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Good Evening: Today’s action in the capital markets did not appear very remarkable on the surface, but it did reveal once again that investors are (for now) willing to be patient with worsening economic fundamentals. The minutes of the last FOMC meeting seemed to reassure the markets that the Committee would keep their collective feet on the monetary gas pedal for as long as they deem necessary to ensure an economic recovery. How long market participants may have to wait until this blessed day arrives was missing from the text.

U.S. equity futures had a modest bid prior to this morning’s open, and the major averages popped for gains of between 0.5% and 1% shortly after the bell rang at the NYSE. A trio of economic data points hit thirty minutes into the session, and the numbers were almost uniformly weak (see below). Factory orders were expected to take a 2.5% hit, so the report showing they dropped 4.6% was definitely unwelcome, as was a much weaker than expected pending home sales figure for November. If housing is still at the epicenter of what ails our economy and financial institutions, then there was no relief to be found in this forward-looking report. The lone bright spot was the ISM services survey, which, while weak, wasn’t as feeble as had been feared.

Stocks eased back to the unchanged mark and even went red for a short spell before trading mostly sideways until the FOMC minutes were released (see below). I must have misplaced my rose-colored glasses because I didn’t see much hope in the text. Perhaps it was enough for market participants to know that the Fed is on the job, and they pushed equities back toward the highs for the day in response. A small bout of profit taking reduced those gains by the closing bell, leaving the averages up between 0.7% (Dow) and 2.5% (Dow Transports). Treasurys were down again this morning, but they managed to stage a small comeback after the FOMC release. Yields fell between 1 and 4 bps as the coupon curve flattened a smidge. The dollar continued its 2009 advance, and, once again, commodity prices rose in spite of the firm greenback. Energy prices fell back after an early rally failed, but there was more than enough strength in the grain and metals complexes to boost the CRB index by just more than 2%.

It may be a stretch to say there was a message embedded in today’s market action, but it appears the forces of belief are still in ascendancy. Since the November lows, the economic data has only gone from bad to worse. And yet, stocks have rallied (26% and counting in the S&P 500, while the Russell 2000 is up a hefty 38%), Treasurys have pulled back a bit, credit spreads have inched in, commodities have risen off the mat, and volatility (especially the VIX) has headed south. Perhaps the minutes of the FOMC meeting offer a clue as to why investors are edging back into riskier assets. The Fed’s moves back in December were fairly bold; it seemed at the time they were going “all in” to fight the economic fallout from the financial crisis. But the minutes released today had in them a whiff of panic, and it is precisely that fear in the Eccles building that comforts investors. Toss in President-elect Obama’s stimulus proposal, and market participants seem to be hoping are troubles will be behind us come summertime.

Even currency traders are currently voting this way, and the emerging consensus is that the U.S. will be the first country out of the financial and economic morass in which most of the globe is now mired. It could indeed play out this way, but I think it is too much to hope that we simply sail ahead from here. Disbelief will once again rear its ugly head, challenging Bernanke & Co. and thus forcing investors to consider less rosy outcomes. If the Fed, as BofA/Merrill’s David Rosenberg points out, is “writing off 2009″, then it’s not too hard to imagine investors losing patience at some point. A big test looms with this Friday’s unemployment report. If the U.S. manages to misplace another 500K+ workers, those believing in a second half recovery will probably at least scan the room for the nearest exit door. A less gruesome figure, however, might lead to another leg up in the rally now under way. I’ll retain my friendly bias toward risk assets for now, but I think prudence demands that I do more than keep an eye on the exits. By Friday, I’ll be standing right next to one.

– Jack McHugh

U.S. Economy: Service Industries, Pending Home Resales Decline

Manhattan Office Rents Fall Most in Two Decades

U.S. Federal Reserve Meeting Minutes for December 16 (Text)

Writing Off 2009

This morning, I caught the Shrill Blond Harpy on CBS.

I have no patience for her absurdities, and I won’t mention her book by name.

However, I will reference this not-safe-for-work blog posts, which I find to be utterly hysterical:

I f&*% ANN COULTER IN THE ASS, HARD

Back in Ann Coulter’s Ass-Saddle Again

Enjoy them at your leisure . . .

Nate's interview on the Reality Report from December 29 is now available from Global Public Media. I think it is very good. According to the write-up:

In this edition of The Reality Report host Jason Bradford interviews Nate Hagens. In a show broadcast over a year ago Nate described the financial deleveraging process and how this could lead to commodity deflation, including "$50 oil."

Topics in this program highlight how the current financial melt down and impact the timing and severity of peak oil and natural gas--including the dreaded "natural gas cliff" as rigs go idle due to low prices. We discuss whether this means economic growth now over, and if so, how should societies adjust?

This is a link to the site where you can download or stream the talk. It is about 50 minutes long. (Per Jason: If you could ask TOD readers for help with GPM transcription services that would be handy. If interested/able they can contact laurel@postcarbon.org)

Geopolitical commentator John Batchelor explains to Simon Constable of Dow Jones Newswires why speculation about a U.S. breakup is wrong, but that America is still a country in decline. (Jan. 5)

1/5/2009

The Fed seems a bit concerned about the horse now that its out of the barn . . .

“The information reviewed at the December meeting pointed to a significant contraction in economic activity in the fourth quarter. Conditions in the labor market deteriorated considerably in recent months as most major industry groups shed jobs.

Private payrolls continued to fall at a faster pace than earlier in the year, and the unemployment rate rose to 6.7 percent…The housing market weakened again as construction activity, new home sales, and home prices declined further. In the business sector, investment in equipment and software appeared to continue to contract.

Industrial production fell markedly in November after sizable declines in the preceding two months. The recent contraction in industrial output was broadly based…

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories.

Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods…

Real construction activity continued to decline in November. Single-family housing starts and permit issuance fell further…

In the business sector, investment in equipment and software appeared to be contracting at a faster rate in the fourth quarter than during the third quarter…

As financial market conditions worsened over the intermeeting period, investors seemed to become more concerned about the likelihood of a deep and prolonged recession…

Source:
Minutes of the Federal Open Market Committee
December 15-16, 2008
http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20081216.pdf

I suppose I should start this by saying that it’s hard not to like Art Laffer. He’s affable and sincere.
His extreme supply-side ideas are kind of quaint and even entertaining. Last night he was on Fast Money, but his comments weren’t so funny anymore.

The segment was on the proposed Obama tax cuts. Laffer didn’t think much of them. Instead, he wondered aloud, what if the government proposed a 6-month income tax moratorium: how great a stimulus would that be? After all, Laffer reasoned, freeing citizens from the undue burden of taxes would get them all out working harder and spending money.

Really? Did anyone on the panel believe that Americans of all income levels are sitting on the couch–or lounging out by the pool–instead of working because they’re unhappy with their income tax? They’re knocking off early because the marginal rates are too high and they’d prefer the leisure time to the minimal extra money? Fascinating. Unemployment moving toward double digits and the greatest white-collar restructuring in 15 years all because of onerous income taxes?

Sure, he’s a guest on the show–they’re being polite, right?–but not one of the traders said a word about this preposterous idea. They just nodded their heads in agreement and kept the bobbing up as Laffer launched into his idea that capital gains should not be taxed at all.

The slam against the Obama cuts was that the money would go into the mattress, not stimulate the economy. After all, that’s what happened with the Bush stimulus checks. Fair enough. But why would the wealthy be any different? Cut their income tax or capital gains and they’ll put the money in the mattress right now too.

Not that cutting the capital gains tax would do anything to move money off the sidelines. Where would it go? What productive use would it be put to?

I’d share the segment with you but there’s no clip of his appearance on the CNBC site and the short post on the segment on Fast Money’s page is covered by an instrusive pop up. Maybe they’ve finally gotten a sense of shame for promoting this voodoo.

If you missed John Mauldin’s weekend piece (2008: Annus Horribilis, RIP), have a look at these estimates for earnings in 2008. They started at $92 (early ‘07) and came down to $48:

>

Not exactly confidence inspiring when it comes to stock analysts.If you want to understand why we prefer to rely on objective data rather than analysts, this is the precise reason.

On a trailing one-year basis, that puts the Price to Earnings Ratio (P/E) at over 19 as of today. This does not make the market cheap.

And what about 2009? Again, the analysts are in a race to find the bottom.

>

The current projections are for $42.26 for 2009. That makes the forward P/E 22. That doesn’t look like value at all, when the historical average is closer to 15.

In 2001, as-reported earnings were $24.67. Operating earnings in 2002 were $27.57. Does anyone think the current recession will be milder than the last one? Or shorter?

