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Black Swans, White
Knuckles |
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Everything is calm in the
markets...happy belated April Fools Day!
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Sink or swim? What happens
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Eric Fry, reporting from Laguna Beach, California…
Hip,
Hip Hooray!...The credit crisis has come and gone, according to all the
folks who never saw it coming in the first place. And the stock market
has bottomed, according to all the folks who never imagined it would
fall when it did.
But
that's not all… the housing market has found a floor, the economy has
stabilized, the corporate bond market has revived, "core" inflation has
moderated and the commodity markets have topped out. CNBC has told us
so. The rallying stock market, we are told, is clear evidence that "the
worst has passed."
We are
not so sure.
The
stock market certainly knows how to make a big splash, but that doesn't
mean it can swim. Since the end of February, the Dow has treated
investors to some magnificent one-day rallies. On three separate
occasions, the Dow delighted its admirers with dazzling 400-point
rallies. And yet, the high-profile index has gained absolutely no net
ground over this five week span. For the year-to-date, the Dow is still
nursing a 5% loss.
Rome
wasn't built in a day, of course. And neither will the pillars of
investment delusion rise in one day. But gradually, marble stones and
mortar construct a massive Coliseum, just like the Federal Reserve's
bailouts and press releases construct a massive deception. Is the
American financial sector genuinely healthier today than it was one week
ago or one month ago? Or does the financial sector merely seem healthier
because the Fed is bankrolling the Bear Stearns takeover and announcing
new bailout mechanisms and processes every couple of days.
To the
casual observer, the Fed seems to be making up the rules as it goes
along. Bernanke's only guiding rule is that there isn't one. But to be
fair, he's in the middle of a very big mess that he didn't make. So we
don't blame this Chairman for his behavior, we blame the last one.
Every
Churchill needs a Chamberlain, of course. And Bernanke has his
Greenspan. But this is where our metaphor breaks down. Bernanke is no
Churchill. Bernanke is not even a Volcker. He is a Greenspan with more
honesty and more facial hair…which is probably not enough of a
difference to restore lasting stability to the U.S. economy or its
struggling currency.
No,
dear investor, Rome wasn't built in a day. So neither should we expect
the stock market to inflict all of its bear-market damage in a single
day…or the Federal Reserve to destroy the U.S. dollar in a single day.
Big projects take time and the ongoing public works project to destroy
America's wealth will be no different.
The
nation's lending institutions are still reeling from the consequences of
their boneheaded speculations. So why should any investor believe that a
few upticks in the stock market will provide instant salvation?"The
world's biggest finance companies reported about $232 billion in credit
losses and writedowns since the start of 2007," Bloomberg news reports,
"[and they] may post $75 billion in markdowns in 2008."
Or
they may post $100 billion in markdowns…or $200 billion…or zero. No one
knows. And knowing that no one knows is knowledge enough to stay away
from the financial sector and to fear the stock market and to distrust
the dollar.
In the
column below, James Howard Kunstler mentions a few more things to worry
about…
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Black Swans, White Knuckles
By James Howard Kunstler
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 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 Banker Boyz getting
ready to air out their Hamptons 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.
Peak oil is for real. The supply can't keep up with global demand, even
if the U.S. portion of global demand dips a bit. And more portentous
sub-plots develop in the story every month. Export rates are falling at
a steeper rate than depletion rates. In other words, the countries with
all the oil aren't exporting as much of it. 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 crazy, 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.
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[Joel's Note: Here at the Rude Awakening, we encourage
you to do your own research, knuckle down and undertake your own due
diligence and then, after re-reading and committing to memory the entire
Rude archive, make your own investment decision.
Some
will scoff at our bullish stance on "tangible assets that sweat", as
Eric and Chris Mayer call them. Others will chortle at our bleak outlook
for the dollar. No matter. You can put your money where your mind is
either way.
Our
business partners over at EverBank have investment vehicles for you to
play both sides of the coin, as it were. Here are just a couple:
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Commodity Index CD : Available in 3- and 6-month terms,
this nifty little CD is comprised of 4 currencies from commodity-based
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There.
Now when you make or lose a bundle, you can write in to rub our faces in
your new found cash...or flatter us with praise. Both of these CDs have
their own particular terms and conditions, so take a good look at each
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Until
tomorrow...
Cheers,
Joel Bowman
Rude Awakening
aussiejoel@the-rude-awakening.com |
