Open Choke

What the "Occupy {Your CIty Here}" Movement is All About...

A reader of this blog, who goes by the name "Rely on the Prize", posted this as a comment.  A brilliant description...

"I agree that people are angry, and those of us used to the norms must heed this unrest, and realize what it means. However, so should the supporters analyze the protests. I had a two hour discussion with my liberal wife last night about Occupy Wall Street, because I have a hard time understanding it. I said "honey, even the hippies in the 70's had an end goal in mind - they wanted the US out of Vietnam." I can relate to that - I want us out of Iraq and Afghanistan...but that isn't what they're protesting. I could support and end to the Fed and the unmonitored, pseudo governmental, yet privately controlled system it upholds...but that isn't what they're protesting. I would even support a rally against oversized, monopolistic banks (10 banks controlling ~80% of American capital is not a good idea)...but that's not what they're protesting. The fact the banks paid back their TARP money makes you wonder why the ire is aimed at these banks. Why not rally at the doors of GM? I would DEFINITELY support the protests if they marched their asses to Washington and protested the contributing factors to our financial woes. Banks paid back TARP, but what about Obama's $787 BB spending bill, the $410 BB omnibus spending bill, and now another $400 BB spending (er...jobs) bill? Government does not create jobs or value, and the last three years pretty well hammered that point home...but that's not what they're protesting.

They are protesting against capitalism and the free market, and I cannot support such a protest. I am just as angry that a century of covert politics resulted in the pseudo socialist system currently in place in America, but the answer is not totalitarian government, as these protesters are manipulated into thinking. Look at the signs - the protesters are being used by the unions demonstrating they can direct an angry mob. The unions want a stronger government...so long as they have a seat at the table. The problem is that such goals are all hogwash in the end.

Strong central government works only in a completely homogeneous society. Marx himself wrote the only way his system would work is if EVERYONE was so fed up with their current system they willingly gave their independence to the commune. If you accept that a diverse society will always have differing opinions (and should), then you must accept that strong centralized forms of governance, such as socialism and communism, will never work. The ridiculous irony is the misguided protesters are aiming for the wrong thing. They want individualism. They want to do what is cool. They want to celebrate the power of the people. The system that gives the most power to the people is free market capitalism. The free market is based on the collective opinions of the entire population when they each place a value on everything around them. Rather than ceding your individual power (and right) to decide what everything is worth to a "superior," capitalism gives those infinite choices to ALL OF US. Power to the people indeed - by simple definition there CANNOT be anything more democratic than the free market.

History shows us there are essentially two ways to organize - centralized power or distributed / individualized power. If Occupy Wall Street had clearly stated goals (that make sense - their website states a "living wage" as a clear demand...I don't have the time to decry the ignorance of paying people for breathing...what does a pay cut mean?), I would support every goal that limits central power and actually does give that power to the people. From what I can discern, these protesters are rallying for stronger central power, in the form of Soviet flags, "support socialism" signs, and union participation at all levels.

I agree with Scott that the American dream is cracking, but it is because we are confiscating We The People's power...and these protesters are willingly delivering their souls, their individual choice, to a very devious group of manipulators who are all too eager to claim this independence in the name of stronger central government. A central government controlled by the very few who are truly behind these protests and this anger."

Thany you "Rely on the Prize".  If you agree with this, I urge you to forward to your friends and facebook friends.  It is the best encapsulation of this I have read yet...

Get Out of Jail Free Card...

I was reading an article yesterday on how Hugo "Juice" Chavez is confiscating the private residences, yachts, and hotels in a resort area of Venezuela to "give to to the poor".  These last 5 words are a depot's favorite, because it confers some sort of twisted moral legitimacy to any specific high crime and misdemeanor.

Try it at home kids...

"I didn't eat my brocolli.  I gave it to the poor."

"I shoplifted the candy. I gave it to the poor."

I shot a man in Reno.  So the poor could watch him die."

"I raped some nuns.  For the poor.  To highlight the venality of the Church."

It is easy, AND  effective!  Never do the right thing again!  Give into your basest desires, because you have the perfect rationalization ready to throw down like trip aces... "For the poor!"

I have the good fortune to count amongst my friends those across the political spectrum.  I have seen an increasing stridency in the progressive movement against those that have assets or businesses.  The polemic is approaching hate speech in its ignorance, prejudice, and frenzy.  Make no mistake, this is being orchestrated carefully, and resembles movements we have seen several times in the last Century that resulted in wholesale destruction of life, liberty and property.  The same play book.

For the record... I have been broke twice and destitute once in my adult life, and, but for the charity of a couch from a friend, would have had to depend upon a disappointed family to provide comfort and roof.  I never once identify myself as a victim of society or as poor.  I focused on how to be successful, a net producer, not a net consumer, and learn from my mistakes.

THAT is the American Dream.  it works, and I am proof.  

As I was reading through the various articles lauding Steve Jobs, I stumbled over one in Gawker that, essentially, called him a fat cat industrialist who was rich and was inferior in meaning and in purose to another fellow who had died the same day, a minister who had devoted himself to a life of sacrifice to make others lives better.  It was a provocative article and it made me think...

I think everyone agrees that making the world a better place for others is a laudable goal.  A life well lived.  A life of meaning.  How should we measure this?

Should we measure it by how much one has sacrificed or should we measure it by how much one has made others lives better?

Is "sacrifice" all that it is cracked up to be?  Is sacrifice laudable if it does NOT accomplish the goal of making others lives better?  Does 'sacrifice' in and of itself make the world better?  

I don't think so.

Take a man who has a blueberry pie.  He shares it with his various neighbors, leaving none for himself.  He has fed his neighbors for a short time, and dies of starvation in the process.

Take another man who bakes blueberry pies.  He trades his pies with his neighbors for what they have to offer... one makes bread, another candles... or, even, God Forbid, evil MONEY, the stuff we use to exchange blueberry pies for bread, candles and other things we need but the other guy doesn't necessarily have, although the guy down the road, who doesn't want blueberry pie actually DOES have.  In  any case, he feeds the whole town blueberry pie for a long time.  

Who has done more Good?  From an objective standard of having people eat, the baker has done more societal good.  Of course, this depends on the others in the town doing what THEY do best in exchange for unlimited blueberry pie.

What if the baker gets filthy rich and gorges on blueberry pie every day?  In other words, his blueberry pie is so popular that more people want to eat it than the average of what other people want to consume?  His product is in more of a demand than others?  Is he eating more than "his fair share"?  Should he quit selling blueberry pie?  

He has still done more objective good, because he has fed more folks for a longer period of time, and those folks willingly gave him more of a share of the collective labor because of it.  It is "sustainable".  This sustainability is based on others doing work making or doing things that others want to trade for.  If too many don't do anything valuable enough to support themselves, then the system changes from Producer to Consumer.   This is unsustainable.

Sustainability is Noble, Unsustainability is Not Noble.  Actually, it is venal.

Our goals should be to make others sustainable and contributors.  Those are noble efforts.  They make us all contributing members of the tribe.  Efforts to make the tribe unsustainable are fundamentally destructive.

Right?

If your neighbor's kid is selling his dad's $10 bills for $5 down the street, what should you do?  I mean, after verifying that Dad was supportive of little Junior giving away his money...

You would buy up as many of the $10 bills as you could, right?

The right answer, apparently,  if you are an American politician or bureaucrat, is to react by selling OUR $20 bills for $5 to "be competitive" with our neighbor's seemingly asinine decision.   

This is exactly the case happening in the case of solar panels today.  China heavily subsidizes its industries to sell stuff for, according to experts,  less than their cost.  Why would they do that?  First, the political chesnut and short term benefit of staying in power via jobs, regardless of how unsustainable those jobs are based on shoveling unrecoverable money out the door.   Eventually the money runs out.  Ask Greece. 

Second, perhaps they want to drive out competition so that you can later raise prices.  This is a proven loser business strategy, as every first year MBA student learns. One never recovers the money spent because it doesn't make it any harder for a competitor to ramp up to compete when the price dumper decides to raise prices. Thirdly, perhaps they think that by reducing the consumer cost to compete with alternatives, thus guaranteeing a stable sales environment, the cost will drop to breakeven or profitability over the long run.  Maybe they are right.  In any case, we get to take advantage of the lower cost efficiencies WITHOUT paying for them as a bystander. 

Why shouldn't we buy as many of the ten dollar bills as we can?  Why should we  get into the business of selling $10 bills for $5 bucks?  That seems to be a sucker game.  China is offering to subsidize us with cheap energy! In return, we sell them Sponge Bob Square Pants!  Yay, I say.

But... but... what if China, based on low wages, is actually MAKING a buck on the $5 buck sale?  So what?  We don't have that same option, do we?  We have a high wage society.  We have no choice but to sell $10 for $5 in that exact business .  It's like saying "I am a lawyer that makes $300k bucks a year, but I really want to make sock bunnies.  That's cool.  But don't expect to make $300k per year doing it!  No one wants to buy $1,000 sock bunnies.   And don't you dare ask the government to subsidize your sock bunny business.  They probably would today!

So let's choose NOT  to sell $10 for $5 bucks.  Let's choose to sell $10 bucks for $20 bucks.  Labor has to be mobile.  Slide rule manufacturers just can't employ the same number of people they could in 1960.  Those jobs didn't disappear, they moved to areas where they could actually do something people were willing to pay for.  The political appraoch would have been a bailout to support the US slide rule industry. 

It's simple, really.  Labor resources need to go where profits can be made on on their deployment.  This grows the economy.  Artificially allocating any resources to areas where no one wants to buy the product is a pure waste.  It removes from the economy.  A job without a willing buyer for the product or service provided by the job is welfare, pure and simple, and unsustainable.

We have led the way on worker productivity, enabled by technology...  selling these $10 bills for $20 dollars.  I have an acquaintance that makes Chinese $10 dollar bills into American $20 bills by networking and monitoring the Chinese solar panels to achieve highest possible energy output.  Brilliant stuff!

Here is a radical idea.  Let's quit competing on things we shouldn't want to win, and instead take the opportunity to stock up on the free value offered us by others less enlightened so that we can concentrate on building or doing those things we do best.

Ol' Delbert and Rico were driving their wagon across the Texas Panhandle.  See, Delbert didn't like horses much, but sure liked gettin' paid to haul freight over the west.  Rico, on the other hand, was a regular horse whisperer.