>

Source:
2008: Annus Horribilis, RIP
John Mauldin
http://www.ritholtz.com/blog/2009/01/2008-annus-horribilis-rip/

Mr Mortgage is a 20-year mortgage banking veteran, specializing in wholesale and correspondent sales and sales/operations management and bringing financial institutions into new lending markets. His primary focus was upon Agency, Jumbo, Alt-A and FHA insured residential mortgages.

Since 2006, his primary focus has been upon his work as an independent finance and real estate sector analyst, consultant and ‘risk enlightener’ to investment funds, banks, mortgage bankers, financial institutions, the public sector and the media.

His 20-years industry experience, extensive research and access to proprietary data few have available has led him to make an extraordinarily large number of early and accurate predictions about the ‘Great housing, mortgage and credit meltdown’ and company-specific events.

He owns and is the primary contributor to one of the leading online mortgage/housing internet properties called Mr Mortgage’s Guide to the Truth located at http://mrmortgage.ml-implode.com

~~~

Mortgage and housing are back in the spotlight like never before. Everywhere you look there are silver linings, lights at the ends of tunnels and ‘mustard seeds’ of hope. This is all great — I encourage hope as a broader theme in life. But ‘hope’ should not be the primary metric in an important business or investment decision — most analyst and media have based their mortgage and housing analysis primarily on ‘hope’ for the past two years.

Since conforming mortgage rates (= or <$417k) fell from 5.875% - 6.125% in November to the 5.25% - 5.5% range today, there has been increasing hype surrounding the weekly mortgage applications survey. In the past, this has been a decent measure of future refi and purchase loan fundings but not any longer.

In mid-December, a weekly release was put out that citing results that compared with 5-years ago. The bottom calling rush was on. The end result was scores of media, economists and analysts calling for the ‘great refi-boom’ to carry the nation out of its housing crisis and onto great things.

Of course, the primary thesis was that ‘if the refi market is at the same pace as 2003 then what followed 2003 in housing, mortgage and the macro economy may follow’. This is not the case. The fact is that refi loan application counts are far fewer than 2003 levels and actual loan fundings far less than that. Data being represented in this manner have led to several disappointments over the past two years. The fall out makes for less trust and weaker markets.

Does anyone really believe that with 60% of CA, AZ and FL home owners and over 90% in NV in or near negative equity that refi’s can be anywhere near 2003 levels?

By virtue of the headline number being ‘near 2003 levels’, it highlights the imperfections with the survey. Remember, at the end of 2003 the nation was in the midst of a mad refi and purchase boom and the first few innings of the ‘Great Bubble’. Rates on intermediate-term interest only ARM money were in the 4%’s, fixed were in the 5%’s. Everyone could get and loan because of easy qualifying and stated income and there was no negative-equity — 70% to 80% of all loan applications actually funded compared to 35% to 45% today.

Mortgage applications have increased in recent weeks and subsequent fundings will as well…there is little doubt about that. Some will be able to do well taking advantage of today’s low rates, which is great for those individuals. But is putting the home owner who is already in a great position into a little better position really going to do much for the broader housing market and economy? The fact remains that for the majority, those that don’t need the credit can get it and those that do can’t.

Housing is in the perfect credit crisis storm; one which low rates alone can’t ‘fix’ nor provide much protection. Mid-year 2007 when it was plainly obvious that unless something was done immediately the fall-out could be devastating — this measure may have made the difference between a housing recession and absolute implosion. Instead we heard ‘contained’ rhetoric for over a year.

Now with home prices at the median down 50% in the bubble states so vital to the nation’s economy and $9 trillion in guarantees made to most every other sector but residential real estate, the move is a day late and 5% short. As a matter of fact, even if rates were zero, it could not help the borrowers that need it the most.

The TRUTH About Mortgage Applications

The weekly survey only covers the top 10 lenders by volume

Back in 2003 through 2007, there were hundreds of national lenders. The top 10 were a driving force then but today the top 10 do the lion’s share of all loans. Therefore, even though the top 10 lender’s volume maybe equal to 2003, total national application volume is far less.

Portfolios shift from one lender to the next as rates fall - double, triple, quadruple counting

Most banks will not just roll-down a rate lock to current market if rates tumble after the borrower locks in. Some will but at a large fee. Rates tumbled a few separate days on news events in December and then backed up over subsequent days. On days when rates tumble, borrowers and brokers re-lock their loans with other banks in order to get a rate better than the one they have locked in — entire portfolios can switch lenders multiple times.

Therefore, much of last week’s jump in mortgage applications was much of the previous month of already counted loan applications switching to different lenders for the best rate. Many borrowers have four or five loan applications going with different banks simultaneously. These are all counted in their respective weekly surveys.

With three to four week underwriting and six to eight week total turn times to get a loan done right now, borrowers and brokers are not loyal to the lender at which their loan is in process making it very easy to switch. Ironically, a major reason for the long turn-times in getting a loan done is because of the long-turn times. Obviously, banks can lose a lot of productivity and revenue when losing loans worked for weeks during these volatile times. Additionally, when banks have no clue about what in their pipeline is real or what will actually fund, it is nearly impossible to hedge with any accuracy and can lead to incredible losses.

Loan applications do not necessarily lead to fundings. The overall fall-out rate is at an all-time high.

Back in 2003-2007 due to the variety of loan programs and easy approvals, 70%-80% of all applications actually funded. During these times, tracking the weekly survey was valuable. Now, 35-45% fund. Even less fund when rates are highly volatile due to the reasons explained in the previous bullet point.

The primary reasons for fall-out during 2008 were because a) the property value is too low b) the borrower does not qualify due to today’s sensible standards c) the rates are not really as low as the borrower has heard advertised by the media for their specific case d) and there is nothing in the Jumbo arena that makes sense for anyone.

Middle-market mortgage bankers are not pulling their weight leading to fewer fundings - they may never be able to

From HousingWire - As Refi’s Swell, Is There Enough Credit

The volume of warehouse credit providers has fallen recently from 30 to about 10, according to an article featured last week by American Banker, raising the question as to whether there is enough warehouse capacity to handle a refinance boom that has clearly surfaced in the past week.

“[I'm] not sure what mortgage companies are going to do, but there is no way all these loans will get funded any time soon with no warehouse money,” said one of HW’s sources, a mortgage banker who spoke on condition of anonymity.

A better gauge of mortgage applications

Lastly theMaxx, a research firm that I rely upon to gain more clarity on the real mortgage application counts, confirmed my research in its 12-22 issue. TheMaxx eliminates all multiple applications. They show applications only up 1.4% week over week. More importantly, theMaxx is at 158 today after this surge in applications and got in the 300’s back then. When you consider that back then 70-80% of all applications funded and now 35-45% fund, you see how bleak the picture is. Apples to apples, actual refi loans are down at least 60% at best.

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In summary, The reporters covering the weekly survey must be getting analysis and PR help from the now infamous Lawrence Yun or David Lereah. This is just another example of why you have to throw out everything you thought you knew about mortgage and housing — very little that excite the markets are actionable in reality. -Best Mr Mortgage

PHSI, Annual % Change, 2002 - 09

>

The Pending Home Sales Index fell 5.3% below November 2007 when it was 86.9, based on contracts signed in November. Monthly metrics fell also (4.0%) but it is the annual numbers that are most significant in the PHSI.

Peter Boockvar of Miller Tabak adds: “November Pending Home Sales fell 4% m/o/m, above forecasts of -2.3% and October was revised down by .9% to a drop of 6%. The Fed’s announcement to buy MBS directly occurred at the end of Nov and thus the subsequent drop in mortgage rates didn’t influence the data much and based on the Mortgage Bankers Assoc data seen over the past 6 weeks, only a reaction in refi’s has been seen and not with purchases. The true test of the government experiment of bullying mortgage rates lower and possibly fixing them at 4.5% will come in the Spring when historically half of all the year’s sales take place.”

>

Source:
Economic Slump Weakens Pending Home Sales
NAR January 06, 2009
http://www.realtor.org/press_room/news_releases/2009/01/economic_slump_weakens_phs

Pending Sales of Existing Homes Fell 4% in November
Bob Willis
Bloomberg, Jan. 6 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajuRLTKaEKm4&

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:

~~~

Taking a look throughout history at years following outsized declines

I don’t think I am alone in saying good riddance to 2008. A yearly decline of 38.49% for the S&P
makes it the 3rd worst year of all time, trailing behind the 47.07% bloodbath of 1931 and the 38.59%
decline in 1937. At the same time, simply looking at yearly declines doesn’t tell the entire story of a
market decline. Yes, 1931 was down 47.07%, an incredibly horrific decline on its own, but that year’s
decline was only part of a near 90% decline for stocks off the peak in 1929. Markets declined 17.37%
and 29.72% in 1973 and 1974 respectively, however neither number tells the true story of the 44%
decline that nearly chopped the S&P in half over those two years. And while 2008 will forever be
remembered for, among other things, being the 3rd worst yearly decline for the S&P, the bear market
peak-to-trough decline of 52% tells a much fuller story of the carnage and fear that pervaded for so
much of the year.

