Ratcheting Mechanism: How Speculators Are Financing Bad Debt in the USA

NVDL: If I understand the contents of the letter below correctly, it means that speculators in the US are using oil futures markets (virtually the only long term growth market that remains) to finance bad debts. Unfortunately, oil markets are cyclical, and while long term they are climbing, they tend to dip slightly in August/September/October (after the US holiday driving season ends) and then dip again in February/March/April (as the US winter becomes spring). The speculators thus (also because of tuition payments made in July/August) will not be able to continue to win their bets during these months, meaning banks will go bankrupt and markets will face drastic drops during these periods.

It is possible that we will see world stock markets eviscerated by as soon as next month (August 2008).

From Kunstler.com:

James;
You may recall that a few weeks ago I wrote regarding my theory that a substantial chunk of the increase in the price of oil was due to speculation to offset bad debt portfolios by the larger east coast investment houses. What puzzled me was how this worked: because once the futures are bid up and the margins made, then the price of crude at the head assumes the previous month’s futures price! The short answer is that a kind of ratcheting mechanism is at work: once the price is bid up, it stays there until it is bid up again the following month.

It’s reported that the level of oil futures market activity by these investment houses is significant, with at least 10 percent of the futures market controlled in any one month. With each market manipulation, their margin per barrel is probably around $5.00. So if you take 10 percent of 85,000,000 barrels a day times 30 days in an average month times $5.00 you get a total of $1,275,000,000 in margin. With each month of these shenanigans, these banks can offset upwards of 12,000 subprime mortgages. Not a lot given that there may be upwards of 2,000,000 of these ticking time bombs, and considerably more if the banks fail to walk the razor’s edge they’ve defined for themselves. At this rate, it will take over ten years to offset the bad debt portfolios and only if few of those who have investment accounts make withdrawals. At the rate of +$5.00 a month, the price for a barrel of oil in 2018 would probably be over $900. It will never get there!

So each month, the investment houses pay out cash to those with account holders who demand it, offset bad paper and then go back to work the futures market with what’s left and what they borrow for 30 days from the Fed. As long as they work quickly, they can keep ahead of the game, at least until the price of oil destroys the underlying economic base. It’s reported that with Americans now paying around 11 percent of their income on energy, we are getting pretty darn close to the end of these shenanigans: in the 1973-74 time frame, the tipping point was reached when Americans had to pay more than 12 percent of their income for energy. When oil gets to $150/barrel in two to three months we’ll be past that point.

Another thing to note: a fair amount of funds in the investment accounts are withdrawn annually in the July-August time frame so that middle class parents can pay college tuition. This is one of the reasons why the market always drops in value in the late summer.

If you consider the combined effects of both the limits to oil futures manipulation and the annual July-August tuition dip and you have some of the makings of a perfect storm.
I think that we very well could be witness the effects of gravity on some very big shoes within the next two months.

It is a pity that potatoes do not have planting instructions written on them like Burpee seed packets do.
Regards,
GEORGE W. ABERT, AIA
ROSEMARY BEACH, FL
gwaaia@yahoo.com

Don't panic about food...just starve

Modern agriculture is totally dependent on the consumption of large quantities of fossil fuel used in fertilizer production, machinery, irrigation, and transportation. To produce one calorie of beef, uses 35 calories of fossil fuel*. By the time transportation, and manufacturing of the various inputs is included, estimates are as high a 500 calories of fossil fuel needed to put one calorie of food on the table. Modern agriculture is clearly on of the most unsustainable activities currently practiced because its ramifications are ubiquitous in the environment.

More.

NVDL: I believe more people will die from starvation in the next 50 years, than from war. Which do you prefer?

Good Morning World

Whatever time it is, and wherever you are, a very good morning.

I think it's time that we start to establish the rules of the game and the game plan for the next few months. What follows are a few graphic announcements that will affect you wherever you live in the world. Don't read further if you suffer from Depression, nausea or a weak bladder.

1) In 3 - 6 months we will begin to see fuel shortages around the world. This is Phase 1 of a serious succession of ongoing breakdowns, that start at oil supply breakdown, and lead to supply line breakdowns right down the line. That means if you've ordered a book on Amazon, of are expecting to get the season's latest fashions in a few weeks, you might want to start preparing for disappointment. It also means food - fruits, canned stuff that is imported - might not make it to the shelves for a while. Those products that are absent...get used to them not being there.

2) South Africans will never see the promised Pebble Bed nuclear reactors come online. The system is too stressed and it's happened too late. The lights will flicker this winter, and by the end of the year, systems will go down for longer periods. We will also not see the Soccer World Cup. That much ought to be obvious by now, but it will be a foregone conclusion by Christmas this year.
Part of the reason we won't be able to keep the lights on is that coal is going to be just as big a problem as oil, meaning fewer households will be up and running to afford to pay for expensive electricity. Unfortunately, those homes glowing in the dark will make brilliant targets for masses of bitter and bitterly cold or otherwise disenfranchised people who suddenly have had to go without. It is not a long road from blaming foreign nationals, to blaming (and butchering) the rich.
Also, by 2010 airlines will not be in business to even get the soccer crowds here. Blame our geography at the ass end of Africa, but it's not going to happen.
Instead, Xenophobia is going to spread as poverty spreads. We'll call it by different names, but the results will be the same. The poor venting their frustrations.

Quiet, empty places like Namibia or defensible farmsteads might be a good idea to ride out the storm. Australia and Canada are likely to be place millions will converge upon.
A quick word of advice. When you see waves of Xenophobia/violence mounting, pay attention. You might have to get out at very short notice, and if you leave too late, you will not find a highway without obstructions and survival will quickly become very difficult and problematic. Use Google Alerts early on to keep up to date on up to the minute news regarding 'violence mobs South Africa'. It may also be good to get yourself a weapon. I don't advocate using weapons, but we're heading for a place that is completely divorced from what we imagine to be 'Normal'.

