We just had a week in the 70s, with more to come. The grass went from ochre to bright green in about thirty-six hours. The buds are popping like mad. This is usually what the first week of May is like around here, and that fact alone may explain New York state’s relentless population drain over the past forty years.

I was out on my bicycle, naturally, taking it all in — like, why sit inside and sulk because the weather is strange in a pleasant way? — and I ventured into the outlands east of town, where an impressive number of gigantic new houses had landed like alien mother-ships in the former cow pastures and wood lots. Of course, the aesthetics were an issue apart from the socio-economics of it, but nonetheless interesting.

Each new, gigantic house seemed the result of a losing struggle to reinvent basic design principles that did not require re-invention. I doubt the spirit of joyous “creativity” among the star-architects has seeped down to the level of the provincial house-builders, who, after all, are just assemblers of modular materials like dimensional lumber and eight-foot sheet-rock. It’s their inability to assemble these parts coherently that’s really striking, so what you get is an endless variety of mistakes along with a complete absence of anything done really well — which may be the essence of what the “diversity” craze has really meant to us, the ethos of current times.

The abiding quality of all these houses was grandiosity (by which I do not mean grand-ness). That, too, is a signature of these times in America — the nation too big to fail and tragically destined to do just that on account of its too big to fail-ness. And, of course, one could not fail to wonder, cruising by these hideously ponderous houses, whether as a matter of fact they were failing in terms of the owners’ ability to keep up with the payments, for instance. One after another, I pictured a husband and wife within sitting in the sunny breakfast room on Easter morning humped in tears as they sorted through stacks of bills and bank statements… and I imagined the yellow foreclosure tape a few weeks hence atop the weird split-block portico treatments and misbegotten arrays of concrete balusters, and the colossal Palladianesque windows with their pathetic snap-in muntins (and the fantastic solar heat-gain, not figured-in by the designer-builder, that would turn the lawyer-foyer into something like a crematorium by two p.m.)… and the pension fund in Wisconsin or Norway that was sitting on the booby-trapped CDO that contained this sketchy mortgage and thousands of others just like it… and, well, this choo-choo of thoughts led to envisioning the train-wreck of economies and nations that lies in wait just around the bend….

One also could not fail to reflect on the recklessness of a nation that placed untold million-dollar bets on the idea that it would be possible to travel anywhere in an automobile from houses like these a few scant years from now. This far along in the tribulations of our time, most Americans still have not heard of peak oil, and the few who have regard it as some figment that Ralph Nader or Al Gore conjured up on an acid trip in a sweat lodge.  The more sophisticated among the mentally unwashed are certain that the earth has a creamy nougat center of low-sulfer light crude oil, or they heard that the Bakken formation in Dakota holds more oil than Saudi Arabia, or that the whole US car and truck fleet will be electrified in a year or two, or that we can drill-baby-drill our way to permanent oil abundance, or just that the American can-do spirit will come up with something to keep Happy Motoring alive because we’re the greatest! Such grandiosity!

Personally, I look at these houses scattered around what was only recently a dedicated farm landscape and I am quite sure that the denizens within will be marooned in their great rooms, and that very probably many of them will have no job to go to — in the conventional sense of what we think a job is, in some corporation or institution — and that in a surprisingly short span of years these buildings will be ruins or squats. I think these thoughts after struggling up a rather steep hill more than half-a-mile (and many others previously). A trip anywhere from here, to do anything, and the return trip, would occupy an entire day even for someone in decent physical condition. Somebody accustomed to rations of Cheez Doodles and Mountain Dew would be dead by then. There will be lots of dead.

On the macro level, the feeling spreads across the USA that our troubles are behind us. Employment is ticking up. The S & P index only goes up now. The banks have stabilized and those “toxic assets” (which I call “frauds” and “swindles”) have been disarmed and safely buried under Yucca Mountain. Housing starts may still be weak, but the “gaming” industry is making great strides in places like the old Puritan commonwealth of Massachusetts, so soon we’ll have a virtually automatic economy of leisure-and-entertainment paid for by creaming off a small percentage of the quarters pumped into video slot stations. No doubt the Chinese will be jealous and try to imitate us.

All these lovely mild days, I was not unconscious of the eeriness of the weather and the possible insidious effects of it on the local ecosystem in everything from the added generations of deer ticks carrying Lyme disease and the death of the honeybees to the fate of this year’s apple crop. I confess: it made me very nervous. Something is happening… out there.

Regards,
James Howard Kunstler
Whiskey & Gunpowder

April 6, 2010

P.S.: Click here to listen to my new play Big Slide about life as the long emergency gains traction.

