The Round-Up: July 3rd 2007

Dried-up Arctic ponds evidence of global warming, study says

A University of Alberta scientist has uncovered dramatic evidence of climate change in the Arctic, where ponds that have been part of the landscape for more than 6,000 years are drying up as global warming has nearly doubled the length of the brief northern summer.

Greenland's ice meltdown quickens

Peterson is keenly aware of a cruel irony: a recent spike in tourism may portend the beginning of the end for an ancient way of life among 56,000 Greenlandic people scattered across the treeless and harsh landscape. Inuit hunters, who rely on cold ocean temperatures and extensive winter sea ice to stalk seals, whales and polar bears, may soon come up empty-handed.

The Greenland ice sheet, second only to Antarctica in the volume of water locked in its deep freeze, has been a barometer for researchers measuring the effect of the world's growing consumption of coal, oil and gas on heating up the planet.

What their instruments have confirmed is that the news out of Greenland is bad -- and getting worse.

Sask. uranium mine promises large yield

You could say Cameco Corp. is sitting on a veritable gold mine these days, but such a compliment would actually undersell the value of the high-grade uranium buried in its flagship McArthur River mine in northern Saskatchewan.

With spot uranium prices around $135 a pound and the mine producing an industry best 21 per cent pure uranium ore, the product piped up from the half-kilometre deep deposit is far more valuable than anything you'd find in a typical gold mine.

Harper's Fearless 'Dirty Gary'

Gary Lunn, the federal minister of natural resources, is trying to push nuclear power, rev up the oil sands, and make way for more pipelines and supertankers on B.C.'s coast. He also happens to represent one of the most environmentally conscious ridings in the country, Saanich-Gulf Islands.

Hike Royalties and Start Debate on Them

All the political posturing on equalization by the Calvert government is designed to divert the attention of the public from their policy on the extraction of our natural resources, and in particular oil and natural gas.

The NDP government has consistently pursued two policies since 1991. First, the province will do everything in its power to promote and enhance the export of our oil and gas to the United States, as fast as possible. There is no regard for the finite nature of these non-renewable resources nor our future needs.

The United States, with five percent of the world’s population, consumes 25 percent of the world’s energy. Saskatchewan extracts around 152 million barrels of oil per year, and over 70 percent of that is exported to the United States. The U.S. armed forces alone consume 124 million barrels of oil per year, more than the annual consumption of Sweden.

The second policy is to try to maximize the profits of the oil and gas corporations operating in Saskatchewan. All kinds of direct subsidies are offered to the industry. But the key factor has been the steady reduction of royalties and taxes imposed on the industry.

Resource revenue AND transfer payments — Calvert wants to eat the cake and have it too

During the NDP government of Allan Blakeney (1971-82) resource royalties and taxes were increased. Saskatchewan became a "have province" and for a few years did not receive equalization payments. The last three provincial governments have all steadily reduced the royalties and taxes on the use of natural resources.

This policy has been warmly received by the owners of the corporations who extract our resources, for their income and profits have greatly increased. Of course, this policy has reduced provincial revenues. But is it fair that this pro-business policy be offset by equalization grants from the federal treasury?

Sending our energy resources south

Deep integration discussions between Canada and the United States make frequent reference to a “North American energy market” or “North American energy security.” The SPP identifies energy security as a priority. In the context of Atlantica, it means Canada sending oil and gas reserves to American companies, regardless of our own energy needs.

The Atlantica proposal includes the creation of an energy corridor for the quick export of unrefined oil and gas to the United States, leaving Atlantic Canadians to face the social, economic and environmental concerns without the financial benefits. While there is a proposal for an oil refinery in St. John, New Brunswick, there is no timeline for its creation. In the meantime, Atlantic Canadians will also lose out on job creation, as raw, unprocessed resources are sent to the United States where they will be refined by U.S. workers. The products will then be sold back to Canadian consumers.

More than an economic union

According to the New Brunswick Telegraph Journal, Atlantica has $500 million earmarked in transportation and energy investments on both sides of the border over the next seven years with little input from the public about the impacts of such a massive project. In fact, it is the government of Maine that is leading a study looking at the proposed Atlantic transportation corridor, which would support the Atlantica initiative, with government representatives from Quebec, PEI, New Brunswick, Ontario and Nova Scotia participating in study committees. Transport Canada is also participating as a nonvoting member. In a Ministerial Declaration from a trilateral transportation meeting held in April 2007, government officials from Canada, the United States and Mexico confirmed that they will be using the SPP to further the Atlantica agenda even though the SPP has never been outlined, discussed or voted on by the Canadian public.

