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California fires, Peak Oil, Euro/dollar, gold, who will buy U.S. bonds, U.S. election strategies and more   (week of November 3, 2007)

For the context behind these comments, please scan late October's entries at October 2007 blog entries .

Marc W.

I've just searched the Internet in an attempt to find some kind of early statements about how the Southern California fires will effect the housing contractors future employment. And I was surprised that no one seems to be crude enough (myself excluded) to look at the enormous insurance/ tax relief that will be raining down on our poor out of work housing professionals.

Some one must have been praying to the Santa Ana Gods for such a miracle bail out for housing / city renewal in those areas. It's a sudden dump of excess housing inventory, and a guaranteed cash injection to play the game all over again. Wow!

I have license to make rude statements like this being a survivor of the Oakland Hills fire of 1991. I lost a few friends who were burned to death. And I saw the complete destruction of my home town.

BUT NOTHING WAS WORSE THAN WHAT HAPPENED AFTER THE FIRE! The reconstruction took a peaceful, loving, hippy, hillside community, with trees and off leash dogs, and turned it into a Bank for the Nouveau Riche real estate investors. The redeveloped area was Ground Zero for the California housing bubble. I'm convinced this is what caused the beginning of the housing bubble. A SUDDEN, MASSIVE RECONSTRUCTION WITH MASSIVE CASH INJECTIONS. And then the idea snowballed everywhere else.

The insurance money tuned the original $75,000 homes into $2,000,000 debt machines that no one can afford, and everyone has to treat like a damn Van Gogh Painting. There's no more kids playing, no more dogs running, no more street hockey, or tree forts. Just speeding German cars and Investors.

The new houses are phony stage prop images of what a home is supposed to be. A home is supposed to care for you.. Now we are just slaves to it, and the debt it represents.

I don't know if the land owners in So Cal know this yet, but their lifestyle will not return. It will be replaced by something far more sterile and corporate. And our poor under appreciated contractors/Realtors/city planners, will make money like filthy thieves!

I guarantee you, they are glued to the TV right now drinking beer, and whispering, "Burn, baby, burn"......

My advise to the hill side property owners is:

1) Buy a metal kit home like one of these for $30,000: kodiak steel homes And spend the rest of the insurance money on food over the next 30 years.

2) Put in a large swimming pool for fun, and for fire fighting water (500,000 fire fighters would have been better than just the a few guys driving around in the red trucks) BUY THIS PUMP

3) And put a neighborhood group together that promises to LOWER property values by preventing Mc Mansions and road improvements. Make it clear to any City Planner that they will be removed from office if they deviate from the intentions of the community! In fact, fire the guy right away! and then appoint a new leader from the community.

4) If at all possible, STOP ALL SPECULATIVE BUILDING. MAKE IT OWNER BUILDER ONLY (no idea how to do that legally).

Zeus Y.

It does give you some confidence that we can and do tap into a larger intelligence when all these coincidences keep popping up. Systems thinking appears to be getting more and more indispensable and will become crucial when this quasi-system/private individual (use the system to enrich the individual and screw everyone else) gets progressively exposed. It’s the so-called “inevitability” (self-evidence without any evidence) of the current whacked-out system combined with the lurking horror (of regular citizens) of having to deal with the fall-out of a “big lie” if it is actually exposed that seems to keep people in line. Two words: exogenous event, globally as well as individually tends to drive someone out into the light because the illusion no longer supports a tenable reality and the consequences of denial become greater than the perceived consequences of "getting real."

Albert T.

Actually I could name some companies of the top of my head which would fill any foreign demand in the treasury market.

Yes Pimco would be one of them but it would perhaps go to the very bottom of the list. Most of the companies are life insurers which are obligated to hold a certain spectrum of securities.

Yes they are diviersified and would perhaps each would hold 10% or less of treasury bonds as part of their portfolio for liquidity purposes/ and AAA criteria.

Nylife 300 Billion
Mass Mutual 500 Billion
Metlife 300 Billion
Prudential 650 Billion
Mutual of Omaha
Liberty Mutual
Guardian Life
Equitable Life (now under AxA)

Just these would have about 2-3 trillion in invested assets assuming a 10% allocation would give 200-300 billion treasury buying power (if they drop to their targeted hurdle rates which are fairly low).

Why wouldn't an insurance company buy a AAA investment if it drops to 6-7% yeild (which hasn't been happening) and increase their 10% of portfolio to govt securities to 20%. Also a lot of ReInsurers hold AAA treasuries and could definetely soak more up as well. Their (insurers the large ones at least) exposure to subprime etc is minimal at least by my opinion.

