Either / Or?

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______________________

     The great debate among those of us on the Economy Deathwatch seems to be whether the debacle we observe around us will resolve as a crash or a slow-motion financial train wreck. It seems to me that at every layer of the system, we're susceptible to both -- in tradable paper, institutional legitimacy, individual solvency, productive activity, real employment, "consumer" behavior, and energy resources. Some things are crashing as I write.
      The dollar is losing about a cent every three weeks against other currencies. A penny doesn't seem like much, but keep that pace up for another year and the world's "reserve currency" becomes the world's reserve toilet paper. Oil prices are poised to enter the triple-digit realm, the psychological effect of which may be jarring to 200 million not-so-happy motorists. The value of chipboard-and-vinyl houses is tanking beyond question. Of course, the government's consumer price inflation figures and employment numbers are dismissed broadly as lacking credence. But anybody who has bought a bag of onions and a jar of jam lately knows that things are way up in the supermarket aisles, and so many illegal Mexican migrants were employed in the Sunbelt housing boom, that their absence in the bust won't register on any chart.
     It's hard to describe what constitutes the bulk of the stuff moving through the world's financial markets for the simple reason that it was purposely-designed to be so abstruse and provisional that traders would be too intimidated to ask what it represents -- and the growing terrified suspicion is that it's mostly worthless. By this I refer to the global freak show of derivatives, concocted "plays" on hypothetical "positions," credit default swaps, arbitrages in imagined "differentials," nifty equations, hedges, promises, algorithms executed by robots, and "off-book" wishes chartered in the Cayman Islands. Probably all of them, in one way or another, are just scams, since they are unaffiliated with productive activity.
     At a more fundamental level, these mutant "investments" were derived from a very tangible trade in loans and mortgages made to flesh-and-blood chumps, but even those are only the last in a long spiral of serial "bubbles," or market frenzies based on unreal expectations. And this leads into the very real realm of poor choices, fiscal and fiduciary irresponsibility, deliberately deceptive policy, criminal malfeasance, and the broad abandonment of standards in acceptable behavior by people in authority. A lot of observers attribute this to the Gordon Gecko ethos -- the discovery back in the 1980s that "greed is good," which was meant to trump a previous ethos that life is tragic.
     Anyway, the trade in mutant investment entities appears to be collapsing now as their worthlessness in market terms (as opposed to theoretical terms) becomes manifest. The major holders of this dreck are losing the ability to conceal their losses, but suspicion now reigns that the losses are far greater than even the massive multiple billions reported so far by the likes of Merrill Lynch, Citicorp, and others. I suppose that what we've been seeing lately is a desperate attempt to hold things together just long enough to cut those Christmas bonus checks so that when the pink slips do finally fly in 2008, at least some Big Boyz will walk away with enough cash to cover a hacienda in Uruguay and the salaries of a half-dozen private security goons to guard it.
     But I must say, at the risk once again of sounding extreme, that the structural and systemic sickness in the finance realm is now so severe that it is hard to imagine we will get through the month of December without some major trauma in the markets. In fact, I'd go so far as to predict a thousand-point drop (or more) in the Dow just in this week after Thanksgiving. Real wealth "out there" is evaporating like popsicles dropped on the floor of Hell's fifth circle. It is coming out of the system whether the Big Boyz or anybody else likes it or not, and its absence will assert itself.
     At the risk of sounding even more extreme, I would be hard put to believe any reports that "consumer" spending in the days following Thanksgiving will match the hopes and wishes of economic officialdom. My own hunch is that average Americans are so maxed out on debt that they don't know whether to shit or go blind. Perhaps lot of them are willing to take a last step into fatal insolvency in order to put a plasma TV screen under the Christmas tree and appear as heroes to their families. If that's the case, it would only imply a greater bloodbath in credit card default thundering through the system in February and March, which would only deepen the carnage in collateralized debt instruments further up the food chain.
     That stuff probably has a long way to unwind, even as the "train" of losses hits the immovable obstacle of reality and the "boxcars" of consequence fly off the rails. The slow-motion train wreck could sweep away an awful lot of familiar things in its path -- banks, companies, government-sponsored enterprises, whole industries, whole economies, nations, up to and including the prospects for civilized existence, if severe hardship leads to war, which it often does.
     To some extent, the speed and severity of the financial train wreck will occur in a mutually reinforcing relation to what happens in the oil markets. The rise in price is only the mildest symptom of growing instability for the system that allocates the world's most critical resource. Even in the face of "demand destruction," weird changes are occurring in the way that the oil producers do business. The decline in export rates and the new spirit of "oil nationalism" will take center stage now, even if the US economy seizes up. These phenomena will represent a new cycle in world affairs: the global contest for remaining fossil fuel resources.
      Sooner rather than later, the next symptom will appear: spot shortages around the US and hoarding behavior. This is what will finally wake the American public out of its long sleepwalk (and Matthew Simmons said this first, by the way) -- when the lines form at the gas stations and the tempers flare and the handguns come out of the glove compartments.
     In the financial markets and the economies of nations, it's not a case of either / or. It's a matter of either / and.