Peak Oil and Unpaid Mortgages Will Kill Suburbia was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Here’s an exclusive peek at the portfolio holdings of John “The Man Who Made Too Much” Paulson. In case you missed it, this shrewd investor (no relation to Hanky Panky Paulson) made the bet of a lifetime against subprimes. His take-home pay netted out to $3-4 billion. While other funds were collapsing, 2007 handed his fund a total gain of $13 billion. So you’d expect this contrarian has something to say — because nothing cements guru status like a big win…

But is he really a contrarian? In part, he’s walking in lock step with the gangster-banksters and paper addicts. But that could be a fine bet, given that the “most powerful geek on the planet” Ben Shalom Bernanke is on Dec. 28’s Time magazine cover.

While I’m sure John Paulson agrees 100% with Paul Volker that America needs to produce more and finance less, it’s not the bet he’s willing to place dollars on.

Biggest Bet: Bank of America

Let’s talk equities for a minute. Paulson is long. Longer than he’s ever been in the history of his fund, which means he’s doing very little hedging of his bets with shorts. Instead, he’s piled into the likes of Comcast and gone non-U.S. with HeidelbergCement AG. But his largest equity bet is Bank of America.

How can this be? He sees an excellent 2012 ahead for BoA and wants to get in while it’s cheap. When it comes to providing cushion against bad loans, Paulson thinks they have more than enough cash, with the worst behind BoA as of Q2 2009. When it comes to earnings, it’s steady ahead. He sees per share proceeds at $2.79 in 2012. So he’s calling for a 2012 share price of $27.99. You could join that bet today for around $15.20 per share.

Willing to get behind him? You may be comforted by the fact that BoA paid back TARP — including the $20 billion it got for buying bundle of trouble Merrill Lynch. How’s it doing so? Some cash, but also $19.29 billion in securities are being put up for offer.

What do you get when you buy in? The biggest consumer lender in the land. And you get the largest debit card issuer. You really don’t want to know how many foreclosed houses it has on the books. And when it comes to credit cards, BoA holds the dubious distinction of highest default and delinquency rate of them all: 13%.

Discover and JP Morgan Chase, ever the optimists, see these defaults peaking early next year. Any consumer trying to pay for Christmas could tell ’em different.

Here’s another monkey wrench: Former dealmaker darling Ken Lewis no longer cuts the mustard after snapping up Mother Merrill. Head of consumer banking Brian Moynihan and chief risk officer Gregory Curl were racing neck and neck take the post. Moynihan just won out. Will Wall Street like him enough to merit a “two-handle” stock price? Anyone’s guess. We’ll suppose everyone’s happy that croniedom evades the influence of Congress and the Treasury.

But don’t take my word for it; try Dan Amoss’, head of Strategic Short Report. He read my notes and ranted away. He’s got a pretty stiff case against BoA, and I added to the arsenal.

3 Reasons Paulson Should Get Stuffed

1. Beware What Bearish Treasuries Can Do

Nobody talks about how a bear market in Treasuries could tank the banks. But a bearish Treasury outlook (which Paulson agreed to in his Q&A) spells hefty write-downs ahead for its held-to-maturity securities portfolio.

2. Don’t Underestimate the Damage of Countrywide

Don’t forget those festering Countrywide-vintage mortgages, second liens, and credit cards. The government’s Making Home Affordable program isn’t making a dent, and it’ll only delay the inevitable. Only 160,000 out of 1 million of BoA’s borrowers who were “potentially eligible” have so far qualified. The rest? Just treading water that may well swell over their heads any quarter now. About 48,000 Bank of America borrowers are among those at risk of losing their loan modifications by the end of the year. The foreclosure backlog of around 7 million should re-accelerate in 2010.

3.Who Will the Fed Sell Mortgage-Backed Securities To?

The government’s quantitative easing campaign helped banks write mortgage-backed securities back up. But when the government tries to sell and no buyers come forth…time for re-write-downs.

But here’s the thing, while Paulson may not be using shorts to protect his fund, he’s found a better vehicle to short the entire stock market. You can bet Paulson knows that Bernanke is no Volker. He’s already made 28% on his anti-Fed bet since Oct. 31.

A Paulson Position YOU Can Get Behind

Paulson showed us beautiful slides about money supply, inflation, and gold price. One after the other focused down on the rough-and-tumble economic years 1971-1974, when gold started to do great things. Here’s the easy pattern to remember: When the money supply shoots up, inflation follows up about two years later. Don’t think I have to tell you that when inflation grows, gold gains, but here’s the proof: Gold gained 67% and 72% in 1973-1974, respectively.