But we all know this already. What we don’t know is how 2009 will look and with so much
macroeconomic uncertainty hanging over the markets, a housing market that refuses to get better and
two more quarters of earnings contractions expected, the horizon is cloudy at best. But this isn’t
stopping strategists from around the street from making their annual predictions for the coming year.
In fact, Bloomberg has compiled the estimates from eleven of the largest brokerage houses which, on
average, expect a 17% rise in the S&P for 2009. UBS is looking for a 44% gain, JP Morgan is looking
for a 22% gain while only one, Barry Knapp from Barclays is looking for a decline of any amount,
3.2% in his case. Of course according to the article, none of these eleven strategists predicted any
decline for 2008 so there is some skepticism regarding their 2009 predictions.

I then asked myself a series of questions. Does this make sense? Only one expects a decline of any
amount in 2009? Does the market even go down two years in a row? It just did, earlier this decade,
but does it normally?

With that in mind, I took a look back at every single year for the S&P or its equivalent going back to
the 1920’s to see how markets reacted in the period following a year of any decline whatsoever as well
as outsized declines. Of course it should go without saying that past performance is not predictive of
future performance, however it is interesting to peruse historically similar instances to see what
occurred in similar situations.

The U.S. capital markets have opened 2009 with what seems to be an emerging consensus of an economic recovery of some sort in the second half of the year. Heeding Warren Buffett’s advice not to wait until they can hear the robins (lest spring will already have sprung), investors spent Friday and part of today positioning themselves to be “in” ahead of what would be a very welcome revival in economic activity. But, as BofA/Merrill economist, David Rosenberg, points out, this consensus view might be too early.

Friday’s across the board gains of 3% or so in New York helped push stocks higher in Asia this morning. Most of the bourses in Europe, however, could only manage to hover with modest gains as the opening bell approached in New York . U.S. stocks then opened lower, consolidating the gains registered during the previous three trading sessions. Construction spending figures for November were released thirty minutes into the day, and while they were down 0.6% month over month and 3.3% year over year, the news was actually better than had been expected. Equities proceeded to rally back toward the unchanged mark in response, a level they spent ducking over and under for the next few hours. Stocks headed back to the morning lows as auto sales dribbled out. Like construction spending, auto sales were weak (GM’s sales were the worst in 50 years — see below) but slightly above expectations.

A minor rally into the closing bell left the major averages down for the day, with losses ranging from -0.9% (Dow) to -0.2% (Russell 2000). As they have for the past few days, Treasurys and credit spreads continued to exchange places with each other compared to their performance in 2008. Despite well behaved short dated issues, long dated Treasurys were simply abandoned. The 30 year bond was hit for more than a five point loss (+23 bps in yield — causing 2’s to 30’s to steepen by almost 30 bps — see below), while mortgage and corporate yields fell. The dollar reversed its recent weakness and rallied more than 1% today, but the levitating greenback didn’t hurt commodity prices. The common theme keeping both aloft seemed to be hopes for the Obama stimulus package, as well as disquiet in both the Middle East and between Kiev and Moscow . Despite a 2% drop in precious metals, the rally in the energy complex enabled the CRB index to finish with a gain of almost 1.5%.

Would it surprise any reader to learn that, even after their optimistic forecasts for 2008 came a cropper, economists and strategists in Wall Street were optimistic in their assessment for 2009? This once burned, twice not shy outlook comes courtesy of the standard, post-WW II playbook for recession-wracked markets. Since the 1930’s, the Street’s standard operating procedure for investing during a recession calls for investors to buy stocks after a big decline but well before an economic recovery takes hold. This S.O.P. takes on added urgency if the Fed is aggressively cutting interest rates and if the government is proffering stimulus packages. All of these factors are presently in place, so shouldn’t the prudent investor concur with both Warren Buffett and the endless parade of guests on CNBC who tell them, in essence, that “history is on the side of those who would invest now”?

“No”, is the advice of BofA/Merrill Lynch economist, David Rosenberg (for his list of reasons, see below). Go back a little further in time for historical guidelines, says Mr. Rosenberg, and one will find that economic downturns caused by broken credit bubbles are very different animals than are inventory-based recessions. He thinks that rate cuts and stimulus efforts will help cushion the blow, but he deems the negative wealth effect from falling equity and real estate prices to be an over-arching negative for the U.S. economy in 2009. In addition, Mr. Rosenberg draws comfort from being nearly alone in his pessimism. In his view, consensus forecasts for a second half recovery and gains of 15% or so in the stock market will be just as wrong this year as were consensus forecasts for S&P 1600 last year. While Mr. Rosenberg makes a persuasive case, I think the crowd stands a chance of being right for a short period as 2009 begins. Thinking investors will believe in the post-WW II playbook and turn a blind eye for now to the worsening economic outlook was why I turned short term positive before the end of last year. I do expect Mr. Rosenberg’s views to eventually play out; I just think he, like investors buying stocks during today’s session, will prove to be just a bit too early.

