Forecast for 2008

      For the tiny fraction of people who actually pay attention to real events -- those, for instance, who know the difference between Narnia and Kandahar -- the final hours of 2007 leading into the fog-shrouded abyss of 2008 must induce great racking shudders of nausea. Has there ever been a society so exquisitely rigged for implosion? The whole listing, creaking, reeking edifice stands like one of those obsolete Las Vegas pleasure palaces awaiting a mere pulse of electrons to ignite a thousand explosive charges perfectly placed to blow away the structural supports.

      The inertia holding everything together that I described in last year's forecast finally melted away at mid-summer and events began spooling out of control. Specifically, the massive tonnage of debt-backed securities circulating through the financial sector stood revealed for the mostly worthless bales of paper they truly are, and the investment community was left suspended in mid-air, grinning unconvincingly, like Wile E. Coyote thirteen yards beyond the edge of the mesa, with a sputtering grenade in each hand and an anvil tied to his ankles.

     The whole second half of 2007 in the ranks of finance was a desperate rear-guard action to stave off the inevitable work-out. The fiasco over at Bear Stearns was instructive. Not long after two of their hedge funds blew up in August, the company announced that the funds had been chartered in the Cayman Islands and were therefore beyond the reach of official US legal machinery -- meaning, forget about lawsuits, you losers, chumps, and suckers who bought into our jerry-rigged scams... submit your complaints to the Tough Noogies desk and begone with you! This dodge might have benefited Bear Stearns in the short term, but in the long term it's hard to see why anybody would ever after cast one red cent in Bear Stearns' direction (in the life of this universe or several like it).

     The summer's blow-ups were followed by truckloads, boatloads, and helicopter loads of rescue "liquidity" delivered through autumn by the Federal Reserve and other central banks in a continuing effort to allow investment houses, mortgage originators, reinsurance firms, and other companies trafficking in suspect paper to avoid declaring greater losses. Then the foreign sovereign wealth funds jumped in with five billion here, ten billion there, coming away with big chunks of ownership, but of what? Of companies with liabilities in excess of assets? Mostly, these desperation moves worked to paper over virtual bankruptcy through the crucial Christmas holiday, when yearly bonuses are doled out, which spared the boards of directors from having to explain why executives were lined up at the loading docks filling their Lincoln Navigators with stupid dope piles and knots of the shareholders' loot.

    On the ground out in the heartland, in the anxiety-drenched, over-valued beige subdivisions of California and the ennui-saturated pastel McHousing tracts of Florida (not to mention the pathetic vinyl outlands of Cleveland and Detroit) a mighty keening welled forth as mortgage rates adjusted upward, and loans stopped "performing," and "for sale" signs failed to turn up buyers, and sheriff's deputies showed up with the rolls of yellow foreclosure tape, and actual ownership of the re-poed collateral entered a legal twilight zone somewhere north of the Florida State Teacher's Pension Fund and south of the Norwegian Municipal Councils' investment portfolios. What a mighty goddam mess was left out there by the boyz at the Wall Street genius desks, who engineered a magical system for eliminating risk from the capital markets -- only to see it leak back in from a million holes and seams and collapse the greatest bubble ever blown.

     In the background, the US dollar sank to record lows against the euro and the pound sterling, the price of oil jumped 56 percent across the year just grazing the $100-a-barrel mark, drought punished the American southeast and Australia's grain belt, floods ravaged Texas and England, the polar ice shrank dramatically, but the US escaped any major hurricane action for a second year in a row.

    Except for the murder of Mrs. Bhutto just a few days ago, the international scene was supernaturally quiet. Even Iraq fell into a torpor, variously attributed to utter exhaustion among the warring factions or to the US troop "surge" under general Petreus. Iran got a surprise clean bill-of-health on its nuclear bomb-making activity from America's own investigators, to the consternation of Mr. Bush & Co. The non-human denizens of Planet Earth didn't have such a good year. Honeybees, Yangtze river dolphins, and house sparrows took big hits, and Al Gore went up another suit size (as well as winning part of the Nobel Prize for his Powerpoint show). Which brings us finally to the heart of the matter: what's coming down the pike starting tomorrow, January 1, 2008?

