Thursday, June 12, 2008

Debt Rattle, June 12 2008: A time of rapid unraveling...

US, ca. 1930: Men eating in a soup kitchen

Stoneleigh: The Bank for International Settlements (BIS) is essentially the central bankers' central bank. They are warning of the potential for another Great Depression. If they were a domestic central bank, they wouldn't have the freedom to do that - domestic central bankers can only cheerlead for fear of precipitating a worse crisis.

Central bank body warns of Great Depression
The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

Things that have not yet happened
Bernanke’s statements are like standing in front of a tsunami proclaiming "The Worst Is Over" before the wave even hits the shore....

....Here's my take: Before we can say the worst is over or the danger has passed, the storm has to reach shore first. With that in mind I thought it might be interesting to look at a few headlines of things that are going to happen but have not happened yet.

* Bank failures
* Monoline fallout
* $500 Billion Option ARM Crisis Coming Up
* A rising unemployment rate.
* An imploding commercial real estate.
* Rising junk bond defaults.
* Rising numbers of foreclosures and bankruptcies.
* Rising credit card defaults.
$500 Billion Option ARM Crisis Coming Up

The economic picture is worsening across the board. And not just in the US but in the UK and Europe as well. A housing bust is now underway in the UK.

In the meantime, Until Things That Have Not Happened Yet Do Happen, it defies credibility to suggest that danger has faded.

Treasury Curve Steepening Bet Unwind Continues
Yesterday [June 9th] we reported a huge four standard deviation event in Treasury Curve Steepening Bet Blows Sky High.

For the second day in row, yield on the 2 year treasury increased in a far larger amount than did yield in the 10 year treasury or the 30 year long bond.

Today's action is not as big as yesterdays, but the important point is there is follow through. Those betting in size that the yields are going to soar on the long end vs. the short end are being carted out in a basket.

Banks Uneasy About $6 Trillion Credit Lines, Citigroup Says
Banks are concerned that companies may draw on $6 trillion of loan commitments they made before the credit crunch, adding to pressure on their balance sheets, Citigroup Inc. analysts said.

Companies from luxury carmaker Porsche SE in Stuttgart, Germany to wireless company Sprint Nextel Corp. in Overland Park, Kansas, drew at least $21 billion of bank lines this year as borrowing costs rose. Lenders had $6.1 trillion in untapped commitments at the end of 2007 up from $3.3 trillion in 2003, according to Citigroup estimates.

``We suspect many banks remain uneasy about their committed loan facilities,'' Citigroup analysts led by Hans Lorenzen in London wrote in a note to clients published on June 6. Companies typically maintain credit lines to back the financing of their day-to-day operations. They don't usually draw on the loans.

``Drawing on these is usually a last resort for corporates, and bears rating implications,'' according to the analysts. ``Yet when access to capital becomes difficult, some corporates may have few alternatives if the current environment persists.''

Junk Bond Defaults Soar; Citigroup "Uneasy"
Tapping Credit Lines Fueling M3

Want to know what's behind a soaring M3? There it is. Businesses are afraid the money won't be there later and/or credit lines will be completely shut off, so they are drawing down those lines now.

And with defaults soaring and recoveries lower, Citigroup has every reason to be spooked. Think this is inflationary? Think again.

Stoneleigh: Karl Denniger's work is always worth reading. He knows his stuff and pulls no punches.

Thursday Thumping
Anyone care to take a bet on Lehman surviving the weekend in its current form? Here, let me help you out....

....Now I have no way to know what's really going on with Lehman, but I can read the tea leaves, and it ain't good.

There were also an awful lot of PUTs bought down to the $15 strike for July. So far, the "KaPUTts" (the $5s and below) haven't been bought with any sort of volume, but that could come tomorrow....

Forbes picked up on it too, saying:

"The losses accelerated into the close on what called "vague chatter" that the capital raising plan had run into trouble. (See: "Lehman's Bear Necessity")

The report said speculation suggests funds could renege on the deal before Thursday's closing."

No kidding? You mean that people won't pay $28/share for stock when they can buy it on the open market for $24? What an unbelievable SHOCK!

This morning it appears that both the CFO and COO are gone - reported on CNBC live. No link as of yet to an official press release. The stock cratered further on the news. Gasparino is also saying - repeatedly - that the company cannot survive as an independant firm!

