Posts Tagged ‘supply and demand’

Buyer’s markets and rising risk (in real estate, stocks, even silver etc)

February 29, 2012
A Buyer's Market

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Prices only collapse in particular conditions. Two general terms for contrasting market conditions are “seller’s market” and “buyer’s market.”
A buyer’s market means that the buyers of that particular type of purchase have the advantage. In brief, a buyers market is whenever there is more offers to sell  than offers to buy (bids). When there is a growing imbalance between the many numbers of offers to sell and few offers to buy, then the relative cost of a purchase tends to decline. If selling pressure floods in to the market at the same time as buying pressure is withdrawn, prices can suddenly collapse.
An example of buyers markets would be when there is a very low employment rate in an area and a truck shows up where there are a bunch of able-bodied and willing workers and there is announcement of work available. People may crowd together or line up in order to get selected early and be hired and earn their pay. If there are only two employers in an area and then one of them leaves, the cost of labor for the remaining employer can plummet. Suddenly jobs are more scarce and available workers are more plentiful.
In other words, in buyer’s markets, the buyers have the advantage because the buyers are relatively scarce, meaning that there are a lot more sellers than buyers, so that, in an extreme case, the buyers are the ones who can publicize to the sellers “I am buying” and then wait for the sellers to come to them and compete against each other to get the business of any particular buyer. There is a large supply of whatever is being sold relative to the existing demand to buy that purchase.
So, another way to describe a “buyer’s market” is “saturated” or “over-saturated,” meaning that there is a lot more supply available than the demand available. Other similar terms are “shortage” and “surplus” (in terms of supply or inventory relative to demand) as well as “boom and bust” (relative to demand).
The opposite condition from a buyer’s market is of course a seller’s market in which offers to buy are plentiful and offers to sell are scarce. For instance, when qualifications to get real estate financing are reduced, that can produce a flood of newly qualified buyers.

Loans (Photo credit: jferzoco)

Let’s say that a government program subsidizes purchases for a particular favored population, such as military veterans, at the expense of all other taxpayers. Further, let’s say that lenders reduce the qualifications for a loan, such as reducing the credit score required and reducing the down payment from 10% to 1%. We can see how this would increase the number of qualified borrowers, right? Further, let’s add that there is a natural disaster such as a wildfire that suddenly destroys 30% of the homes in an area. In that case, we have a sudden reduction in the number of homes available, plus a sudden increase in the number of qualifying borrowers (such as from higher-risk lending by lenders and/or government favoritism to subisidize a particular groups’ purchases). What is likely to happen to prices?

If only temporarily, prices tend to increase when there is a relative increase in buying pressure over selling pressure. Once the new wave of buying is complete, as most of the people who suddenly qualify may complete their pucrhases, then there would be very few prospective buyers left. Where would the next wave of buying come from? In the absence of a sudden decrease in the number of units available for sale, prices eventually could be expected to come back down toward prior levels, especially if the policies end that had increased the buying pressure.

In a seller’s market of relatively scarce supply, a salesman can come in to a public area with an announcement of their offering, such


SALE (Photo credit: Gerard Stolk (vers le Midi Carême))

as snake oil, and people may crowd together in a bidding war to get one of the very few bottles of snake oil (or bottles labeled snake oil). Similarly, an auctioneer can announce foreclosure auctions and a herd of people will gather in a bidding war- if it is a seller’s market in which there is relatively high demand for whatever is being sold.

Or, in the case of recent real estate markets as changing lending policies produced huge surges in the number of qualifying purchasers, sellers can list their homes for sale with a realtor and just wait for bids to come in. In a true seller’s market, owners do not even have to list their item for sale and they may get offers to buy anyway. Buyers do not even wait for offers to sell in extreme cases of seller’s markets.
Another common example of a seller’s market would be when a big business operation (such as a government) is inviting bids to perform a particular construction project. The herd of contractors learn of the opportunity, research the project and then make their bids. From all of the bids submitted, a selection can be made. The seller does not need to do much to attract the attention of a herd of buyers during a seller’s market.

