The predicament that the USA finds itself will not be “solved” at the scale of operation that we’re accustomed to, and we should just stop wasting precious time and dwindling resources in the idle hope that it will be. The failure to recognize this dynamic is the most impressive part of the meltdown. The only thing that the federal government is likely to prove in the process is the ineffectiveness of its actions as applied to any of the raging current problems from the killing burden of hyper-debt to the brushfires of geopolitics. Congress will only make the health care system more complex. Both congress and President Obama will do everything possible to keep housing prices unaffordable — in a quixotic effort to protect the collateral of the big banks. Capital will continue to vanish in the black hole of default.

Something’s got to give in the remaining three months of 2009. My guess is that attention will shift overseas for a while. This will not be due, as many probably think, to a cynical effort by the government to divert attention from the financial fiasco, but because the intrinsic tensions in the Middle East are reaching the snapping point. Iran is being called out on its nuclear program. If, from the start, it had just maintained the need for electric generating power in the face of dwindling fossil fuel reserves, they might have gone unchallenged. As it happened, though, the elected leader of Iran made too many intemperate remarks about wiping other nations off the face of the earth, and this has only prompted the leaders of other nations to take his remarks at face value and presume that Iran’s nuclear program was devoted to armaments, not electric power generation.

So, now the USA has picked up the gauntlet. If Iran doesn’t act to demonstrate the de-activation of its bomb-making capacity, then the USA will try to impose sanctions depriving Iran of necessary imported supplies. (Iran actually imports gasoline, due to inadequate refineries.) For sanctions to be effective, support will be required by other nations, including Iran’s chief gasoline supplier, China. What a delicate calculus this will be! I rather imagine that China would not like to see the Middle East blow up. I’m not so sure about the nations of the Middle East though, or at least major parties in certain nations. The rulers of Saudi Arabia would probably enjoy seeing Iran get into big trouble, since Iran is Saudi Arabia’s most active antagonist, working tirelessly to destabilize the Kingdom. Al Qaeda interests dispersed in many nations would certainly cheer any mayhem. The Taliban would love anything that takes the spotlight off them in Afghanistan. The Russians are conflicted between the wish to enhance their own leverage in world affairs and their need to discipline Islamic maniacs along their own borders. Europe is probably scared to death of anything that might threaten their energy lifeline. Pakistan is too tormented to have a position, but its radical Islamist factions are probably on the side of disorder — as the best remedy for the status quo. If any of that spills over on India, as in the Mumbai bombing, then that flashpoint could turn to conflagration very quickly. We forget about Turkey, which was the hegemonic player in the region for centuries until its swift decline after 1914, but it has potent military capability and very mixed feelings about the the Jihad to ruin the West (since it is partly of the West). And finally there is Israel, the object of Iran’s intemperate public statements.

This is a dangerous situation. I’m not so sure that Israel could launch an effective attack on Iran’s nuclear infrastructure, but it might try anyway, especially if a US-backed sanctions effort fails to coalesce quickly. I’m not sure Israel would seek permission from the US to do this, though the US would certainly be tasked with defending the shipping lanes in the Persian Gulf. Iran might succeed in sinking more than a couple of US ships-of-the-line with sunburn missles and other toys, and this would lead to the bigger danger of oil supplies being choked off to the rest of the world. The US air response would be impressive, but possibly not effective against hardened targets. The leaders of Iran might exult even if the Iranian people were swept into a maelstrom. I imagine that what followed would be a very extravagant military frenzy amounting to World War Three, with European air forces and navies dragged in, with Hezbollah and Syria striking back at Israel, India and Pakistan possibly incinerating each other, and mayhem galore among the bystanders in Iraq, Egypt, Saudi Arabia, and Afghanistan. There could easily be internal mischief in the UK, France, and Germany from angry immigrant populations, and “sleepers” could work some overdue hoodoo in the USA. I don’t know what Turkey would do, but it could be the biggest beneficiary of a bad regional meltdown, providing the only effective governance what remains in the region. China and Japan would probably just gape at the spectacle in wonder and nausea from the sidelines as they saw their energy supplies for years-to-come go up in flames.

The G-20 nations would be crippled as global oil supplies were choked off indefinitely. And if anyone — Iran, or its friends inside the Kingdom — managed to pull off a stunt such as blowing up the Ras Tanura oil terminal — then a darkness will spread across places that were used to being lighted and they will stay dark a long time.

I don’t know if any of this will come to pass, but as I said, tensions have reached a breaking point, including the greater tensions of history, which seem to require periodic release no matter how poignant the Pete Seegar songs are. It is perhaps, just another prime symptom of “overshoot,” the world’s way of shedding some of the toxic organisms that are making it so unhappy — Gaia in a really bad mood.

If nothing develops along these lines on the geopolitical scene, the USA is still stuck in its predicament of trying desperately to maintain an overscaled living arrangement, with no coherent public discussion of downscaling, re-scaling, or re-arranging things. My guess is that this kind of restructuring only occurs when all other options have been exhausted. The last time the USA found itself in an intractable economic morass, World War Two came along and it made things all better here (after considerable sacrifice for us and catastrophe elsewhere). After World War Two, we ruled the world for a couple of generations. The outcome of World War Three would not be so favorable for us. At the very least, it would leave us attempting to run things on about one-quarter of the oil we’re used to. That does not suggest a seamless transition between how we behave now and how the future will require us to behave differently.

Regards,
James Howard Kunstler

October 6, 2009

Iran Fidgets in the Middle East: World War III Anybody? was originally featured on Whiskey and Gunpowder

Guaranty Bank in Texas became the 81st U.S. bank to fail this year. It was the 11th largest bank failure in U.S. history. This kind of thing is becoming so regular it is hardly news when it happens.

But what’s interesting to point out about this one is that the FDIC sold Guaranty to Banco Bilbao Vizcaya Argentaria of Spain. This is the first time regulators have sold a failed bank to a foreign lender. Such a turn of events would have been unthinkable only a decade ago.

So the world turns. When it comes to the question of who has the money, it’s often a non-U.S. buyer these days.

Speaking of foreign buyers, there is probably no group of buyers more watched and coveted than Chinese consumers. Recently, the Financial Times had a piece that highlights things the Chinese like to buy.

This is important because the Chinese are becoming increasingly affluent in large numbers. Total consumer spending was $1.7 trillion in 2007, compared to $12 trillion in the U.S. But that number is growing rapidly. The FT focused on the new rich. China now boasts more millionaires than the U.K. The rapid growth of this group has companies all over the world spending more money and time figuring out ways to get in their pockets.

So what do the affluent Chinese like? Outside of ordinary things like flashy cars and booze and quirky things like ivory and dried seahorses, one thing was mentioned in the FT piece that caught my eye: The Chinese love gold.

“China loves gold in all its forms,” the FT reports, “as a reserve currency, jewelry, an investment.” I’ve mentioned in the past about how the Chinese central bank doubled its holdings of gold this year, but it’s more widespread than that.

The rising middle class in China also buys a lot of gold. Since 2007, Chinese consumers have been the second largest purchasers of gold jewelry in the world, behind only India. The FT points out those gold sales were up 28% year over year in May. Total gold demand for the year was up 21%, to 400 million tonnes. There are not too many sales of any kind going up that much in this financial crisis, but there it is.

The financial crisis and weak stock market have helped gold as people look for a place to park some money. I think gold will remain a good place to be for some time yet. And gold stocks have the stars lined up for them. Many are reporting falling cash costs, yet the price of gold is staying up here in the $900s — and is likely headed much higher. That means gold stocks are reporting good increases in cash flow, among the few sectors to do so.

The Growth Is Overseas

As to the larger picture, I think trends in overseas markets should continue to be a focus, and I will keep on an eye on them. The U.S consumer is pretty well tapped out, finally. The growth is overseas.

Over the weekend, Barron’s featured a worthwhile interview with Chris Wood, the Hong Kong-based strategist for CLSA’s Asia-Pacific group. He’s been on top of some of the bigger-picture developments in Asia for years — sniffing out trouble in Thailand before the Asian crisis in 1997, for instance, and, more recently, giving early warning calls on the global troubles that would emerge after the U.S. mortgage market imploded.