Is metering plan really so smart?

Ontario's energy ministry and local electric utilities might take this as a wake-up call, because it's not entirely clear that "potential future functionality" has been adequately considered in the design of the province's smart meter program. The fact that the sector is running to meet a political deadline hasn't helped matters.

"They're rushing into this, basing their decisions on old technology," says one industry source closely following the program. "Now you have a hodgepodge of non-uniform technologies across Ontario. What happens if technology changes or a vendor goes belly up? All that infrastructure is wasted."

TransCanada and Petro-Canada Receive Approval From the Quebec Government for the Cacouna Energy Project

The Cacouna Energy LNG terminal would be capable of receiving, storing and re-gasifying imported LNG, with an average annual send-out capacity of approximately 500 million cubic feet a day of natural gas. This approval follows a release earlier today from the Government of Canada in favour of the report from the Environmental Assessment Joint Review Panel for the proposed Cacouna project.

Ethanol boom squeezes biodiesel supply

Farmers saw high prices for corn this spring and planted even more than expected. That may help hold down food prices, but it's bad news for struggling biodiesel makers who depend on soybean oil.

The U.S. Department of Agriculture reported Friday that farmers nationwide planted 92.9 million acres of corn this year - 19 percent more than last year and 3 percent more than the government had projected in March. The demand for ethanol led U.S. farmers to plant the most corn since 1944.

But that extra corn acreage means that farmers planted 15 percent less land to soybeans.

The price of soybean oil is "almost to the point where it's not economically feasible to make biodiesel," said Dan Holesinger, manager of Clinton County Bio Energy.

Cellulosic ethanol: A clean but worthless biofuel?

With biofuels being blamed for rising food prices and offering limited environmental benefits, diverse luminaries such as former United States vice-president Al Gore and Microsoft's Bill Gates are throwing their considerable support behind cellulosic ethanol, a second-generation biofuel.

Two necessities, fuel and food, create spiral of rising prices

Now comes the biofuels movement. For a variety of reasons, ranging from an attempt to become less dependent on foreign oil to a desire for cleaner fuels, millions of acres of farmland are being redirected to corn-based ethanol.
If hundreds of planned new ethanol refineries are built, the United States could very shortly be producing about 30 billion gallons of corn-based fuel per year, using one of every four acres planted to corn for fuel. This dilemma of food or fuel is also appearing elsewhere in the world as Europeans and South Americans begin redirecting food acreages to corn-, soy-, or sugar- based biofuels.
Corn prices in America have spiked. And since corn is also a prime ingredient for animal feeds and sweeteners, prices likewise are rising for poultry, beef and everything from soft drinks to candy.

There is more corn acreage - about 90 million acres are predicted this year - than at any time in the nation's last half-century. But today's total farm acreage is either static or shrinking; land for biofuels is usually taken from wheat, soybeans or cotton, ensuring those supplies grow tight as well.

In the past, the genius of our farmers and the mind-boggling innovation of American agribusiness meant that farm production periodically doubled. Indeed, today we are producing far more food on far fewer acres than ever before.
But we are nearing the limits of further efficiency - especially when such past amazing leaps in production relied on once-cheap petrochemicals, fuels and fertilizers.

Hollowing out?

BY ANY standard the sums are enormous. For $32.6 billion in cash and the transfer of $15.9 billion in debt, Bell Canada Enterprises (BCE), owner of the largest telephone company in Canada, has agreed to be taken over by an Ontario pension fund and two American private equity firms. If it is completed, the takeover would not only be the largest in Canada’s history but the biggest leveraged buyout anywhere.

Debt markets turn grouchy as creditors ask for more

Although modest repricing is going on, investors are still willing to take risks if they are paid a little more to do so, and plenty of deals are still going ahead. Yet all is not well. “There's so much leverage in the system that it wouldn't surprise me to see more problems,” says Jim Reid, credit strategist at Deutsche Bank. The place to look for a decisive shift in sentiment is in the buy-out market, which has been fuelled by a trio of habits that in more sober times would have had lenders reaching for the Alka-Seltzer.

The first of these lies in the burgeoning market for “covenant-lite” loans. Loans normally require borrowers to maintain financial thresholds, like limiting debt to five times cashflow. But a huge number are now lacking such “maintenance covenants”, which means that banks have less grip on borrowers when business turns sour. The total amount of covenant-lite loans issued in the first two quarters of 2007 has been $105 billion, which tops the $32 billion of all such loans written from 1997 to 2006, according to Standard & Poor's, a rating agency.