And Paulson’s put his money where his slides shine. Our monetary base has shot up 135% since Lehman Bros. failed, so he sees inflation ahead. And he’s starting a new gold fund come January 2010 to profit.

Regards,
Samantha Buker

December 22, 2009

How 2012 Will Love Your Portfolio was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

This unfortunate phrase from President Obama’s otherwise sturdy inaugural address, echoed through my mind last week as I cruised the suburban outlands of Montgomery, Alabama. All the usual commercial furnishings of consumerist America hugged the flattish ochre and dusty-green landscape of played-out cotton fields where thirty feet of topsoil has washed away in the two hundred years since the mainly English settlers shoved out the native Alabamu, Coosa, and Tallapoosa. Along the low horizon, mall followed strip mall followed “lifestyle center,” book-ending the “one house” failed subdivisions of otherwise empty unsold lots in a cavalcade of floundering enterprise. It seemed at times as if the terrain was a kind of sea-like expanse, and all the retail boxes ghost ships drifting to oblivion.

They say that the banks have stopped calling in their loans on the commercial real estate, even though the owners of the malls and strip malls have arrived firmly in default. Calling in the loans would only pin another horrifying liability on the banks’ balance sheets. So all parties join in a game of “pretend,” that nothing has really happened to the fundamental equations of business life. Something similar goes on at the next level down, where the tenants of the malls and strip malls sink deeper into rent arrears every month, and the eviction process is simply postponed, while the stores themselves put off paying their vendors and suppliers – as the whole system, the whole way of life, enters upon a circle-jerk of mutual denial in a last desperate effort to forestall the mandates of reality.

How long will these games go on? This is the primary question that haunts the republic as we wait for new TARPS, and “bad banks,” economic stimulus packages, infrastructure renewal roll-outs, and other policy life-lines thrown out in guarded hopefulness to haul America out of a ditch.

The center of Montgomery was instructive, too. Not unlike any other city in the USA (pop. about 200,000), the former main artery of downtown commerce – Dexter Avenue, rolling out like a red carpet below the state capitol hill, where Martin Luther King’s early career kicked off in a modest red brick church, and where Rosa Parks famously refused to move to the back of her bus – this “main street” presented a sad sequence of  empty shopfronts interrupted here and there by rather creepy amateur murals depicting the cruelties of slavery, as if a remonstrance to the politicos up the hill. Most of the buildings lining the avenue still stood burdened by the clownish facade re-doos and ghastly claddings of the 1950s, which had replaced the ordered classical-vernacular decorum of the original 19th century frontages. Once the malls had landed in the old cotton fields, and MLK moved on to Atlanta, Dexter Avenue was just left to rot in the memory trunk.

Here and there around the rest of the downtown, other weird experiments in American post-war anti-urbanism presented themselves, most notably a “building” designed to look like a small-scaled Death Star, all black reflective glass, canted concrete and steel walls – which turned out to belong to Morris Dees’ renowned Southern Poverty Law Center — deployed directly across the street from the modest white clapboard-with-green-shutters house once occupied by Jefferson Davis after Richmond fell and the Confederate leadership skeedaddled further south. There were a few recently-built government towers that looked like Nascar trophies. But the rest of the downtown – the parts not dedicated to surface parking – was the ubiquitous array of muffler shops, or restaurants and churches that looked like muffler shops.

With the city center thus nearly dead, and the asteroid belt of malls and strips on their knees financially, this emblematic Sunbelt metro area finds itself in a pickle. Cotton being well-past decline, and having wrecked the soil, the “new” economy of recent decades dedicated itself to building car-dependent air-conditioned suburban sprawl – the perceived perfect antidote to a previous economic order based on serfdom, hook-worm, and inescapable heat. That now-not-so-new economy of sprawl, in turn, has come to a screeching halt, as a cruel destiny threw sand in the mechanisms of reliably cheap oil and revolving credit, and the gears seized up. A mood of ominous watching and waiting pervaded the city, but many of the movers-and-shakers had pinned their hopes on the chance that Mr. Obama’s stimulus bill would allow them to commence building a new freeway to the ocean on the Florida panhandle.

My journey continued on the Jesus-haunted blue highways, to that selfsame place, Walton County, Florida, where some of the most famous experiments in the New Urbanism were conducted beginning in the 1980s with the new town of Seaside. I had been there many times over the years, and I was called down to get a prize in the service of the movement, but it was a little disconcerting to see how the build-out had progressed.