Comments

[Dave]

Note: I'm getting a lot of complaints about bad behavior in the "comments" section of this blog. Report the email addresses or "handles" of the pests and I'll block them from participating.

god, we have to go through this again? get a life people.

[Dave]

does the term clusterfuck give you a clue? does anyone think that a clusterfuck is somehow confined to energy and finance? what is the most common mental image conjured by the term "clusterfuck"? eh.

[Dave]

"i am part of the clusterfuck." go ahead, say it. it don't hurt.

[Dave]

here, i'll go first: "i am part of the clusterfuck". see no big deal.

[Dave]

Anyhoo,

@doom: a guy named howard odum develoded the the idea of the fossil fuel subsidy, for all so called alternatives, in detail.

@gulland

Have you ever tried to make charcoal?

Dave

[Dave]

http://en.wikipedia.org/wiki/Howard_T._Odum

did a lot of good work.

[Zack S]

The subject on the Diane Rehm show on NPR today (11/26/07) will be peak oil. You will need to check your local station for times. Most carry it at 10 AM. You can find your nearest station here; http://www.npr.org/stations/

November 26, 2007, 10:00 AM
Oil Production Forecasts

Some industry experts are forecasting global oil production to plateau by 2012. We'll talk about oil supply and demand forecasts and their implications for both global security and climate change.

Guests
Matt Simmons, chair, Simmons & Co International, a specialized energy investment banking firm and author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy"

David Kirsch, manager, market intelligence service, PFC Energy, an energy consulting firm
Larry Chorb, chief economist, Platts, an energy and commodities information division of McGraw-Hill

Mike Toman, director, environment, energy, and economic development program at the RAND Corporation

[Driver1953]

I sign in and post but I haven't seen my posts. Am I banned? Only posted a few times. We'll see if this one goes.

Have to agree: although it's distinctive and I'm sure Jim wants to hang on to it, "clusterfuck" will bring the Inappropriates out of the woodwork via any search engine you can name.

Maybe clusterfuckpeakoil, as disambiguation. But porn freaks need to learn too. Bible says something about that.

[American]

Always puzzled by your insistence on short-term market calls, Jim.

No doubt whatsoever that we're in for an asswhipping, but this week? Could be next week, could surprise everyone and take another year. I'm "content" (ha ha, what a bad word choice) knowing things in fifteen years are going to be much different and much worse.

[Dave]

driver,

i can never figure out what it is that people have against the ambiguous. why the need for certainty? eh.

dave

[Dave]

porn/finance/peakoil all part of the same clusterfuck.

[Dave]

can the american economy function as it currently does without lindsey lohan(did i get the name right?), or some fungable replacement (notice i didn't say fuckable)? I say no. Please discuss amongst yourselves.

Honestly, this question entered into an ER/EI debate on TOD at one point.

[Dave]

the beauty of a clusterfuck is that it is a clusterfuck. it will evolve into a new clusterfuck that will be unrecogniseable as such from the perspective of the current clusterfuck. you can be sure of that.

[Dave]

well, i for one have a lot of clusterfucking to do today, tah.

[Gulland]

@Dave, I'll make some charcoal this and let you know the results. Thanks for lighting the fire under my ass, by the way.

Gulland

[Success Warrior]

There have been forecasts that people will still shop well for Christmas because since they are going to lose everything anyway, they don't care if they max out a couple new credit cards. 3 months later and we'll see a new spike in credit card defaults to match housing defaults.

[Lost Horizon]

I recall reading several comments on this blog taking JHK to task for his stockmarket prediction awhile back that did not come to past. I too underestimated the lenghts to which America's "Masters of the Universe" would go to in order to prop up the rotting corpse of Wall Street's current Ponzi/chain letter/Gordon Gecko/Three Card Monty incarnation of what passes this days as 'Capitalism'

I just didn't understand how many tricks and 'head fakes' there were still left in their sleazy little ball sacks.