Kevin H.

Hello! Longtime reader, first-time commenter. I read your article on the weak dollar with considerable interest, but I think it overlooked a critical point. If all things were equal and there was no huge national debt owed to foreign investors, then strong exports would be a decent equalizing force. Unfortunately, the crushing level of debt service owed on some nine trillion dollars of national debt is approximately $406 billion per year, according to this site federalbudget.com . To the extent that some or a large proportion of this debt is owed in foreign currency, then a weak dollar makes it much, much more difficult to pay down the debt, and makes the debt service harder and harder to maintain.


Good article. I just wanted to make an observation about one of your charts; the one titled "Household Debt payments as a Percentage of Disposable Income”. What this chart also suggests is that “as the percentage of our disposable income that we pay for housing rose in the past, booms were generated". Notice that the lowest percentages on your chart just so happen to coincide with deep recessions. That begs the question; “if a mere 150 basis point drop in that percentage was a factor in the recession during the “S&L Crisis”, what will happen the current percentage falls back to those historical levels, which would be about a 250 basis point drop”? This time, it won’t just be a factor within the recession. I believe that it will be the driving force.

Don E.

The Last Laugh--George Parr

this is an absolute 'must see'. if you have a slow connection just give it a few minutes to load. british humour at its best.


I have one problem with your point today: you say if I sell 100 euros of something in 2002 vs. 100 euros of something in 2007, I would have more $, but it would be all due to the exchange rate change....my confusion is this: if 100 euros in 2007 buys MORE widgets for the foreigner than it did in 2002 because of the decline in the dollar, than I really DO have an increase in exports…so I don’t quite get your point in this article, sorry.

Your statement "The seller, should they sell the pounds into dollars, will get more dollars than they did in 2002, but they still only sold the one bottle", still bugs me as follows: if the UK buyer buys the same amount of wine, say 1 bottle, then that 1 bottle will cost LESS pounds in 2007 than 2002…therefore, the LOWER amount of pounds required to buy that one bottle will STILL convert to the same dollars as before…why? Because FEWER pounds are required to buy that one bottle than before…THUS, the same dollars result for that one bottle, whether it is in 2002 or 2007…so I am still stuck here…if I’m wrong, let me know if I am not thinking this through…example: if a bottle of wine costs $5, and in 2002 this meant 5 pounds, and then in 2007 this $5 bottle cost 2 ½ pounds (because of the decline in the dollar since), then the 2 /12 pounds would of course convert to $5 again, just as 5 pounds did in 2002…..not trying to debate here, just still don’t follow the logic…..sorry, thanks.

Harun I.

On personal responsibility: I tire of hearing about predatory this and that. In life there are all sorts of temptations. If you give in to a temptation it is a choice. To suggest otherwise is to suggest there was some sort of coercion. So what we have in the majority of those about to lose there homes is a suspension of reality in order to have something they knew they couldn’t afford. But reality cannot be suspended indefinitely and the longer it is suspended the greater the crash-back. People bought the lies because it is what they wanted to hear. They didn’t ask deep questions, break out a calculator, or consult an accountant because that would have forced upon them the reality that they wished to avoid.

In this predominantly Christian country I have never heard the argument that it is God’s fault that Eve ate the forbidden fruit because he put it there while knowing the inherent nature of man.

Michael Goodfellow

Talking about Countrywide: seekingalpha.com

Of the option ARMs it issued last year, 91% were "low-doc" mortgages in which the borrower didn't fully document income or assets, according to UBS, compared with an industry average of 88% that year. In 2004, 78% of Countrywide's option ARMs carried less than full documentation.
Can anyone seriously tell me that giving "optional payment" loans to people who didn't document their income was not completely insane? And for 91% of their option ARMS to be in this category?! What were they thinking?

I remember a cartoon from back in the 80s, I think. It had a bunch of bankers in a room full of dynamite. They had just put out a flame and were saying "who says banking is a boring business?"

John G.