2) Say goodbye - forever - to air travel. It's started already, and it may take another 6-12 months for the airlines to figure this out. Essentially, once oil topped $120, airlines lost their licenses to operate profitably. If you find you're very frustrated by that, get someone to kickstart the rusting train wrecks in a nearby yard. By the way, good luck with that.

3) Within the next year (maybe 24 months), the stock markets - and that essentially means the financial system - will crash. Banks are starting to go. If you have money in bank stocks, get it out. Also, if you've been saving up for some sort of big world trip, some sort of amazing holiday bor honeymoon, I suggest you take it now. (Yes, today, and don't spend more than a few weeks there or you won't be able to make it back). Right now oil is trading at $135, and R/$ exceeds R8.

4) The implications of 3) are essentially that subsequent to the crash, you will only be able to hold onto your job for a few days, maybe a few weeks. And that means within a year, 2 at the most, most of you reading this, will no longer be working and you will never again see the prospects for doing the sort of work you're doing now again in your lifetime. Some might be pretty happy about this.

5) The countdown to one of the worst and most destructive wars has begun. It will probably involve Iran as America begins to realise the end of their world as they know it. There will be a lot of anger and blame as suburbia implodes in America, and people will not worry so much about the ethics of war this time. For the first time though, war will also cross over the Atlantic and onto America soil, as both China and Russia - becoming aware of how serious the situation is - try to push America back into their backyard.

6) There will be other side-effects as the global economy convulses on the vomit of Capitalism. Crime. Disease. Municipal systems not working (dirty water). H5N1 (or H7N1) will use human beings to host their foray across the world. Unfortunately, the background to all this will be some pretty awful weather that will get progressively worse.

7) Expect those around you, and you, and a lot of these systems around us - malls, fast food joints, skyscrapers - expect all of this to be trimmed down to size as the world goes on a very strict diet.

Learn to adapt. And have faith. We can survive anthing if we care enough about ourselves and others. And once we accept what is happening, and learn how to live, life will become a little easier again. But it will take a while.

Media: How to hurt the poor even more

I guess the pictures say the thousand words. Make that 500.

The other 500 then: There has been some debate, even a poll, where 70% of readers approved publishing a picture of a burning man. Every newspaper I saw in South Africa had the same set of images. There was a lot of ethical and moral grandstanding around this, but virtually no consideration of just the economic fallout that this brings about. Here are a few relevant quotes:

Traders said stark images of violence on the front pages of the Financial Times, Guardian and New York Times, prompted a kneejerk retreat in the rand yesterday.

“The photographs had a marked effect,” said Paul Kamp, a senior dealer with Standard Chartered in London. “The violence has been going on for a while, but when investors see these pictures on the front pages they wonder what’s going on — it’s not nice to see.” - Mariam Isa

Attard Montalto said a raft of key economic data due next week, combined with risk aversion and continued xenophobia, could conspire to drive the rand back above the R8/$ level in the near term. That level was last breached in late March, when the rand weakened to a five-year low of R8,25/$.

I don't know if I am stating the obvious saying this, but with oil at $130 and our currency at R8/$, petrol prices in the months ahead will go up by 10-30% and you can basically start writing off lower- middle class South Africa who will have to start getting rid of their houses and begin the nasty process of defaulting on cars, TV's and their furniture, because they simply can't afford to operate under these conditions. I'm guessing 25% of our economically relevant population, or 1/4th of our economy, at least. And it's not just us who are going to burn off a whole new set of economic losers; the scary thing is it is happening everywhere at the same time, creating a cascading effect.

I've raised the concern here that South Africa's currency took a battering as a result of the images appearing in overseas newspapers, and important economic players then changing their positions. In the months ahead we will learn that we need to find ways to really slow down local economic degradation (and it might mean keeping your job for a while longer too, so pay attention). We need to look at making investments into farming, managing the impact of higher costs as much as possible, and remain cognisant of ways to prop up and support our currency. Having said that, I predict stock markets around the world to start wobbling from this point forwards, so there isn't a terrible amount we can do.

The simple act of publishing photographs, while one might have one's own reasons, also has wider consequences, and when the Rand weakens, it makes the price of petrol in Dollars even worse, which means South Africans pay doubly for their troubles. Worth thinking about isn't it.

Am I Psychic?

My sister comes up to me in the Kalahari in January, okay - are you with me - and she starts pitching to me about how we must buy property together. I start a statement that boils down to 'No,' and she immediately backs up her pitch saying that she's discussed it with my father (a successful property developer and investor) and he supports her idea - we should buy a place together. She is going overseas so I can live there, and we can pay it off together and get rich off the investment. Makes sense ne? So here we are, in a lonely Kalahari campsite, the Gemsbok looking like black and white tropical fish swimming on a distant belly dancing pan, and my sister and my father are bearing down on me. Come on son, just sign on the dotted line.

So I say: "Now is not a good time to go into property. The markets are turning. I know it doesn't look that way, but values are going to go down. I'll buy something when it becomes a buyer's market." I know that it sounds incredibly arrogant, especially since it contradicts what 'the expert' has advised.
My dad shakes his head (and I mean, this oke made all his money in the property business over a period longer than my lifetime) and my sister's face looks like a nuclear war has started in her brain. Both of them basically accuse me of being 'doom and gloom' and appear both frustrated, angry and disgusted.

Cut to 4 months later and we're seeing houses in South Africa devaluing. I don't know when the sub-prime crisis hit in the US, I don't remember if I was aware of it in mid-January when we talked about this in Botswana, but I turned out to be 100% on the money. If any possible buyer had known then what we know now (regarding interest rates and all the rest), they would have been nuts to invest. And here I was, with my dad saying, "Go for it son," and my sister saying, "Well if you don't go in this with me, I'll get someone else." Okay then.

