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April 19, 2006

Media Pickin at Pickens -- US Blame game goes on

1 Gasoline prices are rising, which means it's time for a new round of hysterical media stories about that dastardly oil industry, its obscene profits, and its nefarious ways.

Now the media are at it again, but with a different target. They're turned their guns on Texas oilman T. Boone Pickens, whose energy hedge funds have delivered staggeringly successful results for their investors in recent years. (Full disclosure, and sorry to steal the thunder from left-wing conspiracy buffs: Pickens supports the Media Research Center. Not only that, but he's also a friend, though this friend didn't have the Abramoffian common decency to compensate me for writing this.)

In February, the New York Times and CNN reported breathlessly that Pickens had made a $165 million tax-deductible gift to Oklahoma State University (OSU). So what's so scandalous about that? Well, there was more to the story, you see. After receiving the gift, OSU turned around and reinvested it all right back in Pickens' company. How perfectly quaint! If not illegal, certainly it was unethical. No, sleazy. The man took a monster tax write-off with this gift only to have the money put right back into his investment company. They don't call them the greedy rich for nothing. Some friends you've got, Bozell.


Except for a couple of things. What neither "news" outlet saw fit to report was that by the time these stories emerged, just months after the re-investment, Boone Pickens' funds had already generated a cool $20-plus million additional profit for OSU. (That was February, remember.) I understand the number has now topped $40 million!.

Yeah, but what did Pickens make on the deal between management and performance fees? Buried in the Times story in the 12th paragraph, when most people have stopped reading, and ignored altogether by CNN, was this little nugget of information: Pickens had waived all fees and commissions on that reinvestment. In other words, Pickens didn't earn a penny for the work he did increasing the value of his gift to his alma mater to over $200 million.

And get this: The $165 million gifted by Pickens constitutes the largest gift ever received by Oklahoma State University. The fees and commissions waived by Pickens represent the second largest gift ever to that school.

And for that he was attacked by the New York Times and CNN.

Now comes "ABC World New Tonight" with another hit piece on Pickens introducing yet another variable. In their "eye-opening" (their words) pre-Tax Day report on April 11, anchor Elizabeth Vargas and "investigative reporter" Brian Ross charged Pickens' OSU gift was nothing more than an "audacious" abuse of a "loophole" in last year's Katrina Relief Act that allowed full deductions for charitable giving primarily to encourage assistance to hurricane victims. As a result, they charged, because of this "apparently legal" maneuver, "a taxpayer could deduct enough to effectively have a gross income of zero." Moreover, they claimed, Pickens was violating at least the spirit of the law. "None of Pickens' $165 million went to Katrina victims," Ross reported, "unless they were going to golfers in Oklahoma," While Ross dripped his sarcasm, visuals showed people lazily playing that sport at a country club.

How many deliberate distortions, inaccuracies, and omissions of fact can we count here?

Distortion: The gift to OSU was directed to a wide variety of the university's sports programs, including a new stadium -- not golf.

Inaccuracy: There's nothing "apparently" legal about what Pickens did. It's completely legal, and completely ethical. But don't take my word for it. My colleague Amy Menefee found this poignant analysis of the tax code revision from Vargas' and Ross' co-worker, ABC financial contributor Mellody Hobson on Feb. 23: "Well, this is actually a terrific thing. After Katrina, the government really wanted to spur contributions to help the victims, so … they said that 100 percent of any contributions you made, regardless if it was Katrina-related or not, would be tax-deductible."

Omission: Far from finding a loophole to deliver a gross income of zero, Pickens paid over $200 million in corporate taxes last year. That fact was known by ABC when it ran this hit piece.

But what about Katrina victims? Isn't that the underlying point? A big gift to a university in Oklahoma is nice, but what about helping those desperately needy folks so decimated by those horrific hurricanes? Where are the conservatives when we need humanitarian relief?

Here's another little bit of information known to ABC but kept from its viewers, purposely withheld in order to tell this story of corporate corruption.

Guess who was the single largest individual donor in the United States of America, at $7 million, to help Katrina victims directly? Yup. Boone Pickens. And for good measure, his wife contributed hundreds of thousands of dollars more.

The only scandal in these scandal stories is the stories themselves.

Brent Bozell is President of Media Research Center, a Townhall.com partner organization, and author of Weapons of Mass Distortion. You may contact him here

April 05, 2006

HUGO CHAVEZ TELLS BBC, WE HAVE MORE OIL THAN SAUDI ARABIA

HUGO CHAVEZ TELLS BBC, WE HAVE MORE OIL THAN SAUDI ARABIA

Greg Palast Reporting for BBC Newsnight TV

Monday, April 3, 2006

In an exclusive interview with GREG PALAST, Hugo Chávez declares a new oil order.