Sale (Photo credit: Gerard Stolk (vers le Midi Carême))

So, why do prices collapse when a seller’s market shifts to a buyer’s market? One thing is that everyone who owns a particular type of item has been thinking that recent market prices reflect the market value of their item. After all, that is how accountants and tax forms instruct us to estimate the value of something: from a “comp” or recent transaction price for a similar purchase.

Imagine that there are 1,000,000 tons of silver actually available for sale. On a typical day, imagine that only 100 tons are actually exchanged in a sale. So, people look at the going rate for the sale of 100 tons of silver and think that if all the other 999,900 tons of silver were to be sold on the same day, the price of all 999,900 would be the same as the price for the first 100 tons sold that day. That is ridiculous, but that is the conventional method of accounting the value of all 1,000,000 tons of silver. That issue is how silver prices can fall 19% in one day, such as in April of 2006. In the case of certain changes to qualifications to borrow money to buy silver (margin regulations), then the fundamental naivete can quickly be revealed of thinking that the daily price for selling 100 tons of silver is a decent estimate of what the daily price would be on a day that 10,000 tons are suddenly made available for sale. Unless the buying pressure also increases to meet the new selling pressure, of course prices will plummet.
Or, consider the stock price of a large, stable corporation such as Enron. One day, there may be 1,000,000 shares of Enron available in the marketplace, but imagine that only 100 are actually sold in a typical day. The share price might be $7 or $8 on a typical day, (such as Nov. 20, 2001  shown above) but then what if the next day 100,000 shares of Enron are placed for sale at “market price?” If there are not 100,000 offers to buy (bids) waiting to match all 100,000 offers to sell, the market price of the remaining unsold shares listed for sale falls to ZERO, right?
Of course, buyers may show up the next day and purchase the remaining shares unsold but listed for sale (all 99,900) for something like thirty cents per share. What happened to the other 900,000 shares that were estimated as worth $7 each the day before and now are estimated as worth thirty cents each?
Well, the prior estimates over-looked that there suddenly could be a relative increase in selling pressure. If selling pressure rises dramatically and is not matched by a sudden rise in buying pressure, prices plummet, whether prices of silver or Enron or anything else.
There is a chart of what happened when a lot of the owners of Enron stock wanted to sell Enron shares and very few people wanted to buy it: it fell from every single share of Enron stock being accounted as worth $85 a share to zero. Here is a similar chart for the entire stock market of Japan, peaking in 1989, then the trend of more buying pressure than selling pressure reversed to more selling pressure than buying pressure:
When oil prices doubled in less than a year in 1999, there was a relative increase in selling pressure in the sector of the US stock market for airlines, measured as a 40% decline in price:
When the US stock sector for the housing industry peaked in 2005, buying pressure had been increasing as bullishness (optimism) rose from 80% toward 90% and then toward 100%, but from that extreme of bullishness, the chance for another big increase in bullishness was neglible and the risk of an increase in selling pressure was extreme.
After extremes of optimism, waves of conservatism naturally follow. The more extreme the optimism, the more extreme the conservative reaction tends to be. US Housing stock sector prices fell over 80% (so far).
Here is a chart of the US Financial sector which also fell more than 80% (but in a shorter time period). The price decline was led by companies including insurance giant AIG, mortgage companies Fannie Mae, Freddie Mac, and Countrywide, plus Merrill Lynch, Bear Stearns, Lehman Brothers, Washington Mutual Bank, and other major US financial institutions that all faced bankruptcy by 2008.
So, when people say that the market price of silver or Enron stock shares is a certain amount, that is not an indication of the market value of all silver or of all Enron stock shares. That is only an indication of the current price of a tiny portion of available shares in the context of the recent past of the relative pressure of buying or selling.
If a seller’s market switches to a buyer’s market, like what happened with Enron, there may be a sudden recognition that all of the shares of that company’s stock are not worth what a few of them sold for recently. Likewise, if a buyer’s market switches to a seller’s market, a discounted item can rocket in purchasing power, such as the rocketing of the purchasing power of the Japanese currency, the Yen, across the last two decades.
If I had to pick two markets that are currently most over-valued, it would be real estate and all insurance policies. The thing about insurance policies (including the annuities sold by insurance companies) is that they are in the business of risk, yet they do not have enough money to keep all of the promises that they make. Their business thrives when the dollar amount of new claims is far below the dollar amount of new revenues. Their business can collapse suddenly if the dollar amount of new revenues does not cover the dollar amount owed for incoming new claims.
The insurance industry is a classic ponzi scheme of paying old claims (old liabilities) out of their revenues from current investors (premiums). They only have a small fraction of the cash available to cover the vast promises that they have made at any particular time.

