That being said, I offer my opinion that there is a strong possibility that in 2010 the tender green shoots of 2009 will be violently chopped down to be replaced by a flock of black swans from hell. Sometimes, even in the uncertain world we live in, you just have to take a stand. It’s up to you to decide if my views have any merit.

The concept of “Black Swans” was developed by Nassim Nicholas Taleb and refers to high-impact, hard-to-predict, and rare events beyond the realm of normal expectations. In portfolio management these are events that are computed to be well outside of the range of statistical probability and are therefore of such a low risk they are not considered relevant to the risk management of the portfolio.

Nassim Taleb thinks that black swan events happen far more often than anticipated by the number crunchers and portfilio managers. I have previously posted about Black Swan Events. Those readers not that familiar with the black swan concept may want to read the post before pressing forward.

Financial events in 2009 have paved the way for a flock of really nasty black swans to emerge in 2010 - the black swans from hell. Since by their very definition black swan events happen without warning forecasting their arrival is indeed a tricky business. However, actions already taken by the United States government, various USA state governments, and governments of other developed and developing nations move forward the probability of 2010 being off the charts as a black swan hell. Here is why.

1.) Governments Attempting to Cure Problems Caused by Too Much Debt by Issuing More Debt.

The sad development of bubble economies in the recent past is well known. There was the dot.com bubble, the real estate bubble, the stock market bubble. the consumption bubble. As each bubble began to implode various governments of the world, lead by the US, tried to reinflate the old bubble or inflated a new bubble. Even though the bubbles were largely caused by governments keeping interest rates far too low for far too long, all the while creating new fiat currency, governments seemed to say “what bubble, let the good times roll”. This misguided policy, which results in massive misallocations of capital, not only continues but is being expanded by the trillions of dollars.

In the US, the Treasury Department will run a huge dollar deficit in 2010. The Obama administration said the economic downturn has been a bit worse than previously thought. It’s estimate for the 2010 budget deficit has been updated - increased by 19% - to $1.5 trillion. The Congressional Budget Office disagreed. It tallied up its’ own count and came up with $1.4 trillion. Either way, when you get into the trillions, even the low trillions, it’s a hell of a lot of money. So much, in fact, that the human brain can’t seem to get a handle on it. Debt in the trillions will create fertile feeding grounds for black swans from hell.

2.) Confidence Building Rather Than Fixing Problems.

The year 2009 has lead to a multitude of reassuring comforting statements from all of the important con men and women, errrrrr, excuse me, government spokespersons, such as President Obama, Ben Bernanke, Tim Geithner, and FDIC chairperson Sheila Bair, as well as an army of main media cheerleaders on MSNBC and elsewhere. Not to worry, they all say in perfect harmony, green shoots are coming up everywhere.

In 2010, as the temporary boost to the economy by programs like cash for clunkers and other “shovel ready” stimulus programs fades away, the replacement of green shoots by black swans is almost certain to occur. The stimulus programs do not fix anything. They only paper over deeper structural problems. We are not in a recession but in a depression caused by a systematic failure of our consumption based economy. While confidence building is an important function of government, our leaders cheerleading without having put effective policies in place will lead to disappointment and anger.

In 2010 disappointment and anger on the part of voters and investors will lead to fertile breeding grounds for black swans.

3.) Feds Balance Sheet Already Doubled.

The Federal Reserve Bank’s balance sheet provides the monetary ballast for the whole economy. As the Fed’s balance sheet expands, so does the amount of financial activity the economy can support. The challenge is that in at least in theory, the potential for inflation increases geometrically. Each new dollar on the Fed’s balance sheet could be multiplied by $10 in the real economy. Good old “no depression on my watch” Ben Bernanke has already doubled the Fed’s balance sheet - buying an additional $1 trillion worth of Wall Street’s and the Federal Reserve Bank’s toxic waste failures. According to Goldman Sach’s top economist, Jan Hatzius, Bernanke might have to buy another $2 trillion worth in 2010 - bringing the total to $4 trillion.

Black swans from hell must love those trillions. We can soon expect a visit.

4.) Number of Troubled Banks Keeps Increasing.

The FDIC reported on Thursday, August 27, that the number of troubled banks rose to 416 at the end of June, up from 305 at the end of March. Says MarketWatch: “FDIC said this is the largest number of banks on its ‘problem list’ since June 30, 1994, when 434 banks were on the list. Assets at troubled banks totaled $299.8 billion, the highest level since Dec. 31, 1993, the agency said.”

So far this year 84 FDIC insured banks have failed. With the FDIC’s funds to support bank failures fast approaching zero, it is highly likely that the FDIC itself will have to be bailed out in 2010. Who knows what type of black swan might show up to feast at a FDIC bailout?

