Economy Turning

For the past several months, all eyes have been focused on the money printing machine put in motion to salvage the financial credit system. Lots of drama and a lively debate over solutions, but they will grind themselves out the hard way unless congress et al are able to accelerate the healing process. Right now all assets are repriced. The prices are at a level that an intelligent buyer will buy.

More importantly, the lenders are frozen in terms of their liquidation options. They have discovered that when there are no bidders, you are not going to sell at all. Just as the advent of oil at $150 brought the economy to a screeching halt this past summer, present real estate prices have made it impossible for the lenders to liquidate.

So perhaps doing nothing right now is an excellent option. We sure know that they will all be a lot more realistic next year at this time.

In the meantime, what else has happened? The real global economy slammed on the brakes and shook off excess use of credit and inventory. All commodity prices have collapsed back to painful levels, including that of oil. Surplus inventories and capacity has now built up so we have ample reserves to supply the global recovery.

Global trade has dropped over 15% since September and dropped another 5%, this month, but then reorders must begin to kick in about now and the numbers will be trending upward in the spring. Expect a broad recovery to be fully underway this fall and winter and a recovery to prior levels as early as late 2010.

Capital spending will be led by energy investment as the world now understands that $150 oil is not an option.

Also the American automotive industry needs a trip through chapter 11 to shake off contracts that have made it non competitive even in the USA.

Personally, I have no clue what the stimulus boys think that they are going to accomplish with their money. If they actually can fix the financial system, that will be wonderful. I have already said what needs to be done to bounce out of this rat hole. So far they are on the road to attempt to restore the original bubble. It simply cannot be done because no one is going to buy stupid paper from America anymore. You only get one bite at that particular apple.

The key point that we can make is that the global economy is getting over its funk and finding that they are still in business, and there is still so much real liquidity around that business at least will get financed. I expect all surplus inventories except housing to be cleaned up by the end of the year and everything to be functioning normally if a little less flambouyantly.

Home Ownership and Minimum Wage

Lending practices represent hundreds of years of bitter experience. Shifting them for political gain is now providing another bitter lesson and giving us the second great global financial panic.

The solution to the lack of growth in the housing market could never come from changing the lending rules. It has to come from a proper reorganization of the relationship between government and the labor market itself.

Let me spell this out. The labor market is a market that is currently structured with a deliberate built in inefficiency. A minimum wage is established by fiat that is arbitrary, but makes it impossible for a lot of useful activity to work around the edges and promotes the existence of a large cadre of idle workers who are in no position to support debt.

Grant that individuals who are limited by health or other issues cannot work and must become wards of the state.
Everyone else is available to do either light or heavy work at minimum wage with a premium provided for heavy work.

This work is provided by the state automatically the moment that an individual is laid off from other work. This is not work fare. It is temporary to even permanent work provided by the state at minimum wage to pursue goals understood to serve the common good. A classic example is tree planting and historically waste cleanup got a lot of attention. Once the government knew it was in the business of deploying temporary human capital, it could get very good at it.

Most importantly, the minimum wage is tied directly to the monthly cost of supporting the standard mortgage on say five hundred feet of living space per earner with the appropriate multipliers.

This makes every working person a qualified buyer of a home or condo and the linkage between this wage and measured cost of built space will make it hard for the system to become distorted. If housing prices drop then wages drop, attracting more buyers and more demand for the workers and the opposite is also true.

By linking this wage directly to the capital cost of space and thus directly to the real cost of producing that space, we have created a firm floor for both the housing industry and the labor market that should result in home ownership maximizing and producing a compensatory increase in tax revenue since everyone is either working or living off his savings.

Quite simply we make the customers good so that the banks can do what they do best. This may not sound like a scheme that is revenue neutral but I suspect that it can be fairly quickly once we learn how to properly deploy the temporary labour pool to proper economic effect.

It could turn out that many folks enjoy working on farm projects and that then permits farm operators to entertain value added enterprises that requires the availability of labour.

We will be surprised at what we want to do once labor is readily available for normally labor intensive tasks.

And you will be quite sure that a lot of high end employers will grab available talent just to take on projects that have lacked priority in the normal course of business once a system like this is set up and it will not be life or death to either party.

By establishing a real floor for the labor market, mobility will naturally improve, unwilling unemployment will disappear and an efficient job brokering system will also emerge.

And since everyone qualifies fairly quickly to have a mortgage, home ownership should approach ninety percent which is the objective.

Crash and Burn on Wall Street

Almost remote from Main Street and just as remote from the American public, the pillars of the US financial system are in a struggle for life or death. Bear Sterns is absorbed by Morgan, Lehman is entering liquidation and Merrill is absorbed by Bank of America. Their real failure cannot be contemplated. But we are looking at a contraction in the supply of available credit. This means massive financial losses throughout the global economy, however well sheltered. Today AIG asked the Fed for help.