The speculative optimism toward real estate may be currently even more extreme than the optimism toward insurance companies or stock prices of companies like Enron. Even after a recent 50% decline in prices in major markets like Phoenix, Las Vegas, as well as the multi-decade drop in distant places like Tokyo, the blind optimism of many real estate investors is such that they still look to political interventions to boost their position, like a new tax credit to draw more buyers in to real estate at the expense of mainstream taxpayers. Such political redistributions of buying pressure tend to eventually produce sudden destabilizing of overall economies as buying pressure that otherwise might have gone in to something more adaptive like energy efficient housing or energy efficiency transportation is instead diverted toward pouring taxpayer money toward subsidizing the value of existing buildings.

Even after huge declines as well as obvious warnings from other markets worldwide, most investors focus away from those who predicted the real estate decline and instead argue about who is to blame or who should pay for government rescues for the gambling of high-risk real estate speculators. Instead of reviewing the warnings made in the 1990s or early last decade or the more recent updates from those same forecasters, many are so optimistic about real estate that they pretend that the sales prices when 2,000 units a month were being sold in a particular area will be anywhere close to the sales prices if 100,000 units are listed for sale in a single month in that same area, with all 100,000 of those sellers competing for the attention of even fewer remaining buyers than back when 2,000 units a month were sold. Of course prices fell 50% quickly. Given that I among many of those who forecast exactly that, I am clear that the 50% decline is just the first wave of a much longer decline, closer to what has manifested in Japan in the last 21 years, if not much more extreme. ;)
peak oil: supply vs. demand

peak oil: supply vs. demand (Photo credit: D.L.)

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Tengeru market near Arusha, Tanzania

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published June 24, 2011
re-posted on February 29, 2012

when do global stock markets crash?

