All posts by admin46x

"If" Becomes "When"


Via Mark J. Grant, author of Out of the Box,

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:
 
               -Rudyard Kipling
 

  • If the Central banks are done printing
  • If there is to be no more flood of liquidity spilling into the world that required Noah’s Ark
  • That buoyed the equity markets; that compressed the bond markets
  • If the ECB will never do one thing because the EU cannot agree on them to do it
  • If Greece cannot agree on the mandated austerity measures and so new elections are called
  • If Spain asks for money and Germany says it is a legacy issue and it is Spain’s problem
  • If money for Cyprus cannot be agreed to
  • If Portugal appears back at the till
  • If Catalonia decides that it no longer wishes to be part of Spain
  • If China has a slow-down which is far past the common thinking
  • If a new leader appears in Germany who wants to retain the nation for its people
  • If the nations in Europe cannot agree on a banking supervisor or while funding the ESM refuse to hand over their country’s money to other nations any longer
  • If the recession in Europe is worsening and deepening and broadening and the distance across the Atlantic shrinks by the recession’s intensity

Then “If” is no longer “If” and it grows up and becomes “When” and perhaps that moment has begun and the consequences will be soon enough.

Eyes Wide Shut – "We Are In A Bad Spot"


Submitted by Chris Martenson of Peak Prosperity,

After traveling some, speaking with lots of people, reading, and digesting, I cannot escape the conclusion that things remain hopelessly off track.  Whatever form of ‘recovery’ is being sought here simply will not arrive.

The core of my views is shaped by the idea that the very thing being sought, more economic growth (and exponential growth, at that), is exactly the root of the problem.  I suppose I would take a similarly dim view of an alcoholic trying to drink their way back to health as I do the increasingly interventionist central bank and associated political policies the world over.

Go on then, drink more, but I think we all know what the result will be.

The most pressing concept at the center of it all is the idea of net energy, or the energy returned on energy invested.  As I explained in the Crash Course, the price of energy is not really the most pressing that we need to keep track of.  Instead, what we care about is the net, or surplus, energy that is returned from our energy exploration and production efforts for society to do with as it wishes.

Figure 1:  This hypothetical chart reveals the energy returned (green area) on energy invested (red part) and postulates what trying to live in a world of 3:1 energy returns would look like visually.  Where petroleum finds of just a few decades ago where offering 95% or greater returns on energy invested, a future of 3:1 oil offers just a 66% return.

The above chart reveals the world towards which we are rapidly moving with new petroleum finds being deeper, tighter, smaller, and generally more difficult to get to and extract, thereby offering lower net energy returns than in the past.

If there’s less ‘green area’ in which to organize ourselves, then we will simply have to do fewer things.  However, the idea that we are going to get increasing amounts of exponentially-growing economy in conjunction with falling net energy is simply nuts.  It is insane, or at least developmentally immature.

Predictions for a World of Declining Net Energy

The world around me makes a lot more sense when I think about it in terms of net energy and where we are in that story.   Everywhere I go, I simply see oil, oil, and more oil, expressed in jets in the air, cars and trucks on the road, abundant and varied food types at every time of the year, and stores crammed with consumer goods from hither and yon.  We truly live in the age of abundance.

Yet that abundance is heavily subsidized by petroleum as well as other fossil fuels.

Where the prior 150 years were defined by ever-increasing amounts of both gross and net energy, a remarkable experience unlikely to ever again be replicated, the next 150 will be defined by its exact opposite.

The predictions for living in such a world are impossible to make in terms of timing and magnitude, but the trends and direction can be pinned down.

The big picture items are these:

