The Round-Up: July 30th 2007

Subprime coming home to roost?

A rash of bankruptcies at subprime lenders prompted a market wobble in February and March but traders swiftly decided the problem was contained. Equity markets across the world continued to rally, while the credit market remained phenomenally high in historical terms, thanks in large part to the growth of credit derivatives. These prompted optimism that it had become easier to spread risk and so it was justifiable that even the riskiest companies could obtain credit cheaply.

That mood of optimism is over. Fear now rules the credit markets, where the effective cost of ensuring against a default, in both Europe and the US, has increased by more than half in barely a month. A steady drip of bad news has prompted fears that the subprime debacle could trigger a credit crunch, raising the cost of financing worldwide as investors are forced to sell healthy investments to make good their losses....

....Rather than an orderly correction, they confront a situation where the market for riskier forms of credit seems to have come to a complete halt. US issuance of high-yield, or low-quality, debt stayed below $1bn for the third successive week, according to Thomson Financial. The last week of June brought $9.7bn of high-yield issuance; by last week that had fallen to $322m. This financing is crucial for private equity deals.

"The cancellation of high-yield deals and the inability of the large banks to syndicate their leveraged loans is causing the credit markets to shut down," says T. J. Marta, strategist at RBC Capital Markets. "Something has to give here: either equities have to give it up or credit is going to implode".

The Crash of 1929: Are We on the Verge of a Repeat?

Yet this time, it is happening in an information age in which 97 percent of stock transactions are conducted electronically. And this time it is not because of junk bonds, but because of hedge funds, mortgage-backed securities, subprime loans and a bizarro virtual scheme known as naked shorting, which has been around as long as -- and played a role in -- the 1929 crash, and according to some, could trigger the next one any day now.

"We've divorced the system from paper," explained CEO and hedge fund activist Patrick Byrne to me by phone, "and since then it's become easier to divorce it from reality. But the problem is that so much has been drained out of the system using these tools that the money is not there. If this gets exposed, the money is not there. It's been turned into Ferraris and mansions in the Hamptons. It can't be paid back. The system is going to vapor lock."

S&P paints a gloomy picture for big banks

S&P says an upturn in defaults “cannot be far away”. Banks could – if the situation worsens – see “sizeable losses” relative to earnings and capital. In terms of revenues, they will no longer receive such substantial underwriting fees from leveraged finance activity.

Banks may also face litigation from investors, according to Richard Barnes, author of the S&P report. His comments follow a warning by Peter Wuffli, former chief executive of UBS, that the leveraged finance boom could drag banks into litigation if the cycle turned.

S&P says the leveraged finance market had been “ripe for a correction” with “frothy” underwriting criteria, and new issuance skewed towards higher-risk assets. But the jury is out on whether the correction marks a return to rational pricing or a downturn.

Wall Street often shelved damaging subprime reports

Investment banks that bundle and sell home mortgages often commissioned reports showing growing risks in subprime loans to less creditworthy borrowers but did not pass much of the information to credit rating agencies or investors, Wall Street sources said.

The mortgage consultants, known as "due-diligence firms", were hired by investment banks to make sure blocks of mortgages conform to the mortgage seller's own standards. The studies provided a first glimpse of loan quality for ratings agencies and investors who do not normally see the full reports.

The end of the credit party

Dealmakers, investors and home owners in the United States are facing a grim summer as conditions for borrowers get worse.

Until recently, there has been a seemingly unlimited supply of cheap money to fuel leveraged buyouts and other takeovers. There was also an easy flow of mortgage money available before the housing market turned south and the crisis erupted in subprime mortgages made to borrowers with poor credit....

....But now investors are showing a greater disdain for risky debt - and fears about a looming credit crunch have shaken investor confidence worldwide.

Financial crisis just one 'Bear-like' event away: Economist

A global financial shock is just one "Bear-like" event away, economist Mark Zandi warned Thursday, giving it a one-in-five chance. In the current "high level of angst" following the collapse of two Bear Stearns funds, the uncertainty caused by another hedge-fund failure could cause investors to freeze, he said. Zandi, chief economist for Moody's, said he expects significant declines in home sales and prices in coming months to further erode mortgage credit quality. About half of the structured securities owned by hedge funds are in the riskiest tranches of complicated derivatives based on the subprime mortgages that are going sour quickly, he said. If there is a global financial crisis, he said he expected the Federal Reserve would ease, but questioned how effective it would be in restoring confidence in the U.S. financial system.

Bonds hit by credit market dip

The contraction in the credit markets is spreading to global investment-grade debt, with issuance of highly-rated bonds falling to the lowest levels in years.

The tightening of credit has been most pronounced for lower-rated debt in the US, but figures from Thomson Financial show a significant decline in activity in the global investment-grade market as well.

How Credit-Market Tremors Have Affected Junk Bonds, LBOs and Hedge Funds

The days of easy credit may be coming to an end. The jitters began with losses at two Bear Stearns hedge funds that invested in subprime-mortgage debt that now are worth almost nothing. And over the past few weeks, a string of companies has delayed or canceled debt offerings, a sign that investors may be less interested in debt deals that don't adequately reward them for potential risk.

Bear Stearns seizes troubled hedge fund's assets

Bear Stearns Cos (BSC.N: Quote, Profile, Research) has seized control of most assets in a troubled hedge fund, after declines in the value of riskier, subprime home loans caused the fund's value to plummet.

In a statement on Thursday, Bear Stearns said it "assumed possession of the assets" securing a $1.3 billion credit facility provided to the High-Grade Structured Credit Strategies Fund after the fund was unable to meet a margin call.

The investment bank said it does not expect any "material change" in financial exposure as a result of its action. It said it will continue to pursue an "orderly liquidation" of the assets, and will be in position to establish appropriate hedges to protect against future price declines.

Housing Minsky Moment: 3 Factors. Prime Contagion, Record Foreclosures, and Publicity.

This week witnessed the final nail in the housing bubble coffin. We have reached what seems to be the Minsky moment for the housing market. Named after the US economist Hyman Minsky, the idea holds that over long periods of economic stability leverage tends to grow in predictable stages. This economic stability leads to a fertile environment sprouting trunks of easy credit access with little perceived risk. However, as the growth continues there seems to be a movement from moderate lending, risky lending, and finally outright irresponsible Ponzi like lending. With 100+ subprime lenders imploding on their own convoluted mortgages, the housing market is like a fish out of water gasping for life and clearly in the last stage of the lending cycle.

American Home Mortgage says faces margin calls

American Home Mortgage Investment Corp. said its lenders are demanding it put up more cash after the mortgage lender wrote down the value of its loan and security portfolios significantly.

The company said in a statement released late Friday that as a result of the margin calls from lenders, it has delayed paying dividends on its common stock, and plans to delay payments on its preferred shares.

Margin calls can create severe difficulty for a company that depends on funds from its lenders to finance loans, and can force the company to sell assets or seek other financing.

If the company cannot generate enough money to satisfy its lenders, in the worst case scenario it can be forced to reorganize its debt or file for bankruptcy.

Will the Leak Ruin the Engine?

The turmoil we're witnessing in global financial markets is nothing less than the popping of an enormous credit bubble that built up over the past five years, artificially inflating the market prices of stocks, bonds and real estate. It created a bonanza for Wall Street investment houses and private-equity funds and fueled the longest and strongest period of global economic growth in modern history.

The only question now is whether the bubble will deflate slowly enough to allow an orderly repricing of those assets, or whether a broad loss of confidence by investors will create a vicious cycle in which selling begets more selling, markets freeze up for lack of buyers, and a credit crunch ensues.