September 21, 2011
If the costs of conducting “business as usual” rise enough that profit margins turn negative, wouldn’t any business owner consider shutting down? When costs rise so much that net operating profits do not just disappear, but turn into net operating losses, what would you do as a business owner? When continuing to operate a business clearly is less favorable than simply shutting down, then any business would likely close, right? What if a bunch of them closed at once?
That is probably one of the most unappealing possibilities conceivable. If one business depends on others (suppliers, customers, etc), and then even just one essential supplier shuts down, then other businesses depending on that supplier CANNOT continue to conduct “business as usual”- at least not until they can replace that supplier.
This is the same basic issue that people have been concerned about in regard to the government of Greece or of Minnesota, but those isolated budget issues are symptoms of a broader issue: the end of the age of cheap fossil fuel. I will come back to the rising cost of commodities in a minute.
First, if the government of Greece ceased to function, that would definitely effect the operation of private businesses in Greece, right? Private businesses typically rely on government courts not only to provide basic services like road maintenance, but in particular to enforce all legal contracts with organized coercion. If private businesses could not hire governments to use force to evict delinquent tenants and foreclose on them, or to force their suppliers and customers to do as they legally promised, then private businesses would be responsible for the additional cost of acting as it’s own collection agency, rather than hiring the court’s deputies to take their guns and enforce contracts with organized coercion.
From an economic perspective, one can think of any government as a collection agency that is organized and funded by the owners of private businesses in order to arbitrate debt claims for validity and then collect validated debts using organized coercion. The owners of private businesses uniformly agree to promote a sort of monopoly in the use of organized coercion. While there are different levels of government, like city and county and state and national, usually these concentric monopolies co-exist peacefully.
Of course, nations have a history of invading other nations. But outside of that, the only time that local and national governments have a major conflict is when there is a “civil war” between one operation of organized coercion that is claiming to have authority over smaller operations of organized coercion that then “secede” and band together, like to attempt to preserve the patterns of a prior system of relatively decentralized organized coercion.
For instance, let’s say that the government Treasury of Greece eventually defaults. It owes debt to the US, Italy, Germany, and so on. Well, what if Italy, Germany, and the US all start to fight over ruling Greece and cutting up it’s resources? That is basically a world war, like if it includes a distant global power like the US coming over to Europe to defend “US national interests” in Greece from the “axis” of an alliance between Italy and Germany.
Or, what if Germany or Greece wants to secede from the EU instead of being subject to the decisions issued down by the central EU authority? For instance, what if the EU decrees that Germany is liable for the debts entered in to by Greece. That might produce a civil war, right? If a lot of the debt that is owed to Germany (and Germans) is suddenly declared to be paid by Germans and Germany, there is also a logical or logistical issue there, right?
With the USSR, various smaller jurisdictions might “secede” and rebel from the central authority. With the US in the 1860s, the same could happen. With the EU today, it’s about the same. Also, Yugoslavia used to be one country, then, in the 1990s, ceased to function as a singularity and officially split in to several republics, but not before a civil war that involved the militaries of lots of outside nations.
When one government falters or is defeated militarily by another, that is not the end of government monopolies on organized coercion, but sudden changes in procedure can arise. Certain businesses also tend not to operate as profitably when there is a civil war going on and large portions of consumer population is getting killed or goes to war to kill their opponents. Consumption may shift towards the basic “staples” or even “the bare essentials.”
Sometimes a prior central unity of organized coercion is maintained and sometimes a new centralizing of organized coercion develops. Sometimes what happens is a split in to two or more independent operations of organized coercion. In the case of the European Union in recent years, numerous nations went from relatively informal alliances like NATO or NAFTA or the UN to a much more formal alliance of a single set of consistent procedures, passports, and currency, such as the EU and it’s Euro currency.
Now, before we look closer at prices of commodities and how rising commodities prices are related to global economic activity, let’s look at a chart of the cumulative stock prices of 1800 global companies, priced in Euros:
Here is the same global stock market index, but priced in US Dollars:
While the two charts are very similar, a few differences are notable.  In 2007, the Euro pricing topped and reversed prior to the $ pricing. In 2008, the Euro pricing made a low and started a multi-year rebound while the $ pricing made another low in early 2009  and then started a multi-year rebound. Finally, in early 2011, the Euro pricing topped and reversed while the $ pricing once again topped a few months later and then reversed sharply.
The pattern is obvious. The Euro pricing is the leader and the $ pricing is the laggard.
However, as I have indicated from the beginning, the real leader may not be stock prices at all. It may be that those fluctuations in stock prices are symptoms of a simpler development.
Since 2004, I have suggested that rising commodities prices, especially rising fuel prices, would eventually slow down and then de-stabilize the global economy. I even specified that the issue was debt, and that eventually the cost of borrowing to pay for increasingly scarce resources would “pop the credit bubble” and bring down real estate prices worldwide, which I have been forecasting since 2003.
Above is a chart of the prices of a bundle of global commodities (priced in US Dollars and shown in blue) and an index of the overall prices of 1800 global stocks (priced in US Dollars and shown in red). It is easy enough to note that eventually (by 2007), the mutual rising of those two lines diverged. As commodity prices soared to such a high level that economic activity declined, like when the price for a gallon of diesel exceed $11 in the UK in 2008,  stock prices fell first and kept falling.
Once demand for commodities dropped enough that commodity prices came down, stock markets were already “caught in a tide” of a deflating credit bubble. In other words, the aggressive borrowing that had allowed for global stock prices to keep up with global commodity prices from 2004-2007 did n0t resume. Previously stable lenders were in trouble.
Naturally, I am oversimplifying a bit, but the basic idea is that a relative scarcity of resources (especially fossil fuels like oil) drove up commodity prices leading to other effects. The “relative scarcity,” by the way, is not that supplies of tangible commodities were plummeting, but that demand was growing at a historic pace while supply volumes (production of crude oil, for instance) was flattening or even declining slightly.
In the case of oil, this development (relative scarcity of oil supplies- relative to ballooning demand) was predicted in the 1950s and was repeatedly referenced in the 1970s by US Presidents Nixon, Ford, and Carter. However, that was just a national issue, since as US oil production peaked, the US could afford to import oil from elsewhere. now, with global oil production peaking in 2006, a much more widespread issue is emerging.
