Right Now

May 7, 2007
     I got a letter last week from a reader complaining bitterly that the stock market hasn't crashed and blaming me for predicting that it would. He didn't say, but I hope he hadn't been out there on a shorting spree. In case any of you haven't noticed, 2007 is not over yet.

    The markets have been on an extraordinary spring run. The Dow finished 23 out of the last 26 days on the upside -- some of them pretty way on the upside. This is the biggest US stock market up-streak since a 19 for 21 streak in July of 1929, prior to the October crash. Bill Fleckenstein points out a similar run on the Tokyo exchange -- 32 upside trading days out of 38 -- just prior to its 1989 tanking.

      While this kind of behavior seems ominous, I'm not claiming it necessarily has predictive value. One can say that the financial markets per se are running in an impressive state of structural distortion and imbalance and that systems way out of balance do not stay that way forever. But I risk more opprobrium by stating the obvious.

      I think the persistence of this gross imbalance can be accounted for in large part by the current global energy situation. The world is at peak energy, peak oil especially, and the world runs on oil. Peak is peak. The most. There are about 84 million barrels of oil a day flowing around the industrial economies of the world. It is running a lot of activity.

      Now, I happen to think that oil production probably peaked about a year ago, but we are still so close to it that the net available energy remains immense. Even if 2007 averages out to 83.5 million barrels a day instead of 84 million, it will still seem like a lot. Markets may be dumber than we think. All they see is a vast amount of cheap energy for manufacturing plastic salad shooters, for powering tourist jet charters to Cancun, for running WalMart, Walt Disney World, and Taco Bell. All that energy is here right now.

     Among the many tragic elements in the human condition is this tendency toward short-term thinking, the inability to imagine how our arrangements will work in a time that is not right now.

     Interestingly, the main effect of post-peak oil on markets and economies is that it will produce shocking instabilities in complex systems dependent not just on the energy itself, but on the expectation for continuity of the energy. Financial markets are especially sensitive because they operate on sheer expectations. The Dow Jones doesn't manufacture salad shooters, or haul tourists to the Mexican beaches, or build suburban houses. It just relays a dumb signal that says "we expect more" and investors respond. The trouble will start when the signal changes to "we don't expect more." That moment will be when the recognition of peak oil galvanizes the public's attention. It will manifest as a simple societal binary switching mechanism. When that happens, the markets will exhibit the dumb herd behavior that they are famous for.

     Of course, I have argued previously that the stupendous run-ups of market indexes themselves represent a kind of instability (those distortions and imbalances), as do also the supernatural flows of "liquidity" -- notional money extended to investors for harvesting future notional profits -- and I would stick to that observation. After all, if the world is "high" on oil -- and I would argue that it is zonked out of its mind -- then it would naturally spring way up off the diving board before swan-diving into the empty pool below.

      Me, I'm keeping my eye on things like the production figures coming out of Mexico, the North Sea, and the Kingdom of Saudi Arabia. They're all sliding down. Mexico is especially interesting because it is our Number 3 source of oil imports and its production is crashing so hard that a couple of years from now it may not be able to send us a single drop of oil. What do you think of that? Maybe the Walton family will buy Iowa so they can keep WalMart running on ethanol.

     Meanwhile, US oil refineries are running above 90 percent production capacity to keep up with the gasoline demand for Happy Motoring. The stress on these complex operations is unprecedented. It gives them no slack time for routine repairs. The results are liable to interesting, too, between the Fourth of July and Labor Day.

Comments

[Thad Beier]

Note that the only metric that the US stock market is exhibiting record gains by is the US Dollar. Compared to foreign currencies (not artificially pegged to the dollar), commodities, gold, silver, or anything else, it is already crashing.

What we're seeing, I believe, is the markets preparing themselves for further dramatic weakening of the dollar as assets move away from dollars.

Thad

[Stephen B.]

Several people I knew back in the late 1990s knew that it would all come crashing down, but it can be so hard figuring out just when it's going to happen. Anywhere one looked in 1999 it seemed like a correction was due any day, but even though the shorters were eventually right, how many could hang on until March 2000?

Never underestimate how long bubbles can persist.

[American]

I expect catastrophe before 2030.

As for August, who knows?

In my horizon, 2030 is soon enough to generate all the anxiety, despondency, and (yes), curiosity I need.

And I'm 44, with zero children.

[Scott Coursey]

Investing is always a gamble so the trick is to make your money and then get out fast. The best investment we can make is in ourselves and building a sustainable future for us and our children. Good post this week !

[David Mathews]

The stock market will collapse when it collapses: That much is certain. But until then, we might just see a 14,000 DOW. Who knows?

After numerous failed predictions of the stock market collapsing, wisdom suggests that it is best to stop predicting a stock market collapse.

Something really dramatic has to occur in order to precipitate a stock market collapse. $3 a gallon gasoline, evidently, is not enough. The housing bubble popping is evidently not enough. Losing a war in Iraq is not enough.

Something is missing from this recipe, what is it?

Maybe a major hurricane in the Gulf of Mexico ...