Delbert was always adding freight to the wagon, because he got paid more the more he carried.  

"Del, don't you think we ought to feed the horses a little bit more if we are gonna have them carry this much freight?", asked Rico.

"Nah.  Scroom.  Them horses are already overfed.  Feed 'em more and they will jest crap some more and mess up the envire-ment even more", replied Del.  "In fact, I think we should load up the empty space we got with rocks just to get 'em trained up some more... make 'em all better at carrying loads".

So Del hopped off the wagon at the next stop and started loading it up with rocks.   "Rico, get your ass over here and help me load these rocks!"

"I don't know if this is a real good idea, Del".

"Dammit, this wagon is gonna get loaded with rocks even if I have to do it myself, so get over here and help me so we can get going".

Pretty soon, the wagon was loaded tall with rocks.  So tall, that the wagon was riding and grinding against the axle.   The horses were straining to pull the load, especially up the hills.  Every once in a while, the horses would fall, and the wagon would drop backwards.

"I got me an idea, Rico.  These wheels are about to bust, and going backwards isn't good.  We should replace them with square wheels.  They are more stable on flat ground.  Not as likely to bust up and slide backwards." said Del.

"Well, yeah, Del.  I can see your reasoning, but it sure seems like it will make it a lot harder for these horses to pull the wagon forward when we get going again." Rico sputtered.

"You know, Rico, I am tired of your horse loving attitude.  These here animals are just beasts of burden.  One dies, we replace it with another.  Simple.  We do things your way, these animals would be sitting around sipping marg'ritas on a beach somewheres, instead of hauling our freight.  Quit arguing with me and lets get these square wheels on the wagon."

Pretty soon, the first horse pulled up lame trying to haul the hugely frictioned wagon.  

"Dad gum it, thats some bad luck", mumbled Del.  "That's a pretty good horse.  We need to do whatever we can to make it part of the team again.  I say we cut off its two bad leg and put it in the middle of the team so the rest of the team can support it and it can contribute with its two good legs." declared Del.  

So they did it.

"You know, Rico, I like ducks better'n horses.  They don't eat as much and they don't crap as much as these horses and they got some wings, so I think they would do a better job pulling the cart with the square wheels.  We feed the horses less, and give the food we save to the ducks, we gonna move fast!  We are gonna transition to an all- duck team".

"I think this is a real bad idea, Del.  I think physics dictates that it will take a million ducks to replace a few horses, and how we gonna bridle them?"

"What you taking physics, Rico?  You some sort a duck denier?  You clearly hate the enviro-ment.  That reminds me.  I got these razor sharp bridles I want to put on the horse team.  They slow up at all, it cuts the bejeezus outa their mouth!  That'll teach them not to slow down none!"

Of course, soon all the horses die of their festering mouth wounds and of exhaustion.  The ducks flew the coop and were drinking marg'ritas on a beach during their southward Winter journey, and Del and Rico were left with a busted down cart full of rocks near Hereford.

Del muttered "I always knew that horses were worthless!"

 

 

 

S&P lowered the US debt rating from AAA to AA+ last night.  What does this mean to you an me?  Well, S&P is only one of three debt rating services, and the other two have said they aren't going to downgrade, but this is historic, nonetheless.

When your debt grade goes down, your cost of borrowing goes up.  This sad fact is NOT lambasted when you are a basic middle class person.  It is made out to be the crime of the century when applied to "the poor" by the socioeconomic class divide and conquer folk.  It means we have too much debt to handle safely.

Applied at the personal level... that bad credit folk either can't get a bank to loan them money or that they are charged higher rates to make up the risk of default.  When we do stupid things out of feeling sorry for bad risk folks, like guaranteeing their payments, we typically end up... making their payments.  

So the cost of Fed Money is going to go up some amount.  Since the Fed is the source of all funds, this means that interest rates at banks will go up, mortgage interest rates will go up, and the general cost of borrowing money will go up.

As a result, the value of homes, and businesses, and the stock equity values, and anything you use credit to buy will go down.  Why?  Because the cost to buy just went up, without any underlying change of value.

Let's take a house, for instance.  If you can afford $1000 bucks a month for a payment, minus all the taxes and insurance and stuff, then the value of the house you can afford at 1% interest rate is is $311,000.00.  At 5% interest rate, that value drops to $186,000.00.  Poof.  $125,000.00, or nearly 40% of your value disappears automatically.  To be fair, your house probably wouldn't lose this total value, but the buyer pool would be substantially lower for your house now, because the cost to own it would be much higher, so the price will drop substantially.  It works exactly the same way for the Stock Market.  Cost to borrow goes up, equity value goes down.  Simple as that.  It is a Natural Law.  That's why the stock markets will behave negatively, although, to be fair, the market anticipated this downgrade, and the real result come monday may not be a drastic drop.  Had S&P said that it was satisfied with government efforts, then the stock market would have tended to rally, since the downgrade was so much baked it.  

http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

So... we will see more downward pressure on home values.  Downward pressure on stocks (meaning YOUR pension/401k/mutual funds).  Lower job growth.  The whole gig.  To add to it all, the price of managing US debt just went up!  We get Jack Sh** for that extra expenditure, an expenditure we ship overseas to countries that do us a favor of loaning us money.

The S&P said that it had no confidence in our politicians to actually perform on its commitments it just made to reduce spending.  It also negatively noted that the US did not raise taxes. Why would it make that distinction?  Let me tell you...

Debt is caused by "Spending Too Much".  You spend more than you take in.  Responsible people and governments don't do this.  Why would you?  People with too much debt essentially want too many things that they can't afford.  Heartless as it may seem, too much debt is, 90+% of the time, the fault and responsibility of the person who decided to buy something they couldn't afford.  That trip to Cancun or that new Beemer on easy payments sure looks different after the fact.  It doesn't matter where you are on the socioeconomic ladder.   This problem is endemic.  

Once you get used to a certain level of spending, it is hard to reduce it.  Losing the BMW, foregoing the trip to Cancun... it's just not FAIR!  However, getting out of debt, for most of us, entails stopping spending.  The 2nd job can accelerate it, but it doesn't solve the problem.  You just die earlier.  Think of taxes as "The Second Job".

The S&P cited taxes because raising taxes is the LEAST politically risky action on Earth.  Less than 50% of us pay income taxes at all, and the ones they are targeting comprise the 2% of the 135 million tax returns filed reported income at this level.  Choosing to tax these folks isn't politically risky in the least, is it?  They only comprise 2% of the voters!  Most Americans believe in letting the richer guy tote the note, just not me. Stopping spending.... now THAT takes real political huevos!  We have lots of quivering lips around the myriad of government teats.  In fact, it seems the goal of our political class has been to gain a voter majority by giving them yours and my money (assuming you, dear reader, is a taxpayer).  The S&P guys know this.  

The government is no different than you or I.  Here is the perfect analogy to our current system... You onw a home.  Over the years, you have allowed people to live in your home because they were "down on their luck". This group has trouble getting or holding jobs.  They are eating more and buying more things with your credit card, and they invite their friends to live in your house.  When you finally say "enough", they say it is only appropriate for you to go out and get a second job.  There are a lot of mouths to feed.  You are an insensitive uncaring individual for not getting the second job, all the while they are opening new credit accounts under your name.   And then they hold a vote, and they choose to keep on spending your money and for you to go out and get another job, deadbeat.  Its for the children.

In closing, my little nephew was showing me the money he had saved this morning.  I took 40% of it and put it in my pocket saying it was a tax, and that I would give it the less fortunate, minus a 60% carrying charge for my time in doing so.  What did he think of that?  He told me "that's crazy"!

Drillinginfo's Allen Gilmer gave a very interesting talk at the SW Section AAPG a couple of weeks ago where he showed this slide.  
 It shows an amazing uptick in both US liquids and natural gas production beginning 8 years ago, the component of such that is due to unconventional well drilling and stimulation, and an estimate of when we will crash through the glass ceiling of Peak Hydrocarbons.  Doesn't look to be a ceiling at all.

People want to use more and more of YOUR money to make riskier bets.  When people use their own money, things don’t get out of whack.  The more the risk/reward equation is manipulated to allow shots at high risk returns by laying the risk off on others, the more bad behavior affects us all.

The best and brightest in our society are used to invent deal structures where risk/rewards  are bent and stretched all out of shape, instead of building products and services that we could all use.  This is a structural deficiency, I think.

Those of us in the oil and gas business are intimately aware of risk/reward and how to play with the equations.  Hell, screwin' bankers ('scroon sum bankers') is the first thing we learn in the business.  

The first and most famous promote structure was a 1/3^rd for a ¼, where an investor paid 1/3^rd of the cost for ¼ of the project, and the originator got a “carried quarter”.  Most buyers learned over time to require the promoter hold on to at least some sort of  risk position… ie, wanted to see them have some skin in the game, not just a free quarter.  This was an indication that the promoter believed in the project enough to keep some money in it.  It gave everyone comfort.

Geologists would sell their projects for cash an overriding royalty interest… a cost-free percentage of the gross dollars produced.  You learned quickly that you didn’t want THAT geologist making completion decisions.  It cost them nothing to make expensive and high risk casing decision, but they had all the upside.  Like going to Vegas and getting 20% if all winnings generated on hitting an inside straight without having to put a bet up yourself.  This change in the rules results in too many  hits on inside straights instead of folding or building on a pair.  These would be characterized systematically as “Bad Decisions”, because they don’t maximize overall return.  They are, in fact, destructive to capital overall.   And it is caused by stupid rules.

Our good ol’ oil business drove a major set of bank failures… failures like Oklahoma's Penn Square Bank and their associates when they broke fertile new ground in wildcat drilling funding by offering non-recourse bank debt.  Those were a glorious and heady days for those of us fighting to jam through the front door of the bank, while being jostled by our jowly be-booted brethren like Walmart shoppers on a Thannksgiving midnight.   We thought someone had slipped acid into the coffee that morining.  See, loaning money to drill wildcats is,  in reality, a 1/3^rd for a 1/30^th deal. 