The Seaside experiment began very modestly as the idea for a bohemian village of architects and artists in what was then an almost empty quarter of piney woods owned by the St Joe timber company. Seaside was designed so beautifully that it attracted the attention of every thoracic surgeon and corporate lawyer between Nashville and New Orleans, and pretty soon Seaside became the Riviera of the Sunbelt’s economic elite – and came in for gales of criticism for becoming that. The newer houses and commercial structures grew ever grander, as a Boomer generation status competition ramped up into the new millennium. Several more, ever-grander New Urbanist towns sprouted along the adjacent beaches, some of the most recent composed of immense mansions embarrassing in their opulence. The outcome was a little scary, especially now that the fortunes behind many of these mansions may be threatened by the multiplying fiascos of finance and economy overspreading the nation like a vicious plague.

The New Urbanists had not set out to build monuments to Yuppie-Boomer consumerism, but a peculiar destiny shoved them into that role for a while – even while they toiled elsewhere around the nation to reform town planning laws and generally provide an antidote to the fatal cultural cancer of sprawl, that is, of a settlement pattern guaranteed to comprehensively bankrupt our society. Anyway, the collapse of the housing bubble has affected the New Urbanists’ business, too, and this may turn out to be a very good thing because they can put aside the distractions of building very grand places to sop up ill-gotten wealth and focus on the issues that Mr. Obama’s people should have been paying attention to all along, namely, how are we going to reform the way we live in this country and what will be the physical manifestation of how we live in the decades to come.

The New Urbanists have preached for years that conventional suburbia would fail America in the long run, and that we’d have to prepare for this failure by restoring traditional modes of occupying the landscape. So far, the Obama team has not been willing to identify the suburban system as the heart of our economic problem. They can’t recognize it for what it truly is: a living arrangement with no future – and an economic, ecological, and spiritual disaster. It is, of course, the primary reason why we find ourselves in the deadly predicament of importing over two-thirds of the oil we use every day.

But then, more than half the population lives the suburban way of life, with its deadly mortgage traps, its mandatory motoring, and its civic disengagements. Nobody in power dares tell the truth: that we can’t live this way anymore.

But there are scores of places like Montgomery, Alabama, and thousands of traditional main street small towns that are sitting out there waiting to be re-activated. We need to do this much more than we need to build new freeways to the beach. Suburbia is not going to be abandoned overnight (even if it fails logistically and economically!) but we have got to arrive at a consensus about rehabilitating our forsaken small cities and small towns. The New Urbanists have gathered, organized, and codified all the principle and methodology needed to carry out this campaign. This should be their moment. Mr. Obama and his team should get with the program.

Regards,
James Howard Kunstler

February 5, 2009

Road Trip Through Montgomery: The Collapse of Consumerism and Suburbia was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Multiply this by millions of permanent layoffs, bankruptcies, shut downs, going out of businesses, chains closing for good, autos down the tubes, housing starts virtually zero, and sales almost the same, and what do you get?  The Toyota effect, multiplied many times over. 2.5 Million jobs were lost in 2008.

You get millions out of a job, millions behind in their mortgage and credit card payments, millions with homes worth less than is owed on them, and the chain reaction follows.  The more layoffs there are, the more store closings and bankruptcies there will be, and resultant layoffs and increasing of all of the above.  In other words, thanks to the welfare state, which wasn’t in existence in the 1930′s depression, credit cards which weren’t in existence in the 1930′s depression, and un-backed dollars, which were backed in the 1930′s depression, and no money down home purchases and ARM mortgages, which weren’t possible in the 1930′s depression, the conditions currently extant can and probably will make this depression far more severe than the 1930′s depression.  The facts say it will be far worse. 

Unfortunately, you haven’t seen anything yet.

Carburetors

For over 75 years, cars, trucks, planes, and everything powered with gasoline engines, used carburetors to mix air and gas to feed into the engine’s intake manifold.  They worked well, but on occasion, they became ‘flooded,’ and the engine wouldn’t run.  (Modern, fuel injected engines can’t be ‘flooded.’)  Carburetors had two things on them which caused ‘flooding.’  (1) The accelerator pump, and (2) The choke.  On cold mornings, often the choke, which restricts the flow of air, might make the mixture too rich, and cause the ‘flooding,’ or often in hot weather, too much gas pedal pumping would inject too much raw gas into the engine, ‘flooding’ it, and causing it not to run.  Both things, which caused the ‘flooding,’ and engines not running, were TOO MUCH GAS. 

The solution was to stop the flooding by depressing the accelerator all the way to the floor, and crank the engine till the excess gas was used up, or open the choke and wait for it to evaporate.  Gasoline engine technology is not the point here.  The point is this:  What got us into this economic mess?  TOO MUCH MONEY INSERTED INTO AN ECONOMY by the Federal Reserve.  Just like the engine being flooded with too much gas, the solution is to cut off the gas.