[Harry]

Anyone considering short selling should remember the words of a very successful investor.

The market can remain irrational longer than you can remain solvent.

That's the only sensible thing Keynes ever said.

[gene]

It truely is amazing how anyone could not view all of this assumed wealth as nothing but mostly a
"Alice and Wonder Land" reality. The careless stupidty of mankind (generally speaking of course) and how is has grow over the last several decades is absolute incrediable.

Just wait until all of this crap created by stupid human beings implode. One day (VERY SOON) the shit is going to hit the fan like never before.

It will be a miracle if it does not occur this year.

[Joe Four-Pack]

If you think the stock market is a game rigged by the Powers That Be, who knows if/when it will crash? Even if it isn't 100% rigged, it is certainly tilted in Big Money's favor.
I am also reminded of Zimbabwe's stock market. It has certainly had months of steady gains, but the currency is near worthless. The dollar may be headed down the same path.

[American]

Imagine the housing market taking a sharp turn for the worse.

US government responds with some sort of bail-out for overextended buyers, rather than allowing them to be sent packing to the street. E.g., maybe the government buys tons of crap-tranche mortgage-backed securities, propping up the price of these things, with a quid-pro-quo that servicing agencies go easier on late payers, or reset interest rates at below-market levels.

So now those who held the MBS have more dollars, some of which go into the stock market, driving up nominal index levels.

Did any of that help the economy? Hell no. Is the underlying story one of disaster? Hell yes. Do we see a dollar-measured stock market plunge? Not at all.

Each night's breathless commentary about another stock market "record" doesn't seem to factor in inflation effects.

If no one's going to pay attention to the dollar count, we may see the market "kick ass" for a long time to come.

[Kickaha]

Here's Mike Whitney's take on the current economy and future of the stock market. It strikes me as sound reasoning. http://www.smirkingchimp.com/thread/7205

[greenbeans]

"Tourist jet charters to Cancun" sounds a lot like a recent tourist jet charter to Hawaii for my favorite Jonah. How about it Jim, will you be taking more flights around the globe?

Good stuff today, but I think your argument will be even stronger if you insist on traveling by rail, bus, or trolley, but not air, in the future.

[Bill]

"While this kind of behavior seems ominous, I'm not claiming it necessarily has predictive value."

Of course you wouldn't claim that - that would be too much like your trademark bait-and-switch equivocation. Go out on a limb for once Jimmy - tell us with certainty when the market will hit 4000. Surely your massive intellect is up to that challenge.

"All they see is a vast amount of cheap energy for manufacturing plastic salad shooters, for powering tourist jet charters to Cancun..."

And let's not forget those jets to Australia and Maui that haul your sorry ass around so you can make a living providing absolutely nothing of value. Nothing. Not even a salad shooter.

Keep whining, Kunstler. A stopped clock is right twice a day.

[Bill]

"I expect catastrophe before 2030."

Wow, you should have your own blog!

[American]

1984 = 23 years ago.

2030 = 23 years from now.

Not that far off. Especially for young folks.

So Bill, please, don't be a dipshit.

[Laura Louzader]

It's not that the financial or business movers and shakers are dumb, exactly.

It's that they have an incredibly narrow focus and they must maintain that focus to be successful at their respective functions. When your job is running an operation that makes plastic straws, or invests pension money in bonds, or makes cars, all you have time for is what directly impacts your business. You have no time for the "big picture", and you are also very short sighted because the investors are interested in next quarter, not 10, 20, 30 years out.

That last thing- the extremely short time horizans of the business world and of our society in general- is what's killing us, as individuals, businesses, and a society. One author way back remarked that you could judge the level of an individual mind or an entire civilization of a given person or society by the time horizons the person, or society. The more intelligent the mind or advanced the society, the longer the time horizon.

A brilliant mind, or technology, harnessed to the service of a "now" mentality is like a car driven by a 5-year-old on speed. It's going places you can't predict much faster than your mind can absorb it.

On another subject, you must remember that the Dow is a very narrow index of 30 stocks, and that a lot of action on one or two stocks can drive the thing. The S&P and NASDAQ are much broader indexes, and IMO much more reliable indicators of what is happening. This runup feels to me like a classic "blow-off" that always occurs just before a decline.

This summer will, I believe, be like 2002.

[Laura Louzader]

It's not that the financial or business movers and shakers are dumb, exactly.

It's that they have an incredibly narrow focus and they must maintain that focus to be successful at their respective functions. When your job is running an operation that makes plastic straws, or invests pension money in bonds, or makes cars, all you have time for is what directly impacts your business. You have no time for the "big picture", and you are also very short sighted because the investors are interested in next quarter, not 10, 20, 30 years out.

That last thing- the extremely short time horizans of the business world and of our society in general- is what's killing us, as individuals, businesses, and a society. One author way back remarked that you could judge the level of an individual mind or an entire civilization of a given person or society by the time horizons the person, or society. The more intelligent the mind or advanced the society, the longer the time horizon.

