The Impact of the Credit Crunch on Energy Markets
Posted by Gail the Actuary on October 4, 2008 - 10:27am
The credit crunch is already having an impact on energy markets. New projects are harder to fund. Highly leveraged companies are sometimes finding it necessary to shed assets. Some players are finding themselves to be the indirect casualties of other players, like Lehman, that have already failed. Long term, we will probably see consolidation and lower production than would have been the case without the credit crunch. Of course, if there is a major recession, it is possible that we won't need as high production.
In this post, I have tried to bring together some of the impacts of the credit crunch on the energy industry that are already being felt. If you are seeing other impacts, please make note of them in the comments.
One article seems to suggest that speculators are being driven away from the oil and gas industry, and that more care is being taken with counter-party risk:
Credit crunch slows oil trading
The OTC markets in oil have not seized up because of credit issues, but liquidity is lower and participants are treading more carefully.
Platts, a unit of the McGraw-Hill Cos. and which provides price assessments in physical oil markets, says derivatives trading, but not physical deals, is slowing down.
"The number of trades and the length of a trading chain are likely to be reduced because of the problems banks are having," said Jorge Montepeque, Platts global director of market reports.
"But the physical oil markets are carrying on because oil has to be moved from producers to consumers.
They said credit worries were also spurring a shift to clear over-the-counter (OTC) oil trades, such as price swaps, on NYMEX Clearport, which offers clearing for some OTC derivatives. . .
"People are worried about counterparty risk, so if you don't clear your OTC deal you are simply relying on your counterparty to perform," said Bellew.
More marginal production seems already to be getting squeezed:
Credit crisis squeezing western juniors
For Canada's junior oil and gas companies, the credit crunch comes on top of a helter-skelter commodity price drop that has hit company valuations hard.
As a result, new exploration activity now seems more fraught with risk, especially as Alberta is set to implement a new royalty regime in January that will erode profit margins.
"There's no doubt there's not enough capital around in the market," said Kel Johnston, chief executive officer of Alberta Clipper Inc., a Calgary-based junior oil and gas firm. "I can't see anything other than [drilling] levels dropping off, especially in Alberta."
Newer projects are getting squeezed, especially IPOs.
Russian IPOs fall dramatically amid credit crisis
NEW YORK (MarketWatch) -- Capital raised through initial public offerings in the third quarter by companies from Russia and the former Soviet Union fell to the lowest level since 2004, as the global credit crisis took its toll, the PBN Company said Thursday.
Forty-three companies from the Commonwealth of Independent States (CIS) have postponed or pulled their flotations this year, said PBN, a consultancy with a focus on Russia and the CIS.The CIS consists of former Soviet republics, such as Russia, Ukraine, Belarus, Azerbaijan, Armenia, and Kazakhstan, among others.
The credit crisis is providing buying opportunities for the more cash-rich. The recent decline in prices is forcing the more highly leveraged companies to put properties up for sale, and this is putting downward pressure on sale prices of assets.
Cash-Rich Oil Firms Snap Up Assets
The turmoil on Wall Street is reshaping the U.S. oil industry, forcing debt-laden smaller producers to sell assets and creating opportunities for larger, cash-rich companies that until recently had been criticized by investors for spending too conservatively.
The latest example: Occidental Petroleum Corp., one of the largest independent oil producers, Thursday snapped up the 50% interest it didn't already own in oil and gas fields in Texas and the Rocky Mountains from smaller company Plains Exploration & Production Co. The $1.25 billion price tag was nearly 20% less than the $1.55 billion Occidental paid less than a year ago for the first half of the assets.
Another credit related sale was the purchase of Constellation Energy by Warren Buffet's Warren Buffet's Mid-American Energy Holdings. About this we read:
Constellation in Quick Deal With Buffett
Constellation's shares had fallen 70 percent since July 31 as investor concerns increased over the liquidity needs of the company's energy-trading business, which was growing until this year. That business relies heavily on financing that has all but disappeared with the turmoil in the financial markets.
Investor and lender confidence was damaged by chief executive Mayo A. Shattuck III's August disclosure that Constellation had dramatically underestimated the collateral it would need to put up if its credit rating were downgraded. Then late last month, the company took several steps to raise capital, selling off some natural gas reserves. That appears to have been too little, too late.
Then there are the indirect problems, coming from the failures of other organizations. For example, the state of Georgia formed the Georgia Municipal Gas Authority in 1987, to help communities get better prices in natural gas. This authority formed Main Street gas corporation, to enter into prepaid gas contracts on behalf of communities. These contracts were entered into with Lehman Brothers, J. P. Morgan, and Merrill Lynch. Now Lehman has defaulted on its contracts, and Main Street and the communities it represents will need to go looking for more natural gas, probably at higher prices. Tax exempt bonds were used to purchase this gas which has "gone missing". One hopes the contracts with J. P. Morgan and Merrill Lynch will hold up better.
Lehman failure leaves natural gas supplier searching
Main Street, an affiliate of the Municipal Gas Authority of Georgia, lost a $709 million, 30-year gas supply contract.
The contract was with a subsidiary of Lehman Brothers, the investment bank which collapsed last week.
Main Street now has to find new gas to replace the low-priced supplies that Lehman was supposed to deliver in Georgia and Florida.
The new gas will almost certainly cost more.
We also have the next layer, a gas marketer, failing as well. In Thursday's Atlanta Journal Constitution, we read:
Catalyst Energy Files for Bankruptcy
De Aguero said his company’s bankruptcy stems directly from the meltdown on Wall Street.
“We are all aware of what’s happening with the macro economy,” he said. “And it’s gone down into the midmarket and now Main Street.”
“It’s very common. It’s going on all over the country right now.”
Catalyst’s credit line and gas supply contracts were both with Constellation Energy, the nation’s largest independent energy marketer. Constellation was a trading partner of Lehman Brothers. Its stock price collapsed after Lehman Brothers’ demise two weeks ago. Constellation announced it was selling itself to Warren Buffett’s Mid American Holdings for a cheap discount a few days later.
Constellation cut off Catalyst late last week, leaving the marketer scrambling for credit in a market that isn’t giving any.
“The illiquid credit markets have exacerbated the issue,” de Aguero said.
The credit crisis can expect to cut back in investment in alternatives. Where an investment is made, it is likely to be made by the larger, better funded organizations.
Credit Crisis May Delay Biofuels Development
LONDON, Sept 29 (Reuters) - A global pull-back from bank lending may dent the commercialisation of biofuel technologies to replace conventional gasoline, said the chief executive of U.S. cellulosic ethanol firm BlueFire Ethanol.
A credit crisis which claimed more bank victims on Monday has raised project finance costs and made ambitious targets to replace fossil fuels with renewable energy sources look less achievable. . .
The credit crisis could slow that transition both through more costly finance and by diverting subsidies from renewables, which are often more expensive than conventional fossil fuels.
Credit Crisis Could Lead to Consolidation in Renewables Industry
A clamp down on the credit market will make it difficult for renewable energy developers to finance new projects, putting utility companies in a strong position to increase their share of the renewables pie, according to a Reuters report.
Utilities have large supplies of cash, and even if they have to borrow, they can do so more cheaply as government-regulated businesses, an analyst at Raymond James & Associates notes.
"The big projects being built by big utilities don't need to borrow from banks for short-term loans," said JP Morgan analyst Chris Rogers. "But if banks don't lend to each other they certainly won't lend to small project start-ups."
Let us know what you are seeing as well.
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I heard this afternoon that some service companies (one MAJOR and many smaller) are having trouble accessing lines of credit and are incapable of paying bills. I am unclear whether this is banks refusing them credit, or the banks themselves unable to send funds. Unless credit markets unfreeze they will have to raise money via public equity markets, something that for them would have been unheard of a few months ago. Here is a related Bloomberg story tonight: Libor Rises, Commercial Paper Slumps as Credit Freeze Deepens
I also talked to some E&P executives, who while concerned about both Peak Oil and their stock price, are not concerned about money because they fund themselves through producing low cost oil, and selling it higher...e.g. via operations. I asked what would happen if their service companies suddenly couldn't service them and there was a long silence. In sum, some sort of short term remedy better pass the House or we are in big trouble (we are in trouble in either case, but some sort of relief valve on credit markets seems now essential)
I don't think anyone can imagine the manifold implications that the global deleveraging will have. One that I have written about in my past several posts and am even more confident in after this weeks events is that Peak Oil is a thing of the past. 2008 may not even catch 2005, but in either case we will never again produce as much oil as now. The high cost of the marginal barrel, delays in projects due to funding, inability of lower EROI (or ROI) projects to meet capital thresholds, lack of capital availability in general, will all combine to not keep pace with ongoing depletion. On top of that, lower prices (and lack of credit) will now cause problems for scaling of alternatives, just when we need them most. As TOD commenter BrianT said in Jeromes post yesterday, a longshot but brilliant move now by government would be a massive stimulus package completely directed at renewable energy infrastructure, locally feasible food and transortation systems, and national railways. Would impact 2 problems at once. One can hope...
When I talked to Red Cavaney, Chairman of American Petroleum Institute, on the phone last Friday, he was much more concerned about the credit crisis in oil and gas companies than I had expected (at 57:54). In his words, "Our economy runs on credit." He was quite concerned that there would be a "big impact" on the oil and gas industry if the credit problem continued for a "couple more weeks".
The issue he mentioned in particular was the one of the service companies needing credit. It would seem to me that there are other smaller parts of the system that need credit as well--for example, the gas stations that are not owned by the major oil companies may use credit to buy their gasoline. There are probably some aspects of pipelines operation (perhaps handled by subcontractors) that rely on credit also.
Nate and Gail,
Why can't the larger, cash rich, oil and gas companies pay the service companies in advance and establish lines of credit with the smaller gas stations? It seems to me that if the business relationships are essential, and there is a large cash flow then an arrangement should be easy to reach.
It is very likely that I am over simplifying this, but if I had to pay my phone bill in advance to get service and I had to establish a line of credit with my customers in order to retain them as customers that I would find a way to make it happen.
Here's my take on it.
The bail-out package should mitigate the problems, but it will not avert them. To date governments have been dealing with the problems one at a time. They have struggled to gain control not just because of the speed of contagion but also because politicians and central bankers do not fully to understand the breadth and depth of the crisis. For example, Germany’s finance minister declared on September 25th that America was “the source and the focus of the crisis”; the governor of the Bank of France declared “there is no drama in front of us”. Since then several European banks have been failed-out.
The problems have also hit banks outside the US and Europe in Hong Kong, Russia and India. Some European countries, including the British, Irish and Spanish banks, also have housing bubbles.
Governments need to co-ordinate. Unfortunately Greece has probably prevented or delayed the French sponsored European EUR300bn plan by following Ireland and guaranteeing all deposits.
The money markets are the plumbing of the financial system. Banks and companies lend and borrow trillions of dollars for up to a year at a time but the markets for longer term paper are shutdown, so banks and companies must borrow even more money overnight than usual. Investors are unwilling to lend for long, many companies are unable to sell any commercial paper with a maturity longer than overnight. Those that have lines of credit with banks are increasingly drawing on them. This is causing the banks more problems.
Companies face higher interest charges and are also losing access to bank loans altogether. So they also hoard cash, cancelling acquisitions and investments, in order to pay down debt, delay new products, leaving factories unbuilt, shut loss-making divisions, and cut costs and jobs. They will no longer extend credit and loans will become harder to obtain and more expensive, unemployment will rise. Private-equity groups that bought companies with leveraged buy-outs will find it harder to refinance their debts.
Bank borrowing costs reached almost 7% on September 30th, more than three times the level of official American rates, while some were willing to pay 11% to borrow dollars from the European Central Bank (ECB). Banks have become so risk-averse that they deposited EUR44bn with the ECB on September 30th (quarter end) even though they could have earned far more by lending to other banks.
Over the coming weeks the CDS market faces its biggest test as billions of dollars worth of contracts on Fannie Mae, Freddie Mac, Lehmans and WaMu are settled. An auction is scheduled for next Tuesday to evaluate a price for Fannie Mae and Freddie Mac CDs. Estimates are that payments on Lehman's bonds could be as much as $350bn. I fear that some underwriters have insufficient capital and will simply go bust when the claims are made.
Interestingly Buffet has just pumped USD3bn into GE; I would be reluctant to bet against Buffet!
I just heard that Fannie & Freddie contributed over $200m to congressmen, they were one of the biggest lobbyists. Why the heck is there so much money swilling around in US politics??