   

Down and Dirty
    I shudder to imagine how things will play out now as we turn the corner into 2008. Not to put too fine a point on it, but my little walnut brain can't imagine any scenario in which the US economy doesn't end up on a gurney in history's emergency room. It's not necessary to rehash the particulars of the Greenspan bubble-blowing disaster. The outcome is what concerns us. The web cables have been blazing for months with arguments as to what form the workout will take. There's little disagreement about the fundamentals at the housing end of things.

      The housing market is in a death spiral. Eventually, the median price of a house will have to fall back to the median income, and it has a very long way to go, perhaps 50 percent. Until that happens, houses will be generally unsellable. At the same time, of course, an anxious finance sector will be offering fewer mortgages and on much more rigorous terms, so there will be far fewer qualified buyers even for distress sales. And the median income itself may soon not be what it has been. The whole equation has changed. As the painful re-pricing process plays out, many owners/sellers will be upside-down and under water in what they owe on the mortgage in relation to the value of the house they occupy. Quite a few may have lost jobs and incomes along the way. Most of these unfortunates would be better off just mailing in the keys and walking away. But in so far as these awful liabilities are peoples' homes, full of all their stuff and their childrens' stuff, not to mention being the repository of all their previously-imagined wealth, as well as their hopes and dreams, walking away is psychologically more easily said than done.

      Surely in this election year, schemes will be advanced to bail out these poor suckers. But the beneficiaries of such a putative bail out would be far outnumbered by the home-owners still making mortgage payments, plus property taxes jacked up during the recent orgy by greedy public officials, and I don't think this majority would stand for the unfairness of seeing their neighbors simply let off the hook on their obligations. Perhaps the one thing that congress could do is change the insane law that treats foreclosures like some kind of bizzaro capital gain and piles additional huge tax demands on people who can no longer afford to buy their kids a frozen burrito. The issue of what to do about the dispossessed will be so politically red-hot that it could upset the election process --but I get a bit ahead of myself.

     One thing the public doesn't get about the housing debacle is that it is not just the low point in a regular cycle -- it is the end of the suburban phase of US history. We won't be building anymore of it, and those employed in its development will have to find something else to do. Now, unfortunately the whole point of the housing bubble was not really to put X-million people in so many vinyl and chipboard boxes, but rather to ramp up a suburban sprawl-building industry as a replacement for America's dwindling manufacturing economy. This stratagem ran into the implacable force of Peak Oil, which not only puts the schnitz on America's whole Happy Motoring / suburban nexus, but implies a pervasive trend for contraction in everything from the daily distances we can travel to the the very core idea of regular economic growth per se -- at least in the way we have understood it through the age of industrial capital.
     But to return to my point, something like 40 percent of all new jobs after the year 2000 were created in the final burst of suburban expansion -- everything from the excavators to the framers to the sheet-rockers, and then the providers of granite countertops, the sellers of appliances and furnishings, and cars to service the far-out new subdivisions, and so on. This is the end, therefore, not only of the production "home-builders," but perhaps everything from Crate and Barrel to WalMart, too, eventually.

    By the way, the housing collapse was only one phase of a more generalized real estate debacle, because the commercial side of the business has also begun a nauseating slide into non-performance and equity destruction. In other words, we built way too many strip malls, power centers, and office parks. God knows what will happen to the owners of these white elephants, or the mortgage and lien holders of these things -- but as one wag remarked to me some years ago as we both gazed upon a forlorn abandoned strip mall outside of Tulsa, "...we don't need that many evangelical roller rinks...."

     What happens out there on the housing market scene will certainly redound in banking and finance and whatever still constitutes the US economy generally. The fears and uncertainties surrounding all credit-backed tradable securities derive first from the millions of troubled home mortgages dangling slowly in the wind. These fears and uncertainties will multiply as defaults commence in commercial real estate, and desperate individuals next enter a wave of credit card default, all of it, too, securitized and sprinkled all over the world. None of this stuff has yet been priced into the public disclosures of the many troubled banks and bank-like companies holding it. Nor does anyone really know how this is affecting the hedge funds, and their staggering leveraged positions in things that are looking more and more like quicksand. I can't imagine that quite a few major banks will not collapse in the first half of 2008. It is hard to escape the conclusion that many hedge funds will also blow up, given the unsoundness of their counter-parties' positions, not to mention the frailty of the bond reinsurers. But the death of more than a few hedge funds could easily unwind the entire global finance system -- meaning a period of destructive chaos followed by a set of severely different institutional arrangements, with untold loss of imagined capital wealth along the way and big changes in everyday life. The world has never really been in a situation like this before and it is impossible to say what it might lead to. But there is no doubt that the American public has enjoyed an artificially high standard of living in relation to the value of what we actually produce -- fried chicken, hair extensions, and the Flaver Flav Show -- so the conclusion is pretty self-evident.

