stock market projection by a smidgeon. The S&P 500 is essentially unchanged for the year, while the NASDAQ and Russell 2000 will finish in the red.

The country did not add 2 million new jobs. It added 1.4 to 1.5 new jobs. Too bad the working age population went up by 1.7 million people. But our friends at the BLS, when they aren’t manipulating away the inflation that real people in the real world experience every day, have the gall to declare the unemployment rate has fallen from 9.8% to 8.6% in the last twelve months. How could this be you might ask, since the working age population went up by more than the number of people who found jobs. Easy if you are a BLS government drone. Everyone knows that things are so good out in the real world that 1.8 million Americans decided to kick back and enjoy the good life by leaving the workforce. It wasn’t because they gave up looking for the jobs that were shipped to the Far East by the mega-corporations making record profits and paying record bonuses to their executives. It’s just a rumor that those long lines at food banks around the country have a few of these “lucky” non-members of the workforce in them.

The housing recovery is just around the corner. Larry Yun, chief liar for the National Association of Realtors, assures us that it’s the best time to buy. We all know that the NAR is a bastion of honesty and truth. Just because they reported 3 MILLION more home sales than actually occurred between 2007 and 2010, you can’t scorn, ignore and treat everything they say as a bald faced lie. If Larry says the housing recovery has arrived, it must be true.

  Revised Previous % Change
2007 5,022,000 5,652,000 -11.1%
2008 4,124,000 4,913,000 -16.1%
2009 4,334,000 5,156,000 -15.9%
2010 4,182,000 4,907,000 -14.8%

When the pundits on CNBC sum up the year, they will not be touting the fact that gasoline prices went up 10% in the past year and the average price for a gallon of gas was the highest in U.S. history. They will not be proclaiming that even the government manipulated CPI shows food prices up 6% and clothing prices up 5% in the last year. I’m sure glad Ben Bernanke doesn’t see any inflation on his radar. Maybe he should ask his chauffer about his inflation. Lastly, the stocks for the long run crowd will not be yakking about the fact that gold finished up 10% for the year and has been up for TEN consecutive years. I wonder whether the numbskulls on CNBC can look at the chart below and figure out why gold is up ten years in a row. The national debt reaching $20 trillion by 2015 is a given. I wonder whether the price of gold will be higher. Maybe I’ll give Abbey Joseph Cohen a call and ask for her prediction.

Overall, my assessment of what would happen in 2011 wasn’t too far off. But, it was the things that I and virtually everyone on the planet missed that will reverberate in 2012 and for the next ten years. Our 20 year Crisis deepened, became more violent, and clearly revealed that the establishment will use all their power to put down protests and crush opposition to their corrupt crony capitalistic policies. The major developments I missed regarding 2011 included:

  • The self-immolation of a young Tunisian man set off revolutions around the globe, toppling U.S. supported dictators in Tunisia and Egypt. Dictators attempted to retain power by killing citizens by the thousands. The self-immolation of a man in New Hampshire in front of a courthouse was completely ignored by the mainstream media. I wonder why.
  • The Arab Spring has resulted in revolutions in Yemen, Bahrain, Syria and Libya. Depending upon how much oil was at stake, the U.S. has supported the dictator or the people whenever it suited them. This is called democratic principles.
  • Young people across the U.S. were inspired by the Arab Spring and began to Occupy Wall Street and many other streets in 97 other U.S. cities this past Fall. The spirit of these protests was against Wall Street criminality, Washington corruption, and corporate malfeasance. Peaceful civil disobedience by citizens of this country was met with beatings, tear gas, mass arrests and bulldozing their encampments. Students were maced while sitting in front of a college building. Ultimately a Department of Homeland Security coordinated attack on all the protests squashed the movement. The American people were too distracted by Dancing With the Stars and the latest iGadget to notice. The corporate media did their part by spewing misinformation and propaganda about the Occupy Movement, while the Wall Street Elite giggled with delight from their NYC penthouse suites.
  • Shockingly, no bankers were prosecuted despite clear unequivocal evidence of the greatest financial fraud in world history. The former head of Goldman Sachs, U.S. Senator, and NJ Governor continues to eat caviar and drink champagne in his glorious mansion after stealing $1.2 billion directly from customers’ accounts. These funds now reside in the pocket of Jamie Dimon and his upstanding JP Morgan institution.
  • The Federal government methodically moved closer to a totalitarian regime by passing legislation that will enable them to imprison U.S. citizens without charges. The only remaining area that has allowed critical thinking Americans to find the truth – the Internet – is on the verge of being locked down by the Feds. Pending legislation will allow them to shut down any website that may inconvenience their agenda. We inch ever closer to Orwell’s vision of the future.
  • No one in the MSM or government anticipated that the only truthful, honest, forthright politician in Washington D.C. – Ron Paul – could possibly win the Iowa caucus. His message of freedom, liberty, self reliance, and non-interventionism has struck a chord with young people and those capable of distinguishing between MSM propaganda and reality. The establishment is terrified of Ron Paul and is now on a mission to destroy him. What they don’t realize is their time is coming to an end. The existing social order will be swept away in a violent manner. The youth of this country will lead the charge. 2012 should be a real doozy.

I’ll take another shot at predicting the unpredictable with my next article:  2012 – The Year of Living Dangerously.

SEARS – I TOLD YOU SO

Anyone remember my SEARS = TOAST post from May of this year? Here is a snippet:

Jesus Christ himself couldn’t save Sears. Has anyone on TBP actually bought anything at a Sears/Kmart in the last five years? They are the worst run retailer in America. They are dead and don’t even know it. These morons have added 247 new stores since 2006 but have managed to decrease their annual sales by $10 billion. Eddie Lampert is truly a retail genius. Over the next five years you will see a battle of retail zombies. Every big box retailer is part of the walking dead.

Sears will be the first victim and the stronger zombies – Home Depot, Lowes, and Wal-Mart will destroy them by underpricing appliances and tearing their heart out. Target, Kohls, and Wal-Mart already destroyed their apparel and general merchandise business.

A forward thinking realist would take a look at his 4,038 stores and close the 1,000 worst performing stores and try to conserve cash for the rough years ahead. They will not do this. They will go out in a blaze of glory with the biggest retail bankruptcy in history. There will be 4,038 rat infested vacant hulks rotting in our communities for decades.

You know I hate to tell people I told them so, but after yesterday I’m afraid I have to do it again. The demise of Sears is baked in the cake. Remember the stories in the MSM about Eddie Lambert being the new Warren Buffett. They were right. Buffet and Lambert have both proven to be dumbasses. Buffet’s brilliant investments in Goldman Sachs, GE and Bank of America have all sucked.

Eddie Lambert bought K-Mart and Sears as asset plays. One problem – the asset values of the properties have been cut in half. The fact that Sears and K-Mart are the worst managed retailers in America hasn’t helped. Sears started the year with $1.3 billion in cash and has burned through $600 billion in twelve months. This Lambert is a fucking genius. He is butt brothers with Jimmy Cramer. They worked together at where else but – GOLDMAN “THE VAMPIRE SQUID” SACHS. Cramer has been pumping this stock for years. Let’s assess his brilliance as an investment guru.

The stock traded at $192 per share in early 2007. Jim Cramer rated it a buy at this level. Today it trades at $34 a share. That is a NEGATIVE 82% return in just under five years. That is about par for the course for Jim Cramer. It traded at $95 earlier this year. It dropped 27% yesterday alone.