A bit more on the subject of money and politicians, here's a quote from Ayn Rand
"Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion---when you see that in order to produce, you need to obtain permission from men who produce nothing---when you see that money is flowing to those who deal, not in goods, but in favors---when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you---when you see corruption being rewarded and honesty becoming a self-sacrifice---you may know that your society is doomed."
A couple of thoughts come to be about the $3 billion Buffet has pumped into GE. One is that he is getting an awfully good interest rate /stake in company for what he is doing. The other is that he may be trying to protect his other investments. If the US government cannot take a lead in fixing the situation, perhaps he can--and get some favorable publicity to go with it.
I think what's more likely is what we're already seeing being reported in this thread: outright absorption of less-well-capitalised operations. Why extend a private line of credit when you can just pick up the service for a song?
Whether an overall trend in this direction is good or bad is going to depend on your point of view, methinks.
Today I read an article blaming Bill Clinton for the sub prime mess. The article is behind a pay wall, but basically Clinton wanted to increase home ownership amongst poor Americans, especially minorities. To do his banks were bullied and arm twisted in to in to lending in poor areas. they were given rating systems depending on how much they lent in said areas, without which they would be severely restricted. To do this they had to abandon normal rules of credit worthiness, with the eventual results we see around us.
It's called 'Equal Opportunities Lending'.
A brief but excellent history of this disaster can be found here:
The Long Road to Slack Lending Standards
http://www.realclearmarkets.com/articles/2008/10/the_long_road_to_slack_...
Steve Sailer (movie critic at the American Conservative) has also written a penetrating analysis of the 'affirmative action' dimension of the sub-prime crisis:
Karl Rove—Architect Of The Minority Mortgage Meltdown
http://www.vdare.com/sailer/080928_rove.htm
i loaned money to my fat lazy brother in law so he could get a car to drive to work. well, he never got a job or even looked for a job and he was lying about how much he was going to make too, he ended up sleeping in the car. in short, this turned out to be a sub-prime loan, a non performing asset and as a result, i dont have the liquidity i need to buy anything else. where is my bailout ?
A close friend of mine had a story to share that is right in this ballpark. His aunt loaned money to a flaky inlaw. When she was asked why she said she loaned just enough that he would never come back asking for more. To little they come back- too much it hurts you.
something to think about.
The article you read has its roots in the fever swamps of the right wing -- Freerepublic.com, Cato Institute, National Review, etc. -- and like most right-wing arguments, is "truthiness" incarnate. In other words, it sounds logical, but isn't true at all.
The argument goes that the subprime crisis was a result of the combination of the Community Reinvestment Act (CRA) forcing banks to make loans to minority and poor borrowers and that the GSEs (Freddie Mac and Fannie Mae) accelerated this phenomenon by buying up the toxic mortgages and encouraging more to be made.
Some facts that chew holes in that arguement ...
The real root of the subprime/credit crisis is the deregulation championed by Sen. Phil Gramm, who later became a banking lobbyist (surprise!) and is now an on-again, off-again economic advisor to John McCain. If McCain wins the election, Gramm is the odds-on favorite to become the next Secretary of the Treasury.
So why was CRA created anyway? It was in response to both intentional redlining and structural barriers to credit for low-income communities. CRA applies only to banks and thrifts that are federally insured; it's conceived as a quid pro quo for that privilege, among others. This means the law doesn't apply to independent mortgage companies (or payday lenders, check-cashers, etc.)
The law imposes an affirmative duty to lend throughout the areas from which banks and thrifts take deposits, including poor neighborhoods.
You can argue that the CRA did introduce more risk for people who were happy with the existing system. Just as giving poor folks political rights was “risky” for the existing power structure. What the CRA did more than anything was force financial institutions to take on the risks that had been created by their exclusionary practices.
No one put a gun to the banks' heads. If making loans in those areas was too "risky," they could simply stop taking deposits in those areas and close up that branch. Apparently the banks thought that the plus of the deposits more than outweighed the minus of making loans to people they considered riff-raff.
As for Fannie Mae and Freddie Mac, their problems were rooted in their private sector managers engaging in the same kinds of questionable business practices that managers have made at other big-name financial institutions thta didn't an implied Federal guarantee. That's why there are lot of lenders and banks going bust lately, not just Fannie Mae and Freddie Mac.
This has little to do with the current price of energy, so I'm sorry to go on about this. But right-wing propaganda has to be answered with facts, or you end up with weirdness like the Congress passing an $850 billion bank bailout bill that doesn't even address the real problem. But that's another rant.
On the other hand, the longer the credit crisis goes on, the more likely that it could affect future energy prices.
To go back to the article the instigator was one Roberta Achtenberg, who in cahoots with the then Attorney General, Janet Rino brought all kinds of lawsuits against mortgage banks under the Civil Rights act,even on the grounds that the term master bedroom had slavery connotations.
The clinton team made changes to the Community Reinvestment Act which stated that without a good rating they could not get approval for mergers, expansion or opening new branches.
The effect was that banks were forced to forget their normal criteria for lending. This took years to unwind but when it did.
Go back and read the bullets in my previous comment (the one you're replying to). You may be quoting an article, but the article simply has it wrong in the cause and effects of the credit crisis.
You are repeating right-wing memes (I saw John Sununu repeating these very same talking points) that aren't helpful. Only by dealing with the credit crisis in a reality-based manner can we hope to get through this problem.
It may be too late -- we may not be able to avoid a severe recession and deflation even if we do everything right. But our odds improve if we don't let ourselves get distracted by fallacious fairy tales.
Reality is a good thing. Some might think the provisions of the 1995 CRA revisions did indeed contribute to loss of objectivity in fiscal standards for lending.
"The performance criteria for lending test are:
1. Lending activity: including the number and amount of loans in the bank’s assessment
area.
2. Geographic distribution: including the proportion of loans in the assessment area and
distribution of loans in low-, moderate-, middle- and upper-income38 geographies in
the assessment area.
3. Borrower characteristics: including the proportion of loans across low-, moderate-,
middle- and upper-income borrowers in the assessment area, and the number and
amount of loans to small business and small farm.
4. Community development (CD) lending: including the number and amount of
community development loans and their complexity and innovativeness. Lenders can
elect to have their regulators consider CRA-qualified community development
lending by their affiliates under certain guidance. This guidance in terms of types of
CD lending that are qualified, data that needs to be collected, maintained and reported
and other restrictions on the affiliate lending are discussed later in this section under
‘Data Collection and Reporting Requirement’.
5. Use of innovative or flexible lending practices: including use of innovative or flexible
lending practices to address credit needs of LMI borrowers and neighborhoods."
Then there is the 1999 update as well:
"The FMA also known as Gramm-Leach-Bliley
Act (GLBA) is one of the most sweeping financial modernization acts in recent years. The act
repeals sections 20 and 32 of the Banking Act of 193362 that restricted depository institutions’
affiliation with securities firms. This act also modifies the Bank Holding Company Acts of 1956
and 1970 and creates a new "financial holding company" that would be able to engage in a list of
statutorily provided financial activities, including insurance, securities underwriting, agency
activities, merchant banking and insurance company portfolio investment activities."
And some key ramifications:
"The act requires that Federal Reserve may not permit a company to form a financial
holding company if any of its subsidiary banks or S&Ls did not receive at least a satisfactory
rating in its most recent CRA exam. A bank or financial holding company may not commence
new activities authorized under the Gramm-Leach Act if any bank or bank affiliates of a
financial holding company, received less than satisfactory rating at its most recent CRA exam."
And some observations:
“Successful lower-income residential lending programs often rely upon techniques
and procedures that require local presence and flexible decision making. These might include the
use of flexible underwriting standards, nontraditional measures of credit quality, a variety of
credit enhancements, or intensive monitoring of outstanding loans that all depend upon
knowledge local neighborhoods, and economic conditions and credit risk factors specific to the
local community [Haag 2000].”
A review in 2004 noted significant changes in the lending industry, and that house prices had rising "significantly higher" in CRA neighborhoods, which at that late date was still apparently a good thing.
CRA was amended many times, and as with most regulations it appeared to grow it's own unique oversight approach which increasingly favored bulk lending and loan repurchases, and less the combined local bank branch and lending institution that was originally envisioned. I'd say that over the course of several decades everybody had a hand in this, and when you combine a left desire for social engineering with the right favor of big-business you have a recipe for fleecing everybody.
"You are repeating right-wing memes..."
clinton hasnt been president for nearly 8 yrs and we are still hearing that he is to blame for everything from teen pregnacy to wmd's. clinton was, imo, a mediocre president - a lot better than the current one.
I agree. And even more simply, why can't my mother "loan" my brother $150K for his house at 5% interest? She gets more and he pays less. Othewise, she get 2-3% interest and he pays 6%. Why not keep that money in the family/community?
There is a pretty big risk of default with personal loans. Furthermore, a default can cause quite a bit of animosity within the family (though not as much as loans to friends).
I would suggest either getting the loan from the bank (without a co-sign) and paying that spread or outright giving the house as a gift.
A even better solution would be for house building to be a community affair such as the Amish do, but that seems to be a far-fetched dream in this country.
Hello LeeAnn,
Your mother can load your brother $150K for his house at 5% interest.
Register the load at the county court house for a small fee.
Your brother can deduct the interest from his income tax.
Your mother has to pay income tax on the interest she earns.
This is a recourse loan; if your brother defaults, your mother gets the house.
As yartrebo points out, be careful of the emotional fallout.
Even talking about these loans can stir up bad feelings.
I anticipate:
Rig utilisation will fall in 2009.
Small Service companies carrying debt will struggle
Distress sales and mergers and takovers will occur
Super Majors with production will be ok.
Mid-Cap and minnows will struggle to fund projects unless they fund out of existing earnings (production)
Exploration will tail off
And for all TODers out there salivating at the prospect of Wall Streets demise:
None of this is helpful in a post-peak world that still runs on oil
It leaves more oil for later, and forces adaptation to less oil sooner. Those are good things.
When you think of the oil in the ground as finite and unsubstitutable then the logic changes. Treat it like the last few tins of biscuits on the lifeboat. Why should the goal be to deplete it as fast as possible?
the last few tins in the lifeboat are not useful - if no one can open them.
If the oil industry cools down next year, then a lot of old hands will take retirement. They will take a lot - a serious lot - of experience with them.
No, this is not good. We still need oil and the crunch will squeeze out a lot of much needed exploration.
Mud - I agree with you and in fact IMO this is true of many industries.
Younger generation would do well to latch on to an elderly professional an their industry of choice and make themselves indespensible.
The payoff will be HUGE (read - A JOB).
Some oil majors are sending emails to all employees talking about the financial crisis.
-- supplier stability
-- customer problems paying
-- insurance risks
-- pension investments
-- oil price swings
-- exchange rate swings
-- economic slowdown
-- falling confidence
That's what the biggest companies are worried about.
Of course, it's much worse for the smaller companies...
Not good! Any excepts available?
No comment necessary.
This is a real concern. I had lunch with the chief economist of Chevron yesterday and asked specifically whether retail deliveries could be a problem because of the need to finance inventories. He wasn't sure but said their management were meeting yesterday and today to talk about it. Oil companies might find themselves in the position of having to be financiers to move their product if the credit situation doesn't ease.
Is he friends with the Chief Economist at BP who thinks that there is zero evidence of Peak Oil, as long as one isn't concerned about costs?
LOL.
Interesting comment re: oil companies having to be their own financiers...take that trajectory a few steps out...
Ask your Chevron friend how much money/and or energy it takes them to find a NEW barrel of oil, on average...My fear is that world production is mixing old cheap oil with new expensive oil and showing a big profit - this profit is subsidized by relatively cheap marginal production but new fixed infrastructure rapidly raising avg cost. If he could get us some data on this it would be most appreciated...Will he join us?
;-)
But will tar sands be sustainable with $50-$90 oil. I doubt it.
If the tar sands fail....
and 4-5 mbpd of projected production is not available....
what percentage of TOD readship will die as a direct result?
IMHO, time for a reality check.
This is ugly folks...
For a moment everything looked fine....
It would be an interesting trap for Big Oil if just after diverging themselves of their own stations (which many have been doing) due to declining end margins they had to get back in on the backside via credit to sell their products.
I heard a CNBC commenter say that what we have now is a real slowing economy coincident with purely psychological banking problems (spiking distrust between institutions). These two things usually happen independent of one another. He said the last time this happened was the Panic of 1907. This once-in-a-hundred-years lightening bolt has at least temporarily scrambled all the normal supply/demand equations for not only oil, but all resources. The short term relation between credit crimped supply and credit crimped demand is a roll of the dice.
House prices ramped up to the point of unaffordability at any prudent multiple of income are not psychological, and nor is a high level of personal, corporate and Governmental indebtedness.
