Financial topics

[Gordo]

1) Coal - the often repeated 100 year supply has two major faults;at our current rate of coal consumption (which supplies about 45-48% of electric power generation) we have an estimated coal supply of 100 years, if we transfer transportation into the mix the number declines to something like 10 to 20 years.
This all depends on estimates of reserves which are estimates.

There's definitely a lot of guesswork, but it is estimated that we have 1700 billion tons, of which the experts say anywhere from 5 to 25% can be mined. Even if the demand for electricity from coal TRIPLED from current levels, we would have a 120 year supply if the 10% minable number were correct. We have plenty of time to move on to better, cleaner, renewable sources of energy.

4) Solar; the best solar cells have maybe 20% efficiency, that may improve to 40%, still only works in sunshine (and mostly) daytime.

5) Hydrogen is not a source of energy, it is a carrier (here on earth,apart from stars)

Combine the above two and what do you have? We could setup vast networks of thermal solar collectors that stretch over the ocean and convert salt water to hydrogen. Remember 71% of the planet is covered in water, a space we have barely begun to take advantage of. I'm not saying this is ready for prime time right now, but is it so hard to imagine it will be at some point over the next 20-40 years?

7)Tar sands and related projects have been on the books for almost 50 years (a pilot program dates back more) but wouldn't be economical for oil prices bellow $75/bbl. These are still estimated to be more than 25 years away from commercial viability.

25 years away from commercial viability?? You have no idea what you are talking about. Suncor is producing oil from Canadian tar sands RIGHT NOW and they have been for years. They produced 228,000 barrels per day in 2008 and expect to produce 300,000 barrels per day in 2009. Their cost per barrel is less than $35. They had $5 BILLION in profits over the last 2 years.

[mannfm11]

First of all guys, the way the government is going to create all this money is easy. They will buy all the crap out of the banking system. We think they are going to write a check for this stuff from an empty account or run it off like toilet paper. No, they are going to swap bonds for it. It might not be direct, but that was basically what the S&L bailout did. The banks are going to need assets to back their deposit liabilities and cash in the sense of currency is only good if the depositors are going to take their money home to their matress. Banks hate cash. When the government gets going, the game will be much easier. All the government needs is about $10 billion. They mail out the checks, the banks buy more bonds, the government gets the money and they mail out the checks again. They can do this over and over again. They aren't taking the deposits out of the accounts but because it is the equivalent of high powered money, it can buy bonds. Treasury debt is the money in the current banking system as far as what will convert. In a credit type system, this is easier done than imagined. But, there won't be much to lend to the public.

This could be inflationary, but it could also be deflationary. The problem is the entities and people that owe the banks are not the same entities and people that the banks owe. The banks assets are not liquid because they are of doubtful quality and because if they were to sell them to their depositors at FMV, the money supply would collapse. When you take your $100 and pay down on your banks IOU, there isn't an account in the back of the bank that says money. This is the hard thing to convey to most of the pea brains out there when I say that money really don't exist in the bank. balance sheets exist within the bank, but not money. To illustrate, let say a bank has a 10% net worth or lets say $100 million and assets of $1 billion and deposit liabilities of $900 million. Today, depositors all decide to pay off their cars and the amount to pay off their cars comes to $200 million. So, the banks books are now $800 million in assets, $700 milion in deposit liabilities and $100 million in capital reserves. But, didn't they just get $200 million? If they followed the rules of roughly 10% capital reserves, they would have to leave $70 million up. Thus, the most that could possibly be taken out of that bank was $30 million. It was $10 million before, so the $200 million they were just repaid disappeared. It disappeared. It was a book keeping entry where the bank was holding legal title to the depositors automobiles in return for acting as surety for $200 million in deposits.

