Is the Financial Tide About to Ebb? 

April 18, 2009 

Though I don't offer any investment advice, I do report my own decisions from time to time. Based on my own analysis and judgment I recently shifted most of my IRA into the Financial Bear 3X ETF.

The single most powerful investment concept is that going against the trend destroys your wealth and riding with the trend increases your wealth.

It sounds so simple, yet very very few make large gobs of money in the market. We can thus conclude that identifying and riding the trend is not as easy as it seems.

Now before we proceed, let's cover two key issues:

I don't offer investment advice. What I do is present my own amateur-investor decisions from time to time for free, and occasionally offer up charts and commentary from readers like Harun I., also for free. Do your own research, analysis and decision-making. If I haven't pounded "This is not advice!" into the ground enough, please read the HUGE GIANT BIG FAT DISCLAIMER below a few more times.

If anything on this free site provides useful grist for your own research, analysis and decision-making, a donation to help keep the site up and running is most appreciated. If you run out and make $100K based on today's chart and commentary, please don't forget those providing the milestones on your path to wealth.

In describing my own analysis and actions, I am NOT OFFERING ADVICE.Sorry for shouting. I am an amateur and a blatantly crazed speculator in all things, so caveat emptor etc. No one can make sound decisions for you except you.

OK, now let's get down and dirty in pure speculative bliss. Yes, I mean going short, and not for a measly 4 yards, I mean deep, I mean stepping back into your own end zone from scrimmage on the one yard line, dodging a couple of huge scary tacklers and launching a Long Bomb far beyond the wide receiver you glimpsed downfield, I mean a toss at the outer extremes of your capability, one that feels right as it rolls off your fingertips and you think, Man, this might work, even as a linebacker knocks you to the hard turf and you can't breathe because the guy has fallen on you and you wait for the crowd's roar or sigh to reveal whether the Long Bomb dropped futilely to the ground, was caught or intercepted somewhere out around the other team's 20 yard line.

OK, enough football metaphor; I think it's abundantly clear now that I am indeed a crazed speculator. Let's look at a chart of an ETF (exchange traded fund) I bought on Thursday and Friday in my IRA:

Let's start by noting this is a "bear" (short) fund so it moves inverse to the financial stocks. When they drop to lows then this fund hits its highs; when the financials rebound smartly, as they have since March 6, then this fund plummets to its lows. As a 3X fund it it leveraged 3-to-1, so every move is exaggerated up or down (much like an option).

The "rational" investor reading the MSM financial news about the stock market having lots of upside and the banks being all fixed and profitable looks at this chart with a mix of horror and fear. Wow, this looks "risky," doesn't it? Well, it was certainly risky to buy it at $100 and hold it until $9.

Perhaps we should define risk. Risk is holding a position against the trend. The "trend" is supposedly up as far as the eye can see, now that the financial sector is on the mend and making huge profits again. Those who believe this will run away from FAZ in order to buy more C, BAC, GS, etc. (Citicorp, Bank of America, Goldman Sachs, etc.)

This is a chart of a robust, extremely stable financial sector. Uh, is that really what we have? Or do we have a painstakingly crafted simulacrum of a "healthy" financial sector, a duct-taped contraption of lies, obfuscations and gaping omissions? How can Goldman Sachs just leave out December in their financial statements and not be accused of criminal negligence or worse?

Where are our fearless Democratic regulators? Cowering under their desks, it seems, lest the Financial Mafia break their kneecaps for questioning Goldman Sachs and its henchmen in the Treasury? Talk about collusion; imagine Apple or IBM or Sears not reporting December 2008 because doing so might have punctured their phony "profitability."

I look at this chart and see a trend change is about to occur. That's my analysis and based on that I bought this leveraged inverse fund, which acts like an option that doesn't expire (at least that's my view).

I see the following evidence that a trend change is in the wind:

1. MACD is divergent, meaning it's rising even as price declines to 52-week lows.

2. Stochastic is extremely oversold.

3. Price is dragging along the lower Bollinger Band, and the bands are contracting as volatility decreases. Low volatility leads to high volatility, as I noted last Monday in highlighting the VIX: The Stock Market: Poised for a Pause--or a (Brief) Reintroduction to Panic (April 13, 2009).

