Hot Shots

August 20, 2007
      The Federal Reserve seems to be manufacturing an impressive supply of "greater fools" to go along with the dribs'n'drabs of credit that it is dropping into the sucking chest wound that the economy has become for the body politic. The Fed's idea, I suppose, is that if they lend a little money to the geniuses who engineered the latest (and probably last) bubble of the cheap oil age to cover their present losses, then the US economy will "right itself." What I think they don't get is that finance has virtually become the US economy -- if you subtract it, there is nothing left besides hair-styling, fried chicken, and colonoscopies. By "righting the economy" do people mean the ability to keep running a transparently fraudulent set of rackets that have nothing whatever to do with financing real productive activity?

     By "greater fools" I mean, of course, buyers willing to step up and purchase securities that other people are shedding as if they were smallpox blankets. But even the Fed's supply of greater fools may prove insufficient when it becomes evident how much bad paper really is out there, and how it has been allowed to contaminate every tradable niche in the banking and investment house of horrors. I don't think we've begun to hear the disclosures.

      The destruction continued globally last week, with dark portents for this week, and indeed for the rest of the year. The much-mentioned "carry trade" -- borrowing Japanese yen in massive bales at ridiculously low interest and stashing the money in places where returns are higher -- got rocked as stock markets shuddered and currency spreads began to go this way and that way. This could not have been healthy for the derivatives geniuses, whose algorithms get the flu every time the temperature changes on a trading floor somewhere, and for whom the carry trade has been a sort of money strip-mining operation in recent years. Last week's action must have burst a lot of cell walls under those high foreheads. The Big Fund Boyz have been scrambling to paper over the damage. But sooner or later, the strength of the unwind will surpass their ability to pretend everything is okay. My guess is they will do just about everything except put their worthless MBS-and-other-crap-paper on the auction block -- and then we'll get two things: straight-up announcements of capitulation and insolvency, and addenda to the effect that, oh, by the way, our fund was incorporated in the Cayman Islands, out of reach of the US courts, for those of you credulous slobs out there who were thinking of suing our asses, so fuck you (and won't that work nicely for the US financial sector's greater legitimacy).

      Speaking of the Cayman Islands, they are about to get hammered by Hurricane Dean. Those Potemkin offices where the Boyz incorporate their mystery funds may not even be standing by three o'clock. But speaking of Hurricane Dean raises some interesting parallel issues. Texas may be breathing a sigh of relief with the storm's present course calculated to take it over the Yucatan Peninsula and into Mexico. But, as you can see from this article on TheOilDrum.com, it's a real Scylla and Charybdis situation. The US Gulf oil fields and the Houston refinery universe may not get smacked, but it looks like Mexico's Cantarell oil field will get roached instead. With Mexico being our number two source of oil imports, and with oil imports being almost 75 percent of our daily oil supply, and with the Cantarell field being 60 percent of Mexico's oil production -- well, you see how that goes. Nobody really seems to know what has kept crude oil trading just barely into the $70 range at the height of the driving season, but the two main speculations are 1.) "demand destruction" among tapped-out American consumer-motorists and 2.) desperate Big Fund Boyz ditching positions in the oil futures markets to raise cash to cover their losses elsewhere. In any case, Dean does not look good for oil prices in the US slouching toward Labor Day.

     These things prompt me to say that we are firmly in a zone of pronounced instability in global finance. I have to guess that the losses and imbalances in the funds are now too grave to correct. The Federal Reserve has got to choose whether to let these outfits sink, or whether to sink the US dollar trying to bail them out. The kind of penny-ante "helicopter drops" of "liquidity" they've made the past two weeks may actually accomplish both, only just a bit slower. By this, I mean that the damage may not occur all at once but be stretched out into the Fall of this year. Anyway, the massive amounts of adjustable mortgage resets coming down through Christmas, will blow out many more cell walls in the ailing body politic. And let's not forget that one Hurricane (even a Cat-5 howler) does not a whole hurricane season make.