– Jack McHugh

~~~

U.S. Stocks Retreat on Earnings Concern; AT&T, JPMorgan Decline

GM’s 2008 U.S. Sales Dive to 49-Year Low on Recession

U.S. 30-Year Bonds Drop Amid Concern Debt Sales to Reach Record

Don t know much about history .pdf

In this post, I consider some major issues contributing to our current financial problems, before making a financial forecast for 2009. These are

1. Why so many asset classes are so highly correlated in times of distress. This chart gives my interpretation of part of the problem.

Figure 1
2. Why growth is essential for keeping the current debt-based financial system operating.

3. Where we are now, and the role reduced resources (including peak oil) are likely to play as we go forward.

4. My forecast for 2009.

We keep hearing about plans to stimulate the "consumer" to buy more. Until I stopped to think about it, it wasn't obvious to me that the consumer (or perhaps I should say, ordinary citizen), and his ability to purchase goods and services are key to keeping the whole system going. These connections include:

1. Adequate income is needed for a citizen to repay the debt he already has.

2. Some of the "higher level" debt in the tower in Figure 1 is simply debt from one of the lower levels, recycled on someone else's balance sheet.

3. Revenues from ordinary citizens support the businesses and governments that have loans higher up on the "tower", and are critical to these organizations' ability to repay their own debt.

It is only when the system is under stress, and shortfalls in income of the ordinary citizen start shaking the system, that these connections becomes clearer. Let's look at the debt shown in Figure 1 by layer, starting from the bottom:

Layer 1. Household Debt (Mortgages, auto loans, credit card debt, student loans). Adequate income is needed for citizens to repay these loans. Also, if ordinary citizens have adequate incomes, this helps to keep demand for houses up, which in turn helps to keep the prices for houses up. These higher prices allow citizens to borrow more against their homes, and use this revenue to purchase even more, helping prop up businesses from which they buy goods and services. If the prices of homes drop because of inadequate demand, huge problems develop, as we are now acutely aware.

Layer 2. Debt of Non-Financial Businesses. This would include loans for companies like GM and Ford and mortgage loans for restaurants. It might include debt for casinos, and debt for church buildings. All of these businesses are directly or indirectly dependent on wage-earners having enough money to buy their products, or contribute their Sunday offerings, in order that they can repay their loans. Even if a business only sells its service to other businesses, it is a part of a chain of businesses that at its base is dependent on customers buying its goods and services.

Layer 3. Debt of Financial Businesses. To a significant extent, this is just recycled debt from the first two layers. What happens is that an individual or business borrows from a financial institution, for example a commercial mortgage or credit card debt. The financial institution repackages the debt (sometimes first slicing and dicing it) and lays it off again. If one of the first two layers defaults, then the third layer is likely to default as well.

Layer 4. Debt of State and Local governments. In a way, these governments are service providers. They collect money from their citizens one way or another (property tax, sales tax, tolls on roads, lottery tickets) to pay for the services they provide. If citizens are laid off, or are working for lower paid jobs, they will pay lower taxes to the state. Also, if the citizens don't bid up the prices of houses, it is difficult to collect as high property taxes on them. Some of a state's services, like unemployment compensation and health services for the poor, may increase in bad times.

Layer 5. Government Guaranteed Mortgages. This is just a recycled version of part of the mortgages in Layer 1, including those held by Fannie and Freddie, and those indirectly guaranteed by Fannie and Freddie. If the Layer 1 mortgages default (or are reduced because of "cram down" provisions), Layer 5 mortgages will almost certainly have problems as well.

Layers 6 and 7. Different Versions of Federal Debt. The Federal Government obtains most of its revenues from taxes of individuals. If citizens are earning less money, it is difficult to continue collecting as much taxes. Some of the taxes come from businesses, but to earn money to pay taxes, businesses have to sell some goods or services to the public. If citizens are short of funds to buy goods and services, the profits of businesses will be lower, and the revenues from taxes on these businesses is likely to be lower as well.

Layer 8. Unfunded Medicare / Medicaid. These are promises made to individuals that will eventually have to be paid for by someone. Ultimately, the funding for these will have to come from taxpayers, which for the most part are ordinary citizens.

Layer 9. Unfunded Pension Plan Amounts. Pensions are funded by a combination of investments in bonds, stocks and other securities. To the extent that these securities have performed poorly, there will be a shortfall in funding. The events of the last year will cause many pension plans to be in poor shape, because they hold debt shown in the tower in Figure 1 and some of it is defaulting. If additional contributions from the organization setting up the pension plan become necessary, these funds will ultimately have to come from a taxpayer (if it is a local government) or a purchaser of goods or services (if it is a business).

The above list relates only to debt and promises to pay, but other financial assets are affected as well. The value of stocks is likely to decrease if people aren't buying a company's goods and services because of inadequate income. Insurance companies will have financial difficulties, because they tend to hold many bonds which decline in value as defaults increase. Hedge funds hold a mixture of asset types, but are also likely to be affected. Derivatives vary in what they cover, but some of these will also be affected by debt defaults related to inadequate consumer income. While this list is not exhaustive, it gives an idea why inadequate income by the ordinary consumer is likely to ripple though the system in many ways.

I would note too that there are a lot of feedback loops in the tower. When things are very good, the feedback loops tend to make things look very, very good (higher wages-> higher spending -> profitable businesses -> more hiring -> rising home prices -> less need for government programs). These same feedback loops work the opposite direction when things are bad (layoffs, for example), making a bad economic scenario truly terrible. The huge tower is also expensive to maintain, and takes resources from productive uses, like building infrastructure and new factories. As more and more layers are added to the tower (like TARP), the tower becomes more and more unstable, and more and more likely to have big reactions to small events.

Perhaps the easiest way to see that growth is essential to repayment of debt is to think about the government's borrowing to bail the United States out of our current financial predicament. As with the vast majority of debt, the debt is not really for an investment that will add value in any real sense (more goods and services manufactured). Instead, it represents time-shifting of payments to the future, with an interest charge for this time shifting. In the case of the government spending, it is not even clear that all of the spending will be particularly beneficial. When previous stimulus checks were sent, some of the money was spent on goods imported from China, helping the Chinese economy. Also, some of the additional borrowing ended up in the pockets of high-paid financial executives who likely will not spend it on another car or house, since they already have more money than they are able to spend.

Think about the additional debt from the perspective of a typical wage-earner. Suppose the typical wage-earner's income is 100 units in 2007, 105 in 2008, 110 in 2009, 115 in 2010, 120 in 2011, and so on. If the government spends the equivalent of 10 units on the bailout (the wage-earner's share of the total), and gives the wage earner 3 units of it back as a stimulus check in 2009, the wage-earner's 2009 income will equal 110 + 3 = 113 with the stimulus check. It should not be too onerous a task to pay the 10 units back through higher future taxes, since the wage-earner's income will be higher in future years, and he can use part of that increased income to pay the 10 back. With interest, the total amount to be re-paid may amount to 11 or 12 or 13, but even this may not be too onerous, because of rising income. Additionally, there may be the possibility of "rolling the debt forward", and not really repaying it, saving it for society's grandchildren, since it looks like the future is getting better and better.

Suppose on the other hand that the typical wage-earner's income is 100 in 2007, 98 in 2008, 96 in 2009, 94 in 2010, 92 in 2011, and so on. If the government spends the equivalent of 10 units on a bailout, and gives the wage-earner 3 units of it back as a stimulus check in 2009, the 3 units added to the 96 units will bring the wage-earner almost back up to where he was in 2007, (since 96 +3 = 99). The difficulty comes in paying back the 10 (or 11 or 12 or 13) units, because these will need to be subtracted from the wage-earner's lower future income, putting him in progressively worse financial shape. Also, the possibility of "rolling the debt forward" is likely to go away, since those buying government bonds will figure out that in 2020, when the typical wage-earner's income is down to 74, the chance of the wage-earner using part of that income to repay the debt from 2009 is pretty poor.

Because of these issues, the amount of debt a declining economy can support is much lower than the amount a rising economy can support. It seems to me that if there is no interest to pay, time shifting works well in a flat economy (as in 5,000 year ago). If there is interest to pay, time-shifting works as long as the growth rate is equal to the "real" interest rate. If there is a long-term decline in the economy, (something never really experienced in the past), time shifting generally doesn't work well.

If an investment truly generates a return rather than simply time-shifts (a factory rather than a mortgage), it may be possible to use debt in a period of economic decline, but interest rates will need to be much higher (quite possibly 15%+) because of a much higher risk of default. Such high interest rates are likely to make most potential investments no longer profitable. As a result, I would expect that the total amount of debt in a declining economy would be much less than today--probably less than 10% of the current total debt load.

Figure 2. Household debt outstanding and employee compensation since 2000. Household debt from economagic.com. Employee compensation from US Bureau of Economic Analysis. Adjustment to 2000 $ made using US GNP deflator.

This graph gives an indication as to the problem. Employee compensation has been fairly flat since 2000. The situation for many employees is likely quite a bit worse than what the graph would suggest when one considers that (1) the wages I show in 2000 $ are adjusted using the US GNP deflator, and the actual inflation rate is likely higher, so the trend in wages in 2000 $ is likely lower than that shown; (2) the increase shown includes population growth of about 1% per year rather than being on a per capita basis; and (3) pay changes have not been the same for all employees. In general, higher paid employees have tended to fare better than the rank and file (rising Gini Coefficient). Now that major layoffs are starting, the situation is worse than shown on the graph. Taxation policies have tended to reinforce the trend toward lower spendable income for the middle and lower classes, with most tax cuts since 2000 favoring the wealthy.