Here’s the deal. These bozos opened 247 new stores since 2006 and now they announced they are closing 120 stores. That is a piss in the ocean. If they really got serious and closed their 1,000 worst stores, they would have a chance to survive. But the ego of Eddie Lambert will not allow that decision to happen. He thinks he is smart. He’s a graduate of Goldman University for Christ’s sake. His reluctance to accept the facts will result in the bankruptcy of this piece of shit retailer and will leave the rotting carcasses of 4,000 rat infested hulks across suburbia. This stock is going to zero.

Thanksgiving Day Massacre: Sears Slaughtered On Collapsing Margins, To Shutter Hundreds Of Stores, Provides Revolver Update

Tyler Durden's picture

Submitted by Tyler Durden on 12/27/2011 06:24 -0500

That retailer Sears, aka K-Mart, just preannounced what can only be described as catastrophic Q4 results should not be a surprise to anyone: after all we have been warning ever since the “record” thanksgiving holiday that when you literally dump merchandize at stunning losses, losses will, stunningly, follow. Sure enough enter Sears. What we, however, are ourselves stunned by is that as part of its preannouncement, Sears has decided it would be prudent to provide an update on its credit facility status as well as availability. As a reminder to anyone and everyone – there is no more sure way of committing corporate suicide than openly inviting the bear raid which always appears whenever the words “revolving credit facility” and “availability” appear in the same press release. Just recall MF Global. And here, as there, we expect shorting to death to commence in 5…4…3…

From Sears:

Sears Holdings Corporation (“Holdings,”  “we,” “us,” “our,” or the “Company”) (Nasdaq: SHLD – News) today is providing an update on its quarter-to-date performance and planned actions to improve and accelerate the transformation of its business. 

Comparable store sales for the eight-week (“QTD”) and year-to-date (“YTD”) periods ended December 25, 2011 for its Kmart and Sears stores are as follows:

K-Mart

QTD  -4.4%

YTD  -1.8%

Sears Domestic

QTD  -6.0%

YTD  -3.3%

Total

QTD  -5.2%

YTD  -2.6%

Kmart’s quarter-to-date comparable store sales decline reflects decreases in the consumer electronics and apparel categories and lower layaway sales.  Sears Domestic’s quarter-to-date sales decline was primarily driven by the consumer electronics and home appliance categories, with more than half of the decline in Sears Domestic occurring in consumer electronics.  Sears apparel sales were flat and Lands’ End in Sears stores was up mid-single digits.

The combination of lower sales and continued margin pressure coupled with expense increases has led to a decline in our Adjusted EBITDA.  Accordingly, we expect that our fourth quarter consolidated Adjusted EBITDA will be less than half of last year’s amount.  For reference, last year we generated $933 million of Adjusted EBITDA in the fourth quarter ( $795 million domestically and $138 million in Canada ). 

Due to our performance in 2011 we expect that we will record in the fourth quarter a non-cash charge related to a valuation allowance on certain deferred tax assets of $1.6 to $1.8 billion .  Although a valuation adjustment is recognized on these deferred tax assets, no economic loss has occurred as the underlying net operating loss carryforwards and other tax benefits remain available to reduce future taxes to the extent income is generated.  Further, we may recognize in the fourth quarter an impairment charge on some goodwill balances for as much as $0.6 billion .  These charges would be non-cash and combined are estimated to be between $1.6 and $2.4 billion . 

“Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail – at the store, online and in the home,” said Chief Executive Officer Lou D’Ambrosio.  Specific actions which we plan to take include:

  • Close 100 to 120 Kmart and Sears Full-line stores.  We expect these store closures to generate $140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate.  Further, we intend to optimize the space allocation based on category performance in certain stores.  Final determination of the stores to be closed has not yet been made.  The list of stores closing will be posted at www.searsmedia.com when final determination is made.
  • Excluding the effect of store closures, we currently expect to reduce 2012 peak domestic inventory by $300 million from the 2011 level of $10.2 billion at the end of the third quarter as a result of cost decreases in apparel, tighter buys and a lower inventory position at the beginning of the fiscal year.
  • Focus on improving gross profit dollars through better inventory management and more targeted pricing and promotion. 
  • Reduce our fixed costs by $100 to $200 million .

In addition to the specific store closures listed above, we will carefully evaluate store performance going forward and act opportunistically to recognize value from poor performing stores as circumstances allow.  While our past practice has been to keep marginally performing stores open while we worked to improve their performance, we no longer believe that to be the appropriate action in this environment.  We intend to accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.

We currently expect the store closure and inventory reduction actions to reduce peak inventory in 2012 by $500 to $580 million and reduce our peak borrowing need by $300 to $350 million in 2012 from levels that may have resulted in 2012 without such actions. 

At December 23rd , we had $483 million of borrowings outstanding on our domestic revolving credit facility leaving us with over $2.9 billion of availability on our revolving credit facilities ( $2.1 billion on our domestic facility and $0.8 billion on our Canadian facility).  There were no borrowings outstanding last year at this time.

During the fourth quarter through December 23, 2011 , we have not repurchased any of our common shares under our share repurchase program.  As of December 23, 2011 , we had remaining authorization to repurchase $524 million of common shares under the previously approved programs.

Money in America, Part Two

In our last exciting episode, we saw barter, foreign coinage, fiat money, the rise of a banking system and systematic efforts to fiddle the system, by both banks and government. From one Turning to the next …

When the War Between the States ended, federal expenses had doubled, to $130 billion. The United States notes called the “greenback” arose from the Legal Tender Act of 1862, especially useful for all debts, public and private when there was already not enough specie to support the banking system.

The old state banking operations were supplanted by a system of banking entwined with the federal government. This new scheme led to the establishment of the Federal Reserve System.

First, of course, the government had assured the people that only $150 million greenbacks would be issued. Alas, they made two more issues, reaching a total of $415 million in 1864, all of which depreciated in real terms. Secretary Salmon P. Chase had tried unsuccessfully to manipulate the gold market to stem the depreciation along with other ‘tricks’. He ended up losing office.

Meanwhile, the state banks were still operational, and quite happy with the new fiat currency.

Needless to say, price inflation increased significantly. In the South, the Confederate fiat money issuance was far worse.

In 1865, Congress legislated a 10 percent tax on existing state banks notes. After that, the federal national banking system that had arisen had the legal monopoly on fiat money.

Much argument about the large public debt which existed after the war, and what to do about it and the greenback question. A federal debt of about $65 million in 1860 had blown out to $2.3 billion in 1866. The greenback issue was finally ruled unconstitutional in 1870 by Chief Justice Salmon P. Chase. Yes, he was for it before he was against it. Chase had become a born-again sound money supporter.

The Republicans of the day loved the legal tender laws; Democrats supported specie resumption. The railroads weren’t happy at the thought of paying their massive debts in gold. President Grant had two vacancies on the Supreme Court – and judiciously filled them with a pair of railroad lawyers. A 5-4 revisit to The Law in 1871 established paper money in accordance with the Constitution. All the banks, state and national, were happy, too, and the money supply more than doubled in seven years.

The Panic of 1873

Easy money led to easy loan, to individuals and companies. When the growth levelled off after their period of prosperity, the money supply did not decrease, nor productivity. Prices fell because costs were down and output up.