Chorus of fear grows over cheap money

We reported a few weeks ago on the misgivings that the CEO of New York banking giant J.P. Morgan Chase has expressed about the dangerously cheap money that's fueling the global takeover boom. He's since been joined, last week, by the CEO of the huge Swiss bank UBS AG. Separately, a panel of European bankers fretted last week about a coming liquidity crunch if some of the recent, highly-leveraged takeover megadeals go sour. So did Michael Nobrega, also last week. Nobrega is CEO of Ontario Municipal Employees Retirement System (OMERS), which has more than 20 per cent of its assets tied up in infrastructure projects, whose price tags are getting way out of hand, Nobrega says.

What We're Hearing

A hedge fund whose identity we know is having subprime-related problems similar to Bear Stearns, one veteran investment banking source told us. We are not releasing the name of the fund until we can confirm more information about the fund and its problems. Stay tuned. Meanwhile, several sources tell us that the CDO (collateralized debt obligations) market is in serious trouble. CDOs that invested in subprime assets are being hammered. "Most of these are held by insurance companies and foreign accounts," said one banker, requesting anonymity...

Wary investors peak over the hedge

Shell-shocked mortgage bond traders who just closed the books on a surpassingly ugly June are eyeing the calendar warily, waiting for the next two weeks to bring the first word of just how much damage hedge funds sustained as a result of the subprime mortgage mess.
With a series of bad bets on subprime bonds and arcane structured securities triggering the near-collapse of two Bear Stearns hedge funds, wide swaths of the $6 trillion mortgage-backed bond market have sold off sharply. In turn, it is believed that many investors - especially hedge funds, which can borrow over a dozen times their capital base - have seen their already lackluster performance shellacked.

If the performance of subprime investors is as bad as expected, institutional hedge fund investors and the investment banks that loan funds money and clear their trades will be faced with investors' concerns over capital withdrawal, matched by the banks' need for better collateral and reduced exposure.

With a fear of lawsuits for breach of duty and a lack of faith in the quality of the loans backing the subprime mortgages, there could be little incentive to ride out the storm.

Deepening debt crisis hits close to home

Once that insurance is breached, two very bad things happen.

First, the investors who elected to buy the equity tranche, attracted by the possibility of an equitylike return on a fixed-income investment, get killed. And unfortunately, those big losses won't be limited to Wall Street or to the sophisticated investors in hedge funds.

Hedge funds bought about 10% of equity tranches in 2006, according to Bear Stearns. But pension funds bought more -- 18%. Insurance companies bought even more -- 19%. And asset managers bought even more -- 22%. When pension funds take big losses, parent companies have to make up the loss or workers have to take smaller pensions. When insurance companies take the loss, insurance rates go up. When asset managers take the loss, well, we all cry when we open our monthly mutual-fund statements....

....And second, after the insurance is stripped away, the prices of higher-rated slices of the debt pool start to tumble to reflect that greater risk. That's the worry facing the market right now. Merrill Lynch's (MER, news, msgs) attempt to auction off the collateral from the sinking Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund revealed that the market is well beyond the 5% price drop that Grant's Interest Rate Observer pegged as a danger point. Merrill Lynch succeeded in auctioning off some collateral at 90 or 95 cents to a dollar, but other collateral didn't sell at all, even at discounts of more than 50%.

Last year, global sales of CDOs hit $503 billion. In 2006, sales of CLOs broke $150 billion. We've just started to see a massive re-pricing of all the debt in those massive pools.

Picture the domino effect

You don't have to look far for signs of the speculative excess that marks the climactic phase of a raging bull market. With the notable exception of the world's stock markets, there is hardly an asset class that has not been caught up in a breathtaking investment frenzy.

Nowhere has greed overtaken fear in a more cavalier fashion than in the credit markets, where the compensation for risk has shrunk to negligible proportions. The recent failed auction of assets seized from two failed Bear Stearns hedge funds showed that the pricing of debt long ago lost touch with what anyone might actually pay.

Credit crash fears surround debt whirlpool

Could the fallout from hundreds of thousands of dodgy home loans given to poor people in the US cause a global credit crash? That question is being openly discussed after the near collapse of two big hedge funds run by the Bear Stearns investment bank.

The funds are exposed to about $4 billion in toxic debt after they bought the risk of the home loans going bust in the secondary market through collateralised debt obligation.

