Black SwaNS Everywhere

     After a one-day reprieve from total meltdown in the financial markets, news media cheerleaders for the most reckless gang of bankers in world history declared the crisis over on Good Friday (with the markets safely closed). Whew, that's a relief. Problem solved. And just in time for baseball season, too, so none of the Banker Boyz have to sell their sky box leases.  

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke

 

      What is meant by "meltdown," by the way, since the word is used so promiscuously by myself and others. I'd define it as the shock of recognition that many big institutions are worse than flat broke and are therefore powerless to conduct normal operations. By "worse than flat broke" I mean they are so deep in hock that all the accountants who ever lived, in the life of this universe and several others like it, using the fastest parallel processing computers ever built, could not keep up with their compounding accelerating losses (now approaching the speed of light).

      The current vacation from reality on Wall Street may last a few more days, or even a couple weeks, but it seems as though a whole flock of black swan events is circling the sky over Financial-land and is about to blot out the sun. By black swan, I refer to the concept popularized by Nassim Nicholas Taleb in his recent book of that name, namely unexpected events of  great power that tend to change the course of history.
     For the moment, with the crisis "contained," and the Boyz getting ready to air out their Hampton villas for the coming season, we are once again primed to be blindsided by potent random events that nobody saw coming. The trouble is, there are enough potent potential fiascos already visible on the horizon.

      The mortgage fiasco is still just gathering steam as it moves from the non-payment stage to the default and repossession level on the grand scale. Even the political wish to bail out feckless mortgage holders will stumble on the mammoth clerical task of administrating the process, especially since we've barely begun to sort out who actually holds the mortgages after they've been minced into a fine mirepoix of securities off-loaded onto countless dupe "investors" ranging from municipal funds in obscure corners of foreign nations to countless public employee retirement plans.

     No matter how the authorities try to "nationalize" the sucking chest wound of bad mortgages, the body of finance will flat-line -- and the American public will get stuck with the bill from the intensive care unit. Those who, for some weird reason, continue to pay their way and meet their obligations, will be none too pleased to pay for misdeeds of the deadbeats and their banker-lenders. This portends a taxpayer rebellion, which may translate into a voter rebellion.

      It's too bad the current presidential candidates have been unable to address the unfolding economic nightmare. Their collective silence on the matter suggests that they don't have a clue what to say about it. As the nightmare plays out and black swans flock in to blot out the sun, and the hedge funds come a'tumbling down, and more big banks blunder into black holes, and businesses big and small across the land shutter up their operations, and the unemployment rolls swell, and families are thrown out of their houses even when bailouts are supposed to be saving them (but the bureaucracy can't get the paperwork done in time) -- well now, they are going to be one pissed off bunch of people. What will they do at the conventions? Our outside the conventions?

      In the deeper background of all this is the all-important oil story that nobody in politics or the media wants to pay attention to. Notice that in the fervid unloading of assets this past week, as investors dumped their positions in the commodities markets, the price of oil remained stubbornly above $100-a-barrel when it was all over on Thursday afternoon. Well, maybe they'll ratchet down a little further this week, but the trend line will prove to continue remorselessly upward in the months ahead.

      Peak oil is for real. The supply can't keep up with global demand, even if it dips in the USA. And more portentous sub-plots develop in the story every month. Export rates are falling at a steeper rate than depletion rates. The exporting nations are not only buying more cars and running more air-conditioners, they also need to use more energy to lift the oil they've got out of the ground.

      Another sub-plot is the fact that the equipment used world-wide to drill for oil and recover oil and move oil around the planet -- all that equipment is now so old and rusty that it can barely do the job, and it is going to start failing altogether unless investments are made to replace it, which nobody is making.

   By the way, Americans blame the familiar private oil companies for all the trouble with oil in their lives -- Exxon-Mobil, Shell, et al -- but they don't seem to know that oil nationalism is in the driver's seat now. The old private "majors" are only producing five percent of the world's oil. The rest is coming from the national companies -- Aramco, Petrobras, Pemex, et blah blah -- and the very operations of the oil markets are entering a phase of radical instability as they move away from auctioning their stuff on the futures markets and start making long-term favored customer contracts instead.

