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The Coming Dollar Deflation
Of course the world is worse off than we are. England and the EU certainly are, Russia is toast, Brazil India and China all have a lot of stuff shoved under the rug (unreported liabilities, weird government interventions, and huge investments in US real estate securities). So the US dollar remains the strongest currency. Add the repatriation of global investments gone bad, or just requiring redemption and that lifts the dollar doubly.
However, we almost lost the entire financial system, again, last week when Citi caved in. We have had 3 episodes, each worse than the last, where immediate action by B&H was required to save the system. Can they keep this up indefinitely? Is this really good news that they can save time and again. Will they make a mistake?
We easily could loose all the big banks, after all they are already bankrupt. Will the gov be forced nationalize the banking industry? What about the auto industry, the insurance industry? We are a long way down these roads already.
I think B&H (Ben and Hank) are realizing that they cannot print enough money to stop this monster, and are shifting their priorities accordingly. Banks are just trying to find a way to survive to fight another day. The auto industry is toast.
Where does your confidence in the system come from? It is amazing!
Anyway there are serious dislocations coming the consequences of which are impossible to predict. But within all the scenarios gold will retain its value. It will soar if we end up with hyper-inflation. It will be hedge against other assets falling in price a deflationary scenario where the US gov is shaky.
Gold is not a commodity, it's not a currency, it is an insurance policy against exactly the scenarios we seeing play out on CNBC everyday. If Gold goes to $2000, that means everything else you own (your house, car, 401k etc.) is worth less than half, not exactly a great scenario there either.
DDT
The Day After: Is the Honeymoon Already Over?
The Shallowest Generation
Americans have always been spoiled rotten, and we worked our asses off getting that way. The so-called "great generation" was also a bunch of sheep who let a depression and a world war go by without even asking why or wondering if there was a better way. They came home and created the most shallow materialistic society ever seen: the 1950's became the achetype of what you're complaining about. If the boomers are spoiled, its the great generation that spoiled them.
Certainly Americans might do better if they didn't consume so much, but that's true of every generation. The depression is actually due to a series of bubbles not unlike the ones we just went through. Shame on all of us for learning a damn thing in all those years.
You want to blame a generation for something, how about the people of the 1920's who nearly destroyed the world; first with hyper-inflation in some countries, then a bone crushing depression and finally with a monstrous war. That was a real low point.
I don't see any difference between the boomers and any of the peace-time generations that follow us. We are all spoiled, and we all borrow too much, and everybody including the great generation get blame for creating the incredible mess that Social Security and Medicare shortfalls will create.
FDR didn't set it up right, it got compounded in 1960's and we all have ignored the problem for the last 40 years.
Why Are Perma-Bears Coming Out of Hibernation and Recommending We Buy?
The perma-bears have been waiting their whole lives for this. The only problem is they've never been through it. So they dust off their 30% down rule, and start buying. The problem is there is NOTHING fundamental is going up, as listed in the last comment. The market may go up against all odds, but we have a lot more bad news to ripple into earnings before you should start buying. If the market turns back up 6 months before the end of the recession (another piece of trivia that might be useless this time). look for a turn around in June of next year, not now.
Where Have All the Peak Oil Believers Gone?
But the supply problem persist. Check out the FT article reviewing a draft of the IEA's annual report. The upshot is that we need invest $350B / yr into existing oil infrastructure, including developing known fields and finding new ones, or face severe shortages.
Underlying this is a 9% annual drop in existing oil production from the world's premier fields. Anybody who's looked at it knows a 9% drop in oil production is catastrophic for the global economy. If it comes on the heels of the worst recession since the 1930's, we are in for a world of hurt.
So, you see, peak oil is alive and well, and the IEA is now one of the strongest proponents.
First Fuel, Now Metals - Forecasts Lowered
However when the economy craters with massive deflation like now, paper money holds up very well, preventing any flight to gold. However, even without extra demand, you would expect gold to hold its value . Right now all assets are falling in price, but gold is holding its value or dropping slowly depending on which currency you talking about. So gold remains the asset of choice, but only AFTER cold hard cash.
