Off On A Tangent

16 Aug

The market is trying to tell us something

If you have money in the markets, get it out.  The short story of why the market is falling now is that money loaned out as mortgages is not being repaid due to people defaulting on the loans.  Real Estate values and long term mortgage securities are slowly being revalued (they don’t sell as often as stocks, so you don’t know, minute to minute how much such things are really worth, you only find out now and then).  This re-evaluation has bankrupted a few hedge funds, American Home Mortgage, and soon Countrywide - the nation’s largest mortgage lender.  One big reason why a lot of mortgages are defaulting is ARM mortgages reseting at higher interest rates.  People can easily see their monthly mortgage rates jump $300+, and many many people bought houses beyond their means already.

So, the market is tanking - that usually means that bad news has come out, the market has taken it into consideration, and we’re off to the races on the upside again.  But hold up.  Here is the schedule of past and upcoming ARM resets, by dollar amount:

(source JP Morgan)
March 07 = 6 billion $
April 07 = 7 billion $
May 07 = 9.8 billion $
June 07 = 10 billion $
July 07 = 12 billion $
Aug 07 = 17.5 billion $
Sept 07 = 18 billion $
Oct 07 = 20 billion $
Nov 07 = 23 billion $
Dec 07 = 22.5 billion $
Jan 08 = 25 billion $
Feb 08 = 25 billion $
March 08 = 23 billion $
April 08 = 22.5 billion $
May 08 = 24 billion $
June 08 = 18 billion $
July 08 = 20 billion $
Aug 08 = 25 billion $
Sept 08 = 23 billion $
Oct 08 = 23 billion $
Nov 08 = 23 billion $
Dec 08 = 20 billion $

As you can see, this doesn’t top out until Jan-Feb of ‘08.  A big reason why the relatively small number of defaults so far has hit so hard is because of hedge funds being leveraged 90+% in their investments.  Ie, they took $1, used it to buy $10 worth of risky investments on margin.  When that investment drops 10% in value, the fund loses $1 - ie 100% of it’s actual monies.  When the lender of the other $9 comes by and demands his money back, you wind up with $0 after paying it back.  Less with interest.  This is how a “piddly” $100 billion problem turns into a crisis of mega proportions.
So, the market wasn’t expecting problems in August when ARM resets jumped from $12 billion to $17.5 billion.  This seems a rather late reaction since Bear Stearns funds went out of commission more than a month ago.  Didn’t that foretell coming problems?  No, it would be contained.  Then American Home Mortgage fell, but the market thought that would be contained.  Now Countrywide is being rumored to fall, and the market is finally reacting.  But what do you think the market thinks about Sept’s $18 billion in ARM resets, and Oct’s $20 billion, and Nov’s $23 billion?  And with lending practices really tightening up, at what rate are those ARMs going to reset?  No, the market still thinks the fed is going to lower the fed funds rate soon and that that will allow mortgage companies to keep their mortgage rates down, but that seems like wishful thinking.  There is nothing tying mortgage rates to the fed funds rate - already the fed is having to force-feed money into the system to keep its own rate at 5.25%.  And yet mortgage rates are going up anyway, because banks can no longer afford risky and unprofitable loans.  These ARMs, I predict, will be reset at higher rates than the market currently thinks, and many many financial institutions are going to come up dry.

The slow unwinding of the market in the next few months is going to be horribly depressing and is going to fool a lot of people.  But, it’s also a chance to get out now while you’ve only lost 10% from the highs.  Do so.

25 Jul

CVS (Not the Pharmacy)

I just realized that we have not made it official yet the latest news in the Stover Family. Mike and I are expecting our second child! :) We are excited with the prospect of having another little one in the house and giving Jaime a sibling.

Today the baby got tested for genetic defects. I underwent a procedure called Chorionic Villus Sampling (CVS), which collects genetic information about the baby. The procedure was not really painful, but it was a bit scary to me, not to mention having to endure an extremely full bladder for about 2 hours. The testing is done earlier than the amniocentesis and it is newer as well ,that is why you may not have heard of it.

I need to rest for 48 hours and cannot pick Jaime up. Results will be in in about 10 days. We are positive we will get good news. Now the only question we have is … Do we want to know if the little one moving inside me is a girl or a boy?

25 May

Progress?