So where, really, was the panic? Yes, with a bloated banking system and railroads fat with subsidies from the federal government and the inevitable boom time speculation. Then Jay Cooke’s Northern Pacific railroad crashed and burned – hoist on his own petard of inflationary policy.

The U.S. Mint ratios, as determined by the Constitution, undervalued silver. As a result, silver coinage left for better climes where the value was respected. That’s the flaw of a bimetallic system. Also, European countries were shifting from silver to a gold standard. Add the discovery of silver mines in the American West and a government intervention.

February 1873, Congress passed a bill discontinuing further minting of silver dollars. Further legislation in June, 1874, demonetized silver for good. The GSR reached 18-1 in 1876 and was 32-1 on 1894!

The lack of transparency regarding silver had not been unnoticed by those who called for the free coinage of silver at the traditionally accepted ratio, and in unlimited quantities. This faction carried on throughout the century. Really, this movement was essentially the people vs. eastern bankers …

In 1875, the ubiquitous greenbacks still circulated, albeit discounted by 17% against gold. Grant’s administration determined to resume specie resumption in 1879. The next decade experienced great productivity, gold flowed into the country, prices were still edging downward, yet wages were up by 23 percent. Goodbye greenbacks.

Even the great Panic of 1873 had GDP growth of 6.8 perent a year. Prices going down is a signal for some economists to shriek “deflation”. Ordinary people hardly noticed; maybe the main deflation was that of fatcats whose greed brought them down.

(1877 – The Department of the Treasury’s Bureau of Engraving and Printing started printing all U.S. currency, A year later, they issued Silver Certificates in exchange for silver dollars. The last issue was in the Series of 1957. )

The Gold Standard Era, 1879 –1913

The NBER identifies a Long Depression from October 1873 to March 1879. At 65 months, this was a bigger record than the Great Depression of the 20th Century, which contraction was 43 months.

Some economists see price deflation over a long span and interpret that as the Great Depression of 1873 – 1896. While this period was most noticeable in Great Britain, in the U.S. after the inevitable correction to the panic, Main Street nor farmers hardly noticed any problem.

Productivity through 1897 continued to grow at 3.7% each year, average. Prices crept downward one percent a year. The change in money supply made the difference. A small panic hit in 1884 due to a minor contraction in the money supply.

Foreigners noted the increase of silver reserves at the Treasury and wondered if the U.S. would stay on the gold standard. The domestic agenda actually had to do with favors to the pro-silver bugs, including the western miners.

This was a tremendous period of growth – real wages climbing, prices declining slightly, savings up, inflation modest. High employment, significant investment activity, and continued rise in productivity created a period seldom equalled in American history. In real terms.

Like some say, no good deeds go unpunished.

The Devils in the Details

In the real world, one cannot separate politics and economy – it’s a symbiosis. Only academics can do this, as though it is meaningful. Back before Lincoln’s War, we saw the Whig Party implode, and Lincoln seeking his destiny with the new Republican party.

He did say, however, “I will always be a Whig in politics” which meant following his idol, Henry Clay, with internal improvements, high protectionism by tariff, a strong central government, and a national bank predicated on inflationary money policy.

In other words, mercantilism, cronyism, central control. And regionalism. For decades, tariffs had been based on the bulk of the costs borne by the South and the expenditures by the federal government primarily in the North.

The new Republican party in 1854 grew from a coalition of Whigs in disarray, “Free Democrats”, the Liberty Party, “Free Soilers” and abolitionist Democrats. Everybody had an agenda and none of it amounted to “the party of limited government” and the rest of the hype.

After Andrew Johnson’s one term, there were Republican administrations: Grant, Hayes, Garfield, Arthur – and in 1885, the first term of Democrat Grover Cleveland.

The Republicans’ nomination of James G. Blaine of Maine, former Speaker of the House, for president dissatisfied many partisans who considered Blaine as immoral. Democrats seized the day by nominating Cleveland, whose reputation of opposing corruption in government appealed to voters generally.

Cleveland’s first term was marked by significant government reform. He repudiated the ‘spoils system’ in which an incoming president appointed party cronies and turfed out the opposition. Cleveland said Republicans doing their jobs well would not be fired, merit ruled. He also diminished government departments staffed by chair warmers. Even worse, from some points of view, he attacked railroad robber barons who had not extended rail lines in accordance with agreement – those land grants were forfeit.

Cleveland was also the master of the presidential veto.

He also believed in a gold standard as opposed to bimetallism, which won him more enemies of the silver persuasion. And he also advocated tariff reform, as the beloved Republican high tariffs had actually created a government surplus. The Republic Senate, however, defeated the reform bill. The tariff question became a significant issue in the 1888 election.

Republican candidate Benjamin Harrison won two swing states, narrowly defeating Cleveland yet slightly behind the national popular vote – another victory for the Electoral College.

The advocates for free silver resurrected. The Sherman Silver Purchase Act of 1890 required the Treasury to buy 4.5 million ouces of silver each month. To pay for this increase in reserves, wait for it … a new issue of greenbacks although these were redeemable, with Treasury deciding whether gold or silver would be used.

1890 – Inflation is good!

Harrison, of course, had supported the Sherman Silver Purchase Act of 1890. Add the McKinley Tariff Act of 1890 and the supporters of high tariffs and an inflationary policy were happy.

Also, in August of that year, the New York Subtreasury used old greenbacks and the new greenback (silver) Treasury Notes. The result was paper replacing gold for settling customs charges. Cause and effect thus yielded gold outflows to foreigners, decreased imports, and growth declined.

Interventions beget interventions.

With foreigners already concerned about the U.S. honoring the gold standard, the Treasury imposed a fee on exported gold bars. As a result, all gold leaving the country was by American gold coin! Then the Senate put the cat among the pigeons in 1892 by passing a free-silver coinage bill.

Inevitably, gold exports increased. The gold-backed dollar was untrusted.

Banks submitted $6 million in Treasury notes for redemption. Treasury, worried about their declining gold reserves, implored the banks to exchange the gold for paper.

But as imported goods became more expensive, formerly Republican voters, particularly in the western states, opted for the new Populist Party. The election of 1892 was a curious and quiet affair: Harrison’s wife was dying of tuberculosis and he elected not to actively campaign. Cleveland followed in deference.

Nonetheless, much activity by the free silver factions opposing the Republican agenda, and others, led to a strong victory for Cleveland’s second term, with a significant margin in both electroal and popular vote.

He was inaugurated during this period of uncertainty and money crisis. In May 1893, the stock market collapsed. And in June, a run on the banks caused failures across the land. Many remaining banks suspended specie payment with government permission. The full-blown Panic of 1893 rocked the country. The total money supply diminished over 6 percent.

Cleveland, a sound money advocate, strongarmed the repeal of the Sherman Silver Purchase Act in November.

The gold-standard was reaffirmed.

Even so, silver advocates continued to press their case in 1895. The Treasury actively bought gold from a cartel of banks, including J.P. Morgan, and reassured everyone that gold was king.

Meanwhile, the fight against the McKinley Tariff continued. A revision bill passed the House with a large margin, after much debate. The Republican Senate, however, felt compelled to add over 600 amendments, all protectionism for cronies. The tariff, especially on raw materials was decreased, but to make up the revenue shortfall, a compromise income tax of 2% on earnings over $4,000 was added. Cleveland was not wholly satisfied with the reform but let the bill become law without his signature.