While time and space do not permit a full listing of the potential back swans that 2010 may well bring to our weakened economy you can be assured that 2010 has a good chance of being a black swan heaven and an investors hell. 2010 has a real chance of surpassing 2008 as a prime year for black swans. Should a record number of black swans be recorded in 2010, however, the record may not last very long. With another round of mortgage resets peaking in 2011 the hell caused by black swans may be with us for a very long time.

While Wall Street welcomed the change which will allow banks to use a mark to model  method of setting a value for their toxic assets the move will only cover up the horrible loans and derivatives already on the banks books. The banks will certainly use their own model to carry nearly worthless assets, perhaps in some cases, entirely worthless, at values far in excess of current market value.

The change in the FASB guidelines will probably torpedo Tim Geithner’s latest plan to set up private-public auctions that he had hoped would remove the toxic assets off the banks books and into the hands of favored investor groups heavily financed by the government. Geithner has come under heavy fire for the plan as both noted economists Joseph Stiglitz and Paul Krugman have labeled the plan as a robbery scheme at the expense of the taxpayer.

The banks will now likely not want to risk an auction that while weighted in their favor by virtue of generous government financing to the bidding partnership may still set a value far less than if the banks can just hold onto the assets and mark them to model. After all it will be their own model that they will be using and I expect the evaluations will be in la la it’s a wonderful world after all land.

The Wall Street rally probably does have legs as it is coming from deeply oversold levels. However, I expect that the rally is only a sharp rally in a big bad bear market and when the bear goes to work again, probably sometime shortly after Memorial Day, the bottom truly will fall out.

The change in FASB accounting rules may look good to the banks for now but are sure to spread grief around later. Trash is trash no matter how it is temporarily evaluated and in time the trash will start to stink even no matter how hard the banks try to hide it. In addition, another pile of trash is on its way. The commercial real estate market is sinking fast. Empty office and retail space produces no income and a lot of maintenance expenses.

Many banks are insolvent now and poorly qualifies to handle a flood of non performing commercial real estate loans. By easing mark to market accounting rules the FASB is actually doing the nation a huge disservice. Zombie banks will stagger along longer than they should be allowed to stand and recovery will be delayed for years. A full recovery will probably never materialize.

Many of the banks toxic assets will get only worse as time goes by. We are not returning to the happy go go days of over leveraging and a crazy spend, spend, spend consumer based economy in our life times or ever. A new order will eventually evolve that will require downsizing of all things. Glossing over reality with mark to model accounting will only lead to greater pain over a longer time period.

But for now let the good times roll. Just keep your eye out for the big bad bear and beware of that horrid smell drifting out of big banks mortgage filling cabinets.

Here is the TheFreeDictionary definition of insolvent:

1.
a. Unable to meet debts or discharge liabilities; bankrupt.
b. Insufficient to meet all debts, as an estate or fund.
2. Of or relating to bankrupt persons or entities.
n.
A bankrupt.

I’m sure that Obama would like to usher in a new era of transparency in government. I expect that the new Treasury Secretary, Tim Geithner, and Obama still haven’t been able to grasp the awful truth, the US banks are insolvent. Neither the banks or the Obama government are willing to write down to market value the remaining trillions of dollars in near worthless or worthless assets on the banks books in the vain hope that markets will recover and that values will increase.

Financial markets will recover in time, perhaps a lot of time, but it is unlikely that mortgages secured by the values of trashed and stripped down houses will recover or that mortgages secured by the value of closed shopping malls that remain closed will have much value. Ever. It is almost certain that the days of wild arsed go-go financial “leadership” by banks and Wall Street investment firms will not return, at least not in our lifetimes.

The trillions of dollars in toxic “assets” held by the banks have a true value of zero or near zero. The trillions of dollars that have gone to money heaven will not return from the land of the money dead.

No wonder Tim Geithner’s plan to revive the banks had so little detail and that Wall Street tanked as his presentation of the non plan proceeded. No one in Washington has a clue as to what will work to fix the US banking problem. In truth there probably is not a fix short of nationalizing the banks. The new administration is not yet willing to explore that option. I expect after pouring a few more trillion dollars down the toxic waste rat hole someone in government will eventually find another word for nationalism and in fact nationalization of the banks will take place under that code name.

With nationalization the present bunch of “highly paid talent” that got us into this mess can be booted out. Many of them should probably be escorted to new digs at a federal prison although the power of the good old boy network is unlikely to let that happen. If it were up to the public I expect that it would be off with their heads.

New good banks can be created and performing assets and customer deposits can be transferred to the new banks. The toxic assets would be left in the original bad bank. The stockholders and bondholders would be wiped out in such an arrangement but the new government owned bank , under new management, would have a good chance of being successful.

While nationalization is a dirty word to believers in the free enterprise system when you become insolvent and there is not enough money in the entire world to restore solvency options become limited. It would be better to face reality now than after wasting trillions of dollars that will have to be printed out of thin air.