Very nice, heh heh, but alas, unsustainable as a business model.  Why would a banker do this?  I mean, the data clearly tells you that you are going to get barbequed as a lender under these terms, So why do it?  Fees and Bonuses.  Banks paid them every year.  In this case, the bankers learned that if you are paid to generate loans, not on how well they perform, you are going to push to get loans approved, regardless of how they perform.  In other words, “You get what you pay for”.

Bad Behavior Poster Boy Enron, which at one time was a real midstream company with real assets and a real upstream sub, decided, via its McKenzie alum COO Jeff Skilling, that it could do anything in the world and it could somehow similalry de-risk everything it did. 

Essentially, this company would enter into all sorts of businesses, and, like all other businesses, it would write business plans for the businesses it entered.  Unlike all other businesses, it lobbied the Federal Government to allow it to essentially take the profits it anticipated making from their business plan spreadsheets and recognizing them immediately AS profits!  If they didn’t come true, they would take a charge off on them later. 

This brilliant breakthrough virtualized every business on Earth, because it magically made an idea tangibly worth whatever you wrote down you thought it might be able to generate in the future, all because the SEC, a regulatory agency, said so!  Essentially, every idea is worth whatever you could model on a spreadsheet!  A billion dollars!  More!  Except, of course, in reality, when they are not, which is 99.999% of the time. 

Venture Capital firms, all other companies, and house cats already knew that ideas per se weren’t all that valuable.  They all must have forgotten to tell Skilling and Lay, and the Enron Board must not have known any house cats.  They relied on Attorneys and Accountants to tell them it was "alright". An appeals court, and later the US Supreme Court held that the Attorneys and Accountants couldn't be held liable for this blatant misjudgement, since, essentially, they weren't Enron.  Some might fine lawyering went into THAT decision, because it defies all common sense.

Enron would book their future earnings every quarter as real, and manage their earnings by just having more ideas if the earnings were looking a bit weak, like when they didn't generate revenue in spite of the brilliant business plans being passed around.  

Like all financial shenanigans, there was  just one little problem.  It’s called cash flow.  They still had to make a payroll for all those folks having brilliant billion dollar ideas, and those pesky “non-idea” businesses with actual equipment and inventory they had the misfortune to still be in. 

They initially decided to borrow money off their earnings by way of long term bonds.  When that dried up, and the brilliant ideas still weren’t generating any cash, they jumped into what we call “fraud”.  Yep.  Up until this point, what they were doing was perfectly legal, although patently ridiculous.  Their need for cash,  the ony real fuel for the funhouse, drove them into creating their “special purpose vehicles” they called Raptors.  Essentially, to generate cash, they sold iffy assets at high prices, guaranteeing them with corporate stock that they would buy them back again at a profit.  Very nice, EXCEPT that it doesn’t meet the legal or commonsense description of “selling assets”.  Imagine you had a cool picture of a 1966 Mustang Convertible.  Your wife wanted you to sell it, so you sold it to your neighbor at Blue Book for a REAL Mustang, not a picture, BUT you promised to buy it back for twice what you sold it to him for in 2 years, because your neighbor is not an idiot.  And you secured it with a note to your house, because, again, your neighbor isn't an idiot.  Problem is, my wife would not say I SOLD the painting.

The housing market meltdown was driven similarly.  Politicians like to give things away in return for donations and for being well kept in political hog slop, so what better than promising Homes for Everyone?  The problem?  People don’t like to loan money they know won’t be paid back. 

Essentially, the banks learned from their earlier mistakes, because, Penn Square, being NOT Too Big To Fail, failed.  The fellows running similar operations thought “I sure like my cozy job and I sure don’t want to fail, so I am not gonna let anyone talk me into makin’ stupid loans on wildcats”.  So  what to do?  Being an entrepreneurial banker, and still liking the flavor of bonus, the best and brightest we diverted from engineering and such, decide that maybe they can sucker… er, talk politicians into taking the risk part of the whole equation for the “good of the voter… er, people”.  Why not let the Federal Government take all the risk via Fannie Mae and Freddy Mac?  Think of the ungodly fees we will make if we aren't on the hook for the loans to these people that clearly cannot pay them back?  Praise the Lord!  Hell, its only taxpayers on the line, and they are less than 50% of the voting public today, and all we have to do is get whore politicians on board, so why the Hell not?  Easy money for those that can’t afford it!  Yehaw!  Plus, it sounds good on the stump.  A Chicken in Every Pot!  We are doing this for the poor people!

In the end, we are merely talking about two things… debt and the ability to become indebted, and fraud. Is debt a good thing?  You bet.  It allows us to live very well and to invest for the future. Should poor people be excluded from accessing debt?  Hell no.  As long as someone, NOT taxpayers in general, are willing to gamble on someone’s ability and propensity to pay back what they own, why get in their way?   If a lender is stupid enough to NOT require documentation, so be it.  If the borrower is stupid enough to buy something that is guranteed to be  taken away from them in the future, so be it.  The failure is that either one of these folks expect US, the taxpayer, to make them whole for their very bad decisions.

Free Markets can only be Free if they are transparent and fair.  Thus, appropriate government regulations.  If you lie to me, you are defrauding me.  Lying and fraud are no more an endemic component to free markets or capitalism  than robbing a bank is endemic to banking.  Both are wrong, and both are illegal.  The reason transparency is so important to Free Markets is that it allows capital flows into lots and lots of bets, but not too much or for too long for bad bets.  It is a self correcting system.  If the bet works, you feed more into it.  If it doesn’t, you quit feeding it.  Bad bets thus don't burn huge amounts of capital.  You need fraud or bad government regulations to waste on epic scales.  

Enron and Bernie Maddoff lied about their results.  Had Enron said “we are booking all our profits before we realize them, and borrowing money to take care of cash flow until we know whether they do or don’t work”, it wouldn’t have been the hot stock to own.  Similarly, had Maddoff said “we really don’t invest anything, we use money coming in to pay the earlier investors a return”, no one would have invested.  Easy Peasy. 

Our regulatory system didn’t require this level of disclosure, nor did they check to make sure the companies were as represented.  Class Action attorneys did a much better job, although they tended to overreach at times, as compared to the regulatory agencies.  I find myself in the uncomfortable position of supporting and applauding the plaintiff bar over regulatory agencies, but why am I not surprised?  Plaintiff attorneys are part of the free market and respond to free market forces, while regulatory agencies are not.  Oh well.  Irony abounds, it seems.

 

A disturbing blog article...

http://rancholoslosmalulos.blogspot.com/2011/05/3000-finder-fee.html

If you have been to Europe lately, you are aware of the ever shrinking dollar. I used to tease my Canadian friends by calling their  "loony", ie the Canadian Dollar, the "North American Peso".   My Canadian friends are having the last laugh, it seems.

Our markets seem very sensitive to the price of oil... to the extent that I read articles about how high oil prices are keeping the economy down.  That begs the question... is it "high oil prices" or "weak dollar"?  Here it is...

This first graph shows the Price of a Barrel of Oil in North American Pesos... er, I mean US Dollars in red, and the Price of a Barrel of Oil in Euros, normalized to US Dollar/Euro exchange one year ago.

This graph shows the variation in $/Barrel.  In other words, this is the component of the price per barrel of oil due strictly to further devaluation of the dollar relative to the Euro (and, in reality, a whole basket of other currencies).

This chart just relates it to the percentage of the price per barrel of oil that can be attributed to dollar devaluation... also known as dollar inflation.  Is it any wonder the Chinese are worrying about their trillion dollar holding of dollars?  20% of it has magically disappeared in the last year, at least in regards to buying energy by this Inconvenient Truth.

The Bigger Blueberry Pie Theory...

As I was reading through the various articles lauding Steve Jobs, I stumbled over one in Gawker that, essentially, called him a fat cat industrialist who was rich and was inferior in meaning and in purose to another fellow who had died the same day, a minister who had devoted himself to a life of sacrifice to make others lives better.  It was a provocative article and it made me think...

I think everyone agrees that making the world a better place for others is a laudable goal.  A life well lived.  A life of meaning.  How should we measure this?

Should we measure it by how much one has sacrificed or should we measure it by how much one has made others lives better?

Is "sacrifice" all that it is cracked up to be?  Is sacrifice laudable if it does NOT accomplish the goal of making others lives better?  Does 'sacrifice' in and of itself make the world better?  

I don't think so.

Take a man who has a blueberry pie.  He shares it with his various neighbors, leaving none for himself.  He has fed his neighbors for a short time, and dies of starvation in the process.

Take another man who bakes blueberry pies.  He trades his pies with his neighbors for what they have to offer... one makes bread, another candles... or, even, God Forbid, evil MONEY, the stuff we use to exchange blueberry pies for bread, candles and other things we need but the other guy doesn't necessarily have, although the guy down the road, who doesn't want blueberry pie actually DOES have.  In  any case, he feeds the whole town blueberry pie for a long time.  

Who has done more Good?  From an objective standard of having people eat, the baker has done more societal good.  Of course, this depends on the others in the town doing what THEY do best in exchange for unlimited blueberry pie.

What if the baker gets filthy rich and gorges on blueberry pie every day?  In other words, his blueberry pie is so popular that more people want to eat it than the average of what other people want to consume?  His product is in more of a demand than others?  Is he eating more than "his fair share"?  Should he quit selling blueberry pie?  

He has still done more objective good, because he has fed more folks for a longer period of time, and those folks willingly gave him more of a share of the collective labor because of it.  It is "sustainable".  This sustainability is based on others doing work making or doing things that others want to trade for.  If too many don't do anything valuable enough to support themselves, then the system changes from Producer to Consumer.   This is unsustainable.

Sustainability is Noble, Unsustainability is Not Noble.  Actually, it is venal.

Our goals should be to make others sustainable and contributors.  Those are noble efforts.  They make us all contributing members of the tribe.  Efforts to make the tribe unsustainable are fundamentally destructive.

Right?

If your neighbor's kid is selling his dad's $10 bills for $5 down the street, what should you do?  I mean, after verifying that Dad was supportive of little Junior giving away his money...

You would buy up as many of the $10 bills as you could, right?

The right answer, apparently,  if you are an American politician or bureaucrat, is to react by selling OUR $20 bills for $5 to "be competitive" with our neighbor's seemingly asinine decision.   