Venezuela officially demands OPEC recognize his nation's reserves as largest.

Tonight, BBC Newsnight will kick off its Latin America Week Special with Palast's exclusive report from Venezuela.

You can watch the BBC Newsnight Report live at 5.30 pm EST at Newsnight's website: http://news.bbc.co.uk/1/hi/programmes/newsnight/default.stm

(The report will remain viewable for 24 hours).

Read below about BBC Newsnight revelations ...

 

NO MORE CHEAP OIL SAYS CHAVEZ

BBC Newsnight

Monday April 3, 2006

If you thought high oil prices were just a blip think again. In an exclusive interview with Greg Palast for BBC Newsnight the Venezuelan President Hugo Chavez has ruled out any return to the era of cheap oil.

The colourful Venezuelan leader hosts the OPEC meeting on June 1 in Caracas and he will ask OPEC to set $50 a barrel - the average price last year - as the long term level. During the 1990s the price of oil had hovered around the $20 mark falling as low as $10 a barrel in early 1999.

Chavez told Newsnight "we're trying to find an equilibrium. The price of oil could remain at the low level of $50. That's a fair price it's not a high price". Hugo Chavez will have added clout at this OPEC meeting.

US Department of Energy analyses seen by Newsnight show that at $50 a barrel Venezuela - not Saudi Arabia - will have the biggest oil reserves in OPEC. Venezuela has vast deposits of extra heavy oil in the Orinoco. Traditionally these have not been counted because at $20 a barrel they were too expensive to exploit - but at $50 a barrel melting them into liquid petroleum becomes extremely profitable.

The US DoE report shows that at today's prices Venezuela's oil reserves are bigger than those of the entire Middle East including Saudi Arabia, the Gulf states, Iran and Iraq. The US DoE also identifies Canada as another future oil superpower. Venezuela's deposits alone could extend the oil age for another 100 years.

The US DoE estimates that Chavez controls 1.3 trillion barrels of oil - more than the entire declared oil reserves of the rest of the planet. Hugo Chavez told Newsnight's Greg Palast that "Venezuela has the largest oil reserves in the world. In the future Venezuela won't have any more oil - but that's in the 22nd century. Venezuela has oil for 200 years." Chavez will ask the OPEC meeting in June to formally accept that Venezuela's reserves are now bigger than Saudi Arabia's.

Chavez's increased muscle will not go down well in Washington. In 2002 the Bush administration welcomed an attempted coup against Chavez. He told Newsnight that the Americans had organised it in an attempt to get hold of Venezuela's oil.

Ironically by invading Iraq George Bush has boosted oil prices and effectively transferred billions of dollars from American consumers to Chavez. Up to $200 million a day - half of it from the US - is flooding into Caracas. Chavez is spending this on building infrastructure and increasing the minimum wage and improving health and education in the poor ranchos which surround the cities. As a result even his opponents accept that Chavez is extremely popular and will easily win the next Presidential election in December.

Chavez is also spending billions in the rest of Latin America - exchanging contracts for oil tankers and infrastructure projects and buying up loans in Argentina and Brazil. He has made cheap oil deals with Ecuador and the Caribbean.

He has also spent some of the dollars which have come in from the US supporting Fidel Castro in Cuba. In return Cuba has supplied the thousands of doctors and teachers who are transforming conditions in the barrios of Caracas. Washington accuses Chavez of buying influence in Latin America.

The Newsnight team had to endure the long speeches and marathon six hour TV shows which Hugo Chavez delights in. Chavez posed for Newsnight posing with the sword of Simon Bolivar the 18th century liberator who drove out Spanish imperialists from South America. The symbolism was clear but behind the showman is a clever political brain.

Chavez has not invaded any foreign countries. He does not have secret prisons at home or abroad. Chavez has repeatedly won democratic elections and the opposition operates freely although some members have been charged with accepting illegal foreign donations. Nonetheless George Bush's administration repeatedly targets Chavez on human rights and finances his opponents.

Earlier this year US Defense Secretary Donald Rumsfeld compared Chavez to Hitler - because he was elected democratically - and last year the influential American evangelist Pat Robertson called for his assassination. Robertson later apologized and said that he did not "necessarily" have to be killed so long as he was kidnapped by American special forces.

Chavez told Newsnight that he was still concerned that George Bush had not learnt the lessons of Iraq and would order an invasion to try to secure Venezuela's oil. "I pray this will not happen because US soldiers will bite the dust and so will we, Venezuelans". He warned that any such attempt would lead to a prolonged guerilla war and an end to oil production. "The US people should know there will be no oil for anyone".

Chavez does not accept Tony Blair's criticism of him for lining up with Fidel Castro. He told Newsnight "if someone is sleeping together it is Bush and Blair. They share the same bed."