Unfortunately, the government is also insolvent so it must act before everyone in the world realizes that sad fact. Who will want to lead money to a government that can only pay it back by wildly inflating its currency? The major banks are insolvent and expect to be saved by an insolvent government. Hmmmmmmm. Maybe buying more gold even as it reaches $1,000 an oz has some merit. The complete distrust of the banking system and of paper money of any kind can not be too far away.

The damage rendered to the world’s economy and financial system by the toxic brew of derivative financial instruments conceived and unleashed upon the world by Goldman Sachs and other Wall Street investment banks is beyond measure. Losses are already in the trillions of Dollars yet there are likely more even larger trillions of losses to come during 2009.

The resulting financial carnage has destroyed the investment banking industry. Lehman Brothers was allowed to fail. Bear Sterns was “rescued” by a government bailout, The shell of Merrill Lynch was given burial by a hastily arranged marriage to the ailing Bank of America, and Morgan Stanley and the once proud Goldman Sachs had to give up their investment bank status and arrange for commercial bank licences. The investment bank profit machine has been broken beyond repair. Goldman Sachs will never return to the level of profitability that it once enjoyed.

During 2009 an almost total breakdown of the financial system will occur. This process is already well underway as the black hole of a compressive deflationary deleveraging of trillions of dollars of debt accelerates. As the process is geometric the destruction of capital will far outpace the government’s ability to re-inflate the economy. Bailout after bailout will cause the treasury to print money it doesn’t have. Initially the flood of “new money”, or what the treasury hopes will pass for money, will have little effect. The deflation will continue.

However, once the forced liquidation of debt and the liquidation and resultant destruction of the value of assets, such as houses, commercial real estate, stocks, art works, collectibles, commodities of all sorts including oil has run its course, the trillions of dollars in fiat money thrown at the deflationary problem will have severe unintended consequences.

Probably the economy will rapidly move from deflation to hyper inflation as people realize the world over that the flood of trillions and trillions of new dollars has no real value and only postponed the death of large inefficient poorly managed companies. Who can believe that an effective nationalization of our financial system and what’s left of our manufacturing base will in the long run be good for the American economy?

The whipsaw effect of a deflationary economy moving to hyperinflation will be a catastrophe of the first order. People holding only US dollars as assets will be wiped out in a hyperinflationary environment as the paper becomes nearly worthless.

Goldman Sachs is not immune from the financial meltdown under way worldwide. While Goldman Sachs reported 2008 earnings per common share of $4.47; fourth quarter loss per common share was $4.97. Goldman has finally began to realize the decline in value of its poor investments in the sub prime mortgage sector and the collapse of the mergers and acquisitions market. Alas, even Goldman couldn’t resist taking toxic assets onto its own books rather than dumping them on trusting investors and collecting fees and commissions.

Note the decline in income for 2008 compared to 2006 and 2007. While still showing a profit for the year 2008 with a loss of $4.97 for the fourth quarter the horrible conditions of the credit markets are beginning to bite even Goldman Sachs. The figures are from Goldman’s website in a PDF file of the 2008 K-10 document filed with the SEC.

2008 2007 2006
Year Ended November
Investment Net revenues . . . . . . . . . . . . . . . $ 5,185 $ 7,555 $ 5,629
Banking Operating expenses . . . . . . . . . . 3,143 4,985 4,062
Pre-tax earnings . . . . . . . . . . . . . $ 2,042 $2,570 $1,567
Trading and Principal Net revenues . . . . . . . . .$ 9,063 $31,226 $25,562
Investments Operating expenses . . . . . . . . . . 11,808 17,998 14,962
Pre-tax earnings/(loss) . . . . . . . . $ (2,745) $13,228 $10,600
Asset Management and Net revenues . . . . . . . . .$ 7,974 $ 7,206 $ 6,474
Securities Services Operating expenses . . . . . . 4,939 5,363 4,036
Pre-tax earnings . . . . . . . . . . . . . $ 3,035 $ 1,843 $ 2,438
Total Net revenues . . . . . . . . . . . . . . . $22,222 $45,987 $37,665
Operating expenses (1) . . . . . . . . 19,886 28,383 23,105
Pre-tax earnings . . . . . . . . . . . . . $ 2,336 $17,604 $14,560

Unfortunately, this is predictable as the typical US citizen/consumer has little if any idea as to the vast changes in lifestyle that will soon be a coming. It is highly doubtful that Obama and his “experienced” team see the need to completely transform the American economy from one of debt and consumption to one of savings and manufacturing. The odds are great that within a few years from being the largest consumer economy in the world the US will migrate at blinding speed to a survival economy where millions of citizens will not be able to hang on to a decent lifestyle. This process is already underway.

There is one man who has a realistic take on the tremendous changes that are taking place. That man is James Howard Klunster. His take on the year 2009 is partially revealed below.