Some people believe in Progress.  Others don’t.  Usually the source of disagreement is about what “Progress” means anyway.  Those who argue we’ve obviously made lots of progress point to things like the end of slavery, civil rights, technology, democracy, etc.  Those who don’t believe in progress point out slavery has ended many times in the past, democracy has come and gone in the past, etc.  But their biggest argument is that our current apparent “progress” is happenstance; that, take away some specific material benefits, mankind goes right back to doing things the way he used to do them before the arrival of those material benefits.  And, if those material things are only temporarily available to us, then this phase in history is just that, a phase, and not a culmination.  Ergo, no progress.

Maybe the best exmple of the no-progress point is the Olduvai Gorge Theory (http://en.wikipedia.org/wiki/Olduvai_theory and http://dieoff.org/page125.htm).  Please do go read those links in full.  To summarize the theory, energy production per capita steadily increased from 1930 to 1979.  Then it plateau’d and declined a little, and with peak oil, peak natural gas, and peak coal all arriving now or in the near future, is set for a steep decline.  Also, population increases between 1-2% annually.  When energy production per capita declines below the level it was at in 1930, then the industrial age is over, never to return, and in fact, the declines continue and we’ll experience a horrendous die-off due to our dependence on energy for food production, and world population will plummet due to disease, war, and famine down to 2 billion people.  To get a sense of just how horrendous our world would have to be to go from a population of 7 billion to 2 billion in, say, 40 years, see (http://canada.theoildrum.com/node/2516).  It’s a long article, but worth reading.

On the face of it, the theory is simple and hard to argue with.  Once you see that peak fossil fuels (oil, coal, natural gas) theory is, like evolution, not so much a speculative theory, but simply an observation (ie, US peaked in oil and natural gas production around 1970; the north sea peaked in oil production around 1999, mexico peak in oil and is currently crashing pretty hard, most countries of the world have peaked in oil production and follow a very predictable curve while doing so.  Natural gas tends to peak and then crash and vanish.  Oil tends to peak and then decline relatively slowly.), then you understand that the rise and fall of fossil fuel production is inevitable.  Because so much of our energy comes from these sources, and because other renewable energy sources appear to have a cap on how much energy they can provide (hydro is maxed out, solar and wind can’t provide more than about 20% of our power needs because of intermittancy and unreliability, plus the huge expense of them compared to other energy sources, nuclear - well, we’ll get to nuclear later), it seems to follow that, over a long enough time period, our overall energy availability is going to rise, and then fall.  If you add into the consideration the idea of energy per capita with an exponentially increasing population, then the situation is worsened, though not qualitatively changed.

But, there are some problems with the theory.  For one thing, energy efficiency has generally increased over time, and thus we do more with the same amount of energy.  I’d love to see a graph of energy usage per capita that factored in our overall societal energy efficiency increases, but such data isn’t readily available.  Any estimates on efficiency improvements is necessarily rife with interpretation controversy.  One could measure things in terms of GDP and inflation, but such measures are untrustworthy, as inflation is intentionally underestimated and GDP intentionally overestimated.  Furthermore, one could look around and see all kinds of energy-wasting activities that could easily be reduced or eliminated all-together (SUV’s anyone?), so, when we look at it, we need, at an absolute minimum, about 4 million barrels of oil per day (or its equivalent in natural gas) to grow our food - this oil/natural gas being used for fertilizer, pesticides, farm equipment - and probably about half of our transportation fuel - 14 million barrels per day - is a base necessary amount for the distribution of said food and other necessities.  This means the US absolutely needs 11 million barrels of oil or it’s equivalent to sustain itself and its food production, and since we currently use somewhere around 24 million barrels of oil currently for these needs, then it appears, at base, that we can improve our efficiency by 50% - with considerable hardship.  Of course, doing so means a lot of capital investment, as our entire vehicle fleet would have to be replaced (using up quite a lot of oil in new car production).

However, that means we’re still dependent on fossil fuels - there is simply no way to produce as much food as we do and distribute it without fossil fuels - our soils are too poor and depleted to grow much at all without enormous inputs of chemical fertilizers.  Without the fertilizers, some estimate that north america can support between 100-200 million people total, and that would not allow for any of the food imports that helps the rest of the world feed it’s remaining 6 billion.  So, 50% efficiency improvement doesn’t kill the Olduvai Theory, it just delays it.  And possibly not even for very long.