4. The last time these conditions were met FAZ more than doubled.

5. There are significant open gaps in the chart which will likely be filled at some point. That would require price to move up from $9 to $17, then to $19, then to $31 and from there to $92.

That's impossible, right? Just like it was impossible that Citicorp would fall from $40 to under a dollar, right? Now that all the financials have doubled, tripled or quadrupled, this inverse fund has fallen from $100 to $9, leaving big gaps behind which have a nasty tendency to get filled at some point:

down Apr-09-2009 17 to 14.45

down Apr-02-2009 19.06 to 18.39

down Mar-23-2009 30.78 to 29.54

down Mar-10-2009 91.8 to 87

down Nov-24-2008 143 to 138.745

Could this Financial Bear ETF actually rise from $9 to $90? I have no idea. But I do think that if the truth were revealed about the U.S. financial sector's true losses and actual risks, then their recent euphoric leaps would retrace with alarming speed to their recent lows.

Right now the Financial Media SIPs (standard issue pundits) are all crowing about how "the market has bottomed," "the banks are healthy again," "the market has lots of room for upside," "the stimulus is working," etc. etc. ad nauseum.

Nice, but what if reality intrudes on their carefully manufactured fantasy of financial recovery/stability? The question boils down to this: can they keep a lid on reality indefinitely? Perhaps. But this chart is suggesting to me that reality cannot be hidden away behind lies and secret machinations forever.

The Financial Royalty is demanding that the tide of reality cease its ebbing, and since the tide has risen for six weeks they are congratulating themselves on their immense power and craftiness.

Let's see what the financial tide does for the next six weeks before pronouncing them Masters of the Universe. Gaps have a nasty tendency to fill, just as the tide ebbs.

HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

Thank you to everyone who emailed me recently. My computer time has been very limited due to the intrusions of "real life" and so I remain behind in all digital work. Thank you for your patience and understanding. 


What's for dinner at your house? has been updated with a new recipe: Eggplant Parmesan . This a mouthwatering photo-illustrated PDF from longtime contributor Bill Murath.

Of Two Minds reader forum (hosted offsite, reader moderated) 


Operation SERF Book One is now complete:

Operation SERF (all 12 chapters)

Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes. 

Thank you, Eric R. ($20), for your most generous contribution to this site. I am greatly honored by your support and readership.

Read more...

Why a 50% Drop in Housing Is Not the Bottom 

April 16, 2009 

The psychology behind the idea that a 50% reduction in bubble-era housing prices constitutes a "bargain" is flawed for a number of reasons. (NOTE: to view charts in full, please go to my main blog page at http://www.oftwominds.com/blog.html .)

I recently saw a few minutes of a Nightly Business Report program on PBS in which a Florida broker was observing that homes which once commanded $350,000 at the bubble top were selling briskly now at $169,000 to investors from every part of the globe.

In other words: "These homes are half off! They're screaming bargains! They can't get any cheaper than this!"

The psychology behind this euphoria is accessible to us all. It's easy to forget where housing prices were before the bubble and focus instead on how much they've dropped from the bubble peak. The same is true in any bubble, be it collectables, real estate, stocks, or tulip bulbs.

But valuation realities have no relation to bubble top pricing. Thus we should ground our analysis of housing valuations and what constitutes a "bottom" in metrics other than "it's 50% off it's top price."

Let's start by considering just how high the bubble took housing valuations:

This chart reveals that housing in California more than tripled at the bubble top. A fall of 50% from that peak (i.e. $275,000) is still 60% above the starting point.

Let's consider a model of all bubbles, regardless of the asset or the era:

No model can predict the timing, highs or lows of any bubble, but bubbles tend to follow a pattern traced in human psychology:

1. As euphoria grabs hold, prices rise in a steep ascent to a point at which "everyone" believes there is no end to the trend.

2. The initial descent from the bubble peak is a "shock" which leaves the bubble mentality intact, i.e. the Bull Market in tulip bulbs, real estate, tech stocks, etc. is only suffering a standard retracement/indigestion; the trend higher is still in place.

3. In housing, this psychology is embedded in such chestnuts as "they're not making any more land," "real estate always rises over time," "population growth means demand for housing will always rise," "the house is the foundation of middle class wealth appreciation," and so on.