Ah, but that was then, this is Now.

The bag looks kinda shiveled and whizen.

Oh, to be sure, the Captains of Industry and Finance are saving a few more tap dances for the Rubes, but there is light at the end of the tunnel, and it's the Headlight of the Train from Hell coming down the Dark Tunnel of Derivatives at break-neck speed!

Woo-woo, All aboard!

I'm wondering just how 'upset' the 'average' American is going to be.

There are so many guns and chemical mood 'enhancements' out there. I think these two 'American as Apple Pie' features are a match made in Delusional Thinking Heaven.

Instead of the Men in the Grey Flannel Suits taking a dive from the 14th Floor, Americans in their current devolved terrible two mentality will lash out at anyone but themselves for their self made circumstance.

All attempts buy the "Leadership" of this country to 'solve' this financial perfect storm will look like someone who has lit their hair on fire, and then tries to put it out with a Hammer.

[inquisitivemind22]

hello,

The news has crossed that the Saudis are increasing production ahead of the December OPEC meeting. While this is good news moving the price of oil down, I think it sends the wrong message to those who are not paying attention to peak oil. Despite this move, the Saudis are no longer swing producers.

[SouthLA]

Seems that the credit card debt in the USA would have a big impact on the insanity with buying unnecessary plastic objects at Walmart for the holiday season.
Does anyone have a link to current statistics for credit card debt in the USA?

i googled and did find this now famous post that indicates that ther e are NO credit card debt problems.

http://moneycentral.msn.com/content/Banking/creditcardsmarts/P74808.asp

I've read numerous reports that black friday was a big success. I don't know if this is true or not, but if so, i find this rather disturbing.

SouthLa (trailer-trash from south louisiana!)

[montysano]

A few weeks back, I posted here that I'd read that the global value of derivatives was $350M-$500M. Another commenter called "bullshit", saying that that just couldn't be true.

Sadly, it is.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a58EF32GpHeg

So, if I understand all this: we have a global GDP of about $50T per year, with the value of "funny paper" at 10x of that. What could possibly go wrong?

[Johnny Rico]

"Diane Rehm show"

Great. I'm finally forced to listen to this woman. She sounds like a constipated 80-year old with a quaalude habit. I have literally never been able to stay tuned for more than 20 seconds. Her voice was definitely not made for radio.

In other news, Peak-oil made the New Yorker a few weeks back and into John Gray's new book,"Black Mass."

[Johnny Rico]

$350M-$500M

I saw this too and thought it a bit odd. A derivative is basically an option and ninety percent of options expire without being exercised. The "value" I'm guessing is the aggregate of the premiums held at any time. This doesn't account for the value of the underlying security (long or short) - this would be many times greater. I'd guess at least 100 times greater. Is there any work on the value of the in-the-money exercised 10 percent?

[bud4wiser]

Wow, now even the Typepad Blog is Clusterfucked.

JK, No one has ever listened to poor people. No reason to think anything will get noticed this year yet.

But watch what happens as soon as the the "boy king" and DickBrainy leave - then a new round of jesters will get to look over the US Treaury's books. Feb, 2009, TSHTF!

[dale]

Rico,
You probably understand about as much about derivatives as anyone on Wall St. I don't think anyone understands what they are actually worth, or at this point wants to know.

The easiest way to understand them is how they are used. They are "hedges" against highly leveraged investments like the mortgage backed CDO's and SIV's.

The institutions that own these CDO's and SIV's use derivatives to suggest they have minimized their risk in holding assets with 100's of billions in "value" at extremely high leverage levels.

For the derivative writers it was a bit like selling flood insurance during a drought. Now if a flood came and only affected one small part of their asset base, they would be fine. But that is not what happens when floods come. That's why these reinsurance companies stocks have been plummeting lately.

[ArnoldSkaaland]

HEY KUNTSLER: WHATSAMATTA; NO MORE WEEKLY NEW YORK STATE RAGS FOR YOU TO PUT YOUR UFO ABDUCTEE STORIES IN? READ HIS BIOGRAPHY,LADIES AND GERMS: THIS FRAUD MAKES THE WIZARD OF OZ LOOK LIKE JOHNNY FUCKING RICO IN DRAG