The worry is not that the two particular funds will go under but that the near collapse has exposed the ripple effects beyond the poor people who took the loans and the companies who made the loans into the secondary market.

According to research published in the Wall Street Journal this week, there is $1.8 trillion debt in the secondary market. There are concerns that the figure is the tip of the iceberg in that market for people buying and selling the risk of default as the banks try to minimise their exposure.

The Rating Game Scam

You'll see massive losses from banks, insurance companies and pension managers," said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody's and Fitch understate the risks of subprime mortgage bonds. "The longer they wait, the worse it's going to be.

Mish comment: Corporate America always puts off until the bitter end anything and everything that looks smells or tastes like medicine, no matter how sick the patient is and how badly the medicine is needed. The reason is simple: short term profits are at stake and the greed and fees to be made by protecting improper relationships is simply too overwhelming.

Home Values Slashed in Half? The Housing Bubble Is About to Burst

House prices will not collapse to nothing like the most ridiculous of the Internet stocks, but homes in the most-inflated markets could lose 30 to 50 percent (in real terms) from their bubble peaks. Some people bought homes in these markets expecting to make great returns on their investments. Perhaps these people deserve their fate.

However, many homeowners followed the advice given to them by Realtors, politicians and financial advisors, and were simply pursuing the American Dream of homeownership. When the wreckage from the real estate bubble becomes clearer, these "experts" will have much to answer for.

Fannie, Freddie could have big subprime exposure-analyst

The continued writedown of subprime assets could hurt the two government-sponsored enterprises even though they hold highly rated mortgages, according to a report from Federal Financial Analytics in Washington.

"Looking only at their non-AAA positions, a writedown of 15 percent to 30 percent would mean a $1.8 billion to $3.6 billion hit for Fannie and a $1.5 billion to $3 billion hit for Freddie," the report said.

Neither government-sponsored enterprise has much of a cash reserve against losses of that size, and covering those costs could push the companies' capital below the levels agreed to with their regulator.

'Sub-prime Chernobyl': So gold has to be hit hard

The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Managers: Subprime Blame Lies With Rating Agencies

Robert Rodriquez, chief executive officer of First Pacific Advisors, was even more blunt. "We haven't seen much of a problem in the subprime area [but only] because the pricing is a fraud; the ratings are bullshit," said the two-time recipient of Morningstar's Fund Manager of the Year.

"I don't buy these prices, but as long as someone can provide capital to keep the finger in the dike, the charade will go on."

Rodriguez concurs with Gundlach that rising subprime mortgage delinquencies are a problem not just for hedge funds but also for major banks and other financial institutions.

"It is estimated that U.S. banks have invested 10% of their assets in collateralized debt obligations," he said. "And 40% of the CDOs are in subprime mortgages. I'm trying to get details on the components and I can't get any. This is setting up the next catastrophe."

Moody's, S&P fell for 'hooker heels'

MOODY'S Investors Service and Standard & Poor's were duped by the make-up and "six-inch hooker heels" of CDOs (collateralised debt obligations) on which they gave investment-grade ratings, and investors now stand to lose all their money.

This is the view of Bill Gross, manager of the world's biggest bond fund.

Sub-prime mortgage bonds made up about $US100 billion ($119 billion) of the $US375 billion of CDOs sold in the US in 2006, Moody's and Morgan Stanley data show. CDOs are created by bankers and money managers who bundle together debt securities and divide them into slices with varying credit ratings.

With defaults on those sub-prime loans rising, buyers of the BBB pieces of some CDOs stood to lose their entire investments, said Mr Gross, chief investment officer at Pacific Investment Management Co. He manages the $US103 billion flagship Pimco Total Return Fund in Newport Beach, California.

Grim worldview from the deck of the Titanic

Like the allegory, I look to our leaders and wonder if they are clueless. But the fact of the matter is they know everything we know and much more.

I believe that most politicians know the awful truth confronting us but refuse to do anything about it as it will cost them their jobs. They hope to safely navigate through the ice field, fingers crossed. If this is the case, our leaders have failed us: It is their responsibility to lead us down certain paths, regardless the pain, if circumstances demand it.

Will environmental lobby curb interest in gas line?

Some wonder whether any company will offer to build the gas line from Prudhoe Bay, not for fear of rising construction costs but for fear of the cost of the political clout needed to obtain construction permits.

A strong new industry has sprouted up to oppose development of any kind in Alaska. It's the professional environmentalists - the Sierra Club, the Alaska Coalition, the Wilderness Society, the Southeast Alaska Conservation Council and others. One of the newest and most influential is the Alaska Wilderness League.