--

Also see The Guardian story about the report: http://business.guardian.co.uk/story/0,,1745467,00.html

Read, "The Assassination of Hugo Chavez," in Greg Palast's new book, "ARMED MADHOUSE: Dispatches from the Front Lines of the Class War" to be released by Penguin Dutton June 6 (US) and July 7 (UK).

Pre-order it today or donate to Palast Investigative Fund for a personally signed copy at: http://www.gregpalast.com/armedmadhouse/preorder.html

View Palast's investigative reports for Harper's Magazine and BBC Television's Newsnight at http://www.GregPalast.com

Special thanks to Matt Pascarella, Leni von Eckardt, and Richard Rowley for their research and production assistance on this report.

March 29, 2006

Peak Oil Flash

A very important flash presentation on Peak Oil.

March 23, 2006

Spot Uranium rises to US$40.50

Up from $30.00 last October. The Most Bullish metal of all.

March 19, 2006

Significant Energy Statistics

 
  • Oil reserves
  • Oil production
  • Oil consumption
  • Gas reserves
  • Gas production
  • Gas consumption
  • Coal reserves
  • Coal production
  • Coal consumption
  • Energy consumption
  • February 22, 2006

    Omen at Chicxulub


    by Kevin McKern
    February 21, 2006
    65 million years ago the Chicxulub meteor crashed into the sea near the Yucatan Peninsula, ending the reign of the Dinosaurs and the lives of most of the species then living on earth. The fossils types change so radically that the impact marks the end of that period of earth history called the Cretaceous and the start of the Tertiary, the so called K/T boundary.

    The impact left a hole in the earth 100 miles in diameter and a mile deep but so capped by limestone and buried in sediments in the meantime as to be invisible in modern times. It was only after finding a global iridium spike at the K/T boundary, the "smoking gun" of an extraterrestrial impact, that geologists finally traced the outline of the buried Chicxulub crater in PERMEX (the Mexican Oil Company) seismographic data. Ironically, the crater was only found because a section of its sand and limestone cap had trapped 35 billion barrels of oil and become Cantarell, one of the world's greatest oil fields.

    Discovered in 1976, it was quickly producing a million barrels a day from less than fifty wells, but as the years passed and the gas pressure dropped, PEMEX kept production up by injecting 1.2 billion cubic feet of nitrogen into the field daily. This is what keeps current Cantarell production at 2 million barrels a day and Mexico's total exports at 1.82 million barrels.(1)

    Last year, the decline started, 2005 production was 5% lower than in 2004.

    Last week the top secret PEMEX Cantarell Depletion study was leaked and apparently it reports that there is only 825 feet between the gas cap over the oil and the water that is pushing into Cantarell from the bottom and closing at between 250 and 360 feet per year. Cantarell's production will drop from 2 million b/d to 875 thousand barrels a day by the end of 2007 and halve again by mid 2009.

    The loss of 1.5 million barrels a day of production capacity within three years will be very difficult to overcome because exports will be seriously reduced or perhaps even eliminated forever.

    High depletion rates are not unknown. Production at Oman's Yibil field peaked in 1997 at 225-250 thousand barrels a day and then declined to 88-95 thousand barrels a day in three years. Part of that decline was attributed to the introduction of horizontal and multi-lateral drilling into the field that increased the percentage of water being brought to the surface with the oil to a greater extent then anticipated.

    Increasingly the concern is expressed that advanced technology may not increase the quantity of oil you can recover from a field so much as get a slightly smaller amount out much faster. In the meantime, oil production from Cantarell bears close watching. An unusually fast decline will be yet another indicator that peak oil is near at hand.

    The Oil Depletion Analysis Centre in London reports that 68 oil-recovery mega projects with announced start-up dates through 2010 will add 12.5 million b/d of crude supply by the turn of the decade, but, according to Chris Skrebowski, a board member.(2) "This new production would almost certainly not be sufficient to offset diminishing supplies from existing sources and still meet growing global demand."

    If demand increased by 2% year, available supplies would fall short of the total projected to be needed in 2010 by more than 2 million b/d" roughly equivalent to losing all of Kuwait's current daily production," ODAC said.

    Other analysts see this estimate as optimistic.

    IHS Energy, consultants in Epsom, UK, reports that 85% of all the oil ever discovered is now in production and that only half of the total produced last year was replaced by new field discoveries.(3)

    Oil consumption has now exceeded new discoveries every year since the early 1980s and oil discoveries have been declining steadily for the past 40 years. With most producers operating flat out to meet runaway demand increases this year, the world's immediately available spare production capacity has disappeared.