Comments

[David Mathews]

Hurricane Dean isn't going to destroy Cantarell. The Oil Drum boys are hoping and wishing rather than objectively thinking about the situation down south.

Hurricane Dean will weaken significantly over land and pass over Cantarell as either a Category 1 or 2 hurricane. Such a hurricane is a threat to power lines and street signs but not a deadly threat to oil infrastructure.

Certainly if Cantarell was built to street-sign tolerance it would have been demolished long ago since hurricanes are known to travel through that region quite often.

The Oil Drum must have forgotten that both Hurricane Katrina and Hurricane Rita passed over the Gulf of Mexico's oil infrastructure while still at Category 5 power and later slammed into the coast as Category 3 storms. This is the sort of hurricane which can destroy industrial equipment.

The Oil Drum is experiencing its second hurricane-related panic. Hurricane Gonu's great threat to the oil industry never materialized.

***

As for the market meltdown: Hasn't it ended already?

We will have to wait and see. The world hasn't ended yet, to my great disappointment.

[David Mathews]

For those who need a calming influence, hurricane Janet:

http://en.wikipedia.org/wiki/Hurricane_Janet

If Cantarell survived Janet it will also survive Dean. End of story. Stop worrying.

Technological civilization has survived the 2007 Hurricane Season.

Peak Oil isn't even much of a threat for the rest of the year. Going into the Winter America's oil demand will diminish and the price of both oil & gasoline will decline.

$100 oil ... where are you? We've been waiting, it seems, forever.

Waiting for Peak Oil is like waiting for water to boil.

***

Matt Simmons hates Hugo Chavez. Listen to the latest Financial Sense Newshour:

http://www.financialsense.com/Experts/2007/Simmons.html

Does that mean that if Mitt Romney becomes presdient the United States will bring Freedom & Democracy to Venezuela?

No, no, no ... the oil industry would never want to kill a foreign dictator in order to gain access to that nation's oil reserves:

"I am about to be traveling, but I wanted to throw this out for discussion. Over the past few years, I have heard various claims that oil companies were complicit/ultimately responsible over the Iraqi invasion. People have suggested that Big Oil was behind it, or supported it, and that they should be billed for the invasion. Or, that the military expenditure there is really a hidden subsidy for oil companies. This all seems to be widely-accepted "fact.""

( https://www.blogger.com/comment.g?blogID=20902939&postID=117834970186232078 )

Fortunately Robert Rapier exonerates the oil industry from those charges. The oil industry is like the harmless kitten of the corporate world.

The oil industry wouldn't harm a fly. The oil industry is the friend of the Iraqis, Nigerians and Venezuelans.

Isn't it wonderful that the oil corporations are so benevolent? Such kindness and selfless love displayed by a corporation really makes me feel good inside every time I fill my gas tank.

Too bad that the Arctic icecap is melting away. But let's not get too negative about climate change. The melting icecap exposes an entire region to oil exploration. With all of this new oil coming to market the American consumers might gain five or ten years with their beloved SUVs.

And ... imagine for a moment all of the oil resources which still remain hidden beneath Greenland's icecap! Once that icecap melts another region will open up for oil exploration.

I love the oil corporations so much that I would gladly sacrifice the entire world's coastline and nearly all of Florida to keep the industry profitable. Those Iraqis are dying for the sake of Freedom & Democracy, not for the oil corporations!

[Perfectscotty]

Good post Jim and YES there will be much more fallout to come from the subprime mortgage crisis over the next year. The fed. successfully infused enough cash into the economy to stem the losses on wall street last week but I doubt that tactic will work indefinitely, how many billions of dollars in paper would be required ?

On a personal note this all boils down to the fact that I'm most likely stuck in the house I own now for good and so are a lot of other people. Homes aren't selling now and prices are sagging, I only wanted a place with a big yard for growing food in the future.

