Obama, Oil, and the First Wave

The Obama administration is almost upon us. I have told friends and relatives for years that I do not envy the person stepping into the oval office in early 2009. Last week president-elect Obama acknowledged what we all know…the economy is bad and it will get worse. While it is nice to see the typical sunshine pumping about the economy that has been pouring out of D.C. for way too long come to an end…it is very apparent that our “leaders” are still a number of steps behind. In fact they are just as behind as they were 4 years ago when oil had never breached $40 a barrel and a number of concerned folks were trying to raise awareness about the danger we would soon find ourselves in with oil topping $100 and the unknown economic catastrophe triggers it could switch. Well, all of that happened.

I admit, while I did clearly see the energy side of the equation, the nature of this first phase of economic hardship was only learned by me as it was happening. So where are we now? This is just the first wave. Things are now happening much too quickly for our big lumbering governmental and political systems to have a prayer of keeping up. We must obviously fend for ourselves. Oil is hovering at $40 a barrel as I type this. Demand is about 86 million barrels per day (mbpd) while supply is about 87 mbpd. Numerous energy projects have been cancelled due to the recent price collapse. A lot of work that was economically viable at $80 a barrel is not even worth considering today.

Thankfully oil demand has been slowed by the economic downturn. When things start looking rosier, keep an eye on those oil prices. Demand can turn up in the blink of an eye. What happens when demand exceeds supply? The price keeps going up until something (something very big and important) breaks. Then the price comes down when demand has sufficiently been destroyed. Does that sound familiar? It should. You have just lived through a very mild cycle of it. It will get more exciting from here on out. It can be frightening or exhilarating…but that depends on how you have prepared. Of course most people won’t connect the dots and will do the easy thing….blame the government or the president or whoever else. Like I said, this is a bad time to be the president. Good day and God bless.

Economics, Oil, Politics, and the Future

Regular New-Think readers know that we enjoy prognostication. Please allow us to clear up a few things for you regarding the next decade or so.

First, let’s get our credentials out of the way. Way back before oil was above $40 per barrel we predicted that oil prices were set to skyrocket on the basic principles of supply and demand. Way back when the Dow was up in the 14,000-15,000 range New-Think told you it would fall below 10,000 (and probably much further) within the next year. Since we are going to spend the next few posts talking about macro-economics and energy (in the most interesting way possible) it is important that you keep these things in mind. We have not been wrong about calling the shots before they happen in the past.

Now, here is a disclaimer. This is NOT investment advice. My only investment advice to you is to get out of debt. The world economic situation has entered a VERY volatile phase and my prognostication is going to be full of “if-then” type statements. New-Think clearly sees the dominoes, set up and ready to fall, but seeing which domino will fall first is a bit of a guessing game at this point.

These posts are written in response to two sentiments I have heard expressed by ordinary citizens (non-New-Thinkers) in the past few weeks.

1. No one could have seen this coming (in reference to current economic downturn).
2. Gas is under $2 a gallon! We’re all saved!

Tune back in daily for the next few days to get a taste of the future.

The Genesis Plan

Click here for The Genesis Plan that will truly correct our economy and not just slap a bandaid on it. OR scroll down 3 posts where I have pasted it for your convenience.

If you wish to see this plan, or anything other that what you hear about in the MSM, enacted then you need to contact your Representatives TODAY (early and often) to tell them you will vote them out if they vote for ANY bailout that uses tax payer dollars. Don't forget to give them the link to the Genesis Plan. Ciao.

Use Your Power People!

Congress will try to ram this through again today even though there are better options on the table. Use your power to stop them. Contact your reps and senators and tell them in no uncertain terms that a yes vote for this legislation means you will NOT vote for them. We scared them out of it on Monday....time to do it again. It won't happen unless you get involved.

Contact your senator.

Contact your rep. Note: As of 7 a.m. Wednesday morning this site is down...because we have overwhelmed it with traffic. If it doesn't work for you just google your congress-persons name and you will find the contact info you need.

Also...we are not just opposing for the sake of opposing it. There is a better plan, actually a number of them. See next post down for the one I like.

BREAKING NEWS: Paulson and Bush threatened to veto the legislation if there was an explicit prohibition of transfers from foreign banks to an American subsidiary.

This means if legislation says they cannot give YOUR money to foreign investors...they will not accept it. If that does not motivate you to get active...then just go back to watching American Idol.

Don't forget..read The Genesis Plan, one post down.

The Genesis Plan

Are you confused about what is going on in the U.S. economy right now? Need some help? You have come to the right place. The following plan will help you understand the problem and presents a reasonable solution that you can demand your senators and reps take action on. Socializing the banking system is NOT the answer.

Help New-Think make this viral! Send it to everyone you know.

Ladies and gentlemen, I give you The Genesis Plan.

How To Fix Our Banking System
The “Genesis” Plan
by Karl Denninger
karl@denninger.net

It is clear that we must act to stabilize our financial markets. What is also clear is that if we act imprudently we will destroy our financial markets and system instead of saving it, and are likely to usher in a Depression. What Henry Paulson and Ben Bernanke have proposed will do the latter, not the former.

