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Tue

08

May

2007

Right Now - Kunstler
Tuesday, 08 May 2007 12:34
by James Kunstler

I got a letter last week from a reader complaining bitterly that the stock market hasn't crashed and blaming me for predicting that it would. He didn't say, but I hope he hadn't been out there on a shorting spree. In case any of you haven't noticed, 2007 is not over yet.

The markets have been on an extraordinary spring run. The Dow finished 23 out of the last 26 days on the upside — some of them pretty way on the upside. This is the biggest US stock market up-streak since a 19 for 21 streak in July of 1929, prior to the October crash. Bill Fleckenstein points out a similar run on the Tokyo exchange — 32 upside trading days out of 38 — just prior to its 1989 tanking.

While this kind of behavior seems ominous, I'm not claiming it necessarily has predictive value. One can say that the financial markets per se are running in an impressive state of structural distortion and imbalance and that systems way out of balance do not stay that way forever. But I risk more opprobrium by stating the obvious.

I think the persistence of this gross imbalance can be accounted for in large part by the current global energy situation. The world is at peak energy, peak oil especially, and the world runs on oil. Peak is peak. The most. There are about 84 million barrels of oil a day flowing around the industrial economies of the world. It is running a lot of activity.

Now, I happen to think that oil production probably peaked about a year ago, but we are still so close to it that the net available energy remains immense. Even if 2007 averages out to 83.5 million barrels a day instead of 84 million, it will still seem like a lot. Markets may be dumber than we think. All they see is a vast amount of cheap energy for manufacturing plastic salad shooters, for powering tourist jet charters to Cancun, for running WalMart, Walt Disney World, and Taco Bell. All that energy is here right now.

Among the many tragic elements in the human condition is this tendency toward short-term thinking, the inability to imagine how our arrangements will work in a time that is not right now.

Interestingly, the main effect of post-peak oil on markets and economies is that it will produce shocking instabilities in complex systems dependent not just on the energy itself, but on the expectation for continuity of the energy. Financial markets are especially sensitive because they operate on sheer expectations. The Dow Jones doesn't manufacture salad shooters, or haul tourists to the Mexican beaches, or build suburban houses. It just relays a dumb signal that says "we expect more" and investors respond. The trouble will start when the signal changes to "we don't expect more." That moment will be when the recognition of peak oil galvanizes the public's attention. It will manifest as a simple societal binary switching mechanism. When that happens, the markets will exhibit the dumb herd behavior that they are famous for.

Of course, I have argued previously that the stupendous run-ups of market indexes themselves represent a kind of instability (those distortions and imbalances), as do also the supernatural flows of "liquidity" — notional money extended to investors for harvesting future notional profits — and I would stick to that observation. After all, if the world is "high" on oil — and I would argue that it is zonked out of its mind — then it would naturally spring way up off the diving board before swan-diving into the empty pool below.

Me, I'm keeping my eye on things like the production figures coming out of Mexico, the North Sea, and the Kingdom of Saudi Arabia. They're all sliding down. Mexico is especially interesting because it is our Number 3 source of oil imports and its production is crashing so hard that a couple of years from now it may not be able to send us a single drop of oil. What do you think of that? Maybe the Walton family will buy Iowa so they can keep WalMart running on ethanol.

Meanwhile, US oil refineries are running above 90 percent production capacity to keep up with the gasoline demand for Happy Motoring. The stress on these complex operations is unprecedented. It gives them no slack time for routine repairs. The results are liable to interesting, too, between the Fourth of July and Labor Day.
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Jimmy Montague said:

0
Do I see the flaws in your thinking?
You point out that a system running out of balance will inevitably undergo a correction. Doesn't that assume that the system is governed by some sort of natural law, say, for example, the fabled law of supply and demand? Does that assumption hold when the system is corrupt, responding not to law but to manipulation?

Shouldn't the question be asked: "Is it possible for players to jigger a market so that it keeps going up forever and there's NEVER a correction?" Or: "Is it possible for players to jigger a market so that it keeps going up forever because so-called 'corrections' are relatively shallow, and short-lived, and happen as part of a plan to keep new money flooding in so that old money can steal it?" Or how about this one: "What will happen to currency and stock markets if and when the U.S. does away with currency and operates entirely by means of plastic credit/debit cards?"

Understand I had one college course in macroeconomics, most of which I long since forgot, and that's the sum of my economic expertise. If it wasn't for Quicken, I couldn't balance my checkbook. The stuff I've laid out here is just some stuff that I've been thinking about. So if I'm full of shit, by all means say so but please answer the questions I've asked.

The poker player who knows percentages is way ahead in an honest game. But if someone is cheating, then all the honest player knows means nothing. Why wouldn't the same analogy apply to markets?
 
May 08, 2007
Votes: +0

Bobby Enevoldsen said:

0
PiggyBacking on Iraq
Given the "high on oil", the sense of easy street--imagine it and it will happen mindset, America's man Bush is just following the collective addict orders in Iraq. His failure isn't that he went after it. (As an Atlantic article yesterday or so noted, the big media doesn't address the whole oil focus in Iraq as central.) For the addict mind, his failure is he didn't get it for US. So much of that stuff in Iraq is just waiting for us to use it as fast as possible. Forget about tomorrow, it doesn't exist. When you're riding speed, the only intolerable event is getting derailed from the acceleration.
That consumer mindset--do it now, do a lot Now, receives tons of messages through TV, radio, billboards, magazines, on and on. Conditioning.
Riding a high is hard to change without some kind of awakening or crash. There's such inflation to it. Ego inflation. America's the best. We know the Truth. Some awakening is happening. Some people are engaged in real projects to lessen personal and collective use of energy/water. The Global Warming Craze/Movement/Media Blitz is an opening. Yet the bizarre corporate spin finds messages like the one from Lexus: You don't have to give up luxury to help the planet. (ie. you can get a hybrid Lexus with everything including a 350 HP engine, etc. The message: Shoot up and still be a good guy.) The implications are impossible to grasp unless awareness expands beyond the need to get the next fix...of whatever kind. The addict mind fights tooth and nail to avoid gaining a perspective on the Big Picture... So...

The other way: the crash. Momentum, karmic conditioning, would tend to indicate that short of a miracle, the crash is, as you have proposed, "is a coming". I wonder where the insiders will put their cash, the blessed Capital.

What we currently do in our society to users who crash and become frenzied is to convict them of crimes and put them in jail (2.2 million in jail--half drug related). Imagine the boom in the prison industry when the crash happens. Forget about treatment, actual and metaphorical, for this consumer mind, this agitated needy mind. Our society has become conditioned to the likelihood that the winners demonize the losers and lock them up. Label them terrorists, etc.
Anticipatory leadership might shift the yearning towards the project of a national movement to shift to other forms of energy, to needing less, etc. Maybe enough people are angry enough about the shoddiness of the pushers, that they not only shake things up, but take stock of how they promote them through their own participation in this addictive mind.

No easy road ahead. Bubbles burst. Pop. Pop. Pop. As the Buddha so perfunctorily put it: Everything changes.
 
May 08, 2007
Votes: +0

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