A crisis in confidence is visibly shrinking the economy and forcing premature liquidation and scaring sound money from coming to the table.

CNBC: Warren Buffett No Longer In Talks With AIG

Posted By:Alex Crippen

Topics:Warren Buffett

Sectors:Insurance

Companies:American International Group Inc Berkshire Hathaway Inc.

Don't count on Warren Buffett to "rescue" AIG.

A few minutes ago, CNBC's David Faber reported on the air that Buffett is "no longer" in talks with the insurer "about an investment or anything else."

AIG is desparetely trying to sell assets and raise new capital to avoid what would be a disastrous downgrade of its debt by the credit rating agencies.

Faber reports that people familiar with the situation tell him that talks between Buffett's Berkshire Hathaway and AIG did take place last Friday and Saturday, but there's been nothing since then and nothing is happening now on that front.

Faber says AIG is focusing its attention on getting billions in bridge financing from the Federal Reserve, to allow for massive asset sales.

This is forced liquidation and it is not the liquidation of AIG itself that is troubling, it is the idea that such liquidation is thought possible in the first place. This is the domino liquidation scenario that is impossible to execute in a crumbling credit market. Again it will be necessary for the fed to step in and bridge every piece of script out there in order to stop the collapse.

And do not get it wrong. A collapse means a collapse in available credit for everyone and a collapse in the value of real assets to match that of the great depression. The ensuing economic collapse will then be driven by a lack of financial liquidity.

Right now this financial disaster is having babies, but the damage so far has been contained to the smart money crowd who are supposed to know better.

There is still time to end this rolling disaster by going to the mark to market strategy partially outlined in earlier posts.

I have been reticent on what I have been saying about the current credit situation for fear of adding gasoline to a forest fire. Right now, I fail to see how it could get any hotter.

A full disclosure of real exposure by all participants is needed followed by a mark to market exit strategy promulgated by the fed and backed by the fed’s guarantee. Right now there is no such strategy and no clarity as to where this will all end. The result is that one failure is feeding the next failure.

This can continue like a string of dominos until every mortgage is made almost worthless and every house selling at a fraction of its cost to manufacture. The objective of the fed is to stop this process, and so far they have been bailing like crazy and every event is a surprise.

The next few short days should tell the story as far as the equity side is concerned. I suspect that another 1500 points of decline is possible. We lost 500 today.

It will then take months for the money managers to get everything rebalanced and count the damage.
In the meantime, oil is heading for $65 to help offset this shock.

Perhaps this spring the public can reenter the housing market and clean up the inventory at double speed and get the big boys off the hook.

We are living through an historic credit contraction, once again brought about by pure negligence. Reckless lending always has champions and naïve lawmakers to play along. Putting armies of financial industry executives may keep them sober for a couple of generations.

Take note that I do not blame greed. That is a constant. What in hell were they thinking when they bought mortgages not guaranteed and managed by a local bank? An acceptable loss ratio for a bank portfolio is half a percent. With no local management you would need an impossible zero percent. It is as if the fix was in and the mafia was running the show laying the paper off onto whoever they could bag.

Market Fear

Market Fear

For the past few months we have witnessed the struggles of the American leadership to come to grips with the damage done by the promotion of reckless lending practices. Two things have happened.

A huge inventory of badly underwritten first mortgages are rotating into the market and failing to refinance. This has resulted in a massive inventory of homes coming into a market unable to absorb them at anywhere close to a bail out price. The losses are now negatively impacting the balance sheets of the banking industry.

In the midst of this, we have been greeted with a major run up in commodity prices for the past five years. This is now draining liquidity out of the pockets of the ultimate consumer and is now impacting demand. This is accelerating production expansion and efficiency improvements world wide which will quickly ramp up inventories.

If this is not enough to scare the hell out of you, then what will?

Of these problems, the commodity issue is already resolving itself. Belt tightening and expanding supply is wrecking these markets and they will soon blow down to discouraging price regimes. The oil shock has cured everyone of their complacency over oil dependence and we can now expect an aggressive move into cheap solar energy and other viable alternatives. This will slash global demand for oil over the next decade as this comes to pass.

I have attached an article by Lawrence Solomon on global reserves that although questioned are saying that we have kept pace with our draw downs and have even added reserves. He also introduced me to the advent of the Nanosolar production breakthrough a couple of weeks past.

That leaves the mortgage business. And what we are dealing with here is a slow motion striptease of disclosure. The fact is that at some point, it is technically possible to deflate the currency pool and put everyone in bankruptcy. This was exactly what happened during the Great Depression. After all, could you pay off your mortgage in cash tomorrow? Yet if your house fell in value by eighty percent, you would be expected to do just that. And then it gets ugly even if you have a good job.