The reason the economy appeared to do quite well between 2000 and 2007 was the increase in household debt. With greater debt, families were able to buy more from business, keeping businesses profits high. Prices of houses also rose. The higher home prices allowed people to remove more equity from their houses, and use this equity to spend even more. In addition, the stock market was rising in 2002 to 2007, also contributing to the feeling of wealth.

The amount of additional spendable income available from (1) the increasing debt and (2) the money people could take out from the equity on their homes was truly phenomenal. Figure 2 indicates additional debt amounted to about $1 trillion a year. Also, as the value of homes inflated, people were able to refinance loans and use the additional cash to for buying other goods. The amount of home inflation was of the order of magnitude of $1 trillion a year, and this was available to homeowners to extract, theoretically making a total of up to $2 trillion a year. Funds available in these two ways (higher debt and equity extraction) were generally not subject to income tax, so the impact was even greater than if they had been added to wages. Employee compensation during this period was only $6 to $8 trillion a year, so the impact was very large.

Figure 2 shows that there was a sharp change, starting in late 2007. The total amount of household debt flattened, cutting out the less credit-worthy from buying more goods. Other factors not shown on the graph also had an effect. The prices of food and energy products rose, putting a strain on the finances of families, and causing debt defaults. In addition, homeowners were forced to stop padding their spending by taking more equity out from the value of their homes, because by then the value of their homes was falling, rather than rising. All of these factors provided a sharp contrast to the very favorable dynamic that existed when household debt was rising rapidly.

I expect that Greenspan and other financial leaders engineered much of the debt-driven growth in the 2000 to 2007 period when they realized that underlying growth rate was very low. Now we are hitting the "no free lunch" time. The attempt to pump up growth in the 2000 to 2007 period using additional debt could only produce a temporary fix, and that fix is falling apart. The fact that wages weren't really growing much in "real" terms suggests that there was an underlying problem that more and more debt could only temporarily disguise, but could not really fix.

A big piece of the problem is that energy consumption in the US has not been growing very rapidly since 2000, and we know from the work of Robert Ayres and Benjamin Warr that there is a close tie between energy use, increase in energy efficiency, and economic growth.

Figure 3. US Energy Consumption in BTUs, based on EIA data. Other (barely visible) includes geothermal, wind, and solar. Biomass includes wood and ethanol.

Between 1985 and 2000, US energy consumption (all fuels combined) grew by an average of 1.7% per year; between 2000 and 2007, US energy consumption grew by an average of 0.4% per year. On a per capita basis, energy consumption was actually declining between 2000 and 2007. Energy consumption through September 2008 is down about 2% from 2007 (about 3% on a per capita basis).

Another part of the problem is that a larger and larger share of US energy consumption has been coming from imports (Figure 4), and the US has been becoming less and less able to pay for these imports, as evidenced by its ballooning balance of payment deficit. If the US had been able to import energy, use the energy to produce products that were worth a great deal more, and export those products, the US would not have had this problem.

Figure 4. US Energy of all types, split between US produced and imported. Nuclear is treated as US produced, even though the fuel is mostly imported. Based on EIA data.

It appears to me that the US is rapidly reaching "peak energy", whether or not the world is reaching peak energy. What drives this peak is the economics of the situation--we are not producing enough goods and services with the fuels that we are importing to justify their continued importation. Also, even US produced natural gas from unconventional sources is becoming too expensive for the economy to afford. We have been in a type of overshoot in terms of buying more energy products than we really had funds for. The spike in prices for oil this summer helped force the issue. With the higher prices of oil and food, some people at the margin could no longer pay their mortgages, and the situation began to unwind.

Now with the lower prices of energy products, world oil production is starting to drop back. Demand is dropping off, because consumers are not able to borrow as much, and thus cannot buy as many goods and services requiring oil to produce. It is likely that US oil use will drop in years ahead, because of these factors. US natural gas production will also decline, because most of the new sources of natural gas are high priced sources (low Energy Return on Energy Invested sources), and consumers cannot afford the high cost of energy from these sources.

When the US faced a situation with declining energy availability in the 1970s, it was able to make changes to improve energy efficiency and to shift production of heavy goods offshore, and thus mitigate the impact of the decline in energy on economic growth. It seems unlikely that we will be able to do as much this time around. For one thing, the easy solutions have already been implemented. For another, US energy efficiency gains have only been about 2% per year in recent years. It will take capital (which is difficult to obtain now) to even maintain this kind of efficiency growth. Also, oil and gas are becoming more and more difficult to produce, meaning that a greater share of the oil and gas that is produced will need to be used in production of these fuels, leaving less for other uses.

The US economy has barely been growing between 2000 and 2008, apart from debt-induced growth; it has not been growing enough to produce much gain in the compensation of employees. If energy consumption declines from the level it is at today, it is likely that real growth will be even lower than it is today. Based of the discussion in (2) regarding how essential growth is for the repayment of debt, this suggests that it will be extremely difficult to pay back all of the debt that is currently outstanding. The existence of the close inter-relationship between all of the types of debt shown in Figure 1 suggests that there may be defaults on many of these types of debt simultaneously, and the same factors that caused debt defaults may affect other classes of assets as well.

It looks to me as though that we are due for a debt unwind, and with it a rapid decline in the US standard of living. Exactly what form it will take, and what the timing will be (for example, sudden one month from now or sudden three years from now, or gradual over a longer period), isn't certain. I would expect that many (or most) other economies in the world will be dragged along in this debt unwind and will experience a decline in their standards of living.

As I note in the Section 1 discussing why so many asset classes are correlated in time of stress, the tower of debt (Figure 1) has many feedback loops, and tends to magnify the economy's reaction to events, both favorable and unfavorable. When consumer debt is rising it tends to make the economy look very, very good. When there are layoffs, the interrelationships tend to magnify the impact, making the economic impact much worse. One wonders whether there are tipping points, beyond which it is not really possible for the system to recover--particularly now that the US seems to be at the point of "peak energy" (Section 3), energy is required for growth (Section 3), and growth is required to allow debt to continue (Section 2).

The tower of debt is in some ways deceptive. It can make the economy look mostly OK to the casual observer, until all too quickly, things start to fall apart.

So far, the "fixes" that the US government has been attempting seem mostly counterproductive. Putting government guarantees behind more and more debt (thus stacking Figure 1 higher and higher, with a new TARP layer) just increases the likelihood that the US government will be drawn into the downward spiral. The financial services layer will be less and less needed in years ahead, as our need for debt-based products declines. Bailing it out does not help get additional income to ordinary workers (although it may temporarily protect them from losing their bank account balances).

I expect that essentially all aspects of finances will be affected by the unwind of debt. A huge amount of debt will be defaulted on (or will be forgiven, so that an actual default does not need to occur). Regardless of whether the non-payment occurs because of default or forgiveness, the effect on financial institutions will be the same. Financial institutions such as banks, insurance companies, pension funds, and many hedge funds will find themselves in poor financial condition, because they were depending on the proceeds of this debt repayment to fund what they have promised--bank account balances; insurance policies; pension payments; or hedge fund returns. Institutions guaranteeing debt, such as monoline bond insurers will be particularly hard hit. The FDIC will likely be called on to rescue many failed banks, and will need to find funds from some source (printed money?) to do this.

As the year goes on, I expect each evaluation of where we are to be worse. Banks will report operating losses each quarter. Fannie and Freddie will need more funds than originally thought. TARP will need more funds than original planned. More and more businesses will enter bankruptcy, and more and more governments (states, cities, counties, and countries around the world) will find themselves unable to meet their obligations. There are a huge number of inter-relationships, and the bankruptcies and losses in one area will tend to cause more bankruptcies and losses in other areas, and act to destabilize the debt tower.

Debt of all forms will be very difficult to obtain, except through government sources. The interest rate the US government is currently paying is very low, mainly because of a "flight to quality". If the US government keeps issuing more and more debt, it seems likely that at some point this will change, because buyers will figure out that even if the US is the best of a bad lot, its risk of failure is significantly greater than 0%.

I do not expect a steep rise in the price of oil and natural gas in the next year, because the decline in demand is likely to outpace the decline in production in the short-term. If we look back at Figure 2, I expect that funds available to ordinary citizens will continue to decline in 2009, even considering any stimulus plan. This will happen because employee compensation will decline due to layoffs. Household debt outstanding will also decline (rather than just stay flat, as it has in the past year), because of the poor financial condition of lending institutions, and because with the poor economy, the risk of borrower default will be quite high, discouraging lending. A $300 billion stimulus program will be tiny in comparison to the boost the economy got in the past from increasing debt and greater refinancing (up to $2 trillion per year), as the prices of homes increased. With lower incomes, lower (actually net negative) cash flow from borrowing, and only a modest boost from a stimulus program, citizens will have less and less to spend on goods and services.

