Vanishing Point

July 30, 2007
     Last week's stock market meltdown suggested that a financial sector rigged for the falsification of reality eventually enters a danger zone where reality implacably reasserts itself, expectations dissolve, and all that remains is the sour odor of fraud.

     This long episode of market mania, running for seven years, was based on the idea that non-performing loans could be turned into money by removing them from their point of origin and dressing them up in respectable clothes -- like taking all the winos in downtown Los Angeles, putting them in Prada suits, and passing them off as the faculty of the Harvard Business School. It was a transparently ludicrous racket and the wonder is that America proved to be so utterly bereft of regulating authority -- not to mention plain decency and self-restraint --at every stage.

     It's really hard to account for the stunning failure of responsibility. What you had was a whole industry that surrendered the standards and norms that brought it into being and enabled it to function in the first place. Mortgage lenders stopped requiring house-buyers to qualify for loans; bankers stopped caring what stood behind the paper they issued; dubious loans were bundled and resold like barrels of rotten anchovies -- in such numbers that no individual stinking minnow would stand out -- and the barrels were traded up the line, leveraged, hedged, fudged, fobbed, and fiddled until, abracadabra, they were transformed into so many Tribeca lofts, Hampton villas, Piaget wristwatches, million-dollar birthday parties, and Gulfstream jets.

     It worked for the Goldman Sachs bonus babies, and the private equity scammers, and for the corporate CEOs and their board members, and for the politicians who parlayed their votes into cushy lobbying jobs, and even for the miserable quants in the federal government's termite mounds of statistical reportage. It even worked for about 18 months for millions of feckless US citizens gulled into contracts for houses they could never hope to pay for, under arrantly false and ruinous terms.

     My critical auditors never tire of pointing out how consistently wrong I have been about weakness in the US economy, but I really do think we've reached the vanishing point, and that spot on the horizon is looking more and more like a black hole -- with dire gravitational powers of suckage. It first appeared a few weeks ago when two Bear Stearns hedge funds got into trouble over the barrels of rotten anchovies they had bought for their investors. The B/S boys tried desperately to sell the barrels, but nobody showed up for the auction. Word began to spread that all the other companies sitting on barrels of rotten anchovies might not be able to sell theirs either. All of a sudden there was a lot less notional "money" in the system. The "positions" held by the hedge funds (bets made on all kinds of other things leveraged by rotten anchovy collateral) have not themselves unwound quite yet. But enough nervousness ran through the system last week that the stock markets came down with irritable bowel syndrome. The blood and fecal matter whirling around the exit pipe is what remains of the "money."

     By the way, I believe the stunning failure of responsibility actually can be accounted for, though my theory may not be to everyone's taste (especially the science hard-asses out there). In a word: entropy. The US has enjoyed unprecedented energy inputs and the result is unprecedented entropy outputs. The protean force of entropy then manifests as degradation in just about everything around us from the immersive ugliness of a landscape overbuilt with WalMarts, Pizza Huts, and vinyl houses, to the sexual perversion available on the Internet, to the surrender of standards and norms by executives in the financial sector. It's as simple as that. Entropy rules.

     What reinforces my feeling that we are at the vanishing point is the additional simple fact that on Friday, West Texas crude oil closed one-cent short of its previous record high of $77.03 reached on July 14 last year (thanks to John William's Shadowstats.com for the date). Apart from turmoil in the financial markets, there is nothing especially traumatic going on out there for the moment -- no hurricanes, no terror bombings in Europe or America, no guerilla action against Nigerian oil platforms and pipelines. Of course, any of those problems could spring up tomorrow, but right now things are kind of quiet, by current standards. And yet there was oil closing at $77.02 on Friday.

     The reason for that high price, I believe, is that we really have entered the zone of the permanent oil export crisis, meaning that the oil exporting nations (Saudi Arabia, Mexico, Russia, Iran, Venezuela, etc) are using ever more of their own depleting product and are able to send less and less along to the places that import their oil (the US, Europe, China, India, and Japan). There is just enough of an export bottleneck now to put upward pressure of a-dollar-here-and-there on the oil in the futures markets . It is certain to get worse. A lot worse.