4. At some point speculators who were left out of the initial explosive rise jump in because "prices are a real bargain now."

5. This buying pushes demand above supply briefly, and prices start rising again.

6. But the realities beneath price action have changed, and this bargain-hunting burst soon fades as demand falters, supply rises and prices renew their descent.

7. Speculators and investors' memory of the tremendous profits made on the way up remain firmly embedded, forming an "investment memory" which locks them into the view that the upward trend will resume at some point. This drives wave after wave of bottom fishing in which speculators buy into an apparent bottom only to be disappointed/ wiped out by a renewal of the downtrend.

8. At some point, all the bottom fishers have expended their capital and prices retrace to the pre-bubble levels, or even lower. This is what can be called "the real bottom."

9. But the memory of past glories still remains in the minds of speculators/investors, and so a subdued uptrend starts as "hope springs eternal" buying kicks in.

10. Eventually this institutional/cultural "memory of an uptrend" fades as the "recovery" in prices fails. The truisms which fed the brief bubble and long post-bubble decline and recovery--that tech stocks were the future, real estate only goes up, the South Seas is the epic investment of all time, etc. are repudiated and lose favor. This is the ultimate bottom.

Can a 10-year bubble reach this "ultimate bottom" in a mere two years? History suggests not.

Then there's the preponderance of other evidence that the underpinnings of the housing bubble have irrevocably shifted. Let's review some charts:

Household balance sheets are in terrible shape: This chart only reflects the extreme reached in 2006; it's undoubtedly even worse now.

Personal savings rates have risen recently, but Americans will need to start saving roughly a trillion dollars a year to return to historic savings rates:and that means not borrowing a spending a trillion but withdrawing it from consuming.

Meanwhile, the equity extraction game is over, and the stands are littered with broken dreams and busted bets:

Mortgage debt has tripled from $4.2 trillion in 1997 to over $12 trillion:

This explosion of debt is economy-wide, and is not limited to residential housing: How an economy foundering beneath stupendous debt can forcefeed housing prices higher via ever greater debt is unknown.

Just as a refresher on the extremes the housing bubble reached even when adjusted for inflation:

A significant percentage of this debt comes due in the years just ahead:

Another standard measure of valuation, the price-to-rent ratio, also reached historic highs. In some areas of the nation, this might have already returned to the mean, but with property taxes skyhigh and the cost of renting dropping, it may well be the cost of renting is still significantly cheaper than owning.

While this graph is a few years old, the trend to historic highs in property taxes is clearly illustrated. Yes, you can petition your county to lower your appraisal, but unless your state is protected from fast-rising property taxes via a Prop 13-type law, then brace yourself for local governments to make up their declinign tax revenues on the backs of property owners--plummeting prices be darned.

With reports of banks holding some 600,000 foreclosed or distressed properties on their books and off the market in the news, it is a foregone conclusion that any blip up in demand for homes will be met with a tide of new supply. After the current "bargain buying" dries up, inventory will exceed demand and prices will resume their fall.

And last but not least, let's note that we're dealing not just with the aftermath of one historically extreme bubble, but three: one in stocks(shown here), one in housing (shown above) and another in bonds which have skyrocketed as yields drop to near-zero.

The net result of declining asset values across all asset classes but gold is that there will be a global reduction in borrowing against assets. So add up the financial contexts which control real estate valuations:

1. Extreme bubble valuations must eventually retrace to the starting point, and in many cases they drop below the starting point.

2. Housing and real estate are based on the availability of cheap, plentiful debt. As economy-wide debt loads are at historic extremes, it is prudent to ask what conditions will enable trillions more in debt to be issued to buy inflated housing.

3. As the Federal government borrows trillions of dollars on the open market to fund its mega-stimulus-bailout debts (in the trillions and counting), then the government is competing with private borrowers for a dwindling pool of capital/savings. That will drive up rates, making mortgages more expensive. And since prices drop as rates rise, this global push on interest rates is a profound headwind for housing prices globally.

4. Paying a mortgage requires steady income, which for most citizens means a steady job. Rapidly rising unemployment reduces the pool of potential buyers and adds to the inventory as those losing their incomes also lose their homes.

In short: with the national and household balance sheets at historic extremes of indebtedness it is difficult to see what fundamental financial foundation exists for higher housing prices.

