Friday, October 23, 2009

Crystal balls : The Five Year View

A friend was asking just the other week what a group of us though was going to happen in the next 5 years and I figured I may as well jump on the topic and produce the worse case scenario, after all its expected of me. Then I figured if I’m going to write this up anyway I may as well post it and see if I can force them to come read my blog, something they usually avoid

Of course should the others who were asked this question produce a different scenario I’ll post theirs too. It’s only fair that it’s not just mine that gets picked apart in public.

Now 5 years is a long time but I think its pretty safe to say that the most important developments in that time will be centred on just a few themes which are already an everyday part of my doomer mantra.

Peak Oil, Financial/Currency crisis, Food shortages, The unraveling of Globalization and Political instability


Peak Oil

First of all those not paying attention to me for the last 5-6 years, peak oil is not the end of oil but simply a point where the easy and cheap oil is mostly used up and supply begins to drop. This appears to be happening today but the recent recession has lowered demand while the advent of bio fuels, tar sands, and natural gas condensates have supplemented dropping conventional supplies hidding the impending peak oil storm. An important factor to note is that some Biofuels (especially corn ethanol) is energy neutral at best and does little for energy supply. Oil crops like Palm involve deforestation of natural lands or a diversion from food production both of which are importance issues for biodiversity, and world food security. South American sugar cane ethanol also relies on slash and burn agriculture on thin topsoil creating ever increasing dead zones in the rain forest. Bio fuels as they are produced today are nothing but an ethical, environmental, and economic clusterfuck and will do little but create new and different problems.

Bio fuels and the water intensive processes to mine heavy oils will not be able to keep up with the depletion of conventional oil creating the possibilities of either world or regional oil shortages in the next 5 years. I believe that in 5 years we will be dealing with very volatile energy prices with peaks above $200 a barrel. Without huge conservation moves to curb demand prices at this level will bring endless stagnation, negative growth, extremely high unemployment as well as impacting the other themes for my predictions. Those countries that have moved towards conservation and efficiency will be the net winners as they will be less hurt by energy prices, have less concerns about shortages and will easily compete with inefficiency economies. WE WILL NOT BE ONE OF THE WINNERS IN THIS RACE!

While Canada does have energy and resources much of it owned by foreigners who will not use it for our benefit. Despite being an important exporter to the U.S. Canada is not a big net exporter buying nearly as much foreign oil for the eastern part of the country as we export to the U.S. from the west. NAFTA requirements that we export energy to the U.S. added to the lack of a Canadian Strategic Oik Reserve means Canada will constantly flirt with regional shortages by the end of the 5 year period.

The U.S. will be in even worse condition starting in as little as a year or two as Mexico’s oil fields deplete to the point they can no longer export to the U.S. This will not only cut off a great deal of the American oil supply but also leaves Mexico ( a country which recieves about 40% of their government budget from oil profits) broke and even more dysfunctional than it is now. Mexico is destined to be a failed state possibly fracturing into several domains run by drug lords in the north and possibly independence movements by indigenous peoples in the south.

Financial/Currency Crisis

The myth of green shoots is mostly bullshit! Yes we in Canada appear to be doing relatively ok right now, but there are still several other shoes to drop before this financial story is over.

U.S. unfunded liabilities are about $ 60 trillion dollars today closing in on 5X GDP. There is no way for the U.S. to get out of this mess without doing something drastic like destroying their currency through massive printing and eventual hyper inflation, hiking tax rates so high the 30s will look like a boom town, or simply defaulting on foreign debts. The U.S. is like Donald Trump, it survives on OPM (other people’s money) mostly borrowed from Japan, China and the Gulf States.

This model is not sustainable and will collapse on itself very soon and the collateral damage of a U.S. collapse on Canada will be huge.

The world derivative market is about 10 X the size of the entire world economy (about $600 trillion today) and any number of likely or unlikely events could trigger vast quantities of these toxic products leaving dead banks, dead insurance companies, dead corporations, dead pension funds and perhaps even dead governments who bought this crap from the banks in various bailout plans. When a market such as this exists for the sole purpose of high risk corporate gambling it’s simply a matter of time before a bad bet cascades through the system wrecking everything in its path.