What’s Wood’s take today? “The financial crisis in the Western world will lead to a long period of anemic growth,” he says. “From a global investor’s standpoint, Asia and the emerging markets stand out as a place to invest.”

When you look at some of the data rolling in, it is hard not to see it. For instance, earlier this year, oil consumption in the developing countries passed the top 30 (OECD) countries for the first time. There are now more cars sold on a monthly basis in the top 16 emerging markets than there are in the U.S., Japan and the EU combined.

More opportunities will emerge, as many of these markets are only in the early innings of the most commodity-intensive part of their development. As a result, we’ll see a lot more power plants, water treatment plants and the like built over time. Then there are the agricultural needs, not only to support population growth, but to support the boost in biofuels.

Biofuel Boom

Steven Johnston at AgCapita, a firm dedicated to investing in agriculture, put together a worthwhile newsletter. In the latest update, the group shows how biofuel production is on the rise:

This trend will surely continue, as most of the oil-producing countries have in place biofuel targets whereby they mandate that a certain amount of fuel must be biofuel. AgCapita’s own research indicated that the biofuel targets in the U.S., the EU, Canada, Japan, Brazil, India and China alone could require the use of over 400 million acres of arable land, or over 10% of the world’s total. This is in direct competition with food production and should have a significant effect on crop prices.

What a lot of people overlook is just how fertilizer-, water- and energy-intensive these biofuels are. So agriculture remains another attractive market to invest in right now in what otherwise looks like a time of tepid growth. That means opportunities in fertilizer stocks, grain handlers, farm equipment and farmland.

Have a good week, and I’ll write you again soon.

Regards,
Chris Mayer

September 2, 2009

What Chinese Money Buys: Gold Goes Green was originally featured on Whiskey and Gunpowder

The ADC uses its position as an Ecuadorian Non-Governmental Organization (NGO) to raise funds as a not-for-profit in the United States. With these funds, it pays for a widespread publicity network (including a Washington, D.C. public relations firm) that would never exist in the absence of well-meaning donors. This network publicizes over and over that Chevron is liable for damages of $27.3 billion.  But the claims have no basis in fact.

How could this situation arise?

It seems to me that the Ecuador suit may have begun with good legal intentions, but has gone badly off course. One possible scenario:

Texaco operated in Ecuador until the early 1990s.  By 1992, Texaco turned over all its operations to Petroecuador.  Then Texaco paid for and oversaw a cleanup of many of the oil pits, pursuant to its agreement with Petroecuador and the national government.

In 1993 Texaco got sued in US court over the Ecuador matter.  The ADC was formed at about the same time, probably not by coincidence.  To be accurate, in 1993 there were a lot of unremediated pits related to oil production in Ecuador.  There were many local concerns about what the long-term health issues would be.

Case Dismissed?  Not So Fast…

But in 1995-1998, Texaco cleaned up its share of the pits, pursuant to an agreement with Petroecuador and the Ecuadorean government.  The cleanup was good enough that new vegetation started to grow on these sites. Eventually, after a lot of legal haggling, the US court case was dismissed on grounds of forum non conveniens.  So what happened?  Plaintiffs filed a new case in Ecuador in 2003.

Then with the new case in Ecuador, the plaintiffs started learning some unpleasant truths—Texaco had done a pretty decent job of cleaning up the pits. There wasn’t any evidence linking Texaco-remediated sites to higher cancer rates, and tests for soil and water pollution kept coming up negative.

So what were the plaintiffs’ lawyers to do? Drop the case?  No way. They had the big troop of ADC folks, whom they had convinced of a huge problem. These ADC folks volunteered their time and contributed money to the cause.

Also by that time, the suit was in Ecuador where the court system was much looser (and has become more so over time).  Almost any allegation can be made in a lawsuit, no matter how scandalous.

When current President of Ecuador, Rafael Correa was elected in 2006, he made it clear that he was on the side of ADC.  Correa made it even easier for the plaintiffs to paint the story however they wanted, and to get the court to support them so that results came out as they wanted.  In his weekly radio program, Correa has talked about his support for the ADC and his solidarity with the Ecuadorian lawyers in this case.

The US trial lawyers in the case, and their Ecuadorean co-counsel, started embroidering on the truth, and found they could get away with it.

Instead of just trying to get back to where they would have been if the pits hadn’t been remediated, the lawyers decided to make a huge suit out of it — $27.3 billion instead of the original $1 billion. To get to such a large suit, a lot of embroidering on the truth was needed—including accusations that had little to do with the underlying facts.

Complicated Case

The nature of the case was so complicated that only a very few at the top of ADC understood how misstatements were being made. The rank and file of ADC, let alone the local citizens near the Ecuadorean oil operations, never knew the difference.

Most of the well-intentioned people who had volunteered their time and money to the ADC never figured out where the paths diverged. It seemed like such a “good cause,” and as the allegations increased, ADC donors became more and more convinced they were doing the right thing.

US Press Takes Sides – Against the Oil Company (Surprise!)

Almost all of the US press assumed that if an NGO was making the allegations, there must be some substance behind them. Certainly, an oil company can’t be believed in this day and age.

Once the story got started – including the catchy (but totally false) notion that Chevron caused an “Amazon Chernobyl” — it was easy to propagate.  More and more media were unwittingly drawn into what was pretty close to a multi-billion dollar scam.

The fact that the suit was in a foreign country and much of the evidence was in Spanish made it even easier to issue accusations as if there were substance behind them, and to pass off problems caused by the state-run oil company, Petroecuador, as problems caused by Chevron.

Examples of Baseless Allegations and Questionable Claims

1. Pits recently in use by Petroecuador are being passed off as showing damage caused by Texaco Petroleum prior to 1992.

Newspapers and magazines are peppered with photos such as this one from the Economist:

Looks terrible, huh?  Except that it’s not a Texaco pit.  It’s a pit from Petroecuador operations.  Whoops.  Wrong oil company.

When the ADC shows reporters pits at issue in the suit, it shows pits such as the one above with liquid oil in them. Any pit that still has liquid petroleum in it clearly has been in recent use (by Petroecuador), because the more volatile elements quickly evaporate in the heat of the Amazon, leaving a substance similar to asphalt.

Texaco has been completely out of the country since 1992.  So that means the pit shown in the photo is one that Petroecuador has been using. Trying to pass it off as Texaco’s responsibility is just plain fraudulent.

Texaco remediated 161 pits back in the 1990s.  These were Texaco’s responsibility under its agreement with Petroecuador and the government of Ecuador.  These old, remediated pits are undetectable to someone now looking at the sites, based on the ones I saw during a recent visit.

2. Water pollution that is either non-existent, or that is caused by current Petroecuador operations, is being passed off as the responsibility of Chevron.

The example of Texaco-caused water pollution that is now being offered to the press is that of “Mr. Salinas’ well.”  In the movie Crude and in a recent segment on the CBS News show, 60 Minutes,  Mr. Salinas indicates his well is polluted with petrochemicals, and that this has caused health problems.

One problem with this allegation is that if it is true, it could not possibly be the fault of Texaco. Mr. Salinas’ well was tested in 2005, as part of the official, court-sanctioned “Judicial Inspection” phase of the Ecuadorian trial. When it was tested in 2005, there was no petrochemical contamination as determined in tests performed by the plaintiffs and the defendants. So if there is petrochemical contamination of the well, it must have occurred after 2005 – and long after Texaco left Ecuador.

A May 11, 2009 article  in Terra Magazine talks about pollution of the well near Mr. Salinas’ house caused by a recent Petroecuador accident. If there was a problem with pollution at the time of the filming in early 2009, this recent Petroecuador accident would seem to be the likely cause.

La Nueva Casa de Senor Salinas

One thing that is strange about the whole story is that Mr. Salinas recently received a new house, as part of a program sponsored by ADC and the Ecuadorian government. As a condition of the grant, the house near the polluted well was to be torn down, because of the pollution.

Yet I had a chance to visit Mr. Salinas’ old house when I visited Ecuador in early June. Mr. Salinas has moved (presumably to his new house), but his old house has not been torn down. Instead, his daughter and her children were living in the house near the well. We could detect no sign of hydrocarbons in the well. In fact, Mr. Salinas’ daughter seemed to be washing clothes with the water, as shown in this photo I took. One wonders whether the extra house was some sort of bribe or payment, in return for testimony.