This issue is not specific to a particular exclusive region of the globe like the US or to a single currency or to a particular system of organized violence (court system) which enforces the value of all currencies and indeed of all financial contracts. There is no particular national political solution to a global economic shortage of fuel. Courts only have power over human activity (including the “activity” of human perception or interpretations in language), but not over the geological facts of the volume of oil reserves globally. Reports can lie, but deceptive reports do not deceive the wells or the amount of oil in the oil deposits.
That bring us to a different perspective on the prices of the global stock market. Above, we reviewed the price of the global stock market relative to the US Dollar and also relative to the Euro, which we also saw has a clear history of forecasting the trend reversals of global stock prices measured in US Dollars.
Now, let’s look at about 4 years of global stock market prices relative to global commodity prices. This is a chart showing changes over time in how much tangible resources can be purchased by selling the same set of global stocks.
The most obvious thing is that this chart has gone down rather consistently for all 4 years. There was no recovery in the tangible purchasing power of the global stock market in 2009 and 2010 relative to that particular set of major global commodities called “CCI.”
Global stocks measured in US Dollars made a low in early 2009. Global stocks measured in Euro made a low prior to that in late 2008.
However, prior to both of those, the above chart of global stocks relative to global commodities made a low in mid-2008, then rallied in to late 2008, then floated a bit for a year or two and recently broke sharply below the lows of early 2011.
As in late 2008, we may now see prices of global commodities and global stocks tumble together. In late 2008, global commodity prices did the worst, then global stock prices, then- much better than either of those two- the Euro did quite well. However, by far, the US Dollar did better than any of those 3 other alternatives (for late 2008).
That is a fit with what I began predicting in 2003. Now, we are one the brink of a continuation of the shift that was notable in global stocks by 2007. Relative scarcity of global commodities is slowing global economy activity, especially in relation to fuels, but that rising fuel prices also cause rising prices in transportation costs of all things shipped long distances.
Rising fuel costs are not inflation. If it was just inflation, then US real estate prices would not have begun a historic plummet in 2005. If it was just inflation, then global stocks priced in whatever currency would not have plunged.
Back in 1999, when global oil prices began a rally and doubled in less than 12 months, the prices of a group of companies very dependent on the price of fuel fell by 40%: airlines in the US. Stock prices of ending institutions also declined, though not as far. Again, the decline in prices of airlines and lenders preceded the top of the high-tech bubble as well as the broader stock market decline of 2000-2002.
Commodity prices matter. When diesel hit $11 per gallon in the UK (and Germany) in 2008, people changed their behavior, including business owners.
Stock prices shifted (down). Currency values shifted (eventually, way up relative to historical norms).
Now, the instability in the EU that myself and others have been referencing for many years is now getting attention from the mainstream media in the US. While there is perhaps no open talk of civil war, there have been a series of riots, including riots not directly explained by economics or politics. However, when an economy is de-stabilizing, that can manifest in “short-fuse” public hysteria, in epidemics related to stressed immune systems, and of course in prices.
Previously, people perceived that stocks were quite safe, as in a “safe haven.” Then, when stocks fell, people perceived that real estate was safe. Then, when real estate was safe, people perceived that all commodities, including gold and silver, would be safe.
However, silver prices fell over 90%  from 1980 to 2000. Is that the kind of safety that people are seeking?
In late 2008, the Euro was safer than most alternatives (rising against a wide variety of alternatives), and the US Dollar was even safer than that. This time, the Euro may not do so well. The entire EU may not do so well.
The economy of the EU is much more dependent on foreign oil than the US. The economy of the EU is a bit more like the economy of Japan, which is even more dependent on foreign oil, and has been in a deflation for nearly 22 years now.
Will Europeans (others who have been invested in the EU) flood to the US Dollar and US economy? I think so. However, I do not think that the US economy will do well.
In fact,  as we look at the chart above of Japan, the Japanese currency (Yen) has done extremely well in recent decades even though the economy there (and stock market prices) have not done so well. As the court system in Japan is recognized as more and more crucial to the economy of Japan, the Yen have been very well-respected by the Japanese and others.
Will the Yen or the Euro or the US Dollar collapse in to hyperinflation or a civil split (civil war) resulting in the use of multiple currencies? Or, will the global centralizing of court systems continue as the UN, World Court, World Bank, and BIS continue extending their empire?
In the case of the USSR, the central government disbanded, but initially a monetary union was maintained by 15 of the independent states (operations of organized coercion). As time went on, the various independent jurisdictions (of organized coercion) issued their own currencies.
Russia continued to use rubles, but in the old USSR, rubles were only good to purchase certain things from the government, rather like credits for a prisoner in jail or like gift certificates that can only be used with a certain store or certain catalog. The rubles had no particular functionality outside of the USSR. Now, Russian rubles are traded in open market exchanges at variable rates with other national currencies.
Relative to the US and the $, the EU and the Euro may do well, but I do not expect so at least in the mid-term. While many in the US are concerned about the creditworthiness of the US Treasury, everything is relative in investment markets.
Relative to US real estate, US Dollars have done very well for several years. Relative to US stocks, US Dollars did so well in 2008 alone that stocks are still way behind and, as of recent months, have resumed falling.
Today, I have titled this blog post “when do global stock markets crash” because today is an interesting juncture in global stock markets. In 2003, I was already forecasting the type of stock decline that developed in 2007. I am clear, especially when looking at prices of global stocks relative to global commodities, that the decline that began in 2007, which I forecast back in 2003, did not end.
Further, in the days and weeks and months ahead, I expect that more and more will realize that the global stock market top in 2007 is not going to be exceeded any time soon. I expect that market pricing of global stocks, including in the US, will reflect that recognition with a series of large declines and increasing volatility.
In other words, people will increasingly recognize the value of the operations of organized coercion within their midst and increasingly recognize the instability of most if not all private lending institutions. I expect that the attention to credit ratings as if they are anywhere near as important as cash and cash flow will end.
English: Various Euro bills.