    1) http://www.fcnp.com/550/peakoil.htm
    2) Oil & Gas Journal, Tulsa: Nov 22, 2004. Vol. 102, Iss. 44; pg. 28
    3) Petroleum Economist, London: Mar 2005. pg. 1

    February 18, 2006

    The Conundrum of Risk

    "Let us start with what we know. First, these markets look nothing like anything I've ever encountered before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness, the light-speed at which information moves, the degree to which the movement of one instrument triggers nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary to price them speak to the reality that we are now sailing in uncharted waters.

    "Next, we know things have been getting less, not more, turbulent, and that the tendency towards market serenity (complacency?) has been increasing. This is counterintuitive. It's not as though the 21st century has been lacking in liquidity shocking events. Since the bursting of the tech bubble, we've had a disputed Presidential election, 9/11, the collapse of Enron and Worldcom, the invasion of Afghanistan, the war in Iraq, US$70 oil, the largest debt downgrade in history and the failure of Refco, to name just a few. There seems to be an inverse correlation between market complexity and market stability, for now anyway.

    "Counterintuitive though it may be, it's not like we don't see this pattern everywhere we look. Take aviation, as one example of many. There were three fatal flights per million in 1979 as compared to 0.5 in 2004. Flying today is statistically 6 times safer than it was 25 years ago, even though technology now does most of the actual 'flying' with autopilots, GPS navigation and the like. In medicine, engineering, even warfare, risk is being reduced at the junction of technology and human endeavor....

    ...the present level of financial technology has allowed the western world to take leverage to new levels - ratios never before contemplated in our financial history. It is without a doubt smarter leverage, and it is, in no small part, responsible for the wealth we enjoy today as a society....

    "...But something isn't different, too, and it's what keeps me up at night. It's the other side of the hyper-efficient frontier: the investors. Over the years, when trying to make sense of the impossibly complex global economy, I think a lot about the elegant advice of Albert Einstein, who said everything should be made as simple as possible, but not more so. Two simple things I understand are risk and return, both of which seem to have been coming down.

    "Lets' start with return. There are several truths about return that have held up well over the centuries, making for a good statistical sample. Eventually, returns diminish relative to assets invested. The point where the diminishing returns occur vary across investments, but were it not true some very smart investor would have wound up with all the money in the world by now. We also know there has been an explosion in asset growth in efficiency capital, the term I use to describe the societal function hedge funds and prop desks perform, and that returns in that space have come down. I'm still trying to find someone who thinks that's a coincidence.

    "The next thing we know about return is that asset classes have a risk premium. They will pay you a return relative to the amount of risk the 'market' deems you to be taking by owning a particular asset. The risk of a T-Bill is less than the risk of a small cap stock, and so is the return over time. Now let's talk about what we don't know. Or, to be fair, what I don't know. If these hypotheses about the hyper-efficient frontier are true; if the restructuring of the world's capital and derivative markets and the explosion of efficiency capital have structurally lowered risk in financial markets, then wouldn't risk premiums also be lower? Let me say that again. If markets really are less risky, why would they continue to pay us the same return? Wouldn't that be the proverbial free lunch that isn't supposed to exist?

    "The implications here are large and it's too early to prove them. There will not be enough data actually to prove anything for years. The premise is that the growth of efficiency capital has not just lowered the returns in hedge funds, but by lowering the risk across capital and derivative markets, it has lowered the future returns in those markets as well. Great for the business economy, but a new, and unappealing paradigm for investors.

    "There was a saying in the seventies among commodity traders: 'Watch out for the risk, and the returns will take care of themselves.' Today, returns do not seem to be taking care of themselves, and going forward, it may be that investors have to actively seek riskier assets or structures to earn a respectable risk premium. So let's talk about risk.

    "We can start by acknowledging that the nature of risk in the markets has changed. It could be higher or lower, but it's different. The cumulative impact of technology, telecommunication and financial product innovation has, at the least, altered the way information is shared, orders are transmitted, and both risk and return factors are dispersed. The proliferation of derivatives has created leverage never imagined a generation ago, and trillion dollar exposures now exist in instruments that make the '90s seem like a different century. Ok, they were a different century. But empirical data supports the conclusion that market risk is changing, at least in the short term.

    "This leaves us with two options, and their respective implications:
    • Markets are structurally less risky, leaving us to answer the question about future risk premiums, or
    • Markets are still as risky as they ever were, but the nature of the risk has somewhere been altered...
    "... and this brings us back to the question I raised in my last column about 'risk compensation,' the proven tendency in humans to react to safer conditions by taking more risk. You make me wear seat belts, I drive the car faster.