Superpower? Really?

The Washington Post (May 8, p.D1): "Joseph E. Stiglitz [Nobel winner in economics] ... co-authored a study that predicts the Iraq conflict alone will eventually cost taxpayers more than $1 trillion, counting military rebuilding and health care for wounded veterans." Incredibly, we haven't paid for any of this yet. The Post article noted, "The war bill is going directly on the nation's credit card." Foreign investors, especially China, have been paying for this war.

Now why would they do that? The answer: It's in their strategic interest to finance a war that drains America's financial, military, and leadership clout. They're paying for us to screw ourselves. It saves them the trouble. However, given the irresponsibility of America's military adventures and the equal irresponsibility of the American electorate in elevating someone like George W. Bush to power, why would China and the other investing nations finance the rebuilding of America's military might? How could that possibly be in their interest especially now that the euro has overtaken the dollar as a viable medium for world exchange? Hence China and others are making obvious moves to invest differently. We're about to be left behind.

Dirty bomb would cause panic, cost billions: Study

A new federal study says the explosion of a small dirty bomb near the CN Tower would spew radioactivity over four square kilometres, resulting in mass anxiety, a rush on Toronto's medical facilities and an economic toll of up to $23.5 billion.

The nightmarish scenario – detonation of a device containing a modest amount of americium-241, a silvery plutonium byproduct – is among several sobering projections quietly mapped out by federal officials to prepare for a terrorist attack in urban Canada.

Ontario will limit big rigs' speed

The OTA estimates that speed limiters will save a typical tractor trailer 10,500 litres of diesel fuel every year, as well as reduce the number of severe accidents involving large commercial trucks.

Thanks Stoneleigh - I greatly appreciate your econo focus. I too feel that it is very important and in fact will be the first and most important effect that general Q public will see and feel that might wake them up.

I only hope the looming financial crisis does not render us unable to act appropriately.

My sister is a teacher and her pension fund is giving the teachers organization a huge and frustrating run around regarding the funds solvency. Everything is in stasis.

Here is a disturbing piece on the issue.

Investment Landfill: How Professionals Dump Their Toxic Waste on You
by Paul Tustain

I second that - your efforts are appreciated!

When the right wing National Post in Canada starts to chime in, that's like bells ringing. Loud.

It's not so much even the stupid investments by pension funds, it's the leverage, the money that's been borrowed to finance those investments. Instead of getting a pension, you'll get an invoice.

Storm clouds rapidly form

Can subprime field troubles be contained?

The warnings are now flowing thick and fast.

Donald Coxe, global portfolio strategist for BMO Financial Group believes the market for fiendishly clever debt instruments will implode like all previous financial fashions from Third World bank loans to derivatives dreamt up by Nobel laureates.

"In this decade it is collateralized debt products that seek to make risk disappear from cash markets into a tower inhabited by investment banks and hedge funds in which the shared language is algorithms," he wrote in his recent publication Basic Points. "Like all past Babels, this one will, at some point, self-destruct."

Collateralized debt obligations are securities backed by pools of bonds, loans or others assets. In this cycle of ultra-low interest rates the "other assets" have quite often been subprime loans which offer higher yields -- for higher risk.

Sales of CDOs soared to more than US$500-billion last year, compared with US$84-billion in 2002, according to data from Morgan Stanley.

Bill Gross, the self-described curmudgeon of credit, and man-aging director at bond management company PIMCO, agrees the inevitable unwinding of the CDO market will be ugly and will ultimately cause a constriction of credit in other markets such as high-yield debt, bank loans or commercial paper.

"Sorry Ben [Bernanke], but derivatives are a two-edged sword," he wrote in his July report. "Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets."

By the way, a few hundred million of your pension money goes to speculators. Employees my derrière.


Bell Canada Inc. insiders stand to reap hundreds of millions of dollars in gains from their stock options and other long-term compensation in the proposed sale of the company to a group led by Ontario Teachers' Pension Plan for $42.75 per share.

Information in company filings shows that, as of March 31, an unspecified number of Bell employees had 23 million stock options outstanding, with an average strike price of $33, the price employees can pay to buy stock during the life of the options.

Since options are expected to automatically vest with the closing of the transaction, the gain will be an average of $9.75 per option, for a total of $224-million. That is a significant improvement over just four months ago, when the stock was trading for $30 and the majority of options held by employees were essentially worthless, after five years of flat performance by the stock.