I think there is a distinct possibility that this could all end very badly. One possibility is that there will be more and more defaults, and the US government will not be able to prop up all of the institutions and will eventually default on its debt. While this seems to be the direction things are headed at the current time, the much more usual outcome is hyperinflation, caused by printing more and more money, wiping out the value of people's savings and pensions. Situations such as these are often accompanied by a new government (including a new constitution), and may even include different country boundaries (for example, Soviet Union after its fall).

Many people have started making preparation for the time when food needs to be produced locally and electricity is often not available. I would not discourage such preparations. While we do not know that the economy will collapse completely, I think such preparations are prudent, in the face of rising risk. Preparation for a major change takes many years, so starting earlier rather than later makes sense. Also, with the tower of debt (Figure 1) and the many feedback loops, the downward spiral can happen more quickly than our prior experience suggests is possible.

To solve our current financial problems, I expect that the United States (and other countries) will ultimately need a new financial system that is much less debt based. Such a system might start simply as ration coupons for food and energy products, and gradually be expanded to replace our current monetary system. Debt forgiveness and derivative write downs will also probably need to be part of the solution, but with the caveat that debt forgiveness and derivative write downs can be expected to have just as adverse an effect on the balance sheets of financial institutions as outright defaults. In conclusion, 2009 looks like to be a very challenging year for the new administration and for the world as a whole.

Last year's forecast: Peak Oil and the Financial Markets: A Forecast for 2008

Admittedly, there isn’t a whole lot about a 1940 Chevrolet that relates to traditional hot rods or customs. They weren’t beautiful cars by any means and they certainly weren’t strong platforms for speed dwelling either. That said, I love this video. I was a young student at the University of Oklahoma when I stumbled upon it while browsing the archives of the campus library. I really don’t know much about the source other than what was written in the “media notes” of the footage:

First color motion picture for Chevrolet - 1940. Produced in technicolor and shown during intermissions around the country.

Very Cool

via Wall Stats

Eliot Spitzer gets his oar in the stimulus debate. In a classic bit of mavericky Slate-think, the former Governor goes after the administrations emphasis on meat-and-potatoes public works projects:

The “off the shelf” infrastructure projects that can be funded immediately and provide immediate demand-side stimulus are almost by definition not the transformative investments we really need. [ . . . ] These projects by and large are building or patching the same economy with the same flaws that got us where we are.

Huh, you think. Until you get to the fairly conventional argument lower down that the economy would be better-served by smart utility meters and non-gas cars. (Now that’s out-of-the-box thinking!)

Of course, he’s right. But the bait-and-switch obscures a more important issue, one feeds into real issue with the stimulus and a source of resistance to it. Although the US economy needs a long-term investment that will reshape its foundations, we’ve gotten past the point where we can just take today’s pain and look toward tomorrow. That’s why the immediate stimulus is focused on immediate fixes.

Spitzer worries: “This moment presents the administration with what is likely to be its best—and perhaps only—opportunity to have essentially unlimited capital (both fiscal and political) to spend on a transformative economic agenda.”

The capacity of even the U.S. government to affect the overall global economy is limited. Suppose the package is $800 billion over two years: $400 billion is less than 1 percent of the global economy and a mere 3 percent of the U.S. economy. In relative terms, $400 billion isn’t all that much more than the $152 billion spent on the 2008 stimulus, which had nary an impact on the economy. Here is where the New Deal analogies are instructive. The New Deal probably didn’t pull us out of the Depression; World War II did that.

Spitzer thinks its a choice between saving the old economy and building a new one. But this now-or-never, a crisis-is-a-terrible-thing-to-waste attitude will be Democrats downfall. There’s a long road ahead to a new economy. And history is somewhat instructive. We’ve heard this refrain a lot recently–it was the war, not the New Deal–but we haven’t bothered to look at what that means.

World War II ended the Depression because it did two things: drew upon the surplus manpower and through the destruction of materiel re-deployed the industrial base. The war itself didn’t just solve the problem. The period after the war was an economic disaster as the country struggled with surplus labor power and idle capacity again. The GI Bill and Marshall Plan were two responses to that problem that set up the expansion of the 50s.

In other words, there’s more than one bite at this apple. And we’ve got a long list of jobs to address.

Source:

Robots, Not Roads
The Obama stimulus package should be spent on transformative investments, not bridges and buildings.
ELIOT SPITZER
Slate; January 6, 2009
http://www.slate.com/id/2207920/

The Costly Compromises of Oil From Sand OTTAWA — A major source of oil for the United States must now confront another problem: its carbon footprint.

Canada, in large part because of the production capacity of its oil sands, is now the largest oil supplier to the United States. But environmental groups in both countries are pushing for a slowdown or even a halt to further oil sands development, which is concentrated in northern Alberta.

Not all oil is alike when it comes to environmental impact, and many environmentalists single out production from the oil sands as the epitome of “dirty oil.” In a recent study, the RAND Corporation estimated that oil from the oil sands generates about 10 to 30 percent more greenhouse gases than conventional crude.

That may place oil sands exports in a precarious position when Barack Obama becomes president this month and moves forward with a climate change program.

Green revolution: still possible amid deep recession? Experts believe that current prices, just below $50 a barrel, will persist only as long as the downturn. The IEA has for the first time hinted that the era of "peak oil" may be upon us – the highwater mark of production, after which output will start to taper off. As soon as economic growth resumes, it will open a costly gap between supply and demand – unless the world radically transforms the energy model.

"The minute you get recovery, you'll get a sharp rise in oil, which will stall the recovery," says Tom Burke, an environmental scientist and former British government adviser. "So you have to use the stimulus to get yourself off oil dependency and that will reduce the climate curve and you'll start to drive carbon the way you want to go.

New cold war in Europe as Russia turns off gas supplies Fears of a deep chill spread across Europe yesterday after a row between Russia and Ukraine over gas prices cut supplies to the rest of the continent on a day of plummeting temperatures and heavy snowfalls.

The European Union said the situation was "completely unacceptable" as thousands of businesses were urged to switch fuels, and households struggled to keep warm in sub-zero temperatures. But there was no sign of an end to the standoff between Russia's energy monopoly Gazprom and Ukraine, locked in battle since New Year's Day.

Dependence on Russian energy places Europe at risk: The EU must ensure that no one can hold it to ransom in future The angry stand-off between Russia and Ukraine over gas is now seriously disrupting supplies to several European Union countries. Romania has lost 75 per cent of its supply; Bulgaria has only a few days' gas left; Slovakia is on the verge of declaring a state of emergency. The European Commission has waded in with indignant condemnation. But what may look like a replay of what happened three years ago, when Russia drew international condemnation for shutting off gas supplies to Ukraine is in many ways very different; 2009 is not 2006.

Automakers Fear a New Normal of Low Sales DETROIT — The historic collapse of the new-car market dragged on in December, raising questions of whether the auto industry will ever again have sales levels that it took for granted just a few years ago.

The 'McMansion' trend in housing is slowing In Atlanta's 1920s-era Kirkwood neighborhood, teardown projects in the last year have been cast in the simpler Craftsman style, which have immediately found buyers. Indeed, US builders say their clients increasingly look for quality materials and workmanship rather than sheer size. Some families are even abandoning the one-bedroom-per-child model, builders say, in favor of larger, but fewer, shared rooms.

..."There's an awareness now that some of the homes frankly are too big," says Scott Van Duzor, a home builder in Illinois's Fox River Valley. "The McMansion has almost become embarrassing to some people," he says. "They're listening not just to their wallet but their conscience."

LA water cops hunt wasteful faucets, sprinklers Officials estimate that landscaping accounts for as much as 70 percent of household water bills.

Offenders can be cited with a warning or hit with fines that start at $100 for homeowners and automatically appear on water bills.

The tough tactics began this summer after a voluntary conservation program yielded only a 4 percent drop in water use. Restrictions were expanded and penalties stiffened with the aim of seeing a 10 percent reduction.

Recipe for Famine The bag of green peas, stamped “USAID From the American People,” took more than six months to reach Haylar Ayako. For seven of his grandchildren, that was a lifetime. They died as the peas journeyed from North Dakota to southern Ethiopia. During that time, the American growers, processors and transporters that profit from aid shipments were fighting off a proposal before Congress to speed deliveries by buying more from foreign producers near trouble spots. As a result of legal mandates to buy US goods, the world’s most generous food relief program wasn’t fast or flexible enough to feed the starving in Ethiopia’s drought-ridden South Omo region last year.

“I am so grieved that I lost those children,” said Ayako, a Bena tribesman, speaking in his local Omotic language. “They died of the food shortage.”

Chevron lifts force majeure on Nigeria oil output LAGOS (Reuters) - U.S. energy giant Chevron (CVX.N) said on Tuesday it had lifted a force majeure on oil output from its Escravos terminal in Nigeria a month and a half after saboteurs forced it to shut in around 90,000 barrels per day.