Stoneleigh: When the market senses weakness in a sector, it looks for the weakest to pick off first and then turns its attention to the next victim. Bear Stearns was first and Lehman seems to be next. The rout won't stop there though - there is too much money to be made (for some).

Lehman: Independent for How Long?
Lehman Brothers appears to have averted a Bear Stearns-like financial crisis with plans to raise $6 billion. But the storied investment bank, now the smallest of the major Wall Street firms, may ultimately face the same fate: the end of its independence.

Takeover rumors have dogged Lehman ever since the bank went public in 1994. A few months after the IPO, Lehman's stock tanked, prompting speculation that insurance company Travelers would swoop in at the sale price. Investors were betting on much the same for Lehman in 1998 after the collapse of hedge fund Long Term Capital sparked a bankruptcy scare. Yet Lehman always emerged intact. "Somehow these guys never die," says Roy Smith, a professor at New York University's Stern School of Business.

This time around the outcome could be different. Over the past decade, Lehman CEO Richard Fuld pushed aggressively to remake the onetime bond shop into a diversified financial institution. By some measures, it worked. In 2007, fixed income accounted for 31% of revenues, compared with 66% in 1998. But the business model of Lehman—which now dabbles in everything from bond trading to equity underwriting to M&A, and dominates none—simply doesn't work in an environment that requires either strength or size.

Lehman doesn't have a distinct specialty like boutique advisory firm Lazard. Nor does it have the heft and scale of big, commercial banks like JPMorgan Chase and Bank of America that are market leaders in a number of areas. "It's hard to see where Lehman fits in," says CreditSights analyst David Hendler. "Lehman needs a bigger-balance-sheet bank that can use its skill set."

The question remains, though, which financial company would step up as a potential suitor for Lehman, whose stock price is currently trading at a five-year low. JPMorgan Chase and Bank of America have the financial muscle, but the two are still busy digesting recent acquisitions. And another subprime survivor, Wells Fargo, doesn't want to get into the investment banking game. That leaves a foreign player such as Britain's HSBC or Barclays. Although both have their own set of headaches from the credit crunch, the two are looking to expand in the U.S.

Still, absorbing Lehman would be a yeoman's task. Unlike Bear Stearns, which has a couple of strong assets in its clearinghouse and prime brokerage business, Lehman has few standouts. The once-proud, fixed income business, which has had three heads in the past three years, remains in shambles after moving aggressively into risky subprime securities. Adding to its woes, top bond executive Rick Rieder left in May to start a hedge fund.

Meanwhile, Lehman pales next to Morgan Stanley and Goldman Sachs in mergers and acquisitions, where it ranks in the middle of the pack. "They don't have a long-standing history in investment banking to thrive in this environment," says Hendler.

Despite the difficulties inherent in an acquisition, Lehman's days as an independent firm may be numbered. Says analyst Chris Whalen of Institutional Risk Analytics: "Lehman is next. When you have a pack of dinosaurs, the slowest gets picked off."

Foreclosed home prices slashed - with unprecedented number, lenders try fire-sale approach
The trend is most dramatic in many parts of California, Florida, Nevada and Arizona, where prices skyrocketed during the housing boom and are now falling precipitously. Sales of foreclosures, vacant new homes and other distressed properties now dominate some markets, causing grief for individual homeowners who need to sell for other reasons, like a job in a new city.

Nationwide, one out of every four sales between January and March was a distressed sale, and that figure jumps to more than 50 percent in the hardest-hit areas like Las Vegas, Detroit and distant suburbs of Los Angeles, said Mark Zandi, chief economist at Moody's The number can be as high as 90 percent in some newly built subdivisions, real estate agents say.

SEC `Scarlet Letter' Drive Hurts Asset-Backed Market
Regulators' plans to add a letter to credit ratings of asset-backed debt may constrict the $4.6 trillion market and choke off consumer credit at a time when Federal Reserve Chairman Ben S. Bernanke wants more lending to bolster the economy.

The U.S. Securities and Exchange Commission may recommend this week that Moody's Investors Service, Standard & Poor's and Fitch Ratings include a new designation to the scale created by John Moody in 1909, according to people familiar with the plans. The changes may force investors to reassess the way they gauge the risk of securities backed by mortgages, student and auto loans and credit cards, said one of the people, who declined to be named before the announcement. The action could force banks to add capital to guard against losses or curb lending.