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There are two realities “out there” now competing for verification among those who think about national affairs and make things happen. The dominant one (let’s call it the Status Quo ) is that our problems of finance and economy will self-correct and allow the project of a “consumer” economy to resume in “growth” mode. This view includes the idea that technology will rescue us from our fossil fuel predicament — through “innovation,” through the discovery of new techno rescue remedy fuels, and via “drill, baby, drill” policy. This view assumes an orderly transition through the current “rough patch” into a vibrant re-energized era of “green” Happy Motoring and resumed Blue Light Special shopping.

The minority reality (let’s call it The Long Emergency ) says that it is necessary to make radically new arrangements for daily life and rather soon. It says that a campaign to sustain the unsustainable will amount to a tragic squandering of our dwindling resources. It says that the “consumer” era of economics is over, that suburbia will lose its value, that the automobile will be a diminishing presence in daily life, that the major systems we’ve come to rely on will founder, and that the transition between where we are now and where we are going is apt to be tumultuous.

My own view is obviously the one called The Long Emergency.

Since the change it proposes is so severe, it naturally generates exactly the kind of cognitive dissonance that paradoxically reinforces the Status Quo view, especially the deep wishes associated with saving all the familiar, comfortable trappings of life as we have known it. The dialectic between the two realities can’t be sorted out between the stupid and the bright, or even the altruistic and the selfish. The various tech industries are full of MIT-certified, high-achiever Status Quo techno-triumphalists who are convinced that electric cars or diesel-flavored algae excreta will save suburbia, the three thousand mile Caesar salad, and the theme park vacation. The environmental movement, especially at the elite levels found in places like Aspen, is full of Harvard graduates who believe that all the drive-in espresso stations in America can be run on a combination of solar and wind power. I quarrel with these people incessantly. It seems especially tragic to me that some of the brightest people I meet are bent on mounting the tragic campaign to sustain the unsustainable in one way or another. But I have long maintained that life is essentially tragic in the sense that history won’t care if we succeed or fail at carrying on the project of civilization.

While the public supposedly voted for “change” this fall, I maintain that they underestimate the changes really at hand. I’m far from convinced that Mr. Obama really sees the kind of change we are in for, and I fret about the measures he’ll promote to rescue the Status Quo when he moves into the White House a few weeks from now.

Where We Are Now

Without reviewing all the vertiginous particulars of the year now ending, suffice it to say that the US economy fell on its ass and that the “global economy” did a face-plant as well. The American banking sector imploded spectacularly to the degree that investment banking actually went extinct — as if a meteor landed on the corner of Madison Avenue and 51st Street. The response by our government was to shovel “loans” onto the loading dock of every organization that pretended to be something like a bank, while “bailing out” an ever-longer line of corporate claimants with a pitiable song-and-dance. The oil markets went on a roller coaster ride. The housing bubble collapse grew to avalanche velocity (taking out whole colonies of Realtors, mortgage brokers, and construction contractors in its path), the commercial real estate sector developed hemorrhagic fever, retail drove off a cliff on Christmas Eve, the stock market fell in the toilet, jobs and incomes went up in a vapor, and tens of millions of ordinary citizens addicted to revolving credit found themselves in a life-and-death struggle for the means of existence. None of this is over yet.

The Year Ahead

Much of what has been lost in 2008 will not be recovered: enterprises, personal fortunes, chattels, reputations.

I expect a period of euphoria to mark the early weeks, perhaps months, of the Obama team. It will be a relief to have a president who speaks English correctly and has experienced something like real life prior to politics. Restoring credibility and legitimacy in leadership will be a big deal. If nothing else, we may recover a collective sense of consequence from a president who tells the truth, even the harsh truth. The age when it was enough to claim that “mistakes were made” might be over. A sign of this sort of change may be the commencement of prosecutions for misdeeds in banking and securities that are now destroying the entire system of deployable capital. A good place to start will be an investigation of Henry Paulson for insider trading stemming from Goldman Sachs’s shorting of its own issued mortgage-backed securities when Mr. Paulson was the company’s CEO. Beyond his case, there should be enough work at Attorney General Eric Holder’s office to employ a line of law school graduates stretching from Brattle Street to the planet Mars. It will be salutary for the nation to see those who engineered the banking collapse come to greater grief than the mere surrender of their Gulfstream jets and Hamptons villas. By the way, being allergic to conspiracy theories, I don’t believe for a minute that there is some kind of shadow elite of “Bilderburgers” standing in the background to protect these grifters — and I also believe the reason these paranoid notions persist is because it is otherwise hard to account for the extravagant irresponsibility of the Bush circle and its servelings.