Escalating residential option ARM mortgage resets, normal mortgages with negative equity, failed commercial mortgages and credit card loses which have killed 105 U.S. banks this year will accelerate destroying at least 1000 U.S banks in the next 5 years. The market leaders which seem to have an inordinate amount of control over the U.S. Government will not be allowed to fail but they will gobble up all the clients and assets of their smaller regional completion. The recent profits by U.S. banks have not been natural but rather because they were allowed to trade toxic assets for better ones. They are also allowed to borrow from the Fed at 0.25% and then buy treasuries yielding in the 3% range.

Goldman especially has made a killing on its high frequency trading software that allows it to basically skim the market as it makes millions of micro trades in advance of orders they know about from the outside. Banks that look profitable do so because they are not being held to Basal 2 and 3 reporting standards as they continue to value assets to model or face value NOT the market. Banks that do not adopt these accounting standards could be frozen out of the European market.

The current reports of a stabalizing housing market cannot be trusted because the banks have not foreclosed on all properties that qualify. In some cases manpower or legal costs have delayed or stalled the process making the true numbers higher than the reported ones. The banks have also held back a portion of the seized houses from the market lest they flood it even further and drop the prices another 10-20% in over saturated regions. One report claims 80,000 Pheonix houses are being held back, another claims 200,000 in Florida have not hit the market.

Don't thing all the problems are in North America: the Baltic States, Ukraine, Hungary, Spain, and Portugal all could have Icelandic style banking collapses which could bring down of number of overexposed EU banks and freeze credit once again. The additional stimulus required to free up a second credit crisis would cripple governments with debts they will never be able to pay without creating inflation. Greece is on the verge of collapse or ejection from the EU.

In five years I believe we will see several mauled or destroyed currencies including the U.S. dollar and the Sterling. I have no doubt it will happen, the only unknown is will whether Canada will join the currency death spiral in order to maintain its U.S. customer base or act to protect the purchasing power of those who behaved rationally and have saved.

I believe we will see very high inflation in the U.S. perhaps verging on hyperinflation and the PTB(powers that be) will be forced to acknowledge 20%+ unemployment even though it will probably be closer to 30% by the drastically more accurate work of John Williams at Shadowstats.com


Outright fraud and manipulation of the metals market will eventually lead to a Comex/LME default. Myself and others have documented the fraud around Bullion Certificates and the ETF’s show discrepancy in physical holdings and the likelihood that multiple claims exist for the bullion. 5 years is a long time to make an accurate prediction but I suspect $3000 gold $120 silver will be the norm by that time, the numbers if a default happen will be several times higher.

What we will realize in 5 years is that last years crash was the beginnings of a new depression that will reset the western model of over consumption and buy now pay later. We will also realize that the American empire is dying: VietNam was its Teutoburg Forest and the cycle of bread and circuses, wars for distractions, monetary debasement and rot will mimic that of Rome as it falls.



Food shortages:


Growing populations, a growing meat loving Asian middle class, desertification, drought, the collapse of ocean fisheries, blight, and the drive for bio fuels are all going to contribute to a food crisis that has been widely reported but mostly ignored in the last few years. Added to these issues is the financial crisis which has frozen credit for many third world farmers reducing he number of acres farmed, Many other farmers are trapped in the endless debt cycle caused by patented seeds which must be purchased each year and require considerable amounts of costly chemical and fertilizer applications. India for example is suffering an epidemic of debt ridden suiciding farmers who are unable to support their families.

The Saudis, self sufficient in grain for 20 years have announce their aquifers are nearly empty resulting in zero wheat production within 8 years time. In the U.S. Lake Mead is ½ empty, the mid west aquifers are well depleted, deserts are spreading in Africa and China, Monsoons are failing around India, and as Himalayan glaciers melt for good the rivers feeding India and Pakistan will shrink. All these water issues will cripple food production in coming years.

Peak oil will greatly increase the cost of energy used in the production, processing and shipping of foodstuffs. Malthus would have been correct in his predictions that stagnating food production would cap world populations if not for the discovery of cheap oil which allowed the industrialization of farming and the creation of chemical pesticides and fertilizers. The cheap energy that allowed millions to leave the farm while production increased is running out and we must expect food production to stagnate if not shrink drastically in the coming years.
Peak oil = Peak food

Further the damage done to fertility by over tilling and chemical applications will take a great deal of time to correct once we are forced to change our ways. Even if we do manage to keep up with growing demand for a time, prices will spike drastically when new energy prices are worked into the cost of eating. Currently 1/6the of the world suffers hunger, ¼ is soon possible.