I know what you're thinking. That was a one off fluke, a gelukskoot. Ne? Not so fast. On Thursday this week I interviewed Katharine Euphrat, an American intern. We spoke at length about racism in South Africa, and focused in particular on America's dilemma with...are you ready for this...immigrants. One of the questions I asked, last week, was whether there is any Xenophobia in America. I also speculated that this is a problem that is likely to worsen in countries like the USA, the UK, South Korea and South Africa. Two or three days later, all hell breaks loose. And what word gets thrown around? Xenophobia. Racism. I was specifically studying this two days before it erupted.

In a magazine article I wrote as far back as 2006 I advised the following:
- buy gold
- do not buy new property especially if you already have properties that you are already paying off

Go and check yourself to see how the value of gold has climbed since 2006. I think gold was about 1/3 what it is now.
I've made other predictions too, namely the current oil price level I predicted many weeks ago (before the Goldman Sachs gurus did) and I also predicted $150 by the end of this year, also in advance of the Goldman Sachs moment of enlightenment, and I've predicted, along with many other commentators, that our most immediate crisis would be 'starvation'. I know, before this happened it seemed like a crazy statement to make.

So the answer is, if you live in a fool's world, then yes, I am psychic. As far as I'm concerned, I'm just more closely aligned with reality than by far the majority of people, and these people actively resist to even consider 'bad news', to even think (yes, sometimes that's hard) beyond the ordinary paradigms of society. It's laziness.

There is a very easy explanation for all these things. For why we have a food crisis. Why the world is entering its worst recession, why we will experience chronic stagflation, why property prices in America will spread everywhere, and be chronic in South Africa too. How I know South Africa will not only lose the fight against crime, but eventually be completely overrun (yes, destroyed) by it. How can I make these sweeping statements with any accuracy? Because it is easy to extrapolate our human psychology in terms of our consumption to a macro-version of demand, to see how individual use of energy by a middle class user magnifies on a daily basis to create a worldwide problem of scarcity. Against the background of these simple facts:

- we are dealing with a finite resource against infinite and growing wants
- we are dealing with severe levels of delusional entitlement, mindsets that are not geared to hearing 'bad news' or 'change your habits'
- we have two of the world's biggest populations attempting to come online simultaneously (China and India together have 3 billion people, both countries are growing economically, India is now the world's 12th biggest Economy ahead of South Korea, and rapidly expanding including its human numbers)
- our psychology of previous investment and the 'growth psychology' make it impossible for people or businesses to begin to see how these investments actually have no future (since cheap oil is presupposed to be the underlying resource that these investments run on)
- many obvious past and present patterns are simply ignored in favour of self-reinforcing evidence that calls into question or contradicts unpleasant news (this applies to markets, climate change etc)

So it is easy to see that the downward spiral cannot easily be improved or interrupted. It is an accelerating breakdown, and one that is endorsed by delusional and protracted 'wishful thinking', by our lifestyles and habits, and by the multitude of systems that function solely on these now critical resources. We need oil for fuel, food, to power our homes, to get around, for plastics, medicines. In short, we need it for everything, and in order to afford everything and to continue to live the way we do, we need it to stay cheap. But that's suddenly changed. So is a high oil price important? It's the most important news for you, and for this world. You and everyone else are immediately going to feel those effects, whether you agree that it is important or not.

Here are a few more predictions:

The violence/criminality in South Africa next year will be at least twice as bad as it is now, affecting many other centres, including Cape Town, and we will see a resurgence in numbers that were decreasing, for example murders, rapes, hijackings, bank robberies, cash-in-transit heists, corruption and all the rest (predictions have been made on many occasions about crime increasing prior to this one today). Crime will get worse very quickly, and very soon, and accelerate.

The 2010 World Cup will be shifted to Australia if it happens at all, but it will not happen in South Africa. Crime and electricity will be cited as the chief reasons.
The Eskom crisis will become permanent within a few weeks from today, and within a few months, large areas will no longer have electricity on a permanent basis.
Instability in Zimbabwe will gradually lead to regional instability in Southern Africa. In other words, in the next 5-10 years the subcontinent (as will other regions in the world) will be plunged into a sort of large internecine conflict. Much conflict will not appear any different to either 'racism' or 'criminality', but its roots will be the same: chronic shortages of services, food, shelter and growing levels of intractable poverty.

I know these are dire predictions, and I know they appear very dark and negative, but I can be confident that they will happen simply because I also know that an oil price of $141 this year will simply produce so many economic losers in South Africa, that the majority of people in this country will be poor, unemployed and getting hungrier and unhappier by the day. Any country that has a vast majority of recently disenfranchised poor is going to be angry and restless. And there will be huge resentment towards the middle class (and anyone else really) sitting prettier. Celebrity and wealth in the next decade will become vulgar and will be hidden, an opposite condition to the present 'showing off ' of wealth.

Is there an antidote to all this misery? There is, but I don't expect anyone to buy into it, and I don't expect it will happen. The antidote is farming. Becoming self-sufficient locally. I don't expect you to give up your job and go and toil in some farmers field. Which is also why I know we are on the road that we are on, and will remain on this highway, wherever it takes us.

Bad News Alert: Steer Clear of 'Things Aren't So Bad Stories'

More and more reporters are going to try to talk up everything from the economy to politics, to everything else. I'd like to believe in Father Christmas, the Easter Bunny, fairies, pixies and life after death, but I live in the real world, and so should you. Once again, this isn't about being gloomy, or raining on our own parade, it is time we grow up and start to face up to what is happening. We've been living, let's face it, in a fantasy land of movies and moviestars, listening to music, living the good life. That's what we're used to, but if we're honest, we always knew there was something wrong we how much each of us was getting... When you're eighteen years old and you first start driving around a car, you get that funny tingly feeling that you're too young to be given somuch power to around the world, to exercise your whims, but hey, if you have the license you're going to use it right? Somehow it was never righht on the rest of the world that so few of us consumed so much...it wasn't right that a person got to consume all this stuff so cheaply and easily.