3. The truth is being stretched when it comes to health issues of people affected by petroleum pollution.

If there were huge numbers of individuals suffering from cancer as the result of petroleum pollution, it’s likely we would find them, and they’d be plaintiffs in this or other law suits. Yet when attorney Cristóbal Bonifaz (the lawyer who filed the initial suit in 1993) filed a suit in San Francisco in 2006 on behalf of nine Ecuadorian plaintiffs supposedly having cancer, three of the plaintiffs didn’t have cancer.  A US federal district court dismissed the case and sanctioned and fined Bonifaz.

The suit in Ecuador against Chevron also does not include the names of any individuals with cancer. Since the Ecuador suit doesn’t claim the particular individuals named in the suit have cancer, it isn’t necessary that any of the 48 named individuals have cancer.  But the lack of individuals with cancer is somewhat strange. When one looks at government statistics regarding cancer in Ecuador, cancer rates are lower in the area with oil extraction than they are in the nation’s capital of Quito.

A second approach to stretching the truth is a peer-reviewed paper whose data appears to have been doctored. The 2008 paper “Monitoring of DNA Damage in Individuals Exposed to Petroleum Hydrocarbons in Ecuador” by Cesar Paz-y-Mino et al. purports to show injuries from hydrocarbons. Yet, another paper with the same lead author from 2004 called “Chromosome and DNA damage analysis in individuals occupationally exposed to pesticides with relation to genetic polymorphism for CYP 1A1gene in Ecuador” has identical summary exhibits.

The likelihood of identical results in two supposedly “different” cohort  studies is virtually nil, especially since there were different numbers of subjects in the two studies. One can only conclude that results of the second study (the one regarding hydrocarbons) are incorrect—the second study really reflects the results of the earlier study on pesticides, but it was tossed into the pileup onto Chevron.

A third approach to stretching the truth is determining the incidence of illness by asking residents their recollections of illnesses of types that may or may not have anything to hydrocarbon pollution. Sewage water in the area is not treated prior to discharge into rivers, so there are a large number of illnesses related to bacterial contamination. Yet no attempt is made to distinguish between illnesses cause by bacterial contamination and illnesses caused by hydrocarbon exposure.

A fourth approach to overstating health issues is repeated mention of the possibility of benzene contamination (for example, here).  Benzene is known to cause cancer.  But in the lawsuit against Chevron, none of the test results submitted to the court show evidence of benzene contamination.

I could go on and on with many other baseless allegations and questionable claims. Some of these are given in a post I wrote earlier for The Oil Drum.

Why Am I Writing This Post?

The primary reason I am writing this post is that I am appalled at the level of journalistic investigation in the US. It is ridiculous that a case such as this one against Chevron can have so many baseless allegations repeated endlessly, without any attempt to discern the truth.

The fact is that I’m an energy-oriented blogger.  I work for nothing (or often, less than nothing).  Yet I’m the one investigating these issues, involving multi-billion dollar international claims that appear to be riddled with fraud.  It’s bizarre.

A second reason I am writing this is that I believe that current press treatment is manifestly unfair to Chevron.   There seems to be a belief today that oil companies are somehow “bad,” so it’s OK to treat them differently.

As far as I am concerned, with world oil shortages ahead, US oil companies will be ever more important to the US mix of energy needs. We are still far from the point where we can expect renewable energy systems suddenly to appear on the horizon and save the day, even if many people would like immediate salvation from them.

I’ll come right out and say that Chevron paid most (only most) of the cost of my trip to Ecuador to see the oil extraction sites.  But Chevron buying me an airline ticket, hotel lodging and a few meals has not influenced my independence of thinking. I’m just following the facts as I see them.

Actually, I came out financially behind on the trip to Ecuador, and risked physical harm, both from yellow fever (for which no vaccine was available) and from the people of the area—we were accompanied by armed guards on the trip.

Meanwhile, I do not own any shares of any oil company or any renewable energy company.  I have no opinion about the future financial prospects of Chevron, although I happen to believe that a company like Chevron is vital to the world’s future energy prospects.

I did not get any answers when I twice attempted to get information from the ADC. I do not see this as a huge disadvantage. The “ADC story” – supported by a slick, Washington, D.C. public relations firm — is told endlessly on the Internet and in much of the mainstream media.

But based on what I saw when I visited the site of the so-called “Amazon Chernobyl,” the ADC story is baseless.  The lawsuit is nothing but a world-class shakedown of Chevron.

Regards,
Gail Tverberg

July 15, 2009

A Baseless Lawsuit Against Chevron in Ecuador was originally featured on Whiskey and Gunpowder

Much of Brazil’s South Atlantic development will require drilling wells in waters up to two miles deep, through four-five miles of rock beneath the seabed. The prize at the end will be oil deposits with reserves estimated in the tens of billions of barrels. With access to this offshore bounty, Brazil expects to take its place among the first ranks of energy-producing nations in the world.

Brazil’s state-controlled national oil company (NOC), Petroleo Brasileiro SA (Petrobras) plans to spend over $175 billion in the next five years just on offshore development. The immense investment involves buying and building dozens of new drill ships and seagoing platforms, along with many dozens more support and servicing vessels. Petrobras will lay thousands of miles of pipelines on the seafloor, connecting massive complexes of subsea equipment that will sit atop hundreds of oil wells.

To finance much of this development, Brazil has turned to China. With the active support of the Chinese government, many Chinese banks are lining up to extend loans to Brazil’s energy sector. Right now, there is an agreement for a Chinese consortium to lend Petrobras $10 billion. In exchange, Petrobras will eventually ship 200,000 barrels of oil per day to Chinese refineries. There are more such long-term finance supply deals in the works.

The Chinese government has established strategic guidelines for its national firms. That is, the Chinese government has set goals for Chinese firms to supply China’s long-term needs for energy and other natural resources. The Chinese are looking well ahead into the rest of this century, and even into the 22nd century. They want to ensure their future access to a diverse global supply chain, as well as win entrée into resource-rich regions of the world for Chinese industries and support firms.

Why are the Chinese receiving such a warm welcome in Brazil? According to Sergio Gabrielli, CEO of Petrobras, “The U.S. has a problem. There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese.”

In other words, there is a new geopolitics of oil at work. In the olden days, it would have been large international oil companies (IOCs) like Exxon Mobil, Shell and BP walking into a room to meet with the Brazilians. The IOCs were the only game in town. They controlled the financing and the technology for large developments.

But today, the biggest deals begin with a political understanding at the top, hammered out between the highest levels of the respective governments. This top-down political deal making cuts out the IOCs, except where they have technical expertise that can be hired on a contract basis.

In essence, we are witnessing the end of the post-World War II economic construct of the world’s financial system. That construct always had a Western bias. But the 2008 crash of the Western business and financial model has changed everything. It has left a barren worldwide financial landscape for large development projects. Most traditional Western financing is simply not available for large projects. And as French author Francois Rabelais (1494-1553) once noted, “Nature abhors a vacuum.”

Thus has the Western financial crisis handed well-capitalized, government-backed Chinese banks and industrial firms an unmatched competitive advantage. With the traditional credit markets dry, Chinese banks have transformed into key lenders for the resource developments that will fuel the next generation of humanity. Indeed, for now, the Chinese are the world’s ONLY lenders for large resource development projects. See Brazil, Exhibit 1.

China’s Rare Earths Monopoly – All But Insurmountable

China’s support for Brazilian energy development is not the only angle that the Chinese government is pursuing for its future gain. China’s large reserves of foreign exchange, as well as its national strategic focus, has enabled incomparable – even insurmountable – progress for the Middle Kingdom to corner the world supply of substances called rare earths. Here’s the production chart for the past half century. Obviously, something is going on here.

Now that we’ve seen this chart, the questions arise: What are rare earths? And why are they important?

Rare earths are the 15 elements within the lanthanide series of the periodic table, plus the elements yttrium and scandium. The best known are lanthanum, cerium, neodymium, praseodymium, gadolinium, europium and samarium.

Here’s why rare earths are important. They’re used in a wide range of industrial and electronic applications. For many years, large amounts of lanthanum and cerium have been used in petroleum refining, with the result of increasing yields from each barrel of oil by about 10% while extending the life of other expensive catalysts like platinum. And rare earths find their way into myriad other applications, from aerospace super-alloys to rechargeable cell phone batteries.