     Others have said (and I concur) that 2008 will be the year that the issue of Peak Oil not only takes stage in the forefront of American politics, but pushes global warming aside as the most immediate threat to the "modern" way-of-life. There is every reason to believe that the world has arrived at its all-time oil production peak -- and some statisticians would even pin-point the exact moment as July 2006. Since then a few new and crucial story-lines have emerged to allow us to understand what is happening out there on the world oil scene.

     One story-line is that only "demand destruction" among the world's poorest nations has kept the oil markets functioning "normally" among the OECD nations and the rising Asian players. Even so, oil priced in US dollars more than doubled in 2007. It remains to be seen whether demand destruction in a wobbling US economy -- with the suburban builders crippled -- will keep oil prices from jumping into the uncharted territory beyond $100-a-barrel. But two other forces are in operation now.

     One is the growing oil export problem, soon to be a crisis. It now appears that exports, in nations with surplus oil to sell, are going down at an even steeper rate than production declines.  Why?  They are using more of their own oil.  The population is growing robustly.  The Saudi Arabians are building the world’s largest aluminum smelter and many chemical factories. This takes a lot of oil. Russia, another big exporter, saw its car sales jump by 50 percent in 2007.  Mexico is depleting so rapidly, and using so much more of its own oil, that it might be out of the export game altogether in three years. That will be bad news for the US, since Mexico is tied with Saudi Arabia as America's number two leading source of oil imports. Remember, the US now imports close to three-quarters of all the oil we use.

      The second new factor on the Peak oil scene is "oil nationalism." It is prompting countries like Norway and Russia to husband more of their own resources as the awareness hits that they are past peak and might want to keep their own motors humming further into the future. Oil surplus nations are also trending more toward selling their oil on the basis of long-term contracts with favored customers rather than just auctioning the stuff off on the futures market. This makes oil a much more important element in geopolitical power politics. Note that the US may not enjoy "favored customer" standing among many of these nations.

      Matt Simmons, the leading investment banker to the oil industry, predicted at a major conference in October that the US is much closer to encountering a problem with chronic spot shortages of oil (and gasoline, of course) than the public realizes, and Simmons says that this supply problem will be extremely disruptive in every imaginable way -- economically, politically, and socially. Most of the commentators I take seriously see the price of oil oscillating in 2008 between $80 and $160-a-barrel. Simmons says Americans will keep sucking up the price increases, but they will probably freak out over spot shortages.

     I have no idea how presidential election politics will play out in 2008. It must be obvious that so many nasty pitfalls lie out there in the months ahead that something's got to shake up the current scripted mummery among the contenders. The current batch of candidates will soon find their story-lines and pre-cooked messages out-of-date as the nation faces crises in finance and energy (at least). Given the uneventful geopolitical scene of the past 18 months (since the Hezbollah-Israel War and up to the murder of Mrs. Bhutto in Pakistan), odds are that the US will have more rather than less trouble from the rest of the world in 2008-- especially if our own financial recklessness trips up the global economy.

     Back in the early days of George W. Bush, even before 9/11, I used to joke with my friends that Bill Clinton would return as the Emperor Bill the First. The joke doesn't seem so funny anymore with Hillary off and running. I never liked the way she muscled her way into a US senate seat -- sending the message, in essence, that there was not one genuine New York resident qualified for the job. But there is so much more about her I dislike now, starting with her presumption of dynastic entitlement to the annoyingly phony way she nods her head (like one of those old "drinky-bird" toys) to put across the idea that she is a fabulous "listener." I write this a few days before the Iowa caucuses and then the New Hampshire primary. New York's Mayor Bloomberg is suddenly making noises again about entering the race as an independent. That might lead to a situation as fractured as the one in 1860 that saw a multi-party scuffle send Lincoln into office (or the election of 1912 when Teddy Roosevelt made a credible run on the independent Bull Moose line). At the moment, I'd like to see both John Edwards and Barack Obama roll on. The mere thought of a president Huckabee gives me the chilblains, and the rest of the Republican pack I would not want to have as my county supervisor.