That is why the Paulson plan is a scam which does not even begin to tackle the real issues.
It is based on the false premise that the housing market will recover.
The loss of confidence is based on sound reason, that the Ponzi scheme in housing is over.
A friend mentioned today that some of the bills tacked on to the bailout plan that passed the Senate are designed to do parts of what you describe. I don't know the details but perhaps a few people are using the crisis to get funded some "needed pork." Anyone looked into this? It is happening so fast.
With all that pork stuffing I wonder how much its gone up to?
With or without lipstick?
In the Temple Daily Telegram (Temple is a 100,000ish in population town located about 30 miles north of Bush's ranch) this morning were two Assosicated Press stories. One said there is $110 million of pork in the bailout. The other said there is $100 billion.
Therein lies one of the big problems facing the country. A goodly chunk of the population of the country, including some of the writers for Associated Press, don't understand the difference between a million and a billion.
Terrible news sir three Brazilian soldiers where killed in Iraq today.
GWB: That's terrible, how many is a Brazilian?
Here is a site that I think is doing a pretty good job, The Automatic Earth
Unfortunately they don't seem to understand with derivatives that when a "credit event" happens, e.g. bank goes bust then there is a standard procedure to handle these derivatives. These will be tested in the next month when the Fannie and Freddie CDs start to be unwound next week.
Note, I am not saying there will not be any problems, but not to the scale of 70 trillion as they suggest. Remember for everyone that pays out someone receives. There will be some firms that cannot pay out and go bust.
Just saying there are trillions worth of derivatives does not mean there will be people losing trillions of money and it is likely that many of these CDs will have been taken out as a gamble in the first place.
That's certainly not what the Barclays Capital report into this problem stated. If this bomb is set off, then the markets would simply cease, even if some would still be able to hand out cash to those collecting. The neutral trade nature does not alter the fact that a systemic crash in short time pretty much pisses on everyone's parade.
AV, I would like to read this, have you got a link to the report? Of course my comment is purely my own opinion:-) Here's more opinion, I think the finance market needs to greatly shrink to support the economy instead of controlling it.
Unfortunately, I cannot seem to find it, but I know of this report from a Telegraph article earlier this year by Ambrose Evans-Pritchard, who has been quite prescient on this topic.
The article in question.
So, if I read that right, then it doesn't matter that the transactions are neutral in monetary value traded. What matters is access to that wealth, which as we can see with the frozen credit markets despite huge liquidity today, is a bigger issue. If you can't access that money because the system is dead and buried, then it may as well not exist. And when we're talking derivatives that number over a quadrillion (yes, with a Q) now, then this is Seriously Scary™.
"This is "gap risk", the stuff of trading nightmares. Fortunes can vanish in a moment."
This is what it happening in interbank lending, except the defaults are 'sold forward', This is a big reason why Libor/TED spreads are so high ... gap risk. (Not all banks will default, just some of them ... the interbank markets are broken feedback loops.)
The road real solutions begins where all parties 'fess up and open their books ... and let the world know what kind of crap they have on their balance sheets.
The next step is triage, the step after that is regional reorganization of banks, a few of the walking bad with the good. Decentralize, people!
The next is debt forgiveness. If the loans aren't going to be repaid, why bother? Mebbe the banks should all get together and hire Bono.
CDS settlements and redemptions should be suspended until all parties can demonstrate soundness; the means to participate in such activity. Unbalanced positions should be unwound and fees recovered. This is just the beginning for the DCS market, I have a gimlet eye ... on it.
Short-selling (naked) through the swaps markets should be prohibited. Persons so engaged would be prosecuted.
Shadow banking system should be regulated through the BIS and a concord with ECB and the Fed. No oversight, no trades, that simple. Insert taxman, here ...
Congress could do something useful for a change and keep a floor under the prioe of crude, the funds directed toward an alternative transport/energy regime.
The interbank markets should return to 'plain vanilla' swaps and ditch the complex derivatives. The US government should guarantee only the originator of a deposit or security, not any derivatives thereof. Doing this would calm the money markets. (Hint; interbank lending rates 'R' gonna go up, regardless.)
The Treasury should watch what Buffett does and not listen to him; it should buy preferred shares of companies, not debt.
Bernanke should take a page from JP Morgan and lock hedge-fund and finance managers in a room until they cough up a nice round figure of their own money; a trillion would be a starter. Treasury would then match it ...
Borrowing another page from Buffett, not allow any CEO of any company with ANY federal guarantee of ANY kind sell ANY stock of the company he runs ... that he owns ... for three years. Desperation tends to focus the mind.
If I was the Treasury Secretary, I would meet - for once - with my counterparts overseas! Good Grief! What is with the unilaterism, all the time? We will all hang separately. Nanu, nanu!
The major oil companies should be threatened with nationalization; do your job or you're out! We need a Treasury Secretary and a Fed Chairman with balls.
Andrew Cuomo should be named Attorney General and given two tasks; one, rebuild the integrity of the Justice Department and two, devote all the necessary resources of that department to the pursuit of criminality on Wall Street ... and in the Federal Government! The goal is to recover ill gotten gains. A secondary goal is to serve warnings to others.
Put a duty stamp of .01 per dollar of notational value upon all derivatives denominated in US dollars issued anywhere. How big is the currency swap market again? (A hint, $450 TRILLION) A similar duty can be placed on all dollar denominated equity and bond sales. Don't like that, wanna go overseas and beat the system? Go ahead, your losses or derivatives thereof won't be recognized in the US for any purpose and any gains here will be attached ... back taxes and penalties.
Right now, there are absolutely astounding sums of money-like substances sloshing around the international financing system. It is flowing down the drain fast ... where no one will be able to get it. At the same time, the damage done while swirling down is enormous. Let's make a deal; let the taxman have a crack at it! Some can be recaptured before it all vanishes. For instance, the CDS market has a notational value of $60 trillion; if ten percent can be confiscated through taxes, that is $6 trillion, if the CDS market itself collapses ... who cares?! It a useless 'thieves market' that has no value outside of speculation. Taxing should be used to reduce the notational value of swaps to align with the underlying debt; right now there is ten times the value of swaps over debt. Weapons of mass financial destruction, indeed!
A lot of banking problems can be solved with $6 Trillion Dollars!
A 90% tax on all winnings from all forms of gambling would just be icing on the cake!
The central banks need to coordinate on lending rates. Low, lower, lowest rates are doing nothing in the markets and have painted central bankers into a corner! Liquidity is being hoarded ... give 'em a head fake and raise rates a point. It would cause no hardship to the greater world and would get the financial industry's attention! It would give the central banks instant credibility, which they do not have at this moment. One lousy, stinking percentage point!
The next Congress can rescind the 'Grand Mal Bailout' and take action as noted above. Sheila Bair can be made the new Treasury Secretary and Paulson can be prosecuted for conflicts of interest. A long prison sentence would serve to warn others ...
:)
tonyw, you could be right lets make it a date to talk it over when we are standing in the bread line, but for now I say it isn't the derivatives but what underlies the derivatives that is worrying.
Unfortunately, it is you who doesn't understand. I'm fine, thank you.
Let me put this as simple as I can: For any deal -perhaps bet is a better word here- to be finalized, the buyer -loser- will have to be able to pay up. If not, then what? This is called counterparty risk.
Say you go to the racetrack and put a bet on a horse. Your bookie allows you (he knows you got some cash) to take that ticket and use it as collateral for a bet on the next race, without knowing the outcome of the first. Rinse and repeat. You place a thousand bets. You're now in over your head, but your bookie doesn't realize that. Plus, it works like a shine as long as your horses win, which they do for a while. So did Charles Ponzi. But...
And that's by no means the entire story. Your buddies want in on the free manna from heaven deal. So you sell them the risk on the risk on the risk on the risk of all your layered and leveraged bets (they, too, know you got some cash). They then take the tickets to the bookies' window as collateral for another bet. Again, rinse and repeat. And they too have friends who want in. Rinse and repeat.
This is how this scheme got to be as big as a quadrillion dollars. This is also why the consequences of the by now inevitable losses will be far more severe than you understand.
Just imagine that you, the first one to place a bet, see your first horse lose, or even just your thousandth, and follow the chain of friends and events from there. The essence is that risk has been used to collateralize risk, which only works on the way up.
Yes, there is a standard procedure to handle these events. The bookie volunteers to redesign your kneecaps.
And it all ends in:
Fortunately, the world has plenty of cheap energy and resources to help us out of this big hole we dug, so we can go on repeating this marvellous success of creating wealth by rearranging noughts and ones virtually.
Oh, wait...
Right, doesn't anyone believe in the possibility of abiogenic petroleum, I plan to talk this very subject over with tonyw when I meet him in the breadline. Maybe we will get together and form a company call it the Abiogenic Ponzi Forever, Co unlimited.
Thankyou ilargi,
I did not realize derivatives are nothing more than a grand pyramid scheme.
Well, you known the old saying "...hard work makes one free..." - unless your on top of the pyramid - I suppose?!?
Great website and excellent analysis. I have been browsing them daily since they started up.
If I had had spare cash, I could have made a mint by leveraging their intellect.
Agree. Stoneleigh and Ilargi have had the most amazing foresight. They have been wrong about practically nothing. The melt down of the financial world has been the greater story and unfortunately, money is the real lubricant of society. It wouldn't have had to be this way, but the greed, politics, lobbying in Washington, and financial instruments used in this housing market scheme will bring us all down in most likely a fast crash scenario. As America and the world now deflates away, at least they have prepared us for what to expect. There are still those unfortunate souls who think Hank just opened up the floodgates of liquidity to begin our journey down the lane of hyper-inflation. What Hank, Ben, Bush, Nancy, and Barney just did to this nation, we have yet to see. I've got some ideas. I hope I'm wrong. This day, too, will go down in the history books.
I videotape weddings for a living in Melbourne, Aus (just getting ready to head out to one today). Have four booked for 2010, two of those I haven't even met - Y-gen: too busy! When I arive at couple's homes, they all have a plasma and a flash car in the driveway. And often the home is newish and on little land.
I see MS media has been covering the "global economic crises" a fair bit lately, but only if there's a record drop, or something provocitive is said by a recognisable face. Little about "trends".
I understand that large problems are looming, that there's limits to growth and all that - our major dam's only a quarter-full to boot! - but yet I continue to live (more or less) the MS life. The wife and I are even in negotiations to purchase an easement (a mere 60 sqr metres) adjoining our property; and so increase our debt. Weird.
But what choice is there? Honestly?
Regards, Matt B
Living one life, pondering another
Matt, please ponder (plan) what you will do when people can no longer afford to have you videotape their weddings.
Bit hard to think about an alternate furture when the wife continues to ramp up the heater; or plan a trip to Fiji next year; or friends buying and borrowing; etc (oh, and there's law-makers dropping another trillion on the table to keep the world turning, more or less). All I can see myself doing in a few years is jumping at the last second (12:00:59 perhaps, on Al Bartlett's clock?) for one of those ditch-digging jobs, which I'd be happy to do - all that fresh air and exercise! - before the bus hits the crowd.
At the moment, "going it alone" is not an option. That's all I'm saying.
Regards, Matt B
It's more than possible: it's certain.
Historically, high oil prices in the context of an economic contraction have led to rapid declines in consumption.
In the US, July's consumption was 7% lower than the same month of the previous year. So what would happen if we had a severe recession?
(say -3% GDP, 9% unemployment)
Answer: Easily, a further 15% drop in consumption. That dumps 3 million bpd extra on the world market at a time when Europe is looking a little sickly too (an addition million barrels).
$40 oil is not out of the question.
So, just as peak oil has been cited as the solution to global warming, similarly a recession could put
peak oil on the back burner for a long time ... just when it was starting to get attention.
[Remember,too, that declines in oil consumption
are slow to reverse. The lesson sticks for a while]
I think that the credit crisis may actually mean that we are permanently past peak oil. According to Tom Whipple in the Falls Church News-Press:
Sure. That makes sense to me.
Generally, I'm not convinced that a severe recession at this point is especially bad considering the options.
It would flatten the peak somewhat and put a break on global expansion, meaning a smaller economy has to be migrated to using renewable power.
We have to become frugal wrt energy and other inputs and I doubt anything other than economic distress will accomplish that. Using less is a lot cheaper than millions of windmills and thousands of nuke plants. Hopefully a great depression isn't needed.
Gail and Jason, please let me know if I've got this straight. Our economy has expanded for the last several years, based on increasing consumption of energy and other resources - yet wages for most people remained flat in real terms. This meant that the increase in gross domestic and world product went to the richest people on earth. But the average worker with stagnant wages was the real driver of much of the economic growth.