This is exactly the case happening in the case of solar panels today.  China heavily subsidizes its industries to sell stuff for, according to experts,  less than their cost.  Why would they do that?  First, the political chesnut and short term benefit of staying in power via jobs, regardless of how unsustainable those jobs are based on shoveling unrecoverable money out the door.   Eventually the money runs out.  Ask Greece. 

Second, perhaps they want to drive out competition so that you can later raise prices.  This is a proven loser business strategy, as every first year MBA student learns. One never recovers the money spent because it doesn't make it any harder for a competitor to ramp up to compete when the price dumper decides to raise prices. Thirdly, perhaps they think that by reducing the consumer cost to compete with alternatives, thus guaranteeing a stable sales environment, the cost will drop to breakeven or profitability over the long run.  Maybe they are right.  In any case, we get to take advantage of the lower cost efficiencies WITHOUT paying for them as a bystander. 

Why shouldn't we buy as many of the ten dollar bills as we can?  Why should we  get into the business of selling $10 bills for $5 bucks?  That seems to be a sucker game.  China is offering to subsidize us with cheap energy! In return, we sell them Sponge Bob Square Pants!  Yay, I say.

But... but... what if China, based on low wages, is actually MAKING a buck on the $5 buck sale?  So what?  We don't have that same option, do we?  We have a high wage society.  We have no choice but to sell $10 for $5 in that exact business .  It's like saying "I am a lawyer that makes $300k bucks a year, but I really want to make sock bunnies.  That's cool.  But don't expect to make $300k per year doing it!  No one wants to buy $1,000 sock bunnies.   And don't you dare ask the government to subsidize your sock bunny business.  They probably would today!

So let's choose NOT  to sell $10 for $5 bucks.  Let's choose to sell $10 bucks for $20 bucks.  Labor has to be mobile.  Slide rule manufacturers just can't employ the same number of people they could in 1960.  Those jobs didn't disappear, they moved to areas where they could actually do something people were willing to pay for.  The political appraoch would have been a bailout to support the US slide rule industry. 

It's simple, really.  Labor resources need to go where profits can be made on on their deployment.  This grows the economy.  Artificially allocating any resources to areas where no one wants to buy the product is a pure waste.  It removes from the economy.  A job without a willing buyer for the product or service provided by the job is welfare, pure and simple, and unsustainable.

We have led the way on worker productivity, enabled by technology...  selling these $10 bills for $20 dollars.  I have an acquaintance that makes Chinese $10 dollar bills into American $20 bills by networking and monitoring the Chinese solar panels to achieve highest possible energy output.  Brilliant stuff!

Here is a radical idea.  Let's quit competing on things we shouldn't want to win, and instead take the opportunity to stock up on the free value offered us by others less enlightened so that we can concentrate on building or doing those things we do best.

Ol' Delbert and Rico were driving their wagon across the Texas Panhandle.  See, Delbert didn't like horses much, but sure liked gettin' paid to haul freight over the west.  Rico, on the other hand, was a regular horse whisperer.

Delbert was always adding freight to the wagon, because he got paid more the more he carried.  

"Del, don't you think we ought to feed the horses a little bit more if we are gonna have them carry this much freight?", asked Rico.

"Nah.  Scroom.  Them horses are already overfed.  Feed 'em more and they will jest crap some more and mess up the envire-ment even more", replied Del.  "In fact, I think we should load up the empty space we got with rocks just to get 'em trained up some more... make 'em all better at carrying loads".

So Del hopped off the wagon at the next stop and started loading it up with rocks.   "Rico, get your ass over here and help me load these rocks!"

"I don't know if this is a real good idea, Del".

"Dammit, this wagon is gonna get loaded with rocks even if I have to do it myself, so get over here and help me so we can get going".

Pretty soon, the wagon was loaded tall with rocks.  So tall, that the wagon was riding and grinding against the axle.   The horses were straining to pull the load, especially up the hills.  Every once in a while, the horses would fall, and the wagon would drop backwards.

"I got me an idea, Rico.  These wheels are about to bust, and going backwards isn't good.  We should replace them with square wheels.  They are more stable on flat ground.  Not as likely to bust up and slide backwards." said Del.

"Well, yeah, Del.  I can see your reasoning, but it sure seems like it will make it a lot harder for these horses to pull the wagon forward when we get going again." Rico sputtered.

"You know, Rico, I am tired of your horse loving attitude.  These here animals are just beasts of burden.  One dies, we replace it with another.  Simple.  We do things your way, these animals would be sitting around sipping marg'ritas on a beach somewheres, instead of hauling our freight.  Quit arguing with me and lets get these square wheels on the wagon."

Pretty soon, the first horse pulled up lame trying to haul the hugely frictioned wagon.  

"Dad gum it, thats some bad luck", mumbled Del.  "That's a pretty good horse.  We need to do whatever we can to make it part of the team again.  I say we cut off its two bad leg and put it in the middle of the team so the rest of the team can support it and it can contribute with its two good legs." declared Del.  

So they did it.

"You know, Rico, I like ducks better'n horses.  They don't eat as much and they don't crap as much as these horses and they got some wings, so I think they would do a better job pulling the cart with the square wheels.  We feed the horses less, and give the food we save to the ducks, we gonna move fast!  We are gonna transition to an all- duck team".

"I think this is a real bad idea, Del.  I think physics dictates that it will take a million ducks to replace a few horses, and how we gonna bridle them?"

"What you taking physics, Rico?  You some sort a duck denier?  You clearly hate the enviro-ment.  That reminds me.  I got these razor sharp bridles I want to put on the horse team.  They slow up at all, it cuts the bejeezus outa their mouth!  That'll teach them not to slow down none!"

Of course, soon all the horses die of their festering mouth wounds and of exhaustion.  The ducks flew the coop and were drinking marg'ritas on a beach during their southward Winter journey, and Del and Rico were left with a busted down cart full of rocks near Hereford.

Del muttered "I always knew that horses were worthless!"

 

 

 

S&P lowered the US debt rating from AAA to AA+ last night.  What does this mean to you an me?  Well, S&P is only one of three debt rating services, and the other two have said they aren't going to downgrade, but this is historic, nonetheless.

When your debt grade goes down, your cost of borrowing goes up.  This sad fact is NOT lambasted when you are a basic middle class person.  It is made out to be the crime of the century when applied to "the poor" by the socioeconomic class divide and conquer folk.  It means we have too much debt to handle safely.

Applied at the personal level... that bad credit folk either can't get a bank to loan them money or that they are charged higher rates to make up the risk of default.  When we do stupid things out of feeling sorry for bad risk folks, like guaranteeing their payments, we typically end up... making their payments.  

So the cost of Fed Money is going to go up some amount.  Since the Fed is the source of all funds, this means that interest rates at banks will go up, mortgage interest rates will go up, and the general cost of borrowing money will go up.

As a result, the value of homes, and businesses, and the stock equity values, and anything you use credit to buy will go down.  Why?  Because the cost to buy just went up, without any underlying change of value.

Let's take a house, for instance.  If you can afford $1000 bucks a month for a payment, minus all the taxes and insurance and stuff, then the value of the house you can afford at 1% interest rate is is $311,000.00.  At 5% interest rate, that value drops to $186,000.00.  Poof.  $125,000.00, or nearly 40% of your value disappears automatically.  To be fair, your house probably wouldn't lose this total value, but the buyer pool would be substantially lower for your house now, because the cost to own it would be much higher, so the price will drop substantially.  It works exactly the same way for the Stock Market.  Cost to borrow goes up, equity value goes down.  Simple as that.  It is a Natural Law.  That's why the stock markets will behave negatively, although, to be fair, the market anticipated this downgrade, and the real result come monday may not be a drastic drop.  Had S&P said that it was satisfied with government efforts, then the stock market would have tended to rally, since the downgrade was so much baked it.  

http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

So... we will see more downward pressure on home values.  Downward pressure on stocks (meaning YOUR pension/401k/mutual funds).  Lower job growth.  The whole gig.  To add to it all, the price of managing US debt just went up!  We get Jack Sh** for that extra expenditure, an expenditure we ship overseas to countries that do us a favor of loaning us money.

The S&P said that it had no confidence in our politicians to actually perform on its commitments it just made to reduce spending.  It also negatively noted that the US did not raise taxes. Why would it make that distinction?  Let me tell you...

Debt is caused by "Spending Too Much".  You spend more than you take in.  Responsible people and governments don't do this.  Why would you?  People with too much debt essentially want too many things that they can't afford.  Heartless as it may seem, too much debt is, 90+% of the time, the fault and responsibility of the person who decided to buy something they couldn't afford.  That trip to Cancun or that new Beemer on easy payments sure looks different after the fact.  It doesn't matter where you are on the socioeconomic ladder.   This problem is endemic.  

Once you get used to a certain level of spending, it is hard to reduce it.  Losing the BMW, foregoing the trip to Cancun... it's just not FAIR!  However, getting out of debt, for most of us, entails stopping spending.  The 2nd job can accelerate it, but it doesn't solve the problem.  You just die earlier.  Think of taxes as "The Second Job".

The S&P cited taxes because raising taxes is the LEAST politically risky action on Earth.  Less than 50% of us pay income taxes at all, and the ones they are targeting comprise the 2% of the 135 million tax returns filed reported income at this level.  Choosing to tax these folks isn't politically risky in the least, is it?  They only comprise 2% of the voters!  Most Americans believe in letting the richer guy tote the note, just not me. Stopping spending.... now THAT takes real political huevos!  We have lots of quivering lips around the myriad of government teats.  In fact, it seems the goal of our political class has been to gain a voter majority by giving them yours and my money (assuming you, dear reader, is a taxpayer).  The S&P guys know this.  

The government is no different than you or I.  Here is the perfect analogy to our current system... You onw a home.  Over the years, you have allowed people to live in your home because they were "down on their luck". This group has trouble getting or holding jobs.  They are eating more and buying more things with your credit card, and they invite their friends to live in your house.  When you finally say "enough", they say it is only appropriate for you to go out and get a second job.  There are a lot of mouths to feed.  You are an insensitive uncaring individual for not getting the second job, all the while they are opening new credit accounts under your name.   And then they hold a vote, and they choose to keep on spending your money and for you to go out and get another job, deadbeat.  Its for the children.