The root cause of the current lack of trust in our financial markets is threefold:

1. Nobody can trust a balance sheet. This is due to off-balance-sheet vehicles (which were supposed to be banned after ENRON) and “Level 3” assets, which nobody can analyze the true valuation of, as identification of the claimed assets and their valuation models are undisclosed.

2. Credit Default Swaps (CDS) are “over the counter” (OTC) transactions with no margin or capital supervision. As a consequence nobody knows if their “counterparty” can pay. In fact huge percentages of these people can’t pay – but nobody knows who they are.

3. Leverage. The SEC removed broker/dealer 12:1 leverage limits in 2004. Every firm that has failed – all five (Fannie, Freddie, Bear Stearns, Lehman and AIG) had leverage far in excess of 12:1. The draft bill is even more dangerous as it accelerates a provision intended to go into effect in 2011 that allows Ben
Bernanke to increase financial firm leverage by dropping reserve requirements on banks to zero should he so choose. It is excessive leverage that got us here in the first place, and this bill actually makes it worse.

The solution to the trust issues in our financial system is elegant and it will work.

1. Force all off-balance sheet "assets" back onto the balance sheet, and force the valuation models and identification of individual assets out of Level 3 and into 10Qs and 10Ks. Enact this requirement beginning with the 3Q 2008 reporting period which begins next month. Total taxpayer cost: $0.00

2. Force all OTC derivatives onto a regulated exchange similar to that used by listed options in the equity markets. This permanently defuses the derivatives time bomb. Give market participants 90 days to get this done; any that are not listed in 90 days are declared void; let the participants sue each other if they can't prove capital adequacy. Total taxpayer cost: $0.00

3. Force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit. Every firm that has failed had double or more the leverage of that former 12:1limit. Enact this with a six month time limit and require 1/6th of the excess taken down monthly. Total taxpayer cost: $0.00

Once 1-3 are put in place then send in the OTS and OCC examiners and look at every financial institution in the United States. All who are insolvent and unable to raise private capital immediately are forced through receivership where the debt is converted to equity and existing equity is wiped out.

With the CDS monster caged the systemic risk is removed, the bondholders provide the cushion for recapitalization (as it should be) and the restructured firm emerges with no debt while the former bondholders are now the owners (of the equity) in the resulting firm.

With a clean balance sheet the restructured firms remain in business and open the next morning able to raise and attract capital.

For the few firms that have an insufficient debt-holder capital cushion to successfully complete this process, weare left with two options – a capital infusion or liquidation. There will be few of these and in fact each of those firms is a regulatory failure, as we should have never permitted a firm to become so far "underwater" that the bondholder's capital is insufficient to capitalize a restructuring.

For those firms, give the FDIC (or if an insurance company, the appropriate state and federal regulatory authorities) primary control. As the CDS monster has been caged, the primary threat is now loss to state and federal guarantee programs. If these regulators deem that this firm’s liquidation would result in an unacceptable loss to the system’s guarantee programs then recapitalize the firm as follows:

· The government shall be issued senior preferred debt ahead of all other debt and equity in the capital structure, paying a floating coupon of 3 month LIBOR + 8% adjusted quarterly, in an amount sufficient to bring regulatory capital above minimum limits.

· All dividends are suspended for as long as the preferred remains outstanding, and during that period no employee of the firm may receive any form of compensation exceeding that of the President of the United States for a corporate officer, and no more than that of a United States House member for any person who is not a corporate officer. At the issue of the preferred stock all outstanding deferred compensation, including options, are deemed cancelled.

· The firm may retire the preferred at its option by repurchasing it at the issue price.

· The appropriate regulator shall have primary authority to “call” the above debt issue at any time and force bankruptcy (along with recovery of invested amounts) should the firm fail to execute an effective turnaround plan.

Finally, drop the silly shorting restrictions. Liquidity in the market stinks and this is a big part of why. Start prosecuting aggressively the rumors and other manipulation that leads to stocks both rising and falling.

This plan will instantaneously stabilize the credit markets as balance sheets will be transparent, the CDS monster will be permanently de-fanged, leverage will be returned to reasonable levels and the forcibly restructured firms will have no debt on their balance sheets and be able to access the capital markets. Firms that would fail once they have disclosed their true liabilities and result in unacceptable insurance program costs will be recapitalized with a reasonable expectation of the taxpayer not being stuck with the bill. Systemic risk will be removed.

Best of all, it will require zero taxpayer dollars with few exceptions, and for those instances where taxpayer dollars are required the amount of taxpayer risk would be small and well-protected.

This plan is very similar to what Janet Tavakoli proposed on September 25th in an open letter released on the web.i Ms. Tavakoli is an internationally recognized expert in these matters, is an adjunct professor of derivatives, and is widely published.

This and other alternatives must be examined before our nation embarks on what may be a disastrous path.

POWER TO THE PEOPLE

YES YES YES!!!

I have never been prouder to be an American than I am today. I have renewed faith in our system of government. Along with thousands (millions??) of other Americans I have spent the week slamming the phone lines of congress persons to insist (in the strongest of terms) that we not pass the so called "bail out" in any form. No number of special provisions justifies borrowing our way out of a credit crisis. We won!! Without the efforts of concerned citizens and the internet community I am certain we would have just socialized our economic system.