Apart from “cleaning up Dodge,” so to speak, and from issues of collective character-and conscience-in-office, I worry that the avalanche of troubles already ongoing will overwhelm Mr. Obama and his people. It’s also well worth worrying whether they will pursue policies similar in kind to the ones pursued by Bush, namely throwing money at everything and anything, and it sure looks like they are planning to do just that. I am especially concerned about an “infrastructure stimulus” project aimed at highway improvement at the expense of public transit. This would be the epitome of a campaign to sustain the unsustainable. We need to begin planning right away for a transition away from automobiles, not in order to be good socialists but because Happy Motoring is at the core of our unsustainability trap. The car system is going to fail in manifold ways whether we like it or not, and it will fail due to circumstances already underway. For one thing, it will cease to be democratic as the remnants of the middle class find it impossible to get car loans, or pay for fuel, or insurance, and that will set in motion a very impressive politics-of-grievance setting apart those who are still able to enjoy motoring and those who have been foreclosed from it. Contrary to what you might make of the current situation in the oil markets, we are in for a heap of trouble with both the price and supply of petroleum (more on this below). And there is no chance in hell that any techno rescue remedy to keep all the cars running by other means will materialize.

A consensus in the blogoshpere says that the stock markets will rebound strongly during the first Obama months. This is possible just on the basis of pure “animal spirits,” but the Obama Bounce will occur against a background of continued dismal business and financial news. It will appear to defy that news. By May of 2009, the stock markets will resume crashing with the ultimate destination of a Dow 4000 before the end of the year. Meanwhile, jobs will vanish by the millions and companies will go bankrupt by the thousands, especially in the so-called service sector, and in all the suppliers of such, along with the landlords in all the malls and strip malls. The desolation will mount quickly and will be obvious in the empty storefronts and trash-filled parking lagoons. In the event, two things will become increasingly clear to the nation: that the consumer economy is dead, and that there is no more available credit of the kind that Americans are in the habit of enjoying.

Regards,
Jim Kunstler
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For additional insights from James Howard Klunster visit his website.

Well, we shall soon see. In my view 2009 is going to be a very rough year in the financial world. Many analysis and investors, I believe Mr. Warren Buffet, included, still really don’t get it. They are still talking about America pulling out of the recession sometime during 2009 and on we go to even greater things in investment land. In fact Warren Buffet recently made a highly public disclosure that he was once again bullish on stocks.

I fear that many people, even seasoned pros like Buffet, are still underestimating the beast that has us in its claws. This is a super cycle to the downside. Scores of years of improperly evaluating risk, of improperly allocating capital, and of mispricing investments of all sorts, has to be and will be corrected. The beast will not be denied.

The best efforts of the hard working Ben Bernanke, Wall Street’s best friend, Hank Paulson, and even the new hoped for savior, President elect Barack Obama, will be like spiting into a 100 mile an hour headwind. The blowback is going to be impossible to avoid and may well make matters worse. All of this fiat currency that is being created by the US government to fight deflation will likely blow back within a year to eighteen months as an inflationary gale. In fact, the blowback may be in the form of a hyper inflationary hurricane.

Warren Buffet’s style of investing has served him well over the past decades. But perhaps it is his own professionalism and investing style that is about to cause him and his investors grief. Bottom fishing for solid companies with proven management, then buying the chosen few and holding on is one thing. However, trying to guess and to time the bottom of a super down cycle is all together another. The down draft will likely last much longer then you first think. Remember, that Warren Buffet make his fortune and reputation during one of the great bull markets in history. We will probably not see another one during our lifetimes.

Companies that are well managed and that had excellent prospects will be dragged down by the firestorm of further deleveraging and panic that 2009 will bring. It is true that the way to investment riches often is to buy when there is blood in the streets. Then one hangs on for the long term.

The challenge of that approach in the coming panic is that the blood may be your own and of those companies that you have prematurely positioned in your portfolio. Even your formerly great companies may bleed to death before the end of a super cycle. As may you.

While I am not forecasting the end of the world I am forecasting the end of the old world and of the old way of doing business. Do not expect things to go back to “normal” in an energy starved world. And our preferred source of energy, crude oil resources, may turn out to be one of our lesser challenges. The consequences of climate change will probably grab our full attention faster than we now think.

Investment riches will flow to those who invest in companies that find ways of producing value, perhaps those companies that produce those things that are truly needed by the masses, like clean water and new sources of affordable energy. These companies may have to revert to water power as their major source of energy as existing power grids break down.

The old dinosaurs, like GM, Chrysler, Citigroup, and the like will almost surely perish. In regard to BRK.A some reported actions that if true are very unlike Buffet’s investment style are sure to cause problems in 2009. Writing naked put options is a risky venture at any time. For the year ahead it looks to me to be reckless. The prospect of losses as stocks totally collapse just couldn’t be worth the premium received upfront.

2009 will soon be upon us. The big question is if any of us are ready? I think not. That is why selling BRK.A short may make sense for 2009. I expect that the economy during 2009 will be far worse than now forecast.

That event will gain quite a lot of attention for the peak oil concept. Even now, in spite of all evidence to the contrary, many Americans believe that peak oil is only a myth and should be of little concern. The next great crisis, after the global financial meltdown, will kick in about the time that the consequences of climate change will become too obvious to ignore. The convergence of disasters, a financial meltdown, climate change, and peak oil, will be difficult for any government to manage, even one headed by Barack Obama.