Easy credit was the other key ingredient to growth, beside increasing consumption of natural resources. Since workers' wages were held low, the only way they could afford to buy things was via credit. The I.O.U.'s of these workers were packaged into certificates of value by banks and sold to investment houses who used them as collateral for debts of their own. A debt-driven pyramid of finance was thus created, and was sustainable as long as oil and other natural resources were available.
When growth in oil production stalled in 2005 while oil demand increased, the resulting rise in the price of energy and the unwise adaptations to this price rise (such as biofuels) squeezed the many poor in the world who could no longer finance the growth of a discretionary consumer economy since their income was going entirely to food and energy, and it began to squeeze the working class people of the First World, who started to default on their debts. The certificates of worth created from the debts of these people began to lose their value, causing investment houses to crash and dissuading lenders from financing debt.
But all productive economic activity in the First World is debt-based - in other words, corporations don't buy the means of production from their savings, but take out a loan in order to buy necessary equipment. This applies to energy companies as well. It is for this reason that the credit crisis will end any ability to expand oil production.
Is this the picture? I am trying to explain these things to my co-workers. Thanks!
I would agree with most of what you say. The only thing I would disagree with is at the end, where you say "all productive economic activity in the First World is debt based". It is not really all of it. What happens is that important components of it are debt based, and these important components will cause the rest of the system to stop functioning. The components that everyone thinks of (the oil majors) have plenty of capital, and generally don't need to worry about debt. But the oil majors use a lot of servicing companies and other contractors. These servicing companies and other contractors aren't nearly as rich, and depend on debt to keep their operations going. Without these companies, the operations of the oil majors would come to a screeching halt.
Won't vertical lending and then vertical integration naturally occur, for industries with cash-rich majors and cash-strapped support systems?
The question is whether these can occur in a reasonable time-frame. It may be that so much of the financial infrastructure is missing that it is difficult to get any reasonable work done. For example, if banks are not open so that the integrated companies cannot pay anyone, it will be difficult for them to do anything. Or as a different example, if the problems spill over into electric utilities, so that there is virtually no electrical service, even if the banks theoretically have money, there still may be no practical way to pay employees. Electrical utilities are likely to have problems of the same type as oil and gas. If electric utilities cannot be restarted, it will be difficult to restart other companies.
I had another thought on the vertical integration. We are in a world market. If the US cannot get its act together in a short time, but other economies can (say China and Saudi Arabia), their NOC's could buy up the most-needed service companies. Then, even if we could later get our act together, we might still be out in the cold.
As I keep thinking of the US as a "exporter of T-bills" as a primary commodity, I increasingly believe (fear?) that instead of wanting to get dollars back or tangible products the holders of the T-bills will swap them for declining equities -- real estate, companies, etc. -- in the US itself.
A credit shortage could really help that along, if holder of dollars decide to lend "us" money directly, via company loans and investments, instead of lending it to the treasury.
What if, instead of HSBC calling up to offer your business a loan, they waited until you were desperate and then offered to buy half your firm for a reasonable price, in cash?
Some here have expressed a desire to move from "loans" to "investments" by bankers, but this seems to end up the same, with heavy foreign influence and ownership at the end.
I think your correct and in my opinion this bailout is in place to ensure that wealthy Americans get a big piece of the pie effectively stiffing our creditors.
Once they have ownership they can flip off Tbills and the dollar and reprice the assets in a new currency.
A good chance is this is the Euro and we see some sort of Pan EU/American mega banks pull this off.
At this point we've screwed things up to such an extent ourselves that we could use some foreign advice if you ask me.
Foreign Advice:
Since California seeks a $7 billion bailout, I would suggest that KSA and/or China can easily ante up the cash in exchange for title to everything in the State. Of course, then the current residents would have to leave to make room for the new titleholders.
Oh, wait... http://www.bizjournals.com/sacramento/stories/2007/05/21/daily23.html?fr...
--------------------------
Study: California is suffering 'brain drain'
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Recall that the same happened to the former breadbasket of Zimbabwe, which is now a basketcase.
Thanks very much for your reply. That clarifies things.
Gail,
While I agree with you there is one thing I have learned the hard way. That is 30 day credit or "terms". This may or may not be defined as credit by analysts of debt problems, I do not know. We can have extended 1/4 to 1/3 of our yearly income on 30 day terms during our peak season. I would not be surprised if the amount of money extended on 30 terms dwarfs longer term commercial loans.
Flaky operations you get to know by "the pattern" of how they pay on terms. Customers are either well capitalized or well run. Usually they are one in the same imho. The only signal I get someone is marginal or having problems is with 30 day money.
Proper screening before extending credit helps but some of the biggest operators and highest volumes are with people who run on very thin margins.
There is always someone some where who wants a bigger piece of the action and tries to break into the market on the cheap. Sometimes they can struggle for years, depressing profits for competitors. All it takes is a slight turn in the market and these marginal operators damage "vertically" the industry.
We have a sad joke in the nursery industry. I loose a nickle on every plant but make it up on volume.
I can't imagine that what I have laid out is unique to the nursery industry. Oil and gas is obviously big dollar stuff but in the pyramid of suppliers there must be some of this going on. With oil falling so hard, has the market changed and who is going to not get paid?
You are greatly overstating the effect of peak oil on the financial markets to date. Peak oil has had a secondary effect while the bursting of the real estate bubble is the dominant force. When the Fed raised interest rates, fewer people qualified for loans to purchase the overpriced houses which reduced demand for houses. The prices declined. When the rates of the adjustable rate mortgages began increasing, subprime borrowers began defaulting on their loans. Because reckless subprime lending practices had ignored sensible things like down payments, the banks or whoever had purchased the mortgages could not recover their losses by repossessing the houses. Since the banks increased the amount of money available to lend by packaging their mortgages (called mortgage backed securities or MBS's) and selling them to investors, the defaults caused investors to lose confidence and stop buying MBS's. Since the banks could not sell the MBS's, the amount of money they had available to lend decreased forcing them to raise their loan standards further reducing the demand for houses because fewer people qualified for loans. Housing prices declined further. As the subprime defaults mounted the banks and investors began losing money triggering the payment of credit default swaps (CDS's, like insurance policies on the MBS's) which cascaded the losses through the insurance industry. All of the investors realized the MBS's were bad investments and did not trust any company that owned them. The problem was compounded because the MBS's are complex making it difficult to determine their actual worth with some of the mortgages failing and other not. The CDS's are private contracts whose terms can not be viewed by the investors. No one knows how many exist and what credit events trigger their default. Furthermore CDS's were traded without any regulation requiring the purchaser to have sufficient assets to pay out in case of default. One does not even have to own the MBS to get a CDS for it. The CDS's are part of the derivatives market which amounts to an astonishing 1.14 quadrillion dollars globally. It is a fog concealing a financial black hole of debt that can swallow the GDP of every country on the planet and has every potential lender scared senseless about the financial stability of every potential borrower in the investment world.
For example, when Bank of America purchased Merrill Lynch and Lehman Brothers went bankrupt, credit defaults swaps were likely triggered that exceeded AIG's assets causing the Federal Reserve Bank to bail them out with a loan in exchange for ownership. After loaning or giving away ~$600 billion dollars, the Fed. is running out of money prompting the bailout bill.
At least this is my understanding to date.
Thanks for your reply also, though I'll have to chew on it a bit to get it all. American finance seems to be a more complicated game than any Las Vegas racket.
"When the rates of the adjustable rate mortgages began increasing, subprime borrowers began defaulting on their loans."
You're right, but this is not the whole picture. It was the adjustable rates resetting COUPLED WITH skyrocking food & fuel costs (i.e. oil prices rising at the onset of plateau) that initiated the defaults.
TH in OR has written a pretty good summary of Michael Klare's Barreling Into Recession.
Mortgage shenanigans + oil plateau = Perfect Storm.
I disagree. While fuel costs did rise, squeezing cash available for mortgage payments, it was primarily ARM's coming due with banks unwilling to refinance in such a way as to keep the payments the same that started the downward spiral. That originated because debt transfer between banks started slowing down. Oil was a pinprick in comparison (people's energy bills going from $100 to $200) compared to mortgage knife through the heart ($1000 payments to $2000 after some resets).
Of course, it's not just gasoline. It's the overall increase in energy prices, which contributes to rising costs across the board, especially for food. And the farther one lives from job centers, the greater the increase in commuting costs, contributing to the tendency for the more remote suburban/exurban areas to show the sharpest declines in property values.
I think that rising food & energy prices acted as a trigger and as an accelerant for the mortgage meltdown, but of course the underlying cause was the massive debt buildup, in much the same way that a dry forest full of dry underbrush is just waiting for a trigger, a lit match, in order to start a firestorm. Imagine aerial tankers dropping napalm (rising food & energy prices), instead of fire retardant.
But Greg, the insane build-out itself was facilitated by cheap oil!
And it ain't coming back.
I'm not trying to deflate the importance of the ARM debacle. I'm only trying look at the whole big CF as a system based on cheap energy, which is no more.
Some people call the energy price spike a "straw that broke the camel's back." I call it a G-damn 2-by-4 across the back of an already-crippled animal.
The build out was facilitated by cheap energy, cheap raw materials and cheap credit. Take away any one of those 3 and builders would not have been as proliferous and (apparently) profitable as they were. Cheap energy became less so (but keep in mind it still makes up less of a percentage of income spent vs. the '70's still), but it was cheap credit that evaporated once people realized the risks. If there hadn't been an associated price boom as well as a building boom, I'd say you were right entirely about energy, but I think the price boom that is painful now was driven by undervalued risk.
However, the future will see how energy comes into play to halt the economic recovery.
No, even if the price of crude oil had remained constant from 2004 to today, the people with subprime loans would have defaulted when the rates reset. The lending practices for the subprimes were completely irresponsible. Houses were increasing in value at rates like 26% per year. The ARM borrowers accepted the hype that houses always increase in value hoping either to sell their houses for profit before the rates reset or to refinance their loans using the increased equity in their houses to get better terms. The banks did not care if the subprime borrowers could not pay off their loans because they also assumed the houses would increase in price. Also, they had a scam going that allowed them to sell off the subprime loans dumping any potential defaults onto some investor. They said it was good to spread the risk around. The scam was to bundle subprime and prime mortgages together into complex mortgage backed securities and sell them to investors who misunderstood the risks, thereby removing the risks from the banks' books and acquiring more money to lend to other borrowers. That scam worked great until Greenspan raised interest rates reducing the number of people who could qualify for loans and the demand for houses.
An adjustable rate mortgage usually defaults about 6 months after the rate resets making the worst period for defaults the fourth quarter of 2008, which is now. Defaults on ARM's will lessen starting next year while defaults on Alt-A loans may increase. Peak oil is not causing subprime loans to default. The high price of crude oil is putting a drag on the economy because discretionary spending is being diverted to pay for higher priced fuel and food. Unemployment increases. When a person loses his job due to recession, even prime loans are at risk of failure. Peak oil should cause an increase in defaults of all types of loans as people lose their jobs in a recession. The assertion that people default on their mortgages because food and fuel costs a few hundred dollars per month more than last year is absurd. People would cut back on discretionary spending to save their homes first. Catastrophic financial events, like a mortgage payment doubling in one month or losing a job, cause mortgage defaults. Peak oil is killing the auto industry, but it is not causing the current financial implosion.
I do agree that peak oil will likely derail any recovery from a recession or depression as we bump up against limited supply until (or if) we convert our society to different energy sources.
Subprime loans are not the problem. It's the CDS, SIVs and other oddball gambling schemes. It's not the people who couldn't afford the loans that are the problem; it's the people that made the loans.
Use of cheap abundant energy is limited by marginal utility.
I think the oil plateau was very much intertwined with the mortgage problem. The very easy money supply problem that was used to encourage lending was partly to mask the lack of real growth. Real growth would likely have been much better with growing oil supply.
Once the bad mortgages and structured securities were in place, the rise in the price of oil and food made it harder for people to pay back the mortgages. There were other things too, like the rate resets. The whole mess would have collapsed eventually, but oil related issues made it collapse sooner than it would otherwise.
I think the thing that most people miss is that going forward, we know that oil shortages and other types of shortages (minerals, water, fertilizer) are likely to continue, because we have a finite world, and are reaching limits. Thus, the normal bounce back that people expect will be restrained. Prices of oil based products and some other products will quickly rise, as soon as pressure to use more returns. Of course, too, since we are in a world economy, demand may return, even without our contributing much to it, driving up prices. All of these things assure that there won't be much of a rebound. There may be some variation, but the general economic trend will be down, making future loans even more difficult to pay back than the current ones.