I firmly believe that Westexas is right when he says that peak oil was not the primary cause but was the trigger for the economic meltdown now underway.

But more importantly, we fail to recognize what Hubbert himself stated decades ago - that science and economics only got along because both were undergoing rapid growth from the end of the medieval period to now. But science, bounded by the real world, is not capable of many more doublings whereas the economic world simply assumes doublings forever. Is it any wonder then that the economic system, built upon myths, legends, and lies reaching back to our pre-history in caves, is now facing collapse? Reality refuses to cooperate with the illusion of endless growth any longer.

Maybe we'll get lucky and get a real science in place of economics when this is all done but I am not counting on it.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

BusinessWeek explains a bit more of the how and why:

Mutually Assured Mayhem

It's white-knuckle time on Wall Street as firms try to prevent the subprime mess from spreading. The hedge fund blowup has suddenly thrown the world's biggest financial institutions into a game of brinkmanship that will end in one of three ways: a quick, brutal crash of the subprime mortgage market and possibly the broader corporate bond market; a slow, painful meltdown of one or both lasting many months; or a short-term blip that, over time, will be forgotten as conditions return to normal.

Disaster has been averted so far. But pressure continues to come from all sides. The decisions made by Wall Street's bankers, hedge fund managers, and bond raters over the next several weeks will determine which way the game plays out. One twitchy move by any of them could lead to mutually assured destruction.


At first the subprime mess looked more or less like a Bear Stearns problem. When its funds stumbled, it was Bear that put up a staggering $1.6 billion in loans to stanch the bleeding. It was Bear's stock that took the biggest hit of any brokerage house, falling some 3.2% in a day. And it was Bear that, as reported by on June 25, drew the scrutiny of the Securities & Exchange Commission, which has opened up a preliminary investigation into what went wrong inside the 84-year-old firm led by CEO James E. Cayne.

Ordinarily, rivals wouldn't shed tears if Bear Stearns were suffering—they'd pounce on the weakness. But much of Wall Street is elbow-deep in the same troubled securities, all created during the height of the mortgage boom, that are now coming back to bite Bear.

Last year, Wall Street churned out some $550 billion in so-called collateralized debt obligations (CDOs): complex bonds often backed by subprime loans that pay high yields in good times but are dangerous when the market gets rocky, as it is now. "This is not [only] a Bear Stearns problem," says Joseph R. Mason, associate professor of finance at Drexel University's LeBow College of Business.

And what's worse, they try to hide the damage as long as they can:


CDOs are especially troublesome in a choppy market because they're illiquid— difficult not only to sell but even to value. Until now, accounting rules have let firms peg their CDOs at roughly the price they paid for them. But if the market sets new prices, then others must use those prices to value their holdings. What gives Wall Street nightmares is the possibility that Bear Stearns' struggling hedge funds, which once controlled $16 billion in assets, will be liquidated by their creditors.

A shotgun sale of poorly performing securities would provide Wall Street with a true price for valuing the slumping assets. "Nobody wants to officially acknowledge the worthless nature of these products," says Peter Schiff, president of Euro Pacific Capital, a Darien (Conn.) money management firm. Indeed, SEC Chairman Christopher Cox, during a hearing on Capital Hill on June 26, disclosed that regulators have opened a dozen separate probes on the subprime market and the issue of CDO pricing, in addition to the Bear inquiry.

Thanks HISF. This is a huge issue. It won't be possible to stave off a true valuation of these 'assets' indefinitely, and when it happens we are likely to see a scramble for the exits (ie every institution for itself). IMO a deflationary crash is inevitable and not far off.

I do not believe that prior estimations or existing economic theory will necessarily apply as we move through peak and beyond. A deflationary crash? How about horrible deflation and inflation at the same time just in different parts of the economy? How about assets deflating in value in real terms as Helicopter Ben starts printing dollars at lightspeed trying to keep the economy afloat?

Economics is not science. Don't take my word for it. Read the words of Dr. M. King Hubbert himself as he explains the incompatibilities between science and economics and how in our upside down world, economics has control over science (for now).

Economics is the killer. Economics is what will drive us to make collectively bad decisions. And if the decisions are late enough and if energy decline is too rapid, we won't get a second chance.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Ben Bernanke said he would throw money from helicopters, but he didn't throw free money - he threw free debt (ie he fostered a huge credit expansion by keeping nominal rates artificially low). The money supply increased dramatically and asset prices went through the roof. It is that credit expansion, following on from the Greenspan mania, that must now correct.