     The launching of this new oil export crisis is coinciding with the crisis in confidence in the financial sector. In fact, the oil export crisis is the un-recognized reality test that is challenging the habitual falsification of reality in finance. This oil export crisis will also have a palpable effect on the reality of everyday life in America. It will bring our system of extreme car dependency closer to failure every day, with each upward one-penny click.  Whether the public ever comes to recognize what this means, it will still affect millions of individual decisions. Among these decisions will be a refusal to consider buying a new house 27 miles outside Minneapolis (or Dallas, or Atlanta....). At the same time this is occurring, and the anchovy barrels stashed around Wall Street start exploding from the gases of putrefaction within, there will be no more mortgages available for new houses anyway. And so the only real activity still driving the US economy -- the building of ever more suburban sprawl -- will come closer to a complete shut-down. I don't think the financial markets will survive that.

Comments

[Riddick]

Implacably the masses move as Lemmings toward the cliff, rolling in SUV, convertible, sporting designer labels, smelling of sun tan lotion and listening to the latest craze on the HD radio or XM. Is Kunstler the canary in the coal mine, a lone harbinger of the end? If one merely observes the excesses so readily apparent in "affluent" American culture one must know the truth. History teaches that great hubris comes before the fall and that is one item we have in vast, unlimited supply.

[umass82]

The market turn down was a result of peak oil, but the old media went on about country wide as if the housing bust was the real problem not just a sign of the peak oil situation, the old media critizes the blogasphere and calls peak oil an internet ruse.

the clothes came off of the emporer last week and showed why the old media will not address peak oil, they are afraid of what it would do to their stock prices and market cap, also they do not want to bring down their advertisers.

I am constantly amazed by these peak oil naysayers who bring out a long line of wonks and economists to debunk peak oil they insult the oil geoligists and the bloggers whoi are trying to educate the public as if they were the one with a hiden agenda, it is like a doctor hiding a cancer from his patient, when it is finally exposed that peak oil has hit and that it was hidden from the public there will be far worse repucussions.

[American]

Things may fall apart in six months, may fall apart in ten years, may even hold together, after a fashion, for twenty before collapse.

I find Jim's thoughts on "how," "why," "where," and "to whom" provocative and valuable. Each Monday morning, I look forward to reading an interesting note.

His insistence that "when" is absolutely imminent is peculiar, though. Again, I think we're going to see major shit-fan contact in the next decade. But two down days in the market can be countered by plunge protection, or some delusion, or a bigger M3, or even some unexpected good news.

I'm all for the gloomy outlook. If a lot more people shared it, we wouldn't be in the fix we're in.

But saying "this is the big one, Elizabeth!" following every downward market twist is a bit of a sucker's game.

Even if you're rooting for collapse, being patient won't hurt. I don't think the wait will be all that long.

[Tangurena]

The two Bear Stearns funds that melted down showed just what the other investment houses think of the subprime and alt-a paper that made up those two funds. Many of the high bids for the so-called "assets" in the funds were getting high bids of 10 cents on the dollar - when they could get any bids at all. And that was *after* they got a multi-billion dollar bailout. If those "assets" had been sold, regulators would have started looking into all the other MBS papers that the investment houses have been foisting on the public. Sales have been so low that "mark to model" (where the math model of the "asset" gets to decide what the price is) is the rule that applies, and if Bear Stearns had been forced to sell, then "mark to market" (where the market price decides the "value" of the "assets") would have wiped away hundreds of billions of dollars in inflated "assets."

That high price for oil is a measure of the weakness of the US Dollar. Last week, the dollar hit a record low against the euro, and is sliding down.

[kochevnik]

Mr. Jim had it absolutely correct - entropy is at the heart of EVERYTHING.

Consider that what you are watching, first-hand is the world's worst credit implosion in human history. Word on the street is the money center banks - stuck with 100's of billions of bridge & LBO loans are yanking the credit lines of every one of their customers - case in point - AHM today. Consider that under the 'new' terms of mortgage lending, I would estimate only 20 percent of previously qualified buyers will be approved to buy a house. You need a mid-700's Fico, a good paying job and 20 percent down (+ closing fees) up front. 20 percent of a normal $250,000 shitbox is 50 grand - in this day of negative savings rate, how many fine citizens can scare up 50 large to buy a mediocre house ? And in California, that 50G down jumps to easily 100.

If 80+ percent of potential buyers disappear, what happens to the housing market ? What happens to companies who no longer have easy access to credit to fix their mistakes ? What happens to the people who work for them ?

All day yesterday, even in my sleep, I kept rolling over the words - "Credit Market Lockup".

Credit Market Lockup.
Credit Market Lockup.
Credit Market Lockup.