More recently, large volumes of rare earths (especially neodymium) have gone into magnets. In fact, rare earths are a key component in strong, permanent magnets. It’s not those cute little refrigerator magnets; your computer contains a number of tiny magnets in its hard drive. If there are no permanent magnets, there are no computers. Or DVDs or DVRs or iPods, etc. Say farewell to your wired way of life.

And then there are the giant 1-ton magnets used in large windmill assemblies. Each windmill magnet is about the size of a car engine and uses 560 pounds of neodymium. The implication is that if the U.S. wants to erect windmills to generate electricity, the nation is making a long-term commitment to buy and use unprecedented amounts of neodymium. And there are NO substitutes. For just this one “clean energy” application, large amounts of rare earths – and the ores and mines to produce them – are essential.

There are many other clean-energy applications for rare earths as well, particularly in the now forming electric car industry. Neodymium magnets are key components in electric motors and regenerative braking systems used in hybrid vehicles. Without these magnets, no electric cars will ever roll off an assembly line, let alone whiz down an American highway.

Another significant demand for rare earths will come from large rechargeable batteries for electric cars. Nickel-metal hydride (NiMH) rechargeable batteries, for example, contain cerium and lanthanum in a form called “mischmetal.” And right now, NiMH batteries are the battery of choice for many hybrid vehicles. Overall, a typical hybrid electric vehicle can use about 50 pounds of rare earths – between the rechargeable battery pack, the permanent magnet motor and regenerative braking system. (Plus other tiny magnets for the sound system, power windows, power seats, windshield wipers, etc.)

So clearly, demand for rare earths is set to skyrocket. Just clean energy applications will drive unheralded demand for metals of which most investors – let alone consumers – have never heard.

It’s also important to keep in mind that almost none of the rare earths used in large power systems (like windmills) or electric vehicles (such as with NiMH batteries) are currently being recycled. The long lifetimes of the magnets and batteries, coupled with the lack of recycling technologies and dedicated facilities, means that any increase in supply can only come from new mining.

Another factor is that there appears to be an official Chinese policy to slow down export of rare earths. Chinese exports have decreased by 8% or so each of the past three years. Chinese suppliers have placed foreign customers on allocation, at reduced quantities from years past. The Chinese explain that they have closed mines for environmental reasons. Yet the Chinese also promise adequate supplies of rare earths if foreign users will move their industrial facilities into China.

According to Yoichi Sato, head of the Rare Earths Department of Japan’s Mitsui Industries, China is displaying its long-term strategy toward these critical elements. Mr. Sato believes that China is playing a complex game with the world’s rare earth consumers.

First, China is restricting rare earths exports, to provide its own high-tech industries with the chance to flourish and gain a competitive edge over rivals in Asia, Europe and the U.S. And second, it will force many foreign firms to move their high-tech factories and research centers to China to circumvent quotas. China, to be sure, has a small army of highly capable scientists and engineers who focus on rare earths applications – over 15,000 Ph.D.-level individuals, by one count.

Mitsui’s Mr. Sato believes that China will use its existing monopoly status in rare earths production to crush any competition that emerges. While about 42% of worldwide rare earths resources are outside China, there are NO non-Chinese sites with any significant processing or refining capacity. In the game of rare earths, China holds almost all of the cards.

Mr. Sato has stated, “Many people are looking at establishing alternative refineries and sources outside China, but the investment is not necessarily a sound one because of the threat of price revenge by China. If new projects emerge, as they have recently in Malaysia and Australia, China could just drop its prices and force rivals out of business.”

And as if on cue, in April 2009, Chinese firms used their financial muscle to buy large stakes in potential foreign rivals in Malaysia and Australia.

I hope that you now understand the importance of rare earths to the 21st-century economy of the West, particularly to the energy future of the U.S. I’m following this situation very closely. There ARE some potential investment opportunities in rare earths, but only in very small, thinly capitalized firms.

Until we meet again,
Byron King

June 12, 2009

Brazil’s National Commitment to Energy – Bankrolled by China was originally featured on Whiskey and Gunpowder

We are patriots. We have proudly served in our country’s military, have extended a helping hand to its public sector, and have plowed our entrepreneurial enterprise into its once fertile soil. We love America, but these days, America does not love us back. It takes without giving and squelches free enterprise. These days, America is no longer the land of the free, especially when it comes to the market.

Just look at the headlines, seemingly ripped from the pages of Atlas Shrugged: Unconscionably large bank bailouts. Punishing regulations and tax requirements. An arctic business climate. Government money bombs. Riots and protests. Slowing trade. Protectionist rhetoric. Demonized corporate executives. Even pirates hijacking cargo ships. One can guess what will happen next.

We predict the next several years will usher in larger, more obtrusive governments, resulting in a decline of personal liberty and financial privacy. The world will become increasingly polarized between two groups: those who consider government intervention a great idea, and the rest of us who happen to be sane.

As such, you can bet your last falling dollar on some absolute certainties: bank nationalization is a given, at least de facto if not de jure; taxes are going up on those of us with any money left; the Fed’s money blitzkriegs will spark a blaze of inflation; and financial privacy will be a thing of the past in the United States.

The obvious and necessary solution is to position one’s finances outside of the United States, and to do so now, while the narrow and finite window of opportunity is still open.

To be clear, evading (or even avoiding) taxes at this point is not a wise move, given the size and scope of the ever-growing IRS. But there are significant advantages to expatriating your capital now:

For starters, you will actually have control of your own money. Yes, in certain instances you’ll be obliged to tell the IRS exactly where it is and what you’re doing with it, but no government agency will have the authority to reach into your overseas pocket and freeze or expropriate (read: steal) on a whim just so Team Obama can give it away to pay for someone else’s McMansion.  Plus, when exchange controls are implemented and Americans are forbidden from wiring money overseas, your capital will already be secured in another jurisdiction, where you will be free to do what you want with it.

Secondly, you will no longer have to assume the risk of insolvent banks or go through the hassle of petitioning the government to get your FDIC insurance bailout. Many overseas banks are far better capitalized than those in the United States, and some of them are in jurisdictions with constitutionally protected banking privacy.

Lastly, and probably most importantly, moving money overseas gives you a last chance at diversifying out of the dollar, which, in a very short period of time, will barely be worth the paper on which it’s printed.

Bank and Brokerage Accounts

Opening a foreign bank or brokerage account is easier said than done; the United States government severely restricts where and under what terms you can open a bank account, invest in a fund, or engage in other economic activities that facilitate the protection of and access to your assets. As the signatory on an overseas account, you are required by law to inform the federal government on Treasury form TDF 90.22 by the end of June each year. Ostensibly, this has been done in the name of fighting money laundering, but it has the effect of severely restricting your freedom of financial movement.

Many foreign banks simply won’t work with you… don’t worry, it’s nothing personal. Uncle Sam has been beating them down since the Reagan years, and between Qualified Intermediary rules, tax treaties, and the USA PATRIOT Act, Sammy gives himself a lot of regulation to bury the opposition with.

There are some jurisdictions that are still excellent banking centers; Switzerland may have rolled over, but Panama, Uruguay, Singapore, and the United Arab Emirates have thus far ignored the call for “greater transparency” (read: government access to private finance).

Some individual banks, like Credicorp and Global Bank in Panama, or Banco Itau in Uruguay will not work with U.S. citizens anymore, but there is still opportunity with the hundreds of remaining banks in these jurisdictions.

Similarly, opening a foreign brokerage account is a shrewd move, not only to move your money overseas but also to have greater access to financial markets. Remember when world markets tanked on Martin Luther King Day 2008? If you were a U.S.-based investor and wanted to sell, sell, sell, you had to wait a full 24 hours until the markets opened after the holiday on Tuesday morning. If you had been invested with global depository shares through a foreign brokerage, you could have saved yourself several points and gotten out in time.

We would suggest looking at Saxo Bank in Denmark.

If you have gold, it would be highly beneficial to get it out of the U.S. – stat. If you do keep it in the U.S., your only truly reliable and private option is to store it yourself in a safe that you bury in your backyard.  Otherwise, move it out of the U.S. now before Team Obama pulls an FDR and takes your gold from you.