The next week will be very telling of our futures and I am prepared for the dow to drop another 1000 points. Are You ?

[American]

I'm curious about the race to explore the North Polar region for oil. If oil materializes from dead organic matter, does that mean the hyper-arctic used to be populated?

I'm sure my question is naive in about 40 different ways, but I don't imagine dinosaurs roaming up there.

[bud4wiser]

JK,

You sure used a pile of words in an effort that resulted in saying almost nothing.

Here's a recap of your article: Financial "weather" is currently unstable. Forecast, stormy weather ahead. Big deal......

If there need be any story here at all - at least one point for discussion would be is the remarkable ability of -"Joe Sixpack"- not to "get it" -- and leave his money in the Market.

Come February 2009 - no amount of double financial-double-speak will work. The public WILL come to terms with the concepts of inflation, deflation and Peak Oil.

Good day to all.......

[German Mike]

"By "greater fools" I mean, of course, buyers willing to step up and purchase securities that other people are shedding as if they were smallpox blankets. "

... a senior Wall Street marketing director recounted the genesis of the current situation:
"'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!

"He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt... until now."

Basically it comes down to trading toxic financial products for toxic toys. Luckily for the US, foreign investors are not to terribly bright and are lacking anything that resembles a long term memory. First we took 'em for all they're worth with the .com bubble, now toxic financial products. Slow learners indeed.
Hey foreign investors! Get ready for the next greatest thing since the last greatest thing. I tell you, TULIP BULBS!!! Triple AAA rated and guaranteed not to chip, split, peel, rust, fade or turn yellow or every penny of your money back...
China using the "nuclear option" on the US $$? What a joke. We stuck you with a bunch of worthless paper. SUCKERS!!! Them Commies still have to learn a lesson or two when it comes to the scams of high finance made in USA.
But seriously, all taunting and sarcasm aside, how long can we fool the rest of the world in financing our current life style? The greatest potential damage out of this is not some greedy house flippers loosing the a$$ or some dubious financial institution going under. The greatest potential damage is the total loss of credibility of the only game in town we've left; financial products and services.

[Tangurena]

The so-called "bankruptcy reform" added a brand new chapter that Bear Stearns is going to be using: Chapter 15. This allows corporations (who got far easier bankruptcy terms added in the alleged reform) to jurisdiction shop for the most favorable bankruptcy courts worldwide, while requiring US courts to run interferance.

[David Mathews]

Hello American,

> "I'm curious about the race to explore the North Polar region for oil. If oil materializes from dead organic matter, does that mean the hyper-arctic used to be populated?"

You are failing to take into account Continental Drift, American. That region of the world was elsewhere millions of years ago:

http://en.wikipedia.org/wiki/Image:Pangea_animation_03.gif

http://en.wikipedia.org/wiki/Continental_drift

These are the sort of large-scale changes which have occurred on the Earth over billions of years. They put humankind's 10,000 year old civilization in perspective, don't they?

Humans are burning over the course of centuries what Nature created over the course of millions of years. I guess that means that humans really aren't as smart as advertised.

[DanaJ]

"I'm sure my question is naive in about 40 different ways, but I don't imagine dinosaurs roaming up there."
My fellow American, yes, Dino's did roam the far north way back when, and when they died, they fell into the mud and turned into fossils & oil. Why do you think the Russians & Canadians made such a big deal recently of laying claim to the Arctic? When the snowpack melts in the next few years and they can put in rigs, they hope to get a lot of oil outta there to keep their countries running. Of course with the corresponding rise in sea levels and increase in hurricanes, the US south is gonna get its hammerer time.

[German Mike]

"If oil materializes from dead organic matter, does that mean the hyper-arctic used to be populated?
"
a. During most of it's history the Earth was completly ice free. We are currently in an inter glacial period in an ice age. Most ice ages lasted between 10 - 30 million years. The most recent one started about 3 million tears ago.

b. Things shift around over a couple of hundred million years. Africa and South America used to be one continent. Now they're several 1000 miles apart. Same happens to underground oil reserviors.

c. Nobody has a clue how much (or little) oil is in the Artic. It's one of the last unexplored regions left. Could be another Middle East or could be a total bust.