The only conclusion to be drawn from the above charts is that those currently buying "at bargain prices" will very likely be disappointed as prices renew their downtrend in the near future.

Thank you to everyone who emailed me in the past two weeks. I will try to respond to everyone over the next week. Your patience and understanding are greatly appreciated.

Thank you, Alexis H. ($10), for your very generous contribution to this site. I am greatly honored by your support and readership.

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The Titanic's Great Pumps Finally Fail 

April 15, 2009 

In honor of the sinking of the great ship Titanic on April 15, 1912, we extend the analogy of its sinking to our current financial situation.

On April 14, 1912, the liner Titanic, considered unsinkable due to its watertight compartments and other features, struck a glancing blow against a massive iceberg on that moonless, weirdly calm night. In the early hours of April 15, the great ship broke in half and sank, ending the lives of the majority of its passengers and crew.

The usual analogy drawn between the Titanic and our financial meltdown stems from the initial complacency of the passengers after the collision.Some passengers went on deck to play with the ice scraped off the berg, while most returned to the festivities still working their magic as midnight approached.

The class structure of Edwardian Britain soon came into play, however; as the situation grew visibly threatening, the First Class passengers were herded into the few lifeboats while the steerage/Third Class passengers--many of them immigrants--were mostly kept below decks, sealing their doom.

But there are even more compelling analogies than initial complacency turning to panic. Consider this diagram of the great ship:

The large black rectangles on the lower deck represent the coal bunkers; they were located adjacent to the boilers which powered the engines. Though the ship only scraped against the iceberg, as Titanic explorer Robert Ballard explains, that was enough to pop rivets and open hull plates:

The glancing blow that ruptured the Titanic's hull over a distance of roughly 250 feet (out of a full length of 882 feet) and admitted water into six of her compartments sealed her fate.

Considerable hullabaloo attended the attempt in the summer of 1996 to raise a piece of the hull from the debris field, but far more interesting was the ultrasound investigation of the area of the bow damaged by the iceberg. These images revealed six small tears or openings affecting the first six compartments. Just as we had surmised in 1986, the great gash was a myth and the actual openings into the ship seem to have been the result of rivets popping and hull plates separating.

This provides us a very powerful analogy to the fatal damage inflicted on our financial system by an apparently "glancing blow" with risky subprime mortgages and high-flying derivatives. Just as the Titanic was mortally wounded not by great tears in its hull but by the buckling of steel hull plates, so the U.S. (and thus global) financial system is sinking from similarly "glancing" blows.

The actual damage could have been contained--do you sense another analogy about to surface?-- had the fifth watertight bulwark--shall we call it "the bulwark against systemic failure"?-- extended a few decks higher. But inexplicably, this watertight barrier did not extend as high as the other watertight bulkheads.

Thus even though the water gushing through a fat three foot gash in the forward engine room was held back by the ship's great pumps, as the bow sank lower then water seeped over the fifth watertight bulkhead and gushed into the boiler room.

And so against all "rational odds," the ship's apparently minor structural design flaw led to its inevitable loss as the mighty pumps lost their battle against the rising water.

To all the "experts," the risk of collision with an iceberg were considered low, while the risk of catastrophic damage were considered essentially zero. Hmm, does that remind you of our financial system circa April 2008, just as the great U.S. economy's hull was buckling?

As the water rose higher, the forward boilers driving the ship's massive engines were extinguished, causing the pumps to falter, and thus a positive feedback loop was created: the higher the water rose, the more boilers were extinguished and the less power was available to the pumps.

Now we have the Great Pumps of the Stimulus, which in a close analogy are pumping hundreds of billions of dollars into the sinking U.S. economy. But just as the engines of the Titanic lost power as the water extinguished the boilers supplying steam to the engines, so the stimulus is only keeping the rising water temporarily at bay-- it is not actually saving the "engines" of the economy from sputtering.

And what are those engines?

1. Debt, which must increase to fuel spending, income and thus taxes

2. Rising assets, which provide the basis for ever-more borrowing

3. Government borrowing, which enables governemnt spending to keep rising without regard to actual tax revenues or the health of those being taxed

4. Rising employment as vast borrowing and spending creates new jobs

The ice-cold water is splashing into each of these engines. As assets fall then there is simply no foundation to support more borrowing. As debt is paid down rather than expanded, then spending falls. As spending falls, so do revenues, profits and employment, all of which crimp tax revenues.