    "Having given it some thought, I believe we are adjusting our risk levels in the financial markets back up to where they were before we employed all this efficiency capital. In fact, we may have no choice. Sitting on the short arm of chromosome 11 is a gene with the Stars Wars-like name of D4DR. Its function is to regulate the flow of dopamine in the brain. Dopamine is a neurotransmitter which, among other things, regulates the flow of blood in the brain. To greatly oversimplify, the level of dopamine in the brain affects behavior. Too little and individuals tend toward lethargy, too much and they become easily bored and tend to seek adventure. Put simply, we may one day discover that, for all our efforts at building safer roads and more efficient markets, our collective appetite for risk is set at the genetic level. Genetically or not, the generalized response to the more-or-less recently created hyper-efficient frontier seems to be that we keep adding leverage.

    "The warning signs are there. The Bank of England's 'Financial Stability Review' in December of 2005 said the following: 'The U.K. financial system remains healthy. However, the persistence of the 'search for yield' across financial markets continues to fuel an increase in highly leveraged and potentially illiquid financial products. It has placed pressure on financial intermediaries to ease lending terms, challenged operational controls within the financial sector, and may have heightened the vulnerability of the U.K. financial system to adverse developments.'

    "The BoE goes on to talk about crowded trades, the potential for financial contagion, the possibility of smaller banks with rising loan losses cutting back on lending with dangerous consequences in a macro downturn, and concentrated lending to emerging markets, culminating in potential risk to the payment system, otherwise known as a liquidity shock. I've seen this movie before. So after all this, I'm left thinking about the old wedding rhyme: 'something old, something new, something borrowed, something blue.'

    "I've had 30-plus years of learning experiences in markets, all of which tell me that technology and telecommunications will not do away with human greed and ignorance. I think we will drive the car faster and faster until something bad happens. And I think it will come, like a comet, from that part of the night sky where we least expect it. This is something old.

    "But I have learned to trust my eyes and ears and overrule my heart, when I have to. Everywhere I look, technology is making things faster, more efficient, safer. I cannot find the law of physics or economics that says it cannot happen in financial markets as well. I think, because risk will be lower, return will be as well. And savvy investors may have to seek additional risk, and manage it well, in order to earn an excess return. This is something new.

    "I think shocks will come, but they will be shallower, shorter. They will be harder to predict, because we are not really managing risk anymore. We are managing uncertainty - too many new variables, plus leverage on a scale we have never encountered (something borrowed). And, when the inevitable occurs, the buying opportunities that result will be won by the technologically enabled swift.

    "At least, that's what I think tonight. My goal every morning is to wake up humble, with an open mind. It's harder than it looks, and I fail far more often than I succeed. These ideas represent secular change on a fundamental level. They go against all our learned experiences. They could be wrong, and we won't know for a long time what the correct answer was. And, for all of that, there is still money to be made. The tactics may have changed, but then tactics usually do, every ten years or so. The shape of alpha may change and reappear in new forms and arenas, but it won't go away. And it can be captured by those who can adapt. Those who don't? Well, the song they sing will be something blue."

    Lost in Translation: 45,000 Derivatives

    Let's pull out one important paragraph. "I think shocks will come, but they will be shallower, shorter. They will be harder to predict, because we are not really managing risk anymore. We are managing uncertainty - too many new variables, plus leverage on a scale we have never encountered (something borrowed). And, when the inevitable occurs, the buying opportunities that result will be won by the technologically enabled swift."

    Why are we no longer managing risk? Primarily because of derivatives and other forms of insurance. It was the advent of insurance at a pub in London which later became Lloyd's lo London that enabled the quicker proliferation of trade and commerce. Insurance of all types spreads the risk of any one negative event from one person to many persons.

    And thus credit default swaps, one form of derivatives, have enabled more and more firms to mange their risk and feel comfortable increasing their leverage, adding to the pool of capital looking to go to work. But in an effort to mange risk we create a new form of uncertainty.

    Bill King brought this to my attention this morning: The WSJ in GM Debt Poses Challenge To Derivatives Market: "The car maker has about $30 billion in debt. Traders estimate more than $200 billion in credit derivatives are linked to GM. But because such derivatives don't trade on an exchange, nobody knows for certain how much credit-default swap protection has actually been written on GM. And nobody can say with confidence that they even know who is on the other side of the trades that they have entered into. Such uncertainty is one reason that, since last year, regulators have asked participants in the fast-growing market to get their operational act together. That encompasses everything from dealing with a backlog of unconfirmed trades to figuring out who their counterparties are when one side transfers contracts to another party. The Fed has asked market participants to report by today on their progress in dealing with these and other issues...Four years ago, the derivatives market was a fraction of the size of the underlying corporate-bond market. Today, it is estimated at $12.5 trillion, more than twice the underlying market's size, and it continues to expand rapidly."