This is a great summary!
I wouldn't go so far as to say "all economic activity is debt based" but I think you are correct in that more and more economic activity is debt based. I may try to put together a post about this, but the general point is that for the money system to keep going more debt needs to constantly be created. This is because money is lent into existence with interest, so that borrowers need to come up with principle plus interest. That extra bit needs to be created in the future or too many borrowers will default. How is more money created in the future? Through more debt!
Now one way for the economy to "grow" is through gobbling up work that used to be done without money. Think of America circa. 1950, where mom stayed home and cooked and cleaned and everyone watched each others kids. Now we have fast food and cleaning services and professional child care and all adults join the labor pool to pay money for what they once did themselves. The money system appears to require that the work people do be incorporated into it in order to grow, sort of like The Borg in Star Trek with the mantra “You will be assimilated.”
From an energy perspective, this is a bad situation.
As long as the credit crisis and recession lasts, production is not the bottleneck constraining demand. So any economic hardship directly attributable to oil is delayed until the economy recovers.
As soon as the economy attempts to recover, demand will increase and oil supply will become a bottleneck again. Basically peak oil kills the prospects of a recovery.
Keith Fitz-Gerald points out that there is a relationship between the fundamentals of oil price and the inflationary nature of the bailout. Peak oil is laying some fundamentals for a long term uptrend. These fundamentals superposes to another factors. The strength of the dollar could and probably did cause oil to decline on the short-term. But the reverse holds true. The bailout is in effect printing dollars. This will weaken the dollar on the long term on top of the effect of peak oil. Oil prices will soar.
These factors will mask the fundamentals. It will take a long while before people understand and accept the true impacts of oil on the economy because there are too many factors that have a greater immediate term impact and will steal all the blame game spotlights. I am afraid this will delay peak awareness and real mitigation efforts until after much of our ability to conserve have been used up to mitigate the credit crisis. At this point much of one of our last trump cards will have been wasted.
I've been thinking about this very thing lately in conjunction with the findings of the SAIC Hirsch Report.
The "mitigation" strategies described there are fast becoming quaint, I'm afraid to say. It now reads like Lost Opportunities.
On of the biggest effects I can see, apart from simple lack of credit where credit is due, is that ever smaller companies will join the supermajors in retiring their own stock at accelerated rates. Why overdo risky drilling when your own IRR can be calculated precisely based on assets - and often tax rates - you know and love.
We have a number of companies in Canada that are trading at or below next year's cash flow based on $100 oil. That's very pricey dilution. I'd object to issuing more stock if I was a shareholder. Without adequate debt availability, projects will compete with self-liquidation a la ExxonMobil. High drilling costs and depletion rates, low EROEI, low prices, low ROI PLUS high risk equals a lot less E&P action and much less non-NOC ie. non-OPEC production.
I haven't thought much about the NOC's, but it is possible they will benefit a little from a consequent reduction in service and factor costs. This plus the need for national energy security might keep Brazil's deep ocean drillbits turning, but ultimately the credit crisis will mean every nation for itself as far as development capital and oil are concerned. Kind of like our "island" banks these days.
The bear pundits (Philip Verleger is the latest - Reuters had him talking $50 or even $10 oil) ignore this scenario: OPEC will continue to get more and more powerful and Russia is not disposed to co-operate with the OECD on energy exports for reasons they consider perfectly reasonable. Needless to say, non-OPEC exports just continue to collapse even quicker.
Barring an "incident", $100 is an easily defensible price, though we can expect regular and alarming spikes. OPEC would like to keep things uncertain enough to delay all those decisions that need to be taken ten years in advance. OPEC certainly knows those kind of decisions. $100 out-competes everything else, especially in transport. It's close to some of the higher FD marginal costs, especially in deepwater. Therefore, it's just money that pushes us past the peak, not geology or even politics. Talk about the usual suspect...
Translate this into US politics: "Drill baby drill" means the private sector will need sweet deals to risk opportunity cost IRR's upwards of 50% drilling in basins that look costly and dusty. It'll need to be special oil covered by special deals and it'll hafta (I'm imitating a well-known pol) make the majors and Haliburton a very special rate of return. Therefore, the basic GOP lie translates into enriching the usual customers. Joe Sixpack gets the empties. Whaddya know?
By the way, the trading band in your survey ($85-160) was set pretty wide this time, wasn't it? Nevertheless, I think it is pretty accurate. But it'll look like a porcupine with almost no stability at all. That alone does not bode well for increased oil supplies, though it's great for trader profits. Was there any reason this band was set so wide?
july1406,
You make an important point.
Inherent in the oil bears' prediction of $50 oil is the assumption that OPEC won't be able to get its act together and curtail production. The probabilities of this to me seem fairly remote.
I don't have the production figures right in front of me, but the implosion of oil prices in the 1980's required a precipitous fall in world-wide demand and a huge run-up in non-OPEC production. This time around I don't see much possibility of a surge in non-OPEC production. In the 1980s it was Russia who greatly contributed to the surge in non-OPEC production. As you indicate (even if Russia could overcome geological constrains) politics in and of itself will preclude it from coming to the rescue this time with a big increase in production.
Important oil executives and policy makers in Russia have indicated they want and anticipate higher, much higher, oil and natural gas prices. Why would one not take them at their word?
I think it's also important to keep in mind that Russia has a nuclear arsenal. This will make Iraq-style solutions to the problem impossible.
The following offers an excellent case study of how this most likely will play out, despite some sputtering, mis-steps and set-backs by Russia and OPEC:
http://www.tsl.state.tx.us/exhibits/railroad/oil/page6.html
It's important to note that, after the regulators got their act together, oil prices were higher in 1935 than they were in 1929, despite being in the midst of the Great Depression.
The key point about the Eighties is that the really big price drop did not occur until 1986, when Saudi Arabia considerably increased their production, which resulted in a corresponding increase in consumption, because of the lower prices. Oil prices in 1982 were something like eight times higher than they had been in 1972.
I look at the graph and I remember 1973/74 when the oil price was called the "Arab Oil Shock" and we were concerned that the Western economy was going to collapse.
Today's price was completely unthinkable then.
I wonder what the price will be in 35 years time?
I had to laugh
"...Oil towns like Longview were open 24 hours a day, with gambling dens and houses of prostitution springing up to entertain the workers and fleece them out of their earnings. Armed robberies and murders became frequent enough that many people were afraid to go out at night. ... but there was not enough law enforcement to go around. In such an atmosphere, it seemed anything could happen."
But despite all these homegrown problems there was the usual search for scapegoats to blame:
"Frank Hamer, another famed Texas Ranger, was convinced that Communist agitators were planning to blow up refineries, pipelines, and storage tanks..."
Just China and Saudi Arabia alone consumed 9.9 mbpd in 2007. If, and it's a big if, they maintain the rate of increase that they showed for the past 10 years, they would be consuming 19 mbpd in 2017--not counting any of the other countries showing fast increases in consumption.
However, I think that China today is analogous to the US in 1929. And as someone (Downsouth?) pointed out, there were three million more cars on the road in in the US in 1937 than in 1929. The difference between the US in 1929 and China today is that in 1929, millions of Americans wanted to drive a car for the first time, while hundreds of millions of Chinese today want to drive a car for the first time.
In the early Eighties, we saw lower consumption, primarily because Saudi Arabia reduced their production. As soon as they increased their production in 1986, world consumption started climbing, and consumption in 1989 was higher than in 1979. And consumption in 1939 was higher than 1929. In fact, the only year in the Thirties that showed lower consumption year over year was 1930.
But note that for the US, the peak year for consumption in the '70s was actually 1978.
It wasn't surpassed until 1998, a full 2 decades later.
http://tonto.eia.doe.gov/dnav/pet/hist/mttupus2a.htm
Again, for US, the numbers I've seen (in a book) show consumption collapsing by 1/3 during the Depression but I have no online reference.
A big difference between '29 USA and modern China is that oil was cheap and plentiful then, expensive and scarce now.
But the price of oil is set on the basis of global supply & demand, especially in regard to net oil exports, which I anticipate will show a long term accelerating decline rate.
http://www.commodityonline.com/news/Why-Crude-Oil-production-is-falling-...
As I believe you mentioned in a previous thread, one might expect international trade to contract to some form of oil-for-food or oil-for-water, using whatever currency is current to settle the trade. Bluejeans, iPods and other assorted geegaws will decrease in importance, as they may be manufactured most anywhere.
If you live in a place without an oil, food, or water surplus, your standard of living may decline. ...
Russia is clearly aligning itself with OPEC hawks like Venezuela and Iran - and adds a "natural" gas monopoly in Europe to the energy mix.
This means the potential for spikes is always there if force majeure - real or politically convenient - turns a few valve switches. For example, overplaying US military options and/or local conflicts could easily reduce supplies.
This applies equally to credit availability in Eastern Europe. Let's hope they can pay for their winter warmth this season, as you could see credit dominoes start to fall and pipelines start to be blocked or bagged en route.
The bottom line is that OPEC and quasi-OPEC hawks will hold supplies back in order to support prices, sometimes even to make a point at times.
KSA does not have the production flexibility to claim market share from other producers any more. And is it not true that increased car sales in China and India, not to mention the oil exporting countries, guarantee growing oil markets for a while? The current sell-off is overdone.
"In the US, July's consumption was 7% lower than the same month of the previous year. So what would happen if we had a severe recession? (say -3% GDP, 9% unemployment)"
if we were looking at real numbers for gdp for example, that 7% lower may be exactly what we (would) see with a severe recession.
and, imo, you would need to recalibrate your model. also, ksa or opec, by design or necessity, would probably defend the oil price a lot higher than $40.
About 3 years ago I was involved in convincing my City to install renewable energy systems associated with critical infrastructure. One big project went ahead to put photovoltaics at the water treatment plant, which sits near the reservoir and uses a lot of electricity to run pumps.
The solar panels are now installed, but due to some glitch with final financing (done privately) the thing hasn't been used! An entire summer just went buy and the electrons were simply grounded.
Unfathomably ridiculous.
I just noticed that Wharf Rat posted a link to this article in yesterday's Drumbeat:
Tough Time Securing Credit
Also, I ran across this article regarding natural gas drilling:
Barclays: Credit Crunch Could Limit Natural Gas Drilling
I wrote about Chesapeakes strategy and the fact that the marginal cost for Natural Gas in North America is above the current futures prices last week. Since then, Petrohawk (HK) has also announced reduction in capex. I expect others to follow -especially at $7.40 per mcf.
In yesterday's Drumbeat there was a link to article saying that two refiners would get more oil from the SPR. This was announced while oil prices are dropping, presumably because of weak demand and/or plentiful supply.
It occurs to me that the difference between getting the oil from the spot market and the SPR is that the first requires money, while the second requires only a promise to replace the oil you use. Are these refiners forced to go to the SPR, because they can't get credit to buy oil?
Not energy related, but the crunch is being felt here. I was told by a school board member it will take about 30 days to get things back to normal...
Sonoma County has been forced to postpone issuance of $110 million in tax revenue anticipation notes -- used to finance ongoing operations -- because of lack of money normally available at low interest rates in the national credit markets.....
Mendocino County government issued its tax anticipation note in July, so it wasn't facing the same problem as its southern counterparts. But officials were postponing payment of certain bills for the rest of the month until property taxes roll in.
Shari Schapmire, Mendocino County treasurer/tax collector, said the cash crunch means asking school districts and other agencies to delay such things as vacation payouts for employees. Payroll and vendors won't be affected, she said.
http://www.pressdemocrat.com/article/20081004/NEWS/810040323/-1/frontpag...
This is unrelated to credit. But I just had to post it. Amazing.
This is the top story on the Yahoo home page....
Stars Not Aligned for Palin
Where is Richard Feynman when we need him?
Been pouring over USA's horoscope, looking for timing of events, I'll spare you my musings.
Well, this is certainly a bad omen for Yahoo's ranking algorithm and probably democracy.
your handle, very witty.
.
Now this is off topic, when economic dominoes start to fall it chills down my spine. I just saw that NBA season tickets are suffering from the credit crisis. And I'm neither a fan nor a supporter of overpaid athletes.
What this has to do with the price of potatoes or oil drilling, I have absolutely no idea but I'm sure there are some rocket scientists out there who can tell me.