Another Aussie Hedge Fund Hit By Subprime Mortgage Effect

Another Australian hedge fund has run into trouble as the impact from turmoil in U.S. subprime mortgages spreads across global credit markets.

Absolute Capital Ltd., part owned by Dutch financial-services giant ABN Amro ( ABN) , said on Wednesday that it has suspended investor redemptions from its Yield Strategies funds because liquidity has dried up in global structured credit markets.

Easy Money, Lifeblood Of Economy, Is Drying Up

Easy credit has been the economy's lifeblood in recent years. It gave people who previously couldn't afford homes a crack at the American dream. It fueled multibillion-dollar takeovers of some of corporate America's biggest names. It buoyed the stock market and propped up the prices of many other assets.

But now, the investors who a few months ago were willing to lend money to Wall Street at low interest rates, on loose terms, are balking as they worry about having to pay the price for lax lending standards.

The trouble started in one of the shakiest sectors of finance, home mortgages for people with bad credit, but it is spreading. As easy credit dries up, some huge corporate deals are being delayed and could unravel.

The question now is how far will the pain spread, and how many people will get hurt as it does.

"When people get scared, they tighten up all over," said A. Gary Shilling, president of the investment firm that bears his name. He said he expects housing prices to fall significantly further. "This kills consumer spending," he said of the credit crunch. "We think we'll be in a recession as a result by the end of the year. And that will spread globally because U.S. consumers still are the buyers of first and last resort for the excess goods and services produced around the world."

Japan sees no end to deflationary pressure

Japan said Friday its consumer prices fell for a fifth straight month in June despite rising energy costs as deflationary pressure kept weighing on the world's second-largest economy.

But the drop came within market expectations and analysts predicted it would not be enough to deter the Bank of Japan from moving soon to lift the nation's super-low interest rates.

Dollar tumbles vs yen as Japan sees safe-haven flows

The U.S. dollar tumbled against the yen on Thursday, as investors seeking refuge from global concerns about credit markets poured money into the Japanese currency, unwinding the so-called yen carry trade....

....The carry trade refers to investors borrowing currencies at cheap interest rates in one place, in this case in Japan, to invest in higher-yielding currencies -- ie., where interest rates are higher -- in this case the U.S. dollar.

But "this is not a story of broad dollar weakness but manifestation of a sharp reduction in global risk appetite emerging from worldwide concerns with hedge fund
losses," said Ashraf Laidi, currency strategist at CMC Markets.

"Unwinding of carry trades is hitting the markets rather than then broad dollar selling as the yen rallies across the board on emerging credit concerns in global credit
markets," he said.

Credit crunch ignores borders

If you are looking for an explanation for the sudden surge in volatility, you'll have to look beyond Canada's borders and gaze upon the credit drama unfolding in the United States, where big-name debt offerings are being yanked.

"We are on the same planet," said Clement Gignac, chief economist and strategist at National Bank Financial, pointing to the fact that the mergers-and-acquisitions boom
that has been stoking Canadian stocks this year relies to a large extent on credit conditions elsewhere.

In the United States, cracks began to appear about a month ago, when investors balked at a number of high-yield debt offerings that typically follow private-equity takeovers. (Essentially, private-equity firms finance the buyout of companies by issuing bonds through investment banks.) Debt offerings from U.S. Foodservice, ServiceMaster Co. and Thomson Learning, worth billions of dollars, hit a wall.

Now, investors continue to raise their noses at anything that looks a tad risky, raising the possibility that surging M&A activity could be sputtering. According to
Bloomberg, at least 35 different borrowers have either cancelled, postponed or restructured debt sales recently.

Market turmoil no threat to Bell: Teachers

Despite concerns a volatile debt market may force Ontario Teachers Pension Plan to shelve the debt offering needed to buy Bell Canada Inc., the head of the massive pension says the $52-billion deal is not in jeopardy.

"We have our financing," Claude Lamoureax, president and CEO of Teachers' said yesterday. "Clearly right now, the spreads have widened but that's why you pay the bank huge fees to take the risks."

He also added the deal is "far from closing, you are looking at another long period before we close," and the debt markets could rebound in that time.

During a terrible week for North American stocks, shares of Bell have been shrinking away from Teachers' $42.75 a share offer. After a terrible week on the markets -- partly driving lower after other leveraged buyout takeover targets such as DaimlerChrysler AG and Alliance Boots PLC shelved their debt deals -- Bell shares closed at $40 a piece, a full 6.4% below the Teachers' offer.

As Mr. Lamoureax said, in leveraged buyouts the banks "take the risks" and right now the investment banks are temporarily swallowing the billions of dollars worth of debt deals for Chrysler and Alliance.

Stocks set for losing week as investors worry about tightening credit

Stock markets are likely headed for further losses after worries about a tightening of credit conditions cut a wide swath through indexes last week. "What we're seeing is the global re-rating of risk," said John Johnston, chief strategist for the Harbour Group at RBC Dominion Securities.

The Toronto stock market had a horrible week, losing 834 points or 5.72 per cent in a slide that started right after it hit a record high July that had taken the TSX up about- per cent since the start of the year

The Canada-U.S. housing divide

The contrast between the Canadian and U.S. housing markets has never been starker.

U.S. existing home sales sank to a near five-year low Wednesday while prices continue to slide. In Canada, however, home sales continue to defy all expectations, breaking records for the last three months.

"Such a divergence between the Canadian and U.S. housing markets is unprecedented," said Marc Pinsonneault, an economist at National Bank Financial, in a note to clients.

'Reckoning' begins for prophet of doom

Instead of rocket science, he chose a different vocation: prophet of financial doom. Mr. Narayanan makes Eric Sprott look like a cheerful optimist. The credit squeeze that has put a deep-freeze on leveraged buyouts in July and forced this little stock market correction - this is just the beginning, he says. "I would say we're probably in the second or third inning." The best-case scenario? A replay of the summer of '98, when the Dow lost about 20 per cent in a month-and-a-half. The worst? "More like the Great Depression of this century."

If it gets really ugly, blame Wall Street and its obsession with inventing ever more complicated financial products. Mr. Narayanan is something of an expert on this. His first job out of Yale was for Smith Barney, working on earlier versions of mortgage-backed securities - mortgages that are packaged together and resold to investors.

Bond risk nears record as investors flee corporate debt

The cost to protect debt of companies from Goldman Sachs Group to Deutsche Bank and Australia's Westpac Banking Corp jumped as investors shunned all but the safest of debt, according to credit-default swap traders.

A risk benchmark in Japan had its biggest one-day increase on record. Risk premiums rose beyond records reached in 2005 when General Motors Corp and Ford Motor Co lost their investment-grade credit ratings.

More than 40 companies worldwide reorganised or abandoned borrowing plans in the past month as investors balked at extending credit. The retreat has forced banks to take on at least $32bn of debt and threatens to bring an end to a record run of LBOs, which topped $690bn this year.
"The big risk in the coming weeks and months is that you get forced selling of credit with institutions, both from the hedge fund side and the bank side," said Bob Janjuah, chief credit strategist at Royal Bank of Scotland Group Plc in London. "The global economy is a debt-fueled, confidence-based scheme. All assets are and will be impacted."

Living the American nightmare

To many people in the affluent Bay Area, losing a home to foreclosure sounds like a Depression-era relic or a Rust Belt phenomenon. Our real estate prices have defied gravity for so long; our job market is so strong; our cachet as a place to live seems so obvious. How could foreclosures happen here?
But in recent months, the Bay Area has proven to be home to numerous victims of the subprime loan debacle. Just like elsewhere in the country, people here with tarnished credit or limited funds bought houses that proved to be beyond their means, often putting little or no money down, and borrowing money through exotic, expensive loans that were virtual time bombs set to soar to unaffordable levels after an introductory period.