I know that some economists and libertarians will state that the market will correct by increasing supply or lowering food demand, but in this case the former is probably not possible and the latter is simply a nice way of saying the poor will starve and the middle class will eat less and become the new poor.

5 years is not long enough for this problem to reach its peak but within 5 years we will see much more expensive food, more people starving abroad and at home. More people will begin to utilize their yards for food, more people will legally or illegally begin to raise livestock in the city, and people will begin to demand access to hydro corridors and vacant lots. In 5 years we might even see the decline of migrant farm workers as some Canadians will be forced to do work previously deemed “beneath them”

Globalization:

I believe that we are at or just past the point of maximum globalization; the increasing cost of energy and shipping will begin to erode the price advantage of cheap third world imports saving some existing manufacturing jobs but also allowing those with access to capital to begin rebuilding the local production of necessities. Countries have become far too interdependent and will not quickly change the course but in 5 years people will recognize that dependence on other countries for food, energy, drugs and basic necessities is not sustainable in a high cost energy future. Little progress will be made in localization initially but the public will begin to realize the dangers and businesses will realize the opportunities. The danger to the U.S. is that a destroyed dollar and a lack of skills may thwart any move towards reindustrialization. Jeff Rubin’s new book is a simple to understand but solid explanation on how Globalization will decline.

Globalization has also made us susceptible to economic blackmail as vital commodities beyond food and energy become more tightly controlled by nations that don’t worship the free market. China has long set taxes and quota on exports of strategic materials and has made it clear that Rare Earths used in permanent magnets, solar and electronic applications will be hoarded for domestic use. Manganese, Magnesium and other metals used in alloying steel have seen export limits and taxes to keep both resources and jobs at home, yet they roam the world buying all they can get of other materials. In theory globalization should be one great big open market but it’s not. The west is reliant on too many commodities and manufactured goods from countries that don’t necessarily care if we thrive. The west will begin to realize this and begin to support internal manufacturing and resource extraction. This revelation may be the only good thing that comes out of the next 5 years.

Political Instability.


Political stability rests entirely on 3 issues: the ability of governments to provide the services, order, protection and fiscal management citizens expect, the market’s ability to supply the necessities of life at an affordable price or the government’s ability to subjugate the public into submission.

The problem is that each year less countries, regions, municipalities are able to meet the expectations of their citizens. In most cases expectations were way too high to start with because of government’s lies and handouts which set these expectations in the fist place. It’s also the fault of the people for being so stupid as to think you can pay $100 dollars in tax, loose $20 of that in administration costs and corruption yet receive $120 dollars of service each and every year. This kind of accounting leads to endless deficits with an extra dollar or two moving to the administration column each year until the administration costs and carrying charges on the debt uses up the entire $100 leaving government to borrow or print the $120 for services.

Each of the other themes I have discussed can impact the ability to maintain political stability!

The financial crisis and housing collapse are destroying the tax base for many governments and I fully believe that a thousand or more villages, towns, and cities will default in the U.S. obliterating government services and pensions. Without massive federal aid there are at least a dozen U.S. states that could default within the next 5 years (all will run deficits), but of course there is no way this aid can be created without further debasing of the U.S. dollar through massive monetary inflation, say goodbye to the dollar or all government services, not much of a choice is it? The fiscal mismanagement of Canadian Conservatives which took a $ 16 billion surplus and made it into a 60 billion deficit in just a couple of years may well move our government to print money too, ditto for Europe. World wide inflation look out!!!

Peak oil won’t trash civilization in the next 5 years but the chances of regional and/or seasonal shortages will continue to grow and the affordability of home heating will drop, people will freeze in the dark, people will protest and demand subsidizes, further hurting the government bottom line. Don’t think that scrimping Canadians and Americans will cure the demand issue for oil, for every family that gets the heat turned off, 10 or 20 new Tata Nanos will hit the streets in Calcutta, or perhaps a few new Geely cars in Quandong

The west is still generally rich enough to buy what food it needs but there are many individuals in the west who are not so rich. The U.S. already has 35 million people on food stamps which represents 10% of the population. With unemployment rising, unemployment benefits running out, and food price inflation you can add more deaths, illness and disgruntled folks to the mix. 60 million or 20% of the U.S population may end up on food stamps in 5 years. Food and fuel riots are becoming more common in many parts of the world and peak oil, peak food and financial loss will only aggravate this problem.