I'm just writing to comment on your article regarding the possible collapse of oil prices, and the conjecture that current prices reflect the equivalent of a commodity bubble. I offer an alternative interpretation. It has always been my contention that oil prices have been drastically undervalued for more that 15 years, really since the end of the Gulf War and the start of the roaring '90s. The price of oil, and any other highly fungible commodity such as gold, is as much an indicator of economic confidence as a reflection of its own intrinsic value. That's the trouble of having an unbacked fiat currency, it's contrary to any logical system of trade; a fiat currency is something that becomes a cultural identity, requires absolute logical positivism in its worth, and is inseparable and worthless beyond the context of the body-politic that creates it, whereas Spanish gold ingots from the 16th century or English silver I imagine would spend just as well today as it did in the past. Why? Because precious metals, like oil, are finite resources, which is I imagine why the Federal Reserve has always hated gold: you can't make more out of thin air.

No, a collapse in demand is impossible unless coupled with complete economic deconstruction. Our society's entire infrastructure depends on cheap, plentiful oil. Prices may decrease considerably, but only in reaction to the implosion of the dollar. A $20 barrel of oil is not a deal in a country where the average income is a few dollars per week. Personally, before we reach this point, I look for a period of hyper-inflation tied to the devaluation of the dollar because of Bernanke's wonderful interest-rate cut. Just my two cents. Thanks.

Mark A.

I liked your comments today about the oil price. I agree that the oil price looks very frothy at the moment and is liable to surprise folks on the downside almost anytime. (I attach a very basic chart suggesting it could fall back to $80 without breaking trend). I'm not so sure about its vulnerability to a decline below $50 or so. Keeping in mind that my knowledge of the subject is worth about the price of postage for this email, I think the peak oil phenomenon does introduce a radically new element into the equation, as does the China-India phenomenon, as well as the related issue of oil-exports decline.

My (only-)intuitive sense is that while US demand has indeed driven the "Chindia" economic engine to date, U.S. dough has had the effect of "priming the pump" of domestic industrialisation and consumption in these places and they may very well carry on getting richer without us. In fact, or alternately, however, I suspect the brake on Chindia story (or even own economy) will be a resource squeeze epitomized by oil, such that any slack in the price will be (relatively) immediately be taken up by pent-up demand, even in a depressed environment. I can't quantify any of this, of course, but you know Tata Motors is about to introduce a $2,500 car in India... (so when do we get it??)

I liked your comments about the strategic desirability of a low oil price. Pity poor George can't think that cleverly.

Keith W.

I was amazed how narrow your reasoning is in predicting a contrarian move on the dollar, oil and gold. Charts work great if one does not address how outside factors will affect them. I will simply point out why you are wrong.

480 trillion dollars in derivatives are in deep trouble away from the publics eyes. The sub- prime crisis is a cover name of the derivative crisis. 30 trillion in derivatives have already blown up with a true value of zero. 450 trillion to go. Several major wall street firms are already bankrupt in reality. Wall street desperately needs another rate cut and more. Since the bankers run the U.S., the rate cuts will happen.

Secondly, the U.S. has not slowed its massive electronic printing of currency for one second. M3 is parabolic. With no new policies implimented to limit spending, the dollar will not rebound. Hyperinflation will not save the backed by nothing dollar.

Third, concering gold, Goldman Sachs sold a massive amount of gold short contracts on friday. G.S. now has its lowest gold short position in 10 years. If you were correct that gold will drop , shorts would have been added, not liquidated. Also, the gold manipulation between several bullion banks and nations has run its course. The demand is outpacing every ounce they sell.

Last, concerning oil, the total neglect of the U.S. to fund alternative fuel sources will come home to roost. China and India's demand alone will ensure cheap oil will never again occur. The intentionally outlawed hemp crop could have elevated the U.S. to fossil fuel independance. If you do your research, hemp was the largest crop in Kentucky for decades. It is easy to grow, renews rapidly with 4 crops a year. It was used in making rope, paper and auto fuel. Big oil and big paper, didn't like the competition so, they lobbied to outlaw growing or using hemp. It had nothing to do with its ability to get high. Hemp can grow in 49 states. Its potential for an alternative fuel source is great and cheap. Big oil will never allow it. Do some research and you will learn that Hearst, Getty, and Dupont together, paid congressmen to ban it.

Technical fundamentals are simply guesses if you do not factor in surrounding influences.

I would like to add one very important fact. Hemp oil can be refined into auto use cheaper than corn oil and hemp oil will not cause the price of human food or livestock fead to go up. I believe that if the hemp industry was allowed to expand to its potential, that the U.S. would have been fossil fuel independant decades ago. All of our once great nation's destructive policies are the result of the constant corruption in our congress and the white house. Again, have a great day.