Platts had some good stories today, on this subject. (see below the line). In my own observations, the shares of producers which the investment community understands are notably heavy into debt or lengthy hedging contracts appear to have moved first, downward, starting several weeks ago. Notably, CHK started underperforming before others, in the natural gas group. It goes without saying that the junior producers started getting hit very early as well. UTS, in a JV with PetroCan and Teck, comes to mind. Other juniors like Connacher (CLL) and speculative plays like North Peace (NPE) have been hammered. It goes without saying that collectively, oil sands and conventional juniors represent a ton of undeveloped resource. It's very concerning. My personal view, shared by others, is that global supply is going to chase price down the ladder, much more quickly and efficiently than most understand. At ASPO, the sense that recession and credit issues would lock in the peak was an idea that stalked the rooms. At least, for me it did.
G
____________________________________________________________________________________________
The latest from the credit wars
Several items from the world of trading, courtesy of various Platts' reporters, and what the credit crunch is doing to it.
--One clear beneficiary: the NYMEX. There are increasing reports from the market that traders are turning to NYMEX' ClearPort on-line clearinghouse to clear their trades. It costs money that you don't need to pony up if you do a deal in the over-the-counter market, but that cost now brings a NYMEX guarantee with it. Recent NYMEX data shows that daily volume has increased in recent days on ClearPort, the exchange's over-the-counter trading and clearing platform. From September 17-29, ClearPort volume was 4,463,449 contracts, up 1,872,838 contracts from the September 1-16 period.
-- In Europe, Platts reported that the high cost of working capital and the unwillingness or inability of financial institutions to loan significant amounts of cash is frustrating European oil traders and heavily weighing on liquidity. "Banks aren't crazy about lending money to each other," one source at an independent European oil trader said. "Bearing that in mind, how thrilled do you think they will be about lending money to me, an oil trader?" Interest rates being offered to traders are said to be in excess of 10%.
--This is a scary one: petroleum marketers in the US, already battered in some parts of the country by a loss of supply due to Hurricanes Gustav and Ike, are seeing their credit lines tightened. As Platts' Beth Evans reported Tuesday, the "worst-case scenario (is) the blocking of loans leading to shortages at the retail level. While no one has actually reported an outage tied to credit yet, it is a possibility, according to Gary Harris, executive vice president of the North Carolina Petroleum & Convenience Marketers Association. "You have to have a lot of credit to buy 8,000 gallons (a tanker load) of gasoline at a pop." Payment terms are usually "net 10," said Harris, meaning the buyer has just 10 days to pay the oil company for the product.
A geothermal company that I own some stock in (TVE:NGP) has a power plan designed and the holes drilled to supply around 75MW of power. They finally got financing approval last month after working om it for 6 months with five different banks.
Now what should be the interest rate for a loan to build the power plant, secured by the equipment and the power production? The rate they finally found was 16% plus a large number of 'fees' that brought the total to about 20%.
The markets are working, just not as well as we would like...
While the Federal Reserve is mumbling about lowering interest rates, I wonder if the coming (alas) attempt to suddenly raise $700B in the government-bond market will force interest rates up quite a bit? That would force the Fed to follow, and so on. ARM rates would rise further, more jingle mail, etc - pretty soon they'll ask for another $700B? Then the value of the dollar falls, oil price (in $) rises, rinse and repeat.
At some point, it seems like China walks away. Also Mid-east gets fed up with low value of the dollar. Things suddenly get much worse.
We've been overdue for a recession since 2001. Bush told Americans to get out there and spend, spend, spend. We went from a .com bubble to a housing bubble. I believe the effect of pushing recession further and further down the road is a depression. We produce little and consume a lot, now the effects of our lopsided economy are coming home to roost.
I'm strongly against this trillion dollar handout to Wall St. Frankly, I would welcome seeing some greedy bas!@#$s jumping out of buildings. Yes we're going to have a lot of painful times ahead if Congress doesn't pass the bill. Sadly, we are likely to suffer whether or not the bill passes. The financial system probably can't withstand the weight of the MBS and CDO problem.
As I see it we're only delaying the inevitable and the more we interfere, the worse it will be. One good effect of the problem is delaying the onset of the peak. On the other hand, we may also find that it's impossible to identify the peak if we're stuck in a worldwide economic crisis. Although it probably won't be a good thing for alternatives since lower prices will remove incentives for investment. Maybe we'll get lucky and make some big breakthroughs anyhow.
Some would argue we've been in a recession SINCE 2001. Actually, the government - if they hadn't changed the rules to paint a rosier picture.
I would tend to agree but perhaps it was a low grade recession. The recession back in the early 90's seemed a lot worse than what we've been experiencing until very recently. At least back then we had some manufacturing industry left, but Clinton and others effectively destroyed that with NAFTA.
I'm afraid we're about to find out how bad things can really be. I've read that there is somewhere between 500 trillion and 1 quadrillion in bad debt on the books. If that's true and the collapse can't be avoided, we might have to effectively start over.
It seems ironic that the Fed created a lot of this problem with low interest rates and all along they've pretty much said everything is peachy, everything will be ok. Now we have the Fed and Treasury doing an about face. The houses of congress, wall street, the fed, the sec, the president, and just about every other authority figure has lost credibility. They've been wrong about everything else, why should Americans trust them now?
Shadowstats is a pretty cool site.
The terminology for the cause of say...a recession, in financial speak, is oft stated "baked in the cake"
I would suggest this date of manufacture of the cake mix, was 1971. The reason I use the date 1971, is thats when the dollar became fiat. That year was the total removal of any backing of the dollar. Now many of us realise time is required to mix ingredients and then the actual baking and subsequent cooling of the cake....before icing is applied, and the cake consumed <-----my favorite part. Emagine if you will, the candles on the cake being the PO component, a sort of quasi religious symbol of all the energy to grow the ingredients, assemble together, mix, bake the cake. The icing represents the financial aspects necessary to fund this endeavor. TAKE NOTICE the icing is just below the candles. The final act of consumption takes the least amount of time....The old addage of "having your cake and eating it too" now comes into play.
Sorry if I waxed poetic...it makes sense too me!
If you followed and then felt you were left hanging...then you got it, you understood perfectly.
Interestingly, the year US oil production peaked and began to decline. Hubbert's peak for the 48 states ...
There may be a connection there...the whole reason Nixon made the dollar inconvertible to gold ("closed the gold window") was because of the widening trade deficit and the gold flight out of the country. Part of the trade deficit was from increasing oil imports (Nixon lifted the import quota in 1970 in an attempt to keep prices down...wonder how he felt 3 years later?
He's probably spinning in his grave now.
The recession is getting worse and the credit bubble is just starting to burst. The recession will continue and become deeper for possibly up to six more years as the US credit to gdp ratio could fall back down to 150% from the current 300%.
source http://yellowroad.wallstreetexaminer.com/blogs/2008/06/21/k-wave-the-gre...
Good graphic. Thank you.
I wish we could let the finance debt go through bankruptcy, since half the debt but only 20% of GDP would dissipate, but I'm sure that debt is held by all sorts of entities and countries.
I think the debt is a big piece of what is keeping GDP up. Once you let the debt go through bankruptcy, there will be a lot of broken connections--suppliers who are bankrupt; subcontractors who can no longer perform; missing services. It will take a lot of work to try to put the economy back together--probably with much shorter supply lines and more local businesses.
I think it's time to confirm what some have hinted at for a while now;
THE LUNATICS ARE IN CHARGE OF THE ASYLUM.
Hello TODers,
http://www.chron.com/disp/story.mpl/ap/business/6036942.html
----------------------------
Farmers, ranchers could feel credit crunch
Through the week, those commodities' contract prices have continued to wobble "because what you're seeing is a complete lack of faith in the financial system now," Newsome said. "It's going to be much more difficult" to get or extend loans.
Those prospects won't improve even if the House passes the retooled Senate version of $700 billion financial industry bailout, he said.
Tom Buis, president of the National Farm Union, agreed, adding that agriculture is very capital intensive, and borrowing money is crucial.
------------------------------------
http://www.farmfutures.com/ME2/dirmod.asp?sid=F8F0FC025243413D80DEE92F3B...
----------------
4-page PDF warning inside this link--> please scroll down to see the graphic of just how low potash inventories are currently: 40% below the usual five year average.
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Wobble in corn prices you say?
How about losing $2 in the last quarter?
From high 7 to mid 5.
The farmers are starting to get worried.
Someone told me yesterday that it cost him $500 per acre for corn. Thats input costs. Fine business then if your yielding 200 bushel/acre. From that on down you start to bleed.
The market Dec futures lost about 54 cents yesterday as I read the market.
Land prices are still escalating. Fertilizer still heading up. Seed is thru the roof. Diesel is still high. All costs are heading up still and nothing falling.........except grain prices!!!
Airdale
My family are farmers too Airdale...I can see the short-term dislocation, but in the longer-term, the price of food will simply rise until farmers can afford everything they need and profit, there is no other possibility besides mass starvation and I have to think the gov't will step in before we reach that point...at least in the SHORT term ;-).
Food prices rise? Rise?
Hey they are already skyrocketing. I might add that the price of bread is now around $2 and higher. Milk here is very close to $6/gal.
How much higher can it go whilst the average paycheck stopped growing long long ago and folks like me on fixed income(pension,etc) are wondering WTF.
IMO it is the 'globalization' venue that has helped to create this mess.
In the near future I don't think farming will be around. That is what I see as a real possibily.
As to the gov stepping in? They are already in deep enough. They should have backed out long ago. Now they are casting a blind eye to all the new land going into production. They seem to perhaps understand that ag is about the only REAL industry we have left.
The rest is just shoving paper chits around and answering phones.
Airdale
I think it is good to follow wheat since it needs to be planted now. Looks like most farmers are getting credit, but they are worried about covering costs to repay it.
See:
http://www.uswheat.org/justReleased/doc/7958DD17B25D9A36852574D60070175F...
Credit is an essential implement for American family farms. Amid all the bad news about the credit crisis, operating loans for U.S. wheat producers fortunately do not appear to be a problem, and winter wheat seeding is moving ahead normally – albeit with higher operating costs.
“Although the current credit crisis is not yet curbing credit availabilty for most farmers, it has other serious implications for U.S. agriculture," said Alan Tracy, President of U.S. Wheat Associates (USW). "To the extent that our economic problems spread globally and endure, world growth will decline and agricultural market growth will slow, hurting our prices for years to come. Exporters may face higher credit risks. A weaker U.S. dollar by itself would tend to raise our farm prices but also the price of inputs like fertilizer. If crude oil demand and prices continue to slide, commodity prices often move in the same direction,” Tracy added. “The net impact to us of such broad economic changes remains to be seen, but the agricultural community is not going to get a free pass from this crisis.”
At the farm level, Farm Credit Services is one of the largest lenders and recently reported that it had a capital-to-assets ratio of 13.1 percent with 136 days of liquidity as of June 30, 2008. Credit quality is healthy, it noted, with a relatively low level nonperforming loans that is “consistent with the continued strength of the U.S. agricultural economy.”
The Red River Farm Network recently reported that community banks, which finance many local producers in North Dakota are doing fine. Don Forsberg, Executive Vice President of the Independent Community Banks of North Dakota, told the farm broadcasters that credit sector turmoil could actually be good for rural banks.
"A number of community banks are looking at this as a real opportunity to gain back some of the business that they were losing to some of these investment banks,” Forsberg said. He also noted that such institutions “have their own sets of rules which tend to be much more liberal” and are “not supervised like…community banks.”
Janice Mattson, who farms near Chester in the “Golden Triangle” of Montana and is Vice Chairman of the USW Board of Directors, confirms that her bankers are not concerned. “There is no indication they won’t be able to serve operating loan requests for next year,” Mattson said.
Generally good U.S. fall planting conditions (with dry spots here and there) and available credit helps support next year’s wheat supply outlook. Production costs and the potential returns from wheat, however, cloud the picture a bit. Mattson noted that she had to increase the size of her operating lines (all approved) to cover increased fertilizer and fuel costs plus unusually high crop insurance premiums. According to the U.S. Department of Agriculture’s (USDA) Economic Research Service, the average cost to grow a metric ton of wheat in the U.S. this season will be more than US$295 ($8.05 per bushel). Of course that cost varies from operation to operation. But dryland wheat farmers may feel the pinch more than those producers who have the option to plant other crops, especially corn, soybeans or canola (click here to see a historical review of U.S. wheat production costs since 1998).
No wheat being planted around here. We are still busy combining both corn and soybeans.
Its very very dry right now. Most grasses are droughted out. The pastures are not getting a bit of fall rainfall.
I have very very little faith in what the government sources state or project. I fear they are tainted to a large measure.
Aren't these the same dummies who imported all those foreign pests and plants? Like for instance the Asian Lady bug which now infest our homes voraciously. Not fun to find them dropping in your soup or biting you on the neck.