    As King wryly notes, "So GM CDS have created a 6.67 fold increase in the $30B risk that they are supposed to mitigate. What possibly could go wrong?"

    What if I told you there are 45,000 derivative trades the confirmations for which are at a minimum of over 30 days late? Doesn't sound good. But that's not the whole story. Regulators, led by the New York Fed, have been pressing the industry hard to get solve what could be a real problem in the derivatives markets. Even though Greenspan did not want those markets regulated, he did note that inadequate infrastructure was "a significant problem."

    To make a long story short, a report was released last July from an industry committee detailing the problems and making 47 suggestions as to new policies and procedures. Last September, the Fed, along with other regulators, called the main players (named "The 14 Families") to a meeting and more or less said, "clean up this mess or we will step in." At the time there were 97,000 trades that were unconfirmed for 30 days or longer. Also, traders would buy a "credit swap" and then sell it the next day, but not tell the original party, who now did not know who his counter-party was.

    This week, the number of late unconfirmed trades was cut to 45,000, 2 1/2 months ahead of the target. Re-assignments are reported in one day, much to the moaning of hedge funds and traders who do not want to reveal their strategies. Most of the trades are now matched electronically. But as the WSJ notes:

    "The problems aren't solved. There is a backlog of thousand of unconfirmed trades. About 40% of new trades still aren't matched electronically. There's no centralized utility to process credit derivative trades. But the industry and its regulators are on the way to replacing the pipes before they burst - without cumbersome rule making or humiliating any one firm to make a point, or waiting for a crisis to force action."

    Let's be very clear. While derivatives sound like potential weapons of capital destruction to the average investor, they are a very necessary part of our capital markets. The world would come to a screeching halt without them.

    They in fact allow for market participants to "buy insurance" from a one time event by placing the risk with parties who have an appetite for such risk.

    Are derivatives risky? Of course. That is the point. As Taylor noted, it is the potential risk (and the risk premium it yields) that drives the potential reward. If there were no risk in them then there would be no profit, and on one would buy them.

    It is the massive buying and selling of all sorts of derivatives that has distributed the risks of the various markets to a much larger universe, who presumably have calculated the costs of that risk and built in a profit. Of course, there will be problems. Hurricane Katrina was a problem for insurance companies. But because they sold risk (hurricane) insurance over a wide variety or regions and types of insurance, they were able to withstand the storm, even though their profit margins were surely hit.

    (This brings up an interesting side point. There are many hedge funds that are simply banks or insurance companies in drag. Instead of listing on a stock exchange, they run a private fund. Instead of a stock which can go up or down, you get a fund which can go up or down. Instead of a board which sets salaries, the management charges 20% of the profits as their fee for management (along with a typical) monthly management fee of 1-2%.

    This trend is not just in banks and insurance companies. I am seeing more and more hedge funds which are really just some type of business which lets management charge a percentage of the profit rather than the typical salary and stock options. I like that model. Management and investors are on the same side of the table. Of course, just like any business, that fund can fail.)

    Just the same, hedge funds buy lots of derivatives, any one of which could go bad at any time. In fact, most hedge funds and investments banks will assume that some will in fact go bad. They just try to diversify across enough types of derivatives from many companies and "charge" enough in the form of buying risk at a decent price to offset those losses.

    The massive amount of derivatives and their rapid growth is on the surface a troubling trend. But Harry Browne taught me a lesson that I will never forget. In analyzing a whole economy, you have to trust the individual players in the market to tend to their own businesses. Self-interested parties will work to make sure they are ok.

    Each of those funds and investment banks knows their own books. They have very risk managers whose job it is to make sure the risks and rewards are balanced. To assume that the world is going to end because of derivatives assumes that the world of finance in populated mostly by fools. My brief sojourn says this is not the case. There are some very bright people.

    Of course, very bright people brought us Long Term Capital. But those people and the banks which loaned them money lost a lot of their capital. And deservedly so. They took risks because of greed they should not have done. The world rocked along fine even as those firms and individuals lost billions.

    Now, the New York Fed had to tell them to play nice. It was a very scary moment. But the system worked. Those who took the risks lost their money.

    And in some crisis in the future, some uncertainty event, there will be a number of funds and individuals which will lose their money. That is the way of the world. In the next uncertainty event, the headlines will be screaming, but the world will move right along. That will be small consolation to those who are hit by the train, but it should bring a sense of optimism to the rest of us.

    The whole result is that risk is distributed to more and more players. And that is a good thing, except. Except for Black Swans. Just because you have not seen a Black Swan does not mean one does note exist.

    Black Swans (as Nicholas Taleb in Fooled by Randomness called system shocks) still exist: "Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. . . . Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality".