I am convinced the crash will be deflationary - in the Austrian sense, meaning that the money supply will be contracting. As for price changes (a symptom of changes in the money supply), I think asset prices will collapse across the board, although everything will simultaneously become less affordable as purchasing power will be falling even faster. So essentially I agree with what you said, provided we agree on a common definition of inflation.

My view is that credit will cease to be available to anyone who is not already extremely wealthy, and therefore a relatively low risk. Even for those lucky few, I would expect the nominal rate of interest to be high and the real rate to be higher still (ie the real rate is the nominal rates minus negative inflation when the money supply is contracting). Most people would have little or no purchasing power, hence demand would collapse, as demand presupposes purchasing power.

Risk has been ignored during the mania as real interest rates were negative. Everyone has been chasing yield without realizing they were chasing risk, but risk-awareness is about to make a comeback. The Fed may lower short term rates, although even zero won't be low enough under conditions of money supply contraction (ie real rates would still be high). Long term rates will be another story - they are headed much higher in order to reflect risk. Credit spreads will widen dramatically in order to reflect risk as well, and the dollar should increase in value significantly (for a while) as people try to cash out.

IMO we will see another Great Depression (as the BIS warned last week). I think that will bring down much of the banking system and international financing over several years. When the US is cut off from international financing, I think it will turn to the actual printing of money as opposed to fostering credit expansion as it has done so far. There is a big difference between credit expansion and currency hyperinflation - credit expansion ends always in deflationary of the credit bubble, whereas currency inflation can persist as a chronic scourge for long periods of time. IMO we will probably experience hyperinflation after the deflationary impulse is spent.

Thanks for all of your links to subprime stories today. I think your synopsis makes a great deal of sense. If you take your scenario a step further--we are facing a GD, our nation is grossly in debt to foreign bond owners and in the way of our own entitlements, yet we need to increase government spending to get us out of our GD as well as lower our interest rates (like you say to zero), then what happens or rather how can that increased spending happen, or is that where your actual printing of money comes in? At the same time, I suppose we'd nationalize our health care and infrastructure and energy problems, if not our entire transportation and agriculture systems (since they've all collapsed), with inadequate success, adding government work programs for the unemployed, and rationing coupons for essentials, so that we would hardly look like a democracy anymore. Also, if you have any book recommendations for those of us interested in reading about the GD, I would appreciate it.

The best book on the subject at the moment (IMO) is Financial Armageddon by Michael Panzner. Another I would really recommend for historical perspective is The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer - it's a history of inflations and their aftermath going back over several hundred years. It's much more accessible and readable than it sounds.

I don't think we'll see an increase in government spending in the sense that you mean (ie Keynesian) during a depression. A liquidity crunch means that there will be very little money available, and not nearly enough to cover even what people would regard as necessities. (Trying to run an economy with insufficient money is like trying to run an engine with the oil light on - it doesn't take long to seize up.) I think the US government will repudiate its obligations, particularly to its own people, as these are already unpayable even without an economic collapse. The indebted middle class will be ruined, as they were during the Argentine financial crisis for instance (see And the Money Kept Rolling in and Out by Paul Blustein).

I don't think we'll see money printing until all access to foreign financing is lost (hence the need to continue servicing obligations to foreign bond holders in order to avoid being cut off - the bond market is a hard task master). I'm not sure how long this would take as we've never had a credit bubble the size of the one we have now - one that penetrates into every corner of the economy. It makes it difficult to guess how long it might take to unravel. My best guess is that we will see at least a decade of deflation and depression and that hyperinflation could set in some time after 2020.

I agree with you about not looking like a democracy anymore. When there is nowhere near enough to go around, you would tend to get either anarchy (if rationing is by price and the poor are simply expected to do without) or totalitarism (ie central control of essential supplies is imposed). My opinion is that a much greater degree of central control will be imposed. Emergency powers legislation to suspend constitutional checks and balances and impose a unitary executive already exists, ostensibly to deal with a major terrorist event. Unfortunately powers granted rarely lie dormant and are almost always abused at some point (I have a law background, so these issues are of particular interest to me). See this article for instance.

Thanks! That helps. I was trying to imagine how the government could possibly increase spending in such a situation, and you answered it. It can't!
And you anticipated my next question--what kind of time periods would be likely?
What amazes me, is that there seem to be a majority of financial persons who do not think this scenario is possible.
The global ramifications of this are enormous as well--the nations who've financed our debt, and a global inability to fund extraction of remaining oil being no small part of the picture. I've always suspected that an economic collapse could trigger a faster drop in oil supplies than people ever envision.
I suppose the nation's that might fare best are those who have the least amount of interaction with us (the US) now, and, also those richest in natural resources and food production, which still puts the US and Canada in a better situation than many other countries.
Thanks for the reading recommendations.