A brilliant mind, or technology, harnessed to the service of a "now" mentality is like a car driven by a 5-year-old on speed. It's going places you can't predict much faster than your mind can absorb it.

On another subject, you must remember that the Dow is a very narrow index of 30 stocks, and that a lot of action on one or two stocks can drive the thing. The S&P and NASDAQ are much broader indexes, and IMO much more reliable indicators of what is happening. This runup feels to me like a classic "blow-off" that always occurs just before a decline.

This summer will, I believe, be like 2002.

[HappyII]

If you've got a spare couple of dollars you might enjoy the following for a laugh

http://www.amazon.com/gp/offer-listing/0812931459/ref=lp_g_1/103-7630659-5104624

[Mort]

Joe Four-Pack said it all.

[george]

The price of regular unleaded in Detroit topped three dollars a gallon last week. One local gas station had regular unleaded going for two eighty a gallon and it caused a lineup "reminiscent of the 1970's energy crisis" according to one local tv reporter. Meanwhile, personal bankruptcies in Michigan reached a record high and the tool and die industry, the lifeblood of Detroit and my hometown of Windsor, Ontario, has reached a crisis point as manufacturers look overseas for cheaper products. Hope you have a happy Monday Jim. Boy do I hate dentists.

[tom]

Frankly, I think it would be prudent for JHK to stay out of the stock market analysis. Hasn't he been correct in the last 7 out of 5 crashes.

I would be interested,however, if someone could give me a cogent explanation as to why it continues to set record highs. I understand the mania that occurred during the late 1990s. That was an obvious manifestation of the blind faith in the internet bubble.

The bubble we have now appear to be just as dangerous but doesn't have an obvious driver with all sorts of very good reasons why it is headed down soon.

Don't get me wrong. I think JHKs logic is impeccable. And yet his prognostications don't seem to pan out. Yeh, he will be right eventually. But so will a stopped clock.

As far as energy analysis and his reflections on the American way of life, there is none better.

[David Mathews]

Hello Everyone,

For those who haven't yet heard, Australia is suffering from a very dangerous drought perhaps driven by climate change.

The following article shows how desperate the Australians have become because of their lack of water:

Drought drives Aussies to nude carwash Fri May 4, 11:09 AM ET
http://news.yahoo.com/s/afp/20070504/od_afp/australiadroughtsexoffbeat_070504150943

SYDNEY (AFP) - Australia's worst drought in memory has had many weird side-effects -- but a nude carwash has to be one of the oddest.

The "big dry" has driven snakes into towns in search of water and sent thirst-crazed wild camels rampaging through outback camps.

In Brisbane, capital of the "Sunshine State" of Queensland on the east coast, it led to water restrictions, including a ban on residents washing their own cars.

The result was a boom in professional carwash services, a phenomenon which caught the eye of strip club entrepreneur Warren Armstrong.

He set up "Bubbles 'n Babes", where customers can have their cars washed by a topless woman for 55 dollars (45 US), or a nude woman for 100 dollars.

Armstrong told the City News newspaper this week the operation was above board.

"I'm just trying to make an honest dollar -- simple as that," he said.

Police said no complaints had been received and, as the washing took place out of public view, no criminal offence was being committed.

Acting State Premier Anna Bligh said the operation was running on recycled water and therefore did not break water restrictions -- but neither she nor the government fleet would be using it.

"It seems to me a pretty weird and wacky way to get your car washed," she said.

[ross]

Markets can stay irrational longer than you can stay solvent. Peak Oil has next to nothing to do with the present mania in equities. There is massive debt being created by the PTB, (look at the rate of money creation by the Fed yoy and you will get a sense of what I am referring to) and it is funneling into shares. The U.S. marts are up on the back of all the "liquidity" and the slow moving currency collapse. Foreigners are banking, no pun intended, that our economy will not go into recession. The PTB are once again playing musical deck chairs/moveable manias in asset markets. The R.E. bubble has popped for the nonce so the game moves back to equities, but because of Peak Oil, we are well and truly in the last days of what I call "The Final Party" TM.

[Mort]

Money and oil are two different things. Money is infinite, oil is not. The stock market could go to the moon, even if there were no oil. The dollar is not a stable metric of anything.

[Jerry Johnson]

Tom asks for a cogent explanation of the current market uptick.

Let me try. A put two and two together thing.

Obviously money is marginally entering the market and concentrating on select parts of the market. The money is coming from a number of exits from other investments.

1. Money is exiting investments in mortgage backed securities.
2. Fed liquidity is expanding and being soaked up . A good part of this expansion is sub rosa proping up of Fannie Mae etc. The Fed is taking bad paper in exchange for their credit of Fed funds.
3. Foreign Central banks are slowly exiting the Fed paper and still having dollars are putting it into the stock market.

A little money, relatively, concentrated in a narrow spectrum can be quite explosive.

[Jerry Johnson]

I should also add that a central bank holding subsidiary may easily buy stocks for dollars as a plan of dollar bailout. They hold the stock and sell it slowly elsewhere for another currency. American debt of any kind looks to getting quite marginal... slow acting poison.