     In any case, whoever ends up in the oval office will preside over one king-hell of a clusterfuck. In the immortal words of TV's erstwhile "Mr. T," I pity da fool who gets elected into this mess. There will be a whole continent full of bankrupt, re-poed, and idle former WalMart shoppers, many of them with half of their skin tattooed and many of that bunch all revved up to "roll heavy and gun up" against the folks who screwed them.

      Which leads me to my penultimate observation of the moment: 2008 will be the year that celebrity wealth goes into hiding. A land full of people crying into their foreclosure notices will take a dim view of the Donald Trumps and P. Diddys luxuriating out there and may come looking for scalps -- though in the case of Mr. Trump they'll be sorry they woke up the wolverine that lives on his head. Basically, though, I'm not kidding. Conspicuous displays of wealth will be so "out" that Mr. Diddy might take to club-hopping in a 1999 Mazda. Lindsay Lohan and Paris Hilton may have to double-up living in a minuteman missile silo to keep the angry mobs of fans-turned-vengeful-berserkers away.

     Okay, my final comment. After being chastised endlessly about mis-calling the DOW in 2006 (I said 4000), I have learned my lesson about making numerical predictions for the stock markets. So let's just say there is no fucking way that the DOW, the NASDAQ, and the S & P will not end the year 2008 absolutely on their asses. The charade of permanent prosperity based on getting something for nothing is over. That sound you hear out there is reality knocking on the door. It has been standing out in the cold for a long time and it is not happy with us.
 

 

Comments

[nikmills]

Happy New Year Ya'll.
Invest in Alt. energy stocks today.

[Uncle Remus]

Knock knock America.

The Clusterfuck has you.

No "Happy New Year" from JHK.

[dsula]

I wish you were right, but so far I have been waiting for this so called end of the world for more than 20 years. It will happen, just a lot slower.

[Abrey]

Dear Jim: A timely forecast, indeed. One thing you forgot to mention is how much you care about our country and its citizenry, and that we are all in this together; and that in the coming year we should strive to be good neighbors. Having said that, the legal industry (in the short term) should experience gainful employment as 'losers' seek redress. And check out this mind-boggling trade publication, Collections and Credit Risk, www.ccrmag.net, which blithely or naively talks about opportunities in debt collection for the coming year. Yes, indeed, we certainly have a long way to go before Realty becomes Reality.

[Riddick]

But there is no doubt that the American public has enjoyed an artificially high standard of living in relation to the value of what we actually produce -- fried chicken, hair extensions, and the Flaver Flav Show -- so the conclusion is pretty self-evident.

In the spirit of Jim's reference to beloved Narnia I say in the immortal words of Parnell & Samberg that the 25 to 5 ratio statement above is most certainly "True that, DOUBLE true."

[RJG]

Brilliant.

Hey it looks like you're headed to Duluth at the wrong time of the year.. wish I could make it up there, but can't..

Happy New Year Mr. K..

[greenbeans]

"Honeybees, Yangtze river dolphins, and house sparrows took big hits"

Jim, the house sparrow is the most abundant songbird in America, a non-native species, and is widely considered a pest. One can only wish that it would take a big hit.

http://www.sialis.org/hosp.htm

[Methane of Cawdor]

Jim, you're spot on except for the bit about conspicuous consumption. It will not only continue; it will get more grotesquely over-the-top. Why? For the same reason evangelical Christianity will become increasingly popular and shriller: people whose asses are up against the wall need something to turn to, some ray of hope, however dim and dead-end. The promise of a better life than this one, praising Jesus as you realize that he was born, lived as, and died a Jew, or the power-of-desperate-thinking possibility that you, too, can snort coke from a supermodel's labia while your entourage showers you with "verbal support" and tells you how to portray yourself as "green" -- it's all good when what you have is so bad.

[asoka]

In the 1950s the number of house sparrows in Britain was estimated at 9.5 million, rising to 12 million by the early 1970s. In the past 25 years the number has crashed by 62 per cent. Researchers suspect that the fall may be linked to a shortage of insects in summer.

[dale]

"The world has never really been in a situation like this before and it is impossible to say what it might lead to." - JHK

LOL....this, after a book and several paragraphs of predicting precisely "what it might lead to".
Jim, you're a scream.