Come'on I know you can say it.

A credit market lockup brings down everything from J6P's job to the umpteen Trillion dollar derivatives market and the worst thing is no person, no corporation, no govt has a chance of standing in it's way.

I just have no words to describe where we are right now. On an intellectual level I've been watching for decades for something like this, but on an emotional level, to finally see it all play out, right here and now.

It's just awe-inspiring to watch it come, wave after wave.

[Caught in the jaws of life]

So collapse is imminent? What the fuck to do? I got divorced in 1999, and barely recovered enough to buy a very modest home in a small Kentucky town 15 miles from Frankfort, and 20 from Lexington. Should I stay or should I go? I hate my job, but I've been there 14 years, and employers aren't exactly beating down my door for my services. One 13 year old daughter, 3 dogs, a cat. Wife's unhappy with her job, too. Oh, and we're both paying off debt... so we're going nowhere fast. The one good thing is I still participate in a state sponsored defined benefit pension, but guess what? We're underfunded by about $12 billion as are most other pension plans, and the great boomer generation will be bearing down on all the entitlement programs they so disdain. Yep! The writing is on the wall... it's all going to implode. :-/

[Hank]

I do live about 27 miles out of Minneapolis. We have a farm with 80 acres.

The county wants to move the highway so it will bypass the old downtown of the nearby city. Their plan is to use up about 20 acres of my cornfield along with several chunks of my neighbors fields.

At the planning meeting I told them that they need to plan for light rail instead of a highway. I asked what if gas was $10/gal or worse yet, very hard to buy, regardless of the cost. They just stood with a political dumb ass look, no answer offered.

The city, which is 1.5 miles from my farm has an old railway that was torn down years ago. The property is owned by the county. They want to put up a bike path.

All of these "leaders" with their "visions for the future". I can not believe that so many people have their heads in the sand.

Let's go people! Change is coming soon.

The old Boy Scout motto that I learned a long time ago is "Always be Prepared". Talk to a Boy Scout.

[DaveL]

well, i try to always look on the bright side. all this really means is that fewer assholes will have less means to continue turning the world into a giant fucking garbage dump. that's a good thing. please crash hard and fast.

now if only a good old fashioned world wide epidemic would hit, we might stand a chance.

[Laura Louzader]

Standard & Poor's will now be downgrading about 80% of the CDOs they formerly rated A or higher. This means there will be a much smaller pool of institutional investors who will buy this paper.

Additionally, China is no longer buying, or is scaling their investment in our CDOs back drastically. Chinese buyers now realize they made a mistake being invested so heavily in American mortgage debt, and openly admit it.

Our credibility is shot among foreign investors.

It will now be extremely difficult to get a mortgage, but take heart: by the time you pull your 20% down payment together, desirable homes and condos will be available for 50% of today's prices.

If even.

So clean up your credit and pay off those CCs and save your dough, if you still have a job after this debacle plays itself out.

[Riddick]

The only advice I have for "Jaws of Life" is follow what Laura says and work to get out of debt. If even half of what has been predicted on this site and many others comes to pass jobs, even lousy ones, will dry up faster than tapped out west Texas oil well pumped every way but nuclear. Lest anyone believe it is just Americans who are dumb asses, I read that the last remaining Mountain Gorillas were being murdered in cold blood, not even for their organs which typically are ripped out and sold in some rich Asian land as a status symbol/aphrodisiac. I also believe almost all remaining rain forests in Africa have roads plowed into them now for timber operations. This should spell doom for most of the remaining large mammals and primates in the not too distant future.

[asoka]

I don't understand the advice to "save money"

Maybe I'm just thinking there is a currency devaluation in our future. The more you have, the more you lose.

[Johnny_Drongo]

Paul Krugman in his NY Times piece on Friday mentioned peak oil. He's a pretty smart fella so maybe the mainstream is finally coming around.