Oy! What will the US do. Invade Mexico to grab whatever oil the county has left? Invade Canada so that Americans have a more pleasant climate to retreat to as vast parts of the Southeastern US turns into a desert?

A drastic change in all of our futures is closer than you think. But how do you prepare? There is one futurist who has a few ideas. One is that you may want to know how to grow your own food.

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As said by James Howard Klunster on peak oil:

“What’s roiling backstage, itching to shove climate change out of the spotlight, is Peak Oil, which is currently poorly understood at best by the public. For one thing, it’s not about running out of oil. It’s about the complex systems we depend on for everyday life in this country becoming unstable and failing as we enter the slippery slope of global oil depletion – a point which, arguably, we are already at. By complex systems I mean the way we produce our food (oil-dependent agri-business), the way we do commerce (Wal-Mart, et al), the way we do transportation (extreme car dependency), the way we do finance (Ponzi-style), and so on. The oil markets themselves are just another such complex system – and a year-over-year price hike of about 100 percent for a barrel of oil is certainly a manifestation of instability.

Price hikes are one thing. There is plenty of evidence that the American public can keep sucking up increases a while longer. What will probably bite harder is spot scarcities, when your favorite convenience store hangs a cardboard sign on the pump that says “out of gas.” This is liable to resolve out of a growing export crisis combined with a new oil nationalism – phenomena only recently acknowledged even by experts in the trade. It now appears that exports, in nations with surplus oil to sell, are going down at an even steeper rate than production declines. A country like Saudi Arabia may have produced X percent less oil in 2007 over 2006, but their exports actually declined X+5 percent.

Why? They are using more of their own oil. The population is growing robustly. The Saudis are building the world’s largest aluminum smelter and many chemical factories. Russia, another big exporter, saw its car sales jump by 50 percent in 2007. Mexico is depleting so rapidly, and using so much more of its own oil, that it might be out of the export game altogether in three years. The new oil nationalism is prompting countries like Norway and Russia to husband more of their own resources as the awareness hits that they are past peak and might want to keep their own motors humming further into the future. They are also trending more toward selling oil on the basis of long-term contracts with favored customers rather than just auctioning the stuff off on the futures market.

All of this ought to be bad news for big importers like the USA – more than half of the oil we use. These days, we are not such a favored customer among other nations, in particular those of the Islamic persuasion. And when Mexico stops exporting we will lose our number two source of imports. Imagine that? Few Americans have imagined it so far, which is why we are about to be blindsided by this set of problems.

As they gain traction we’ll be forced to make very different arrangements for virtually everything that constitutes everyday life in our society. Living much more locally will increasingly be the only choice. We are utterly unprepared. We’ll have to grow food differently, at a smaller scale, closer to home, with fewer oil-and-gas-based “inputs.” It will surely require more human attention. National chain discount shopping will shut down as its economies-of-scale dissolve and formulas like the “warehouse on wheels” and just-in-time inventory lose viability. Happy motoring will fade into memory and the entire suburban equation will wilt along with it. And just about everything else you can name from centralized high schools to professional sports will be cruelly affected by problems of scale and energy.”
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For the complete Klunster article and for additional articles written by James Howard Klunster vist his website.

Recently Warren Buffett lent the markets some support by revealing on 16 October that he was bullish and buying US shares. Buffet has also make a few market moves that are very un-Buffet like. He sold a ton or two of naked put options to pocket the premium income. This is a dangerous trade in a meltdown economy. By publicly touting the stock market and bottom fishing is Buffet trying to talk up his own positions? Does he really think that the market will revert to “normal” over the next year or so? Have current market conditions confused the aging Buffett? Only time will tell but it could be that Buffet’s luck is about to run out.

It looks to me that the deleveraging of nearly all asset classes related to securities has a long way to go. 2009 looks to me to be shaping up as a very rough year. Than by 2010 to 2012 the energy crisis will become much more acute as Mexico will have precious little if any oil to export to the United States and worldwide oil production will not be enough to satisfy demand, even with slow growth world economies.

Warren Buffet once said that “The stock market is simply the transfer of wealth from the impatient to the patient”. What does Warren Buffet (thought by many to be the greatest investor of all time) mean by this quote? Basically he means to buy solid companies when markets are cheap and to hold on for the long term. However, the problem with this approach is that in the long run we are all dead, as a famous economist once said.

We should not forget that once great companies can and do occasionally die too. For example, take a good critical look at GM. How would you like to still be holding a once mighty portfolio comprised mostly of GM stock that was purchased at market bottom “cheap” prices over the past fifty years? No matter how attractive your average price might be as GM approaches bankruptcy and a price of zero the value of your portfolio will not be very impressive. Maybe you should have sold out during the GM boom times.