The company said it had lifted the measure, declared on Nov. 19 and which frees it from contractual obligations, with effect from Jan. 1.

"Production and lifting operations have resumed," it said in a statement.

Peak oil expert to speak at Western Michigan University KALAMAZOO--Dr. Kenneth Deffeyes, a famed Princeton geologist who believes world oil production peaked three years ago, will speak at Western Michigan University at 7 p.m. Tuesday, Jan. 13.

Speaking in the Fetzer Center's Kirsch Auditorium, Deffeyes will be the first to speak as part of WMU's new Gwen Frostic Environmental Studies Seminar Series. The event is open to the public without charge.

The Powerful Case For $1 Gas If problems in the Middle East are resolved fairly peacefully and other regions which produce oil can avoid significant turmoil, oil should dive back toward $30.

Oil prices are up 25% over the last two weeks. This rise in oil prices has encouraged some analysts to forecast that gas prices could go up 20 or 30 cents in the near future..

The case for lower gas prices is a simple case. The recession could move unemployment in the US to 11% or more. It could cut corporate earnings for several quarters. Air traffic could drop and with it jet fuel demand. Many companies could cut back on trucking.

Gas will move to $1 because things will get so bad that it can't stay higher, for better or for worse.

Gas war may boost alternative routes to Europe MOSCOW (Reuters) - Russia's decision to cut gas exports to Europe via Ukraine in mid-winter may shock the continent into backing major new pipelines to bypass Ukraine, cementing Moscow's control over European gas supplies.

The mystery of Antarctica's speeding glacier With the possible exception of the ice that covers Greenland, the West Antarctic ice shelf is the most important body of water in the world. If it thaws, the results will be disastrous for millions, raising sea levels and flooding coastal cities such as London, New York, Tokyo and Calcutta. So it is understandable that scientists are alarmed as to why one particular section of it - Pine Island Glacier - is melting so much faster than the rest.

Pine Island, which contains around 30 trillion litres of water, is slipping into the sea at an ever accelerating rate, a development that alone could raise sea levels by as much as 10cm over the next century. Starting at an altitude of 2,500m, the glacier is 95 miles long and 18 miles wide, reaching the sea as an ice wall 750m high. Even before it began to speed up, it was one of the fastest-flowing glaciers in the world, at nine yards a day.

Utility cutoffs fuel carbon monoxide poisonings Severe winter weather and a stormy economy could combine to make one of the season’s common killers, carbon monoxide poisoning, even worse this year, public health and safety officials say.

Coast-to-coast snowstorms and power outages, paired with spiking rates of utility shutoffs spurred by record unemployment, are likely to increase the accidental exposures that typically send more than 20,000 people to the emergency room and kill nearly 500 each year.

...Deprived of power, people are firing up gas-powered generators and bringing barbecue grills indoors, forgetting the deadly consequences of the colorless, odorless, tasteless gas that can lead to illness, brain damage — and death.

“We see it during power outages and we see it during bad economic times,” said Jim Burns, past president and spokesman for the National Association of State Fire Marshals. “Unfortunately, people in desperate times take all means to stay warm.”

Iran offers more gas to Turkey TEHRAN, Iran—Iran is prepared to increase gas exports to Turkey after Ankara's supplies -- along with those of several European nations -- were cut due to a dispute between Russia and the Ukraine, an Iranian diplomat said Tuesday.

Shell Said to Delay Start of Gasoline Unit at Pernis (Bloomberg) -- Royal Dutch Shell Plc is delaying the start of a gasoline unit at Pernis, Europe’s largest refinery, by at least a week after a pipeline fire forced its shutdown last month, two people familiar with the situation said.

BP names Russia troubleshooter as U.S. boss LONDON (Reuters) - British oil major BP Plc (BP.L) appointed the man who led negotiations with its oligarch partners in Russian joint venture TNK-BP (TNBPI.RTS) as head of its U.S. unit.

BP said on Tuesday Lamar McKay, formerly leader of the company's Special Projects Team, had been appointed chairman and president of BP America.

The Fall of Green Travel Environmentally-conscious vacations are out of fashion. Travelers expect their next getaway to be green — and they’re not willing to pay more for it.

Richard Heinberg: Slo-mo Splat Remember the wall that environmentalists (like the 1972 "Limits to Growth" authors) have long been saying that industrial society would eventually hit? Permit me to make the formal introduction: Industrial society, meet wall; wall, meet industrial society.

It's understandably taking a while for the recognition to seep in. We are not accustomed to seeing every indicator of economic well-being, in virtually every country in the world, slam into reverse over the course of a few short months. I still have random conversations with businesspeople and bankers who say we've hit bottom and recovery is at hand; in their view, this is just another business cycle. I see things a bit differently: to my eyes the world situation looks like a slow-motion film of a train wreck, and the sheet metal at the front of the locomotive has only just begun to crumple.

Brace for 'Climate Wars' On how to predict the fall of human civilization:

"Most of [the scenarios] were from military reports. There was a lot of awareness among scientists about the severity of climate change, but scientists don't do strategic scenarios. A lot of that scenario stuff, believe it or not, actually started with Shell Oil back in the '70s. They came up with relatively disciplined rules for these things -- we're not just writing science fiction here. What we want is credible, possible futures. The pentagon's very big on that now.

"The American military has been doing them for a long time -- they're not hard to get at. When Bush didn't want climate change discussed at all, the Pentagon went to the think tanks in Washington and said, 'We need you to do all the research that we've already done, but can't publish. You publish it, and we'll distribute it to our staff.'

"I was in Washington in February -- I met with a lot of senior career people, and there wasn't a denier among them. They had made their plans, and were waiting for the administration to change so they could get some action on these things."

U.S. In the Midst of a Revolution Sandwiched around the election of the first African-American President of the United States, we find the debacles associated with the collapse of the international finance sector and the imminent end of the American automotive industry as we've known it for decades -- accompanied by the scurrying of would-be leaders and experts around the world attempting to patch holes in the badly leaking dikes with hastily-applied band-aids.

It's abundantly clear that the world has changed drastically. In my view, we're now in the midst of truly historical sea changes, although the biggest implications of these dramatic changes are very unclear -- and may not become fully apparent for some time to come.

FACTBOX - Global energy investment hit by financial crisis (Reuters) - The deepening of the global financial crisis and a deep drop in energy prices have forced companies to scale back spending and delay projects, with expensive ventures in the Canadian oil sands hardest hit.

Below is a list of projects that have been delayed or scaled back in recent months, as well as other related news.

What's next: Oilsands The collapse of oil prices has possibly set back Canadian production growth as much as five years.

Factbox: who gets what from Gazprom The biggest European customers for Russian gas, whose supplies are likely to be hit by the dispute between the Russian gas export monopoly Gazprom and Ukraine:

Gazprom's Tactics Harsh But Its Logic Sound The Russian gas goliath's argument that the price it charges Ukraine must rise is a valid one, based on its own costs.

Bulgaria president: "We have to reopen the shut reactors of the Kozlodui nuclear plant" Bulgarian president Gheorghi Parvanov declared on Tuesday that Bulgaria must reopen the closed reactors at the Kozlodui nuclear plant, Novinite informs. The decision comes after Russia decided to cease the natural gas deliveries though the pipelines that cross the Ukrainian territory. On Tuesday morning, the pipelines delivering gas to the Balkans region were shut down.

Shortage of nuclear fuel hits Indian nuclear power plants Shillong (IANS) India’s nuclear power plants have been working at about half their capacity due to shortage of nuclear fuel despite the efforts of the Uranium Corporation of India Limited (UCIL) to tap indigenous uranium deposits. The power plants are facing shortage of uranium supply due to the slow process of opening up of new uranium mines.

Tom Whipple: The Top 10 Peak-Oil-Related Stories of 2008 1. The Global Recession

The impact that declining world oil production will have during the coming year, and possibly longer, is now inextricably intertwined with the course of the economic recession that is sweeping the world. During 2008 the world’s stock markets lost some $30 trillion in investor equity. Nearly every major government was forced to begin massive bailouts of financial institutions and many have started to support failing businesses. The end is not in sight.

While many peak oil observers long anticipated that faltering world oil production would lead to much higher oil prices and eventually to an associated economic meltdown, the setbacks of the last year have complicated the situation. While it is clear that worldwide demand for oil has stopped growing and has started to decline in the last six months, it is not yet clear just how fast demand is falling. The sudden drop in oil prices has further complicated the situation by setting off a race between falling prices and slowing economic activity. Related: PeakOil.com's most read stories of 2008

It will take more than goodwill and greenwash to save the biosphere Monbiot: Shell may boast about tackling climate change, but companies tend always to sacrifice good intentions for hard cash.

Obama's Chance For a Blue Legacy Today, President Bush will begin for the ocean what President Theodore Roosevelt did when he created the National Park System. The administration is announcing plans to create a national monument that will protect 195,000 square nautical miles of the Pacific Ocean -- bigger than the size of California and almost 50 percent larger than all U.S. national parks combined. Sweeping areas of the ocean's most pristine treasures, including spectacular corals and the deepest canyon in the world, will be protected by law and given the chance to become stronger.

Yet what is most significant about this move is the opportunity it creates for President-elect Barack Obama.

China's green investment challenge China's environmental and renewable energy sectors are poised for another year of strong growth. However, green industries still face a daunting array of challenges.

Harnessing space energy The first commercial solar power plant was commissioned in 1985 near the town of Shchelkino in the Crimea in the Soviet Union and had a peak load of 5 mWt, or just as much as the world's first nuclear reactor. But the costly and inefficient power plant had to be shut down in the mid-1990s, as on Earth it could not work to full capacity. Consequently, we must consider building such power plants in outer space.