      The bottom line is that high prices for oil is hardly the only thing America has to worry about. Pretty soon the US will have to worry about getting the oil at any price -- meaning, we're in for shortages and supply disruptions sooner rather than later.

      Also unbeknownst to most of America, the financial markets reflect all this instability around the basic resource of oil because industrial economies like ours are set up in such a way that they can't run without cheap and reliable supplies of the stuff. So the least little twitter in the reality-based world of peak oil means that everything to do with money and capital investment will naturally go batshit, since our expectations for increased wealth -- i.e. "growth" -- are predicated on the activities driven by oil.

     It will be interesting to see what new machinations are unveiled this week. Whatever else this catastrophe is, it's a good show from the cheap seats.

Comments

[Johnny Rico]

Hopefully more people will actually read this book now that Jim has mentioned it. There is something of a paradox here with Jim's use of the term. Most of these black swans seem to have been quite "expected" according to the regular readership here. We might do well to call them grey swans.

Certainly the high probability of many of these events was 100% apparent as early as last July. A Black Swan usually comes as a surprise and is virtually unpredictable. Quite a difference from what we see now. Unless CFN is a stand-in for Taleb's "Lebanese taxi-driver."

[Nudge]

Cool, a surprise Saturday post. Great stuff as usual, Jim :)

The proles here in the UPL are most definitely blaming the “greedy oil companies” for everything from high grocery prices to not getting a good night's sleep last night (no doubt from being worried about how to keep that Yukon Denali fueled up enough for the 20 trips to the mall this coming week) to global warming. At all levels, 'murikans seem eerily disconnected from the reality of the effects of their own stupid choices.

Got popcorn? Hi JR :)

[Johnny Rico]

Hey Nudge :)

Big rig drivers slow down to save fuel:
http://www.msnbc.msn.com/id/23757347/
(well, it's about freakin time)

From NNT's website that JHK linked to:
Rome, Sep 29, 2006 – I’ve been getting plenty of emails about a recent Black Swan victim, Amaranth, but did not follow the news –I despise too many perishable information providers (note that I prefer to discuss events before they take place, not after, as FBR presents the classical script such event). It always feels sad to see someone fall into a ravine, particularly when you know him. Out of curiosity I just read the script of the conference call:

“We viewed the probability of market movements such as those that took place in September as highly remote, and our energy risk models correspondingly discount the Funds’ exposures to the losses associated with such scenarios. (...) But sometimes, even the highly improbable happens. That is what happened in September.”

(Amaranth was the Hedge fund that blew up in Sept 2006 trading hybrid Natural Gas derivatives)

[scott]

"Big rig drivers slow down to save fuel:"

Yeah, I could have mentioned that. Most of the big companies already had governed speeds of 70 or less and many have reduced that. The company I just hired on with just cut back from 68 to 65. The company I worked for before gave me a "rooster cruiser" with chicken lights governed at 76 and thats how fast I would go whenever possible since I get paid by the mile.

They also just put an $8,000 APU on it so I don't have to idle.

http://fleetowner.com/news/carrier_confortpro_apu_mats_032306/

[Nudge]

Scott, I'm still baffled and a little disappointed to see vehicle makers not adopting Honda's version of the “displacement on demand” concept. They called it stratified-charge lean burning .. basically just part of the cylinder volume is used, the area right near the spark plug. This lets the air/fuel ratio go up into the 20s, which is why the Insight can idle about 7 hours per gallon of fuel. It gets wacky mpg numbers when going at cruising speed on flat level ground during warm weather. Above 100mpg is normal.

The wind wash from the big rigs is something else when they blow past the Insight, but then, I'm probably asking for it by not going over 60mph unless gravity is pulling the thing down a hill.