Then again they can't figure out what happened to the honey bees.
And in case its gone unnoticed the birds have largely disappeared here. I rarely see a cardinal, very few robins and no mockingbirds plus many other species that I used to see a plenty of.
Something is going very wrong with nature IMO. Very wrong and no one seems to give a shit. Least of all our guv , which BTW couldn't even control or stop SPAM!!!
They exert massive control over the ag lands yet of late the No Sodbusting regs seemed to have disappeared down a rabbit hole!. Everyone is burning trees so that it sometimes look like a 3rd world south american banana republic.
Destroy our woodlands just to gain a few more acres of grain. No one cares what they do anymore. Everyone is worried about the wall street jerkoffs and that they remain solvent...meanwhile the woodlands continue to recede.
People will look at the trees and say "ohhh plenty of woodland" but they dont' know that most are weedy trees. ...like sweet gum...not hardwoods. Getting harder and harder to find any large oak trees.
Airdale-
The trees here, in the heart of the tallgrass prairie, are being bulldozed, piled 80 feet high and burned. We have a wood boiler and wish we had a crew that could harvest all this wood energy that is just being wasted.
There is a case to be made that all these trees are not indiginous to the tallgrass prairie. When settlers arrived here 125 years ago they were required to plant 10 acres of trees per homestead. So you can see the entire countryside with these 10 lots of trees. Now that the farmers are gone (50% population decrease in 30 years) the homesteads and trees are bulldozed and burned.
A nice synopsis, especially with regard to rural banks.
It's not all roses though, and I agree with Airdale wrt corn-it's going back to yields. With these costs, if you don't have an operation getting 125 bu/ac, you better plant something else. With corn at ~4.50 today and other ag commodities way down, the smart ones were the ones who bet last winter's prices were out of whack and contracted out.
The falling dollar is generally thought favorable for producers, allowing more export sales. But caution is noted, in that it may be masked by currency fluctuations in the buying country.
In addition to falling commodity prices, the cost of inevitable borrowing will go up:
Finance worries hit home
Crisis on Wall Street drives crop prices down, credit costs up
http://www.capitalpress.com/main.asp?SectionID=67&SubSectionID=1300&Arti...
Right on Doug. Right on the nail.
My farming buddy who I drive grain trucks for and fix his electronics is so far into debt that he doesn't even worry about it anymore. He makes a profit this last year and the first of any significance for a looong time.
He may make a profit this year and he may not. Right now around here
him and others are putting up their own bins like mad. He has 4 going up right now. Why? More control over his crops. Otherwise the traders and big guys eat your lunch. They control the market way way too finely.
If not for local banks then I am certain a lot of farming would not happen. Only local people can understand the scaffolding of all of it.
If they relied directly on the big guns ....well they would be totally screwed. You can't be selling the loan paper of local farmers.
Besides the loans are always backed by equipment and land. Real good collateral IMO. Plus you won't find many farmers defaulting. If that happens right away you see the auctioneers coming around.
Thats how I got my farm back in the 80's...during the bust out that occurred then. One could get good land for $400 to $500/acre.
Farming is like nothing else. At one time I had about 8 farm loans. I kept rolling them over each year. I was getting around a dollar for my corn back then. Sometimes less.
Airdale
Are they outfitted with dryers ?
Do you think fuel source issues may be a problem ? Anyone thinking of alternatives ?
The Rural Renewable Energy Alliance (Backus Minnesota) is working on solar heat dryers for grain bins. These guys are social entreprenuers and if there is hope-- it lies here.
no driers...put in the ring,which is open at the top...cover with a tarp...blow air thru a drainage field tile(plastic) with holes.
Use a pto-driven vacuum to suck it out when you want to truck it to market/grain elevators.
We put lime on the ground and cover with a some tarps. We only do this over the winter or til market looks right.
Its a new idea around here. We picked up on it when the grain elevator boyz started storing excess corn on the ground in the same way. As they did for the last couple years,,or maybe longer but I recall on the last 3 or so.
Its cheap and it works and we lost not a bit. No docking either.
Each bin can hold about 17-20 thousand bushels.
Again no driers as we put it in at the optimum moisture level then run the blowers to keep any moisture out...depends on weather.
Btw..no one around here uses driers anymore. The wet early stuff goes to the grain elevators. When we start getting close to 12 then we use our own bins.
Airdale
I'm probably simplifying the issue, but it seems to me that the credit crisis and peak oil are substantially linked. The lack of growth in the energy sector over the last 5 years or so has meant that the risk of not getting a return on investments has increased. Money in the economy represents the 'work done' in energy terms, and credit relies on the future growth of the markets. It seems to me that peak oil is dawning on the markets due to the fact that energy growth has stopped, which means that banks want to capitalize thier investments, stop lending and allow the economy to shrink.
I am not sure they want to allow the economy to shrink. I think they are being forced to allow the economy to shrink.
Sometimes simplifying is good. Helps you see deep relationships.
I posted a tirade at Question Everything last night. I think I was getting really mad at what the talking heads had been saying all day and then after listening to the VP debate the Palin-induced rage got the better of me.
I do think there is a deep and insidious relationship between net energy flow and the economy. Our economy has come to rely so heavily on borrowing from the future (growth due to more energy available), and now that the future will not come (peak oil production) we have nothing to pay it back with. Kiss it all goodbye. Shouldn't really hurt though because it was just paper. What will hurt is not eating.
George
"The credit crisis is providing buying opportunities for the more cash-rich."
when the price of oil dropped to $100, i took a look at where share prices were compared to the last time oil was at $100, and concluded that share prices were generally a lot lower. in the past few weeks, some of these same companies have lost nearly half of their value. could be an opportunity to drill on wall street or bay street.
imo, some of the smaller oil and gas cos have been seeing a credit crunch of a slightly different sort for the last two quarters or so. many with a line of credit were required to hedge their oil and ng prices.
many showed hedging losses. the company formerly known as enron, eog resources, for example took nearly a $billion hedging loss in their most recent quarter. i dont know of any that showed a hedging gain.
but now with the recent price drops, the situation may be reversed and we may see some hedging gains in the next few quarters.
Gail,
I personally trade in the OTC market, and I'm happy I cashed out the majority of my positions. Why? There are no buyers at the moment! I've had open orders open for weeks, and I barely get ANY action. I believe investors, given the risky nature of the otc, have also taken out their funds, and this might indicate why these stocks are at extremely low levels. The IPO market is dead at the moment, and will continue that way until market sentiment has been restored.
Valuation of alot of companies, including the financials and oil, gas and mining has been skewed and modified over time due to emotion. We need to get to the roots of the issues, and establish a standardized system. With the New SEC Gudiance, to the market-to-market rules, management of these financials will now be able to subjectively value the assets on their books. Where are the standards?
Valuation
SEC Guidance
i see a lack of liquidity in options as well, probably mostly for smaller companies. xom options are as robust as ever but of course xom stock hasnt moved as much as many. flight to safety, i suppose.
The IPO market is extreemly dried up I agree. Could also have something to do with people being burned in the IPO hype. Most Initial Public Offerings are often dogs. Exceptions of course are obvious, Google (GOOG) is one glaring example. IPO of $85.00 as I recall. although most retail investors couldnt get that price.
The institutional investors always get prefered treatment on the best IPO's and this is almost a sure indicator of if it 'has legs'. The days of several IPO hitting the market weekly and sometimes daily, are in fact, as you stated, long gone.
From Business Week:
The Credit Crunch Spreads to Business
That's what i said up top! If the financial market turmoil gets too bad the banks usually have a get-out clause and can stop lending from already agreed credit lines. So it makes sense to get in early.
What we need to do:
-Make massive investments in renewable energy - wind, solar, hydro, geothermal, oceanic (wave/tidal/current/thermal gradient), biogas, maybe some biofuels (that make some sense like biodiesel, to a limited extent)
-Make massive investments in increasingly expensive non-renewable energy resources - oil (polar, offshore, other difficult locations), NG (polar - $40B Alaska/Canada pipeline), coal (including CTL, etc.), tar sands, maybe oil shale
-Make massive investments in nuclear - both replacing units nearing end of rated life, and increasing capacity
-Make massive investments in energy efficiency - electrified freight and passenger rail (urban transit and inter-urban), building efficiency retrofits, etc.
-Make massive investments in infrastructure repairs and improvements - even if we don't continue expanding highways, and even if we let some highway capacity deteriorate, we still need to spend more on electrical transmission systems, water systems, etc.
All of the above are going to require a very big slice of the GDP pie. Even if the pie were growing rapidly, it would require holding the other pieces of the pie still so that the above projects could take all of the growth. Unfortunately, the GDP pie will not be growing, it will be stagnating or even declining. Thus, everything taking its slice from the GDP pie now is going to have to be cut back - cut back a lot. That means LESS money to households to spend on EVERYTHING. That means LESS money to governments to fund their budgets. LESS for EVERYTHING.
How can we possibly do this? The performance of our government and its political leadership over the past couple of weeks does not inspire confidence. Who is there that has the stature, and honesty and courage to tell the US public that they are going to have live on less, and their government is going to be able to do less, because a bigger slice of our possibly shrinking national GDP pie is going to have to be dedicated to these massive projects?
The harsh, self-evident reality is that we CAN'T do all of the above. We can't even come close. And that in turn means that our national GDP pie is going to be shrinking even more in the long run than might have theoretically had to have been the case - IF we were able to do what had to be done to redirect resources from consumption to appropriate investment.
It is all so sad. Future generations are going to curse us all.
I agree.
One of the big problems is that we have a bloated banking and finance sector, now amounting to something like 21% of GNP. To put this in perspective (and if my memory serves me correctly) this compares to 2 or 3% in the 1970s before all this market fundamentalism insanity began. We have a huge and rapidly growing rentier class in this country that the productive segments of the society must support.
Ninety to ninety-five percent of the nation's banks need to disappear. The manufacturing and energy-production sectors need to grow. We need more engineers and fewer bankers and real estate agents. More scientists and fewer economists.
Unfortunately, the bankers and real estate brokers are the only ones who have a seat at the policy table. That is why all the benefits of the proposed $700 billion bailout flow directly to those sectors while nothing flows directly the manufacturing or energy-production sectors.
I agree two. Actuaries are in the financial sector too, and they have seen huge growth since World War II. Several years ago, someone named actuarial work to be the top profession, from the point of view of pay, working conditions, and downside risk if you made a mistake.
Most insurance products rely on the same flawed assumption that banking products assume. Insurance products are just not quite as flawed, and there is more of a margin built in. Except for AIG, companies weren't aiming for go-go growth. I expect a big cut-back in the insurance sector as well. Products that are closest to investment products will be hardest hit. Some short payout products, like homeowners coverage and health coverage may continue, but there is a lot less need for companies selling long term care and other long-term products.
I suppose you can throw me in there with the offending parties too. I don't have much right to toss stones at anyone since I decided to retire at an early age and join the unproductive rentier class.
In our own defense, however, I think a society sets up a set of rewards and the members of the society tend to respond to those. The society gets what it asks for. How the reward system of the United States became so perverse is a mystery to me.
However, it is certainly not unique. J.H. Elliot in Imperial Spain describes an almost identical situation that developed in late 16th and 17th century Spain. In Spain's case, it never recovered. Which leads me to wonder if the U.S. can recover.
Drudge Headline:
California may need emergency $7 billion loan
http://www.latimes.com/business/la-fi-calif3-2008oct03,0,5726760.story?t...
From your link:
Where does all this end? We will have the California turning to the federal government. We will have the large insurers turning to the federal government. The FDIC with its expanded limits will have lots of losses, and will need to get money from somewhere. Pension plans will need a lot more money than the PBGC has. And then there are the airlines, and the auto manufacturers and probably many more.
It ends when nobody will buy the T-bills needed?
It strikes me that China and Japan apparently prefer T-bills to bad debt in their banks, given the foreign provisions in the bailout plan, so it must be assumed that they believe T-bills have value. Therefore there must be a next-step plan to repay T-bills with something other than more T-bills.
Or maybe we're just all kicking the can a few more steps down the road, making it up as we go, and soon it'll all collapse at once.
Bingo. We have a winner!
What these fine, upstanding titans of industry and finance haven't grasped yet is that "shock and awe" can happen to anybody, not just the peasants. To paraphrase an old song, "sometimes you're the cement truck, sometimes you're the deer in the headlights".
I am hearing a fund that has 10$ billion under management was down 50% in September and part of its strategy was to take huge sector bets, the latest being energy infrastructure - I know they were a large holder of MDR (McDermott) among other energy stocks - they are in forced unwind situation now and given possibility of leverage the position sizes could well be huge - I think this is 50-70% of story on energy stock downtrades, as I wrote about in the Energy/Hurricane post. Energy stocks are now at same levels they were on the way up in 2006 when oil was $60.