Paramedics get muscle cars EMS District Chief Jeffrey Hammerstein said the department comparison-shopped before settling on the Chargers, which are similar to those recently purchased by the N.C. Highway Patrol.

They are cheaper and more fuel-efficient than the Chevrolet Suburbans and other SUVs issued to EMS supervisors, as well as comparable police interceptors such as Ford's Crown Victoria. Their resale value, he added, should be higher when it comes time to sell them as surplus vehicles.

Gulf takes wrong currency path The GCC members produce between them some 16 million barrels of crude oil per day, and possess some 45% of known oil reserves. In addition, members, particularly Qatar, also have immense reserves of natural gas.

The key innovation that will enable a Gulf Clearing Union is the simple expedient of creating - within a suitable legal framework - a "petro" unit redeemable in a constant amount of energy value, let's say the energy released by burning 100ml (measured at 20 Centigrade) of n-octane.

Such a definition of an energy value unit provides a straightforward benchmark for both domestic and international buyers of oil, gas, petroleum products, and even electricity, to use petros - as well as, or instead of, US dollars - in settlement for purchases of GCC production.

Oil Rises to 5-Week High Above $50 on OPEC Cuts, Russia Dispute (Bloomberg) -- Crude oil rose to a five-week high above $50 as Kuwait and Qatar indicated they will implement supply cuts announced by OPEC last month, and a dispute between Russia and Ukraine reduced natural gas shipments to Europe.

Kuwait and Qatar plan to cut oil shipments to Asia starting in January, refinery officials in the region said today, after the Organization of Petroleum Exporting Countries agreed on a record output reduction on Dec. 17. OAO Gazprom cut gas shipments to Europe through Ukraine to less than one third of normal levels, a NAK Naftogaz Ukrainy spokesman said.

“The focus is shifting from demand to supply again,” said Eugen Weinberg, a Commerzbank AG analyst in Frankfurt. “We know demand is going to be very weak, but cuts from OPEC and the latest geopolitical risk will compensate.”

Gasoline price up first time in 16 weeks WASHINGTON (Reuters) – U.S. retail gasoline prices have risen for the first time in 16 weeks as higher crude oil costs were reflected at the pump, the government said on Monday.

The national price for regular unleaded gasoline jumped 7.1 cents over the last week to $1.68 a gallon, but was still down $1.43 from a year ago, the federal Energy Information Administration said in its weekly survey of service stations.

Soybeans Jump to 3-Month High on Crude Oil, Dry Weather Concern (Bloomberg) -- Soybeans extended gains to a three- month high and corn rallied on speculation higher oil will boost demand for crops as a source of alternative fuel and concern that dry, warm weather will damage crops in Brazil and Argentina.

UK: Energy bills to drop by more than £100 CONSUMERS were today given hope that their energy bills will fall in the New Year, after Scottish Power cut the cost of one of its tariffs by 10 per cent.

Consumer groups said it was the “shape of things to come”, with reductions of 10-15 per cent expected across the board in the coming months.

Ukraine: Russia cut gas to Europe by two-thirds KIEV, Ukraine – Ukraine's gas company Naftogaz said Tuesday that Russia cut natural gas supplies to Europe by about two-thirds, raising the stakes in a spiraling dispute between the two neighbors that bodes ill for European consumers.

Naftogaz spokesman Valentyn Zemlyansky said Gazprom sent only 92 million cubic meters of gas for European consumers, down from 221 Monday and about 300 during previous days.

"That is all they are sending, in several hours Europe will feel it," Zemlyansky told The Associated Press.

Slovakia to call state of emergency over gas-agency PRAGUE (Reuters) - Slovakia will declare a state of emergency over a drop in gas supplies from Russia, Czech news agency CTK reported on Tuesday, citing Slovak Economy Minister Lubomir Jahnatek.

Europe begins to feel gas pipeline pinch Moscow – Thermometers are plunging across Europe, and so is the pressure in the natural-gas pipelines connecting the continent with its key supplier, Russia.

But no one is pushing the panic button yet. The five-day-old gas war between Moscow and Kiev appears worse than in past years, aggravated by Ukraine's deepening financial and political crises and Russia's urgent need to refloat its floundering state budget by raising gas prices. Europe, watching closely, has sufficient gas reserves to see it through any short-term crisis and has officially declined to take sides.

It's time to see through Gazprom The bust-up between Russia and Ukraine that threatens to gum up the gas supplies of much of southern and Eastern Europe hardly comes as a surprise. It is almost part of the New Year ritual and somehow – perhaps Kremlin meteorologists are in on the plot – always seems to strike during a cold spell. Across the continent, radiators run cold.

So why hasn’t the European Union devised some kind of strategy by now to deal with the threat? Years of talk about energy security have generated nothing but hot air.

Mexico's Pemex pushes ahead with Chicontepec field MEXICO CITY, Jan 5 (Reuters) - Mexico's state oil company Pemex has awarded over 2 billion pesos ($148 million) in construction contracts at its Chicontepec project aimed at boosting crude output, the firm said on Monday.

The contracts call for the construction of access roads and site preparation work at 344 well pads, where Pemex plans to drill thousands of horizontal oil wells to tap the difficult-to-produce oil of Chicontepec.

Dow to Take Action Against Kuwait on Halted Venture (Bloomberg) -- Dow Chemical Co., the largest U.S. chemical maker, plans to pursue legal options against Kuwait for canceling a joint venture agreement and will seek a new partner to invest in its basic-plastics business.

U.S. Refiners Don't Look Cheap (Unless We're Going Back to '06-'07 Environment) In regards to U.S. refiners still being priced for good times, in my view as per EV /Capacity analysis. If you have a bullish near term view on their industry, think we're going back to 2006-2007, then fine. The point I make is that if you think we're going back to a 1999-2002 environment, then U.S. refiners such as Valero Energy (VLO), Tesoro (TSO), Holly Corp. (HOC), and Frontier Oil (FTO) still look a bit overvalued despite their massive declines this year.

Toyota to suspend production for 11 days in Japan TOKYO — Toyota is suspending production at all 12 of its Japan plants for 11 days over February and March, a stoppage of unprecedented scale for the nation's top automaker as it grapples with shrinking global demand.

Cars outsell trucks in rough year DETROIT — The final numbers are in, and it's official: 2008 was a crummy year to sell cars.

Not only did sales fall off a cliff, but consumer preferences changed faster than automakers could predict or react to. Gas prices skyrocketed, causing consumers to flee SUVs and trucks for smaller cars. Then the financial crisis hit, ruining nearly everyone's appetite for any vehicle.

Australians buying more bikes than cars Australians continue to buy more bicycles than cars with the economic downturn, health issues and climate change driving sales, the Cycling Promotion Fund (CPF) says.

Figures released on Tuesday put total vehicle sales for 2008 at 1,012,64 while bike sales were 38 per cent higher at 1,401,675.

Australia: Ethanol demands may consume grain crops: farmers Farmers say one fifth of New South Wales' grain crop could be eaten up by changes to the proportion of ethanol in unleaded fuel.

The State Government announced last month it would quadruple the ethanol mandate within three years.

Severn barrage: Row breaks out over UK's biggest renewables project Government consultants have been accused of miscalculating the costs of a project to generate vast amounts of green electricity in the Severn estuary, promoting a 10 mile-long tidal barrier strongly backed by ministers in preference to a scheme that engineers and environmentalists say is far less damaging.

SAfrica to start wind power project: official JOHANNESBURG (AFP) – South Africa's state-run power utility Eskom plans to start operating wind turbines this year to boost the supply of electricity, a company spokesman said on Monday.

"We are looking at building 50 wind turbines with two megawatts each before the end of this year across the country," Fani Zulu said on public broadcaster SA FM.

LDK shares slide after issues revenue warning LOS ANGELES (Reuters) – Solar wafer maker LDK Solar Co Ltd warned on Monday of lower-than-expected fourth quarter and 2009 revenue, saying the global economic crisis and tight credit markets have weakened demand for solar power, sending its shares down nearly 14 percent.

The Chinese company also said it experienced a delay ramping up production at its new polysilicon plant. Polysilicon is the solar industry's key raw material.

The staggering cost of new nuclear power A new study puts the generation costs for power from new nuclear plants at from 25 to 30 cents per kilowatt-hour — triple current U.S. electricity rates!

This staggering price is far higher than the cost of a variety of carbon-free renewable power sources available today — and ten times the cost of energy efficiency.

Group sues to force EPA to clean up Chesapeake Bay WASHINGTON – A conservation group filed a federal lawsuit Monday to force the U.S. Environmental Protection Agency to enforce the law and clean up the polluted Chesapeake Bay, citing 25 years of failure to restore the nation's largest estuary.

Timber company drops road deal with Forest Service HELENA, Mont. – The nation's largest owner of timberland disclosed Monday that it will no longer pursue changes in agreements governing its use of U.S. Forest Service roads — changes that critics complained could transform forests into housing subdivisions.

Pope: Pollution could destroy world's future VATICAN CITY – Pope Benedict XVI is warning that pollution in the world could destroy our present and our future.

Contraceptive pill is polluting environment: Vatican newspaper VATICAN CITY (AFP) – The contraceptive pill is polluting the environment and is in part responsible for male infertility, a report in the Vatican newspaper L'Osservatore Romano said Saturday.

The pill "has for some years had devastating effects on the environment by releasing tonnes of hormones into nature" through female urine, said Pedro Jose Maria Simon Castellvi, president of the International Federation of Catholic Medical Associations, in the report.

"We have sufficient evidence to state that a non-negligible cause of male infertility in the West is the environmental pollution caused by the pill," he said, without elaborating further.

1 in 5 considering leaving Hong Kong due to pollution: survey HONG KONG (AFP) – One in five Hong Kong residents is considering leaving the city because of its dire air quality, a survey released Monday has found, raising fears over the financial hub's competitiveness.

The findings equate to 1.4 million residents thinking about moving away, including 500,000 who are "seriously considering or already planning to move," according to the survey by the think tank Civic Exchange.

Russia suspended from UN carbon trading scheme The immaturity of one of the UN's flagship carbon trading scheme was underlined yesterday after Russia was suspended from trading carbon credits as a result of unpaid fees.