Gold and Party Politics in 1896

The once-and-forever two-party political system as we know it simply did not exist in the 19th Century.

As mentioned earlier, the Whig party effectively shot itself in the foot. Whigs became new Republicans. Four political parties contested the 1860 election. After the unCivil War, several special interests coalesced: farmers wanting lower railroad freight charges and higher crop prices, silver miners and silver bugs, prohibitionists and factions for certain populist changes to the system.

A People’s Party began in the Utah Territory in 1870 and expired in 1891. More concerned with local issues, they purported to represent the majority of Utah residents; supporting women’s suffrage helped the party. The dissolution of the party as such was an aid to gaining statehood in 1896.

The People’s Party of 1887 – 1908 is more commonly know as “the Populists” and became formally organized in 1893 with the adoption of the “Omaha Platform.” This resolution included:

  • free silver (and bimetallism!)
  • a graduated income tax
  • direct election of senators
  • public ownership of railroads and communication
  • women’s suffrage
  • eight-hour work day
  • restricted immigration

Everyone knows the phrase “the man behind the curtain” and the metaphor gets wide use in our time. L. Frank Baum’s 1900 “The Wonderful Wizard of Oz” may well contain political imagery, though it is unclear if Baum himself intended this or if later commentary reads the story as allegory.

Most people in our time are probably more familiar with the movie version. Perhaps a significant clue, Dorothy’s silver shoes in Baum’s story became ruby slippers, courtesy of Technicolor.

The movie departs from the story significantly, as Baum wrote Oz as a real place, not a dream. Another clue might be that a later Baum Oz book mentioned Aunt Em and being unable to pay the mortgage on the new house which replaced the carried-away one.

If the symbolism was intended, then the characters represent:

  • Dorothy – the American people
  • Scarecrow – western farmers (backbone of Populist movement)
  • Tin Woodman – industrial workers
  • Cowardly Lion – William Jennings Bryan (lost elections)
  • Wicked Witch of the East – eastern banking interests
  • Yellow Brick Road – gold leads to Washington, DC
  • Oz – abbreviation of ounce (gold or silver?)
  • the Wizard – possibly William McKinley

Baum supported women’s suffrage, and had known a Populist advocate who later was an elected People’s Party senator.

The Panic of 1893

Haven’t we seen this movie before?

Well, yes, we did skim it above – but 1893 is a reprise of 1873. The usual suspects: Treasury mistakes undermining the greenback, their gold reserves declining, railroad speculation, national and state banks suspended specie payments. McKinley’s Tariff of 1890 contributed rising import prices and gold outflow from the U.S.

The Philadelphia and Reading Railroad went bankrupt ten days before Grover Cleveland’s second inauguration. Then, the National Cordage Company went into receivership – it had been the most active stock on the exchange. Several other railroads went bankrupt. The stock market crashed completely. Unemployed soared to near 20%.

Distrust of the banking system caused runs on banks all across the country. The money supply diminished over 6% in less than a year.

By November, Cleveland had killed the silver purchase act, the Treasury acted to restore confidence in the gold standard, and the panic was over.

But there was yet no joy on Main Street Unemployment remained high. Ohio congressman Jacob Coxey led a “petition in boots” march from Massillon in March, 1894. Coxey’s Army of over 500 reached Washington, DC and were arrested – don’t walk on the grass at the Capitol!

Another faction out west had commandeered a Northern Pacific train, avoided detainment by Federal marshalls as they headed east. They were stopped most of the way across Montana, at Forsyth, by the army. This action foreshadowed the military breaking the Pullman Strike later in the year.

The Populist movement thought they had a win by getting Lincoln’s income tax resurrected. “Curse you, robber barons,” they might have said. But the Supreme Court had the last word in 1895 and struck down the measure.

Needless to say, with Republicans and Democrats blaming each other for everything, the 1894 election was a bloodbath for Democrats. And the Populist movement was marginalized and thus had to support the Bryanite Democrats in the 1896 election.

The election of 1896

It was a year that the political party system in the U.S. changed for the fourth time. For the Populists, every cloud had a silver lining and William Jennings Bryan was one.

This election was about money in more than one way: bimetallism and free silver, the gold standard, the tariff – and who could spend the most.

1896 truly ushered in modern campaigning. Republican campaign manager Mark Hanna commanded $3.5 million, easy when your candidate, McKinley represents the moneyed classes. Bryan appealed to the Rocky Mountain states, rural Midwest, and the South.

And so much for the two-party myth: there were nominations from the Democrats, National Democratic Party (pro-gold), the Populist Party, the Socialist Labor party, and the Prohibition Party and the Silver Party of Nevada.

Bryan appeared to be an outside chance at the nominating convention of the Democratic party but had the final word on the third day of the debate: his “Cross of Gold” speech turned the tide. Having begun with humility, and illustrated the equivalence of all walks of life as kinds of business; praised bimetallism, invoked an early ‘trickle-down’ concept as a bad idea, and finished with the killer quote:

“Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.”

He walked back to his chair, in silence, thinking he had failed. Only then, the crowd exploded in praise, a frenzy that took nearly a half hour to quell.

It took five ballots the next day but Bryan carried that day.

Alas, his rhetoric did not carry the election. This key aspect of the Democratic platform more than anything:

We demand the free and unlimited coinage of both silver and gold at the present legal ratio of 16 to 1 without waiting for the aid or consent of any other nation. We demand that the standard silver dollar shall be a full legal tender, equally with gold, for all debts, public and private, and we favor such legislation as will prevent for the future the demonitization of any kind of legal tender by private contract.

killed Democratic aspirations and McKinley reigned. The free silver enthusiasts built a castle of dreams and good intentions, failing to understand that they could not impose their GSR on the rest of the world.

The real outcome of 1896 was the death of any support for the quaint Democratic party belief in small government, sound money, and laissez-fare ‘mind your own business’ attitudes. The wowsers won and the drive for Prohibition would not go away.

Old-time Democrats had voted Republican for the first time in their lives.

The McKinley campaign also succeeded because “those men behind the curtain” were the Morgan and Rockefeller banking groups; $3.5 million war chest had to come from somewhere! One of the stipulations for McKinley was to agree to support the gold standard.

The Populists were down but not out. Another Reform movement began, to solve the problems they perceived in monetary police and their dislike of the gold standard. A grassroots currency reform in the Midwest was suggested in a letter to the Indianapolis Board of Trade – by Mark Hanna, businessman, political manager and also friend of President McKinley, and U.S. Senator from Ohio from 1897 to 1904.

The Indianapolis Monetary Convention began in 1897 with representatives from 26 states and the District of Columbia. The Yale Review noted it was an assembly of “businessmen in general” and not “bankers in particular”.

One of their resolutions suggested a new and improved system of elastic bank credit. Do you see where this is heading?

Meanwhile, the economy had recovered in 1897 and the Progressive Era would soon remake the society.

*

Money in America, Part One « The Burning Platform

How Does Your Personal Capital-To-Income Ratio Stack Up with This Recommendation?