But we'd like to believe it's just going to magically carry on. I'd also like to believe that, but intelligence, and being practical says technology isn't going to save us.

Technology isn't energy, and unfortunately, people haven't turned out to be quite as smart as we all thought we were. We became very arrogant, as all great civilisations do before they implode. This is just history repeating itself, and it's completely normal to go: "No. Won't happen to us. We're smarter and more sophisticated."

The sort of news stories that inculcate these delusional thoughts, that perpetuate wishing thinking, sound like this:
Global economy faring better than widely feared, but dark clouds remain
British Court Rules Al Gore Film Exaggerated Climate Claims
Of course, if you're looking for information that confirms what you believe you'll find it, and oddly enough, Google does exactly this. This is why it is important to be critical, to begin to examine both possibilities. Could it be happening? Could it not be happening?
And then we see:
How Bad Can the World Economy Get?
Grim Climate Predictions Not Exaggerated, Analysis Says

Here's what you're going to see in the media a lot:
Last week, a survey of U.S home builders found their confidence slipped in May and was near the all-time low notched in December. However, a separate report showed housing starts up a surprisingly strong 8.2 percent in April and applications for new building permits turned up for the first time in five months.

What's happening here is the writer is reflecting public sentiment and uncertainty. He's not going out on a limb, he's going, well, things could be bad, but they might not be. It's actually easy to assess if something is half full or half empty. Measure it. Have a look at the long term trend. And here the fundamentals are obvious: much higher oil prices means you are a fucking moron when you start to pontificate about 'well perhaps on the other hands things might not be so bad.' Catch a fucking wake up. They are bad, they're getting worse. Accept that, and now begin to determine your response, how you can adapt your investments, your lifestyle, your family. That's the grim, humbling, hard news. Can you handle it?

Other economic sore spots are also showing signs of improvement. Not only have financial markets bounced back, but several of the Federal Reserve's auctions have been undersubscribed, suggesting that banks are less desperate for cash.

The Baltic Exchange's sea freight index, which tracks global trade of raw materials, hit an all-time high on Friday, and is now 11 times higher than the lows seen during the last U.S. recession in 2001. That points to strong global demand.

Actually, in the context here strong global demand isn't a good thing. We need weaker demand to bring food and fuel prices down, and that means people like you and I using and consuming less compared to our 'normal' lifestyles. Unfortunately, even if we are all good citizens, in China and India they're just starting to enjoy a motoring way of life, so do you think these benefits of us living modesty are going to impact on the world economy? Hmmm?

U.S. consumer confidence tumbled to its lowest level in 28 years this month, according to the Reuters/University of Michigan Surveys of Consumers. Steep food and fuel prices in particular darkened the mood.

"Any blue skies you see are likely to be short-lived," said Paul Kasriel, director of economic research at Northern Trust in Chicago. "The economy is in the relative calm of the eye of the business-cycle hurricane. The mortgage credit problems are not over. And credit problems in other sectors are just beginning as the housing recession spreads to the rest of the economy."

Let me set a benchmark for you and let's see if you can handle it: we're moving towards a Great depression scenario of stagflation - a period of inflation combined with stagnation (that is, higher prices, slow economic growth and rising unemployment - and just to be clear, this Depression will make the 1929 Depression look like a honeymoon. That's a fair and reasonable assessment. This is going to happen on a global scale, it will affect you, me and everyone. Things are going to slow down. Things are going to change. We're going to not really know what normal is, the term 'business as usual' will make no sense. Commerce will become less and less, and probably, social disorder will rise by an order of magnitude that we haven't seen since 1939. It's been 63 years since the last World War, and it's difficult to believe given the immense stresses and strains many countries will face, that we will go into the night on our best behaviour. We are entering a prolonged period of austerity, and you can take your pick which catastrophe will be worse? War (probably nuclear), starvation, disease pandemics, tribal violence around the world, and then the impact of crime, racism etc on ruining, raping and pillaging those few systems that remain functional.

We may be able to organise ourselves into functional communities. We may. But the amount of people who accept the above as a certainty is a tiny fraction, and it is very late in the day to start collecting firewood. We can however, try to start being discerning now in how we deal with information. Think critically, begin to steel yourself mentally for the long, hard night that is to come.

Tsvangirai will be assassinated within the next 60 days

Despite Mbeki's claim that someone out there has started a 'factory of lies', the evidence is clear that Mbeki supports Mugabe, that he sat on Scorpion's reports and that he was dishonest in his claim to 'know nothing about Thint' .
While in theory Mbeki can be credited with a singular lapse of common sense (meaning his first sensible contribution), it's debatable whether he did not oppose the disbanding of the Scorpions simply on the grounds that it benefited him personally (to the extent that it was harmful to his opponent, Zuma). In any event, the disappearance of the Scorpions occurs at an interesting juncture of the countries criminal evolution - crime is about to reach its zenith both at the highest and lowest levels.

Meanwhile, across the border an arms shipment has now reached Mugabe, the man Mbeki recently held hands with, and is it so unlikely that Mbeki didn't give a direct instruction to the SAS Drakensberg to refuel the An Yue Jiang as online newspaper Canal de Mocambique has reported? The Chinese ship was being tracked by Lloyds of London, however the Drakensberg had radar and satellite jamming equipment on board.

In any event, Mugabe now has weapons for a war, weapons to crush dissent, and he wasted no time deploying his war machine. 40 MDC activists are reported dead, and we are about to see armed military controls increasing all over Zimbabwe.

