Off On A Tangent

At school the other day, during recess, Jaime picked a large handful of dandelions.  When he returned to class, he gave a dandelion to the teacher.  Then he decided to hand out dandelions to all the students (20+).  Everyone was very excited to get dandelions and surrounded Jaime waiting their turn to get them.  Those who didn’t come and get them, Jaime made sure to deliver individually.  In Montessori, students are supposed to work individually and be respectful of other students doing their work.  Jaime’s flower gifts disrupted every student in the class, but the teacher’s couldn’t bring themselves to do anything more than shrug their shoulders and wait for Jaime to finish.

Jaime learned to catch with his hands over the weekend.  As opposed to just holding out his arms and “catching” when a ball or object lands and sticks, he learned this weekend to catch with his hands by timing the ball into his hands and grasping.  I was a proud papa, and Jaime and I played catch in the living room several times.

…and it’s too late to give out any decent (capital-preserving) market advice.  I’m truly sorry what advice I did give was probably too vaguely worded and too infrequent (and too optimistic, I think!).  Not that anyone really reads this blog, but I’d feel better had I done a better job writing here.

So, the markets are falling fast now.  There will be a bounce at some point - probably a sizable one.  But I see no way of knowing when that will be.  It would be extremely foolish to try and catch some profits on that future bounce.  Being wrong in your timing could be disastrous, as we are in a position now where the market can very easily react to some unexpected bad news with a 10% drop in a day (at which point the market is closed).

However, since there is every reason to expect fundamentals to erode further from here - housing prices will fall further, unemployment will rise more, credit will continue to tighten, debt is increasing faster now than ever, consumer spending will fall from here - then it does make sense to wait for the bounce to happen and then sell into it.  If you’re willing to take a short position that is (which doesn’t have to mean shorting a stock, it can mean buying an etf that tracks the inverse of a market index).  Wait for the bounce and then sell it.  It won’t matter a whole lot how you time that bounce, because the market will almost surely thereafter retreat below whatever temporary bottom the bounce starts at.

I believe we are in for a 2-4 year downturn and a grinding market bottom of up to 90% down from the highs is pretty likely.  Once unemployment begins to rise fast, all our debt is going to eat this economy alive, and the debt will be defaulted on person by person, household by household, corporation by corporation, municipality by municipality, and possibly even state by state.  That defaulting on debt will make matters worse each time, exacerbating the feedback effect.  The end result is a 90% downturn (and that’s the good outcome) or hyper-inflation, in which case the economy is just toast anyway and we’ll either be going to war or rebooting the financial system with a new currency and across-the-board debt forgiveness.

I’m having nightmares now about basic utilities being shut down due to lack of credit to pay employees and pay for commodiites (ie, natural gas, water, coal, uranium, etc).  If the credit markets fall apart and paychecks bounce, what keeps people going to work to provide the water, the natural gas, the electricity that comes to my house that is needed for life?  I’m guessing the answer will be a government mandate to go to work possibly enforced by the national guard (are they all back from Iraq yet?  Looks like we might need them).  But I’m having nightmares of keeping my family warm during a cold winter, of feeding them, of feeding my baby megan with formula.  I have some rice and beans stocked up that the rest of us can eat - I think I probably need more though.  I need to update my disaster supply list and get moving in buying some - it could become too late to do so within days.

Such has been the response many times when I’ve argued that Peak Oil was going to be a huge problem for our society.  “We’ll just switch to more efficient cars” goes the response.  Big deal, we’ll all get high mpg cars, or hybrids, or electric cars will become available.  Or hydrogen fuel cell research will make breakthroughs and we’ll all drive on clean-burning hydrogen.  In the face of this argument I’ve tried to outline the scale of the problem and the scale of this “solution”.  Replacing our entire fleet of cars is expensive.  Hybrids and EVs are excessively expensive.  Research and development into technologies like batteries and hydrogen fuel cells is expensive and risky.  It would take 20 years to replace our fleet of cars, and a lot of money.

Well now credit is drying up.  It’s becoming more and more clear to everyone that we are already bankrupt, even before we try any of the above solutions.  Loans and grants for research is going to dry up.  Companies are going to restrict their technology research and development, preferring instead to hold onto what little money they have.  Companies already in a lot of debt will likely go bankrupt, and companies with cash will hoard for their own protection.  A wealthy nation might have been able to mitigate the effects of peak oil.  A debt-ridden bankrupt nation cannot.

Oil and gas have been dropping in price lately, this despite hugely problematic shortages in the SE US, despite gasoline inventories at record lows (in terms of Days of Supply), despite shut-in oil production due to hurricanes Gustav and Ike.  They are dropping in price because of demand destruction due to a faltering economy and because of deflation due to the credit markets drying up.  In the near-term one of two things will likely happen: oil and gas will again shoot up in price in order to rebuild inventories, or demand will drop dramatically (more than it already has) as a result of a severe economic downturn.

Of course, severe economic downturn is inevitable at this point, but I’m just not sure it’s going to happen fast enough to avoid a fast increase in gas and oil prices.  We’ll see.  What I am sure of, however, is that :

1. During this severe economic downturn that will last years, planning for Peak Oil mitigation will be the last thing on anyone’s mind.  The price signal of oil will be buried in an avalanche of more terrible and more immediate economic signals.  Demand destruction will keep the price relatively low most of the time.
2. Few will be making large investments in energy efficient technologies as a result of #1.
3. When the credit crisis finally resolves, or begins to resolve, an economic recovery will immediately slam into a ceiling of Peak Oil.  World production by that time will be considerably lower than it is currently.  The newborn economic recovery will be immediately squashed by a spike in energy costs.

It is sad more haven’t read the Hirsch report, which describes all this in some detail, and which comes to the conclusion that successful mitigation of Peak Oil would require that we start 20 prior to the arrival of Peak Oil.  Oops, it would appear we’re already 20 years late in starting, and on top of that we have to first wait until the distraction of a multi-year recession passes before we’ll again have a chance to address PO.
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Jaime started primary classes yesterday. he spent the entire day in the new class. He came home happy, almost like a different kid from the one around in the last 2 weeks or so. The Toddler class was no longer holding his interest and he was eager to move “upstairs” where the older kids study. We went to the Primary Curriculum night this week and the teacher, Mrs. Vargas, seems like a non-nonsense type of person, very real. I think she will be a good teacher for Jaime.