Today I’m highlighting the capital to income ratio, which I’d heard about before, but hat tip to White Coat Investor (good new finance blog I found which you should check out) for making me rethink it and share again here.  Basically, this is one of the many ratios that Charles Farrell focuses on in his book Your Money Ratios.  The capital to income ratio is a basic measure of your retirement savings divided by your current income.  Why does this ratio matter?  Because it gives a good measure as you progress through your life where you should be.  Too many Americans coast through life enjoying life in the moment without regard for “saving for a rainy day” (retirement).  Some of the drawbacks of the measure, as I see it, include the following:

One-size-fits-all approaches are usually flawed.  This is the case when…

Continue Reading Capital to Income Ratio

IRAN IS BIG

Another good article from http://www.theoildrum.com/. Some interesting charts and maps. The first chart shows that Iran produced 6 million barrels of oil per day in the 1970s. The Islamic revolution and the brutal war with Iraq resulted in a collapse of their oil production. It has barely reached 4 million barrels per day since the early 1990s. They are unable to ramp up production due to sanctions and the lack of technological expertise. More than 60% of their exports go to the far east. China, Japan and India will not be happy if Israel and the U.S. decide to teach Iran a lesson.

I’ve always been geographically challenged. I never realized the size of Iran. Take a really good look at that map. Iran dominates the Middle East. Take a long hard look at the Persian Gulf and the Strait of Hormuz. Approximately 15 oil tankers per day, carrying 34% of the world’s oil supply, must traverse a 6 mile wide traffic lane. Imagine what would happen to worldwide oil prices if this Strait was shutdown. The Iranians aren’t stupid. This is their trump card.

Imagine how many soldiers it would take to subdue a country this large. Cruise missiles and B1 bombers aren’t going to defeat Iran. We’d just be killing thousands of innocent Iranians. The neo-cons like Gingrich and Romney act like taking out Iran will be a piece of cake. When have the neo-cons ever been wrong? The sanctions and embargoes are designed to force Iran to do something stupid. They will be attacked no matter what they do. The unintended consequences will likely lead to the next phase of this Fourth Turning.

Iran – Possible Implications of an Oil Embargo

Posted by Euan Mearns on December 6, 2011 – 6:30am
Does Thursday’s announcement that the EU is considering to ban oil imports from Iran epitomise the draining of power from west to east? The big winners here will be China and India, who do not fear rising Iranian influence and who will gladly soak up any additional oil exports they may have to offer. However, ending this small dependency upon Iranian oil imports in Europe (Figure 2) does clear the way for military action without the need to ponder the immediate consequences on oil imports.

 


 

Figure 1 Iran displays export land traits where growing domestic consumption is eating into the oil available for export that has been declining slowly since 2003. Data from BP. Y-axis is barrels per day (1000s). Balance = production less consumption which is a proxy for net exports. Production = crude+condensate+NGL whilst consumption may include refinery “gains” and bio-fuel. In many countries there is also an active two-way trade in crude and refined products. 

In a week where the UK embassy in Iran was overrun and the two countries are breaking off diplomatic ties, on the back of heightened concern about Iran’s nuclear weapons program and an unexplained explosion at an Iranian missile launching site, the EU has decided to flex its muscles and to ban Iranian oil imports. The big winners here are the other countries importing oil from Iran – Japan, China, India and South Korea. Does the EU really believe that in today’s extremely tight oil market that oil sanctions against Iran will worry them in the least? 


 

Figure 2 Table from a worthy article on Iranian oil and demographics posted on Crude Oil Peak details the countries importing oil from Iran in 2008. The four EU countries to be affected by any embargo will be Italy, Spain, Greece and France. Given that Greece and Spain are already in recession and that Italy and France are heading in that direction, it seems likely that their oil consumption will already be on the wane and that losing these relatively small amounts of Iranian imports will have little consequence. 


 

Figure 3 OPEC net exports (production consumption balance from BP) showing the importance of The Gulf states. 

With the risks of armed conflict against Iran increasing with every week that passes it is important to grasp what this may mean for global oil markets. Two end points seem to exist. The first is where “the West”, i.e. NATO or some other looser alliance ± Israel launches a cruise missile attack (conventional) against Iran’s nuclear facilities. destroying them. In that eventuality Iran, with current leadership, would be unlikely to ever again export oil to “the West”, but since at that point The West will not be importing any oil from Iran this would not matter. 


 

Figure 4 Iranian oil infrastructure, setting in the Arabian or Persian Gulf and the linch pin location of The Straights of Hormuz. Map from Wikipedia. 

The second more extreme scenario is that armed conflict spreads, compromising oil exports through the Straights of Hormuz. Oil exports from Saudi Arabia, Kuwait, The United Arab Emirates (UAE), Qatar, Iraq and Iran all pass through Hormuz. Data is not available for Iraq, but exports from Saudi, Kuwait, UAE and Qatar stood at around 12,805,000 bpd in 2010. The global net export market stood at around 35,173,000 and so these 4 countries alone account for around 36.4% of the global export market (excluding Iraq and Iran). Should these exports cease, albeit temporarily, the oil price will go through the roof, causing severe trauma to the global economy, including China. 

In addition, there are significant liquefied natural gas exports from Qatar that pass through Hormuz on a daily basis. According to BP, Qatar exported around 96 BCM of gas in 2010 (Figure 5) to the countries shown in Figure 6. In Europe, the UK, Spain, and Belgium would be most affected by disruption to LNG supplies from the Gulf whilst in Asia, India, S Korea, and Japan would be most affected. This highlights the increasingly exposed nature of OECD energy supplies where electricity supplies may be threatened by armed conflicts on the other side of the world. 


 

Figure 5 Production / consumption balance for natural gas in Qatar. 


 

Figure 6 Destinations of LNG exports from Qatar in 2010. 

IT’S GOOD TO BE A MEGA-CORPORATION

The 30 mega-corporations in the chart below generated $164 billion of profits in the last three years and paid no taxes. Not only did they pay no taxes, they received $10.6 billion in tax refunds. Not a bad return on their $476 million lobbying investment. This was all done legally. You see when their lobbyists right the laws for Congress and the tax rules for the IRS, things tend to fall in your favor. I’d love to see the compensation amounts for the CEOs of these organizations.

Did you pay any taxes between 2008 and 2010? If so, you paid more in Federal taxes than 29 of these 30 mega-corporations. You should fire your lobbyist.

Remember this information the next time you hear Gingrich or Romney declare that corporate tax rates are too high.

Country’s Largest Corporations Spend More Money On Lobbying Than Taxes

 

120711flag.jpg

In a “remember me, three years ago?” speech in Kansas yesterday, President Obama told the crowd, “This country succeeds when everyone gets a fair shot, when everyone does their fair share and when everyone plays by the same rules.” A new report [pdf] from the non-profit organization Public Campaign shows that 30 of the country’s largest corporations—including GE, Wells Fargo, Verizon, and Fed Ex—paid more to lobby Congress from 2008 through 2010 than they did in federal income taxes. What country was the president referring to?

Of the 30 companies, only one actually paid any federal income taxes: FedEx. The rest received nearly $11 billion in rebates. And even FedEx only paid 1%, 34% less than the statutory rate. As for lobbying, the 30 corporations spent a combined $476 million—or $400,000 a day every single day of the year, to ensure their interests were represented in Congress. GE led with way with $84 million in the three-year period (wonder why?) Verizon spent $54 million, and Boeing spent $52 million.

