Stocksplosion

April 23, 2007
    Whenever somebody complains about "the lies that George Bush & Co. told to get us into the Iraq war" (as Frank Rich did in The New York Times on Sunday), I wonder how those lies compare to the lies that the American public tells itself every day -- for example, that we could run America without oil from the Middle East, or that hybrid cars will save Happy Motoring, or that we can have an economy without producing anything of value.

     Meanwhile, the Dow Jones index went up over a hundred points the same day that 32 people were massacred on a university campus. And bear in mind that the massacre did not occur late in the day but literally around the same time that the New York Stock Exchange rang its opening bell -- so that as the body counts mounted through mid-day, the stock markets only went higher! They must have liked what they saw. Then, the rest of the week, while the cable news Mommy-Daddies went through the familiar rituals of bewildered hand-wringing, and NBC released the trove of farewell videos sent in by shooter Seung-Hui Cho between killings, the Dow piled on another 250 points to close at an all-time record high just under 13,000.

     Could the financial markets be more detached from reality, from life on the ground (or in a free-fire-zone classroom) in this nation?

      Doug Noland over at Prudent Bear.com is right: we've entered a euphoric phase of financial arbitrage capitalism with extreme Ponzi overtones, a pyramid scheme of revolving credit rackets and percentage spread plays completely abstracted from any reality of fruitful activity. The reason we don't even call "money" by its former name anymore is precisely because we realize at some semi-conscious level that "liquidity" is not really money. Liquidity is a flow of hallucinated surplus wealth. As long as it flows in one direction, into financial markets, valve-keepers along the pipeline, like Goldman Sachs, Citibank, or the hedge funds, can siphon off billions of buckets of liquidity. The trouble will come when the flow stops -- or reverses! That will be the point where we will rediscover that liquidity really is different from money, and if we are really unlucky we'll discover that our money (the US dollar) is actually different from real wealth.

     Noland and others recognize the severe distortions in the finance sector, and they are surely correct to flag the implied dangers. But even these clear-eyed observers survey the disturbing finance scene without factoring the global energy situation. In a nutshell: world oil production seems to have peaked about 10 months ago. Being just past peak, there is still a huge amount of oil going into world economies. But being just past peak we are now seeing how complex systems proceed toward instability and breakdown when the underlying energy flow turns toward contraction.

     The situation in finance is particularly sensitive and acute because an overall contraction in available energy means the end of industrial expansion (a.k.a. "growth") at "normal" rates of three to seven percent annually. More to the point, it means that certificates, contracts, deals, plays, and rackets pegged to the expectation of growth will lose their legitimacy. Meaning, stocks, bonds, collateralized debt obligations, hedges -- anything that represents the hope and expectation for more-of-anything -- will no longer be understood to represent real value.

     The current euphoric hysteria should therefore be viewed as a form of disorder in its own right. The players in the markets are making their moves based on misunderstood signals. They think the world is awash in energy and prosperity. They believe Cambridge Energy Research Associates (CERA) and the Chairman of the Federal Reserve. They believe that the mortgage fiasco and the associated imploding housing bubble are just a couple of temporary zits on the handsome WASPy face that Wall Street presents to the world. In the background, though, feedback loops are aligning to rock the systems we depend on for daily life in the real world. Capital will become unavailable. Food will grow scarce. Trade will be interrupted. Mobility will be constrained. And an awful lot of pissed-off people will be poised to fight over the table scraps of industrial civilization.

Comments

[Ted]

I was talking with my dad about the end of cheap oil and he, like many Americans, believe that the establishment (corporations) are lying about the future supply of oil. He thinks there's plenty to go around. America and the rest of the world are in for a rude awakening when the bottom falls out.

[Jeff-Bob]

Will the hedge funds implode at some point? Sunday's NY Times business section had an article claiming that it will take some time to figure out who takes the fall for the mortgage mess, and that the hedge funds should still take a massive hit.

How long can our economy tread water?

.

[Weaseldog]

The North Lake Arlington Power Plant (Tarrant County Tx) exploded a short while ago. Flames are pouring high into the air.

Oddly the freeway near it isn't closed yet, so morning commuters are seeing the paint peel off their cars as they drive by.

[steve duncan]

The spoils will accrue to those with the bigger hammers. Hence our feverish attempts at limiting those in the nuclear club.