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When a currency is only accepted by one particular government and that government operation of organized coercion has a functional monopoly on the operation of all businesses within a jurisdiction, credit ratings may simply not be an issue. Similarly, with food stamps, there is no issue of credit rating. Prisoners are not lent funds by the prison. Soldiers do not apply for credit lines at the commissary, but are issued a ration of coupons. During wartime, that is also common for civilians, and something similar happened in the US in the 1970s in regard to gasoline.
Private credit markets are destabilizing. I have published warnings about this since 2003. But that is just the symptom of a simpler issue.
Human populations are increasingly demanding access to diminishing resources. Governments will change or arise to stabilize and regulate access to resources.
Governments are operations of organized coercion. Organized coercion is the basis of the purchasing power of all currencies (and all financial contracts).
Increasingly, populations will recognize the value of organized coercion to maintain order. They will seek to pay off old debt and will diminish involvement in borrowing as well as lending. Private credit markets as we know them may cease to function, as in the case of jurisdictions like the USSR or Cuba. Public trading of private corporations may drop in volume considerably, or private corporations may be socialized, as we see happening in the US within such fields as education, gambling, health insurance, and health care, plus, as of 2008, the auto industry and banking industry. Of course, the US national government with the FDIC, FHA, HUD, GNMA, FNMA, FDMC, SLMA and so on… have long been involved in direct financial responsibility for much of the US economy.
50 years ago, what percentage of the public lived in government housing? 50 years ago, what percentage of the population received subsidies (like social security or unemployment) from the federal government?
How about 100 years ago? Socialism has made immense progress in the US in the last 100 years, though many might resist even considering that idea or would at least propose some other alternative as favorable.
Imagine that if the bureaucracy of the EU were to so dominate the economy of Europe that after, for instance, 150 or 250 years, Europeans forgot that Germany and France were ever not united? That would be like New Yorkers and Georgians forgetting their historical roots- back when they had independent currencies and very distinct cultures, and even fought in wars against each other. Impossible?
However, a major logistical problem in the EU is the absence of a common language. Will a global empire establish English as the imperial language, or will the EU dissolve, or what?
Well, I do not know yet. But the EU is facing huge logistical problems, especially due to rising gasoline prices which have recently approached their highs of 2008 (in Europe and elsewhere), and the US is in position to receive a huge surge of people seeking a “safe haven.” However, perceived safe havens have a history of being perceived as safe only temporarily.