Imagine the million man March of 1995. Now imagine it again but instead a peaceful march by the Nation of Islam, its leaders are pissed off middle class people who no longer own house, no longer have a pension, no longer have anything to lose but do own a gun. Riots, protests, civil disobedience, armed resistance to evictions and targeted attacks on the rich and elite will come to north American and Europe in the near future. Attacks on bankers and kidnappings of factory executives have already started to happen in Europe.

The U.S. is in crisis and once the States begin to go bankrupt and the Feds cannot or will not bail them out, what is the value of the Union? Already there are numerous secessionist movements in the U.S. and more State legislatures are chafing at the interference by Washington into areas of State jurisdiction. When the Feds were flush and could toss lots of money around states put up with it, but now there is much less incentive to bow to the Chief.

Mexico, Pakistan and most of the Countries in Africa are failed states. The U.S., UK, the Baltic States, Ukraine, Spain, Portugal, Greece are just some of the countries that are teetering on abyss and the strong actions required to save them are not palatable to the majority of the public, Just ask Ron Paul.


WRAP UP

Now this might seem long and lacking in concrete predictions but I can’t say that something in particular will happen next Tuesday I can only say that unless things change drastically this will happen eventually.

For those who want quotes to throw in my face later here it goes.

In 5 years we will still be suffering in a depression that started last year no matter how much the governments goose the numbers to show otherwise. Until the numbers at Shadowstats shows a recovery I will not believe the U.S. is out of recession. Canada by contagion will suffer low double digit unemployment, growing deficits and reduced government services for a decade. Unless we cozy up to the Chinese and soon it will get worse.

In the next 5 years 1000 U.S. banks will go under, including some biggies like Wells Fargo and JP Morgan

At least 5 U.S States will default, probably more, without searching out the stats I’d guess on California, Nevada, and Michigan as possible victims.

Many 100s of municipalities will join the states in default, municipal bonds will become worthless and AIG, AMBAC, FGIC, FSA and others who have their hands in the bond insurance market will get killed. The same muni disaster will destroy pension funds making retirement impossible just when there are not enough jobs to go around.

20% unemployment will officially be acknowledged, unfortunately it will only happen after unemployment hits 30%+ as per shadowstats.com

60 million will be on food stamps but they won’t be worth enough to eat on.

5-6 million homeless, some homeless will forced into FEMA camps and assigned work on government projects

High inflation will lead to massive poverty as government/private pensions don't keep up to the real cost of living

Numerous constitutional cases will be brought up by U.S. states to regain stolen jurisdiction

Several U.S. States will, in spite of the Feds, propose the legalization and taxing of marijuana in order to balance the budget.

Gold at least $3000 and silver $120,

If the Comex/LME does default on gold or silver the numbers could peak at $10,000 and $1000, this is what I’m banking on, and at less that $2000 dollars for a single 100 oz bar of silver everyone should be making such a low risk high potential bet.

Oil $200, NG $20

US dollar will lose at least another 30%

Obama will get defeated, that’s if he even lives to the end of the term. I hold no hostility towards the guy but I do believe he was elected to fail and this no win situation he’s in will assure it!

More Peter Shiff and Ron Paul clones will contest republican nominations for office.

The Federal Reserve will simply shut down and walk away from an unmanageable situation after they’ve diverted that last of U.S. wealth to foreign banking concerns.

Bankers will be hunted down and killed in their homes

Riots will happen in many U.S. cities. These riots will make the LA riots look like a cream pie fight from an old movie.

England also but throw in some race riots too, as unemployment, more refugees and religious tensions bring the pot to a boil

U.S. minute men militias will grow in numbers and begin killing illegal’s on the Mexican border. If there is a total breakdown in Mexico the U.S. government might sanction or deputize these groups.

A noticeable growth of Secessionist movements within certain states: Texas, Vermont, Alaska and the Republic of Lakotah being my choices.