If on the other hand, we end up with inflation, where paper money starts seeking its intrinsic value (zero), gold is known by everyone as the investment of choice. Governments would print more gold if they could, but since they can't, it only needs to hold its value to go up in price. But if the inflation gets bad enough, heavy demand will outstrip all supplies and the price will really shoot up.
Central banks will try to moderate its price, but with demand shifting from promises (paper gold) to physical gold, they won't be able to (they lease their gold in the paper markets, but won't sell the actual bars). We easily return to the 1980's peak of $2100/oz (inflation corrected) then perhaps higher if this period is worse.
Of course, this is never a good thing, even if you're a gold bug. Everything else you own, like your house, will be in the crapper. Its a little like a home owners insurance policy. When your house burns down you get a big check, but your house is still gone.
Response to Bloomberg's 'Gold May Pay Only in Case of Maximum Despair'
Gold has been setting record highs in pounds and euros in the last few weeks, it's only gone down dramatically in dollars, which are obviously going up as dollar denominated derivatives need to be unwound, and hedge funds repatriate all manner of international trades for dollar redemptions.
So it's actually holding up better than just about anything else. Check Platinum, Oil or real estate for comparison. Having said that, the premium on gold coins make them an inferior investment. The 400oz bar market is still quite liquid, and there are several ways to get allocated gold at very small premiums to 'good delivery' bar prices. I some cases you can buy in 1 gram increments, which is about $23 .
The Crash of 2008
2. Oversold indicators only make sense when the market is in relative equilibrium. It presumes a population of buyers hungrily waiting for their entry point. No such thing right now.
3. Just about everything in this crisis is 'the worst since the great depression'. Well, we just put in the worst day EVER on the Dow. In other words, we now have one metric whereby this things is WORSE than the great depression. Your 50% down is still in play, which is more than 1000 pts below where we are now.
4. Investors are bearish because real estate prices are still in free fall, we still have to unwind trillions upon trillions of toxic deriviatives, the US banks have $8T of level II & III debt that is may be worth $0.10 on the dollar, the US government is printing money so fast the presses will catch fire, the entire global financial system has collapsed and we are HOPING the world governments can resuscitate it, and we are still in a steep economic decline. Yeah, everybody's way too bearish.
5, Expecting government to cooperate is naive. If this gets worse or lasts too long it will rapidly devolve into everybody for themselves.
Now having said all that, a fast large snap back rally has to happen in here somewhere. It would flush out all the shorts, sending it even higher. But that is only a trade, not an investment. The whole world in hanging by a thread, and the risk profile for equities depends on the immediate context, and that sucks right now. I would quantify it as a couple of percent upside against 10-20% downside.
In virtually all the episodes like this one, it has taken 10 years or more for equities to recover. So investors beware.
Think of These as Short-Term Troubles
The number of resets & recasts coming down the pike.
The amount bad debt on banks books still marked at $0.80.
The fact banks aren't modifying mortgages at affordable levels (and they want 1/2 the equity!)
This is the engine of decline in this debacle, and until the brakes are applied hard, or it just runs its course, we aren't near a bottom. It will take the market, the world economy and all the big banks with it.
Some banks have withstood the first half, but can you imagine any of them surviving a second onslaught of equal size? If they're going out of business anyway, why bail them out now? Let 'em go and start fixing things sooner rather than $5T later.
This bill has NOTHING to slow the root cause. It will do nothing but delay the inevitable and waste an absolute ocean of money.
Investing now would doom your money to more losses, and subject it to the serious inflation that will follow this printing party. We are only down 30%, which is an average bear market. There is nothing average or normal about this one.
I'm all for dollar cost averaging in as we approach a real bottom, but I'm in cash and waiting. Don't try to catch a falling hydrogen bomb.
Talk Me Down From the Wells Fargo Ledge
But nobody's safe in this s*&t storm. They will have a lot of foreclosures over the next 3-4 years, and nobody knows how bad that will get.