At the moment, gold is not considered a monetary instrument by the U.S. Customs and Border Patrol, so there is no legal requirement to declare your bullion upon leaving the United States. Some countries, like Taiwan and Uruguay, require you to declare gold in excess of a certain value to customs officials upon entry.

We recommend Panama, Austria, Switzerland, and the United Arab Emirates as locations to store bullion; one particular favorite is a location called Das Safe (www.dassafe.com) in Vienna where anonymous safes start at 400 euro/year.

Real Estate

It might sound counterintuitive after the subprime debacle, but real estate is a sound option for moving money outside of the United States; there are zero reporting requirements. It’s your business where you own property, and (so far) no one else’s. You can purchase property in a private way by setting up a corporate structure to hold the assets so that they’re not in your name (Panama is an excellent jurisdiction to set this up), and although there are many places with depressed real estate markets, there are also many with good growth potential: in Latin America, we would recommend Panama, Colombia, Uruguay, and Chile. In Europe: Slovakia, Albania, and Poland. In the rest of the world: Lebanon, Hainan Island (China), the Philippines, Cambodia, and New Zealand.

Time is of the essence – start looking for your safe haven now.

Regards,
Simon Black and Fitzroy McLean

April 3, 2009

Move Your Money Out of America and Soon was originally featured on Whiskey and Gunpowder

But what if it was the US that closed the Straits of Hormuz?  What would the world think if the US directly precipitated the end of ship traffic in the Straits, or at least severe restrictions on transit and passage?

Closing Hormuz?  We Almost Found Out…

Well, we almost found out last Friday, March 20.  That was when two US Navy ships collided during an otherwise routine transit through the Straits of Hormuz.  And one of the vessels was a nuclear-powered submarine, the USS Hartford (SSN-768).  Hartford is a Los Angeles-Class attack submarine.

In those dark hours of collision and confusion — and as is often his custom and courtesy — the god of the sea Poseidon favored the US Navy.  That is, we did not experience the catastrophe of a nuclear submarine sinking in the Straits of Hormuz. Now THAT would have altered the shipping and energy patterns of the world.

But one cannot but wonder “what if” in situations like this?  “What if” worse things had happened?  “What if” the worst occurred?  Remember the Russian submarine Kursk, which tragically sank in 2000 in the icy waters off northern Russia.

Here Is What We Know…

Early in the morning of March 20, submarine Hartford was transiting into the Persian Gulf through the Hormuz Straits.  Hartford was accompanying an amphibious surface ship, the USS New Orleans (LPD-18) which was making her first extended deployment.  Hartford was “submerged but near the surface” at the time of the collision, according to Navy officials.

For reasons not yet known, the two ships collided.  According to one report, submarine Hartford rolled 85-degrees to starboard.  The impact and rolling caused injuries to 15 Sailors onboard.  The bow planes and sail of the submerged Hartford ripped into the hull of New Orleans.

According to a Navy statement, the collision punched a 16-by-18 foot hole in the fuel tanks of New Orleans.  Two interior ballast tanks were also damaged, the statement said.  USS New Orleans lost about 25,000 gallons of diesel fuel, which rapidly dissipated in the ocean and could not be tracked after a few days.  There were no injuries to New Orleans crew of 360 or the embarked unit of 700 US Marines.

Nuclear-powered submarine Hartford was severely damaged.  Indeed, the submarine’s sail was torn from its mountings to the vessel’s pressure hull.  (See photos below, courtesy of US 5th Fleet.)  The submarine’s sail is clearly bent by several degrees to starboard.  It’s not part of the builder’s specs, that’s for sure.  Apparently, the submarine’s communication masts and periscope are warped and inoperable.  The watertight integrity of the pressure hull is suspect.  After the collision, Hartford transited on the surface to Bahrain, where the vessel tied up to a military pier.

“It’s important to point out that Hartford’s [nuclear] power plant was not affected in this at all,” said a Navy spokesperson.  Also, according to the Navy, “Despite the roll, engineering investigations have confirmed the propulsion plant of the submarine was unaffected by this collision. … However, Hartford sustained damage to its sail and periscope, as well as the port bow plane.”

Deployment Ending, Now for the Long Trek Home

According to a report in the latest issue of Navy Times, this is a “deployment ending” event for the USS Hartford.  The submarine cannot fulfill its combat mission.  The vessel must move to a nuclear-capable shipyard to undergo extensive repairs, costing “in the tens of millions of dollars” according to one source.  Coincidentally, USS Hartford ran aground in 2003 near La Maddalena, Italy, damaging its bottom and rudder.  Repairs then cost near $10 million and involved installing equipment that had to be cannibalized from another, decommissioned submarine.

In all likelihood, in its current state Hartford will be restricted from submerging.  So the question is how to bring the damaged vessel on a long, transoceanic trek back to the US for repairs.

The submarine may be able to transit back to a nuclear-capable shipyard in the US under her own power.  A voyage like that would have to be made entirely on the surface, due to the risks of submerging the damaged pressure hull.  Nothing is easy, however.  A surface transit would require extensive preparations and effort, to include armed Navy escort.

Sailing a damaged nuclear submarine from the Middle East to the US would likely require avoiding many of the busy sea-lanes of the Indian and Atlantic Oceans.  Just the fact of a damaged nuclear submarine re-transiting the Straits of Hormuz, on the surface and within sight of Iranian spotters, must give chills to US Navy planners.

Suez?  Or the Cape of Good Hope?

The shortest route home would involve transiting the Red Sea, Suez Canal and Mediterranean Sea.  But this is problematic, considering the public relations nightmare of a damaged US nuclear-powered vessel moving through busy seas adjacent to densely populated regions that are critical to world commerce.

Or Hartford could transit south around Africa, and sail around the Cape of Good Hope.

Doubtless, the South African Navy would take an interest in any southerly transit by USS Hartford.  South Africa has a fine, modern navy that includes three brand-new, German-built Type-209 diesel-electric submarines.  Indeed, the South African Navy Base at Simons Town — home-port to its Type-209s, relatively remote and very secure — might be a suitable locale for the US Navy to consider for logistic and/or emergency support.  However the South African government might also be concerned at the presence of a damaged nuclear vessel in or near its waters.  Last fall, the South African nuclear regulatory authorities waited until almost the last minute to give approval for a port call at Cape Town by the (undamaged) nuclear powered aircraft carrier, USS Theodore Roosevelt (CVN-71).

If Hartford does not sail home on her own, the US Navy would have to arrange a “lift” for Hartford.  This would entail placing and securing the 2,800-ton submarine on the flat deck of a large transport vessel, such as occurred with the USS Cole in 2000 after that ship was bombed while at anchor in port in Yemen.  But removing Hartford’s hull from the sea would also require jury-rigging a continuous means to pump seawater and cool the ship’s nuclear reactor.  Nothing like this has ever been done before.

Money, Assets, Favors, Political Capital – and Luck

Whatever happens, the damage to the USS Hartford is going to take much money, many Navy assets, and a lot of favors and political capital to fix.  We in the US are certainly not finished hearing about the USS Hartford, let alone paying for it.  Then again, we were very lucky.  For both our Navy and our country, it could have been much, much worse.

As a long-time student of both Naval history and disaster, I commend Poseidon that, once again, he has favored the US Navy — even in adversity — and that the Straits of Hormuz are still open.  Going forward, we had better absorb the lessons and not press our luck.

Whew…

Until we meet again,
Byron W. King

April 2, 2009

Closing the Straits of Hormuz and the Effects on Oil Prices was originally featured on Whiskey and Gunpowder

In fact, in the car coming off the very long flight from North America, with what felt like a brain-pan full of screaming weevils produced by jet-lag, I kept on wondering if I had somehow landed in LA by mistake, so similar was the palm-studded terrain and most of the objects deployed on it. After a day or so of brain rehab, the differences became more apparent.

I spent virtually all my time there in and around Johannesburg (”Joburg”) a world-class-sized city of nearly four million (in a sprawling metro area of over seven million). The official race segregation called “apartheid” was dismantled starting in 1990 by then-President F.W. de Klerk after several decades of struggle and resistance. With the population of about 50 million at roughly 80 percent black African, nine percent white, and the rest mostly Indian and Malay, South Africa’s first full-suffrage national election in 1994 yielded government to the African National Congress party (ANC) led by the long-time political prisoner Nelson Mandela. The casual observer must assume that the choice for white South Africa at that time was between accommodation and suicide.