[DaveL]

"...transparently fraudulent set of rackets that have nothing whatever to do with financing real productive activity?"

Then why keep writing about it? It's like politcal commentary, a review of kabuke, "Oh, the smoke screen is blue today". It's silly. It's nonsence.

It's time to turn away. Ignore it. don't look at it anymore. It's harmfull to your mental health. The proceeds are used to kill baby gorillas. it (the market) chops off thier fathers hands and thier mother's heads (the gorillas), and sells them to fat putrid collectors in purple jump suits. It poisons you. it enslaves your children. There is nothing good admirable or worthwhile about it.

It'll soon be over, thank god.

DaveL

[American]

I get it.

Thanks.

[Patrick]

The important thing to realize about Hurricane Dean and the Cantrell fields is not whether or not the hurricane will destroy the fields. It is the overall effect on the global oil market because of a reduction of Mexico's oil production. Even if Mexican oil production is only shuttered for 2 days to clean up the mess that still means about 4M barrels of oil(2M a day ave prod) will have been removed from the market. The significance of this reduction can be seen if there is no other oil producer who can make up the difference--to me that means Peak Oil is now.

[asoka]

Jim, I am hereby awarding you the Tom Robbins Metaphor "Even Oil Fields Get the Blues" Award. Great writing.

To answer some of the questions above. Can I sustain a 1,000 stock market drop? Yes, I can sustain up to a 7,000 point drop.

How long will the rest of the world finance our life-style? I would estimate 80 to 90 years. The 22nd century may see some bumps.

As far as this week goes... as long as we have govermnent welfare for the rich to bail out the banks, there will be no TSHTF this week.

And since Bush/Cheney are saber rattling again, let me make a pre-emptive strike, actually a repeat of my prediction that has held for five years now: Bush will NOT bomb Iran.

[Dr.Doom]

Nice new picture, Jim.

Regarding the past climate and glaciations, the present cycle of glacial-interglacial we find ourselves within started about 2 million years ago, at the end of the warmer Pliocene era. Interglacials usually only last about 20,000 years or so. Since we've enjoyed about 10,000 years of the Holocene Interglacial from the last big glacial period, normally we would only have about another 10,000 years of relative warmth left before heading into the next glacial period. However, humans may have altered this cycle with greenhouse gas emissions to the atmosphere (and ocean). It's quite possible we have made a transition out of the Pleistocene cycle and back into a much warmer, Pliocene-type world. If so, one of our greatest "acheivements" may have been adding a new geologic boundary to the Earth's record, together with yet another mass extinction event.

[baileyalexander]

Europe's doing fine. Contagion is scary but maybe it's a combination of technology and globalization that's making the markets more volatile than usual.

Leave back for London on Wed and the gogo city it tis, but funny thing is they don't produce much anymore, just services.

But it is boomtown.

[greenbeans]

Nice post Jim. I can almost understand it all thanks to German Mike's 9:34 AM contribution.

"On a personal note this all boils down to the fact that I'm most likely stuck in the house I own now for good and so are a lot of other people. Homes aren't selling now and prices are sagging, I only wanted a place with a big yard for growing food in the future."

Perfectscotty, you really don't need a big yard. If you have space for a 20'x20' plot you can grow more than you can possibly imagine using intensive gardening methods. Front yard? Why not?

www.motherearthnews.com/Organic-Gardening/

http://cals.arizona.edu/pubs/garden/mg/vegetable/intensive.html

[Perfectscotty]

That's reassuring greenbeans ! I've been a subscriber to Mother Earth news for years now and it's always reassuring to read through it knowing there are others who want a simpler, less hectic and more sustainable lifestyle. Can't wait !