Another problem with the theory is that is equates fossil fuel energy with energy itself.  While true that fossil fuel energy is limited and will inevitably decline, that is not true of renewables.  This is where the per capita part of the equation plays in.  If population keeps increasing, a flat amount of total energy means a decreasing amount of energy per capita.  However, that energy is still there if there is a die-off and thus industrial civilization could reassert itself with a lower population level.  Furthermore, nuclear energy has potential to allow us to increase our energy production far into the future, though it does require the development of breeder reactors that can ultimately use all the uranium we find to create electricity.  Three problems with nuclear, however: 1) breeder technology is somewhat unproven and very unpopular currently, 2) building nuclear power plants has extreme up-front costs and thus requires central societal planning and committment (ie, free markets don’t tend to build nuclear power plants), and 3) we have problems with our current technology and infrastructure using electricity for transportation needs.  Nuclear remains problematic, but is very probably our best chance to escape the Olduvai crunch.

If we could do away with our cars entirely, and/or use only electric vehicles plus electrified rail, that would go a long ways towards eliminating our need for any fossil fuels - which we will eventually have to do.  But, what about farming?  How can we continue to produce food from depleted soil without the fossil fuels as fertilizer and pesticide input?  Even assuming the equipment is powered electricall from a nuclear power plant, we can’t escape the fact that our soil management in industrial agriculture is completely unsustainable.  Even with ever increasing fertilizer inupt and use of pesticides, our output is flat or declining.  Some estimate that Iowa is down to it’s last 6 inches of topsoil, from a initial 14.  Producing ethanol from corn to burn in our cars is only exacerbating that, as corn is one of the worst crops in terms of soil erosion and depletion.  Plus the fact that when you burn the ethanol, you are sending into the atmosphere nutrients that belong back in the ground.

I don’t see anyway out of this part of the problem except for extremely intensive, highly advanced and localized, labor intensive farming - techniques like permaculture, small scale organic farming where human labor and intervention and ecologically high-tech techniques are brought to bear on the problem of food production.  Rather than a 5,000 acre farm with enormous tractors and harvestors and planes for spraying fertilizer and pesticides, we’ll need 50 acre farms where every inch of soil is carefully managed, where every input into the system is measured, and every output is tracked and eventually returned to the system (as manure or whatever).  This leaves us our high-tech society, but at the expense of requiring a higher percentage of people involved in farm labor and maintenance.  Our energy efficiency will have to be maximized as much as possible, and wasteful activities eliminated entirely.  Virtually all our technology research which currently goes into making things bigger and better and more powerful, will have to switch to making things smaller and better and more efficient.  And more sustainable in terms of the environment.

But who believes we’ll choose this route over war, thievery, and greed?

04 Apr

The subject is too large

I am despairing over my attempts to write up threat scenarios from peak oil. The number of economic factors and problems we currently face are so numerous and complicated. I have no certain thoughts of what might happen. The threat I’m worried about is oil and gas spiking in price, natural gas spiking in price, all necessary items like food going up in price while suburban real estate collapses in value as a result of no one wants to live there when gas costs $10/gallon and seems to be heading only upward. The stock market takes a huge tumble as a result of the halt to any future growth as a result of energy supplies not growing, and declining even, plus the effects of the bursting of the housing bubble, aided by the newly rising cost of gas.

SUV’s become worthless, and people’s houses become worthless. They lose their jobs because the economy tanks and we experience a deep recession. I lose my job. I can’t pay my mortgage and my house is worthless, thus forcing me to either liquidate most of my 401k/IRA assets to pay off the debt, or declare bankruptcy. Vivi, Jaime and I move in with her parents. Other people are in worse shape - they have an SUV and a house, both of which now cost too much for them to keep and use, and both of which are completely worthless to them. They can’t afford a new prius, so they just scrap the cars altogether.
With the eroding tax base, a deep recession, all the newly needy potential welfare recipients, and a climbing debt to pay off, the federal government can either A) raise taxes and wreck the economy some more, or B) not raise taxes/lower taxes, and default on some of its responsibilities, or C) borrow a whole hell of a lot. A) probably leads to deflation, as a further wrecked economy leads to stock market collapse, which along with the real estate collapse means so much money is destroyed that we have deflation. C) probably leads to hyper-inflation and the eventual destruction of the US Dollar as a viable currency. B) means a whole lot of suffering for a whole lot of people, and possibly leads to stagflation as interest rates skyrocket due to doubts that the government can pay off it’s debts with a decreasing tax base.
None of this leaves a whole lot of room (ie money) for replacing the American vehicle fleet with new energy efficient vehicles, or building new solar/wind power generators - you know, for replacing all of the infrastructure in this country that currently exists to service our cars and suburban lifestyles.