Fidel and Raul Castro will both die and the embargo will be dropped ( there is no real rationel for this, it's just a "what the hell" prediction.) However access to well trained inexpensive doctors and a people experienced in adapting to peak oil through localized agriculture could be an invaluable resource for the U.S.

In Europe Swedish, Spanish, Portuguese banks will fail, Latvia, Lithuania, and Estonia will suffer fiscal crisis, be unable to pay off foreign loans, fail to hold their currencies to a Euro peg and will not qualify to adopt the Euro. Several of the Southern EU countries will be forced to pull out because they cannot maintain debt to GDP ratios mandated in the EU constitution, and/or cannot live with ECB monetary policy. Greece, Spain, Italy and Portugal are all good choices. Right wing parties with anti Muslim, anti African agendas will gain power.

Mexico will totally collapse, Pakistan will be in civil war, Afghanistan will be lost and the U.S. will be forced to pull back to Kuwait and Iraq where guarding the oil will be there only priority.

Japan will finally face a crisis over government debt levels.

Russia, China and India will begin to displace the U.S. as guarantor of security in the middle and Far East.

One or more country will launch a partially gold backed currency. Russia, China or a common Pan Arab currency are most likely. One Zimbabwean minister has already suggested that Zimbabwe should follow such a course, but I doubt they are on the ball enough to pull it off.

I could spew out more prediction buts lets argue these first.

Have at it!!!!

6 comments:

k31fan said...

if bankers will be hunted down as you say.....please dont leave out politicians.....

IMHO secession is a real possiblity. Some states will no longer pay for the stupid socialist ideas of most "blue" states.

If we split apart we will do it because of debt and money.

and the dems are adding the public option to healthcare today.....the blind leading the blind...over the cliff.

The GOP will take the House and or Senate.....by default alone in 2010NOT because they deserve it. But because most americans want to stop obama and nancy pelosi. To slow socialism down.
They are doing NOTHING pro-growth
pro-spend money we dont have yes but progrowth no.

we need more ron paul and peter schiff clones.

CSB said...

when push comes to shove the politicians will demonize the bankers to divert blame and attention, but I would not be surprised if some got popped off too , hence my reference to Obama losing the next election provided he survives the term.

I saw a good article today saying that the cost of health care is a major point of contention but no one ever questions the over 1 trillion spend on defence and war per year. If the Ron Paul foreign policy was enacted health could be dealth with but with current spending levels its not doable.

I still argue that free neo natal care could save more than it costs when you factor post delivery conditions, premies, etc, free access to GPs would prevent a lot of costly illneses,, still the legislation as writen is too long and complex to even know what it means or what it will cost.

Many of the FOX arguements are pretty shallow. There are valid concerns but they are lost in the bullshit ones.

The Mad Scientist said...

You covered a lot of important points here. Certainly your outcomes are possible and even probable, but I think there is a chance that Peak oil related problems can be overcome by systematic planning specially since it is 40% of our overall energy usage and not 100%. With the remaining sources staying constant or even increasing over the next 10 years it gives us time to implement a solution.

Mike said...

Hi there. Keep it up for a good job.You really have a lot of nice blog here. Lots of information. I have read and passed on this info to my friends as well.

CSB said...

Mad,
Peak oil is survivable if we begin to to use less and use alternatives when possible, unfortunately the millions of new Chinese and Indian Middle class will not be told they have to use less when they already use just a fraction of what we in the west do.

Even most of the greens I know still drive, still fly out for vacation, still have more house than they need. If those who believe there is an issue are still to self centered to make hard choices regarding energy use how can we expect non greens to behave.

Peak oil really is the key stone to many of the problems I see coming down the line, if we could change our ways the food issues, cyclical recession issues, climate change issues could all be partially mitigated.

There is not a lot of time to make these changes as the IEA now states the world oil field depletion rate is over 6% yearly. In other words new fields are not being found in large enough quantities and size to ofset our use. At 6% per year our supossed oil glut we have now is gone in 18 months+-

The Mad Scientist said...

CSB, while I agree with the implications of a 6% depletion rate, one must also give weight to the the energy equation as a whole.
I had written some thoughts about the electricity issue in particular here,
http://ispeakofpeak.blogspot.com/2009/03/we-are-all-freaking-doomed-and-other_22.html