Aggressive mortgage brokers and lenders, along with naive consumers combined to create an unstable situation. The tipping point came a year and a half ago when real estate prices started to flatten or fall in some areas. Suddenly home buyers who had planned to refinance saw that door slammed shut because they no longer had equity in their houses and their "introductory rate" mortgages quickly became unaffordable as interest rates -- and their monthly payments -- rose. This year, almost 1 million people nationwide will enter a stage of foreclosure, according to That great tidal wave is ravaging the already beleaguered real estate market and causing repercussions from Wall Street to Washington, D.C.

Migrating to new Energy Paradigms

The difference between making money, and building wealth:

Policies of the World's Central Bankers in general and the US Federal Reserve Board in particular are geared to facilitate the making of money. Making money has become a "game". The rules of the game will be explained. Anyone can play. However, one consequence of these policies is that wealth is being destroyed. We are consuming future capital. If our political leaders do not soon come to their senses there is a growing risk that this wealth destruction will become irreversible.

Environmental Tax Reform: Expanding the Neo-Liberal Agenda (PDF warning)

Migration west adds $2-billion to economy

But as the commodities boom took off in Alberta and British Columbia in the past couple of years, migration picked up, and so did the economic impact, the study shows. Migration boosted the country's gross domestic product by 5.8 per cent in 2006, compared with an average gain of just 2.6 per cent over the decade, the study shows.

The study, Mr. Sharpe said, "puts some numbers to the anecdotes about Alberta."

Part of the economic gains comes from the fact that the migrants are young, well-educated, and are moving to find ways to put their skills to good use, the study says. It points to findings that interprovincial migrants saw their earnings rise by 9.4 per cent over two years, compared with a 4.8-per-cent raise for home-stickers.

All told, the study shows that the oil boom has favoured the Western economy while the Eastern economy flags, but it is not a zero-sum game.

Flaherty sounds final knell for income trusts

In a final blow to investors and trust executives who held out the faintest hope, the Conservative government has officially rejected making any changes to its tax on income trusts.

The rejection came in a response, tabled last week, to a report from the all-party House of Commons finance committee that urged Jim Flaherty, the Finance Minister,
to reduce the trust tax to 10% from 31.5% and extend the transition period under which the tax would take effect.

Mr. Flaherty said the recommendations were "unfair" and "unworkable" and would lead to a loss to the Treasury of up to $3-billion.

Canada Natural Gas May Decline as U.S. Inventories Near Record

Natural gas at Canada's largest trading point may drop after U.S. storage levels expanded to a near record and moderate weather is forecast for the weekend in several key markets.

Injections of gas into underground storage facilities in the U.S. last week totaled 71 billion cubic feet. That exceeded the median estimate of 70 billion, based on 21 responses in a Bloomberg survey of analysts, and boosted injection levels 16 percent higher than the five-year.

Stockpiles stand at 2.763 trillion cubic feet, ahead of the same point last year when they eventually reached a record 3.458 trillion in October.

Injections may continue to expand more rapidly than a year ago, when hot weather limited additions, and reduce prices, Credit Suisse analyst Jonathan Wolff said yesterday in a research note.

"We expect short-term prices to continue to weaken as storage becomes stressed," he said. Owners of storage facilities may limit injections once total inventories exceed 3 trillion cubic feet, likely within the next five weeks, Wolff said.

Cameco's series of unfortunate events

Management at Cameco Corp. took on a firestorm of criticism yesterday, as a triple-whammy of adverse events shook confidence in the Saskatchewan uranium giant, not only among investors but also at Canada's nuclear regulator.

Last Friday, Cameco disclosed it was suspending production at a nuclear fuel conversion plant in Port Hope, Ont., for at least two months, after discovering soil contaminated with uranium.

News of the leak sent Cameco shares down 6.5 per cent yesterday, adding to declines suffered last week when the Saskatoon-based company said annual production from its gold subsidiary would be cut by a third and that delays at its Cigar Lake uranium mine would be at least a year longer than previously thought.

"Management is addressing, as it should, each one of these unfortunate events. Timing makes it look like there is a failing, but I can assure you, people are working overtime on these issues," Cameco president and chief executive officer Jerry Grandey said in an interview.
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Polluter will pay for BC oil cleanup, Baird vows

Those responsible for the oil spill in a Vancouver suburb will pay for the cleanup, federal Environment Minister John Baird said after touring the affected area in a chartered boat yesterday.

"I'm a big believer in polluter pays," he said. "There will be an investigation into how this happened ... and how we can stop this from happening in the future."

Workers with Cusano Contracting -- doing sewer work for the city of Burnaby -- punctured a Kinder Morgan Canada pipeline under a residential road on Tuesday, showering a residential neighbourhood with thousands of litres of crude oil.

Downtown electricity supply stretched thin

The electricity supply in downtown Vancouver is stretched so thin that an equipment breakdown like one that occurred this month could touch off an economic and social disaster, documents filed with the B.C. Utilities Commission suggest. Documents filed last year by the BC Transmission Corporation indicate the Crown corporation is very worried about the consequences for Vancouver's core business district in the event of a breakdown of one of the two gigantic transformer units that coordinate electricity supply for the area.

LNG terminal go-ahead rests with cost cuts, PetroCan says

Costs of Petro-Canada's proposed liquefied natural-gas terminal on the St. Lawrence River, which have soared 50% to about $1-billion, must come down before the project can proceed, Ron Brenneman, president and chief executive, warned yesterday.

Mr. Brenneman said the project at the Quebec port village of Gros Cacouna, where gas liquefied overseas and shipped to the proposed plant would be turned back into gas form and sold into North American markets, is undergoing a redesign to pare back a new, inflation-driven cost estimate.

"That cost has gone up like any other LNG project in North America, so we're now looking at numbers more in the $1-billion range," Mr. Brenneman said on a conference call. "We're still seeing costs that need to come down in order for this project to go ahead. We'd like to see them below where we are today, and we think there are some possibilities, with some alternate pier and jetty arrangements."

Energy security: Infrastructure is not enough

With limited supplies of indigenous natural gas, proponents are looking to liquefied natural gas (LNG) to meet Nova Scotia's perceived needs. Of the two Nova Scotian projects, one has been mothballed (Anadarko's Bear Head) and the other is still searching for a supplier (4Gas in Guysborough). Irving, in conjunction with Repsol (a Spanish supplier of LNG), is completing construction of an LNG facility in Saint John. Since the natural gas from this facility will be shipped directly to the U.S., it cannot be considered as a potential supply for Nova Scotia.

Whether or not an LNG regasification facility is built in Nova Scotia, the fact remains, LNG is not indigenous energy source. It is expected that the world's major natural gas suppliers will band together to form a cartel, much like OPEC, to control the supply and price of LNG.

If Nova Scotia is to achieve any degree of energy security, it will be necessary to begin with a review of provincial energy demand, and then focus on how this demand can be reduced and ultimately replaced with indigenous supplies of energy. Building infrastructure in the hope that a supply of energy will be available is not the way to improve energy security.

Is Nova Scotia ready for the oil supply crunch?

Nova Scotia is in the unenviable situation of relying almost exclusively on oil imported from regions that will contribute to the supply crunch: the UK sector of the North Sea (production peaked in 1999 and is now in decline), the Middle East (politically volatile and has a growing internal demand for its own oil products), Venezuela (looking for other markets as part of its war-of-words with the US), and offshore Newfoundland (production is expected to peak within the next few years and then decline).