first harmony then prosperity

August 9, 2011
Harmony internally, then prosperity externally

Yes, “there is more to life than money.” Also important, “a fool and his money are soon parted.”

So be aware of the possibility of being foolish about wealth. Be aware of the possibility of being foolish about all of life or any of it. Then be aware of the possibility of being calm and clear and courageous about life, including the aspect of life regarding wealth.
Lately, many people are talking about financial risk and results that they have called surprising. Many of them have been investing their trust in mass media or massive bureaucracies like the insurance company AIG or the Federal Reserve or the government of the USSR- you thought I was going to say US, didn’t you?
What have been the consequences of investing trust in the mass media and massive bureaucracies? Have those results (perhaps such as being unpleasantly surprised) raised the question as to whether those methods might have been foolish? Is it possible that foolish methods of investing trust may produce the result of financial losses, rather like the saying goes that “a fool and his money are soon parted?”
What about discounting the importance of financial realities? Are finances suddenly important to you or were they always important and only recently recognized as important? How about this: are gasoline or electricity suddenly important to you or were they always important and only recently recognized as important because we could take them for granted until prices reached a point that we altered our perspective and our behavior based on things like rising gasoline prices.
For many years, I have been focusing on the possibility of rising fuel prices and their consequences on the economies of Japan, the USSR, Europe, and the US. My publication in 2004 of “the Real US Deficit: OIL” featured a section called “the DominOIL effect” relating to why I expected fuel prices to continue their dramatic rise that began in 1999 and what consequences I expected in the US, which I expected to be similar to what had been happening in Japan since 1989 and the UK and EU since 1999.
The next chart shows the all-time low of inflation-adjusted prices of gasoline in the US in 1999. Global oil prices also made a major low in 1999.
The last chart is a chart of the stock market of the UK. Next, here is what gas prices in the US were near the time of that article in 2004:
My central question (in this 2004 publication: was “how many dollars will it cost to buy a gallon of gasoline next year?” Here is an 8-year chart of what happened:
(from here:
Some people have questioned my logic because of oil and gasoline prices falling sharply in 2008.  However, for those that have the courage to read my old articles, I did not say that demand for fuel would never drop or that prices would never drop.
On the contrary, I simply said that diminishing supplies (since the easily predictable peaking of global oil production in 2006) would raise prices enough to slow down the global economy, including that of the US. That predictable slowing of economic activity would predictably reduce demand for fuel, which would predictably drop prices. The drop in 2008 does not disprove the accuracy of the logic, but establish it. I may have even published all of that content, but it is pretty easy to see the logic one’s self if one is willing and able to face the simple facts.
How can the global economy expand after the 2006 peak in oil production? It must contract. Economic activity drops as fuel supply drops. Things like currency inflation or credit deflation are secondary financial measures relative to a primary tangible economic issue like an empty fuel tank in your car. Having lots of cash or credit but being out of gas in the middle of a desolate highway do not make a fool into a genius. Primary functional economic tangibles like gasoline and food are the things that we value having currency to access. No one cares much about currency (or gold) when they are starving, right?
So, it was the spiking of fuel prices by 2007 that were accompanied by the steep decline of global stock prices in 2008. After stocks began to plummet, fuel prices did too eventually- all as I predicted. Further, real estate borrowing had predictably diminished considerably as well, so real estate prices predictably declined dramatically, which resulted in financial trouble for many financial institutions, such as FNMA, AIG, and WaMu, as I specifically predicted in a video that has been online since 2006. (I can send a link to those interested.)
Once fuel prices fell, the global stock market began to recover. However, gasoline prices in the US recently approached their 2008 highs again (in red below).