A state of rather tense provisional accommodation has reigned since then. The most conspicuous feature visible to someone from the US was the huge numbers of black Africans everywhere, but especially those traipsing or waiting along the the secondary highways in a country with very poor public transit. It looked like some kind of refugee stream from a distant war zone, but I was assured that it was just the normal flow of daily life.

Along the same lines, the numbers of black Africans employed in service jobs absolutely everywhere is also impressive. Every cafe, restaurant, and commercial venue was bursting with redundant labor. Where in the US, you might see ten employees in a given bistro, in South Africa there were thirty. Caretakers, maids, yard-men, pool-men, door-men, parking valets, waiters, cooks, attendants of every kind worked constantly in the background of the still-economically dominant white culture. Laws require the redundant hiring, and it must function as a safety valve of income. Among these black service workers were huge numbers of security guards posted everywhere, overseeing the non-human security apparatus of gates, checkpoints, and electronic entry portals that define the fortified white world.

After apartheid fell, white business fled the large central business district of Joburg for the northern suburbs, establishing an alternative universe of drive-in offices, malls, and gated housing “estates” (what we call tract housing). Meanwhile, the skyscraper district — about the size of Denver’s — was abandoned for a while. Squatters moved into forty story towers, even after the elevators stopped working. Other buildings were just stripped of valuables like copper wire and fixtures. Now the downtown has been officially reinhabited and many of the former office towers have been refitted for apartments. But the elevators are still often broken and in 2007 a series of rolling electric blackouts made life miserable there. I had to wonder what the future of that place was, given how much it costs to really maintain a skyscraper over the long haul. My guess is that the decay must necessarily outpace the attempts at upkeep when these places are owned, in essence, by slumlords.

On-the-ground downtown, the streets were so clogged with people hurrying in chaotic flows along the sidewalks that the place took on the character of an immense termite mound. I was in a car — what else? — and was told it was not a good idea to go exploring on foot there. Much of South Africa’s notorious crime — number one worldwide in rapes and assaults per capita and second in murders — takes place in the center city. There is plenty of friction, too, between South African black nationals and black refugees from places in crisis like Zimbabwe who sift down there by the millions and compete for income. But in the social hierarchy, the center-city dwellers enjoy advantages less available to the dusty township slumdwellers of distant Soweto, southwest of the city.

Soweto was established first as a kind of barracks area for workers in the gold and diamond mines that run in a straight line for several hundred kilometers east-west across a geographic rift south of the city center. The topography is visible even from a car on the freeway, where the old gold-mine tailing heaps bigger than the pyramids of Egypt glisten in the sun along the rift line. Another feature that kind of defines the ambience of Soweto is the remains of the old cyanide factory — a chemical used in processing gold ore.

Today, Soweto has grown to an aggregation of about one million people living in various low-rise conditions ranging from vast districts of cardboard shacks and tin-roof shanties to what have evolved into streets of middle-class houses and even a few mansions. Up until the fall of apartheid, the government severely limited the amount of retail amenities that could be established in Soweto, so the inhabitants had to travel ten miles at a time to buy household goods. Probably the weirdest thing about the life of Johannesburg and its companion Soweto revolves around the abysmal lack of public transit.

Every day the denizens of Soweto fan out northward to work by means of taxi-cab. A gigantic system of metered cabs and mini-vans, many in desperate disrepair, driven with infamous recklessness, serves the metro area’s poorest citizens. A colossal taxi “park” (parking lot in our lingo) near the freeway entrance to Soweto’s closest-in township dispatches all these vehicles to another massive taxi park in downtown Joburg, with van or taxi connections at each end to take commuters further. This exercise consumes around four hours of misery every day, in traffic that almost always turns Joburg’s freeways into yet another a taxi park twice a day. Returning to Soweto after a day’s work, some people have to make two or three additional taxi connections to get home through the sprawling townships. Many cannot afford this and the shoulders of the connector highways off the freeway in Soweto were filled in late afternoon with streams of people heading home on foot, some burdened with bundles, some carrying things on their heads.

The sheer monetary expense of doing all this must be out of this world for people with not much to begin with. Somehow, the insanity of it has been established as “normal,” and there were few signs that the government — now black-majority, after all — was planning to rectify the situation. There are plans to run a new subway line across town, but at this point it is conceived mainly as a connector to the main airport. The South African rail system — like America’s — is completely inadequate, and the mandatory motoring program so deeply ingrained — and associated with the extremes of security and fortification — that no workable consensus for getting beyond the current situation can be formed. Otherwise, the government was getting ready to host the World Cup of Soccer this summer and was preoccupied with directing its planning resources to that.

The casual visitor can see a pretty clear gradient of social and economic hierarchy in the two parallel worlds of white and black South Africa. There is a cohort of educated urban blacks now established in business and the bureaucracy that obviously stand above those working in service jobs and those who are essentially bumpkins coming in from the countryside or the “bush” or from the failing nations to the north. Like any upper crust, the educated blacks in good jobs seal themselves off from the lower ranks — though politically, there is a pretense to identify with them. This black upper crust has only been in charge of things for a decade and a half. Obviously they have not yet been able to address problems like public transit yet, but it was unclear to me whether all the other categories of things there, from electric power to health services, were being managed capably.

There are as many political factions among the black majority as there might be in any sizable nation. Friction between them sometimes leads to violence. Corruption is not on the level of the infamous “kleptocracies” straddling the equator, but it is far from unknown. Right now, the nation awaits a national election coming up in April and the near-certainty that Jacob Zuma will be elected the new president. His ascent is widely dreaded by the white minority, who broadly regard him as a thug.

This white minority appears to carry on with the “normal” tasks of daily life not unlike what you would see in Europe and North America. But close to the surface you detect a resigned fatalism. Their old center has not held and things for them could fall apart at any time. The evacuations of whites that occurred with the shift to black-majority government in the 1990s have tailed down. I’m not even sure how conscious the whites are of their own base-line nervousness, though the multi-layered apparatus of security, with all the locks, gates, and video cameras speaks for itself.

The combination of the fortification mentality with compulsory motoring has left Johannesburg with a conspicuous scarcity of shared civic space. It’s hard to beat the USA for this, but South Africa has managed to. The architects and developers who designed the Melrose Arch project tried to supply something that was otherwise non-existent in the country and they did a very good job. All the classes of the various races were present there — whites, blacks, and Asians — sitting in the outdoor cafes, often at mixed tables, while the virtually all-black service class puttered and watched in the background. The nicely-scaled main square felt like the only tranquil, open, safe public gathering place in the entire metroplex. The health club down the street where I dropped in three times in a week reflected the mix of races, too, as did the offices and business establishments.

Melrose Arch was a brave experiment. Its development coincided time-wise with the more-or-less peaceful revolution out of minority rule starting in the 1990s. There have been some copycat wannabe spin-offs of it in other parts of the city, but nothing nearly as successful either as an economic venture or a civic amenity.

On the whole, you got the feeling that all the multicolored upper crusts of South Africa were largely tuned-out to some larger forces gathering to shake up their world — in particular the energy crisis that has moved off center-stage temporarily while banks and national economies flounder everywhere. The energy crisis will return. South Africa has coal and nuclear power, but not enough generating capacity to stay very far ahead of an ongoing shortage of electric power. They have a pretty robust coal-to-liquids program for helping to fuel all the cars — but they also import a lot of regular oil and are at the mercy of oil states elsewhere in Africa who resent them. The white minority seems to ignore the fact that their future hangs by the rather flimsy threads that hold together the combined motoring-and-security systems that protect them. The story there is hardly over.

On the way out, I had one of those experiences that bizarrely defines a place. I checked into the business-class lounge at the airport only to find that no toilet was available there. They just didn’t have any. I was sent outside down the concourse to find one. “It’s Africa,” the old expression goes.