    I hope Taylor is right. The shocks will come, but they will be shallower and shorter, because the risks are more distributed. The trick for clever managers and investors is to make sure they are distributed to someone else.

    Home Again, Home Again

    I am going to quit a little early tonight. My twins are home from college for the weekend. It will be nice to see them. It looks like we night actually get some winter weather in Texas and I want to beat the ice, not to mention get to bed and deal with some jet lag.

    London was fun. I enjoyed being on CNBC. Being a guest host was a hoot. On Wednesday, I had a really interesting dinner party. Bill Bonner and Simon Hunt, both of whom I quote often, some very smart local money mangers, another from South Africa and Tom Kass (who works with EFG), one of the brightest biotech analysts I have ever met. We had dinner with my London partner, Niels Jensen, who is also Danish.

    We did discuss the irrational and out-of-proportion response to the publication of cartoons in some third rate Danish paper. The irony of the vilifying of a nation which almost makes a fetish of being non-offensive should be lost on no one. To show our solidarity, we decided to let Niels pick up the check.

    In future letters, I am going to be writing about some of the amazing things that are happening in the biotech world. Tom really opened some eyes.

    One of the books I read this last week was called Getting Things Done. It has inspired me to once again see if I can increase my own personal productivity. We will see. Have a great week.

    Your deciding to get organized analyst,

    John Mauldin
    John@FrontLineThoughts.com

    Copyright 2006 John Mauldin. All Rights Reserved


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    February 08, 2006

    Peak Oil and the State of the Union

    In his State of the Union speech, President Bush said, "America is addicted to oil," and set a goal of replacing 75 percent of the nation's Mideast oil imports by 2025 with ethanol and other energy sources.

    Who is he kidding?

    Saudi's Ghawar field is close to being in irreversible decline. The Saudis are only managing to maintain current oil production volumes by virtue of a massive seawater injection program that pumps more than seven million barrels of salt water per day into its oil fields. This pumping helps to maintain production pressures in the oil reservoirs, but is also the source of formation damage due to the presence of oxygen and bacteria in the seawater. By 2025, Saudi will still export oil, but far less oil than now and each tanker will be of such value as to require its own armed escort.

    United States Peak Oil: Iran and Iraq

    Iran is not quite at its production peak, but within 20 years, even the most optimistic estimates forecast that Iran will cease to be a net oil exporter. (This may also have something to do with Iran's desire to develop a nuclear program.) And Iraq? By 2025, Iraq may be an oil exporter, not to mention an eastern province of Iran. But considering the looming and inevitable decline in daily world oil production, who will be able to afford whatever gets exported? (Hint, do you speak Chinese?)

    The point is, on the other side of Peak Oil, the United States will be fortunate to receive any oil at all from the Mideast, let alone the Bush goal of only 25% of current (or forecasted) imports. The planners, who are connecting the dots of the past, and mechanistically extrapolating out into the future with no allowance for Peak Oil, are living in a fantasyland. They are planning, if anything, for the failure of the American economy and the attendant decline of American civilization.

    Still, our Mr. President raised the subject. To recall an old phrase: "What does the President know, and when did he know it?" If G.W. Bush is onboard with Peak Oil, he failed to bring up the subject with specificity in his State of the Union speech and give the concept the publicity and credibility that such a speech would merit. Then again, maybe the president saw the movie A Few Good Men. Maybe he is imitating Jack Nicholson's character, a colonel in the Marines, who said, "You want the truth? You can't handle the truth." Maybe, to Mr. Bush's way of thinking, he is just doing the best that he can.

    There are people who plan for the long term. There are Japanese companies with 100-year business plans. Can anyone predict what the world will be like in 100 years? No. But these companies, reputedly, intend to be around when the next century rolls over. One way or the other. It might be the founder's great grandchildren, but they will be around. As the saying goes, "It's not the plan, it is the planning." (This is a famous quote from General Eisenhower that is painted on the wall of every staff college of the U.S. military.)

    United States Peak Oil: Strategy

    Strategic planning, operational planning, tactical planning...they all have their place in this world. It is not that things will follow exactly the plan. It is that you have at least planned something and thought things through. You have identified your challenge. You have considered your "desired end state," and determined which pathways might get you there. There are many roads from which to choose, so ya gotta choose. What are you going to do? You need to marry-up your resources to your action plan. What do you need in order to accomplish your mission? You need to identify what you need, and how you are going to get it. And you have to consider the alternatives along the way.
    Few things in this world are more scripted than a U.S. President's State of the Union address. By comparison, the Oscars are a little-old-lady Bingo game down at the fire hall. The entire resources of the U.S. federal government are at the disposal of Herr POTUS. If el Presidente says "X," then the next day there are small armies of federal employees power-pointing "X." If el Pres. says "Y" in the SOTU address, then...you get the picture.