Scott,
The order of magnitude between Hubbert's prediction of PO/US and apocalyptic predictions of the future of mankind is probably about 1 to 1,000,000 in terms of the complications and number of factors involved. It is rank nonsense to compare the two.

BTW, as I see it Hubbert was wrong on PO/World. Of course, his disciples just keep saying he is a "couple of years off".

My prediction: Oil production in the next five years will continue to rise enough to keep prices between $90-150 per barrel inflation adjusted. The oil producers don't want prices to rise too fast.

[LaughingAsRomeWasBurningDown]

My first post here, hoo ah. Why all the gnashing over the Dow? Seems like a meaningless and manipulated number to start with, and even more so with the decline of the dollar...

[Senior Distiller]

Curiously, Jim, I haven't heard you say much, if anything about Ron Paul. Surely you have read his articles. What is it that you don't like about him?

[Dave]

shit loads of starlings around, another import. i think that the original idea was that they would just stay in central park, maybe attend a gg allin show.

[john milton]

A few thoughts Jim:

- "walking away" from the unaffordable house is not so easy to do for many folks.

Where are they going to walk to? Many of the boomer/x'er parents are already in the nursing home, siblings may be in the same situation, or unwilling to let 4.6 folks move in with them, kin or not.

Have you tried to rent with blown credit and low rental vacancy rates?

Any move that is not local means they will be unemployed as well as broke and probably upside down on car and credit card debt, plus leaving whatever marginal community support they have outside of family. Very grim!

- This idea that the newly poor will "take revenge" against the economic parasites, while logical in an abstract way , seems unlikely to me.

The L.A. riots after the Rodney King issue is a case in point. Was it the homes of L.A. cops that got trashed? No, it was the Korean groceries etc.

Enraged people don't often make practical detailed plans against remote reasonable targets, they lash out at what is close to hand.

another example, in Pakistan this week we don't see the masses going after the gov't or the fundies, but burning buses and trashing shops.

I don't think the ultra rich are any more at risk next year than last...

[Dave]

BTW, as I see it Hubbert was wrong on PO/World. Of course, his disciples just keep saying he is a "couple of years off".

hubbert was so dead on with his U.S. predictions it's almost as scairy as a gg allin show. he could be way off on his world predictions too. we'd just need to find a couple of north sized fields in the next month or two. could happen.

god i'm glad i got this brick here. now that feels better.

[Dave]

not too...though, he was dead on with the U.S.

[Dave]

north sea... someday i'll learn to edit before i post...nah.

[Dave]

all i can say is that if gg allin was still alive he'd straighten this mess out pronto.

[Dave]

hubbert was so dead on with his U.S. predictions it's almost as scairy as a gg allin show. he could be way off on his world predictions though. we'd just need to find a couple of north sea sized fields in the next month or two. could happen.

edited responce to dale's comment. i didn't look at the comment again, so i didn't need to hit myself in the head with my brick again, just in case anyone was wondering.

[Doug]

The end of capitalism is nigh. Viva Socialism!

[Dave]

man, i need a new hobby.

[Dave]

viva fidel? no hugo, that's the ticket.

[Dave]

everyone needs to write in gg allin on thier ballots. can you still do that?

[Dave]

see what ya did SF, now i got gg on my brain. it's all your fault. you corrupted me with vile needs to throw feces.

[Dr.Doom]

dale, I see you've directed your comments to scott and JHK. I assume you're "through with me" but guess what?, I'm not through with you.

Regarding Hubbert's PO predictions, for the world he gave two scenarios based upon his estimates of ultimate recoverable reserves (URR). The lower one gave a peak at 1995, the higher one, at 2000. The global peak for conventional oil was 2005/6. He made his predictions in 1956. So, that's a 10% error too conservative on the high-URR date over a 50 year time span. And, he was the first to see it.

Let's compare that prediction with the "bold one" you've just made here, that oil prices will range between $90-150 per barrel in the next five years. Wow, dale, if we could only hold you to those prices five years out, but of course no one will have to wait nearly that long, huh? You're a genius, no doubt about it.

Besides, you miss the important point that JHK relates from Matt Simmons: there is an increasing concern about spot fuel shortages in 2008 and beyond. IOW, gasoline may become unavailable to some at any price. How will we muddle through that one?

The "rank nonsense" about predictions of societal response to PO and other pending disasters like GW is the essence of this blog. So you don't like it. So what? Don't let the door hit your butt on the way out.