In closing, my little nephew was showing me the money he had saved this morning.  I took 40% of it and put it in my pocket saying it was a tax, and that I would give it the less fortunate, minus a 60% carrying charge for my time in doing so.  What did he think of that?  He told me "that's crazy"!

Drillinginfo's Allen Gilmer gave a very interesting talk at the SW Section AAPG a couple of weeks ago where he showed this slide.  
 It shows an amazing uptick in both US liquids and natural gas production beginning 8 years ago, the component of such that is due to unconventional well drilling and stimulation, and an estimate of when we will crash through the glass ceiling of Peak Hydrocarbons.  Doesn't look to be a ceiling at all.

People want to use more and more of YOUR money to make riskier bets.  When people use their own money, things don’t get out of whack.  The more the risk/reward equation is manipulated to allow shots at high risk returns by laying the risk off on others, the more bad behavior affects us all.

The best and brightest in our society are used to invent deal structures where risk/rewards  are bent and stretched all out of shape, instead of building products and services that we could all use.  This is a structural deficiency, I think.

Those of us in the oil and gas business are intimately aware of risk/reward and how to play with the equations.  Hell, screwin' bankers ('scroon sum bankers') is the first thing we learn in the business.  

The first and most famous promote structure was a 1/3^rd for a ¼, where an investor paid 1/3^rd of the cost for ¼ of the project, and the originator got a “carried quarter”.  Most buyers learned over time to require the promoter hold on to at least some sort of  risk position… ie, wanted to see them have some skin in the game, not just a free quarter.  This was an indication that the promoter believed in the project enough to keep some money in it.  It gave everyone comfort.

Geologists would sell their projects for cash an overriding royalty interest… a cost-free percentage of the gross dollars produced.  You learned quickly that you didn’t want THAT geologist making completion decisions.  It cost them nothing to make expensive and high risk casing decision, but they had all the upside.  Like going to Vegas and getting 20% if all winnings generated on hitting an inside straight without having to put a bet up yourself.  This change in the rules results in too many  hits on inside straights instead of folding or building on a pair.  These would be characterized systematically as “Bad Decisions”, because they don’t maximize overall return.  They are, in fact, destructive to capital overall.   And it is caused by stupid rules.

Our good ol’ oil business drove a major set of bank failures… failures like Oklahoma's Penn Square Bank and their associates when they broke fertile new ground in wildcat drilling funding by offering non-recourse bank debt.  Those were a glorious and heady days for those of us fighting to jam through the front door of the bank, while being jostled by our jowly be-booted brethren like Walmart shoppers on a Thannksgiving midnight.   We thought someone had slipped acid into the coffee that morining.  See, loaning money to drill wildcats is,  in reality, a 1/3^rd for a 1/30^th deal. 

Very nice, heh heh, but alas, unsustainable as a business model.  Why would a banker do this?  I mean, the data clearly tells you that you are going to get barbequed as a lender under these terms, So why do it?  Fees and Bonuses.  Banks paid them every year.  In this case, the bankers learned that if you are paid to generate loans, not on how well they perform, you are going to push to get loans approved, regardless of how they perform.  In other words, “You get what you pay for”.

Bad Behavior Poster Boy Enron, which at one time was a real midstream company with real assets and a real upstream sub, decided, via its McKenzie alum COO Jeff Skilling, that it could do anything in the world and it could somehow similalry de-risk everything it did. 

Essentially, this company would enter into all sorts of businesses, and, like all other businesses, it would write business plans for the businesses it entered.  Unlike all other businesses, it lobbied the Federal Government to allow it to essentially take the profits it anticipated making from their business plan spreadsheets and recognizing them immediately AS profits!  If they didn’t come true, they would take a charge off on them later. 

This brilliant breakthrough virtualized every business on Earth, because it magically made an idea tangibly worth whatever you wrote down you thought it might be able to generate in the future, all because the SEC, a regulatory agency, said so!  Essentially, every idea is worth whatever you could model on a spreadsheet!  A billion dollars!  More!  Except, of course, in reality, when they are not, which is 99.999% of the time. 

Venture Capital firms, all other companies, and house cats already knew that ideas per se weren’t all that valuable.  They all must have forgotten to tell Skilling and Lay, and the Enron Board must not have known any house cats.  They relied on Attorneys and Accountants to tell them it was "alright". An appeals court, and later the US Supreme Court held that the Attorneys and Accountants couldn't be held liable for this blatant misjudgement, since, essentially, they weren't Enron.  Some might fine lawyering went into THAT decision, because it defies all common sense.

Enron would book their future earnings every quarter as real, and manage their earnings by just having more ideas if the earnings were looking a bit weak, like when they didn't generate revenue in spite of the brilliant business plans being passed around.  

Like all financial shenanigans, there was  just one little problem.  It’s called cash flow.  They still had to make a payroll for all those folks having brilliant billion dollar ideas, and those pesky “non-idea” businesses with actual equipment and inventory they had the misfortune to still be in. 

They initially decided to borrow money off their earnings by way of long term bonds.  When that dried up, and the brilliant ideas still weren’t generating any cash, they jumped into what we call “fraud”.  Yep.  Up until this point, what they were doing was perfectly legal, although patently ridiculous.  Their need for cash,  the ony real fuel for the funhouse, drove them into creating their “special purpose vehicles” they called Raptors.  Essentially, to generate cash, they sold iffy assets at high prices, guaranteeing them with corporate stock that they would buy them back again at a profit.  Very nice, EXCEPT that it doesn’t meet the legal or commonsense description of “selling assets”.  Imagine you had a cool picture of a 1966 Mustang Convertible.  Your wife wanted you to sell it, so you sold it to your neighbor at Blue Book for a REAL Mustang, not a picture, BUT you promised to buy it back for twice what you sold it to him for in 2 years, because your neighbor is not an idiot.  And you secured it with a note to your house, because, again, your neighbor isn't an idiot.  Problem is, my wife would not say I SOLD the painting.

The housing market meltdown was driven similarly.  Politicians like to give things away in return for donations and for being well kept in political hog slop, so what better than promising Homes for Everyone?  The problem?  People don’t like to loan money they know won’t be paid back. 

Essentially, the banks learned from their earlier mistakes, because, Penn Square, being NOT Too Big To Fail, failed.  The fellows running similar operations thought “I sure like my cozy job and I sure don’t want to fail, so I am not gonna let anyone talk me into makin’ stupid loans on wildcats”.  So  what to do?  Being an entrepreneurial banker, and still liking the flavor of bonus, the best and brightest we diverted from engineering and such, decide that maybe they can sucker… er, talk politicians into taking the risk part of the whole equation for the “good of the voter… er, people”.  Why not let the Federal Government take all the risk via Fannie Mae and Freddy Mac?  Think of the ungodly fees we will make if we aren't on the hook for the loans to these people that clearly cannot pay them back?  Praise the Lord!  Hell, its only taxpayers on the line, and they are less than 50% of the voting public today, and all we have to do is get whore politicians on board, so why the Hell not?  Easy money for those that can’t afford it!  Yehaw!  Plus, it sounds good on the stump.  A Chicken in Every Pot!  We are doing this for the poor people!

In the end, we are merely talking about two things… debt and the ability to become indebted, and fraud. Is debt a good thing?  You bet.  It allows us to live very well and to invest for the future. Should poor people be excluded from accessing debt?  Hell no.  As long as someone, NOT taxpayers in general, are willing to gamble on someone’s ability and propensity to pay back what they own, why get in their way?   If a lender is stupid enough to NOT require documentation, so be it.  If the borrower is stupid enough to buy something that is guranteed to be  taken away from them in the future, so be it.  The failure is that either one of these folks expect US, the taxpayer, to make them whole for their very bad decisions.

Free Markets can only be Free if they are transparent and fair.  Thus, appropriate government regulations.  If you lie to me, you are defrauding me.  Lying and fraud are no more an endemic component to free markets or capitalism  than robbing a bank is endemic to banking.  Both are wrong, and both are illegal.  The reason transparency is so important to Free Markets is that it allows capital flows into lots and lots of bets, but not too much or for too long for bad bets.  It is a self correcting system.  If the bet works, you feed more into it.  If it doesn’t, you quit feeding it.  Bad bets thus don't burn huge amounts of capital.  You need fraud or bad government regulations to waste on epic scales.  

Enron and Bernie Maddoff lied about their results.  Had Enron said “we are booking all our profits before we realize them, and borrowing money to take care of cash flow until we know whether they do or don’t work”, it wouldn’t have been the hot stock to own.  Similarly, had Maddoff said “we really don’t invest anything, we use money coming in to pay the earlier investors a return”, no one would have invested.  Easy Peasy. 

Our regulatory system didn’t require this level of disclosure, nor did they check to make sure the companies were as represented.  Class Action attorneys did a much better job, although they tended to overreach at times, as compared to the regulatory agencies.  I find myself in the uncomfortable position of supporting and applauding the plaintiff bar over regulatory agencies, but why am I not surprised?  Plaintiff attorneys are part of the free market and respond to free market forces, while regulatory agencies are not.  Oh well.  Irony abounds, it seems.

 

A disturbing blog article...

http://rancholoslosmalulos.blogspot.com/2011/05/3000-finder-fee.html

If you have been to Europe lately, you are aware of the ever shrinking dollar. I used to tease my Canadian friends by calling their  "loony", ie the Canadian Dollar, the "North American Peso".   My Canadian friends are having the last laugh, it seems.

Our markets seem very sensitive to the price of oil... to the extent that I read articles about how high oil prices are keeping the economy down.  That begs the question... is it "high oil prices" or "weak dollar"?  Here it is...

This first graph shows the Price of a Barrel of Oil in North American Pesos... er, I mean US Dollars in red, and the Price of a Barrel of Oil in Euros, normalized to US Dollar/Euro exchange one year ago.

This graph shows the variation in $/Barrel.  In other words, this is the component of the price per barrel of oil due strictly to further devaluation of the dollar relative to the Euro (and, in reality, a whole basket of other currencies).

This chart just relates it to the percentage of the price per barrel of oil that can be attributed to dollar devaluation... also known as dollar inflation.  Is it any wonder the Chinese are worrying about their trillion dollar holding of dollars?  20% of it has magically disappeared in the last year, at least in regards to buying energy by this Inconvenient Truth.

Idjitry...