The banking industry is ``very significantly concerned,'' said George Miller, executive director of the American Securitization Forum, a New York-based group representing 370 companies that package assets into bonds. ``If the rating itself is substantively changed, or the symbology is changed, it's not just investment guidelines that have to be examined.''

SEC Chairman Christopher Cox, who has endorsed a review of separate ratings in speeches and congressional testimony, told reporters in Washington today the agency's goal in writing new rules is to improve disclosure.

MBIA Reconsiders $900 Million Capital Deployment
MBIA Inc. won't contribute $900 million to its bond-insurance unit, downgraded from AAA by Standard & Poor's last week, as the company re-evaluates its business strategy.

The holding company will keep the money, raised through the sale of shares in February, as it considers options for ``supporting the bond insurance market,'' Armonk, New York-based MBIA said in a statement sent by Business Wire. The funds aren't needed to pay claims at the insurance unit, MBIA said.

``Our landscape has changed,'' Chief Financial Officer C. Edward Chaplin said in the statement. S&P and Moody's Investors Service ``made it clear that, at this point, maintaining Triple-A ratings for MBIA Insurance Corporation would be dependent on other factors besides the amount of capital or claims-paying resources we have,'' he said.

MBIA, Ambac Financial Group Inc. and other bond insurers stumbled after expanding beyond municipal bonds to guaranteeing securities linked to subprime mortgages and home-equity loans that are now defaulting at record rates. MBIA and Ambac, which had been trying to preserve their AAA status, balked when credit- rating companies raised the standards that would have to be met.

``They're walking away from their policyholders and their surplus noteholders,'' William Ackman, managing partner of hedge fund Pershing Square Capital Management LP, told reporters today at a conference in New York. Pershing Square had set up trades designed to profit from a decline in MBIA and Ambac shares, which have plunged more than 90 percent in the past year.

States Move To Cut, Cap Property Taxes
Soaring property values in recent years swelled the coffers of counties and municipalities, raising calls for property-tax cuts. Now, even as foreclosures and dwindling home sales shrink local tax bases, a number of state governments are slashing or capping property-tax rates.

New York Gov. David Paterson last week launched a bid to make New York the latest state to roll back property taxes. Already this year, statehouses in Indiana and Florida have passed new property-tax curbs.

But many of these property-tax initiatives, while politically popular, mask a hidden truth: They are likely to lead to increases in other kinds of taxes.

So-called "swaps," under which property taxes are cut and made up for by levies elsewhere, have been popular in statehouses. Idaho, South Carolina and Texas passed their own versions in 2006. But even when states don't make such deals outright, they may in the long run resort to tax increases to plug revenue holes.

Some Buy a New Home to Bail on the Old
Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn't want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.

Homeowners are able to pull off this gambit -- which some lenders and real-estate agents call mortgage fraud -- by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated. "It's just a business decision," says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."

European Commission in crackdown on 'overspending' Britain
Brussels has launched disciplinary action against Britain for a deliberate breach of the EU's rules on public spending, saying the budget deficit will surge far above Maastricht Treaty limits this year.

In a blistering attack on UK public accounts, the European Commission said that large liabilities are being kept off the books and warned that it was far from clear whether Gordon Brown's fiscal blitz "will actually lead to a real improvement in the efficiency of public spending".

Joaquim Almunia, the EU economics commissioner, said Britain's fiscal deficit was likely to reach 3.5pc of GDP this year, violating the 3pc ceiling of the Growth and Stability Pact. The UK says it will be 3.2pc. "This is prima facie evidence of a planned excessive deficit," Mr Almunia said. "Sustainable public finances are at risk, a conclusion aggravated when the long-term budgetary impact of an ageing population is also taken into account."

Britain does not qualify for leniency under Treaty Article 104 as the ballooning deficit has occurred at the top of the economic cycle when government receipts should be strongest. It is the result of a calculated decision to break the law, rather than tighten belts. "The planned excess is neither exceptional nor temporary," said the Commission.

Mr Almunia said Britain has seen a "deterioration of the structural balance of 4.5pc of GDP" since 1999, moving the UK from surplus to deficit. Brussels cannot impose fines for breaching the limit as long as Britain remains outside the euro. Even so, the ritual of "naming and shaming" could prove embarrassing for Chancellor Alistair Darling. Britain is now the only EU state, apart from Hungary, in disgrace.

Tim Congdon, a professor at the London School of Economics, said the clash with Brussels is likely to prove a thorn in the side for the Government for a long time. "If Brussels is jumping up and down now, it is going to be even worse next year. The second half of 2008 will be very grim for the economy," he said.