OK, just one more, Bill Bonner. By the way, it's remarkable how many stories come in on the topic, and the vast majority outside the mainstream press. Wait till they get going.

For now, it's don't look don't tell.

A higher percentage of Americans "own" their homes than ever before, but they 'own" less of their homes then ever. And when prices start falling for real, they will all own mortgage fees based on the buying price. While interest rates go up. Then the bank calls to say they have too little equity to back up their mortgage.

It's quite easy, really. The estimated value of US domestic real estate was $10 trillion in 2000. Today it's over $20 trillion. That difference will disappear soon. And the US economy can't withstand a $10 trillion evaporation of money/credit. Nor is that all: the derivatives and stocks will go down with it. Financial Times' Gillian Tett last year estimated total global derivatives trade at $470 trillion. Nothing says you can't lose 20% of that. Like in a year from now. And it could be worse.

The Salvation Army will be a busy undertaking soon. And so will the real Army.

Subprime Debt:

Falling House Prices Hurt Rich, Poor and Everyone Else

Of course, we all know that the subprime problem is “contained”. Hank Paulson and Ben Bernanke have both said so.

But we are not convinced. Fires are “contained”. Uprisings are “contained”. Containers, we know, can hold liquids…and solids too. But we’re still not sure if you can contain such a vast mortgage problem so easily.

To put it another way, you can contain something while it is still small, localised and manageable. You can’t contain it when it’s spread everywhere. It’s already too late. In a speech at the Mansion House last month, Mervyn King, governor of the Bank of England, was considerably less sanguine than his American counterparts: “Excessive leverage is the common theme of many financial crises in the past. Are we really so much cleverer than the financiers of the past?” he asked.

The short answer to that question is, of course, no. Subprime mortgages represent a substantial portion of the entire mortgage market. But it is not just the subprime part that poses a threat. The real problem is that American homeowners have too little money. Why do they have too little money? Because they’ve spent too much. And where did they get too much money to spend? From the equity in their houses.

In the last six years, America’s middle class has run down its balance sheet in a remarkable way. Never before have homeowners owned so little of their own homes. In the ’60s, homeowners barely mortgaged 30% of the value of their homes. Today, that figure is close to 50%. And it’s happened while house prices rose at the fastest pace in at least 80 years. Thanks to rising prices, owners’ equity increased US$4.37 trillion since the beginning of this century. But, in a prodigious feat of borrowing, mortgage debt increased even more - US$5 trillion.

But now, house prices are falling. A few days ago, Business Week reported that on June 25, according to the National Association of REALTORS, the rate of existing-home sales slipped 0.3% in May, to an annual pace of 5.99 million units, while supply climbed to 8.7 months, the highest reading since June, 1992. The median price of a new home dropped 11% in April from the previous month, to US$229,100, the biggest decline since 1970.

Homeowners are taking a hit, and these are not just people who live in trailers and watch daytime television. No, dear reader, they are us! Well, not necessarily us, exactly…but they are most people.

“Nearly 70% of Americans either own or are in the process of paying off their homes. Everyone wants to believe the worst has come and gone, because that’s what’s best for them. But we don’t always get the market outcomes we want or expect,” The Survival Report’s Mish Shedlock quipped.

The rich can lose money in the stock market and no one will particularly care - there are too few of them. The poor and their problems will always be with us, but they affect only a miniscule part of the financial system. The problems of the rich and poor can both be “contained.” But middle class troubles are troubles for the whole financial system…and the whole economy.

Just thought I'd mention that the ABC (Australian Broadcasting Corp.) Peal Oil documentary just aired on Radio-Canada's RDI (French) channel this evening. All good stuff for the population to see, with Colin Campbell telling it like it is. Even made my wife sit up and listen!

Thanks again for the Round-up Stoneleigh.

Here is a link to show a section of the Hartley bay super tanker route that looks like sheer madness to me. look at the scale left corner and relate that to a super tanker passage.

It is lovely untouched coastline at least it was over twenty five years ago when I last was fishing in that area.

Not quite so untouched anymore. The landmass in the centre-right of the image is Gil Island, where the southbound Prince Rupert-Port Hardy ferry ran aground and sank last year, after failing to make the turn indicated at the bottom of "Bellingham-Prince Rupert Ferry".