Regards,
James Howard Kunstler

March 17, 2009

Side Trip to Soweto Sprawl was originally featured on Whiskey and Gunpowder

I’ll only venture to guess that we could see the start of serious inflation sometime in 2009. To some extent, all currencies are now free-falling together, some at slightly faster rates than others, but the situation of the US dollar is so grotesquely dire, and our structural imbalances so monumental, that it is hard to imagine that our currency will not win the international race to the bottom. Gold resumed its movement upward against the dollar a week before Christmas, and that may be an early sign. The government — and anyone badly in debt — benefits much more from inflation than deflation, so every effort will be made to avert the latter. The trouble lies in the government’s dumb incapacity to control dangerous things that it sets in motion, so that an inflationary campaign to avoid compressive deflation can so easily lead to a fiasco of super or hyper inflation — the kind that kills governments and turns societies into murderous monsters. I’ll forecast that the US dollar is worth 40 percent of its current value by next Christmas.

Geopolitics

Well, now, who the hell knows what’s in store. Aside from a few bombs here and there, and pirates skulking around the horn of Africa, the world scene was miraculously free of major incidents in 2008 — perhaps the worst being a toss up between the September Mumbai bombings and the fiasco in Georgia, where the US prompted Georgia President Mikheil Saakashvili to send troops into the South Ossetia region and the move was answered by overwhelming force from neighboring Russia, leaving the US looking feckless and retarded for our troubles. But otherwise, there wasn’t a whole lot of action out there.

Until the last few days of the year, that is. I’m sure the ever-growing cohort of American anti-Semites who send me emails will be tickled when I assert that the Hamas rocket attacks against Israel of recent days guaranteed a sharp response from Israel — and now, of course, Hamas is playing the crybaby card: “… what’d we do to deserve this…?” Well, you ******* fired a bunch rockets into Israel. Did you ever hear of cause-and-effect? This matter requires no further elucidation, except that it seems to suggest a ramping back up of hostilities. I wonder if it is the beginning of a new coordinated offensive by Islamic extremism aimed at taking advantage of the West’s current economic plight (and the West’s probable aversion to anything that will complicate its desired recovery). We’ll know in a month or so, I think, since any coordinated campaign (if such a thing were possible) might well be aimed at confounding the new American president.

The other hot corner of the world right now is the India-Pakistan border where the 60-year-old rivalry, which has already produced three wars, looks to be gearing up for yet another round. I’m not the first one to say that Pakistan is an extremely dangerous regional player, being an economic basket case, possessing a score or so of nuclear bombs, harboring more Islamic fundamentalist maniacs than any other place in the world, and having a government held together with duct tape and twine. The caper in Mumbai last September could well have been construed as an act of war, but somehow India kept its head. Who knows where this is going…

So far I have only described what is already obviously going on. Add to this the likelihood that Iran is closer to achieving membership in the atomic weapon club. They’ve been spinning their centrifuges all year and nobody has done anything about it. My guess is that neither the US nor Israel will attempt to take out their facilities in the year ahead. If Iran used a nuclear device against Israel, or anybody else, they would be asking to become, in turn, the world’s largest ashtray. End of story. A different story, though, is how Iran might behave if and when the US Military presence in Iraq is reduced. I can imagine Iran doing anything possible surreptitiously to gain control over Iraq’s southern oil regions around Basra, but even the Iraqi Shia don’t like the Iranian Shia that much. Anyway, Iran’s economy has suffered hugely from the fall in oil prices. That nation may be in for more internal trouble than they have seen in thirty years since the Shah was tossed out by the minions of Ayatollah Khomeini.

There’s been a lot of sentiment the past year that as the US and the Europe fall into economic disarray, China would emerge as the great new hegemonic superpower. While it’s come a long way in a quarter-century, China’s internal problems are still enormous and worsening. They’re in trouble with water, food imports, mass unemployment, and energy. They have locked in some oil contracts around the world, but they are still susceptible to vagaries in the oil markets and Black Swan events. As the US consumer economy falls into a coma, and the shipping containers from China to WalMart get sparser, the Chinese government will face the wrath of millions of unemployed workers. I believe they will struggle through 2009, perhaps growing more surly as the US dollar inflates and their holdings of treasury bills begins to look more like a swindle.

Russia may be suffering economically for the moment due to the crash of oil prices, but they are energy resource-rich — at least for the next couple of decades — and if they don’t like the current price, they can keep more of their oil in the ground until the price looks more attractive. I think Mr. Putin has the confidence of the Russian people and will survive the current malaise.

Japan remains a riddle wrapped in toasted nori. They’re beggaring their own factory workers to stay solvent. Their banking sector has been zombified for a generation. They import 95 percent of the energy they use. Do they have a plan? One can imagine them sliding in resignation back to something like the sixteenth century, giving up the whole industrial circus as more trouble than it’s worth, just as they once gave up on firearms.

The over-arching geopolitical theme of 2009 will be the end of robust globalism as we’ve known it for some time. Reduced trade, competition for energy resources, sore feelings over debts and currencies will drive the nations inward or, at least, direct their energies toward their own regions. Note to Tom Friedman: the world turned out to be round after all.

Conclusion

The big theme for 2009 economically will be contraction. The end of the cheap energy era will announce itself as the end of conventional “growth” and the shrinking back of activity, wealth, and populations. Contraction will come as a great shock to a world of conventionally programmed economists. They will toil and sweat to account for it, and they will probably be wrong. Unfortunately, this contraction will do its work in unpleasant ways, driving down standards of living, shearing away hopes and expectations for a particular life of comfort, and introducing disorder to so many of the systems we have depended on for so long. People will starve, lose their homes, lose incomes and status, and lose the security of living in peaceful societies. It will become clear that the Long Emergency is underway.

My hope for the year, at least for my own society, is that we will transition away from being a nation of complacent, distracted, over-fed clowns, to become a purposeful and responsible people willing to put their shoulders to the wheel to get some things done. My motto for the new year: “no more crybabies!”

Regards,
James Howard Kunstler

January 5, 2009

The Specter of Inflation: Forecasts 2009, Part III was originally featured on Whiskey and Gunpowder

Iceland is the poster-child du jour for this. The little island nation of about 320,000 souls (roughly half of Vermont’s population) lately grew a banking sector that thrived on something-for-nothing finance. In little more than a month, its banks have imploded like mini-death stars, leaving Iceland with a pariah currency. Since it has to import just about everything, and it suddenly finds itself unable to pay for imports, the people are stripping the grocery markets of whatever remains there now. You wonder what they will do in two weeks. Ten years from now there may be 32,000 of them left, subsisting on blubber sandwiches.

I exaggerate perhaps a little, but who really knows where all this leads? Here in the USA, the Treasury, enjoying new and seemingly limitless powers of discretionary spending, has begun shoveling dollars into every truck that backs up to the loading dock. The numbers are staggering. In ten days it’s reached into the trillions in loans and handouts. Most of this money is getting sucked directly into the black hole of debt and margin calls of one kind or another. This is previously-presumed wealth that is now un-presumed. It’s leaving the system, never to be seen again. One useful way of thinking about it is to regard it as our society’s previous borrowings against our own future. Thus, we are seeing our future vanish into a black hole — our future comfort, health, and basic nourishment.

This is the kind of fiasco that brings down governments, propels societies into revolutions, and starts wars. In a few months, America will be full of angry economic losers. We’re not the same nation that crowded around the old radio consoles for Franklin Roosevelt’s fireside chats. Back then, we were mostly a highly-disciplined, regimented, industrial society full of citizens who mostly did what they were told to do, and mostly trusted in authority. Today we’re a nation of tattooed barbarian “consumers” with no impulse control, a swollen sense of entitlement, ruled by a set of authorities ranging from one G.W. Bush to the grifter-billionaire pantheon of Wall Street CEOs — now heading into secret bunkers with their stashes of krugerrands, freeze-dried veal Milanese, and private security squads armed with XM-8 carbines.

I go along with Nassim Nicholas Taleb’s idea — read The Black Swan — that nobody really knows anything. We construct our narratives to try and explain circumstances that are unraveling non-linearly before us, and some narratives are more plausible than others, depending on your vantage point. There are infinite narratives. This is nothing more than my narrative. The circumstances we’re entering appear, for the moment, to take the shape of a compressive deflationary depression with the cherry-on-top add-on of a hyper-inflation further down the road — meaning initially that jobs, incomes, and pensions are lost, but that later on even the little money that people manage to get — perhaps mostly from government hand-outs of one kind or another — steadily loses its value. Every way you jigger things, it just ends up meaning the same thing: a much poorer society. It certainly won’t be a society of recreational shoppers plying the Target store aisles for scented candles and home accents. Hyperinflation could make old debts meaningless, but it would also make credit meaningless and spending absurd.