Morgan Tsvangirai has wisely changed his plans, and so did not return home on Friday, as planned, but one has to sympathise with the man - how can he ever return home given that his adversary has now armed himself? Only if Tsvangirai loses the election can he expect a smaller target on his back, because Mugabe certainly won't let him win. And if Tsvangirai does win, he will be bumped off. Either way, it appears now, he won't win.

And how can Mugabe get away with this? Because his backer in South Africa is powerful. Mbeki must be getting a lot of money from Mugabe to play ball. He probably thinks the Mbeki family dynasty will last a thousand years sort of psychology (based on the paycheck he has received). And all Mbeki has to say in defence of his erratic and frankly crazy diplomacy is 'someone is telling lies.' The question is not whether Mbeki is being honest or not; the question is why is he doing what we know he is doing? Simple. He has been offered lekker incentives to make sure Mugabe can continue giving him even more incentives.

Some see oil bubble; others see trouble

Many expect prices to head lower, but suppliers have little margin
The recent trajectory of oil prices — a fairly steady increase followed by a much more vertical rise — has a familiar look to it. Remember those charts of tech stocks and housing prices? It's hard not to wonder: Are oil prices forming the next big “bubble?"

Those who see a bubble forming say you need look no further than the recent run-up in the cost of a barrel of crude to the current level of about $124.

“We were only trading at $86 about three months ago and not a whole lot has changed to move us to where we are now,” said Addison Armstrong, Director of Market Research for Tradition Energy. “There's no doubt in my mind — and most other people I speak to — we are in a bubble. And it's going to deflate at some point.”

Bubble proponents argue that if demand for oil continues to ease and supplies hold up, the speculative fever driving up prices could quickly evaporate, and prices could fall sharply.

It wouldn’t be the first time prices have crashed. In 1986, oil prices began the year at $26 a barrel. By March, crude was selling for $10.25. In 1997, prices peaked in October at nearly $23 a barrel only to fall below $11 a little more than a year later.

But the forces that caused those oil “crashes” aren’t evident today. The 1986 slide was the result of heavy overproduction by OPEC, when Saudi Arabia opened the spigots after fellow cartel members cheated on their quotas. The 1998 pullback also resulted from a huge oversupply after the Asian economy unexpectedly slowed sharply as a currency crisis swept through the region.

Today, the world’s oil producers have little extra capacity, and the Asian economy is booming. Bubble skeptics say that while oil prices may be due for a pullback, the longer-term trend is clearly higher.

“When I hear bubble, I'm thinking of a technology bubble where we spike up and we just never come back to it again,” said Chris Jarvis, an energy analyst at Caprock Risk Management. “I don't think that’s the case. I think if anything you’re talking about more of a short-term pullback. What is short term? I don't know, nine months to a year. But the trend higher is still intact. I would definitely not call it bubble.”

More.

NVDL: What a great article from MSNBC, and actually written by the Senior Producer there, John W. Schoen. It's insightful because it clearly addresses the schism in our psychology. At one end of the spectrum the optimistics are saying - this bad news stuff has got to end soon (very unscientific, but one could argue there is some basic common sense there), and at the other end, reality. Unfortunately the oil phenomenon is quite a complicated problem to wade through in order to get to the simple facts. Not many people are prepared to do that, and those who do start getting confused when they're ankle deep, and tend to throw up their hands and say - well no one knows the answer, so I'll just believe and be positive. Ironically, this explains the belief systems of about 95% of the world's population (who believe there is a God). Never mind that the most intelligent people in the world - our scientists and intellectuals - are pretty clear that God is a fairy tale, a brave enough in their reasoning and their intellectual capacity to say this.

Anyhoo...what do I predict? I predict prices will fall back a teeny bit right now, perhaps going to as low as $110-$115, maybe slightly lower. And just when we are starting to sigh with relief, inearly July, prices will ratchet up again to over $130. They might go higher. They'll simmer lower again as we approach America's winter, and then it's fasten your seatbelts time...I'm predicting $140-$150 by Christmas, but you can start saying your goodbye's to two digit oil prices. That's over. We won't be spending very long periods in any particular zone, we'll see incredible volatility overnight as the system chokes and swims and chokes again.

I hate to burst your bubble, but the only bubble that is out there now is the US housing bubble. Other bubbles will follow, and there will be carnage. Yes, in South Africa as well. And it is deflating everywhere like a wobbly balloon. Can you hear that infernal flubbery shriek. And with each notch the oil price steps up, you'll hear an outward belch of air in property prices. Energy prices (this includes coal and ordinary food) will continue to gain momentum as our global efficiencies start to back-fire, and the financial system starts to eat itself.

Nationwide – it’s just the beginning

Now, in the aftermath of aggressive cutbacks, a growing number of airline jobs are more akin to those at a fast-food restaurant. The pay is low, the work is tough and, in a new twist, airlines are having trouble hanging onto workers and finding new ones. - from the Wall Street Journal, 2007

The Star have referred to Nationwide as ‘jinxed’, as though the airline suffered a lot of bad luck and this is the reason it went bang. Uh uh. To have an engine fall off your wing isn’t bad luck, it’s shitty standards. I experienced those crappy standards firsthand when I flew Nationwide way back in 2005 (PE to Jan Smuts – now OR Tambo). My cellphone was stolen out of my bags but the worrying thing was the attitude of the Nationwide staff: “It happens all the time.” That may be true, but you make a damn effort to do something about it, to at least refer the matter to a baggage inspector, I don’t know, but do something. I had to insist on a procedure, on getting some kind of process underway.