Someone accuses the Fed of printing money. Some people talk of entries on balance sheets, but they forget that their house or the city they live in has tax authority over their property that are also entires on the balance sheet. The Fed creates nothing. The government goes into the banks. They acquire an asset called preferred stock with a 5% dividend. The banks get credit to take to the Fed, who exchanges that credit for bonds. In this case, it is actually the US that is acting as surety for the banks in return for 5%. The actual money is the preferred stock. Just print me a bank if that is printing money.

What would be printing money would be a situation where you give everyone credit cards and turn them loose on some kind of spending drug and they loot the malls. The determination long term as to what kind of inflation one gets out of this depends on if the shop holders hold onto their profits or if they get some of the spending drug and go spend it themselves. But, if money begins to pile up on a certain group of accounts and the rate of interest and CPI inflation begins to drop, this will then begin to result in asset price inflation, as these cash balances pile up and the holders start exchanging property. If you show the debtors how to borrow money and join the asset inflation game, as we witnessed in housing, you get a new asset bubble that is being used to consume and eventually a collapse in the capacity to service the debt that backs the bank deposits. The banks assets need to be liquidated against the deposits and the game start anew. Save for one thing. The early socialists in the FDR camp set up a system where the game can't be liquidated with the Fed and the FDIC. The only money that exists to pay the FDIC insurance is in the bank accounts. It is an absurdity. There are a lot of absurdities, like velocity of money. That is a fiction, as it is really nothing more than a ceasing for some reason of borrowing to spend. People with $1 million let it lie there in the bank and banks don't lend that money out except to other banks. What we call bank loans are guarantees of credit by a bank for additional funds. If the entire US read this post, there wouldn't be 1 person that could say they got a debit slip because the bank loaned out all their money or even a portion of it. No, they create an entirely new account with funds in it in addition to those already there. But, when the borrowers are all of doubtful quality and the rest of the people aren't exactly candidates to get in debt, this activity ceases and we deflate. There is really no sense having the system if the only solution is more absurd lending and more asset bubbles to implode.

[mannfm11]

The energy debate is interesting. There is a lot of Peak Oil talk being used, by those that don't know the history of oil around the world. I would venture that there has been more effort to restrain the production of oil around the world due to constant glut than the mining of about any mineral. After the artificial run up in prices in the 1970's, oil prices went into the cooler for 20 years and actually bottomed in the late 1990's. There was an estimated 600 billion recoverable barrels of oil in the world in 1975 from my recall. While we were in a bear market, consumption was around 65 to 70 million barrels per day or about 25 billion barrels a year. If you count the years between 1970 and 2009, I think you have 39 full years, which puts the total oil production for the period near 1 trillion barrels. See, we have already used every drop of it.

The truth of the matter is that 600 billion barrel reserve was here at a time when gas was so cheap a kid with a minimum wage job could own a gas guzzler and drive around in circles all night in it. There haven't been many large finds since then, not because they aren't out there as the Peak Oil guys say, but because the industry couldn't afford to find one if they did with the glut we have had for most of 3 decades and probably, save the WWII period, since the 1930's. I think oil supplies are going to surprise people.

The talk of coal is something else. I would bet we have 300 years of usable coal in the US. They used to claim a trillion tons and I know that might not all be minable, but I bet it goes a lot farther than 30 years. The oil I mentioned was a 30 year supply and that was 40 years ago. But, it is all beside the point. The world needs to get busy on something besides fossil fuels as an energy source. Hydrogen is nothing but a form of electricity storage and I believe should be considered as a storage medium for wind farms. I don't know much about producing hydrogen other than passing electricity through water. The biggest ideas about solar are about putting it in outerspace and some how or another beaming it with micro waves, which is beyond my financial brain capacity. i have felt atomic energy is probably a necessary source, as the risk of continually burning coal with all its by products, can't be any safer than the possibility of an atomic accident. In the meantime, the world needs to become more effective at using what they already have. i get the idea that this depression is going to increase energy efficiency significantly.