It is important to remember that although Newfoundland's oil is "Canadian", it is still subject to world oil prices. This has two implications for Nova Scotians, the first being that oil from Newfoundland will not be any less expensive than oil imported from anywhere else in the world. And second, crude oil will be sold to the highest bidder, meaning that there is no guarantee that Nova Scotians will have access to crude oil or oil products.

Biofuels: Use With Caution

The total from turning virtually all of our food into fuel is 12.8 MBOE/day - only 15% of the current world oil consumption of 84 million barrels per day. To make matters worse, it takes a lot more energy to make biofuels than it does to simply pump oil from the ground and refine it. A rough estimate is that it takes at least twice as much. Accounting for this necessary energy outlay reduces the available net energy of our biofuels to less than 8% of the world's oil consumption.

I'm not saying we should turn all our food into fuel. Nobody is saying that, or claiming that biofuels can replace all petroleum. What people are hoping is that biofuels will be able to replace some useful fraction of petroleum. This calculation shows that to be a forlorn hope. We are being systematically oversold on the potential utility of biofuels, and this is creating unreasonable expectations of the degree to which biofuels will be able to replace petroleum. The hope is that such substitution will address both climate change and dwindling post-peak fuel supplies.

Every percent of petroleum we replace by crop-sourced biofuels implies a 12%+ reduction in the food supply. While this might be acceptable in very small, localized applications, it will not (must not) be part of the global solution set if we begin to see multi-percent declines in fossil fuels. Trying to make it play such a role would amount to doing what some farmers were forced to do in the depths of the Great Depression: burn their seed corn for heat. We need to be aware that at some point in the deployment of biofuels we might cross the line from "small-scale petroleum extender" to "burning the seed corn". We need to be aware of the issues surrounding biofuels so we can resist crossing that line, because the pressure to cross it will become enormous.

This is one of the reasons why using crop-sourced biofuels for transportation is such a horrifically bad idea. We strip mine our top soil, we deplete our water tables, we starve everyone and we still have only an 8% solution. We all - individuals, countries and our whole civilization - need to be very, very cautious in promoting the use of biofuels, lest our thirst for transportation fuel overrun our common sense.. And we must always remember to crunch the numbers.

Willow trees new biofuel option for P.E.I. farmers

People call Cheryl Hendrickson the 'Willow lady' because she is in charge of the largest commercial willow supply in Canada, and she wants to spread the word about the benefits of farming willows.

As the president of Land Saga, Hendrickson said farmers on P.E.I should consider willows as biofuel. They benefit the environment and decrease the cost of heating homes, she said during a workshop on bioenergy earlier this year in Charlottetown.

Where the wind blows

Wind power has two problems. You don't always get it where you want it and you don't always get it when you want it. According to Jürgen Schmid, the head of ISET, an alternative-energy institute at the University of Kassel, in Germany, continent-wide power distribution systems in a place like Europe would deal with both of these points.

The question of where the wind is blowing would no longer matter because it is almost always blowing somewhere. If it were windy in Spain but not in Ireland, current would flow in one direction. On a blustery day in the Emerald Isle it would flow in the other.

Dealing with when the wind blows is a subtler issue. In this context, an important part of Dr Schmid's continental grid is the branch to Norway. It is not that Norway is a huge consumer. Rather, the country is well supplied with hydroelectric plants. These are one of the few ways (but not the only way, see article) that energy from transient sources like the wind can be stored in grid-filling quantities. The power is used to pump water up into the reservoirs that feed the hydroelectric turbines. That way it is on tap when needed. The capacity of Norway's reservoirs is so large, according to Dr Schmid, that should the wind drop all over Europe—which does happen on rare occasions—the hydro plants could spring into action and fill in the gap for up to four weeks.

Put like this, a Europe-wide grid seems an obvious idea. That it has not yet been built is because AC power lines would lose too much power over such large distances. Hence the renewed interest in DC.

Pipelines may have to ration space by fall: NEB

Canada's crude-oil pipelines may have to ration space as early as this autumn because of a surge of new oil production from the Alberta oilsands, the federal energy regulator said yesterday.

The National Energy Board said the pipeline industry may face a capacity crunch as oil output this year rises to 2.9 million barrels a day, 9% more than in 2006.

Almost all new Canadian oil supply comes from the oilsands region of northern Alberta, where more than $100-billion worth of projects to exploit reserves second only to Saudi Arabia are planned or underway.

Most of the that production is destined for the huge U.S. market and a number of new pipelines are on the drawing boards to handle the expected flood of oil.

However none of those new lines, which include projects planned by Enbridge Inc. and TransCanada Corp. , is expected be completed before 2009.

Putting the bite on C02

Last month, Cambridge, Mass.-based GreenFuel Technologies, a leading developer of algae-to-biofuel systems, found that a pilot system it had built in Arizona was growing algae so aggressively that it couldn't harvest them fast enough. As a result, the algae began to die.

The company also found out that the cost of its next-generation system was twice as much as it originally calculated, so it was forced to shut down the Arizona pilot and lay off nearly half of its staff.

This doesn't bode well for business. Power utilities, normally a conservative bunch, tend to shy away from any technology that isn't rock solid and risk free. They want to see more trial and less error.

As for a developing such systems for the Canadian market, experts say the cooler weather in Canada would make it difficult to keep the algae farms alive and productive year-round.

But never say never. The federal government announced in March that it was contributing $100,000 toward the first phase of a project to design microalgae systems with the potential to "capture up to 100 million tonnes of CO2 from industrial sources," the government said.

Not a huge contribution, but at least it kick-starts some serious research.

It's the first project under the newly created I-CAN Centre for the Conversion of Carbon Dioxide, which will be co-led by government research centres in Alberta, Saskatchewan, Manitoba and Quebec.

Changing Lake Superior frustrates boaters, mystifies scientists

Something seems amiss with mighty Superior, the deepest and coldest of the Great Lakes, which together hold nearly 20 percent of the world's fresh surface water.

Superior's surface area is roughly the same as South Carolina's, the biggest of any freshwater lake on Earth. It's deep enough to hold all the other Great Lakes plus three additional Lake Eries. Yet over the past year, its level has ebbed to the lowest point in eight decades and will set a record this fall if, as expected, it dips three more inches.

Its average temperature has surged 4.5 degrees Fahrenheit since 1979, significantly above the 2.7-degree rise in the region's air temperature during the same period. That's no small deal for a freshwater sea that was created from glacial melt as the Ice Age ended and remains chilly in all seasons.

A weather buoy on the western side recently recorded an "amazing" 75 degrees, "as warm a surface temperature as we've ever seen in this lake," says Jay Austin, assistant professor at the University of Minnesota at Duluth's Large Lakes Observatory.

Water levels also have receded on the other Great Lakes since the late 1990s. But the suddenness and severity of Superior's changes worry many in the region; it has plunged more than a foot in the past year. Shorelines are dozens of yards wider than usual, giving sunbathers wider beaches but also exposing mucky bottomlands and rotting vegetation.

Lake Erie is getting warmer and smaller

"The 'So what?' of all this is that warmer, shallower water can allow toxins to survive, can allow invasive species to take off, and more beaches could be covered with algae," said Michael Murray, staff scientist for the National Wildlife Federation.

And what happens in Lake Erie is an indicator of the health of the entire Great Lakes.

"Lake Erie is really the bellwether of the Great Lakes," said Robert Heath, head of the Water Resources Research Institute at Kent State University. "What's happening in the entire system happens here first."

That Great Lakes system includes more than 30 million people who live in the watershed of a basin that holds 98 percent of America's fresh water supply — a full 20 percent of Earth's fresh surface water.

Which makes Great Lakes water attractive to the burgeoning southwestern United States and a world with an increasingly keen thirst for fresh water. Which puts Lake
Erie in the center of international intrigue.