  • Living standards are going to fall.  Ever-rising gross and net amounts of energy provide the essential building blocks for rising living standards, both directly through the goods and services brought to our doorsteps, such as food and warmth and mobility, and indirectly by allowing lots and lots of people to deploy their talents to things other than securing the basics.  In fact, this process has already begun; it will follow the ‘outside in’ model where the weaker elements of society and the weaker nation states will absorb the first effects of ‘less than there used to be.’ 
  • Inflation will come.  Because of the tendency of humans to try and print their way out of trouble, and because the system is now so saturated with debt that ‘allowing’ it to crumble to meet the realities of a world of less would risk a catastrophic systemic collapse of institutions and ruling parties, there’s not much doubt that sooner or later all this will end in a very scary round of inflation.  Some currencies will not survive at all, and the areas served by them will experience hyperinflation first and complete monetary destruction second.
  • Stocks and bonds will fail to generate real returns.  Real returns, meaning positive growth in the value of stocks and bonds after inflation is subtracted, are an impossibility in a world where the economy is not growing in real terms.  You have to have real growth in the economy if you want real growth in stocks and bonds (in aggregate, that is).  Stripping away all of the gobbledy-gook, real GDP growth is simply not possible without real increases in real things – and those depend, in very large measure, on how much net energy there is to go around.  With declining net energy, there will fewer things to sell and do. 
  • Retirements will be postponed, if they happen at all.  It is only the very recent generations that have been afforded the reality of this thing called ‘retirement,’ which is the idea that you can live off of one’s prior savings and investments for a decade or three, consuming and not producing the whole time.  Not so coincidentally (to me, at any rate), retirement and the exploitation of fossil fuels came along at roughly the same time.  That is, with enough ‘green area,’ we humans can do anything at all that we want with all that surplus energy. We can go to the moon, we can take long holidays to distant places, we can host Olympics, we can retire or do any of a billion other things.  For many, especially those at the margins of society, retirement will simply not be an option.  Retirement as a concept, and these individuals specifically, will be casualties of circumstances.
  • We’re just going to do fewer things and produce less stuff.  What exactly will go away as the green area gets pinched downwards is impossible to predict, as much will depend on decisions that have not yet been made.  Perhaps we’ll do something completely surprising with our remaining energy, channel the spirits of Easter Island, and build some huge yet frivolous monuments to ourselves.  Perhaps we’ll squander the last bits of good energy on bad wars that end up destroying infrastructure that could only be built when there was enough surplus to go around.  Or maybe we’ll get it right and choose a future that we can strive for and use our remaining resources wisely to achieve those dreams. While the exact features are impossible to predict, we can say that the map of our territory will shrink.  We won’t be able to do everything, or even very many things as compared to before. 
  • More resources will be dedicated to and consumed by the energy sector.  One easy observation to make is that if net energy is declining, then we are going to be spending more of our energy wealth on the process of obtaining more energy.  This is one great field to be in, whether in the production side or the efficiency side.  If it takes more and more energy to get energy, what does that mean?  It means more drilling, pipelines, processing facilities, and all of the thousands of job types and millions of parts and components that are needed to get the energy out of the ground and to market.  As prices inevitably rise, the desire (if not the necessity) of using energy more efficiently will skyrocket.  Everything in the entire “built” environment, from commercial and residential buildings, to factories, to how we move ourselves around, and the water we drink will be targets for improvements and enhancements.  If you are thinking of a career to move into, the energy sector is a great place to start.

Eyes Wide Shut

I think we’re in a bad spot.  I mean the globe here, but the developed economies in particular.  I am losing hope that we will navigate towards anything other than a hard landing at some point because even with copious amounts of data accumulating suggesting that the old ways are not working, I cannot detect even the slightest hint of original thinking or new thoughts coming out of the marbled halls of power.

Business-as-usual and more-of-the-same seem to be the only operative ideas right now.  And that’s not really unexpected; systems always try to preserve themselves long after it should be obvious that a new tack is in order.  So there’s nothing really surprising here about where things seem to be headed.

But what is a bit startling to me is the number of individuals that have not yet caught onto the idea that things have permanently and irrevocably changed.

Watch the Third Party Presidential Debate


The presidential debates between Obama and Romney are nothing but a scripted beauty contest.

Third party candidates Gary Johnson and Jill Stein have sued the presidential debate commission to allow inclusion of third party candidates.

Tonight, Larry King will host an alternative media debate between the remaining third party candidates.

You can watch the livestream of the debate right here:

Previous third-party presidential debates – which point out how similar Obama and Romney really are – can be viewed below:

 

And see this.

The Price Of Natural Gas From “Zero” to Dirt Cheap


Wolf Richter   www.testosteronepit.com    www.amazon.com/author/wolfrichter

On March 14, I shredded the natural gas components of the government’s Blueprint, a document that spelled out its energy policy, because it relied on the existence of dirt-cheap natural gas from the “shale gas revolution.” While the combination of horizontal drilling and hydraulic fracturing (fracking) opened up huge resources in the US, and natural gas (NG) production jumped as a consequence, it also pushed prices far below the cost of production, for far too long. A disaster for an entire industry. An opportunity for its customers. But it cannot last.