[mannfm11]

I kind of agree with Freddy on this crash idea John, but then again I agree with you too. Freddy is talking about a rally and I used to have a reputation of being able to call the Dow swings pretty well. This market should have either bounced by now and gone lower or started higher and is really unusual to say the least. As an Elliott pattern, I believe we should rally to 9600 and I like Freddy's Japan pattern, but I think it will be more severe. Thus, we could see a long grind down after this rally or we could see a crash. I do believe that much of the Japan decline was drawn out because of the brewing US bubble in the 1990's, which could provide enough cash flow to keep Japan going. There isn't legitimate consumer borrowing anywhere in the world right now and as long as they are attempting to reflate a bubble at this stage, there won't be any sustained anything for a long time. Maybe a blip, but nothing sustained. But, as for a crash, If I am counting Elliott correctly, we are only in wave 2 of a huge C wave or wave 3. The next down move is going to be the most powerful. Now, we went from 11,600 to 7800 in about 30 days, some 3800 points. For all practical purposes, that is a crash and the world hasn't really been the same since.

[John]

> I kind of agree with Freddy on this crash idea John

Do you have a historical example of this kind of scenario?

What makes you certain that there won't be a panic?

Sincerely,

John

[John]

> My grandfather always feared (and expected) something like the
> great depression to reoccur without knowing why. He was born in
> 1914 and recalled the experience to me when he was in his 50's and
> 60's, he would talk about in his 70's curiously, it really
> permanently changed him. He absolutely wouldn't use credit of any
> kind, he looked upon it like a Faustian deal. I wonder if we are
> going to be like that.

My mother was like that as well. Throughout my life, starting from
whenever I came home from college, whenever I saw her, she would ask
me if we're having or about to have a Depression. She never spent a
penny unless she had to. This crisis still has a long way to go, and
yes, the survivors are going to be just like your grandfather and my
mother.

Sincerely,

John

[MarshAviator]

Gordo,

25 years away from commercial viability?? You have no idea what you are talking about. Suncor is producing oil from Canadian tar sands RIGHT NOW and they have been for years. They produced 228,000 barrels per day in 2008 and expect to produce 300,000 barrels per day in 2009. Their cost per barrel is less than $35. They had $5 BILLION in profits over the last 2 years.

There is a good link on theoildrum about Suncor,
http://www.theoildrum.com/node/3839

I was going to do a little research, but they have done if for us.
The executive summary is that it requires huge amounts of natural gas and water both of which are increasingly in short supply, while profitable
it is highly unlikely to be scaled up from it's niche market.
300,000 bbl per day is (IEA global liquid /day production is 86.65 million/300,000 = 0.3462 % of global liquids) a fraction of a percent.
Total tar sands may according to estimates one day make up 3% of liquids (in 25 years).

There also are significant tax and other concessions by the Canadian government which are part of the mix.

The EROEI (Energy returned on energy invested a measure of practicality, most wells the number is orders of magnitude large,like 10,000:1 or more) is about 5:1 or something and it's really very much like strip mining as far as land damage, good thing Canada has large amounts of land
which can't be used for anything else.
There are also natural gas to liquids projects which are profitable as well.

Gordo, you are apparently quite an optimist and maybe a cornucopia(ist) as well.
Our disagreement is more a matter of just how practical the alternatives are, not that there are alternatives.
For our planet to really address the fossil fuel issue a real breakthrough is going to have take place.
I am in the trenches presently and see just how long these projects take and how much effort is needed to complete them.
It may make me a pessimist, although realist is a better label.

All jokes aside something as radical as ZPE (zero point energy) will be needed.
No one has a clue to how to harness it, but theoretically it is really free energy.
Who knows people in the 1800's could have imagined were we are now.

lastly we (both the US and the world) are going to try everything, we don't really have choice.
It should be an interesting ride.

[John]

To all:

I would like to warn people against the easy seduction of believing
that "the worst is over," that "there'll be nothing worse than long
recession" and that "there won't be a panic."

There is no possibility that any of these things are true. There is
no theoretical support for any of these views, and there are no
historical examples of these scenarios. The global economy is headed
for a massive black hole that will make all current discussions
irrelevant. Any belief otherwise is simply wishful thinking.