[haarp]

I live in the UK and read JHK's blog every week - become a monday afternoon ritual for me. I have read the long emergency (excellent), seen him on video and heard him on the radio and I agree with just about most of his points. But one thing I do disagree with him on, and many of you may think this strange, is that I believe he is too OPTIMISTIC. Don't get me wrong: I admire JHK's work greatly and value it even more. When it comes to peak oil, climate change, new urbanism and the money markets I believe he has his finger firmly on the pulse. However, I believe there is a fatal flaw in his (relative albeit cautious optimism): human nature. Assuming a miracle new energy source does not materialise between now and say 2020 which could be implemented swiftly and easily (bearing in mind the relentless downturn of available hydrocarbons with which to build a whole new infrastructure), I think that things may well unravel far quicker, and far more brutally, than even the long emergency predicts (which itself is a far from cheerful read). Simply because almost all humans, when presented with a real all encompassing crisis which is systemic and global will react with fear, greed and, ultimately, violence. Imagine a scenario wherein you live in a village/town/city and there are rolling brownouts, then blackouts, then just no lights full stop. Would you REALLY look out for your neighbours or just you and yours? And what about those neighbours? When the brown stuff is circulating around the fan (though without electricty it will have to be a hand driven fan!) will THEY give a rodents posterior about you? And what about our leaders, the police, the army, the emergency services? Will they still be there if society is crumbling all about us, and them? Yeah, right!
I appreciate there are many fine people around who would try to rebuild but would there be enough of them? I also appreciate, and admit openly, that I am a gloomy gus. But, before you rush to judge me, let me ask you a question: if such store is to be set by the better part of human nature then why, with all of our ingenuity and technology, have we got ourselves into this God awful mess in the first place? Is it more likely that human kindness, compassion and mercy have got us to the state we're in now or is it more likely because our dark side, greed, fear and hate, usually tend to have the last word? I leave you to decide.

[XER]

Vanishing Point was one of my faorite movies as a youngster.

Jim hit it on the money when he talks of the fraud that lays at the heart of the terminal finacial cancer eating away at the national gut. Our biggest problem IMHO, is that we have become an amoral nation of liars, crooks, perverts, and most of all, moral cowards. We need to face up to the fact that our political and finacial rulers are a direct reflection of ourselves. We demand our rulers to lie to us. We can't handle the truth, because we are self centered and depraved as a people. We deserve everything we get. To fucking bad. We are like a giant man o war taking on water at this point in time. Damage control parties are working to close off compartments to keep us afloat, but there is a tipping point for any sinking ship. The Russian civil war will be easy compared to what we are facing.

"You may not like war, but war likes you." Leon Trotsky

[PeakOilBoy]

Time to gin up the Farmer's Markets around the country... Safeway ain't gonna be rollin' those Freightliners as nearly as well.

If the US Government is interested in a crash program, there are those of us who have been working on it for quite a while!

[XER]

"There is a less tangible consequence. With the end of the American Empire, Americans might have to face who we really are and what we have really done. Germany and Japan had to do so at the end of World War II, and it changed them both profoundly. The United States is not going to lose a war at home, but if it loses its isolation it might gain a devastating self-awareness. It is hard to imagine how Americans will handle it."

"The politicians, Rubs and Dubs alike, fear the loss of their power, and even more, the trembling of the entire power structure that so recently seemed so secure. If the empire goes, wither the Republic? They fear the consequences of a sudden rapid impoverishment of a large portion of the American population. And they are all preparing themselves to retreat to bolt holes considerably better furnished than Saddam's. If it all comes down they hope to hide out with their ill-gotten gains and emerge when the storm blows over. Their corruption and that of our corporate leaders is no longer news."

http://www.swans.com/library/art13/mdolin24.html

[comrade simba]

So a bunch of money grubbers, knowing exactly what they were doing, decided to make obscene amounts of money at the expense of the U.S. economy as a whole. I suppose they must figure that with enough money they can sit comfortably through the results. I doubt they factored peak oil into the mix - the Lexus repairman won't be around anymore, and the personal generator to run the mansion won't be much good without fuel or the infrastructure to deliver it.

Mr. CEO is gonna have trouble soldering a loose connection on his solar array. Our digging a garden. A three log fire is not really a thermostat, y'know... So what's he going to need to live in his beautiful house with his beautiful wife? A slob like me bunking down in the carriage house to cut his wood and haul his slops out to the compost heap. Slob's wife feeds him and does his laundry.

The guys who profited the most are the most dependent on the system and that is why I believe the slowest collapse possible is being engineered. Personally, I am all for their success in this endeavor, but if TSHTF next Tuesday the mighty will fall a lot harder than slobs like me.

[baileyalexander]

Is this correction or meltdown. Who knows. I break bread with international economists regularly, and, as far as I can gather, they’re just glorified accountants with numerous certifications and impressive CV’s. They’ve little more ability to forecast than JK, but, they’re quite serious about the markets and treat them as investments, not emotional rollercoasters to play with as we please.