The last engine is government borrowing. To those still standing ont he sloping deck, this seems like the engine which can never be extinguished. Through thick and thin the Federal government and the state and local governments (via muni bonds) have been able to borrow and spend stupendous sums seemingly at will.

But the world is finally running out of steam and the will and ability to buy trillions of dollars of additional U.S. governmental debt is declining. The demise of this last great engine will surprise as many as the sinking of the Titanic did, but it is as inevitable as the sinking of the great ship. The pumps can only hold the water back for a while, and the Stimulus's magic will expire sometime next year.

As the government scrambles to find buyers for another $1 trillion in new U.S. bonds (and another trillion or two in new corporate debt, new mortgages, new consumer debt, new muni debt, etc.) then interest rates will rise and the great engine of ever-greater debt will hiss and sigh as the water rises and then go silent and cold.

Thank you to everyone who emailed me in the past two weeks. I will try to respond to everyone over the next week. Your patience and understanding are greatly appreciated.

If you'd like to watch me blink a lot and try desperately not to make a fool of myself answering very tough questions, you might enjoy:

Dangerous Minds w/ Richard Metzger Episode 1 Part 1 (interviewing Charles Hugh Smith)

Dangerous Minds w/ Richard Metzger Episode 1 Part 2

Dangerous Minds w/ Richard Metzger Episode 1 Part 3

Dangerous Minds w/ Richard Metzger Episode 1 Part 4

Thank you, Richard, for giving me a rare opportunity to pontificate on Marx. 

Thank you, Derek S. ($40), for your handsomely generous contribution to this site. I am greatly honored by your support and readership.

Read more...

Scalability Gaps 

April 14, 2009 

We've addressed Scalability Traps here before (Complacency and Scalability Traps); today we consider the Scalability Gap in alternative energy.

Correspondent K.D. coined the powerful concept Scalability Trap back in February:

I think this "scalability trap" that we find ourselves in (i.e. the more advanced we become, the more things scale, the fewer jobs we need) is like a hidden compounding tax on modernity- and we are about at the place where that tax is going to break the current model of tech innovation and entertainment consumption. A new model will surely replace it, let's just hope it is not some kind of Mad Max paradigm.

Put another way: once a manufacturing fabrication or production process scales up--for example, semiconductor-type solar panels--then the inevitable automation actually reduces the number of workers needed even as production leaps 100-fold.

Scalability Traps are an inherent feature of capitalism, as the best way to gain competitive advantage in high-cost economies is to reduce costly labor inputs, and the best way to gain competitive advantage in low-labor cost economies is also to automate as a way to reduce errors.

Back in 2000 I had the opportunity to tour a number of factories in China manufacturing products ranging from computer monitors to light fixtures. Factories producing high-tech equipment with human labor had very high failure rates--rates which required costly testing and intervention compared to fully automated lines with minimal human assembly workers. Even if labor costs are free, the robotic line is more productive, less costly and thus more profitable than the lines which require human operators.

A Scalability Gap is the yawning divide between the promise of new technology and its scalability to meaningful production. Potentially important new technologies in alternative energy are presently facing Scalability Gaps of momentous proportions--a situation at odds with the smug assumption that some magical new technologies will enable us to somehow replace 40 million barrels of oil-equivalent energy a day without any disruptions in our lifestyle.

Let's turn to an energy analyst's skeptical view of alternative energy, as posted in a recent Wall Street Journal:

Let's Get Real About Renewable Energy We can double the output of solar and wind, and double it again. We'll still depend on hydrocarbons. (WSJ)

During his address to Congress last week, President Barack Obama declared, "We will double this nation's supply of renewable energy in the next three years."

While that statement -- along with his pledge to impose a "cap on carbon pollution" -- drew applause, let's slow down for a moment and get realistic about this country's energy future. Consider the problem of scale.

By promising to double our supply of renewables, Mr. Obama is only trying to keep pace with his predecessor. Yes, that's right: From 2005 to 2007, the former Texas oil man (G.W. Bush) oversaw a near-doubling of the electrical output from solar and wind power. And between 2007 and 2008, output from those sources grew by another 30%. The key problem facing Mr. Obama, and anyone else advocating a rapid transition away rom the hydrocarbons that have dominated the world's energy mix since the dawn of the Industrial Age, is the same issue that dogs every alternative energy idea: scale.