One of the things that are totally irrelevant is the discussion of
whether the government can "print" an unlimited amount of money for
bailouts and fiscal stimulus. There will be a generational panic and
crash that will change all the rules in a way that can't currently be
predicted.

Prior to the panic, there will be no need for the government to
"print" an unlimited amount of money, since the political paralysis in
Washington will prevent it from happening.

After the generational panic and crash, we can only guess what's
going to happen. My view is that the US dollar will be the only
island of stability remaining in the world, because of its use
throughout the world as a reserve currency. At least at first, it
will still be politically impossible to "print" an unlimited amount
of money, but that may change as the crisis begins to gather steam.

On the subject of the fiscal stimulus: It's possible, as Richard
Koo's theory states, that there won't even be any need to "print"
lots of money, since most of the fiscal expenditures will come back
to the government in the form of investments in Treasuries.

Perhaps someone who really understands the Treasuries market could
comment on what's going on today. From what I understand, money is
increasingly flooding into Treasuries already. This would be what
Koo said would happen.

On the subject of peak oil: I don't talk about this much because I
see it as a derived problem, not a central problem. There are
shortages of oil, and it may even be that "peak oil" in some sense
was reached last summer, until China's economy began to collapse.
But there are shortages of other things as well, and the shortage of
wheat has been far more significant.

The global financial crisis is already solving the oil shortage
problem for now, by cutting demand. And as the financial crisis
continues into a war crisis, oil will be a weapon of war, but peak oil
wil not be the problem. After the war kills of a couple of billion
people, peak oil won't be a problem for a long time.

Sincerely,

John

[Gordo]

To all:

I would like to warn people against the easy seduction of believing
that "the worst is over," that "there'll be nothing worse than long
recession" and that "there won't be a panic."

I pretty much agree with you John but just so everyone understands what you mean when you use the terms "panic", "crash", and "plunge" can you explain in detail what YOUR understanding of these terms are?

As a reference this is what investorwords has (which isn't specific at all by the way):
http://www.investorwords.com/3574/panic.html
http://www.investorwords.com/1190/crash.html
http://www.investorwords.com/3718/plunge.html

Plunge and crash have essentially the same definition but you got all upset when I equated them so your definition must be very specific. When you said a plunge was imminent, what exactly was your timeframe?

I do appreciate you describing what you call a "generational panic and crash":
"An elemental force of nature, where millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly try to sell everything in a mass panic. This will bring down computer systems for hours, perhaps even for a day or two, as people watch tv in glazed horror as their life savings disappear"

Not sure how what happened in '29 fits this scenario though. And by "computer systems" are you just talking about online brokerages? I can see that, many of them had trouble even during the '08 market dives (well at least brief disruptions of service lasting up to 15 minutes). This was much worse during the 2000 market plunges by the way. For what its worth, when computer systems crash in a market panic/crash, GET ON THE PHONE AND BUY. That's what I did in 2000 and I made a small fortune selling literally the next day on the after panic relief bounces.

Regarding panics - what I saw in the 50% '08 stock market dive last year certainly looked like a panic so I'd like to know why you think it wasn't one? I had a coworker literally go to the hospital because of a "panic attack" due to extreme worry about his investments (he also took all his money out at the bottom). A good friend liquidated his entire 401k (hundreds of thousands) on THE VERY DAY of the Oct '08 low. Masses of people were so paranoid that they briefly PAID the government to hold their money as short term treasury yields actually dipped below zero for the first time EVER. People were dumping tax free, high rated muni bonds for 60 cents on the dollar (I bought a bunch of them by the way, they are now back to par value already). What exactly do you expect to see in a "panic" by your understanding? We aren't going to have people lined up at banks to withdrawal funds in any sort of widespread manner because of FDIC insurance. A mad rush out of money markets and into treasuries with no or even negative returns already happened. I'm not saying we won't get MORE panics, but I'm just dying to know why you think what we just went though was NOT a panic...