In 2007, stocks peaked while gasoline (and silver) rose. Then silver peaked next in early 2008), then gasoline. Doesn’t that imply that rising fuel prices may have been the cause of the decline in prices of stocks (in the US and globally) and even of silver? Or maybe it was the high silver prices that brought down everything, right? ;)
When gasoline prices in the US reached a high enough level in April to reverse the spending behavior of the US economy, dropping demand enough to reduce purchases and bring down gasoline prices. However, that reduction in a fundamental behavior within the US economy also brought down the prices of the US stock market (blue above) and even of silver (green above).
In fact, those three things peaked on the exact same day: April 29th, 2011 (close-up shown below). But no one could have predicted that rising gasoline prices would have in any way effected the US economy or spending habits or stock prices or even silver prices, right? Rising fuel prices could not really have any effect on popping bubbles of speculative mania, would they?

Then again, maybe the cause was President Bush or President Obama, not gasoline prices. Or maybe they are personally responsible for gasoline prices- like maybe whether the prices of gasoline rise or fall is totally dependent on the choices of exactly one person.
But why did the Japanese economy slow down in 1989? Why did European economies begin to slow in 1999? Did $11 gallons of diesel in the UK in 2008 have any effect on the spending behaviors and economic activities of business and consumers within the UK?
Possible? Yes.
Predictable? Yes!
So, what is coming next? More selling of stocks and real estate. I’ve been warning of that since before 2004. I knew that the speculative bubbles would not last forever and were nearing their extremes. Real estate began peaking in 2005 (in places like Phoenix) and soon extended to most of the US (and much of Europe etc).  Stocks began peaking in the US in 2007 (at least for most sectors, excluding high tech, which peaked several years prior).
Of course there were a few exceptions, like the US stock sector HUI (shown above). However, the mining stocks of HUI are part of the same economy, too. They actually peaked in early April this year (pink):
What has done well? Here are a few examples of gains approaching 100% gains in the last 10 days:
What else did well lately? I sold a put option for $1.07 today that closed Friday at $.17. That change (up over 400%) is a pretty decent increase for a single day, right?
But remember, the mass media and massive bureaucracies may indicate that there is no such thing as predictability, or at least not in certain instances. Even notice that as you are reading this sentence, there is absolutely no way to predict that this sentence is going to end with a punctuation mark, is there?
No one could have predicted any of this. The future is completely unrelated to the past- not just your personal future, but even the future of how this sentence is going to end.
Nature does not have any patterns in it. And that, as always, is entirely the fault of the US President. Or the Federal Reserve. Or OPEC. Or this sentence.
So how are we going to fix the problem of nature not having any predictable patterns in it? First, let’s blame someone else because that has always worked marvelously in the past, right? Then let’s wait for the person that we blame to save us from them. Finally, let’s complain about how waiting for them to save us from them is still not working again as usual as always.
Just do not adjust. After all, adjusting could effect your actual results, and no one is interested in financial security or economic prosperity because that would be evil and shameful and of no functional relevance whatsoever. So, is any of this fooling you?
Keep in mind that sometimes translations can shift the implication of a message. If someone were to suggest that proudly foolish naivete about financial speculative bubbles was a major risk, deserving great caution, do you think that message might be translated like this: “proud attachment to ideals about wealth is dangerous” or even “the love of money is the root of all evil?”
It’s not ignorance that is most risky. It is believing that something is so when in fact it is not.
From an emotional or irrational attachment to false presumptions, blame and anger and grief and agonizing and proud argumentativeness and shame all may arise predictably. Learn that, either the easy way or the hard way, but learn it fast.
By the way, yesterday at the close of trading (Monday 8/8/2011), I purchased some call options on the US Stock market. Those positions rise in value when stock prices rise. After one of the biggest down days in US stocks in decades, I understood that the panic of the masses after the weekend downgrade of US debt could be a short-term buy signal for US stocks.
So, after stock futures dropped another 2% in overnight trading, they then reversed 4% and are again pushing toward an open of more than 2% up. That should produce overnight gains of well over 100% for those instruments.
I sold those call options for a gain of only 40% overnight. But that was just the start of the day. It got better…..


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