Black Swans Everywhere

Written by James Howard Kunstler

03 23 08

Atlantic Free Press

After a one-day reprieve from total meltdown in the financial
markets, news media cheerleaders for the most reckless gang of
bankers in world history declared the crisis over on Good Friday
(with the markets safely closed). Whew, that's a relief. Problem
solved. And just in time for baseball season, too, so none of the
Banker Boyz have to sell their sky box leases.

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke

What is meant by "meltdown," by the way, since the word is used so
promiscuously by myself and others. I'd define it as the shock of
recognition that many big institutions are worse than flat broke and
are therefore powerless to conduct normal operations. By "worse than
flat broke" I mean they are so deep in hock that all the accountants
who ever lived, in the life of this universe and several others like
it, using the fastest parallel processing computers ever built, could
not keep up with their compounding accelerating losses (now
approaching the speed of light).

The current vacation from reality on Wall Street may last a few more
days, or even a couple weeks, but it seems as though a whole flock of
black swan events is circling the sky over Financial-land and is
about to blot out the sun. By black swan, I refer to the concept
popularized by Nassim Nicholas Taleb in his recent book of that name,
namely unexpected events of great power that tend to change the
course of history.

For the moment, with the crisis "contained," and the Boyz getting
ready to air out their Hampton villas for the coming season, we are
once again primed to be blindsided by potent random events that
nobody saw coming. The trouble is, there are enough potent potential
fiascos already visible on the horizon.

The mortgage fiasco is still just gathering steam as it moves from
the non-payment stage to the default and repossession level on the
grand scale. Even the political wish to bail out feckless mortgage
holders will stumble on the mammoth clerical task of administrating
the process, especially since we've barely begun to sort out who
actually holds the mortgages after they've been minced into a fine
mirepoix of securities off-loaded onto countless dupe "investors"
ranging from municipal funds in obscure corners of foreign nations to
countless public employee retirement plans.

No matter how the authorities try to "nationalize" the sucking chest
wound of bad mortgages, the body of finance will flat-line — and the
American public will get stuck with the bill from the intensive care
unit. Those who, for some weird reason, continue to pay their way and
meet their obligations, will be none too pleased to pay for misdeeds
of the deadbeats and their banker-lenders. This portends a taxpayer
rebellion, which may translate into a voter rebellion.

It's too bad the current presidential candidates have been unable to
address the unfolding economic nightmare. Their collective silence on
the matter suggests that they don't have a clue what to say about it.
As the nightmare plays out and black swans flock in to blot out the
sun, and the hedge funds come a'tumbling down, and more big banks
blunder into black holes, and businesses big and small across the
land shutter up their operations, and the unemployment rolls swell,
and families are thrown out of their houses even when bailouts are
supposed to be saving them (but the bureaucracy can't get the
paperwork done in time) — well now, they are going to be one pissed
off bunch of people. What will they do at the conventions? Our
outside the conventions?

In the deeper background of all this is the all-important oil story
that nobody in politics or the media wants to pay attention to.
Notice that in the fervid unloading of assets this past week, as
investors dumped their positions in the commodities markets, the
price of oil remained stubbornly above $100-a-barrel when it was all
over on Thursday afternoon. Well, maybe they'll ratchet down a little
further this week, but the trend line will prove to continue
remorselessly upward in the months ahead.

Peak oil is for real. The supply can't keep up with global demand,
even if it dips in the USA. And more portentous sub-plots develop in
the story every month. Export rates are falling at a steeper rate
than depletion rates. The exporting nations are not only buying more
cars and running more air-conditioners, they also need to use more
energy to lift the oil they've got out of the ground.

Another sub-plot is the fact that the equipment used world-wide to
drill for oil and recover oil and move oil around the planet — all
that equipment is now so old and rusty that it can barely do the job,
and it is going to start failing altogether unless investments are
made to replace it, which nobody is making.

By the way, Americans blame the familiar private oil companies for
all the trouble with oil in their lives — Exxon-Mobil, Shell, et al —
but they don't seem to know that oil nationalism is in the driver's
seat now. The old private "majors" are only producing five percent of
the world's oil. The rest is coming from the national companies —
Aramco, Petrobras, Pemex, et blah blah — and the very operations of
the oil markets are entering a phase of radical instability as they
move away from auctioning their stuff on the futures markets and
start making long-term favored customer contracts instead.

The bottom line is that high prices for oil is hardly the only thing
America has to worry about. Pretty soon the US will have to worry
about getting the oil at any price — meaning, we're in for shortages
and supply disruptions sooner rather than later.

Also unbeknownst to most of America, the financial markets reflect
all this instability around the basic resource of oil because
industrial economies like ours are set up in such a way that they
can't run without cheap and reliable supplies of the stuff. So the
least little twitter in the reality-based world of peak oil means
that everything to do with money and capital investment will
naturally go batshit, since our expectations for increased wealth —
i.e. "growth" — are predicated on the activities driven by oil.

It will be interesting to see what new machinations are unveiled this
week. Whatever else this catastrophe is, it's a good show from the
cheap seats.