Producers get in trouble and cut back on drilling, lenders turn off the spigot, investors lick their wounds, and as money evaporates from the industry, production eventually declines. But consumers of the commodity, seduced by its low price, react: temporarily, by switching, for example, from coal to gas for power production; and structurally, by investing, for example, in gas-fired power plants to replace aging coal plants, or by building plants to produce chemicals from natural gas that is cheaper in the US than anywhere else in the world. Shortages will develop. The price will jump, and things will rebalance.

Back when the Blueprint was released, NG was truly dirt cheap: $2.28 per million Btu (MMBtu) at the Henry Hub. Storage levels were 48% above the five-year average, after a warm winter had curtailed the use of NG for heating. There was talk that the price would go to zero, as storage levels would reach capacity in the fall, and excess production would have to be flared. Producers cut back on drilling, and by mid-March, Baker Hughes’ rig count had plunged to 670 from 936 in October last year. It was a catastrophic scenario. And the price kept dropping.

It was wreaking havoc in the industry—yet production continued to rise. When NG hit about $1.90 per MMBtu at the Henry Hub on April 19, a decade low, its path to zero seemed assured. Lacking liquefied natural gas export terminals, the US couldn’t even sell its excess production to the energy-starved Japanese who had to pay around $17 per MMBtu on the world markets.

By May, billions in write-offs were pummeling the industry. Chesapeake and other producers were dumping assets to stay afloat. The rig count dropped to 600. Shale gas production was an uneconomic activity at these prices—though by May 23, it had climbed to $2.73 per MMBtu, up 44% from the April low.

The economics of horizontal fracking are horrid. With all wells, production drops over time. But instead of years for traditional wells, decline rates for shale gas wells are measured in months. After a year, production may be down by 80%, after a year and a half by 90%. High production early in the lifecycle allows drillers to show a big upfront profit. Initially, decline rates are obscured by production from new wells. But the more wells they have, the more they have to drill to hide the drop-off in production of older wells! What caught up with them was reality. And they responded by switching to drilling for oil and gaseous liquids, which fetched higher prices, because they had to survive, and producing dry NG wasn’t a survivable activity.

But the benefits of dirt-cheap NG were spreading across the country: households and companies benefitted from lower energy bills. Power generators profited from their strategy, launched in the 1990s, of investing in highly efficient natural gas combined-cycle (NGCC) turbines. The building boom of NGCC plants nearly doubled natural gas-fired capacity, at the expense of coal-fired plants—which are being retired at a breath-taking pace [Natural Gas Is Pushing Coal Over The Cliff]. And companies that manufacture plastics, fertilizers, and chemicals from NG are building plants in the US where they can buy their raw material for a fraction of the cost elsewhere in the world.

By June 20, excess inventory levels were plummeting. It had become clear: storage levels would not reach capacity, and NG would not drop to zero. Speculating in NG entered the sweet spot: the price was still way below the cost of production, but the threat of zero had been taken off the table. Timing remained uncertain, but sooner or later the price would have to self-correct, and by nature, it would over-correct. The rig count had fallen to 562—but production was still rising. The price dropped to $2.53 MMBtu at the Henry Hub. Nothing is ever easy. And in the industry, capital destruction continued [Natural Gas: Where Endless Money Went to Die].

So, when will production finally decline? With drilling activities slowing, production should follow, the theory goes. But there’s a laundry list of reason why it hasn’t happened: producers are now only drilling their most productive wells; drilling technologies have become more efficient, such as pad drilling; finished wells that had been shut in due to pipeline constraints or collapsing local prices, including over 1,000 wells in northern Pennsylvania, are coming on line; dry gas production as a byproduct from the booming oil and gaseous liquids plays is surging; etc.

The EIA’s Monthly Supply and Disposition Balance for July, the latest available, shows that production of dry NG through July was still 6% higher than last year! From April through July, production was up 4.2% over prior year. For data since July, we have to look at the EIA’s weekly figures (available only in percentages), and they’re tapering off: the last week that production was over 3% higher than the same week in 2011 was the week of August 15, at 3.4%. Since then, the differential hovered been between 1% and 2%. Last week, it dropped to 0.6%. So production is still higher than it was at the same time last year (but barely), even as the rig count dropped to 427. Waiting for production to decline is like waiting for Godot.