If your neighbor's kid is selling his dad's $10 bills for $5 down the street, what should you do?  I mean, after verifying that Dad was supportive of little Junior giving away his money...

You would buy up as many of the $10 bills as you could, right?

The right answer, apparently,  if you are an American politician or bureaucrat, is to react by selling OUR $20 bills for $5 to "be competitive" with our neighbor's seemingly asinine decision.   

This is exactly the case happening in the case of solar panels today.  China heavily subsidizes its industries to sell stuff for, according to experts,  less than their cost.  Why would they do that?  First, the political chesnut and short term benefit of staying in power via jobs, regardless of how unsustainable those jobs are based on shoveling unrecoverable money out the door.   Eventually the money runs out.  Ask Greece. 

Second, perhaps they want to drive out competition so that you can later raise prices.  This is a proven loser business strategy, as every first year MBA student learns. One never recovers the money spent because it doesn't make it any harder for a competitor to ramp up to compete when the price dumper decides to raise prices. Thirdly, perhaps they think that by reducing the consumer cost to compete with alternatives, thus guaranteeing a stable sales environment, the cost will drop to breakeven or profitability over the long run.  Maybe they are right.  In any case, we get to take advantage of the lower cost efficiencies WITHOUT paying for them as a bystander. 

Why shouldn't we buy as many of the ten dollar bills as we can?  Why should we  get into the business of selling $10 bills for $5 bucks?  That seems to be a sucker game.  China is offering to subsidize us with cheap energy! In return, we sell them Sponge Bob Square Pants!  Yay, I say.

But... but... what if China, based on low wages, is actually MAKING a buck on the $5 buck sale?  So what?  We don't have that same option, do we?  We have a high wage society.  We have no choice but to sell $10 for $5 in that exact business .  It's like saying "I am a lawyer that makes $300k bucks a year, but I really want to make sock bunnies.  That's cool.  But don't expect to make $300k per year doing it!  No one wants to buy $1,000 sock bunnies.   And don't you dare ask the government to subsidize your sock bunny business.  They probably would today!

So let's choose NOT  to sell $10 for $5 bucks.  Let's choose to sell $10 bucks for $20 bucks.  Labor has to be mobile.  Slide rule manufacturers just can't employ the same number of people they could in 1960.  Those jobs didn't disappear, they moved to areas where they could actually do something people were willing to pay for.  The political appraoch would have been a bailout to support the US slide rule industry. 

It's simple, really.  Labor resources need to go where profits can be made on on their deployment.  This grows the economy.  Artificially allocating any resources to areas where no one wants to buy the product is a pure waste.  It removes from the economy.  A job without a willing buyer for the product or service provided by the job is welfare, pure and simple, and unsustainable.

We have led the way on worker productivity, enabled by technology...  selling these $10 bills for $20 dollars.  I have an acquaintance that makes Chinese $10 dollar bills into American $20 bills by networking and monitoring the Chinese solar panels to achieve highest possible energy output.  Brilliant stuff!

Here is a radical idea.  Let's quit competing on things we shouldn't want to win, and instead take the opportunity to stock up on the free value offered us by others less enlightened so that we can concentrate on building or doing those things we do best.

Ol' Delbert and Rico were driving their wagon across the Texas Panhandle.  See, Delbert didn't like horses much, but sure liked gettin' paid to haul freight over the west.  Rico, on the other hand, was a regular horse whisperer.

Delbert was always adding freight to the wagon, because he got paid more the more he carried.  

"Del, don't you think we ought to feed the horses a little bit more if we are gonna have them carry this much freight?", asked Rico.

"Nah.  Scroom.  Them horses are already overfed.  Feed 'em more and they will jest crap some more and mess up the envire-ment even more", replied Del.  "In fact, I think we should load up the empty space we got with rocks just to get 'em trained up some more... make 'em all better at carrying loads".

So Del hopped off the wagon at the next stop and started loading it up with rocks.   "Rico, get your ass over here and help me load these rocks!"

"I don't know if this is a real good idea, Del".

"Dammit, this wagon is gonna get loaded with rocks even if I have to do it myself, so get over here and help me so we can get going".

Pretty soon, the wagon was loaded tall with rocks.  So tall, that the wagon was riding and grinding against the axle.   The horses were straining to pull the load, especially up the hills.  Every once in a while, the horses would fall, and the wagon would drop backwards.

"I got me an idea, Rico.  These wheels are about to bust, and going backwards isn't good.  We should replace them with square wheels.  They are more stable on flat ground.  Not as likely to bust up and slide backwards." said Del.

"Well, yeah, Del.  I can see your reasoning, but it sure seems like it will make it a lot harder for these horses to pull the wagon forward when we get going again." Rico sputtered.

"You know, Rico, I am tired of your horse loving attitude.  These here animals are just beasts of burden.  One dies, we replace it with another.  Simple.  We do things your way, these animals would be sitting around sipping marg'ritas on a beach somewheres, instead of hauling our freight.  Quit arguing with me and lets get these square wheels on the wagon."

Pretty soon, the first horse pulled up lame trying to haul the hugely frictioned wagon.  

"Dad gum it, thats some bad luck", mumbled Del.  "That's a pretty good horse.  We need to do whatever we can to make it part of the team again.  I say we cut off its two bad leg and put it in the middle of the team so the rest of the team can support it and it can contribute with its two good legs." declared Del.  

So they did it.

"You know, Rico, I like ducks better'n horses.  They don't eat as much and they don't crap as much as these horses and they got some wings, so I think they would do a better job pulling the cart with the square wheels.  We feed the horses less, and give the food we save to the ducks, we gonna move fast!  We are gonna transition to an all- duck team".

"I think this is a real bad idea, Del.  I think physics dictates that it will take a million ducks to replace a few horses, and how we gonna bridle them?"

"What you taking physics, Rico?  You some sort a duck denier?  You clearly hate the enviro-ment.  That reminds me.  I got these razor sharp bridles I want to put on the horse team.  They slow up at all, it cuts the bejeezus outa their mouth!  That'll teach them not to slow down none!"

Of course, soon all the horses die of their festering mouth wounds and of exhaustion.  The ducks flew the coop and were drinking marg'ritas on a beach during their southward Winter journey, and Del and Rico were left with a busted down cart full of rocks near Hereford.

Del muttered "I always knew that horses were worthless!"

 

 

 

S&P lowered the US debt rating from AAA to AA+ last night.  What does this mean to you an me?  Well, S&P is only one of three debt rating services, and the other two have said they aren't going to downgrade, but this is historic, nonetheless.

When your debt grade goes down, your cost of borrowing goes up.  This sad fact is NOT lambasted when you are a basic middle class person.  It is made out to be the crime of the century when applied to "the poor" by the socioeconomic class divide and conquer folk.  It means we have too much debt to handle safely.

Applied at the personal level... that bad credit folk either can't get a bank to loan them money or that they are charged higher rates to make up the risk of default.  When we do stupid things out of feeling sorry for bad risk folks, like guaranteeing their payments, we typically end up... making their payments.  

So the cost of Fed Money is going to go up some amount.  Since the Fed is the source of all funds, this means that interest rates at banks will go up, mortgage interest rates will go up, and the general cost of borrowing money will go up.

As a result, the value of homes, and businesses, and the stock equity values, and anything you use credit to buy will go down.  Why?  Because the cost to buy just went up, without any underlying change of value.

Let's take a house, for instance.  If you can afford $1000 bucks a month for a payment, minus all the taxes and insurance and stuff, then the value of the house you can afford at 1% interest rate is is $311,000.00.  At 5% interest rate, that value drops to $186,000.00.  Poof.  $125,000.00, or nearly 40% of your value disappears automatically.  To be fair, your house probably wouldn't lose this total value, but the buyer pool would be substantially lower for your house now, because the cost to own it would be much higher, so the price will drop substantially.  It works exactly the same way for the Stock Market.  Cost to borrow goes up, equity value goes down.  Simple as that.  It is a Natural Law.  That's why the stock markets will behave negatively, although, to be fair, the market anticipated this downgrade, and the real result come monday may not be a drastic drop.  Had S&P said that it was satisfied with government efforts, then the stock market would have tended to rally, since the downgrade was so much baked it.  

http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

So... we will see more downward pressure on home values.  Downward pressure on stocks (meaning YOUR pension/401k/mutual funds).  Lower job growth.  The whole gig.  To add to it all, the price of managing US debt just went up!  We get Jack Sh** for that extra expenditure, an expenditure we ship overseas to countries that do us a favor of loaning us money.

The S&P said that it had no confidence in our politicians to actually perform on its commitments it just made to reduce spending.  It also negatively noted that the US did not raise taxes. Why would it make that distinction?  Let me tell you...

Debt is caused by "Spending Too Much".  You spend more than you take in.  Responsible people and governments don't do this.  Why would you?  People with too much debt essentially want too many things that they can't afford.  Heartless as it may seem, too much debt is, 90+% of the time, the fault and responsibility of the person who decided to buy something they couldn't afford.  That trip to Cancun or that new Beemer on easy payments sure looks different after the fact.  It doesn't matter where you are on the socioeconomic ladder.   This problem is endemic.  

Once you get used to a certain level of spending, it is hard to reduce it.  Losing the BMW, foregoing the trip to Cancun... it's just not FAIR!  However, getting out of debt, for most of us, entails stopping spending.  The 2nd job can accelerate it, but it doesn't solve the problem.  You just die earlier.  Think of taxes as "The Second Job".

The S&P cited taxes because raising taxes is the LEAST politically risky action on Earth.  Less than 50% of us pay income taxes at all, and the ones they are targeting comprise the 2% of the 135 million tax returns filed reported income at this level.  Choosing to tax these folks isn't politically risky in the least, is it?  They only comprise 2% of the voters!  Most Americans believe in letting the richer guy tote the note, just not me. Stopping spending.... now THAT takes real political huevos!  We have lots of quivering lips around the myriad of government teats.  In fact, it seems the goal of our political class has been to gain a voter majority by giving them yours and my money (assuming you, dear reader, is a taxpayer).  The S&P guys know this.  

