Dead Cat Bounce

It is good to see a breath of optimism return to the markets with rising prices and a restoration of consumer demand. It is fair to say that the panic induced cash flow gap is now been unwound as normalcy of a sort comes back to the economy.

The damage inflicted on the financial system was massive and almost unbelievable. Governments have acted to isolate the cancer while the real economy gets a chance to kick in and start cleaning up some of the damage. The real economy can limp along for quite some time without infusions of fresh credit for capital spending.

What makes me most nervous is that the general behavior of the markets are eerily similar to the 29’ crash and the same time functions are in place. It is only nine months since the actual break took place. In roughly the same time period, in 1930, the markets recovered somewhat and trade also. It really was a dead cat bounce that merely punctuated the ongoing economic decline that rolled on for a full two more years until late in 1932.

As I have said a number of times. The problem is the destruction of the US mortgage market and the ongoing inability of the government to repair the market. The US consumer is not able to restore his household economy until this problem is made well, however long we wish to dawdle. The Japanese took ten years to make the necessary moves, after trying everything else first. We are well on the way to been that stupid.

More positively, the rest of the world is fairing much better than happened in the 1929 crash. China and India both have huge reserves of consumer buying that merely needs to be capitalized and both will emerge the stronger for it. Both economies will be doubling over the next five years just taking care of their own.

Europe’s disaster came from buying US paper and has been back stopped by government printing presses. This will now increase the demand for more prudent investments and strong capital driven investment out of Europe. They are well on the way to sorting themselves out. They may even become large buyers of US hard assets in exchange for the suitcases of worthless paper they have been gifted with. Revenge is sweet.

Latin America is nicely following in the footprints of India and China and looks almost untouched so far. Mexico keeps doing its own thing making it an excellent place to leave.

Canada has gone through the salutary experience of been shot at and missed. We now love our tightly regulated banking system. My only concern is that a lot of excellent work done between the two governments that were unquestionably mutually beneficial are now been subjected to attack by newly empowered incompetents reading from some ideological prayer book. No matter, Canada will end up supplying a third of the globe’s reduced oil demand for centuries, and the big capital build out is about to begin.

That means a positive balance of payments until hell freezes over. We could even afford a socialist system, although we have had great success with the best application of the Laffer curve methodology of anyone.

Market Shivers

The one thing that I learned decades ago about markets is that over the long term, the bulls win. The bears may be right on selecting the losers but over time the winners eat up the garbage left over by the losers and the only real losers are those holding stock in the losers. A certain amount of cash is disappeared but the expanding credit system easily produces more.

The tragedy of 1929 is that the banking system did not understand this and over reacted to a bad market break by cutting of credit and savagely reducing the money supply. It took years for the global economy to claw back to the economic levels of 1929 and we have not made that mistake twice.

The difficulty we have today is that our money supply is not a true fiat currency. It is linked inexorably to oil, since oil still represents over ten percent of the global economy. This means that continued economic expansion will be stifled by tight oil supplies. And a real contraction in the daily oil output will have the same massive effect as a contraction in the money supply.

Hello Houston, we have a problem. In this blog we have investigated and discovered alternate strategies to replace this pending oil shortfall. I know and if you have followed my reasoning, you know that we can completely free ourselves of using any geological oil by making agriculture our principal partner in the solution. It will still take time. But once done our economy will never again be dependent on a finite resource and we will be good for a million years.

In the meantime, the market is slowly waking up to the nasty fact that we are unable to expand oil production significantly anywhere in a hurry. After all we have now had almost five years of high prices to encourage expansion and it simply is not happening fast enough. That is why the overall market is starting to adjust downward with a series of 300 point breaks and consolidations. This is a good time to assemble cash and to learn patience.

Right now the market is waiting for the other shoe to drop. That would be a 2,000,000 barrel drop in production somewhere. There are candidates and it is inevitable somewhere. Saudi Arabia would be the most dramatic. It would end all denial.

This type of very bad news will induce a deep market break and take a long time to overcome. As should be clear, however, the probability of bad news like this is steadily increasing while the probability of good news is declining.

In fact the only source of commensurate good news on oil can only come from the drilling rigs out in remote difficult basins. There may be another Saudi Arabia out there that can give us another fifty years to get our energy act together. After all my readers have seen the future. Fifty years of progressive scientific development will make the implementation of these ideas easy.

On an optimistic note, I suspect that the one great untapped trillion barrel oil resource will turn out to be conventional oil in the Mackenzie delta and the Beaufort Sea. Discoveries have been made and anyone who has worked through the geological logic described in my article titled Pleistocene Nonconformity can figure it out. This oil was produced in the last million years and has not had millions of years to escape. At least there is little evidence that it has with the exception of the trillion barrel tar sands.

There may also be others. Most people do not realize how hard it is to understand the geology of an oil basin or how much has to be spent to get lucky. I never forget the 100 hundred dry holes in Alberta before Leduc #1. You look at the map today and you wonder how they ever missed.

In the meantime, there is a real Sword of Damocles hanging over the market and the market will be unsettled for a long time.