Let's start by deciphering exactly what Mr. Obama includes in his definition of "renewable" energy. If he's including hydropower, which now provides about 2.4% of America's total primary energy needs, then the president clearly has no concept of what he is promising. Hydro now provides more than 16 times as much energy as wind and solar power combined. Yet more dams are being dismantled than built. Since 1999, more than 200 dams in the U.S. have been removed.

If Mr. Obama is only counting wind power and solar power as renewables, then his promise is clearly doable. But the unfortunate truth is that even if he matches Mr. Bush's effort by doubling wind and solar output by 2012, the contribution of those two sources to America's overall energy needs will still be almost inconsequential.

Here's why. The latest data from the U.S. Energy Information Administration show that total solar and wind output for 2008 will likely be about 45,493,000 megawatt-hours. That sounds significant until you consider this number: 4,118,198,000 megawatt-hours. That's the total amount of electricity generated during the rolling 12-month period that ended last November. Solar and wind, in other words, produce about 1.1% of America's total electricity consumption.

Of course, you might respond that renewables need to start somewhere. True enough -- and to be clear, I'm not opposed to renewables. I have solar panels on the roof of my house here in Texas that generate 3,200 watts. And those panels (which were heavily subsidized by Austin Energy, the city-owned utility) provide about one-third of the electricity my family of five consumes. Better still, solar panel producers like First Solar Inc. are lowering the cost of solar cells. On the day of Mr. Obama's speech, the company announced that it is now producing solar cells for $0.98 per watt, thereby breaking the important $1-per-watt price barrier.

And yet, while price reductions are important, the wind is intermittent, and so are sunny days. That means they cannot provide the baseload power, i.e., the amount of electricity required to meet minimum demand, that Americans want.

That issue aside, the scale problem persists. For the sake of convenience, let's convert the energy produced by U.S. wind and solar installations into oil equivalents.

The conversion of electricity into oil terms is straightforward: one barrel of oil contains the energy equivalent of 1.64 megawatt-hours of electricity. Thus, 45,493,000 megawatt-hours divided by 1.64 megawatt-hours per barrel of oil equals 27.7 million barrels of oil equivalent from solar and wind for all of 2008.

Now divide that 27.7 million barrels by 365 days and you find that solar and wind sources are providing the equivalent of 76,000 barrels of oil per day. America's total primary energy use is about 47.4 million barrels of oil equivalent per day.

Of that 47.4 million barrels of oil equivalent, oil itself has the biggest share -- we consume about 19 million barrels per day. Natural gas is the second-biggest contributor, supplying the equivalent of 11.9 million barrels of oil, while coal provides the equivalent of 11.5 million barrels of oil per day. The balance comes from nuclear power (about 3.8 million barrels per day), and hydropower (about 1.1 million barrels), with smaller contributions coming from wind, solar, geothermal, wood waste, and other sources.

Here's another way to consider the 76,000 barrels of oil equivalent per day that come from solar and wind: It's approximately equal to the raw energy output of one average-sized coal mine.

During his address to Congress, Mr. Obama did not mention coal -- the fuel that provides nearly a quarter of total primary energy and about half of America's electricity -- except to say that the U.S. should develop "clean coal." He didn't mention nuclear power, only "nuclear proliferation," even though nuclear power is likely the best long-term solution to policy makers' desire to cut U.S. carbon emissions. He didn't mention natural gas, even though it provides about 25% of America's total primary energy needs. Furthermore, the U.S. has huge quantities of gas, and it's the only fuel source that can provide the stand-by generation capacity needed for wind and solar installations. Finally, he didn't mention oil, the backbone fuel of the world transportation sector, except to say that the U.S. imports too much of it.

Perhaps the president's omissions are understandable. America has an intense love-hate relationship with hydrocarbons in general, and with coal and oil in particular. And with increasing political pressure to cut carbon-dioxide emissions, that love-hate relationship has only gotten more complicated.