[Dave]

The rate at which the real world emerges in the minds of the entranced zombies will be directly tied to rate of erosion of those returns on bonds, contracts, pension obligations, etc.,etc,. As those assumption change and the collapse of the biosphere (as evidenced by the loss of the continents honeybees) becomes visible and no longer deniable it won't be anger that emerges but panic and a deep fearful anxiety that will morph into disgust and a deep desire to separate and withdraw from this world. But given our deskilled and organically incompetent society there is no other world to go too. When that is understood the wheels will be falling off of everything we have come to know and expect as normal. The result will be the first real famine on the North American Continent and mass migrations from places that never should have been settled to places that will be already pretty jammed up with people and the crap of the energy blowout of the last one hundred years. The March of the Zombies can be seen to begin within the next 7 to 10 years. Of course for most it will be a march towards a dance with the ringmaster, Lord Death.

[walt]

I'm not sure Armageddon is so simple as feedback loops aligning so death stars control our universe. Kunstler's wishful thinking notwithstanding, most crises fail to deliver his promised knock-out blow. Still, we obliviously rumble down the same well-worn paths confident that the next 50 years will be the same as the last. They won't, and only a few pundits are willing to say as much. Thanks, Jim, although the breathless hyperbole does wear thin.

We do know: oil is going to dramatically rise in price.

Alternative energy will finally get its due.

The poor will get poorer. Much poorer.

Growth as a never-ending panacea will have to be rethought.

America will either choose to be a functional social democracy or a failed state.

Suburbia has its own momentum and rationale. Virtually all our infrastructure costs will go to propping it up.

Plug-in hybrids, etc., will "save" suburbia from our own bad choices.

Canada will boom.

[Dave]

Anybody seeking seats at The Last Barrel Saloon ? Why if I'm not mistaken Rosy Scenario has just donned a new Thong and Dr. Karma is payingo for a round while our Bar Tender ,with his one flaring eye and skeletal profile, has just begun to Dance to the Juke as it plays " I did it my Way !" sung Mad Money's very own Jim Kramer !
What the hell is he doing here anyhow ?

[Ed]

I also follow Prudent Bear and other bear market sites (after awhile Noland's analyses all blend together). Check out the latest podcast at wallstreetexaminer.com, Lee Adler and Russ Winter discuss how the economy is really doing. Adler talks about his thesis on the stock market as liquidity meter.

He says although there are all these signs of the economy faltering, you have to use technical analysis to figure out when the market will turn (he does cycle analysis which you can see if you subscribe). It will turn when liquidity falters, not when when market participants figure out that there's a recession coming. I think his argument is that the recession and the stock market are both liquidity driven, but markets react faster than the economy (thus the theory that markets discount future economic events).

I'm not a paid shill, I don't even trade (my retirement money is in US Treasuries). It all looks like gambling to me. But this liquidity idea seems appealing to me, if I was going to trade I might look at the cycle analysis more closely.

[German Mike]

I’ve been following the housing & financial markets pretty closely over the last few weeks. So far we’ve only seen the first ripples of the subprime tsunami headed our direction. The motherlode of loans will reset, starting in June 07 with peak reset in late 07 tapering off into late 08. Each month 35-50 billion will reset with foreclosure usually lagging 6 month behind after payments double. Many will struggle to make 1 or 2 payments at the higher rate before giving up. Foreclosure proceedings are usually initiated when payments are 90 days late.
The borrowers are really the ones that stand to loose the least. None of them are loosing THEIR home, since they never had any equity in the game to begin with. Think about it, teaser rate, no $$ down. What a fool I was not to get into the game myself. If the property appreciates I flip it and pocket the difference. If the deal goes sour I just leave the keys on the kitchen table and walk away. It’s somebody else’s problem now. I think that’s what’s happening all over. The “bailout” talk is not about saving that distressed young family and their starving children, it’s about covering the losses JPMorgan and friends will suffer.
The financial markets only know one direction these days, up, up, up. In my opinion a mix of irrational exuberance (love that phrase) and a declining dollar. Suppose of have an asset with a fixed value (gold, stock, whatever) worth 100 currency units. Now suppose that same currency is inflated by a factor of 2, while no new assets enter the system. Naturally that same asset is now valued at 200 currency units without it being worth any more than before. That’s at least part of what we’re seeing right now; not only in the dollar but in all fiat currencies.
As for PO, it’s impossible to call at this time with half the vital information being a state secret. I agree that the outlook on the half that is known is not encouraging. Obviously even the higher echelons of government are moderately concerned if they consider funding Hitler’s fuel: http://money.cnn.com/2007/04/20/news/economy/coal_liquid/index.htm?postversion=2007042306

[Alfred]

"They believe that the mortgage fiasco and the associated imploding housing bubble are just a couple of temporary zits on the handsome WASPy face that Wall Street presents to the world."

Actually, I thought that Jews were well represented. Perhaps I am wrong.