[politickybitch]

Jim,

I would love to hear what you have to say about water?
http://en.wikipedia.org/wiki/Ogallala_Aquifer

[scott]

Ethanol utilizes alot of water hmmm...

[gilda]

How about euthanol?

[scott]

Nudge, I can't figure out why GM and Ford are consistently behind the curve on higher fuel costs. Even if they don't accept PO, and obviously they don't, high oil prices are cyclical and how they can be so consistently behind the curve on high oil prices IS baffling. Remember the 70's when Japanese automakers first started taking big chunks of their market share because they did not have a saleable efficient vehicle?

The Pinto, Chevette, etc. were all plagued with problems and the Japanese had reliable cars that got good fuel mileage.

[Nudge]

Scott, if you read the GM blogs (yes, they have one, it's called Fastlane or something like that) you'll hear a lot of hot air wasted on people who think that vehicles have got to be big and clunky to have “value”. Ford & GM seem not to appreciate the by-now-obvious fact that they'll go under if all they offer are giant gas-guzzlers that get horrible mileage.

The Insight is 1990s technology. There's no reason why Ford couldn't lease the design from Honda, make the car here in the States, and keep a bunch of auto workers gainfully employed. Folks will be screaming for efficient vehicles anyway once fuel prices move into that permanently high plateau. This focus on SUVs, and nothing but SUVs, is incredibly myopic of the UPL's automakers. Part of me wants them to choke on it for being so effing out of touch, but I'd rather just see them retool from SUVs to fuel-efficient little cars. It could be a win/win thing if done right.

I don't put much credence in the conspiracy theories about Detroit and Big Oil being in bed .. this mess can better be attributed to sheer stupidity and inflexibility.

[tipping point]

JHK sounds more fired up than usual. Does this spell doom, or considering his track record for predicting certain catastrophe, does this mean we should all lean the other way and party like it's 1929?

[Dr.Doom]

tipping, I don't think I'd be betting for prosperity-just-around-the-corner just yet. First, it sounds too Hooverish. Second, there have been too many close calls recently, and the one last week was a bit nerve racking. Maybe it's just being Clusterfuck Aware, but when you see TPTB celebrate over a heroic(?) rescue like that one, where is the comfort that all is well, mission accomplished, civilization saved?

There was an interesting topic raised in last week's thread (earlier this week) about the time and energy/capital needed for a switch to CTL (Coal to Liquids) and, I'll add, more nuclear power. Lots of talk now, but not too much action. The big question: is there sufficient time and energy/capital remaining for such investments? There is a fossil fuel platform (FFP), as mentioned in JHK's LE book, and with time this FFP is going to receed. It may look uncertain even now, but it will most assuridly be dropping in the future. Once enough of the planners grasp that notion, the response will either be a grab for what remains or resignation en masse to enduring a slow decline in most/all options that were once viable, but had FFP time stamps. How much time do we have left to plan, and when does the old free-market system transform into exclusive, bilateral agreements for oil and gas? If denied access, does the Empire use it's awesome military might to secure it?

What would Caesar do?

[Dr.Doom]

So, in sum: TPTB no OK. Maybe no JHK's FFP for CTL and Nukes = SNAFU.

[thal]

Caesar would go after his number one problem, Pompey, ultimately attempting to bring him back on board as "old friend" for the good of the "republic" or whatever resemblance that still held in truth.

Never underestimate the inertia of what current "works" even if it proves to be dysfunctional in hindsight.

The world we've always known is, quite simply, dying.

[asoka]

Jim,

Great column this week. I love the "technical" definitions of "meltdown" and "worse than flat broke".

But I think you underestimate the capacity of a media narcoticized population to continue its inertia and apathy regardless of external events. Lack of oil to run cars will not affect them. Shortages of oil will not affect them. Continued over $100 a barrel oil will not affect them.

They are already pissed off at the USA but there is no voter rebellion. Bush the third in the form of McCain is in the wings and the national polls have him leading Obama.