I will see one day if my yard can grow enough to support two people year round in Minnesota. Might have to turn the garage into a chicken coupe too.

[lonerhin0]

Ha. Nice vehicle in your garage - a chicken coupe..

[Andy K]

I posted this link last week, but it got buried too far down in the comments. I'm reposting because it is still relevant to the continuing analysis of real-estate financials:

http://news.goldseek.com/GoldSeek/1183475130.php

[Rock Trueblood]

Jim,

I made the same observations on a Motley Fool board hours ago concerning the Cantarell Oil Field.

One of your responders, Dave Matthews, is using Hurricane Janet from 1955, a hurricane with the same trajectory as Dean, to prove a Cat 5 hurricane will not damage Cantarell.

I would like to inform Dave Matthews the Cantarell Oil Field was not discovered until 21 years after Hurricane Janet. Had Dave Matthews used his cursor to move around in wikipedia, he would have discovered the Cantarell Oil field was discovered by a fisherman in 1976.

There were no oil rigs in Cantarell in 1955.

The oil rigs built there since 1980 are all terribly maintained by the state owned Oil company, Pemex. Cantarell oil workers . . . all of them . . . were removed yesterday.

I've read reports about the Cantarell Oil rigs which make me wonder if many of them could survive just a Cat. 1 hurricane.

Also, Dave Matthews wrote of how the Yucatan landfall would help decimate the strength of the Hurricane.

What Dave did not take into account is Cantarell is open water, in a very large bay formed like a U.

Waters in a bay have more chance to heat up than waters in open oceans and seas. Warmer waters are where hurricanes pick up their energy.

That Hurricane Janet hit the coast of Mexico AFTER traveling through Cantarell, should tell you a Category 5 is not out of the question.

Hurricane Katrina was a Category 1 as it landed up in Hallandale on Florida's East Coast. After Katrina swirled over the Florida Peninsula, it entered the Gulf of Mexico as a terribly weakened storm.

It picked up power over the hotter waters of the Gulf of Mexico.

Katrina was a Cat 4-5 on the open waters of the Gulf. It destroyed hundreds of rigs and knocked out several refineries for many months. When it hit on land refineries, it was only a Category 3 storm.

One last thing to Dave Matthews: if you've never sailed in a tropical storm of 40 to 50 knot winds, you do not have any idea the energy Hurricane Dean has in store for any structure in its path.

Ask any mariner what Category One winds will do to ocean water.

It's not the winds which damage the oil rigs most. It's the ocean, Mr. Matthews.

Just read what Katrina's giant waves did to oil rigs in the Gulf. It snapped some of them like toothpicks.

Otherwise, another good post from Jim and some interesting responses from his readers.

Rock Trueblood
Key West

[DaveL]

http://www.thevanguardian.com/news.php?id=12

haha, this is the market mentality:

ok you pieces of shit, feed your kids lead and eat poison, but don't fuck with walmart earnings.

I guess we deserve whatever we get.

daveL

[greenbeans]

Perfectscotty,

I've gotta clarify a little. There IS a limit to how much you can grow intensively on a small plot, but its usually much more than most people expect. Its also the best way to get started. This kind of gardening is also time-consuming and labor intensive. But that's a good thing. You will be getting fresh air, listening to birds sing and immersed in good thoughts as you garden, instead of wondering why we now live in a Banana Republic, only without the banana crop to export.

[thal]

DaveL,

I thought you might be heading over the top with "feed your kids lead and eat poison" until I watched the link. I've got to agree with you. Perhaps Erin's confusion is the product of eating too much exported chinese food. One can only hope she's getting fabulously wealthy in spite of her disabilities.

[DaveL]

But that's a good thing. You will be getting fresh air, listening to birds sing and immersed in good thoughts as you garden...

ya, everyone should throw these fucking computers in the garbage and go plant a garden. i'm not joking.