"The budget deficit is highly sensitive to the economic cycle and deteriorates with a lag. It will not be surprising if it reaches 4pc or 5pc of GDP." The National Institute of Economic and Social Research said the UK may already be grinding to a halt. Economic growth slowed to 0.2pc in the three months to May. Unemployment rose from 5.2pc to 5.3pc in April, the fourth consecutive monthly rise. The annual growth rate of earnings has fallen from 4.7pc to 3.2pc.

Brussels said Britain's finances have been flattered over recent years by tax revenues from the boom in the City, citing merger and acquisition activity and the rising stock market. It said the Bank of England's loan to Northern Rock was £24.1bn or 1.7pc of GDP and - arguably - should have been "reported as government debt". Even without this, the UK's public debt will rise from 43.2pc of GDP last year to 47.5pc by the end of next year.

US bank stocks driven down to five-year lows
US banking stocks hit a five-year low yesterday, as the financial markets remained jittery following Lehman Brother’s news on Monday that it needs fresh capital. The market was also reacting to rumours that Goldman Sachs would report a hefty second-quarter writedown on its portfolio of mortgage-related investments on Tuesday. Shares in Goldman Sachs fell by $4.76, or 2.85 per cent, to close at $162.45.

Lehman Brothers, which unveiled a much larger-than-expected $2.8 billion loss for the second quarter, saw its shares decline by $3.75, or 13.64 per cent, to close at $23.75. The decline came amid concerns that Lehman may need to raise even more capital than announced at the beginning of the week, further diluting the ownership of the brokerage’s existing investors.

Confidence in Lehman was also hit by a note from Guy Moszkowski, a Merrill Lynch analyst, who lowered his recommendation on the group’s shares from “buy” to “neutral”, on the basis that the “business mix is poor for the environment”. Meanwhile, Merrill Lynch suffered a 6.6 per cent share price decline as John Thain, its chief executive, said he was “comfortable” with the broker’s capital reserves but may still raise more money.

Morgan Stanley fell 5.4 per cent on concerns about its second quarter results, due to be announced next Wednesday and expected to be down by about 60 per cent. Adam Compton, an analyst at RCM Global Investors, said: “People had been confident that the worst was over for Lehman and then it shakes market confidence with its latest results.

There are now rumours flying about everywhere as people worry about all sorts of things, such as whether Goldman may follow in Lehman’s footsteps.” Despite it all, analysts kept their forecasts for Goldman Sachs’ second-quarter results steady. Thomson Reuters is expecting the Wall Street brokerage to report a drop of at least 30 per cent in its profits.

UK bank sector in turmoil as HBOS share price falls
The British banking sector was thrown into fresh uncertainty yesterday as underwriters to the huge HBOS rights issue were faced with the prospect of being lumbered with £4 billion of unwanted shares. Shares in Royal Bank of Scotland, Barclays and Alliance & Leicester, as well as HBOS, sank to levels not plumbed in at least eight years as London faced the possibility of the biggest equity capital flop since the BP fiasco of 1987.

The fresh alarm was triggered when HBOS shares dropped below the 275p price at which it plans to issue £4 billion worth of new stock in five weeks, closing at 258p, down 12 per cent. Unless the share price recovers, the underwriters, Morgan Stanley and Dresdner Kleinwort, and sub-underwriters, will be forced to buy all the shares, leaving them with 29 per cent of the enlarged bank.

As the 275p price level was breached, HBOS issued a statement that the rights issue would go ahead on the present terms and insisted the underwriting agreement was bullet-proof. Shane O'Riordain, the HBOS communications director, said: “This bank is not for turning. The reasons for the rights issue are as valid now as when we made the original announcement.”

Short-selling by hedge funds was blamed for some of the share price slide. The sub-underwriters, fearing a loss, may too have resorted to short-selling as a hedge, analysts said. The collapse in housebuilder valuations may also have damaged sentiment. HBOS has been an enthusiastic buyer of housebuilders.

HBOS added in a statement yesterday that current trading in general, and mortgage arrears in particular, were in line with its expectations, but declined to comment specifically on its housebuilder exposure. Housebuilders blamed short-selling hedge funds for another day of plunging share prices.