The really good news is that the rest of the world is not particularly exposed. However, right now we need a cessation of the damage in process and an end to the attack on the house pricing structure. The fast and surest way, I described last Monday, is to set a day as a mark to market day in which properties can be appraised at their current value. That price is then used to refinance any and all who apply with properly qualified first mortgages set at 75% of that value. The under water portion of the prior mortgage is then exchanged for a fifty percent equity stake in the property going to the original lender.

You would think that millions of takers could then come to the table. Not so! Everyone would realize that this fate is worth avoiding while everyone who must so refinance is suddenly improving his credit worthiness by doing so. This establishes an effective floor to the housing market. It may also be possible to reinstate thousands of abandoned foreclosed properties, cleaning up that mess. In any event the surplus inventory will disappear in a hurry and we will quickly get a bounce in pricing that will stimulate renovation and new house construction.

Abundant energy will power future growth

Lawrence Solomon

12 Jul 2008

National Post

Up! Up! Up! The world is consuming more and more energy and, as if by miracle, the amount left to consume grows ever higher. Never before in human history has energy been accessible in greater abundance and in more regions, never before has mankind had more energy options and faced a brighter energy future.

Take oil, the scarcest of the major energy commodities. In the Americas, proven oil reserves have increased from 170 billion barrels to 180 billion barrels over the last two decades, according to the 2008 Statistical World Review from British Petroleum. In Europe and Eurasia, proven oil reserves almost doubled, from 76 billion barrels to 144. Africa's proven oil reserves did double, from 58 billion barrels to 117. Even the Asia Pacific region, where China and India are reputed to be sucking up everything in sight, has increased its proven reserves. And the Middle East, the gas tank of the world, shows no sign of slowing down -- its reserves soared by almost 200 billion barrels, from a whopping 567 billion barrels to a super-whopping 756.

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Bottom line for the world: an incredible 36% increase in oil reserves during the two decades that saw the greatest globalization-spurred oil consumption in the history of mankind. And that doesn't include the 152 billion barrels in proven oil reserves obtainable from Canada's tar sands. Is there any reason to doubt that the next two decades won't build on the steady growth of the last two?

These oil reserves aren't the end of it. These figures -- for the year ending December 2006 -- represent oil that's not only known to be available, but also economic at 2006 prices using 2006 technology. Since prices have soared in the last year, and technology has improved too, BP's annual assessment for the 2007 year will show greater proven oil reserves still.

But this is still not the end of it. Unconventional oil reserves are now in play. In 2005, the Rand Corporation estimated that the oil shale in America's Green River Formation, which covers portions of Colorado, Utah and Wyoming, contains 1.5 to 1.8 trillion barrels of oil, with as much as 1.1 trillion barrels of oil recoverable, an amount comparable to the reserves of four Saudi Arabias. Oil shale becomes recoverable at $95 a barrel, it determined. With oil now trading at $140 a barrel, oil shale exploitation is now very much economic. Then there's Canada's tar sands, with its even greater potential -- estimates of the total reserves that may be available top two trillion barrels, or eight Saudi Arabias.

This is still not the end to it. Most of the oil we know about lies in the well traveled portions of the globe. But most of the world remains unexplored -- the interiors of Africa, Asia and South America have seen relatively little oil exploration. Oil exploration in the oceans, too, is in its infancy. For all practical purposes, mankind has limitless oil supplies available to it. The story is similar for natural gas and coal, the other major nonrenewable sources of energy. And for nuclear power. And the renewables.

The amount of solar power landing on Earth could supply our current needs 10,000 times over. This potential will soon start to be realized on a large scale thanks to breakthroughs in the U.S. and Israel that have dramatically brought down the cost of solar technology. Wind also represents an inexhaustible resource, as seen in a 2005 NASA-funded study at Stanford University of viable wind sites worldwide. It found that wind power could satisfy global demand seven times over, assuming a realistic capture rate of 20%. Some European countries already meet a significant portion of their power needs with wind.

The world is awash with exploitable energy, both renewable and non-renewable. Availability is not at issue and never has been.

The only issue is the cost -- both economic and environmental -- at which it can be exploited.

Nuclear currently fails on economic grounds. But most fossil fuel technologies don't need subsidies and soon, neither will most renewable technologies. That leaves the environment as the chief determinant of what energy we use, and where we use it. Thanks to environmental awareness and the high energy prices we now face, energy production has become ever cleaner, safer, and more efficient, giving us more meaningful options than ever before.

Whatever the outcome, whatever energy forms we ultimately rely on, the table is diverse and bountiful, allowing the world economy to grow large and to grow cleanly. And it will have been largely set by environmentalists.

Lawrence Solomon is executive director of Energy Probe and Urban Renaissance Institute, and author of The Deniers: The world-renowned scientists who stood up against global warming hysteria, political persecution, and fraud.