The government is no different than you or I.  Here is the perfect analogy to our current system... You onw a home.  Over the years, you have allowed people to live in your home because they were "down on their luck". This group has trouble getting or holding jobs.  They are eating more and buying more things with your credit card, and they invite their friends to live in your house.  When you finally say "enough", they say it is only appropriate for you to go out and get a second job.  There are a lot of mouths to feed.  You are an insensitive uncaring individual for not getting the second job, all the while they are opening new credit accounts under your name.   And then they hold a vote, and they choose to keep on spending your money and for you to go out and get another job, deadbeat.  Its for the children.

In closing, my little nephew was showing me the money he had saved this morning.  I took 40% of it and put it in my pocket saying it was a tax, and that I would give it the less fortunate, minus a 60% carrying charge for my time in doing so.  What did he think of that?  He told me "that's crazy"!

Drillinginfo's Allen Gilmer gave a very interesting talk at the SW Section AAPG a couple of weeks ago where he showed this slide.  
 It shows an amazing uptick in both US liquids and natural gas production beginning 8 years ago, the component of such that is due to unconventional well drilling and stimulation, and an estimate of when we will crash through the glass ceiling of Peak Hydrocarbons.  Doesn't look to be a ceiling at all.

People want to use more and more of YOUR money to make riskier bets.  When people use their own money, things don’t get out of whack.  The more the risk/reward equation is manipulated to allow shots at high risk returns by laying the risk off on others, the more bad behavior affects us all.

The best and brightest in our society are used to invent deal structures where risk/rewards  are bent and stretched all out of shape, instead of building products and services that we could all use.  This is a structural deficiency, I think.

Those of us in the oil and gas business are intimately aware of risk/reward and how to play with the equations.  Hell, screwin' bankers ('scroon sum bankers') is the first thing we learn in the business.  

The first and most famous promote structure was a 1/3^rd for a ¼, where an investor paid 1/3^rd of the cost for ¼ of the project, and the originator got a “carried quarter”.  Most buyers learned over time to require the promoter hold on to at least some sort of  risk position… ie, wanted to see them have some skin in the game, not just a free quarter.  This was an indication that the promoter believed in the project enough to keep some money in it.  It gave everyone comfort.

Geologists would sell their projects for cash an overriding royalty interest… a cost-free percentage of the gross dollars produced.  You learned quickly that you didn’t want THAT geologist making completion decisions.  It cost them nothing to make expensive and high risk casing decision, but they had all the upside.  Like going to Vegas and getting 20% if all winnings generated on hitting an inside straight without having to put a bet up yourself.  This change in the rules results in too many  hits on inside straights instead of folding or building on a pair.  These would be characterized systematically as “Bad Decisions”, because they don’t maximize overall return.  They are, in fact, destructive to capital overall.   And it is caused by stupid rules.

Our good ol’ oil business drove a major set of bank failures… failures like Oklahoma's Penn Square Bank and their associates when they broke fertile new ground in wildcat drilling funding by offering non-recourse bank debt.  Those were a glorious and heady days for those of us fighting to jam through the front door of the bank, while being jostled by our jowly be-booted brethren like Walmart shoppers on a Thannksgiving midnight.   We thought someone had slipped acid into the coffee that morining.  See, loaning money to drill wildcats is,  in reality, a 1/3^rd for a 1/30^th deal. 

Very nice, heh heh, but alas, unsustainable as a business model.  Why would a banker do this?  I mean, the data clearly tells you that you are going to get barbequed as a lender under these terms, So why do it?  Fees and Bonuses.  Banks paid them every year.  In this case, the bankers learned that if you are paid to generate loans, not on how well they perform, you are going to push to get loans approved, regardless of how they perform.  In other words, “You get what you pay for”.

Bad Behavior Poster Boy Enron, which at one time was a real midstream company with real assets and a real upstream sub, decided, via its McKenzie alum COO Jeff Skilling, that it could do anything in the world and it could somehow similalry de-risk everything it did. 

Essentially, this company would enter into all sorts of businesses, and, like all other businesses, it would write business plans for the businesses it entered.  Unlike all other businesses, it lobbied the Federal Government to allow it to essentially take the profits it anticipated making from their business plan spreadsheets and recognizing them immediately AS profits!  If they didn’t come true, they would take a charge off on them later. 

This brilliant breakthrough virtualized every business on Earth, because it magically made an idea tangibly worth whatever you wrote down you thought it might be able to generate in the future, all because the SEC, a regulatory agency, said so!  Essentially, every idea is worth whatever you could model on a spreadsheet!  A billion dollars!  More!  Except, of course, in reality, when they are not, which is 99.999% of the time. 

Venture Capital firms, all other companies, and house cats already knew that ideas per se weren’t all that valuable.  They all must have forgotten to tell Skilling and Lay, and the Enron Board must not have known any house cats.  They relied on Attorneys and Accountants to tell them it was "alright". An appeals court, and later the US Supreme Court held that the Attorneys and Accountants couldn't be held liable for this blatant misjudgement, since, essentially, they weren't Enron.  Some might fine lawyering went into THAT decision, because it defies all common sense.

Enron would book their future earnings every quarter as real, and manage their earnings by just having more ideas if the earnings were looking a bit weak, like when they didn't generate revenue in spite of the brilliant business plans being passed around.  

Like all financial shenanigans, there was  just one little problem.  It’s called cash flow.  They still had to make a payroll for all those folks having brilliant billion dollar ideas, and those pesky “non-idea” businesses with actual equipment and inventory they had the misfortune to still be in. 

They initially decided to borrow money off their earnings by way of long term bonds.  When that dried up, and the brilliant ideas still weren’t generating any cash, they jumped into what we call “fraud”.  Yep.  Up until this point, what they were doing was perfectly legal, although patently ridiculous.  Their need for cash,  the ony real fuel for the funhouse, drove them into creating their “special purpose vehicles” they called Raptors.  Essentially, to generate cash, they sold iffy assets at high prices, guaranteeing them with corporate stock that they would buy them back again at a profit.  Very nice, EXCEPT that it doesn’t meet the legal or commonsense description of “selling assets”.  Imagine you had a cool picture of a 1966 Mustang Convertible.  Your wife wanted you to sell it, so you sold it to your neighbor at Blue Book for a REAL Mustang, not a picture, BUT you promised to buy it back for twice what you sold it to him for in 2 years, because your neighbor is not an idiot.  And you secured it with a note to your house, because, again, your neighbor isn't an idiot.  Problem is, my wife would not say I SOLD the painting.

The housing market meltdown was driven similarly.  Politicians like to give things away in return for donations and for being well kept in political hog slop, so what better than promising Homes for Everyone?  The problem?  People don’t like to loan money they know won’t be paid back. 

Essentially, the banks learned from their earlier mistakes, because, Penn Square, being NOT Too Big To Fail, failed.  The fellows running similar operations thought “I sure like my cozy job and I sure don’t want to fail, so I am not gonna let anyone talk me into makin’ stupid loans on wildcats”.  So  what to do?  Being an entrepreneurial banker, and still liking the flavor of bonus, the best and brightest we diverted from engineering and such, decide that maybe they can sucker… er, talk politicians into taking the risk part of the whole equation for the “good of the voter… er, people”.  Why not let the Federal Government take all the risk via Fannie Mae and Freddy Mac?  Think of the ungodly fees we will make if we aren't on the hook for the loans to these people that clearly cannot pay them back?  Praise the Lord!  Hell, its only taxpayers on the line, and they are less than 50% of the voting public today, and all we have to do is get whore politicians on board, so why the Hell not?  Easy money for those that can’t afford it!  Yehaw!  Plus, it sounds good on the stump.  A Chicken in Every Pot!  We are doing this for the poor people!

In the end, we are merely talking about two things… debt and the ability to become indebted, and fraud. Is debt a good thing?  You bet.  It allows us to live very well and to invest for the future. Should poor people be excluded from accessing debt?  Hell no.  As long as someone, NOT taxpayers in general, are willing to gamble on someone’s ability and propensity to pay back what they own, why get in their way?   If a lender is stupid enough to NOT require documentation, so be it.  If the borrower is stupid enough to buy something that is guranteed to be  taken away from them in the future, so be it.  The failure is that either one of these folks expect US, the taxpayer, to make them whole for their very bad decisions.

Free Markets can only be Free if they are transparent and fair.  Thus, appropriate government regulations.  If you lie to me, you are defrauding me.  Lying and fraud are no more an endemic component to free markets or capitalism  than robbing a bank is endemic to banking.  Both are wrong, and both are illegal.  The reason transparency is so important to Free Markets is that it allows capital flows into lots and lots of bets, but not too much or for too long for bad bets.  It is a self correcting system.  If the bet works, you feed more into it.  If it doesn’t, you quit feeding it.  Bad bets thus don't burn huge amounts of capital.  You need fraud or bad government regulations to waste on epic scales.  

Enron and Bernie Maddoff lied about their results.  Had Enron said “we are booking all our profits before we realize them, and borrowing money to take care of cash flow until we know whether they do or don’t work”, it wouldn’t have been the hot stock to own.  Similarly, had Maddoff said “we really don’t invest anything, we use money coming in to pay the earlier investors a return”, no one would have invested.  Easy Peasy. 

Our regulatory system didn’t require this level of disclosure, nor did they check to make sure the companies were as represented.  Class Action attorneys did a much better job, although they tended to overreach at times, as compared to the regulatory agencies.  I find myself in the uncomfortable position of supporting and applauding the plaintiff bar over regulatory agencies, but why am I not surprised?  Plaintiff attorneys are part of the free market and respond to free market forces, while regulatory agencies are not.  Oh well.  Irony abounds, it seems.

 

A disturbing blog article...

http://rancholoslosmalulos.blogspot.com/2011/05/3000-finder-fee.html

If you have been to Europe lately, you are aware of the ever shrinking dollar. I used to tease my Canadian friends by calling their  "loony", ie the Canadian Dollar, the "North American Peso".   My Canadian friends are having the last laugh, it seems.

Our markets seem very sensitive to the price of oil... to the extent that I read articles about how high oil prices are keeping the economy down.  That begs the question... is it "high oil prices" or "weak dollar"?  Here it is...

This first graph shows the Price of a Barrel of Oil in North American Pesos... er, I mean US Dollars in red, and the Price of a Barrel of Oil in Euros, normalized to US Dollar/Euro exchange one year ago.

This graph shows the variation in $/Barrel.  In other words, this is the component of the price per barrel of oil due strictly to further devaluation of the dollar relative to the Euro (and, in reality, a whole basket of other currencies).