Mark Clare, the chief executive of Barratt Developments, blamed short-sellers for forcing down his share price by as much as 42 per cent yesterday, after a 24 per cent decline on Tuesday. Mr Clare said: “Nothing has changed since our last interim management statement [in May]. The only thing that has changed is that there are people out there for whom it may be in their interest to see share price falls. That attaches to short sellers.”

Fears that the current round of capital-raisings by UK banks will not be enough further hit their share prices. Robin Geffen, the founder of Neptune Investment Management, said that banks had still owned up to only half of the $2 trillion of losses they have sustained. “So the banks are on the first of at least two rights issues.”

Value of UK housebuilders crumbles again as sector mired in turmoil
Housebuilders' shares went into freefall for the second day running yesterday with two of its biggest players – Barratt and Redrow – both plunging by more than 40 per cent in the afternoon, before rallying to close down 21 per cent and 19 per cent respectively.

Taylor Wimpey was also hit hard, closing down 19 per cent after losing as much as 35 per cent during the day. The bloodbath came on top of severe losses the day before, when Barratt closed down 25 per cent and Taylor Wimpey down 16 per cent, as gloomy house price predictions threatened the value of the builders' land banks.

With stocks spiralling and the market awash with rumours of potential writedowns and or rights issues, Barratt finally bowed to the pressure and made a statement confirming the guidance given in an interim management statement a month ago.

Mark Clare, the chief executive of Barratt, said: "We are comfortable with our consensus forecast on volume and profit. Things are just the same as they were three weeks ago; we are still focusing on delivering as we expected to then and we have not seen the complete collapse in the market which is being inferred."

The market is difficult and orders are running at around 50 per cent of what they were, Mr Clare added, but he said the company would remain within its banking covenants when it reports its numbers on 10 July.] However, investors are not so sure, and although all the big housebuilders' stocks rose from the afternoon's collapse following Barratt's statement, by the time the market closed they were all on the slide once again.

"The statement didn't really change anything because it just said what we have been told before," Chris Millington, an analyst at Numis, said. "The market is speculating that Barratt is going to break its banking covenants, that it is likely to have writedowns and could go bust. There are no long buys from pension funds and institutions, just a lot of sellers from hedge funds, and the price is suffering as a result."

The whole sector is struggling but Barratt is particularly vulnerable because it is so highly geared following the £2.2bn takeover of Wilson Bowden last February. With £1.7bn in debt, and a market capitalisation down to £250m, the company's options are running out. "The hedge funds have sold down the stock to such a level that, even if there were a rights issue, there is not enough equity left on the table," Mr Millington said.

Barratt said it expected land writedowns to be limited, but the market, which has stopped conforming to the usual analytical metrics, will remain in turmoil until the trading update next month. Mark Hughes, an analyst at Panmure Gordon, said: "Everybody is out there in the dark and proper share price valuations don't work. But because Taylor Wimpey is falling so sharply as well, it shows that the issue is the sentiment that all the companies that are highly geared will run into trouble."

UK: Fears of widespread job losses grow as unemployed figures rise sharply
Thousands of people will lose their jobs over the next two years as the deepening economic downturn forces more companies to cut staff, City experts said yesterday. After figures revealed the steepest jump in the number of people out of work for two years, economists said the scale and pace of job losses would accelerate sharply in the coming months.

The mounting toll of jobs as economic conditions worsen was highlighted by official figures showing that the number of people claiming unemployment benefits had leapt by 24,400 since February. The number of people receiving state support rose by 9,000 last month, on the heels of a 11,200 jump in April that constituted the biggest increase for two years. This pushed the total to 819,300, up from a low of 794,900 in January.

An alternative measure of unemployment, based on a monthly survey of a section of the population and preferred by ministers who regard it as a closer reflection of labour trends, also jumped. It rose by 38,000 to 1.64 million in the three months to the end of April, the sharpest rise for any three-month period since July 2006. This pushed the proportion of people out of work to 5.3 per cent, up from 5.2 per cent, the first rise since May 2006.

Unemployment rose most sharply in the West Midlands between February and April with 23,000 people losing their jobs. However, employers in the South East continued to hire workers, with employment rising by 23,000 in the three months to April, the official figures show.

In the City, economists said that the trend of rising joblessness was only just beginning. “Given that the slowdown in the economy is expected to continue, unemployment is likely to continue to rise, and at a faster rate,” Philip Shaw, an economist at Investec, a leading City bank, said.