Given the way our society has evolved to operate — as an endless upward spiral of borrowings — you can see an awful lot of things not working anymore, and an awful lot of people not working in them or at them. Maybe the governments of the G-7 will get lending unstuck at the upper levels, but who, exactly, is able to borrow now besides companies on the verge of bankruptcy — and why continue to lend to them? (Except to maintain the pretense that “something is being done”). Besides, there’s much too much previously borrowed money that won’t ever paid back, and the “work-out” of all that debt only implies the continued distress sale of any-and-all assets — so that the USA in effect becomes yard-sale nation.

Personally, I think all the re-jiggering in the world of numbers and indexes will not solve anything, and really only represents a kind obsessive-compulsive neurosis related to numerology that will do nothing to readjust our daily activities toward the production of things that have real and enduring value. In my narrative, the fate of industrial nations really depends on energy resources. The price of oil may be going down for the moment — perhaps due to the de-leveraging of hedge funds, banks, and invested individuals, perhaps combined with a perception of “demand destruction” — but the geology and geopolitics of oil have not changed since June of this year when oil was at $147. Let’s say US oil consumption is down one million barrels of oil a day. Within the next two years, we’re liable to lose more than that in import declines from Mexico and Venezuela alone. The International Energy Agency’s latest estimate is for only slightly less of an increase in worldwide oil demand than was previously posted. It’s still a net demand increase. World oil consumption still exceeds world production now, perhaps permanently so. Finally, the current plunge of oil prices has suddenly halted the very capital ventures in exploration and development that were hoped to increase the worldwide supply of oil. All this portends an aggravation of oil supply and allocation problems in the five years ahead, and ultimately much more expensive, harder-to-get oil.

What we can’t face is the prospect that we might become something other than an industrial “consumer” society. My narrative includes the conviction that we will have trouble producing food for ourselves as petro-agriculture fails, and since society can’t go on without food production, I see this activity coming back much closer to the center of our daily lives. We’re not ready to think about that. The downside of our unreadiness may be that a lot of Americans will go hungry in the decade ahead.

None of this is an argument for despair, by the way, but it certainly invokes the need for steeply revised expectations and serious attention to a national “to-do” list. We’re on our way to becoming another nation, whether we like it or not. No amount of numerological augury or even hand-wringing will change that. The big question for, say the 24 months ahead is: how disorderly will we allow this transition to be?

Regards,
Jim Kunstler
October 16, 2008

Dwindling Resources Meet Vanishing Wealth was originally featured on Whiskey and Gunpowder

“After one of the worst days of trading on the Irish stock market, Ireland’s Government granted a sweeping unlimited guarantee on all bank deposits at its six main banks for the next two years,” reports The Times here in London.

“Brian Lenihan, Ireland’s finance minister, said he had taken the unprecedented action, which starts immediately, to maintain financial stability after Irish banks’ shares collapsed.”

Think of this €400 billion insurance ($560 billion) as a “competitive re-capitalization,” more akin than you might guess to those “competitive devaluations” that swept the world when global finance last suffered a Great Depression during the early 1930s.

Back then, national governments fought to squash the exchange-rate value of their own citizen’s money, bidding to grab export share and revive their home manufacturing.

Today, and not quite in contrast, national governments are fighting to squish the risk of collapse among their domestic savings and loans – the industry that now matters most — by pumping money into local banks and guaranteeing the security of cash savers.

The competitive bit? It comes in the cross-border flows that tax-funded bailouts invite.

“The Irish pledge to underwrite the country’s banking system triggered a flood of cash from British businesses to Irish banks,” a senior Irish stockbroker told The Irish Times in Dublin on Wednesday.

“A spokeswoman for the [U.K.] Post Office — where savings products are backed by the Bank of Ireland — said there had been an increase in customers since the Irish government’s announcement” that it now guarantees all €400 billion ($560 billion) of Ireland’s bank deposits, reports the BBC.

Smart move, you’ll agree. Monday saw the Irish Stock Exchange drop a massive 12.7 percent of its value in the market’s worst ever one-session plunge. Since guaranteed by the Taoiseach, the capital value of Anglo Irish Bank sank by almost one-half. But then, in poured the savings…and up went the ISEQ, jumping by 8 percent the next day.

“We just want the Irish government to look quite closely at the arrangements they are putting in place to make sure they comply with EU competition law,” said a British government spokesman on Wednesday. He picked his words as carefully as any man should before throwing stones inside his own glass-house.

The U.K. administration was the first to leap in and seize a failed bank when this global crisis first hit in September last year. Saving Northern Rock from itself, finance minister and Westminster-village idiot Alistair Darling also guaranteed the cash savings of every man, woman and child in the nation during what he laughably called the then “current instability in the financial markets.”

Not that the British nation has a great deal on deposit, of course. As I’ve noted before, private-sector debts now outweigh the sum total of all cash, bank savings and short-term near-money bonds in the U.K. economy (the M4 money supply) by a massive 43 percent. All too literally, the U.K. cannot pay what it owes; there simply aren’t enough pounds in the world, neither as paper or photons.

But no matter; because in the new global race to bail out biggest and better, government-backed banks provide just the security that frightened cash savers need. Hence the headlines in London.

“Banks protest at Northern Rock’s unfair advantage,” reported the Evening Standard in February. “Northern Rock rivals complain of unfair competition,” said The Times one month later. Now “Northern Rock cuts mortgage rates as rivals go up,” reports the Daily Mail. But why not? Cheap mortgages have been government policy since the Tech Stock Crash on both sides of the Anglo-Atlantic. Higher home-ownership rates became a target and tenet of faith just as much in Whitehall as it did in the White House.

And with interbank lending once again ground to a halt — but with the full weight of tax-payers’ funds stood behind them — what’s to stop Fannie, Freddie, Northern Rock and all the other government-owned lenders from dominating their markets…pumping out tax-funded loans at politically-friendly rates of interest?

Never mind the preferred stock owners in Asia and Arabia, now cursing their part in the $200 billion cash raising somehow pulled off by the world’s major banks between July 2007 and June 2008. Citigroup alone managed to raise $41.7 billion amid the frenzy of rights issues, so-called “hybrid” debt (it comes with equity-like rights and thus losses), and sovereign wealth fund injections. Its stock lost two-thirds of its value in the year to mid-summer.

But even after selling $130 billion of its assets over that time, Lehman Bros. still collapsed eight weeks later, taking a big chunk of the $8 billion in fresh capital it also raised from investors with it. Once bitten, and no doubt needing to recapitalize financial firms closer to home, all that Korean, Japanese and petro-fund money will now steer clear of Western banking investments for as long as it takes bankruptcy, bail-outs and state nationalization to stop trumping risk capital.

In the absence of new financing, then, let’s apply this week’s Irish Sea cash flows to the very big picture. For isn’t that movement of depositors’ cash the best Hank Paulson can hope for with his $700 billion bailout of Wall Street…assuring foreign capital that it’s safe to return to the States, if only as cash-on-deposit rather than equity, because Uncle Sam is underwriting the banks? Doesn’t that risk setting the whole world alight with Irish-style promises, all chasing the same depositors’ funds?

“Everyone knows that a policy of bailouts will increase their number,” as former St. Louis Fed president William Poole said in a speech of late 2006. Calamity Poole, however, was only thinking this moral hazard applied inside the domestic United States.

“Every [U.S.] company, financial or otherwise, knows that if it gets into trouble it is at least worth a major effort to attempt to secure a bailout because there is always a significant probability of success,” he explained, as if looking ahead (without seeing) to the $25 billion bail-out of Chrysler, Ford and GM.

The race to rescue, however, has spread far beyond Detroit. Competitive bailouts are now a globalized game, with taxpayers and savers both set to keep paying.

Regards,
Adrian Ash
October 2, 2008
BullionVault

Worldwide Bank Bailouts was originally featured on Whiskey and Gunpowder