All things considered, I suppose that the interesting thing about oil prices is that they are still so high, down from a monthly peak of $134. To put a mid-90's price in perspective, here is a chart of annual nominal US oil prices that I posted up the thread:
http://www.oilnergy.com/1opost.htm#since20
The really big threat to the US and world economy is the probability, IMO, of a long term accelerating net export decline rate--which almost no one outside of Peak Oil circles is considering to be a possibility that is even worth discussing.
Oil May Fall to $50 in Global Recession, Merrill Says (Update2)
This article has a lot of interesting suggestions, it is worth reading in full. The implications of what is happening are dire. I hate to see my fellow citizens throughout the world suffer, but perhaps the credit crisis can raise alarm bells that peak oil prognosticating couldn't. People can feel the impact of a credit crisis and I think it will tend to make people rethink their lifestyle habits. This is opposed to a rapid rise in oil prices like what we saw earlier this year... where people largely still failed to "get it".
You don't have to understand the threat of MBS and CDO's in order to feel the effect of falling housing prices, falling GDP, and problems getting loans. I've been listening to the radio a lot more lately since I came to depend upon it during Hurricane Ike. Yesterday an investment show was talking about problems getting car loans. They said that previously 90% of people with high credit scores could get car loans and 60% of people with mediocre credit could get car loans. Now 60% of people with high credit scores can get loans and 10% of people with mediocre credit can get loans. CNN also reported that US car manufacturers have sales that are off by 24% and even Asian manufacturer's sales are off by 31% (IIRC).
Somehow I think the credit crisis impacts people in more obvious ways which are hard to deny. When facing peak oil or, a combination of peak oil and speculation, people still didn't get it. Oil input costs are often hidden somewhat better, even though they have more serious consequences. There was always denial when it came to the idea of impending peak. A credit crisis is somehow more tangible because we can see the human suffering more easily when you or people you know are losing jobs. Unemployment is skyrocketing.
We've now entered a perfect storm... or a period of black swans that others have alluded to. All bets are off at this point, strap yourself in for a bumpy ride.
while I agree with the broader points in that article, I would point out re oil price that as soon as most wall st firms agree we are heading to $50-$60 oil we will start heading higher again. By definition if all of their price decks are $120, we aren't going to rally. These are economists after all. Look at average Wall St bank prediction on oil for past decade (or EIA for that matter). Most just extrapolate the last few months trend forward - it doesn't pay to be out on a limb because of shortfall risk of one bad call.
Severe recession or depression will have an impact. If the economic engine gets clogged up and suddenly we have a reduction in demand amounting to a 5%, 10%, 15%, or more... surely there will be an effect. The long term trend will certainly be towards higher prices, but we don't know the timetable at this point. There is a great deal of uncertainty that will come with the latest crisis.
I think the problems we're facing are systemic and in the process of widely metastasizing. A lot of investors and speculators got screwed on the upside of the oil prices earlier this year when they didn't get out early enough. Even if prices go up to $100+, how much will the economic tsunami delay higher prices? Even the oil majors can only bleed so much. I imagine we're going to see delays in some big projects that were only sound projects in an era of ever higher prices. That doesn't mean they will be delayed forever, but we could be talking about a delay of months or years in some cases (ala oil sands).
The whole question is whether the rate of decline of demand due to economic issues will exceed the rate of decline of net exports. We were already falling off the end of the production plateau. Now new projects will be canceled or delayed, increasing decline rates.
I also think the parallels with the 80s decline in demand are overstated. There are at least two major differences:
* In the 80s we had already had several oil shocks. People and businesses had finally come around to the idea that oil shortages were going to be a regular feature of life and made structural changes to accommodate it (such as changing their oil furnace for another fuel source). That's why it too a long time for demand to recover. That has just barely started this time around.
* In the 80s supplies were adequate, and a burst of production came on about the time demand declined. Of course prices crashed.
We may have a short-term (few months) in which demand declines faster than supply, but I don't think it will last long. We might have more than one such period.
Who on Wallstreet predicted Goldman Sachs, Lehman Bro,
Wachovia? Freddie or Fannie? Merril? or any of them 30 days ago?
What? No one did?...sure, lots of folks did, PO porn junkies did. Even they are amazed its happening though. Gas prices falling at the pump doesnt confuse me, no more then freezing to death and feeling so warm, most people remove their cloths and are found nude. Horses run INTO a burning barn, because it always offered protection before...and hey, their scared.
TSHTF and everyone predicted The human manure would hit the fan and expected the fan to be moving fast when the human poo hit the fan, now when TSHTF everyone ooows and ahhs like they werent expecting fireworks, when they specifically went to a fireworks display.
TED Spread at 3.85 at 3 EST - looks like the credit freeze thawed for about an hour..
Dow lost 350 points after Bill was passed, TED spread blinked and then resumed it's journey, that does not look real promising, not that I know much about finance. It won't work, Wall street could be bleating for more as soon as Oct 13.
How exactly will this 700 billion create real jobs, lower houshold debt, increase grain production, reduce global CO2 emissions.
You know: My wife & I went through a parallel experience to the USA in 1999. The financial advisers said we would have to sell our house, like hell. We sold everything else, had power cut off and lost a lot of weight whilst working hard to increase income. We are still very happy in our little house today.
Reduce expenditure and increase income are the real solutions.
May I suggest scale down military operations to reduce expenditure and grow food for export to increase income.
Your musings ?
Reducing ethanol production would probably help increase food exports.
Increasing food exports is a potentially effective national security measure also.
Nothing wrong with producing ethanol. You just produce fine ethanol, package it in fancy bottles, and sell it for $50 per liter. It's taking good land to make cheap ethanol only good for burning that's a waste.
An overly simplistic view of the economic situation.
Every source of cashflow from debt payments has been leveraged and payments on that debt leveraged, and so on and so on.
Fat guy getting on one side of the teeter totter, Skinny kid going up in the air.
Most if not all the future profit of that original debt has been pocketed.
The cashflow is slowing down and even drying up.
Future profit will not be happening so all the leveraging reverses.
Fat guy jumps off teeter totter, Skinny kid plummets to the ground biting his tongue on impact, OUCH!
Everyone on the playground saw Skinny kid bite his tongue and run in to the nurse with blood flowing down his chin so no one is willing to get on the other side of the teeter totter from the Fat guy.
Many in Congress voted to cut taxes and increase government expenditure by 700 billion by passing the Market Finance bill to bail out investment banks, banks, and foreign banks (via C-Span). Barney Frank, the head of the House Finance Committee, lead efforts to use the treasury to support fallen Wall Street fnanciers. I can recall some years ago a story was published in the Washington Post that he facilitated a gay prostitution ring. There is quite alot of dirt on this guy on the internet to this day.
The value of the dollar is now negotiable. This will probably have an effect on inflation in the long run. It will not solve the problem of some people who maxed out their credit limits not being able to get credit. Too many borrowers and not enough lenders.
I would not believe you will see $50 dollar oil over the long term. OPEC has already made their first production cut.
We just can't see $50.00 oil as some called for on CNBC today. But it is going lower. Buy ticker DUG and put your profits into alternative energy stocks. We can invest our way out of this.
Yeah, right, an ultrashort. I just got done losing a big wad on SKF, so I'm kinda skittish about that just now.
Alternative energy stocks may be hype. Show me one with high earnings growth. I cannot find one. It is the old standbys coal, oil, gas, and nuclear power that will yet be around until the resources are gone. They were generating cash flow. They were paying taxes, royalties, and hiring. They did not need a government bailout. Enron was a bad company, but most were not that bad. Solar roof PV's were fine for a tax credit, but in reality they do not seem practical and no one in my neighborhood can afford them, it is a very wealthy county. There must be dozens of algae oil investors who have lost their nest eggs after getting bad investment advice. They do not want treehouses or windmills in peoples' back yards around here.
OUCH!!!..On a day when SKF ran up nearly 10%...and you lost, thats gotta hurt! Maybe you meant you lost on SKF because you got in sometime ago (say 3 months)
or 2 months or 1 month...yeah its taken a beating.
So has everything though. Gold is on the skids. Where you gonna hide when PO comes for you?
Silly me, I just missed selling when it hit its all time peak of around $200. I thought perhaps it would have another peak, what with banks falling like dominoes, so I waited. Then they announced the financial short-selling ban. The managers of SKF announced that they would go along and not issue any new shares (which does not mean existing shares could not continue to go up and down). In disgust and frustration, I just dumped it. Yes, I know it's rising a bit now, I let my emotions override common sense.
And, I don't know. Maybe in the woods somewhere north of here (Texas is too hot)...
Not sure if this has been mentioned..what I'd call 'the affordability window for clean tech'. An economy needs capital to transition from fossil fuels to renewables, built efficiency and nuclear. Interest rates need to be low and the amount of principal available needs to be large.
Specifically loan interest rates should be less than the reciprocal of the payback period. If you spend whatever amount (let's say $100,000) on solar panels it may take 8 years to recoup the embodied energy. If the loan rate was 12.5% you could have invested that capital to get $12,500 a year to buy electricity from the utility. Therefore there is little incentive to buy solar panels. But if the loan rate was 5% you could have bought only $40,000 of outside electricity over that 8 years and the panels make more sense financially. We want r less than (1/payback).
If interest rates rise and capital supply shrinks that may make it harder to create the energy sources to replace fossil fuels. Think of it in calorific terms; when the mother wolf is too weak to hunt then her cubs die also.
Boof, you know what the flaw in your arguement is? Nobody guarantees you today's rate for electricity for 8 years. Utilities are voracious issuers of bonds. They go out and issue a bond for thirty years and build a nuke with the money and pay the bondholders with the electricity revenue. So say the interest rate goes to 12.5%. Then the utility goes to the state capital to get a juicy rate hike to pay the bondholders. The electric utility is guaranteed to cover their costs with a profit margin added.
Affordability window? $800 Billion sort of ate that cookie. Still, Technology Review, in their naming of the Kalashnikov as the "technology winner of the 20th century" quoted a price of about $10 - $15 each. Chump change , to mass produce and distribute to everyone in the US along with ammunition - the Chavez plan. I don't know what Al Gore would think; he's talking of "civil disobedience" at the next coal plant, not "uncivil disobedience" widespread. The grocery store clerks here in Gray, Maine are not listening to Al; they are talking about the need for a "revolt". But that's why we have NorthCom and active US Military on US soil; to prevent such a mistake. Thank god for the military; it's a good thing they are supporting our representatives and the fine work they are doing for us. I'm glad to see they are thinking ahead.
Got a fat and happy banker friend? Thank the Democrats this next election. Mother wolf.
cfm in Gray, ME
Regarding the story above about the Georgia Municipal Gas Company, I believe Tallahassee was also a purchaser of these bonds through Lehman Brothers. It may be a coincidence, but Monday this story broke: Electric bills to rise beginning Wednesday
Linked at Mish's website:
http://www.minyanville.com/articles/index.php?a=19326&refer=socialpicks.com
Five Things You Need to Know: Bailout Passes, Stocks Limp
"No one in politics can accept the reality. . . "
Of course, this is even more true when it comes to finite energy supplies.
Overall RE is the USA is overpriced, but I would disagree with the guy's conclusion that Hank Paulson does not realize this-of course he has known this for a very long time. The "bailout" specifically puts no controls on financial institution behaviour-if the USA government actually wanted more domestic lending, then domestic lending would be specifically subsidized. This bill allows the Treasurer to transfer taxpayer funds to certain institutions of his choosing but puts no onus on said institutions to increase lending-the bill appears to have been designed to specifically loot the treasury under the guise of an attempt to increase system liquidity. My guess is that within a relatively short time the story will go out that the program is not working because 700 billion is far too little and the tab will have to be increased greatly. Just a quick example:lets say we wanted to try to prop up the housing market-just put a 50% premium on all interest expense related to residential housing and make it retroactive for the 2007 tax year-start mailing out the refund cheques, and announce that this is permanent until further notice. The more people owe on RE loans, the bigger the cheque they will receive. This immediately gives RE values a shot-I am not advocating this as an economic plan, just pointing out that there are a lot of things that could be done to quickly shoot up the RE market if that was the intention. Paulson's scheme in no way is designed to help boost RE prices. Another plan off the top of my head would be to offer permanent residency/green cards for anyone without a criminal record with the condition that e.g. $300000 is invested in USA real estate and held for a period of 10 years. My point is that in no way are they even attempting to boost the RE market-they just want the money.