We can hear Eric Cantor crying now: “But these companies create jobs!” Of the seven companies that would make their employment records public, the report shows that over 50,000 Americans were laid off by these corporations, despite them turning a profit.

If you’ve been weeping uncontrollably if you even attempt to pick the paper up from your stoop following the news, the results of this report shouldn’t surprise you. But hey, a few more speeches in Kansas should straighten things out.

A COUPLE FASCINATING HOURS WITH NEIL HOWE

I had the pleasure of spending two hours with Neil Howe today. On his way back to Washington DC from a meeting with a client in NYC he stopped at 30th Street Station and we grabbed a bite to eat and chatted for a couple hours. Neil’s background is fascinating. His grandfather was astronomer Robert Julius Trumpler. His father was a physicist and his mother was a professor of occupational therapy. I know there has been a dominant opinion on this site that liberal arts degrees are worthless. I don’t think any college degree is worthless. I realize we need more engineers and scientists, but many people are not wired for these professions. We need writers, historians, and thinkers too. Neil Howe is a perfect example. His undergraduate degree from Berkley was in literature. He then earned graduate degrees in economics and history. His well rounded education has given him a much broader view of the world. And he’s a Boomer. Proof that all Boomers aren’t bad.

I had never met Neil. We have had occasional email correspondence and he was the star of Generation Zero, in which I had tiny part. He is a famous man. He’s written or co-written 15 books.  He runs a very successful company called Lifecourse Associates. Based on my two hours in his acquantance you would never know he was a famous person. He is extremely down to earth. He is a nice guy. I never felt intimidated, even though his brain power is out of my league. He was actually interested in my background and my opinions.

But enough small talk. You want to know what he thinks about our current Fourth Turning. He was proud that some distinguished institutions had agreed with the Strauss & Howe dating definitions for Boomers, Xers, and Millenials. His starting point for this Fourth Turning is 2007. We are only four years into this Turning and haven’t reached regeneracy yet. I asked him why regeneracy had begun in the last two Fourth Turnings by year four, but hasn’t begun yet. He said that each Turning has its own flow. We agreed that something huge would need to happen in order to create a regeneracy in this country. It could be an economic collapse or it could be war.

He believes the situation which has the biggest potential to blow up the world is Iran. He thinks people are underestimating the implications of a conflict with Iran. He thinks Israel will act unilaterally to keep Iran from getting a nuclear bomb. I asked him if he thinks there will be a world war during this Fourth Turning. He doesn’t think it will be a world war. He expects regional conflicts in the Middle East.

I asked him why the Boomers didn’t seem to be supporting and leading the Millenial generation. He said that within families Boomers and Millenials are very close. This will ultimately exhibit itself. He thinks Boomers will eventually choose to sacrifice some of their entitlements in order to give Millenials a fighting chance at a future. We discussed the upcoming presidential election. He had some nice things to say about Ron Paul. He has been surprised by Newt Gingrich’s rise in the polls. Neil has known Gingrich for 20 years since he has worked on public policy in DC. He believes his past will come back to haunt him. He thinks Romney is likely to win the Republican nomination by default. If the economy stays in the dumper, Romney will be our next President. He is a Prophet/Boomer leader. Neil doesn’t think Bloomberg could win as a 3rd party candidate because of his association with Wall Street. Anyone associated with Wall Street is toxic.

His opinion about OWS was interesting. He says that the movement is made up of 50% Millenials. He thinks the creators of the movement are actually anarchist Boomers trying to use the Millenials for their own purposes. He thinks the movement has a lot of passion but not a lot of depth. His firm has done surveys and he found that most Millenials don’t even know there is an OWS movement. I asked him whether libertarians are likely to be happy with this Fourth Turning. He said that libertarians have an impact early in a Fourth Turning (Ron Paul, Tea Party), but once the regeneracy occurs people rally around the central authority and government is likely to take on more power and control. Not a happy thought.

Neil lamented what a great opportunity was missed in early 2009 by Barack Obama. The situation in the country was awful. He had both Houses in Congress. His popularity was at its peak. He could have done anything. The country could have accepted short term pain and began to fix our structural problems. He could have had an orderly liquidation of the Wall Street banks. He could have combined short term stimulus with a long term fix for our entitlement programs. But instead he rolled over for Wall Street and dished out Keynesian pork to his supporters. A once in a lifetime chance was missed.

He believes the Federal Reserve policies are disastrous. Zero percent interest rates have sucked the vitality from our economy. The policies are exacerbating our debt problems. People have no incentive to save with zero interest rates. I told him that TBP members are anxious to know what happens next. Here’s where you’ll be disappointed. Neil doesn’t make predictions of events. There will always be dramatic events as time passes, but it is how generations react to those events that matter. There is no doubt that it will take a dramatic event to create a regeneracy of spirit in this country. The triggers for this Crisis were clearly visible in 1997 when Strauss and Howe wrote their classic book – debt, civic decay, and global disorder. The toxic combination is still roiling the world. We can only guess at the timing and specific events that will push us into the next phase of this Crisis. 

I told Neil that I end many of my posts these days with, “Fourth Turnings sure are interesting.” He thought that was funny. With Neil’s train due to arrive in a few minutes we got up to say our goodbyes. We agreed that we are living in interesting times. He joked that at least we know how this will end, which is more than most people. He is going to revive his Fourth Turning blog and asked if I would contribute articles. I told him I’d be honored.

All in all, it was a fascinating and enlightening two hours having a great discussion with a brilliant man.

Shorting Treasury Options: Profit, Rinse, Repeat

Every few months, I’ve been repeating the same pattern of shorting out of the money leveraged ETFs on US Treasuries and keeping the premiums when the options expire.  It’s been a nice way to supplement largely flat market returns with recurring income, and in my view, without taking on an inordinate amount of risk.  Since that was a mouthful, I’ll explain.  In my latest post on the matter, I laid out the case and specific trade for shorting treasuries in September.  The key facets of that particular trade were the following:

Continue Reading: Shorting Treasury Options

HMMM. HOW CONVENIENT – DEBT, DRONES & DEMAGOGUES

So Iran shoots down one of our drones. Now the questions. Are we flying spy drones over Iran in order to provoke them into doing something stupid? Did we purposely allow it to be shot down? Will Iran’s blustering and threats to retaliate allow the U.S. to create a foreign conflict in order to take the focus off our imploding economy? China declared last week that they would be willing to go to war in support of Iran. Are we approaching an Archduke Ferdinand moment when countries are forced to choose sides in order to not lose face? Could our Fourth Turning War be just over the horizon? If conflict starts with Iran, what will happen to the price of oil? How many more liberties and freedoms will be sacrificed when the oligarchs lead us into another undeclared war of choice?

If you don’t fly spy drones over foreign countries that we are not at war with, they can’t get shot down. How would we react if China or Russia was flying spy drones over the U.S.?

The ignorant masses will be convinced that Iran is at fault and deserves to be obliterated. Comfortably numb.

Iran Military Shoots Down US Drone, Threatens Response

Tyler Durden's picture

Submitted by Tyler Durden on 12/04/2011 10:05 -0500

From PressTV:

A senior Iranian military official says Iran’s Army has shot down a remote-controlled reconnaissance drone operated by the US military in the eastern part of the country.