Don E.

the one thing that caught my eye on your, and harun's, assessment of gold was the repeatedly stated idea that there is a consensus in favor of gold. this is far from true - unless you are reading a lot of contrarians to the exclusion of the msm. you just don't find a lot of fervor for gold out there in the 'real' world. sure, it makes news when it rises wonderfully, and in keeping with their mission, to sell you stuff, the pundits will trot out an advisor with a wonderful idea about a 'play in gold', but that isn't where the msm action is. right now is seems to be in techs, again. we don't have that sort of consensus until your barber and pool boy are trading tips on mining stocks, as they did a few years ago with dot coms. 'that' is the beginnings of a blow-off top.

seen in perspective the current price may have been arrived at rather suddenly, after a loooooong period of consolidation from the last top a year and a half ago, but it is still in channel. i have posted the chart for this in the link above, but it may not load for you as it is a password protected account. i will try to give you a view.

from the beginning of 02, price under $300 and approx. start of current run up, gold kept a nice channel to the start of 06, with the channel mostly mirroring the 200dma, which is what we expect.

the channel was exceeded slightly for a quarter and then went crazy and up close to 25% in about 6 weeks. that did cause a retracement to the next fib level down. in fact looking at weekly closes since the start of 02 we see gold hit oversold several times and often did retrace just that way, but not always. after that blow off and retracement a curious thing happened. gold consolidated for a year and a half, but it did so in a new channel. now the bottom was the old top, so the markets rise continued nicely despite the noise and furor. we have just now hit the top of that new channel. in a longer term we are at the channels top and indeed hitting oversold, but not anywhere near blow-off readings. if we did get a beeeg sell-off here i would expect it might hit the bottom of the channel, about $690, but not the first fib, around $590. (seeing gold close under $700 again would cause absolute hysteria even tho within expectations; gold is driven largely by paper, as is oil, in the moment and very emotional; that is why i like longer term weeklies as it takes the 'noise' - bodies hitting the sidewalks - out. the 'moment' in the mkt. is essentially what faulkner said about noise from an idiot.)

the press likes the sensational 'approaching new high!!!" headlines, but their hype has no meaning as they speak only in nominal terms. only charts adjusted for inflation tell the real tale - what something is actually worth to the person buying it. adjusted for inflation we are nowhere near a top in gold: that would be out around $2200 a troy oz.

my only point in all this is to say that any case - as you know - can be presented with charts and figures. i believe your view that gold is topping is actually more mainstream and less contrarian than my own view that we are on the stairway to heaven and this is a huge bull mkt. all the best.

Lawrence S.

Meanwhile, over at the Democratic High Council, the victory plan is considerably different. There the brilliant strategists are engineering the exact opposite future: one in which the economy plummets so hard by October that angry voters of every stripe will swallow whatever reservations they might have and vote Democratic.

So a Democratic controlled House and Senate pass legislation that destroys the economy, and this benefits the Democrats? I can hear the ads now: If you like what the democrats did in the house, you’ll love them in the Whitehouse!


Here's the linchpin of the Democratic plan: hammer the Republicans on their abject failure to protect consumers.

And that’s where your plan falls apart. When the economy falters, people look for scapegoats. At the upper level, it’s guys like Millikan or Keating (alas, though one of the Keating-5 is running for president). At the lower level, it’s the illegal aliens – and one of the democrats most vulnerable issues. Look at the recent statements from the republican candidates on this issue.

Excuse the extended cut and paste (from NRO) – got to get back to work now. But I think it’s predictive:

The Dems really have a problem with illegal immigration. John Gizzi has an excellent report in the 10/29 issue of Human Events (though I can't find it on the web). He's reporting on the recent (10/16) special U.S. House election for the Massachusetts 5th district. The district's as Democratic as you like—only 14 percent GOP registration, 57 percent for Kerry in '04, etc. The Dem candidate was Niki Tsongas, widow of local giant (and '92 presidential candidate) Paul Tsongas, and she had the whole gang out there campaigning for her: Ted Kennedy, Nancy Pelosi, Bill Clinton. The Republican challenger, Jim Ogonowski, in spite of being short of cash, got 45 percent of the vote against Tsongas's 51 percent—a stunning result in the circumstances. He'd leaned hard on the issue of illegal immigration, including the issuing of drivers licenses. ("On the Sunday before the balloting, Tsongas made headlines by saying she would support allowing illegal immigrants to receive driver's licenses...")

Fabius Maximus

When will global oil production peak? Here is the answer!

Thank you, readers, for such thoughtful contributions.

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