In almost every Saturday Star for the past 3 weeks I've read about passengers complaining that the airline overbooks its flights, and makes no arrangements (most of the time) to reimburse those left stranded. Apparently there is no law to rap an airline on the knuckles for doing this, so Nationwide have had a grand old time. The people who have bought Nationwide tickets - a friend of mine who needed to visit Cape Town on a business trip was a victim of exactly this kind of injudicious overbooking - have, to some extent, only themselves to blame. Nationwide has provided cheap flights but shoddy service, and we have known this for some time. To go and buy tickets from the airline after so much has happened really reflects the consumer's propensity for self-indulgence (save money) over common sense (in spite of obvious bad practise). The airline is guilty of doing exactly the same thing.

Now it is once again very evident that Nationwide lacks a sense of service commitment not only to its customers, but to its own staff – both of which have been kept in the dark. Is it so difficult to allow people a few days notice? Apparently, it is.

So let’s not mess about with words like ‘bad luck’. Many many more airlines are going to sink now, SAA is probably the next in line, and if service and business standards aren’t excellent, these airlines are going to sink. And this is not a problem unique to South Africa. It's global. In a world and a market that has been trumpeting the benefits of globalisation, reverse globalisation is also possible, and on a worldwide scale. Right now we see reverse efficiency setting in - where higher energy costs now impact on everyone, everywhere. From fuel prices' impact on airlines, to food prices impact on your weekend. A regional problem is also a worldwide one, meaning a solution is going to be pretty hard to find anywhere.

The prospects for air travel as a whole look bleak. We will see a lot of mergers. Probably we will end up with very few super carriers. I'd like to see the best carriers survive, like Singapore Airlines, but we maynot have that luxury. In fact, we're likley to have fewer and fewer. People will pay a premium to get themselves somewhere else in the world from now on. Meanwhile the budget airlines may or may not eviscerate the main players. This will depend on whether the main players cut their own costs and change their service and brand proposition (to resemble the budget players). The future of airlines will have to budget, and a small niche market for the elites. It will be nothing like it is today. To fly in 10 years will be something exceptional for suburbia’s children.

More:
Rising costs reshaping air travel across the USA
Airlines' merger would help offset cost of fuel
Cut in seat capacity, other efficiencies are considered
UNFRIENDLY SKIES
As Pay Falls, Airlines Struggle to Fill Jobs
Tighter Staffing Makes Morale 'Severely Tested';Why Your Flight Is Late

Told you so: Oil at $117, Biofuels under attack as world food prices soar

I'm not gonna mirror all the news on Biofuels here. Suffice it to say before the Biofuels were even endorsed or implemented, a lot of people were saying that neither Biofuels or any other combination of alternatives was gonna allow us to run the world's highway systems the way we are running them. But oil prices are $117 now, so every ostensible 'investment' into fuel comes with a lot more pressure - especially from consumers that are starting to go nuts as they realise they're not going to get through the month.

The answer mustn't be to find alternatives, as in alternatives fuels, it must be in finding different ways to get around, changing our infrastructure, re-engineering and retrofitting suburbia, getting trains going etc. Unfortunately, since we've been stupid and distracted, we'll now find we can't afford to make those changes, and the changes we can afford to make are going to become fewer as our choices become fewer.

Meanwhile the US has 1 new ethanol plant up and running every 2 weeks - right now they have 139 Ethanol Plants. They want to increase this by 300%.

But the hype is even more misleading than everyone thought. The run off from the fertilizers used (and the coal used to fire up these ethanol plants) is creating a lot more pollution than conventional fuel production. I think it's 29% more energy intensive and thus polluting than conventional refining. So much for 'clean' energy. And when you fill your tank with ethanol, it burns quicker, meaning you use more fuel to go the same distance. Ethanol won't satisfy our fuel-for-cars energy appetite, not even close. But then this blog (and many besides) have been saying that for a long time before Biofuels became Campaign Speak in the US.

Biofuels under attack as world food prices soar
Oil hits record $117 a barrel

Do Newspapers have a future in South Africa? And An American Perspective

The good news is that they most certainly do (in South Africa). The bad news, is that online media almost certainly does not have a future.

South Africa is distinctive for having a very low internet penetration in terms of the overall population. Just over 10% (less than 5 million South Africans) have access to the internet, and a large amount of these users have work-only access. On the other hand, the vast majority of South Africans have access to newspapers. Far more people in South Africa read newspapers, or get their news from the radio, than the internet. Meanwhile, what about the penetration levels of mobile handsets. Is it 70% already, or more?

But the macro-economic factors now in play – inflation, interest rates, contraction and recession – are quickly eclipsing South Africa’s Promised Internet Land. Just as South Africa is about to free itself from a service monopoly that has strangled its ability to innovate and grow online for years, just as an undersea cable is about to connect us to the rest of the world, those hopes and dreams have been essentially amputated by prohibitive costs of living. These include the costs of eating and moving around. And what would you rather have? Food to eat, or Google? The lights working, or email?

Most South Africans with internet, that are on a sort of borderline, will probably cut back on unnecessary expenditures, and the first of these include exorbitant communication costs, including internet subscriptions, magazine subscriptions, expensive cell phone subscriptions in favor of cheaper options. Expenditure is about to become far more functional and practical.

Meanwhile, on the other end, the production side, finding online advertising revenues is going to become more difficult, and the small flows that already exists are going to have to be spread even thinner. This does not bode well for companies who have only recently anticipated high market growth, and increasing yields, and responded only over the last couple of years. That market – the internet market – is about to be frozen in its tracks.

Where internet networks exist and are to some extent entrenched, these are likely to thrive. But those who have recently been set up are likely to be shed, as consumers find their choices (and their cash) far more limited. So if all the various websites in South Africa were sodas, we’re going to say goodbye to Fanta, and Schweppes, and Mellow Yellow, and Spar Letta and all the rest. All we’re going to be left with is Coke and Pepsi.