Also in your latest article you say:

"price/earnings ratios (also called "valuations"), and this is the major factor analyzed by most automated stock buy/sell programs"

What is your source for this information because I don't believe its true. I happen to be good friends with a program trader at Merrill Lynch. How many program traders do you know? Do they really tell you that their programs are based on P/E ratios??

Prior to the panic, there will be no need for the government to
"print" an unlimited amount of money, since the political paralysis in
Washington will prevent it from happening.

Is there really political paralysis? Republicans are not going along with Democrats, but don't the Dems have enough votes to pass almost anything? The only thing they don't have is a filibuster proof majority, but do you think they will really need one? The current political wrangling seems like pure show to me...


Regarding inflation/deflation. Monetary VELOCITY has plummeted, this is equally as important as money supply in the inflation/deflation dynamic. It will be difficult if not impossible to have any serious lasting inflation in an environment with low monetary velocity, and government stimulus is not likely to improve velocity. The most I can envision is a temporary uptick in inflation that lasts for a short while (6-12 months). Remember that the financial markets are a DISCOUNTING mechanism. They have already priced in this uptick in inflation. The market isn't always right of course, but its the best guide we have.

After the generational panic and crash, we can only guess what's
going to happen. My view is that the US dollar will be the only
island of stability remaining in the world, because of its use
throughout the world as a reserve currency. At least at first, it
will still be politically impossible to "print" an unlimited amount
of money, but that may change as the crisis begins to gather steam.

Quite the contrary! BECAUSE the dollar is considered the "go to" currency in times of instability or panic, it makes it even EASIER for us to print money without immediate repercussions. This is exactly what we've been doing! This is how we can have $3 trillion in bailouts, deficits, and stimulus, all borrowed at extremely low rates and accompanied by a strong dollar. A plunging dollar (and rapidly rising treasury rates) would be necessary to END the massive printing of money.

On the subject of the fiscal stimulus: It's possible, as Richard
Koo's theory states, that there won't even be any need to "print"
lots of money, since most of the fiscal expenditures will come back
to the government in the form of investments in Treasuries.

Ugh! One more definition that needs clarification. The term printing money is often misunderstood. Its a figure of speech, not meant to be taken literally. The massive increase in treasuries = debt = printing money.

[John]

> I pretty much agree with you John but just so everyone understands
> what you mean when you use the terms "panic", "crash", and
> "plunge" can you explain in detail what YOUR understanding of
> these terms are?

> From the point of view of Generational Dynamics, if you go back
> through history, there are many small or regional recessions.
> But since the 1600s there have been only five major international
> financial crises: the 1637 Tulipomania bubble, the South Sea
> bubble of the 1710s-20s, the bankruptcy of the French monarchy in
> the 1789, the Panic of 1857, and the 1929 Wall Street crash.

> These are called "generational crashes" because they occur every
> 70-80 years, just as the generation of people who lived through
> the last one have all disappeared, and the younger generations
> have resumed the same dangerous credit securitization practices
> that led to the previous generational crash. After each of these
> generational crashes, the survivors impose new rules or laws to
> make sure that it never happens again. As soon as those survivors
> are dead, the new generations ignore the rules, thinking that
> they're just for "old people," and a new generational crash
> occurs.

> It's now been 79 years since the last generational panic and
> crash, so we're probably overdue for the next one.

> A generational crash is an elemental force of nature, like a
> tsunami.

> You'll have millions or even tens of millions of Boomers and
> Generation-Xers in countries around the world, never having seen
> anything like this before, not even believing it was possible, and
> in a state of total mass panic, trying to sell all at once.
> Computer systems will crash or will be clogged for hours, or
> perhaps even for a day or two. People who had hoped to get out
> just as the collapse is occurring will be totally screwed, and
> will lose everything. Brokers and other institutions will go
> bankrupt.

Sincerely,

John