The sub prime market is only going to impact the poor. What my fellow Americans don’t want to understand is that they can’t continue to spend more money than they make. If the interest rate is fixed, they’ll probably be alright, if it fluctuates, they won’t.

But I’ve no sympathy for people that spend beyond their means and very little time for those that wish to understand little beyond their square mile.

The Chinese own 40 trillion of our greenbacks and the only reason they don’t dump the dosh is because it wouldn’t be worth anything...amazing how integrated we all are, it actually does matter that you understand more than that little square mile cuz as much as many of you would prefer to go local with your gardens, it probably isn’t going to happen.

Well, time to pack my waders and head off to Richistan tomorrow morning. My dollar will not go far...but after paying a million bucks to see Streisand I hear Prince is keeping his London gigs cheap....but I’ll check in periodically to hear of those commentators, those that are deemed the brightest and best commentators of all...
bay, paris..

[Caught in the jaws of life]

Hey bailey, why would you expect ordinary Americans to live within their means when our own institutions can't do the same? It's a whole different world from gramma & grandpa's... hell, we were already broke before we started a billion dollar a day war to stop terrorism... NOT! Maybe subprime will only affect the poor... and yes, all my interest is fixed... still no excuse for our leaders putting this country and the world in this spot. With leadership comes responsibility. Maybe FDR did fix the Rubs, and fix em good, but you have to go with what you've got... I have a feeling before it all collapses the folks in the heartland will get a whole bunch more socialism than they desire... you live by the sword, and you die by the sword. :)

[can you see it?]

I believe that the stock market was responding to PEMEX’s prediction of it’s “end of oil.” Of course we are never told anything about oil depletion. At this point, it seems, “they” want to just let shit hit the fan and the hell with us heathens. After all, they’ll be taken away in their Rapture...

Mexican Company Predicts End of Oil
http://www.plenglish.com/article.asp?ID=%7BF1F8B8FE-DA99-4717-8FBD-2B3C4F90FBA3%7D%29&language=EN

Mexico, Jul 27 (Prensa Latina) Petroleos Mexicanos (PEMEX) announced that oil reserves may run out in seven years.

"Supplies of this economically exploitable resource are running out," informed a report sent by the state owned company to the United States stock market.

[Abrey]

A response to haarp above: In Jared Diamond's excellent books, "Guns, Germs & Steel"; and "Collapse", he vigorously makes the point that people, and society, survive and prevail, when we work together. The man who hoards food and gold, rather than securing provisions for himself and rising above the crowd, becomes an easy target for predators. There is plenty of historical evidence to support this. So when Jim's heartfelt predictions finally come to pass, our best chance for survival will be, as Jim himself puts it, to get to be better neighbors. To paraphrase Winston Churchill, Americans can be counted on doing the right thing, after they have exhausted all other possibilities.

So learn a good skill that you can do with your hands; and be cultivate friendships with your neighbors.

We can and will get through this.

Cheers.

Abrey

[DavidinLA]

Niall Ferguson mentioned "peak oil" in his OpEd piece today in the Los Angeles Times. Not capitalized Peak Oil, a lower case "peak oil". Something to the effect of "Some people are worried about peak oil----but I'm worried about peak grain". Well, the two are practically one and the same. Maybe he doesn't quite get the connection between oil and grain production.

[dogfather]

Robespierre, Robespierre, where you at, Robespierre?

I would settle for impeachment, an electoral House cleaning, and the implementation of that damned piece of paper. Also the punitive, retroactive taxation of the uber-wealthy, as payback for their recent rapacity. If they move to Dubai, don't let the door hit 'em in their flabby white asses.

I would love to see Bush working at Circle K.

Maybe when Bubba can't gas up his SUV to haul his ATV to the BLM-sanctioned place of amusement, he will pull his high-n-tight out of his plumber's crack and wake the fuck up.

Meanwhile, let 'em eat twinkies.

[Gary49er]

DaveinLA
Maybe he does see the link and was slyly saying it is the consequences he is worried about more than the occurrence of PO.
I say Abrey is right............

[DavidinLA]

You could be right, Gary49er, about Niall Ferguson. Maybe he does get the connection between Peak Oil and Peak Grain. It was interesting to see the words "peak oil" in print at least. I'd re-read the column but I dumped the paper in the Recycling Bin outside. Maybe it's online. Isn't Niall Ferguson a Conservative? If so, he probably doesn't get the connection.