[halfnelsonchoke]

Mark my words: The reality will not hit the nonbelievers until the school buses stop running. Driving to vegas from ca once, I saw a large schoolbus with one kid on it in the middle of the desert and there wasn't a school(there wasn't ANYTHING) within 30 miles! I've done a little research and it appears that $4-5 gallon diesel will break the bank of almost any school district. When it peaked right after katrina, most schools were spending more on diesel than anything else in the budget. I cannot wait...

[bud4wiser@yahoo.com]

Well, if we are truly [past Peak] as JK states in this article, then the effects of the US vacation-gasoline consumption will surely drive the domestic retail price of gasoline to a new high.

When this happens, enough chatter and despair throughout the US recreation, transportation and tourism industries ought to chill any euphoria in the Stock Markets.

I'm saving this post, and will mail it to JK on the Wednesday before Labor Day for review and discussion. The current fantasy has lasted decades, and JK's been predicting reality will seep in -- for the last ten years.....

I'm voting for fantasy, business as usual -- Labor Day 2007......

[Ken]

East Fort Worth power plant fire video here

http://www.dallasnews.com/

[Bill]

"Could the financial markets be more detached from reality, from life on the ground (or in a free-fire-zone classroom) in this nation?"

No, Kunstler, you've set the bar for detachment so high that no one, not even the US financial markets can reach your heights of righteous indignation and cynicism. Did you ever stop to think that the Dow's rising and falling has nothing to do with your little foul moods and funks? Did you ever think that it might be pure coincidence that the Dow rises when "shit happens?"

I know that your failed prediction of the Dow at 4000 weighs heavily on your mind, but you're letting that one spectacular failure ruin you as a prognosticator. Get a grip. There are a few real things to be upset about if you'll only look around and find them.

[Bill]

"They believe that the mortgage fiasco and the associated imploding housing bubble are just a couple of temporary zits on the handsome WASPy face that Wall Street presents to the world."

WASPy, eh? How about all those years where Greenspan's homely Hebrew mug represented Wall Street?

[ryan costa]

It is suprising they predicted milkweed would be turned into a source of rubber.

Dandelions have the potential for being bred to produce a lot of neat chemicals.

[German Mike]

bud4wiser, I think you're right. It will still be biddyness as usual in LaLa-Land. IF PO is for real within the next 3 years it will coincide with the subprime housing meltdown and things could turn ugly sooner rather than later. If PO is still 10 years down the road we'll still be in for 2 more bubble cycles before things go bust for good. Real estate is dead, now it seems to be the stock market's turn again. The .com bust is ancient history by now, nobody remembers.

[one Eye Open]

"-- so that as the body counts mounted through mid-day, the stock markets only went higher! "

Hey Jimmy,

What on earth should the tragedy at VT have to do with stock market valuations? For crying out loud you chastise all of the poor suckers because they don't get how fuel prices will eventually affect the economy thereby implying that they are not connecting the dots. Then you ask us to connect the dots of the market going up in lieu of a shooting? Help me out here lad, what should the market have done as a result of the events at VT?

[Jim]

Is James Kunstler putting a little damper on you consumption enthusiasm? Like a preacher showing up at your deviant little orgy? Not ready to repent you say? Having too much fun driving your Humvees and supporting a population of pets whose medical and food requirements could feed and care for half of the rest of the world’s human population. No one can tell precisely when our reckoning is coming but that it is coming is for certain. From all indications I can garner we are on the plateau and may wobble around there for a couple of years and then we will be in a descent so rapid that there simply won’t be enough capital or energy to remake the infrastructure of our country. Why didn’t they lead us away from oil 30 years ago? The same reason you’re still enjoying your profitable little orgy, at least until someone presses a little red button, inserts a strange looking key and the thermonuclear sun shines brightly in your eyes before opening two new ones in the back of your head. Welcome to the world of consequences.

[Kickaha]

Things to consider:

1. Very large gains in the current stock market have been in "quality" stocks like utilities and health care and not the broader categories.

2. Most gains have occurred in environments of weak volume.

3. The stock market has become increasingly divorced from investments by ordinary Americans.

4. If you look at Dick Cheney's investments, you would think he was taking Kunstler's advice.

[German Mike]

"If you look at Dick Cheney's investments..."
...mind to post a link? Inquiring minds want to know.

[Kickaha]

"The Veep's Curious Investment Portfolio--Is Cheney Betting On Economic Collapse?"

http://www.counterpunch.org/whitney07052006.html

[one Eye Open]

Another Monday morning at CFN and more Chicken Little the sky is falling claptrap.

[Dale]

Exactly what evidence does Jim have that "Peak Oil" was reached 10 months ago? According to the Saudis, just last week, they still have excess production they intend to ramp up to keep prices stable in the near term.

[one Eye Open]

Dale, being terminally gullible is not a good thing.