Howard Archer, of Global Insight, an economic consultancy, said that weak growth and slumping business confidence guaranteed thousands more job losses in an increasingly fragile economy. “It seems inevitable that below-trend growth and deteriorating business confidence will exact an increasing toll on the labour market over coming months,” he said.

BP dismisses "apocalyptic" $250 oil, Russia row grows
Peter Sutherland, the chairman of BP, has branded as "apocalyptic" predictions of $250 for a barrel oil from Gazprom, Russia's state-backed energy giant, as the tortuous negotiations between BP and its own Russian partner took yet another twist.

Mr Sutherland told the European Policy Centre in Brussels that forecasts from Alexei Miller, the Gazprom chief executive, that oil prices would double within 18 months were unlikely. "Personally I don't believe in some of the more apocalyptic predictions," Mr Sutherland said. "I don't believe we're in for a spike to $250."

BP's chairman was speaking as his chief executive, Tony Hayward, predicted there would be no early resolution to discussions with AlfaAccessRenova (AAR), the Russian investors' group with which it co-owns TNK-BP. Mr Hayward was speaking following another breakdown in talks over the future of the joint venture.

The four billionaire oligarch backers also announced they are to sue BP in a Stockholm arbitration court while lodging a separate suit in Moscowto oust TNK-BP's BP-nominated directors. The power struggle between BP and AAR has been running at fever pitch since December's expiry of the venture's lock-in agreement.

AAR is believed to be trying to take control of the company, which accounts for a quarter of BP's global production, to stave off a bid from the Russian state, in the form of Gazprom, that undervalued AAR's stake. Gazprom said earlier this week that it is interested in TNK-BP, although it will wait for a resolution of the current conflicts.

The problems in Russia highlight the BP chief executive's interpretation of his company's annual global energy report, published yesterday. Global production fell by 130,000 barrels per day (bpd) last year, and OECD countries' production fell for the fifth consecutive year, said the report, while energy usage of all types continued to rise.

China accounted for 52 per cent of global growth, with usage up 7.7 per cent, compared with a 2.2 per cent drop in Europe. But the big factor affecting energy supply is politics, says Mr Hayward. "Declining oil production in the OECD highlights the fact that, while resources are not a constraint globally, the resources within reach of private investment by companies like BP are limited," he said. "When it comes to producing more oil, the problems are above ground, not below it. They are not geological, but political."

Nature laid waste: The destruction of Africa
It was long shrouded in mystery, called "the Dark Continent" by Europeans in awe of its massive size and impenetrable depths. Then its wondrous natural riches were revealed to the world. Now a third image of Africa and its environment is being laid before us – one of destruction on a vast and disturbing scale.

Using "before and after" satellite photos, taken in all 53 countries, UN geographers have constructed an African atlas of environmental change over the past four decades – the vast majority of it for the worse.

In nearly 400 pages of dramatic pictures, disappearing forests, shrinking lakes, vanishing glaciers and degraded landscapes are brought together for the first time, providing a deeply disturbing portfolio of devastation.

The atlas, compiled by the United Nations Environment Programme (UNEP) at the request of African environment ministers, and launched yesterday simultaneously in Johannesburg and London, underlines how extensively development choices, population growth, regional conflicts and climate change are impacting on the natural world and the nature-based assets of the continent.

The satellite photos, some of them spanning a 35-year period, offer striking snapshots of environmental transformation in every country.

America's Need for Saudi Oil and Gulf Money
In addition to promoting the US oil investment, Paulson acquitted sovereign funds, no longer described as a threat to the US national security. He urged these funds to invest in his country. These funds, as Paulson said in his statement to the CNN, were very welcomed in the US. He also explained that his recent tour to the Middle East aimed at confirming this point, especially in light of the doubts looming in the region and around the world.

The call is pressing and justified, given the US terrible need for these funds. The economy is slowing down, enterprises are laying off workers, and unemployment is on the rise; it has reached its highest level since 4 years. As for major financial institutions, they are in need of financial floating that can only be found in the funds of emerging or oil countries, especially Gulf countries. Thus, the most powerful economy in the world is now asking for help, stripping investments of the hostility attribute previously attached to them, investments that were seeking to fructify their profits, similarly to the US capitals in their ongoing search for suitable investment opportunities that might not be available at home.

Stoneleigh: Peak oil is most definitely not a myth as Engdahl says, but his explanation as to how speculation is feeding a commodity top is still worth reading. Tightness in supply and demand doesn't necessarily drive prices continually higher. It is more likely to lead to high volatility, with speculators able to exploit both ups and downs.