Europe in fire and water onslaught

Billions of dollars in damage has been wreaked by freak weather across Europe in the past week.

The death toll from the heat, fires, floods and storms has mounted to the high hundreds, with many thousands more made homeless or having their lives disrupted by weather conditions that have smashed records in many countries across the continent.

Agriculture and tourism have been particularly badly hit, with crops scorched in some areas, waterlogged in others, and tourists forced to flee fires in the south and storms and torrential downpours in northern countries. Electricity blackouts and water shortages caused by fire and flood and affecting hundreds of thousands of households and businesses have compounded the chaos.

Weather Wreaks Havoc on Europe's Grain Crop

A mix of blistering heat and heavy rainfall across Europe took its toll on this summer's grain crop on Thursday, propelling wheat prices to new highs and fuelling fears over more food inflation. With temperatures topping 40 degrees Celsius (104 F) in parts of southern and central Europe, farmers in Hungary demanded compensation after sustained drought and the extreme heat ruined 40 percent of the country's maize crop.

Aegean and Mediterranean coastlines being reduced to ash

The forests along the Mediterranean and Aegean coastlines are being reduced to ash with frequent and intense fires. With global warming on the rise, forest fires have become one of the leading natural disasters on the western and southern coastline of Turkey. Though the authorities are trying to prevent the fires, the number of the fires keeps increasing.

Ozone cuts plant growth, spurs global warming: study

The affects of greenhouse gas ozone, which has been increasing near Earth's surface since 1850, could seriously cut into crop yields and spur global warming this century, scientists reported on Wednesday.

Ozone in the troposphere -- the lowest level of the atmosphere -- damages plants and affects their ability to absorb carbon dioxide, another global warming gas whose release into the atmosphere accelerates climate change, the researchers wrote in the journal Nature.

Huge sea level rises are coming – unless we act now

There are glaciologists who anticipate such long response times, because their ice sheet models have been designed to match past climate changes. However, work by my group shows that the typical 6000-year timescale for ice sheet disintegration in the past reflects the gradual changes in Earth's orbit that drove climate changes at the time, rather than any inherent limit for how long it takes ice sheets to disintegrate.

Indeed, the palaeoclimate record contains numerous examples of ice sheets yielding sea level rises of several metres per century when forcings were smaller than that of the business-as-usual scenario. For example, about 14,000 years ago, sea level rose approximately 20 metres in 400 years, or about 1 metre every 20 years.

There is growing evidence that the global warming already under way could bring a comparably rapid rise in sea level. The process begins with human-made greenhouse gases, which cause the atmosphere to be more opaque to infrared radiation, thus decreasing radiation of heat to space. As a result, the Earth is gaining more heat than it is losing: currently 0.5 to 1 watts per square metre. This planetary energy imbalance is sufficient to melt ice corresponding to 1 metre of sea level rise per decade, if the extra energy were used entirely for that purpose - and the energy imbalance could double if emissions keep growing.

So where is the extra energy going? A small part of it is warming the atmosphere and thus contributing to one key feedback on the ice sheets: the "albedo flip" that occurs when snow and ice begin to melt. Snow-covered ice reflects back to space most of the sunlight striking it, but as warming air causes melting on the surface, the darker ice absorbs much more solar energy. This increases the planetary energy imbalance and can lead to more melting. Most of the resulting meltwater burrows through the ice sheet, lubricating its base and speeding up the discharge of icebergs to the ocean.

More of NASA's James Hansen on Old King Coal

My statement that releasing a coal-CO2 molecule into the air is more harmful than setting free an oil-CO2 molecule caused puzzlement. Of course the molecules are identical. What I want people to recognize is a way of framing the climate problem that makes clear what action is required to avert disaster. Only two aspects of the physics must be understood:

(1) CO2 "lifetime." A substantial fraction of the CO2 released to the air in burning fossil fuels will stay there for a very long time (about one-quarter is still there after 500 years).

(2) Fossil fuel reservoir sizes. There is enough CO2 in readily accessible oil and gas reserves to take atmospheric CO2 close to, and probably somewhat beyond, the "dangerous" level. The coal reservoir, not to mention unconventional fossil fuels such as tar shale, can take CO2 far beyond the dangerous level, producing, indeed, "a different planet".

Weather set to get wilder, warn UN experts

This year is on track to be the second warmest since records began in the 1860s and floods in Pakistan or a heatwave in Greece may herald worse disruptions in store from global warming, experts say.

"The year 2007 is looking as though it will be the second warmest behind 1998," said Phil Jones, head of the Climatic Research Unit at Britain's University of East Anglia, which provides data to the UN's International Meteorological Organisation.

It's hot and wet, but is it global warming?

Computer simulations may soon be able to show how likely it is that extreme weather events such as the floods and heat waves that swept Europe this week were caused by climate change, scientists say.

"To say you can't blame one event on global warming isn't true," Oxford University climate scientist Myles Allen said. "We can understand in a lot of detail what's contributing toward the risk of these events."

A disaster to take everyone's breath away

Deep in the heart of the world's greatest rainforest, a nine-day journey by boat from the sea, Otavio Luz Castello is anxiously watching the soft waters of the Amazon drain away.

Every day they recede further, like water running slowly out of an immense bathtub, threatening a worldwide catastrophe.

Standing on an island in a quiet channel of the giant river, he points out what is happening. A month ago, the island was under water. Now, it juts 5m above it.

It is a sign that severe drought is returning to the Amazon for a second successive year. And that would be ominous. New research suggests that one further dry year beyond that could tip the whole vast forest into a cycle of destruction.

Environmental costs of desalination

Improvements in technology coupled with the rising costs and decreasing reliability of traditional water supplies are leading water-short cities to look to the oceans for drinking water. Despite its popularity, the process of removing salt from seawater to make drinking water is so energy intensive, however, that the resulting greenhouse-gas emissions could contribute to regional water scarcity, according to a global survey of desalination plants by environmental group WWF.

Microbe converts light to energy

Mr. Ward said, the new discovery has "a new kind of photosynthesis. It uses the same kind of machinery, but has the parts in a different arrangement."

The find is going to be important for unravelling the history of photosynthesis, in determining how microbes efficiently harvest energy, he said in a telephone interview.

"We're running out of fossil fuel, so the more efficiently we can harvest light energy the better," he said.

ACLU: US Constitution in Grave Danger

"Presidents have tried in the past to overreach in claiming executive privilege," said Caroline Fredrickson, director of the ACLU Washington Legislative Office. "However, Congress has long served as a check to such abuses of power, slapping the president's hand when needed and pursuing contempt or enforcement actions that eventually resulted in the release of crucial information. Today's Congress must do the same if it wishes to remain a meaningful and independent branch of government."

The ACLU said it "rejected claims that Congress' responsibility to conduct oversight or investigate executive misconduct was somehow less important than its legislative function and therefore not worthy of compulsory enforcement."

"It's do-or-die time for the separation of powers," Fredrickson said. "Congress is facing a historic moment when it can fight for its rightful place in our Constitution or accept the president's continued and sweeping claims of supremacy."

U.S. Set to Offer Huge Arms Deal to Saudi Arabia

In his visit with King Abdullah and other Saudi officials next week, Mr. Gates plans to describe "what the administration is willing to go forward with" in the arms package and "what we would recommend to the Hill and others," according to a senior Pentagon official, who conducted a background briefing on the upcoming trip with reporters on Friday.

The official added that Mr. Gates would also reassure the Saudis that "regardless of what happens in the near term in Iraq that our commitment in the region remains firm, remains steadfast and that, in fact, we are looking to enhance and develop it."