The informed source said on Sunday that Iran Army’s electronic warfare unit successfully targeted the American-built RQ-170 Sentinel stealth aircraft after it crossed into Iranian airspace over the border with neighboring Afghanistan.

He added that the US reconnaissance drone has been seized with minimum damage.

The RQ-170 is a stealth unmanned aircraft designed and developed by Lockheed Martin Company.

The US military and the CIA use the drone to launch missile strikes in Afghanistan and in Pakistan’s northwestern tribal region.

The unnamed Iranian military official further added that “due to the clear border violation, the operational and electronic measures taken by the Islamic Republic of Iran’s Armed Forces against invading aircraft will not remain limited to the Iran’s borders.

The report comes as the United States has beefed up its military presence in and around the Persian Gulf region in recent months in the wake of popular uprising in Bahrain.

The US Department of Defense says Washington is closely monitoring the developments in Bahrain, which is the headquarters of the US Navy’s Fifth Fleet and holds some 4,200 US service members.

From Reuters:

Iran’s military said on Sunday it had shot down a U.S. reconnaissance drone aircraft in eastern Iran, a military source told state television.

“Iran’s military has downed an intruding RQ-170 American drone in eastern Iran,” Iran’s Arabic-language Al Alam state television network quoted the unnamed source as saying.

“The spy drone, which has been downed with little damage, was seized by the Iranian armed forces.”

Iran shot down the drone at a time when it is trying to contain foreign reaction to the storming of the British embassy in Tehran on Tuesday, shortly after London announced that it would impose sanctions on Iran’s central bank in connection with Iran’s controversial nuclear enrichment programme.

Britain evacuated its diplomatic staff from Iran and expelled Iranian diplomats in London in retaliation, and several other EU members recalled their ambassadors from Tehran.

The attack dragged Iran’s relations with Europe to a long-time low.

Washington and EU countries have been discussing measures to restrict Iran’s oil exports since the United Nations nuclear watchdog issued a report in November with what it said was evidence that Tehran had worked on designing an atom bomb.  

And from AP:

Iran’s semiofficial Fars news agency says the country’s armed forces have shot down an unmanned U.S. spy plane that violated Iranian airspace along its eastern border.

The report says the plane was an RQ170 type drone and is now in the possession of Iran’s armed forces. The Fars news agency is close to the powerful Revolutionary Guard.

Iran is locked in a dispute with the U.S. and its allies over Tehran’s disputed nuclear program, which the West believes is aimed at the development of nuclear weapons. Iran denies the accusations, saying its nuclear program is entirely peaceful.

It appears Iran plans to retaliate:

Iran’s response to the downed U.S. drone’s violation of its airspace will not be limited to the country’s borders, a military source told state television.

“The Iranian military’s response to the American spy drone’s violation of our airspace will not be limited to Iran’s borders any more,” Iran’s Arabic language Al Alam television quoted the military source as saying, without giving details.

Iran said in July it had shot down an unmanned U.S. spy plane over the holy city of Qom, near its Fordu nuclear site.

As a reminder from Stratfor, here is how the US navy was deployed most recently as of Wednesday. Looks like life for the Stennis boys is about to get exciting.

FESTIVUS FOR THE RESTIVUS – ADMIN RUBBING ELBOWS WITH 1%

I’ll be pretty much out of touch until Sunday afternoon. Avalon & I are headed to NYC tomorrow for a couple days. We’ll be rubbing elbows with some of the 1% tomorrow night at the annual Minyanville Festivus shindig at the Hill Country Barbecue Market at 30 West 26th Street.

I’ve been to this annual charity event two out of the last three years. It benefits Todd Harrison’s Ruby Peck Foundation for children – https://rpfoundation.org/donate.asp

I get to attend for free since I’m an occasional contributor to their Minyanville website. It’s a laid back country and western themed party. Free beer and grub from 7:00 until 3:00 am. There will definitely be some 1%ers at this party. I’ve met John Mauldin at a previous party. They have cover bands playing rock and roll all night long. It should be fun.

We’ll be checking out Zucotti Park on Saturday. I think they plan a protest in Times Square on Saturday. Hopefully it gets out of hand. If they fire tear gas, I’ll be sure to duck.

Maybe we’ll replay our engagement by taking a carriage ride in Central Park just like we did in December 1989 when I proposed to Avalon. She said yes the last time.

NYC is really fun to visit at this time of year. Hopefully seeing the Christmas tree at Rockerfeller Center will get me in the Christmas spirit.

And of course we’ll have to get the won ton  soup at Ruby Foos.

Hopefully, some people can step up and make some posts in the next few days. We might have sporadic internet access and can release the posts that people want to make.

SURPRISE! MY REAL ESTATE INVESTMENT ROI JUST SHIT THE BED

A few months back, I’d shared the details on a real estate investment I made with a partner where the overall deal seemed quite favorable.  The cash on cash return was estimated at ~15-20% conservatively, we had a good property manager staying on from the prior seller, the prospects in the area looked good for continued capital appreciation and low vacancy, and there didn’t appear to be any imminent repairs/upkeep required outside of routine maintenance.  The first month and a half was fine and we were cruising right along.  The property manager hadn’t flaked out, the college kids hadn’t destroyed the properties entirely (they do have this thing about kicking in doors which is annoying, but if they want to piss away their security deposits, more power to them), and no major repairs crept up.  Then came the email last week.

Blindsided

The email came from a completely unexpected source and wasn’t something we’d even contemplated when purchasing the property – but perhaps you can learn from this story about how to avoid a similar outcome.

Continue Reading How My ROI Just Shit the Bed

HOW ABOUT $175 A BARREL OIL?

I think the chances of military conflict with Iran in the next two years are better than 50%. Students stormed the UK embassy in Iran. London is kicking the Iranians out of their embassy in London. Israel blew up an Iranian missile base a couple weeks ago. Israel will not let Iran get a nuke. Obama needs to distract the public from our terrible economy with a foreign crisis. The implications of Iranian oil coming off the worldwide markets would be devastating. China would not be happy since they get 10% of their oil from Iran. The world is already on the verge of collapse and a surge in oil prices would create a worldwide depression. This Fourth Turning sure is interesting.

Funds, refiners ponder oil Armageddon: war on Iran

REUTERS – Oil consuming nations, hedge funds and big oil refineries are quietly preparing for a Doomsday scenario: An attack on Iran that would halt oil supplies from OPEC’s second-largest producer.

Most political analysts and oil traders say the probability of military action is low, but they caution the risks of such an event have risen as the West and Israel grow increasingly alarmed by signs that Tehran is building nuclear weapons.

That has Chinese refiners drawing up new contingency plans, hedge funds taking out options on $170 crude, and energy experts scrambling to determine how a disruption in Iran’s oil supply — however remote the possibility — would impact world markets.

With production of about 3.5 million barrels per day, Iran supplies 2.5 percent of the world’s oil.

“I think the market has paid too little attention to the possibility of an attack on Iran. It’s still an unlikely event, but more likely than oil traders have been expecting,” says Bob McNally, once a White House energy advisor and now head of consultancy Rapidan Group.

Rising tensions were clear this week as Iranian protesters stormed two British diplomatic missions in Tehran in response to sanctions, smashing windows and burning the British flag.

The attacks prompted condemnation from London, Washington and the United Nations. Iran warned of “instability in global security.”