But the problem of scale means that these hydrocarbons just won't go away. Sure, Mr. Obama can double the output from solar and wind. And then double it again. And again. And again. But getting from 76,000 barrels of oil equivalent per day to something close to the 47.4 million barrels of oil equivalent per day needed to keep the U.S. economy running is going to take a long, long time. It would be refreshing if the president or perhaps a few of the Democrats on Capitol Hill would admit that fact.

Mr. Bryce is the managing editor of Energy Tribune. His latest book is "Gusher of Lies: The Dangerous Delusions of 'Energy Independence'"(Public Affairs, 2008).

Many observers have dismantled the breezy claims that "we have unlimited supplies of coal and shale oil which can be converted to liquid fuels." The truth is that the monumental shale oil mines and processing currently tearing up major chunks of Canada produce less than 2 million barrels of oil a day--not even 10% of the oil the U.S. consumes, never mind Canada itself and its other major customer, China. And also never mind the stupendous quantities of natural gas which are needed to heat and process the gooey sand. Just how "net energy productive" is shale oil or tar sand if we're burning natural gas and oil (and using huge quantities of water as well) to process it?

As for biofuels from algae and many other technically achievable ideas: at this point, the Scalability Gap is the approximate size of the Grand Canyon.

I had the good fortune to speak at length this weekend with a Cal Tech (California Institute of Technology) grad student who is working on the nuts and bolts of one energy technology. His lab is working on modifying an existing protein to act as an enzyme which converts CO2 to carbon monoxide--basically peeling off an oxygen atom which would combine with another oxygen atom and a hydrogen atom to form water.

The idea is that carbon, oxygen and hydrogen atoms can be strung onto the carbon monoxide molecule to form a "clean" hydrocarbon chain--a fuel.

The appeal of this process is obvious even to a layperson such as myself: as we seek some way to sequester the potent greenhouse gas CO2, what better way to do so than to process it into fuel and water?

But the realities of scaling such a technology are prodigiously difficult and unknown. Curently the protein is extracted from e. coli bacteria, which must be grown in quantity. The same is also true of algae-based biofuels. What will be the feedstock for these one-celled organisms? Given the energy needed to process the organisms, "manufacture" the enzymes or catalysts used to "process" living bits into fuel, straining out the leftover gunk, etc., how net-energy productive will the process be?

Pundits with zero knowledge of chemistry and biochemistry find it remarkably easy to wax glowingly about how various technologies will "save the day"--insert the favorite of any particular moment: "clean coal," switchgrass biofuel, shale oil, tidal generators, etc.

But the reality is stark: the civilian U.S. populace consumes over 350 million gallons of liquid fuels in vehicles every day, never mind electricity, petrochemicals, aircraft, the U.S. military, etc. Replacing that with technologies which scale up to producing hundreds of millions of gallons of liquid fuels per day (or their electrical equivalents) may--dare we even whisper it?-- may not even be possible.

The more you know the actual science, the more dubious the various "magical" claims become. Those in the know doubt lithium ion batteries can be lowered in cost and produced in sufficient quantity to the point where they can power hundreds of millions of hybrid vehicles. The search for a "Holy Grail" battery which stores electricity at the same energy densities as lithium ion batteries but at lower cost is certainly on. Many candidates are in the works, but we must be mindful of the Scalability Gap in all cases.

Science fiction author Arthur C. Clarke once noted that technologies we don't understand are essentially magic. As we burn through irreplaceable liquid hydrocarbons at the rate of 80 million barrels a day, far too many believe that some inexplicable "magic" technology will arise more or less seamlessly (like the automobile or air travel) and save the day.

High school chemistry and physics is generally more than enough to grasp the basics of any such proposed "magic," and more than enough to see the Scalability Gaps. The possibility that it is perhaps impossible to scale up any technology to replace 40 million barrels a day of oil equivalents is too frightening to even speak.

But maybe it's true, nonetheless. There is simply no way to know at this point.

Thank you to everyone who emailed me in the past two weeks. I will try to respond to everyone over the next week. Your patience and understanding are greatly appreciated.

If you'd like to watch me blink a lot and try desperately not to make a fool of myself answering very tough questions, you might enjoy:

Dangerous Minds w/ Richard Metzger Episode 1 Part 1 (interviewing Charles Hugh Smith)

Dangerous Minds w/ Richard Metzger Episode 1 Part 2

Dangerous Minds w/ Richard Metzger Episode 1 Part 3

Dangerous Minds w/ Richard Metzger Episode 1 Part 4

Thank you, Richard, for giving me a rare opportunity to pontificate on Marx. 