The $20 billion price tag on the package is more than double what officials originally estimated when details became public this spring. Even the higher figure is a rough estimate that could fluctuate depending on the final package, which would be carried out over a number of years, officials said.

Worried about the impression that the United States was starting an arms race in the region, State and Defense Department officials stressed that the arms deal was being proposed largely in response to improvements in Iran's military capabilities and to counter the threat posed by its nuclear program, which the Bush administration contends is aimed at building nuclear weapons.

Russian expedition sets sail to claim Arctic for the Kremlin

Two weeks after Prime Minister Stephen Harper announced Canada's plans to assert itself more vigorously in the Arctic, a Russian expedition sailed Tuesday for the North Pole, where it plans to send a mini-submarine crew to plant a flag on the seabed and symbolically claim the Arctic for the Kremlin.

The mission is part of a race to assert rights over the Lomonosov Ridge, a barren but energy-rich wasteland that stretches across 11 time zones.

Scientists estimate the glassy icescape is rich with 10 billion tonnes of gas and oil deposits.

The Russians have long claimed that the ridge, which extends into northern Canada, as an extension of their continent.

"The Arctic is Russian," Artur Chilingarov, the expedition leader and deputy leader of the country's parliament, told Russian television.

Sex for the motherland: Russian youths encouraged to procreate at camp

At the start, it was all too easy to mock....

....How wrong we were. Life for young people in Russia without connections is a mixture of inadequate and corrupt education, and a choice of boring dead-end jobs. Like the Hitler Youth and the Soviet Union's Young Pioneers, Nashi and its allied movements offer not just excitement, friendship and a sense of purpose - but a leg up in life, too.

Nashi's senior officials - known, in an eerie echo of the Soviet era, as "Commissars" - get free places at top universities. Thereafter, they can expect good jobs in politics or business - which in Russia nowadays, under the Kremlin's crony capitalism, are increasingly the same thing.

Nashi and similar outfits are the Kremlin's first line of defence against its greatest fear: real democracy. Like the sheep chanting "Four legs good, two legs bad" in George Orwell's Animal Farm, they can intimidate through noise and numbers.

Nashi supporters drown out protests by Russia's feeble and divided democratic opposition and use violence to drive them off the streets.


Great job covering the credit situation. You were one of the few people who had this pegged over a year ago.

Are you surprised oil is still at $77 at this point?


Given your impressive performance in the 2006 oil price prediction stakes, what are our predictions for the future?



I'm looking at three factors that could have a profound impact on oil prices over the course of the next three years:

1) The developments in the credit market that Stoneleigh has done such a great job covering here at TOD Canada. Obviously, if the credit situation leads to a slowdown in U.S. consumer spending, this will be very bearish for oil prices. On this front, I think a U.S. slowdown is already baked into the currency pie, so any contagion to other economies would result in a strengthening dollar, which would be even more bearish for oil and commodities prices.

2) I believe that the U.S. Current Account Deficit bubble is unsustainable and, therefore, will eventually pop. This can only come about through a collapse in the value of the U.S. dollar. I find myself wondering, with the Current Account Deficit now approaching 1 trillion dollars, where China/Japan/GCC will find that amount of secure U.S. dollar-denominated investment vehicles in which to invest their surpluses. If situation number 1 continues or worsens, I have a hard time imagining they will be investing much in the financial/household/corporate sector. That leaves the government sector, but the U.S. deficit isn't anywhere near 1 trillion at this point. So at some point, they may be forced to start selling their dollars either for some other currency (Euros?), their own currency, or gold. A collapsing dollar would obviously cause oil prices (and everything else) to skyrocket in dollar terms.

3) The third factor is peak oil/ELM. If oil production really has peaked, and if the Westexas Export Land Model plays out the way it seems like it will, oil prices could conceivably head higher even in the face of a credit-induced recession.

So, i'm not making any predictions at this point, just watching these three factors and reacting to how they play out. If this credit crunch worsens and sends the economy into a severe recession, that will be the event of the decade. If the Current Account corrects, that will be the event of the century. And if oil production has peaked, that will be the event of the...what?


I've enjoyed yours and Stoneleigh's thoughts on these financial matters, their implications, and which tea leaves to watch.

I do have a question tho. In your #2 scenario above, you talk about the "US Current Account Deficit now approaching 1 trillion dollars" and then seem to contradict yourself by saying "but the U.S. deficit isn't anywhere near 1 trillion at this point."

Forgive me my economic stupidity here but could you better explain what you mean, which I'm assuming has to do with slightly (or is it vastly?) different US deficits. A brief explanation would help undo my befuddlement. Thanks.


The Current Account Deficit is basically the trade deficit. The U.S. Current Account Deficit is approaching 1 trillion per year. What this means is that the surplus countries (mostly China, Japan, and the gulf states of the Middle East) end up with one trillion U.S. dollars which they must reinvest in dollar denominated assets if they don't want their own currencies to appreciate. The last thing these countries want is for their own currencies to appreciate. So they send these dollars back to the U.S. by investing in U.S. corporate debt, government debt, agency debt (Fannie May and Freddie Mac), or corporate equities. The problem right now is that corporate equities and debt are becoming far less attractive, and agency debt and other mortgage related debt will be issued more and more sparingly as the housing bubble corrects. That leaves government debt (the budget deficit), which is only around 200 billion per year. What I was referring to in situation 2 is that there may come a time when there simply isn't enough secure, money-making, U.S. denominated assets for the surplus countries to invest their dollars in. At that point they would have no choice but to convert their dollars into their own currencies (the option of last resort from China/Japan's point of view), convert their dollars into other currencies (for example, they could convert their dollars to euros and then buy euro-denominated debt), or buy something else like gold. We aren't there yet. The federal government is only issuing 200 billion or so of new debt this year, but the surplus countries can still enter the market and buy existing debt from other parties. The expected result of this would be to drive down bond yields. Watch the ten-year bond yield, for example. It's already down to 4.74% from above 5% a couple of weeks ago. That drop from 5% to 4.74% might not have anything to do with the Current Account situation described above, it is more likely just the result of people expecting economic conditions to worsen going forward (which also tends to cause yields to fall). But if at some point you see that yield really starting to tank, then the economy starting to pick up (since mortgage rates are tied to the yield on the ten-year bond), inflation picking up, asset prices spiking back up again, the fed raising interest rates to try to deal with inflation, and then the ten-year bond yield continuing to fall even in the face of Fed tightening, you will know it is because the surplus countries are buying up huge quantities of existing debt. The bottom line is that if the Current Account Deficit is 1 trillion, the surplus countries must find 1 trillion worth of U.S. dollar denominated debt to purchase. If they can't, they will be forced to begin purchasing something else, and this will lead to a dollar collapse.

Thanks SAT.

Ok, the distinction I was unclear about in your post had to do with the annual US Budget deficit (200+ M) vs. the accumulated Trade deficit (~1 T).

(Of course, there's the $8.9 trillion public debt, and the $50+ trillion and growing in total US govt. (We The People's govt.) liabilities of debt (according to the GAO). All this debt makes my head spin.)

I do understand the biggest trade surplus holders (China/Japan/GCC) have been sopping up US debt instruments, which seems counterproductive to me, seeing as they get paid back with more US $; although I guess it has kept us afloat to keep buying their stuff (so everyone can buy the GCC stuff); all of which just adds to their growing surpluses. Seems like a vicious cycle which works fine until it doesn't -- like beginning now with the unraveling of debts in the housing market, putting the squeeze on the consumer and within the credit lending mrkts. debt instruments, etc.

But why this US recession would strengthen the US $ I don't get. A US recession suggests lower US interest rates, which should hurt the $ strength relative to other currencies. And any $ strengthening interest rate hikes wouldn't help in a recession. Although in a contagious recession they'd lower their rates too. Japan doesn't have much room to go any lower. That leaves the Euro (primarily, although there are others but none that compares overall).