    The U.S. Navy, for example, has a 50-year plan. Why? It is because we are building ships with a useful life of 50 years. What will the world look like in 50 years? Beats me; beats anybody. But I bet that you will see U.S. Navy nuclear-powered aircraft carriers floating on the waters of the world. The Navy is inventing its own future, Congress permitting and appropriating. They are designing berthing compartments and kitchen sinks, not to mention nuclear reactors and gear reduction systems and catapult systems, for sailors who will not be born for another 25 years. And when the time comes, these young lads & lassies will be sleeping and washing up, and sailing and shooting airplanes, off of something that some guy designed at a drafting table in Newport News, like, maybe, yesterday.

    United States Peak Oil: Reduction of Dependence

    Yes, we have been hearing this "We will have to reduce our dependence on foreign oil" B.S. for 30 years. And for 30 years, it was easier to let the daily oil markets dictate that the nation did not have to get serious. What were we going to do, put a $4.00-per-gallon tax on gasoline and kill the driving-based economy? Sorry, guys. Democracy gave you Hamas in Palestine, and Ahmadinejad in Iran, right? Well it also has given cheap gas in the United States for the past century. It was fun while it lasted. Now, Mother Nature is at the door, telling you that it's payback time. Uh-oh.

    So, we had our $8.00-per-barrel oil in the 1980s, and our $10.00-per-barrel oil as recently as 1999. We sprawled all over the land, from sea to shining sea, paving over the amber waves of grain, running condos up the sides of purple mountains, and laying out housing tracts where the deer and the antelope used to play. We choke the land with Interstates from the Redwood Forests to the Gulf Stream Waters. This land was made for you and me, huh?

    And we plugged a hell of a lot of stripper wells along the way, too. So long to those marginal barrels, at three or five units per day, times 100,000 wells.

    Now we see and hear G.W. Bush, who is pals with Matt Simmons and Richard Rainwater (ahem...), saying we are going to reduce out oil imports from the Mideast by 75% in the next 20 years.... Considering the reality of Peak Oil, G.W. Bush's statement is a freaking no-brainer. Finally ("Hallelujah!!"), the Bush Administration gets it right, even if it may well be for all of the wrong reasons.
    Wisdom may come late, but it seldom never arrives....
    This applies to motive as well. Why alternative energy? Why now? Hmmm. The gears are turning, slowly maybe. But they are turning. I can hear the medulla oblongata, grinding away in the Oval Office. "I cannot really say 'Peak Oil.' The only people who know what it is are a bunch of too-smart people at the margins. Besides, whatever I say, it won't be enough for them. And I have to talk to the center. And we all know how stupid they are out there in the center.

    “The proles in Florida cannot even push a stick through a piece of paper on election day. Do I want to lay the Peak Oil gig on them? It will be panic-city. What will happen to the stock markets if the masses wake up and realize that their 401(k) funds are invested in....an economy whose long-term business model is just plain busted.

    “Besides, we have 60 Minutes peddling all that crap about how the Alberta tar sands are our salvation. People are confused, and I cannot hold school for the entire freaking country during a one-hour SOTU speech. So, I will say as much as I can get away with, and not get myself assassinated by the...well, I'm not supposed to even think about those people."

    Something is going on. Something big.

    January 22, 2006

    What they don't want you to know about the coming oil crisis

     

     Soaring fuel prices, rumours of winter power cuts, panic over the gas supply from Russia, abrupt changes to forecasts of crude output... Is something sinister going on? Yes, says former oil man Jeremy Leggett, and it's time to face the fact that the supplies we so depend on are going to run out

    "Having built their cases, the two spelt out the consequences of the early topping point. "The perception of looming decline may be worse than the decline itself," Campbell said. "There will be panic. The market overreacts to even small imbalances. Prices are set to soar in the absence of spare capacity until demand is cut by recessions. We will enter a volatile epoch of price shocks and recessions in increasingly vicious circles. A stock-market crash is inevitable."

    January 18, 2006

    Clusterfuck Nation by Jim Kunstler

     

    You can only introduce so much perversity into an economic system before distortions cripple it. From 2001 through 2005, consumer spending and residential construction had together accounted for 90 percent of the total growth in GDP, while over two-fifths of all private sector jobs created since 2001 were in housing-related sectors, such as construction, real estate and mortgage brokering. Much of the money spent did not really exist except as credit -- incomes as yet unearned, hallucinated liquidity, wished-for wealth, all based on the expectation that house values would continue to rise at 10 to 20 percent a year forever. It became a reckless racket, all predicated on sustaining an economy that had lost its other means for generating wealth -- foremost its infrastructure for making things besides suburban houses.