Thank you, Steven S. ($50), for your stupendously generous contribution to this site. I am greatly honored by your support and readership.

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The Stock Market: Poised for a Pause--or a (Brief) Reintroduction to Panic
April 13, 2009

The VIX--often called "the fear index"--is revealing a remarkable return of confidence which borders on euphoria. This usually signals a short-term market top.

The VIX should give market bulls (such as myself) pause. Take a quick look at the chart:

Even a cursory glance yields the following observations:

1. The peak of panic and doubt was reached in October; since that double spike (the 2nd being in Nov.) the VIX has worked its way down even as the market hit a new low in March. That was further evidence that the market was due for a bullish turn.

But this rather rapid return of confidence and appetite for risk should make us somewhat cautious, as in: has the 5-week rally which ranks as one the market's best ever run past mere confidence into euphoria?

The image that comes to mind is Wiley E. Coyote speeding off the cliff, then pausing to look down as he realizes he has left terra firma and is about to feel the painful pull of gravity.

2. The price recently punched through the lower Bollinger Band, suggesting an extreme has been reached. Yes, prices can ride the Bollinger up or down, but when we see that the price last touched the upper bands at the March lows, we can't help but wonder if this marks a near-term top. (Recall that the VIX rises and falls in opposition to the market's extremes; a high VIX usually marks a market low and vice versa.)
3. The stochastic indicator is plumbing the depths which usually mark a turning point in sentiment.
4. The VIX has fallen under its 200-day moving average. Some will see this as a positive, but markets rarely move in one direction for long; a countermove is to be expected from time to time.
5. Even as the VIX slid from almost 90 to 35, the MACD indicator has been rising from the first of the year, providing a divergence from the downtrend in price.
6. DMI indicators are approaching the upper and lower edges of their recent range.
7. If we stand back a step, a huge triangle or pennant formation is visible in the VIX. That is, the price fluctuations have diminished into a narrowing triangle, a situation which is usually resolved by breaking up or down in a big way.

Bulls may argue that the recent plunge has broken the triangle to the downside, a sign of bullishness, but all the other indicators suggest caution in the super-bullish interpretation.
Is the economy really supporting a collapse of the VIX from 35 back to the complacency of the low 20s? As investor confidence readings shoot back up to "happy days are here again" levels, skittish Bulls such as myself are seeing abundant reasons to cash in our chips or maybe slip over to the thinned-out short-side tables in the riverboat and place a few small wagers to hedge our long bets.

Something else gives reason to pause: the markets are hitting key support/resistance levels. Mr. Market rarely blows through key levels without some playful volatility, and as the DJIA is just 60 points from key resistance at 8146, the SPX approaches 875 and the Naz gaps up to 1652, observers may well ponder what happens when resistance is combined with open gaps and a euphoric rise in confidence. The market could certainly rise for a day or two or three, but it certainly looks like Wiley E. Coyote is fast approaching the cliff edge.



Please read the HUGE GIANT BIG FAT DISCLAIMER below once again and note this is not investment advice; it is merely the completely free ramblings of an amateur observer.

HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

Thank you to everyone who emailed me in the past two weeks. I will try to respond to everyone over the next week. Your patience and understanding are greatly appreciated.

If you'd like to watch me blink a lot and try desperately not to make a fool of myself answering very tough questions, you might enjoy:
Dangerous Minds w/ Richard Metzger Episode 1 Part 1 (interviewing Charles Hugh Smith)
Dangerous Minds w/ Richard Metzger Episode 1 Part 2
Dangerous Minds w/ Richard Metzger Episode 1 Part 3
Dangerous Minds w/ Richard Metzger Episode 1 Part 4
Thank you, Richard, for giving me a rare opportunity to pontificate on Marx.

What's for dinner at your house? has been updated with a new recipe: Eggplant Parmesan . This a mouthwatering photo-illustrated PDF from longtime contributor Bill Murath.

Of Two Minds reader forum (hosted offsite, reader moderated)

New Operation SERF Installment:
Operation SERF, Part 12
Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

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