Obviously I'm missing something here. Although I do understand it's a fine mess we all are in. One that is loaded with trap doors everywhere one looks for relief, which is why I've got eggs stashed in every conceivable basket. Hopefully, one of them will survive the gut wrenching slow motion smash-up. Can't we just fast forward this thing and be done with it already! If I'm going to get screwed financially I'd prefer it was done with quick so I can rest up for the next one in line.

What a way to go.


Other than doing a bit of stock market trading, of the head in a sack variety, financial things are a mystery to me. I do not understand why China selling selling goods to the US is not taking those dollars and plunking them into goods, for instance, like oil and grain. Or are they doing that and just have so much more cash in hand that they need to buy 'American debt',( which I take to be all forms of bonds and treasury bits and pieces)? If so then that 'need to buy' would slide into the Canadian end of things equally? I guess that would mean that what my broker, and I guess every other broker in Christendom, keeps talking about bonds being a hedge against stock market slumps would not be in the end that simple sanctum sanctorum of monetary peace and safety?

BTW,Stoneleigh, Thanks for your comment on my plan, I didn't think it much of a plan either. I liked Jenks logical way of looking at it as well. Gotta take care a bit of these days or we all going to end up living with Baldrick in his drainpipe.

I expected oil to start dropping just because of selling to cover margin calls.

Of course this could be balanced by a move to commodities as a sort of flight to safety.

At the moment so much money is moving around the world that you probably can't see and real moves based even remotely on fundamentals.

Thanks SAT :) My first TOD post in October 2005 was about deflation, and I've been at it ever since. The writing has been on the wall for a long time. Liquidity can dry up incredibly quickly as a credit bubble implodes.

I'm not surprised about oil at $77 for now, but I think it's probably peaked. If it was still $77, let alone higher in a month or two, I'd be very surprised indeed. I agree with what Nate said over the weekend - that $50 oil is almost a mathematical certainty. In fact, if I were a betting person, I'd bet on lower than that.

As I've said before though, a lower nominal price doesn't necessarily translate into greater affordability, depending on what's happening to the money supply. Purchsing power could easily be falling faster than price.


When deflation follows a credit boom, it is usually due to the fact that demand doesn't keep up with production capacity. In the near future, we may see this in such areas as office space in Dubai, many Chinese industries (which export to the entire world), but is it true of the oil industry? Even with the enormous amounts of liquidity and credit that have washed over the world economy in recent years, oil production is currently stagnant. Chinese industrial production has been growing 20% a year for a decade, there are almost as many cranes in Dubai as people, but oil production is stagnant. I'm not saying oil prices still can't fall if this gets ugly, but it won't be because the credit boom has led to a large increase in production capacity. Do you think we should expect this credit bust to have more of an impact on the prices of homes, commercial property, cars, t-shirts than on the price of oil?

Thanks for your reply.

Can I just clarify something, in your first factor, you say that if the credit crunch leads to a slow-down in the US economy then oil will tend to go lower.

But in your reply to Stoneleigh about deflation following a credit crunch, you seem to resist the idea of a fall in oil prices.

So, I'm guessing that there is some complexity within the term "credit crunch" which can lead to different outcomes. Can you (or Stoneleigh, or anyone) elaborate on this?




A, "credit crunch," in the absence of 2 and 3, would obviously send oil prices much lower. Factor 2 is not present at the moment. In my question to Stoneleigh, I was alluding to the role factor 3 may have played in the, "credit boom," which now seems to be ending. Why have the massive amounts of easy credit available during the last few years not lead to an increase in oil production as would normally be the case?

Sorry about the delay in replying, but I've been away from my computer for a day or so.

My view of the future for oil prices is that a sharp downward spike due to deflation (which should occur in most asset classes across the board), would probably be followed by a rebound to new all time highs, although I don't have a clear idea about the time frame. I would definitely expect international contagion, which I agree with you would tend to push the dollar higher temporarily. In fact I think we may see a short squeeze in the dollar that could lead to a substantial spike, but I don't think that would last long. Eventually the dollar will go the way of all fiat currencies.

I would say there are strong competing forces driving oil prices in different dierections, the outcome of which is likely to be high price volatility, potentially for quite a while. Deflation drives prices down, partially due to the effect of activity in the financial markets swamping the energy markets, and partly because demand presupposes purchasing power and a strong contraction of the money supply could cut purchasing power very substantially. However, with oil production peaking and many geopolitical risks on the verge of being realized, there is likely to be strong upward pressure on price, especially if the realization of geopolitical risk involves a significant impact on supply (ie sabotage, terrorism, piracy, civil war in oil producing regions, a global resource grab etc).

I think deflation will dominate initially, but probably not for long (at least relation to oil). My guess is that a global resource grab is likely to result in oil supplies being tied up in bilateral contracts, and hence the demise of a global oil market. If, in the (potentially violent) process of securing supplies, oil production or delivery infrastructure suffers substantial damage (I would expect this to happen), then supply could fall very quickly. Supply, and therefore price, could then vary enormously both between regions and over time. That kind of extreme risk would tend to remove private capital from the game, so I would expect national oil companies to play a much larger role in the future.

The one thing we can count on I think is an exceptional degree of disruption. Business as usual simply can't happen, because all the assumptions it is built on are about to be abruptly invalidated IMO.


I too love the Round-Up, especially your focus on finance and Global Warming.

This is starting to get interesting, to say the least.

Tom A-B

Thank you for the links.

The two things that caught my eye today were some news related to the automakers contract negotiations, as well as Kunstlers new weekly column. He truly outdid himself this week, I was belly laughing at the monitor.

Some time back Caterpillar had negotiated a new contract with the union, and now the union is encouraging the retirees to sue Caterpillar for the benefits the union negotiated away.
Kafka was the normal guy. LOL.
Clearly the contracts negotiated with the union aren't worth the paper they are written on.
What would you do if you were Ford or GM? In fact, what would happen if one of them or both went into one of the Chapters?

We should have some news middle of september.

Yeah, Jim Cramer is a tad (let's say charmingly) over the top (100% default on 2/28?), and he looks like perhaps he's lost most of his hair to a substance habit (Kunstler on designer drugs, kidding...) , but in this video he has a lot of "good" advice on the housing market.

He is dead on when he says that he no longer distinguishes between subprime and prime: "When your house loses 20% of its value, it's better to just walk away [or sell it] , even if you're wealthy. You don't want to lose your credit card, and you don't want to lose your car. Your house is the one thing that's fungible".

Best advice you can get, unless it's 90% paid off, or you just wrote the next Harry Potter.

Most of us still can't believe their homes would lose 20%. But who will buy it in 2008? And what will your mortgage payments look like (vs equity) when your home lost 20% of its value? How about 60%?

Cramer says "just walk away"
("No, I sold all my real estate..")

Stoneleigh has been trying for months to provide the ins on the Writings On The Wall Street, but how many people are catching on? There is no way to tell when this all will start hitting "for real" (as if it hasn't already). As Cramer says: "If the Fed lowers the interest rate by 1 basis point, everything will go up in value". But if they do, it will be temporary, and it won't last (and it will murder the US dollar).

Many people you know will get hurt badly. More Americans lose their homes to medical bills then to default on mortgage payments. A credit crunch will take millions of jobs out of the economy. How secure is yours? Be wise rather than greedy. How safe are you tomorrow morning? Debt is never good, but debt in a credit crunch is far worse.

Today I saw the first article that states the obvious:
Historically, October has been the month for big financial busts. But this year, October could come early..

On Cramer says ......