But demand for dry gas is ballooning. From April through July, which excluded the effects of the warm winter, demand was up a stunning 9.6%. The EIA’s weekly year-over-year demand numbers are volatile, but since late August, the low point was the week of September 12 with a 6.2% increase in total demand over the same week last year; four weeks in that period saw double-digit increases, with the week of October 3 jumping by 18.7%.

This surge in demand has performed what in March would have been considered a miracle: it cut the amount of NG in storage from 48% above the five-year average to 7.1%. Inventory levels now feather the upper limit of the five-year range.

At its current price—recently $3.43 per MMBtu, up 80% from the April low—NG is still dirt cheap, and therefore, demand from power generators and industrial users will continue to be strong. When the heating season kicks off in earnest, weather will be the primary factor for a few months, and cold waves, or the lack thereof, might distract from the surging demand for power generation and industrial use that will gradually put pressure on storage levels even if production refuses to decline.

The protests and attacks against American embassies have devastated public support for a military presence in the Middle East, writes Chriss Street. And to facilitate a Middle East withdrawal, the public will soon demand a crash program to exploit domestic energy resources. With big opportunities. Read…. The Coming American Energy Independence.

General Musings Reported As Ordered


I bid you greetings from Opa restaurant in Los Altos, where it’s happy hour and I sit alone, drinking my wine and looking at my charts. Surely there is no blogger on the planet more devoted to his beloved readers (I would also tip my hat, if I were wearing one – – which would be rather rude indoors, but I digress – – to SocialTraders, who continue to push the web site to unprecedented success).

Where was I? Oh, yes, charts.

Even though The Powers That Be pushed the market higher at the close, I was pretty pleased with how the day went. My portfolio was profitable for most of the day – – although a lovely five-figure profit dwindled to a two-figure profit (!) by day’s end – – but the point is that my portfolio hugely outperformed the market (on an inverse basis since, as you’ve probably guessed, I was so short I could jump off a nickel). I remain positioned for a fall.

1022-finalChannel

Recall my Path of the NAZ post from a few days ago. Here was the chart; take note of the highlighted prediction:

1022-finalQQQ

Using the NQ, I’ve highlighted the same “prediction zone” below. The key, of course, is that this thing fall into the bowels of hell soon. If it does, I shall declare myself The King of All Charts.

1022-finalNQ

Critical to this, of course, is that AAPL cooperate. They report their earnings after the close on Thursday (errr, assuming RR Donnelly doesn’t screw up and release them hours too early). Apple pretty much has to blow the doors off every car on the planet in order to justify its price. The notion of them zooming to $1,000/share is laughable.

1022-finalAAPL

The Russell 2000 is at a crucial crossroads. It formerly had broken above resistance away from a somewhat-tilted basing pattern (tinted in yellow). It then failed beneath this “neckline” (roughly speaking) and has been treating it as resistance over the past week or so (tinted in green). The crucial “break” is of the trendline at which it is currently resting. If we can break this trendline, God willing, then it’s party-time.

1022-finalRUT

It’s pretty simple, really: if we can get a break of the supporting trendlines – – which would take very little additional weakness at this point – – we can gather together and profit from a medium-sized drop in the intermediate-term. Some kind of failure on AAPL’s part will make this easy.

The Fed comes on stage this Wednesday (which, by virtue of the mopping-up crew that will be required, will promote new employment), and with QEinfinity in place, the only thing they can do at this point is to vomit up an even greater figure than the $85 billion they are conjuring up out of thin air every stinking monthly of the year. (More radical plans, such as printing up billions of dollars of new money to buy stocks like Facebook and Amazon in the open market could come later, but we’re not there yet).

I imagine Bernanke & Company will simply puke up the same language they spouted last time, since their plans need time to prove themselves (which will lead to inevitable failure, but again, I digress). I am as sure that the equity markets are ultimately going to undergo a vicious collapse as I am the the sun will rise tomorrow morning, and Bernanke will ultimately be villified as a short-sighted idiot. But the future isn’t here yet, and for now, he’s Our Hero, and we have to live with him and his ostensibly-egalitarian policies, surely conjured up to benefit the good working people of America.

Thus Spoke Zarathustra.