Elsewhere in the world, the internet is likely to be a vital resource for news and information, and in many advanced economies, will take over completely from paper, as environmental concerns and costs become ever more critical. Power outages in South Africa will also have a dampening effect on local internet use, and as users attempts to remain connected become more frequently frustrated.

There remains though tremendous opportunity in South Africa to provide effective news to mobile handsets; something which even the poor carry around with them wherever they go. What is certain though is that the future, especially for the poor in South Africa, is becoming less and less certain.

An American Perspective

Last week I spoke to Californian Katharine Euphrat (pictured above). I wanted her view of the Media, and the day I spoke to her was her third day on the job,and her first front page artcicle (‘Soap stars brutal assault on women’). She says newspapers won’t be around 50 years from now,and in some countries, sooner than that. In America she says people her age never buy newspapers. Katharine says she consumes some news from newspapers that her parents buy (the San Diego Union Tribune), but otherwise consumes – and I found this surprising – by far the most news off her cellphone (whilst on the bus or other public transport).

Katharine said that in the USA paper news is hard news, and dying because of that. In South Africa we are seeing more and more Entertainment-based news making front pages. One of the few exceptions to this – in my opinion – is The Star.
Katharine spoke about how ubiquitous news is online in America, and also how useful it was to browse news on her iPhone. She said in her spare time she spends 70% of the time on the internet using her iphone, and 40% on her PC. When she arrived in South Africa it was immediately difficult even to find somewhere to use the internet, and also, she found it agonizingly slow, even our broadband.

I asked her about her first impressions of South Africa and she said, "When we said we were going to South Africa they tried to scare us. They said you’d arrive at the airport and see someone being raped on your left, someone robbed on your right, and someone being murdered right in front of you. But Johannesburg could be anywhere in the world.”

I know that whenever I have returned to South Africa from an overseas visit I am astonished at how empty the place is, like: Where is everyone. In many western countries there are cars everywhere. It’s not like that here, in South Africa. Katharine said she was surprised to see large patches of countryside.

These large patches of countryside are analogous for the large, barren wasteland that is the Undiscovered Internet Country in South Africa. It will turn out that Telkom’s drag effect on the rollout and uptake of the internet in South Africa is likely to be a permanent injury and one which the country cannot recover from going into an austere future. A small niche internet population will survive, but it will be even smaller than the present one as work-place users are shed (both through stricter regulations at work and through increased unemployment as a local recession kicks in). It will also not be worth much as a revenue stream, but it may have some value in terms of the service there will be to communities that remain plugged in.

In the end, (even in a general sense) those companies that have not entrenched themselves, will lose ground and fail, and only the strong and hardy and well established will survive.

Food costs rising fastest in 17 years

NEW YORK - Steve Tarpin can bake a graham cracker crust in his sleep, but explaining why the price for his Key lime pies went from $20 to $25 required mastering a thornier topic: global economics.

He recently wrote a letter to his customers and posted it near the cash register listing the factors — dairy prices driven higher by conglomerates buying up milk supplies, heat waves in Europe and California, demand from emerging markets and the weak dollar.

The owner of Steve's Authentic Key Lime Pies in Brooklyn said he didn't want customers thinking he was "jacking up prices because I have a unique product."

"I have to justify it," he said.

The U.S. is wrestling with the worst food inflation in 17 years, and analysts expect new data due on Wednesday to show it's getting worse.

By ELLEN SIMON, AP Business Writer
More.

NVDL: Newspapers and news peddlers ought to do well over the next 20-30 years. There is going to be so much bad news, there won't be enough space for all of it.

World Bickering Starts As Oil Prices (and their implications) Bite

Brent Crude Oil is now $109.34 (up 0.54%), and we can already clearly see how countries (and their populations) are dealing with higher food and fuel prices. They're moaning. In many countries there are mass protests. Blame, argue, jump up and down. Prices are going to get worse, not better, and people's reactions, in step, will become more inflamed.

New wave of food protests

At least two dozen deaths have been reported in riots sparked by a sharp increase in food and fuel prices around the world, most recently in Egypt, Senegal, Cameroon and Côte d'Ivoire.

We can generally anticipate (in South Africa in particular) a worsening scenario with regard to the affordability of basic services. Civilian reactions are likely to exacerbate these conditions, culminating in civil strife, looting, burning and pillaging.

Times axes Bullard over ‘racist’ column

CONTROVERSIAL Sunday Times columnist David Bullard has been axed for writing a “racist column”.

In his last offering of Out to Lunch, Bullard graphically detailed how Africa had “benefited” from colonialism, an argument that drew criticism from readers and social commentators.

“He wrote a racist column on Sunday. I had a conversation with him on Tuesday, I told him that what he wrote was unacceptable,” Sunday Times editor Mondli Makhanya said last night. “It went against the values of this newspaper.

“He told me he believed what he had written. I took a decision as editor to discontinue his contract.”

Click here for the rest of this Business Day article.

NVDL: A few days ago I encountered David going up the escalator, and I made an odd remark (even for me). I asked him if he had any plans to leave the country, and if he had he could call it, "Out of Africa." I think he said he'd chucked his British passport (he may not have said this, but that is what I picked up), which confirmed a perception I had that he was essentially a South African through and through. After he got shot, he said, he said how touched he was by support from fellow South Africans, and time and again he has cited 'the people' as being South Africa's greatest asset.

Bullard also said on the radio this morning that the article was provided a few days before being published, and that his brief (during his tenure) was to be controversial.

Still, a 14 year run is not bad, and Bullard did end it all off with a third Out to Lunch book.

Timbaland and One Republic: Apologize (MUSIC VIDEO)

Still love this song. I think in 5 or 10 years we're going to be like - oh yes, that was playing when load shedding and everything else started. Things were still pretty good then...