26 Mar

Let’s Outline the Threats to Discuss

I think the general idea that things are not heading in a good direction
is not that uncommon. At Christmas, Dad and I spoke about issues
regarding the downward trajectory of the US in the World rankings for
quality of life and other parameters and the potential catastrophes that
might accompany such a decline (as US will still hold incredible
military might and may become less inhibited in using it. How often did
we hear calls to nuke Iraq rather than send in troops?). How will we
respond when China decides they deserve to have the same quality of life
we do and start protecting that right with their military (take over a
large oil rich country for example)?

To me there is no doubt that sometime over the next 2 decades major
changes in the way all people live will have to take place. I still
believe there is a reasonable chance that we will be able to make these
changes without total disruption of our civilization or nuclear
holocaust. Even as a natural skeptic I believe we have a tremendous
potential to rally once we’ve seen the light to make major changes much
more rapidly than we can now foresee. From what I read, we have the
technology to replace oil. It is not just a matter of generating
equivalent amounts of energy by other means, but reducing needs through
recycling, conservation technologies, and changes in life-style.
Already I believe there is a trend toward younger people living in
cities in condos. The suburban life-style was a failed experiment and
will fade. Lest the discussion become to depressing I see reason for
hope that as a society we will be forced to move in a direction that
brings us back into tighter communities where I believe the majority of
people will find greater happiness and fulfillment.

I guess what I’ve struggled with is trying to predict in what form the
changes are most likely to occur. With the exception of the Soviet
Union, every other world super power in history has gone down fighting
and had no choice but to surrender control. We have a choice and I
think there will be a lot of pressure to maintain our primacy at all
costs. (Fundamentalism in this country being a major difference between
the US today and the Soviet Union of the ’80s, when the rapture is
something to be looked forward to, then mutual annihilation doesn’t seem
so bad). So nuclear apocalypse is one way to go. Alternatively, we may
slip into a severe depression that could lead to rioting, general
upheaval, and Irag-style anarchy. Certainly other possibilities and
variations of these themes are also possible. To make any meaningful
plans we must first consider what we are planning for and how likely we
believe these to be. Plans for nuclear apocalypse might be considerably
different than an economic depression. My suggestion would be to
thoroughly discuss what the potential threats are, how they are likely
to play out, and what the probabilities are for best and worst cases.
Without such a common grounding I don’t think we could get too far in
making any plans because I am sure we all come into this discussion with
different information, different perspectives that it would be helpful
to share.

On another (but related) topic:

In one of your other articles, Mike, you discuss immigration as a moral
and economic imperative. I’ve been sympathetic to the immigrant
situation and have generally been in agreement with your arguments, but
more recently I have started to think that while it may be helpful short
term, we are in fact delaying and worsening the eventual crisis. We are
acting as a release valve for surplus population in poorer countries
instead of keeping pressure on to reduce growth. Europe would have
negative growth in population if it weren’t for immigration, we would be
almost static. That might hurt economically now, but would help us
prepare for the future that is to come and would help prevent the
World’s population from overrunning everything. If the developed
countries which use the most energy per capita were to stay static or
start to decline in population, that would help diminish the impact of
declining energy.

We won’t make a dent in suffering in underdeveloped countries by letting
them all come here. Even our attempts to help them by sending medicine
and food has done little more than provided a means to increase the
population and lead to more people suffering. The only solution I see
is to learn how to live sustainably within the resources of your own
country. Then export that knowledge. An important part of
sustainability is population control. It is a well-know biological
principal that, left unchecked, all species grow logarithmically until
they deplete there resources at which time the population collapses.
The resources typically are then replenished (food source regrows for
example) and the cycle repeats. We need to be our own check if we don’t
want this to happen. I now believe this should start at the borders of
developed nations, and spread to developing nations as quickly as
possible.

If developing countries shift toward slowing and eventually reversing
population growth as they develop (as might be expected based on EU and
US trends) this would further help the transition toward static or
declining growth.

Thanks for bringing up the discussion Mike, I think it’s a good
discussion topic to bring us together and is worthwhile pursuing to see
if we can come up with a consensus on what if anything we should be
doing as individuals and as a family.

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