The near future will not be a cakewalk. No doubt we are headed for hard times, as I have been saying here for more than a year. As I write this the dow has tanked more in 30 minutes than it does in a bad month. But we have shown that the American people will not compromise when it comes to freedom. We will not be given our marching orders by the Federal Reserve. Right on!!!!! Power to the people!

There are still many congress persons who voted for this bill even with unprecedented outcry from their constituents. Their names will be posted on the website shown below. Please join us in systematically voting these people out of office. People who thought they knew better than the people they represented.

http://supportedthebailout.org/

Increase Forward Fire on Congress

It is working but we are not done. I have been calling and e-mailing like crazy. The congress persons are now scared to support this thing because the people are "giving them the business".

Click here to find out more!

A little humor for you. May be slightly offensive (my sincere apologies) but MUCH closer to reality than the mainstream media.

Fed Lies!

The following cut and pasted from here. Do not trust the Federal Reserve. You did not elect them. They are a private company. The are no more "Federal" than Federal Express. Would you give Federal Express $700 billion if they said, "Trust me, we have your best interest in mind." If you would, please contact me...I need all of your money and I have your best interest in mind. Now, see below.

The Fed has claimed that this is a "liquidity crisis."
Really Ben? Then perhaps you can explain this?



Note that this is an intentional drain of "slosh", or liquidity, from the banking system. $125 billion in the last four days drained?
You wouldn't be trying to intentionally cause a bank failure or two to bolster your call for the $700 billion "bailout" plan, or perhaps intentionally lock the short-term credit markets, would you Ben?
If the market has a liquidity crisis, why would you be intentionally draining reserves from the banking system? Don't you think you ought to explain that to Congress?

Contact Congress

I sent a letter similar to my senators and rep this morning. Please do the same.

Dear Dr. Coburn,
My wife and I have supported you with our votes in the past. However, if you vote for the proposed “bail-out” in ANY form you lose our votes forever. Furthermore, we are successfully working to mobilize others to vote against anyone who supports this action.
Respectfully,
Jeff and Michelle Johnson

Don't Waste Your Vote (on either major party)

I won’t be voting for a Democrat or a Republican in the upcoming presidential election. The primary reason is because I don’t really believe there is a major difference between the candidates. In regard to foreign policy, the welfare state, big government, and privacy issues there is no discernable difference at all. Where is the candidate for states’ rights and shrinking of the federal government? Where is the candidate who will reign in the Federal Reserve and move us toward a currency that is actually backed by something more than our imaginations and maintained the shuffling and obscuring of massive debt? As either Obama or McCain will learn during the next term…it is probably too late for that already. The tsunami is coming. I could go on for ten paragraphs about Bear Stearns, Fannie and Freddie, and, soon to come Lehman, Merrill Lynch, and WAMU…but even the perfect candidate could not fix this mess now.
Now I realize there are, theoretically, ideological differences that should be considered between the candidates. This one supports Roe vs. Wade, this one doesn’t. This one wants gun control, this one wants less. But where is the candidate who will state that NEITHER of these issues and many like them are not issues for the federal government to decide AT ALL. At best (where constitutional to even question) these should be decided by the states.
On energy policy. One party wants to drill offshore…the other doesn’t. Seriously, they are not even engaging in the correct debate. I realize most of the sheeple of America believe this is where the debate is. All the time we are told idiotic drivel like “America has 200 years of oil, and all we have to do is go get it.” Absolutely NOT true. These accounts take into consideration oil shale, oil sands, and the Bakken formation. These ARE NOT conventional oil plays and will not solve the energy crisis. We cannot extract any of these resources at high enough rates to make any more than a small bump on the declining production curve of American oil. Don’t believe me, though (someone involved in this arena professionally), research it for yourself. Just please do not listen to what the democrats, republicans, or CNN, or Fox News tell you. Oil is down to a paltry $100 a barrel now (major sarcasm)…so for Joe-six-pack this is probably a dead issue since surely it will head far back down into double digits and stay there forever….it’s our God-given American right (more major sarcasm).
Erosion of civil rights and right to privacy. This is a big one. We are seeing things that are I frankly cannot believe are happening in America. Habeus Corpus/eminent domain…where is the champion of the private property owner? A hair splitting debate about the definition of torture for crying out loud....should we ever get so close to torturing other humans to even ask ourselves these questions? Unregulated government sponsored phone tapping of private citizens. What. Does anyone even care? Neither of the two major candidates does.
I am just getting started. But if you find yourself saying you are going to vote for the lesser of two evils…then don’t. Pick a third party candidate who lines up with your views. The lesser of two evils is still evil. Down with the two (one) party system. More on this later…I’m out of time.

“The argument that the two parties should represent opposed ideals and policies, one, perhaps of the Right and the other of the Left, is a foolish idea acceptable only to the doctrinaire and academic thinkers. Instead the two parties should be almost identical, so that the American people can ‘throw the rascals out’ at any election without leading to any profound or extensive shifts in policy.”
Carroll Quigley – Author of Tragedy & Hope