While traders in Europe prepare for a possible EU boycott of imports from Iran, mounting evidence elsewhere points to long-odds preparation for an even more severe outcome.

In Beijing, the foreign ministry has asked at least one major Iranian crude oil importer to review its contingency planning in case Iranian shipments stop.

In India, refiners are leafing through an unpublished report produced in March to look at fall-back options in the event of a major disruption.

And the International Energy Agency, the club of industrialised nations founded after the Arab oil embargo that coordinated the release of emergency oil stocks during Libya’s civil war, last week circulated to member countries an updated four-page factsheet detailing Iran’s oil industry and trade.

The document, not made public but obtained by Reuters, lists the vital statistics of Iran’s oil sector, including destinations by country. Two-thirds of its exports are shipped to China, India, Japan and South Korea; a fifth goes to the European Union.

Hedge funds, particularly those with a global macro-economic bias, have taken note, and are buying deep out-of-the-money call options that could pay off big if prices surge, senior market sources at two major banks said.

Open interest in $130 and $150 December 2012 options for U.S. crude oil on the New York Mercantile Exchange (NYMEX) rose by over 20 percent last week. Interest in the $170 call more than doubled to over 11,000 lots, or 11 million barrels. Still more traded over-the-counter, sources say.

McNally says that oil prices could surge as high as $175 a barrel if the Strait of Hormuz — conduit for a fifth of the world’s oil supply, including all of Iran’s exports — is shut in.

IAEA CITES “CREDIBLE” INFORMATION

This month’s speculation of an attack on Iran is the most intense since 2007, when reports showing that Iran had not halted uranium enrichment work fuelled speculation that President George W. Bush could launch some kind of action during his last year in office. Those fears helped fuel a 36 percent rise in oil prices in the second half of the year.

The latest anxiety was set off by the International Atomic Energy Agency’s November 8 report citing “credible” information that Iran had worked on designing an atomic bomb. A new round of sanctions followed, including the possibility that Europe could follow the United States in banning imports.

That alone would roil markets, but ultimately would likely just drive discounted crude sales to other consumers like China.

A more alarming — if more remote — possibility would be an attack by Israel, which has grown increasingly alarmed by the possibility of a nuclear-armed Iran. Israeli Defense Minister Ehud Barak said on November 19 that it was a matter of months, not years, before it would be too late to stop Tehran.

In that context, every tremor has been unnerving for markets. Some experts say an explosion at an Iranian military base earlier in the month was the work of Mossad, Israel’s intelligence agency. An unusually large tender by Israel’s main electricity supplier to buy distillate fuel raised eyebrows, although it was blamed on a shortage of natural gas imports.

REFINERS BRACE

No country has more reason to be concerned than China, which now gets one-tenth of its crude imports from Iran. Shipments have risen a third this year to 547,000 barrels per day as other countries including Japan reduce their dependence. Sinopec, Asia’s top refiner, is the world’s largest Iranian crude buyer.

The Foreign Ministry and the National Development and Reform Commission, which effectively oversees the oil sector, have asked companies that import the crude to prepare contingency plans for a major disruption in supply, a source with a state-owned company told Reuters.

The precautionary measure preceded the latest geopolitical angst and is broadly in line with Beijing’s growing concern over its dependence on imported energy. Earlier this year it issued a notice for firms to prepare for disruptions from Yemen.

But the focus has sharpened recently, the source said.

“The plan is not particularly for the tension this time, but it seems the government is paying exceptionally great attention to it this time,” said the source on condition of anonymity.

In India, which gets 12 percent of its imports from Iran, refiners had a potential preview of coming events when the country’s central bank scrapped a clearing house system last December, forcing refiners to scramble to arrange other means of payment in order to keep crude shipments flowing.

That incident — in addition to the Arab Spring uprising and the Japanese earthquake — prompted the government to document a brief but broad strategy for handling major disruptions.

The document, which has not been reported in detail, says that India could sustain fuel supplies to the market in the event of an import stoppage for about 30 days thanks to domestic storage, and would turn to unconventional and heavier imported crude as a fall-back.

It also urged the country’s state-owned refiners to work on developing domestic storage facilities for major OPEC suppliers, consider hiring supertankers to use as floating storage and to sign term deals to price crude on a delivered basis, a copy of the document seen by Reuters shows.

The government has not tasked refiners with additional preparations this month, industry sources say. And in any event, there’s not much they could do.

“If they cut supplies we will be left with no option than to buy from the spot market or from other Middle East suppliers,” said a senior official with state-run MRPL, Iran’s top India client.

To be sure, there’s only so much any refiner can do. The gap left by Iran will trigger a frenzy of buying on the spot market for substitute barrels, likely leading the IEA to release emergency reserves, as it did following the civil war in Libya, or other countries like Saudi Arabia to step into the breach.

“We probably need to do this ASAP but are putting our heads in the sand so far,” said one oil trader in Europe.

For refiners like Italy’s Eni (ENI.MI) and Hellenic Petroleum (HEPr.AT), the most pressing issue is not necessarily an unexpected outage but an import boycott imposed by their government. France has won limited support for such an embargo, but faces resistance from some nations that fear it could inflict more economic damage.

CHEAP PUNTS

Unlike in 2007, there’s not yet much evidence that a significant geopolitical risk premium is being factored into prices.

European benchmark Brent crude oil has rallied 4 percent in the past two days, partly due to accelerating discussion of a Europen boycott as well as Tuesday’s unrest in Tehran, during which protesters stormed two British diplomatic compounds.

But it is also down 4 percent since the IAEA’s November 8 report. Analysts say that it’s impossible to extract any Iran-specific pricing from a host of other recently supportive factors, including new hope to end Europe’s debt crisis, strong global distillate demand and upbeat U.S. consumer data.

“I don’t think there’s very much evidence (of an Iran premium),” says Ed Morse, global head of commodities research at Citigroup and a former State Department energy policy adviser.

And he does not see an attack as likely: “I think it’s a low probability event. Maybe higher than a year ago, but still low.”

But that is not stopping some from looking ahead. Oil prices would likely spike to at least $140 a barrel if Israel attacked Iran, according to the most benign of four scenarios put forward this week by Greg Sharenow, a portfolio manager at bond house PIMCO and a former Goldman Sachs oil trader.

He refused to predict a limit for prices under the most extreme “Doomsday” scenario in which disruptions spread beyond Iran and the Straits of Hormuz is blocked.

With that in mind, hedge funds are buying cheap options in a punt on an extreme outage. For about $1,500 per contract, a buyer can get the right to deliver a December 2012 futures contract at $150 a barrel; even if prices do not rise that high, the value of the options contract could increase tenfold.

The spark of demand for upside price protection this month is an abrupt reversal from most of this year, when the bias was toward puts that would hedge the risk of economic calamity.

“The kind of put skew we were seeing in the last three to six months was remarkable with people preparing for disaster – the Planet of the Apes trade, another massive market crash,” says Chris Thorpe, executive director of global energy derivatives at INTL FC Stone.

“Only in the last three or four weeks has there been increased call buying.”

Options remain relatively costly compared to earlier in the year, with implied volatility — a measure of option cost — of 43 percent above this year’s average of just below 35 percent, the CBOE Oil Volatility index shows.

But nonetheless it’s clear that for some funds the potential upside of violence in Iran means that interest is increasing.

Says Thorpe: “It’s at the back of people’s minds.”