Perhaps 60% of today's oil price is pure speculation
“Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”

The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.”

Stocks, Real Estate and Oil Are Overvalued, Marc Faber Says
Oil may have peaked after a 43 percent increase this year, said Faber, the Gloom, Boom & Doom report publisher, in a Bloomberg Television interview today. He said he favors the dollar against the euro, as well as gold.

``I don't see any compelling value in equities, real estate or commodities,'' Faber said from Zurich. ``Contrary to the last 25 years, we are in a period of de-leveraging. Corporate profits in particular are still far too high for 2009 and have to be adjusted downwards, and valuations become less compelling.''

Stock indexes in the U.S. and Europe have tumbled this year as banks piled up $390 billion in losses from credit investments, house prices fell, and investors braced for the possibility of a U.S. economic recession. The Standard & Poor's 500 Index in the U.S. is down 7.3 percent in 2008, while the Dow Jones Stoxx 600 Index in Europe has dropped 15 percent.


Stoneleigh said...

As I was occupied in the barn dealing with the start of lambing season until quite late last night, I answered the questions from yesterday's Debt Rattle this morning. For those interested in some long answers, they can be found on yesterday's post.

DJ said...

Hi Stoneleigh,

I've read Engdahl. In fact, that's how I started to get into all of this back in February. After reading Confessions of an "ex" Peak Oil Believer, I have a desire to explore abiogenic theory. I think it is always good to question the status quo and what I've read is compelling enough to at least warrant further research. That being said, I'd be very happy if we moved away from oil dependency due to the pollution and habit destruction it creates.

Anonymous said...

Hello Stoneleigh,

You are lambing now?
This may be off subject, but could you give me a very short presentation of your year?
We live in an alpage, a summer pasture, and the 1200 ewes just arrived yesterday. They will not be lambing for weeks. The males will be released (in the barn) on the herd from the end of June to around 28 July so the births will be finished before X-mas and New Year (the people here like ten calm days).

To return to my financial questions, you must have been wondering what my problem was with M3. It was simply that I did not understand that M3 included a lot of what we call credit. Then I read this evening in the Wiki article "Money supply":
"The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new type of money is created. This new type of money is what makes up the non-M0 components in the M1-M3 statistics."

Live and learn. But I am still surprised that there is so much credit beyond M3 and outside of any known aggregate. I will read Mish. Thanks again.

In response to DJ (yesterday) on Obama, yes, he is certainly better than McCain, but his recent comments on Iran were absolute shrubbish (if you are in for puns).

In response to EBrown, I have had much less luck with family and friends. All siblings seem to "feel" that nothing really serious can happen, or at least not soon (one brother spoke of 2000 years), and if it does, we will "adapt". Hey, be happy!


EBrown said...

I also have read Engdahl in the past and found his interpretation of Russian/American political posturing over the last few years to be interesting.
I think he's a nut-jub when it comes to Peak Oil though. Specifically -
In the fifth paragraph he betrays his ignorance about oil formation in claiming it comes from "dinosaur remains". No self-respecting geologist would ever claim that.
I can't speak to the specifics of exploration in Russia except to say that if the Soviet Union had such tremendous expertise in finding and producing oil why did it hit a peak in the 1980s, a peak which it only just now is again approaching with the aid of the most modern equipment and engineers from western multi-nationals?
There have been no production caps in the United States since the early-mid 1970s. US oil companies did in fact shut in some wells during the 1980s due to low prices. Why have they not reopened them now that prices have risen so dramatically? Actually they have reopened them and still every year the US produces a little bit less oil than the year before. There is no chance in hell that the US will ever again produce 10+ million barrels per day as we did in the early 1970s.
He claims that western geologists have not bothered to "offer hard scientific proof of fossil origins". On the contrary there are numerous scientific papers that detail exactely this - oil, natural gas, and coal are called fossil fuels specifically because the come from plants and bacteria that were fossilized. Have you ever heard of the "oil shale" in the western US? This is rock that could one day bear oil if it is ever driven underground and baked by the earth's heat for a long time. Tar sands? Organic material deposit that was baked for a good long time then resurfaced. By resurfacing the smaller molecules like the butanes, ethanes, pentanes, etc, evaporated off, leaving a "tar" of only the bigger hydrocarbons.
I'm not a geologist, but I do have a basic college level understanding of chemistry, physical and organic. After reading Endahl's stuff I doubt very much that he has any kind of scientific background.
Feel free to buy into the abiotic crap if you want to, but please at least read Ken Deffeye's two short books on Peak Oil for a realistic assessment of the oil situation we find ourselves in. He explains things pretty well...