The stock market crash of 1929 was only the end to another financial bubble. The classic pattern of extreme euphoria and irrational expectations will always lead to devastating financial crashes. The stock market crash of 1987 is just one historical example backing up the main point. The stock market crash of 1929 greatly added to economic uncertainty: no one at the time knew what its consequences were going to be. The natural thing to do when something that you do not understand has happened is to pause, wait, and hold onto your “great” company stocks until the situation becomes clearer. The problem is that during the waiting period values can plummet, perhaps even to zero as once great companies fail.

Then when you think that the market is turning around there is the danger that in the present crisis you will just use historical data to determine when the market is “cheap” and jump back in far too early, not realizing until too late that the present downturn is anything but normal. Perhaps we see that type of behavior in Warren Buffet’s present positioning of stocks.

The stock market crash of 2008 is the worst that the world has ever seen in terms of the number of points erased from the major indices. At its lowest point to date, the Dow Jones Industrial Average has lost a historical 6749 points. The huge derivative time bomb is still ticking. Who knows how low the market will go should the derivative deflation bomb explode as it almost surely will in 2009?

Investors and companies are already making less money, companies are closing, and therefore people are buying less. This affects virtually every aspect of the economy and causes overall economic depression. Investors are often asked about their investment objectives. Are they investing for growth or for income? This year investor expectations of the future value of the stable component of corporate earnings (dividends) did not materialize. Stock prices, which had been bid up in expectation of that future stream of income continuing to grow rapidly, fell sharply as a result.

With a stream of bankruptcies almost certain to occur in 2009, involving even well established companies that are household names, it may be that even for a Warren Buffett being in a combination of cash and precious metals is the best position of all. In the current investment environment even Warren Buffet can get awfully unlucky as can many other investors. Has Warren Buffett become an unlucky investor?

Certainly, Obama is pulling together an all star well know group of politicians and administrators to serve on his cabinet and to swerve as advisers. From Hillary Clinton, to Jim Jones, to the present Secretary of Defense, Robert Gates, the Obama team to date is composed of strong experienced people.

Unfortunately, that may be a problem after Obama takes office on January 20th, 2009. High expectations that Obama and his team can solve in short order the complex and difficult challenges now faced by the United States and the world are almost sure to be dashed as 2009 progresses. The problems are so nasty it is unlikely that any mortal could deal with them. Obama’s team are under great pressure to “do something” from day one and will more than likely do a lot of things at once, many of which will probably only make matters worse. And worse. In time probably worse than we can now imagine.

Obama’s experienced team of operators are probably poorly equipped to deal with challenges that will require new ways of doing things in order to be rectified. Americans still by and large think that financial and other conditions will soon return to “normal”. This time around that is unlikely to be the case. Solutions that have worked in the past are unlikely to work this time. Obama’s team will probably be sorely disappointed as their old way of thinking and of doing things produce dismal results.

A few examples follow:

Financial Crisis:

A financial crisis that was mainly caused by the excessive creation of debt and the use of excessive leverage is highly unlikely to be solved by the use of even more debt and leverage. Yet, that is exactly what the transition team seems to be recommending.

Employment Crisis:

Obama proposes a massive infrastructure construction program to help create jobs and to repair the nations crumbling infrastructure. This approach was tried by FDR in the 1930’s and by Japan in the 1990’s. It did not work as planned back then and it is unlikely to work well now. Oh, sure, a massive construction program will create jobs but not enough of them to jump start the economy. Japan build so much infrastructure that literally every ditch in Japan is now paved with concrete, yet 19 years later Japan is still in recession.

In one respect massive projects will cause a further misallocation of capital as many of the proposed projects are planned to repair infrastructure related to the American love of the automobile. It is a hard truth to accept but the end of the days of cheap energy will be the death of an automobile based way of living. Billions of Dollars thrown at automobile related projects will be largely wasted as the automobile is abandoned due to impossibly high operating costs.

Food Shortage Crisis:

The production and distribution of food in America is very dependent upon the availability of cheap energy inputs. The end of cheap energy and climate change together will cause great stress within the food and transportation industries. If the trucks that deliver much of America’s food supply to the supermarkets stop running for even seven days the shelves will be stripped bare by panicky consumers. Food riots can and probably will occur in America as they already have in some countries.

Global Warming:

The Obama team still thinks that global warming is reversible. Sorry good people. It is probably already too late. Obama and his team need to start working on how to deal with the consequences of global warming. That will be difficult as no one wants to think of the dire consequences.

I expect that way before the end of the first Obama term in office it will be clear that the problems that Obama is on his way to inheriting are greater than any solutions that can be implemented by his team, no matter how hard they try. The likelihood of civil disorder is great as American’s high expectations of an Obama miracle turn into dismay and grief.

We are entering into one of those dark times in history that seems to come along every few hundred years. No one knows how or if we will emerge from this period. Obama is probably the best leader the United States has had in decades to deal with the problems. It is unfortunate that the convergence of so many complex problems is probably beyond the ability of any government to cope with them, even one lead by the talented Mr. Obama.