The only thing I see, the only possible event I see, which would cause real consternation would be if the USA begins to have an electricity supply similar to what Baghdad has after five years of USA liberation: a few hours a day in many parts of Iraq.

The lack of electricity would affect the media narcoticized populace who would now not be entertained by cable TV, computer games, internet, etc. And THAT would cause voter rebellion.

But by then, (assuming elections go to the Republicans or are cancelled because of a convenient false flag terrorist attack), the Halliburton prepared concentration camps will be ready and the Presidential National Security Directive can be invoked and anyone who dares protest can be renditioned and never heard from again. (Didn't Pinochet just take them out over the ocean and dump them, letting the ocean become the watery grave for thousands and thousands of dissidents?)

I think we are three to four years from that happening, and although things will be worse, the ruling powers will manage to maintain control. The USA military machine (700 bases around the globe) will continue until the last drop of oil is gone.

Cheers!

[tipping point]

My post was somewhat tongue-in-cheek. Krugman in NYT did an Op-ed last week re 1929. My point, however circuitous, is that the next few weeks aren't going to be the "final straw" though JHK might predict/hope(?) so. The second great Depression could very well be beginning but I would never base an assumption like that on the word of Mr. Kunstler.

[thal]

I've been looking at my passport and wonder what the big deal is about. Yeah, my name, DOB, a shitty picture, the county and state of application. Maybe, I wrote something else down that lives off paper, but what could that be? Is this just silliness, or distraction to no end?

[asoka]

As long as you don't try to go anywhere in an airplane you shouldn't have any problem.

If your passport was tampered in such a way that your name appeared as being on a "watch list", then when you present your passport you could have problems getting onto an airplane. Doesn't sound like silliness to me. Most of us don't have any recourse as to why our names appear on no-fly lists or have any power to have them changed. Same with our passport data apparently. We don't seem to have much privacy anymore and fewer and fewer civil liberties as the days go by.

Cheers!

[thal]

My god, tipping, why would anyone elevate theses (from whomever) to the status of prognostication?

JHK's done us all a tremendous service to paint a potential outcome. The inputs to his arguments are basic, and true. Another thinker (and clearly, in that regard, he is quite good) would craft (not a perjorative word at all) another potential outcome. Do you think I care if he ends up "correct" or not?

He did his best. The Long Emergency stands as seminal in presentation and craft (at least it worked that way for me). At the end of the day, you have to think for yourself, as must we all.

[tipping point]

But thal, JHK prognosticates every week. We don't hold him to it as we are true blue CFN believers.

'salright ;) If JHK can't tell us what the future will be like, FAR can.

[UncleYarra]

Nudge,

Stratified charge, whilst being very old technology*, and certainly refined by the Japanese still has no use in diesel engines i.e. trucks.

The stoichometric ratio in diesel engines is a moot point as they cannot detonate (one of the reasons stratified charge is so useful in spark-ignition engines). No fuel is present in a compression ignition engine's cylinder until it is full of air compressed & hot enough to combust with the fuel - then injection occurs.

Having said that, I don't know why more two-stroke diesels are not used in truck fleets.

*look up Rolls-Royce Crecy engine

[UncleYarra]

BTW Nudge,
Seems like the Easter bunny is using magic octane dust in the eggs he makes, as the petrol this weekend is making the 'ute ping.
Glad I only bought a few litres - even the stale stuff I had spare in the shed ran better.

[thal]

I'd only say he COMMENTS every week, and as JR suggests, if sometimes right, he's terrible at prognostication of the week to come. Track record, and all that.

In spite of my objections, the point you express stands...FAR might.

[thal]

gotta admit, the image of swans (of any color) blotting out the sun is poetry.

[asoka]

Thal,

Let's do a thought experiment. Let's pretend someone peeks at your passport data and get information like your name, citizenship, age, Social Security number, place of birth, etc. Then they steal your identity and you spend a year or more writing to agencies and businesses trying to get your credit rating back and prove you really didn't do the things you are suddenly accused of doing. Definitely not silliness. More like a pain in the ass.