Stoneleigh said...

I completely disagree with Engdahl about peak oil, which I consider to be an established fact, but I find his discussion of speculation interesting. My position is that there is a large speculative premium built into oil prices (and other commodities) right now, based on a combination of momentum-chasing and fear of shortages.

Over the longer term, that fear is justified and prices will rise, but in the short term I believe prices have temporarily over-reached the current situation. They may yet rise higher in a blow-off spike, as commonly happens with commodity tops, but I don't think the top tick is all the far off in time.

DJ said...


Thanks for the info! I'll definitely look into it. I certainly don't buy into abiotic theory, I just found it interesting. My knowledge of chemistry is sparse, but I have an engineering background and what you say makes perfect sense. I was very suspicious of his claim that there was no evidence provided for oil being of biological origins, and I found plenty of articles that proved otherwise. I am still interested in learning more about abiotic theory, but it does seem to be quite lacking. Thanks again.

Stoneleigh said...


Left to their own devices, sheep would breed in the autumn and have lambs in February, but we've tried that and it's not much fun at minus forty Celsius. This year we introduced the ram in January so we'd have summer lambs.

Last year we had a lamb born then and the heat lamps weren't working, so we had to bring it into the house. The ewe wouldn't take it back the next day and I ended up trying to raise it myself in the bath-tub (away from the four dogs in the kitchen). It died after three weeks unfortunately, after I'd been feeding it every three hours round the clock. I'm not anxious to repeat the experience :)

We don't have anywhere near the number of sheep that you have, since we're not trying to make a commercial living at this. We're just working on our self-sufficiency in a small way. We're doing companion planting of corn, beans and squash (among other things) for the same reason.

Anonymous said...

This site has completely undermined its credibility by citing Engdahl. Surely, there must be someone else who can comment on speculation, someone more worthy than abiotic Engdahl.


Stoneleigh said...

I'm afraid today's Debt Rattle is going to be late. My car has an appointment for a service this morning, and my son has a vocal performance exam. With luck the post will be up by mid-afternoon.

The lamb count is growing, with twins added yesterday.

Stoneleigh said...


People can have a point in one field that they happen to know something about, even if they haven't got much of a clue about another important field. There aren't all that many people who are clued up across the board, so we need to put together the big picture from the work of many looking at narrower fields.

Many financial writers are either unaware of peak oil or deny the possibility or are aware of it, but don't really understand it. On the other hand, many peak oil writers have no understanding of financial issues at all and tend to think they can be safely ignored. We are always looking for the big picture here, although we concentrate primarily on finance at the moment as it is close to going critical.

Abiotic oil is nonsense, and I made it quite clear that I disagree with Engdahl on that point.

Anonymous said...

I would perhaps miss Anonymous' departure over your citing of Engdahl if I knew which Anonymous he was.

I find Engdahl's analyses of most things to be brilliant and thought provoking. I am currently reading his most recent book, "The Seeds of Destruction." It is a whole new insight into the Rockefeller Brothers, Genetic Engineering of Plants, and racism. Very well researched and written.

I have lived on St. John, USVI for the past 11 years. Laurance Rockefeller bought up most of the island, and then got a bill deporting all the (black) residents to Vieques. He got it through the House. The local residents pooled their meagre resources and sent the local bar proprietor to Washington to lobby against it. It got stalled in the Senate. Laurance then cut a deal with the National Park Service. To this day, the locals hate the Park which is over 65% of the Island.

As to Abiotic Oil - as a chemistry major, that came as a shock to me. But in my 60 plus years of life, if I have discovered one thing, it is that 90% of what passes for common knowledge is bullshit. Alfred Wegener took a lot of serious "kook" abuse for his theory of plate tectonics. If I get the time, I would like to research the actual supporting data to both theories. I wonder if work has been done on C12 and C13 isotope analysis? This is used extensively in trying to understand the causes of the Permian extinction. Unfortunately I have 40 years of rust on my Russian and so am to lazy to go to the original abiotic sources.

In summary, calling Engdalh a kook is an act of verbal stupidity.