As a result of past successes most Americans, certainly their leading politicians, believe that they are somehow better than other peoples of the world and are entitled to a lion’s share of world resources and prosperity. The converging catastrophes of the 21st century are about to put their belief in American exceptionalism to the test.

It is unreasonable to think that you can conduct your own business along the lines of a third world banana republic and after some period of time not take on the characteristics of a banana republic. Yet, by being reckless in managing its economy and by becoming the largest debtor nation in the world the United States is well on the road to third world nation status. In some of its former premier manufacturing cities, like Detroit, Michigan and Cleveland, Ohio, third world conditions have already arrived.

Now the convergence of several catastrophes early in the 21st century may set the US and other industrialized nations back a hundred years or more. It is a dangerous time for America. Most Americans have no idea as to how life will change over the next ten years or so and are totally unprepared to revert to a pre-industrial age, one in which even electricity is rationed or non existent. I doubt if Americans will accept such a change in living standards gracefully. The early 21st century will be a time of social upheaval and the failure of governments, possibly even the US government. It will not be a pretty time in which to live in the United States.

The converging catastrophes will be as follows:

1.) Financial System Meltdown:

An almost total breakdown of the financial system will occur. This process is already underway as the black hole of a compressive deflationary deleveraging of trillions of dollars of debt accelerates. As the process is geometric the destruction of capital will far outpace the government’s efforts to re-inflate the economy. Bailout after bailout will cause the treasury to print money it really doesn’t have. Initially the flood of “new money”, or what the treasury hopes will pass for money, will have little effect. The deflation will continue.

However, once the forced liquidation of debt and the liquidation and resultant destruction of the value of assets, such as houses, commercial real estate, stocks, art works, collectibles, commodities of all sorts including oil, and even gold, has run its course, the trillions of dollars in fiat money thrown at the deflationary problem will have unintended consequences.

Probably the economy will rapidly move from deflation to hyper inflation as people realize the world over that the flood of trillions and trillions of new dollars has no real value and only postponed the death of large inefficient poorly managed companies. Who can believe that an effective nationalization of our financial system and what’s left of our manufacturing base will in the long run be good for the American economy?

The whipsaw effect of a deflationary economy moving to hyperinflation will be a catastrophe of the first order. People holding only US dollars as assets will be wiped out in a hyperinflationary environment as the paper becomes nearly worthless.

2.) Climate change:

Climate change will continue to take place and will likely not be properly addressed as the financial meltdown will consume most of the US and other government’s attention. The evidence of profound climate change underway is already quite evident, however, many people world wide remain in denial. Probably, it is already too late to reverse climate change. Rather than discuss what is causing it and who should be blamed we badly need to be working out how we, the people of earth, will deal with climate change and develop plans for survival.

In time, as clean drinking water and water for agriculture purposes reach critically low levels, governments will devote more attention to the matter. Then as sea levels rise enough to endanger major cities, like Washington, D.C. and New York City, some sort of action will probably be taken. But for billions of people around the world it will probably be too late. Billions will perish as temperatures, disease, starvation, and resource wars take their toll.

3.) Peak Oil:

The International Energy Agency released a report on the world’s oil fields that contains some shocking numbers about the supply and demand for oil over the near term future. Rather than repeat the full report here review the article “World Oil Fields in Death Spiral”.

The conclusion to the report is that one should not be fooled by the current severe decline in oil prices from the recent high of $147 a barrel. The fall in oil prices is largely a result of the explosive deflationary forced liquidation of all asset classes (margin calls and the desperate need to raise cash) as a result of the financial meltdown. Once that process is completed supply and demand forces will quickly take over and oil prices will explosively move to new highs and far beyond.

The age of cheap oil and cheap energy is over and the prospect of life going on as before, in the golden age of the automobile and petrol intensive agriculture, is non existent. Alternative energy resources will be of some help but will not be nearly sufficient to replace the use of oil. The result will be a downsizing and reorganization of life for Americans and most people of industrial nations in a way that we are not prepared for. To get a feel for what life may be like in the near future review The Daily Grunt at James Howard Kunstler’s website. Warning: It is interesting but disturbing reading.

There are probably additional converging catastrophes of the 21st century that you can think of. However, I will stop at the three listed above. Those three will likely be more than we can handle. In fact we will probably not be able to handle even one out of three, and any one of them left unresolved could do most of us in. It seems like our dramatic advances in technology will ironically force the survivors of these catastrophes to adapt to living a rustic far more simple life, much like our ancestors of a hundred years ago, as the energy to power these technologies becomes non existent or horribly expensive and the technologies fail.

Returning to a far more simple life will probably not be all a bad thing as people will be forced to look after one another and all pull together if they are to survive. A sense of community will develop that will put to shame the me first living habits of people today. No doubt life in the near 21st century will be far from what most people expect. Let’s hope we can successfully adapt to it rather than become a 21st century version of the dinosaur.