"The inland empire needs an agricultural adjustment"

"Plow it under"

The story on the drying (and dying?) Amazon is breathtaking! And it is these sorts of background stresssed-out ecological signals with the potential to rapidly unfold into complete ecological catastrophes that informs my pessimism about fixing anything else a lot of folks presume we can fix.

Should the Amazon suffer just one more year of drought and die of thirst, it's not just the Amazon that is toast, it's everything else too as the repercussions of such a cataclysm would be so vast and unpredictable. By the time we do wake up to this, it's going to be too late.

As if we're going to *manage, fix, or solve* this along with everything else that is going to hell in a handbasket?!!!

IMO, this and all other similar stories of ecological collapse happening NOW is what should be the lead front page and headline news stories much more often if we ever wanted to save anything else. But it isn't, and so we won't.

Now here's the kicker. This article was first published July 2006!!! This is the link to original:

So, what's going on in the Amazon this year? Is it drying up again? Who knows. It apparently isn't news we might need to know about now.

A quick Google search only turned up a May 29th, '07 article entitled: "Will Amazon drought worsen in 2007?" found here:

Our ignorance and arrogance is astounding!

Maybe I'll put in a call to the Woods Hole Institute. I'm a financial supporter of their work and I should be able to get someone to answer this question. If anyone is interested I'll report back what I find out. Otherwise, I guess you'll hear about it later. By then it may well be too late and we'll be asking ourselves: Why didn't we know!

Go figure.

Thanks Stoneleigh.

Godraz, I'd be interested. Agree 100% that our ignorance is outstanding, but then we are only told things when someone wants our money or our support.

There are many strange things going on in our environment that get little attention, like water and temperature levels in the Great Lakes. Seemingly sea level rises aren't that great so far, but India and surrounding regions are being inundated by sea water, coastal erosion and abnormally high swells. Not to mention unusual volcanic/earthquake patterns around the globe. I can't provide a link because for most, no one has written about them, I just notice them in disparate news items from around the planet. Like this one:

Unnatural Orissa sea waves, cause of concern

The effects of climate change on agriculture is another area that is hardly mentioned, yet around the world abnormal weather is wreaks havoc on crops and harvests.

Heat wave wreaks havoc across Southeast Europe

Romania has already lost almost 1.7 million hectares of its grain crop, out of a total 2.8 million. Experts from the National Meteorology Agency project that up to 90% of the crop will eventually be destroyed

Finally, there is the current strange weather patterns affecting both the northern and southern hemispheres. Prelude to abrupt climate change? Is the current European weather due to cooling North Atlantic, a slowing or a failure of the Gulf Stream?

Dropping Ice Age scenario, researchers discard Gulf Stream catastrophe scenario

I don't believe there is any conspiracy of silence on these issues, I suspect there is a lot of people looking at them and scratching their heads unable to say what it all means. The implications are so great that people need to be sure before implying current events are what they appear to be.

I think a lot of people are waiting for confirmation that the problem is real before acting. Of course it is too late to act once the reality appears in the rear view mirror.

Triumvirate of collapse - Economy, Ecosystem, Energy

I'd certainly be interested in anything you find out from Woods Hole about the current state of the Amazon. By all means post it here.

I did call and speak with Michael T. Coe, PhD, Associate Scientist at the Woods Hole Research Center, who was able to tell me the following:

"The last decade has been drier than the mean, with 2005 having been exceptionally so. As far as this year goes the Amazon river level is good." Mr. Coe was just down there last week and this was his anecdotal and positive take.

Upon further inquiry about any specific real time information as can be found here in the states with regard to monitoring moisture and drought conditions, he acknowledged there isn't a lot of such good informational measuring and certainly none that is coordinated and gathered into one source site.

So, this is the present state good news. (We're saved!:-) However, it remains to be seen that it will not reoccur and do so with a vengeance. The threat of recurring and persistent drought is one that can not be ruled out, especially as climate change and human activities (of logging, road & land clearing, and settlement/farming development, etc.*) continue unabated and in combination to undermine the Amazon's health and resiliency.

While a "tipping point" may well be one day breached in the Amazon, it looks like it isn't happening this year from a lack of liquidity.

I guess this means I can go back to worrying about my paper investments. >;-)

*note: I found two good, full bodied, and recent reports on the Amazon & human factors. The first, from Mar.2006 at Global Forest Watch, entitled: Human Pressure on the Brazilian Amazon Forests
The second published earlier this year at Imazon, entitled: The Brazilian Amazon and the Millenium Development Goals

Thanks for that Godraz.

Someone is alarmed enough to take it all very seriously:

Brazil, Alarmed, Reconsiders Policy on Climate Change

Triumvirate of collapse - Economy, Ecosystem, Energy

I don't believe in the sincerity of the Brazilian government.

Losing Forests to Fuel Cars

Ethanol Sugarcane Threatens Brazil's Wooded Savanna

Jaguars, blue macaws and giant armadillos roam the fickle landscape of Brazil's Cerrado, a vast plateau where temperatures range from freezing to steaming hot and bushes and grasslands alternate with forests and the richest variety of flora of all the world's savannas.

That could soon come to an end. In the past four decades, more than half of the Cerrado has been transformed by the encroachment of cattle ranchers and soybean farmers. And now another demand is quickly eating into the landscape: sugarcane, the raw material for Brazilian ethanol.

"Deforestation in the Cerrado is actually happening at a higher rate than it has in the Amazon," said John Buchanan, senior director of business practices for Conservation International in Arlington. "If the actual deforestation rates continue, all the remaining vegetation in the Cerrado could be lost by the year 2030. That would be a huge loss of biodiversity."

The roots of this transformation lie in the worldwide demand for ethanol, recently boosted by a U.S. Senate bill that would mandate the use of 36 billion gallons of ethanol by 2022, more than six times the capacity of the United States' 115 ethanol refineries.

U.S. companies and investors -- including George Soros and agribusiness giants Archer Daniels Midland and Cargill -- are staking out territory in Brazil, expecting even greater growth in biofuels.

The Brazilian government and big agribusiness companies say that the expansion of soybean and sugarcane fields doesn't necessarily mean devastation of the Cerrado, which hosts an estimated 160,000 species of animals and plants, many threatened with extinction. They say they plant on wastelands and pastures where cattle once grazed, improving the soil quality and productivity.

But environmental groups argue that as soy and sugarcane displace cattle and less lucrative crops, ranchers are moving farther into the unspoiled areas of the Cerrado.

"There are ranchers substituting sugarcane for cattle in the Sao Paulo area, for instance, and displacing cattle to the state of Bahia, both in the Cerrado. So what is the point?" asks Ricardo Machado, author of a study about the Cerrado for Conservation International.

Whether they are sincere or not the real "roots" of this are directly linked to population growth (ours, theirs, everyones) and the remorseless imperative for economic growth predicated on endless consumption for endless population growth. And neither of these problems are going to get solved via political sincerity.

Nature does not make political compromises with anyone.

Bear, Lehman, Merrill, Goldman Traded as Junk, Derivatives Show 

On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.

Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show.

“Wall of Worry'

Prices of credit-default swaps for Goldman, the biggest investment bank by market value, Merrill, the third largest, and Lehman, the No. 1 mortgage bond underwriter, also equate to a Ba1 rating, data from Moody's credit strategy group show. Bonds of New York-based Goldman and Merrill are rated Aa3, seven levels higher than swaps suggest. Lehman is rated A1, the same as Bear Stearns.

About 1 percent of the thousands of companies followed by Moody's have a gap of more than five levels between their actual and implied rankings, analyst Tony Smith said in a July 19 report titled “Broker Securities Climb a Wall of Worry.''