The Federal Reserve under Alan Greenspan flooded America with easy money, easy mortgages, and easy credit.  The result was bad credit, bad mortgages, and everything being over-priced.  Pouring more gas into a flooded carburetor guaranteed the problem would be made much worse.  Cutting off the gas would be the solution.  Pouring $2 trillion, and god only knows how much more into the economy, is like pouring gas into a flooded carburetor.  It will only make matters worse.  Obama says he has consulted 20 of America’s best, most respected economists, and they say pour more gas (printing press dollars) into the flooded carburetor (economy), and the engine of America will start.  NUTS!  I wish Obama had called me.

The same exact thing was tried in the 1930′s, with huge government spending, and it took WW II to get us out of the depression.  We’re already in two wars, and I certainly wouldn’t want us in a third one.  How about this as a cure for the current depression? 

(1) Get us OUT of both wars we’re now in, and bring home all the troops.  Let ‘em solve their own problems over there.  We’ve got huge ones here, and can no longer concern ourselves with theirs.  This will save hundreds of billions a year, if not well over a trillion. 

(2) Disband most federal bureaucracies, especially the Federal Reserve, and do it Quickly.  The DOT, DOE, HUD–and the list is long–serve no useful purpose.  The Department of Education educates no one, the Department of Transportation transports no one, etc.  This will save hundreds of billions a year. 

(3) Revert to the Constitution, which gives government no authorization to subsidize anything.  This will put an end to all federal welfare, and save hundreds of billions a year.

(4)  Get out of the UN, NATO, and any and all foreign entanglements, at a savings of more hundreds of billions, and get the UN out of America.  Declare unconditional neutrality, and send no money or advice overseas at any time, or for any reason. 

(5)  Close our borders with Mexico, and see to it that they stay closed 100%.  More savings. 

(6) As illegals come up for police stops, free medical care, welfare, school enrollment etc., which are in the hundreds of thousands each year, instantly send them home. 

(7) Renounce NAFTA, and all laws which encourage, tax wise, the building of plants off-shore, and resulting layoffs here.  With the budget balanced, and no more Federal Reserve, recovery would be pretty quick. 

Today, every single state is in terrible economic condition because of layoffs, bankruptcies, and low tax collections.  They have to balance their budgets.  The D.C. Gang doesn’t, and can print and print and print, which they are doing, and will continue to do with nary a smidgen of responsibility.  We all pay for their lack of responsibility with every single dollar we own being reduced in purchasing power.

I can go on and on, but the point is this:  The ones who harm us the most–other than the Congress who has gotten us into this with a hundred years of bad legislation–are bureaucrats, welfare recipients, and illegals, who would be out of work, and that’s great!  Let D.C. turn itself into a ghost town, full of worthless, out of work ex-bureaucrats.  Maybe they’d burn the place down and we could start over.  Let the illegals go home by themselves, or by force when they are picked up.  If states want to subsidize the poor, or illegal, they can, but not the federal government.  All of these ideas would actually balance the budget, and make America strong again.  None of these ideas have a Chinaman’s chance in hell of coming to pass.  Not a single one.  Obama will print up another trillion dollars in un-backed scrip, and we’ll have hyper-inflation, except in housing, because that has yet to reach bottom.

To fix a flooded engine, you cut off the gas.  To fix an economy flooded with paper money, you cut off the paper money, not print trillions more!  The economy is in such a sorry state, flooded with fake money, that the fed interest is close to zero.  They’ll pay you NOTHING to store your scrip for you.  Wise people have taken their scrip, and turned it into precious metals, which will always have value in any currency, or all by itself.  An economy such as ours, which has been flooded with unbacked scrip, and ceased to run, as in a flooded engine, has to get itself out of the mess by ceasing the printing of scrip.

It will be very painful to millions of people who have not been acting wisely, or who have been depending on Uncle Sam for their sustenance.  The pain of this depression is unimaginable today.  We’re only at the very beginning of it.  The only sensible way to get out of it, is to let it run its course, and at rock bottom, the economy will begin to rise like the Phoenix Bird. 

If my ideas ever came into being, there would be wholesale riots by those cut off, and many millions would die.  Wonderful!  We are flooded with not only too much scrip, backed by nothing, but too much human trash, who have been flooded with handouts from the public treasury. Millions actually believe that government owes them a living, which is gross error, and extremely costly. They, like the scrip, are basically worthless, and they must be gotten rid of to make our economy healthy again.  How to do it?  I give up, or at least won’t write about it.

Regards,
Don Stott

January 9, 2009

Basic Economics was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.