But its obvious they have Buffet's support, and he's doing major PR duty for Paulson and Bernanke. So WF has universal support in the bad bank good bank triage scenario.
Worst case, last bank to fail. Don;t go long or short, but put your money there.
Talk Me Down From the Wells Fargo Ledge
The problem is nobody's safe in this s&*t storm. They have a lot of mortgages in California and Nevada, and if prices keep going down it will be beyond anybody's ability to manage. They also did a lot of piggy backs with the $84B of HELOCs, probably OK in normal times, but those are long gone.
Bottom line: probably the safest bank around because of Buffet AND Fed support. People are calling for public triage on banks: they will be a winner in that scenario, too. Having said all that, I wouldn't buy their stock, but I wouldn't short it either.
Their fate is god's hands at this point. If foreclosures persist they will get into serious trouble, but so will everybody else. And we know this bail-out does nothing for foreclosures and housing prices, so if they're going to need help it will have to come later.
Last bank to fail. Turn out the lights when you leave.
The Great Oil Deception: Part Two
First, all the easy oil has already been found. Big fields are easy to find becasue they are big. Shallow fields are easy to find because they are shallow. They are both require simple technology, and can be developed quickly so they are very profitable.
Second, oil was too cheap fro too long and we now face a huge defficit of petroleum engineers and technicians. The guys we have are expensive and don't want to work in the owrst palces in the world.
We are now routinely going down 10,000 to 15,000 ft for relatively small amount of resource (gas or oil). Its harder to find, and it takes longer to drill the hole and requires better equipment and more time from technicians. The Saduis have just developed the last part of Gahwar. It has 32 platforms with mutliple horizontal wells on each platform. From day one they are injecting this new field with huge number of sea-water injection wells. In addition they have processing plants to remove gas products. The scale of this dwarfs their earlier projects. Again, all this is for less oil than the old easy fields.
Chevron's Jack is under 7,000 ft of water and 20,000 ft of rock! That is a time consuming and very expensive process regardless of the equipment costs. Plus you have to live 100s of miles offshore.
Again mutliple horizontal wells in all directions off each platform.
All this equipment is expensive because it has to be much more sophiticated. Of course equipment is in short supply, but they aren't building the old dumb stuff anymore. Don't forget the environmental aspects. These new rigs don't spill oil the way they did in the past, they are very safe (and more expensive and take longer to build)
One of the new Saudi finds is in one of the hottest part their deserts. Do you want to work out there? How about Prudhoe Bay? The labor costs rise exponentially in these hostile locations. What about getting kidnapped in Nigeria? How much would they have to pay you to go out there for a couple of years? How much do the security forces cost?
At home the Bakken has a lot of oil but it's in non-porous shale. The wells go down 10,000 ft, then horizontally another 10,000 ft. Then the entire horizontal part is frac'd. The technology and equpiment for this didn't even exist a few years ago. These wells only produce a modest flow of oil compared to a similar investement 10 years ago.
Brazil's latest finds are in deep water and will take upto 10 years to develop. Again they will need very sophisticated rigs to tap that oil.
Is the equipment expensive? Yeah! Is there a shortage of rigs? Yeah! Is this going to change? hell no!
I agree that supply constraints are driving up the costs of drilling equipment,
Why I Bought the Ultrashort Financial Sector ETF
originally recommended in Herb Greenberg's blog. There are at least two more trauches of mortgages poised to melt-down: alt-A and the "option pay" (which have some over lap).
These are bigger than sub-prime. The recession will make all these worse with job losses, commercial real estate, and bond defaults.
In march California had 3.5 times the number of defaults as purchases in residential real estate ... (whoa)
We will have 100's of billions more mortgage write downs over the next few years. The real problem is implicit in the fed's bail out of Bear: if Bear had failed, the web of counter-party derrivative obligations would have brought the whole system down. That scenario is still very much on the table. If we back out of that slowly, it still mean enormous changes in captial ratios for all these banks. That is, they need alot more cash on hand, which means less loans, more recession, lower housing prices etc.
An already stressed financial sector will not respond well to any of this.
DDT