China 'uncovers Olympic terror plot'

BEIJING, China (AP) -- China says it has uncovered a criminal ring planning to kidnap athletes and others at the Beijing Olympic Games.

Ministry of Public Security Spokesman Wu Heping told a news conference Thursday that the ring based in the restive western Xinjiang region was one of two that had been broken up. The other was previously reported.

More

NVDL: If you're a terrorist looking for free publicity, the Olympics is perfect to draw attention to your cause, and given the shaky build-up to this one, the organisers are likely to be pretty distracted.

Oil Hovers Below $109 After Steep Rise

SINGAPORE (AP) — Oil prices steadied Tuesday after jumping by almost $3 a barrel in the previous session on concerns about falling gasoline supplies and expectations that U.S. interest rates will be cut again.

Oil prices climbed Monday as traders bet that future U.S. Federal Reserve rate cuts will weaken the greenback. A weak dollar attracts investors to hard commodities such as oil, which are seen as a hedge against inflation. Also, a falling dollar makes oil cheaper to overseas investors.

"What we're seeing at the moment is still a very high interest in commodities, driven by non-fundamental issues such as a hedge against the falling U.S. dollar," said Mark Pervan, senior commodity strategist with the ANZ Bank in Melbourne.

Light, sweet crude for May delivery lost 24 cents to $108.85 a barrel in Asian electronic trading on the New York Mercantile Exchange by midday in Singapore. The contract rose $2.86 overnight to settle at $109.09 a barrel on the Nymex, the highest settlement for a front-month contract since March 18.

Oil futures are now nearing last month's trading record of $111.80 a barrel after a swoon that twice brought them briefly below $100. The rise is helped by a growing belief that gasoline supplies are falling as the summer driving season in the U.S. approaches.

By GILLIAN WONG – 4 hours ago
More.

NVDL: This is in line with predictions made earlier on this blog that oil in the middle of the year will straddle a band of $110-$120.

TIME Poll Shocker

Seems like the financial Boyz and Wall Street Wizards are still in KOO KOO Land. They only admit the bad news when it's a foregone conclusion, which is how the situation got so bad (talking up all the positives ad bankruptsome).

While recession takes hold of the US, my prediction is that it will roll out everywhere else, not because the world is catching cold from the US, but because the world is discovering that it doesn't have a nougat centre filled with limitless supplies of oil.

Our own finance minister said it best: we have to tighten our belts...but not sure if there's much left to tighten. That's code for recession. This will be a recession that gets worse over time.

Oil Predictions (previous blogged on 28 July 2006, 10:08:09 PM)

What the corporate big shots are saying

In December a litre of petrol cost around R5. 8 months later, we’ll be paying R7 a litre. Where will we be by the end of the year?

On New years day this year (2006) I remember reading – with disbelief – that experts (people who called themselves bankers, or economists, and who are generally respected for their insights) were predicting oil prices to average around $50 a barrel this year. They maintained this delusion until April/May, and even for some time after oil prices first broached the $70 level. Does anyone know when last oil was in $60-something territory? It’s been more than a few weeks now, and it’s fair to say it’s heading north, to $80.

Right now we’re at $75.01 [$98 in 2008], and we’re looking at another petrol price hike next week. I called a friend of mine, who works at Standard Bank (in the Merchant Division). He organizes finance and sets up deals between the big blue chips – most recently, companies like Sasol. I asked him, since future projections of oil prices form an important backdrop to these deals, what the industry insiders (some would say experts) were predicting. He said the feeling was that $100 was certainly possible over the short term, but that over the longer term (1-2 years) they saw oil slipping back to $50. Say what?

I asked him to substantiate the reasoning they were using, but I am under the impression they are playing with numbers, rather than astutely aware of a bottom-line in-the-desert-and-the-dust paradigm, an unshakable real-framework when dealing with oil prices.

Here’s reality: We’re in a new era. Things are different now. Two decades ago we were still in an era of Discovery. We could boost capacity when things got comfortable, because we had some West-controlled oil fields like Prudhoe, and the North Sea, and the Saudi fields were in good nick. Today we’re in an era of Depletion, meaning, as supply gets tighter, all we can do is pump faster. Unfortunately we’ve reached a stage now where we’re pretty efficient, and demand is starting to outpace our efforts at being both efficient producers and efficient consumers (if ‘efficient consumer’ makes sense).

Thus the overriding paradigm is that you have tightening supply, and demand inflation, which is simply a situation of consumers demanding more goods than what is being produced. And abracadabra, prices will increase.

And they are. There are a few headlines wailing: ‘Now for the big squeeze’ and ‘Markets stunned by 7.5% surge in factory gate prices’. There are also experts like Jim Rogers who are now openly stating the obvious: Without a major new oil discovery, prices are going to shoot upwards, and everyone (‘including me’, he confides) is going to be shocked. Merrill Lynch, for example, continue – I don’t know why – to pontificate, seeing $60 for the foreseeable future.

At the moment we have some serious things going on. We’ve got a disaster in Iraq – the country is nowhere near the production it was at Prewar, and is unlikely to come anywhere near those levels for months or years. We’ve also got a widening crisis in the Middle East, which threatens to suck in the world’s second largest supplier – Iran. And while all this is happening, China’s economy is galloping at almost 11%.

While my friend at Standard Bank suggested – even without a major discovery – that we’ll see prices somehow fall asleep at a $50 level (he’s even suggested $45) the above processes are continuing unabated. $45 would certainly be possible if 10% of the world stopped consuming at the rate they are consuming (but downscaling will happen whether we choose to or not in the future), if Israel and their enemies had a 1 year anniversary of being Forever Friends and if Hurricanes basically hovered in the same spot for days on end. It’s more likely that the Boks will beat New Zealand, cows will jump over the moon, and pigs will take flight.