This chart just relates it to the percentage of the price per barrel of oil that can be attributed to dollar devaluation... also known as dollar inflation.  Is it any wonder the Chinese are worrying about their trillion dollar holding of dollars?  20% of it has magically disappeared in the last year, at least in regards to buying energy by this Inconvenient Truth.

Wild Horses...

Ol' Delbert and Rico were driving their wagon across the Texas Panhandle.  See, Delbert didn't like horses much, but sure liked gettin' paid to haul freight over the west.  Rico, on the other hand, was a regular horse whisperer.

Delbert was always adding freight to the wagon, because he got paid more the more he carried.  

"Del, don't you think we ought to feed the horses a little bit more if we are gonna have them carry this much freight?", asked Rico.

"Nah.  Scroom.  Them horses are already overfed.  Feed 'em more and they will jest crap some more and mess up the envire-ment even more", replied Del.  "In fact, I think we should load up the empty space we got with rocks just to get 'em trained up some more... make 'em all better at carrying loads".

So Del hopped off the wagon at the next stop and started loading it up with rocks.   "Rico, get your ass over here and help me load these rocks!"

"I don't know if this is a real good idea, Del".

"Dammit, this wagon is gonna get loaded with rocks even if I have to do it myself, so get over here and help me so we can get going".

Pretty soon, the wagon was loaded tall with rocks.  So tall, that the wagon was riding and grinding against the axle.   The horses were straining to pull the load, especially up the hills.  Every once in a while, the horses would fall, and the wagon would drop backwards.

"I got me an idea, Rico.  These wheels are about to bust, and going backwards isn't good.  We should replace them with square wheels.  They are more stable on flat ground.  Not as likely to bust up and slide backwards." said Del.

"Well, yeah, Del.  I can see your reasoning, but it sure seems like it will make it a lot harder for these horses to pull the wagon forward when we get going again." Rico sputtered.

"You know, Rico, I am tired of your horse loving attitude.  These here animals are just beasts of burden.  One dies, we replace it with another.  Simple.  We do things your way, these animals would be sitting around sipping marg'ritas on a beach somewheres, instead of hauling our freight.  Quit arguing with me and lets get these square wheels on the wagon."

Pretty soon, the first horse pulled up lame trying to haul the hugely frictioned wagon.  

"Dad gum it, thats some bad luck", mumbled Del.  "That's a pretty good horse.  We need to do whatever we can to make it part of the team again.  I say we cut off its two bad leg and put it in the middle of the team so the rest of the team can support it and it can contribute with its two good legs." declared Del.  

So they did it.

"You know, Rico, I like ducks better'n horses.  They don't eat as much and they don't crap as much as these horses and they got some wings, so I think they would do a better job pulling the cart with the square wheels.  We feed the horses less, and give the food we save to the ducks, we gonna move fast!  We are gonna transition to an all- duck team".

"I think this is a real bad idea, Del.  I think physics dictates that it will take a million ducks to replace a few horses, and how we gonna bridle them?"

"What you taking physics, Rico?  You some sort a duck denier?  You clearly hate the enviro-ment.  That reminds me.  I got these razor sharp bridles I want to put on the horse team.  They slow up at all, it cuts the bejeezus outa their mouth!  That'll teach them not to slow down none!"

Of course, soon all the horses die of their festering mouth wounds and of exhaustion.  The ducks flew the coop and were drinking marg'ritas on a beach during their southward Winter journey, and Del and Rico were left with a busted down cart full of rocks near Hereford.

Del muttered "I always knew that horses were worthless!"

 

 

 

Whoops!

S&P lowered the US debt rating from AAA to AA+ last night.  What does this mean to you an me?  Well, S&P is only one of three debt rating services, and the other two have said they aren't going to downgrade, but this is historic, nonetheless.

When your debt grade goes down, your cost of borrowing goes up.  This sad fact is NOT lambasted when you are a basic middle class person.  It is made out to be the crime of the century when applied to "the poor" by the socioeconomic class divide and conquer folk.  It means we have too much debt to handle safely.

Applied at the personal level... that bad credit folk either can't get a bank to loan them money or that they are charged higher rates to make up the risk of default.  When we do stupid things out of feeling sorry for bad risk folks, like guaranteeing their payments, we typically end up... making their payments.  

So the cost of Fed Money is going to go up some amount.  Since the Fed is the source of all funds, this means that interest rates at banks will go up, mortgage interest rates will go up, and the general cost of borrowing money will go up.

As a result, the value of homes, and businesses, and the stock equity values, and anything you use credit to buy will go down.  Why?  Because the cost to buy just went up, without any underlying change of value.

Let's take a house, for instance.  If you can afford $1000 bucks a month for a payment, minus all the taxes and insurance and stuff, then the value of the house you can afford at 1% interest rate is is $311,000.00.  At 5% interest rate, that value drops to $186,000.00.  Poof.  $125,000.00, or nearly 40% of your value disappears automatically.  To be fair, your house probably wouldn't lose this total value, but the buyer pool would be substantially lower for your house now, because the cost to own it would be much higher, so the price will drop substantially.  It works exactly the same way for the Stock Market.  Cost to borrow goes up, equity value goes down.  Simple as that.  It is a Natural Law.  That's why the stock markets will behave negatively, although, to be fair, the market anticipated this downgrade, and the real result come monday may not be a drastic drop.  Had S&P said that it was satisfied with government efforts, then the stock market would have tended to rally, since the downgrade was so much baked it.  

http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

So... we will see more downward pressure on home values.  Downward pressure on stocks (meaning YOUR pension/401k/mutual funds).  Lower job growth.  The whole gig.  To add to it all, the price of managing US debt just went up!  We get Jack Sh** for that extra expenditure, an expenditure we ship overseas to countries that do us a favor of loaning us money.

The S&P said that it had no confidence in our politicians to actually perform on its commitments it just made to reduce spending.  It also negatively noted that the US did not raise taxes. Why would it make that distinction?  Let me tell you...

Debt is caused by "Spending Too Much".  You spend more than you take in.  Responsible people and governments don't do this.  Why would you?  People with too much debt essentially want too many things that they can't afford.  Heartless as it may seem, too much debt is, 90+% of the time, the fault and responsibility of the person who decided to buy something they couldn't afford.  That trip to Cancun or that new Beemer on easy payments sure looks different after the fact.  It doesn't matter where you are on the socioeconomic ladder.   This problem is endemic.  

Once you get used to a certain level of spending, it is hard to reduce it.  Losing the BMW, foregoing the trip to Cancun... it's just not FAIR!  However, getting out of debt, for most of us, entails stopping spending.  The 2nd job can accelerate it, but it doesn't solve the problem.  You just die earlier.  Think of taxes as "The Second Job".

The S&P cited taxes because raising taxes is the LEAST politically risky action on Earth.  Less than 50% of us pay income taxes at all, and the ones they are targeting comprise the 2% of the 135 million tax returns filed reported income at this level.  Choosing to tax these folks isn't politically risky in the least, is it?  They only comprise 2% of the voters!  Most Americans believe in letting the richer guy tote the note, just not me. Stopping spending.... now THAT takes real political huevos!  We have lots of quivering lips around the myriad of government teats.  In fact, it seems the goal of our political class has been to gain a voter majority by giving them yours and my money (assuming you, dear reader, is a taxpayer).  The S&P guys know this.  

The government is no different than you or I.  Here is the perfect analogy to our current system... You onw a home.  Over the years, you have allowed people to live in your home because they were "down on their luck". This group has trouble getting or holding jobs.  They are eating more and buying more things with your credit card, and they invite their friends to live in your house.  When you finally say "enough", they say it is only appropriate for you to go out and get a second job.  There are a lot of mouths to feed.  You are an insensitive uncaring individual for not getting the second job, all the while they are opening new credit accounts under your name.   And then they hold a vote, and they choose to keep on spending your money and for you to go out and get another job, deadbeat.  Its for the children.

In closing, my little nephew was showing me the money he had saved this morning.  I took 40% of it and put it in my pocket saying it was a tax, and that I would give it the less fortunate, minus a 60% carrying charge for my time in doing so.  What did he think of that?  He told me "that's crazy"!

US Peak Hydrocarbons to be SURPASSED in 2014!

Drillinginfo's Allen Gilmer gave a very interesting talk at the SW Section AAPG a couple of weeks ago where he showed this slide.  
 It shows an amazing uptick in both US liquids and natural gas production beginning 8 years ago, the component of such that is due to unconventional well drilling and stimulation, and an estimate of when we will crash through the glass ceiling of Peak Hydrocarbons.  Doesn't look to be a ceiling at all.

DiaTribal...

People want to use more and more of YOUR money to make riskier bets.  When people use their own money, things don’t get out of whack.  The more the risk/reward equation is manipulated to allow shots at high risk returns by laying the risk off on others, the more bad behavior affects us all.

The best and brightest in our society are used to invent deal structures where risk/rewards  are bent and stretched all out of shape, instead of building products and services that we could all use.  This is a structural deficiency, I think.

Those of us in the oil and gas business are intimately aware of risk/reward and how to play with the equations.  Hell, screwin' bankers ('scroon sum bankers') is the first thing we learn in the business.  

The first and most famous promote structure was a 1/3^rd for a ¼, where an investor paid 1/3^rd of the cost for ¼ of the project, and the originator got a “carried quarter”.  Most buyers learned over time to require the promoter hold on to at least some sort of  risk position… ie, wanted to see them have some skin in the game, not just a free quarter.  This was an indication that the promoter believed in the project enough to keep some money in it.  It gave everyone comfort.

Geologists would sell their projects for cash an overriding royalty interest… a cost-free percentage of the gross dollars produced.  You learned quickly that you didn’t want THAT geologist making completion decisions.  It cost them nothing to make expensive and high risk casing decision, but they had all the upside.  Like going to Vegas and getting 20% if all winnings generated on hitting an inside straight without having to put a bet up yourself.  This change in the rules results in too many  hits on inside straights instead of folding or building on a pair.  These would be characterized systematically as “Bad Decisions”, because they don’t maximize overall return.  They are, in fact, destructive to capital overall.   And it is caused by stupid rules.

Our good ol’ oil business drove a major set of bank failures… failures like Oklahoma's Penn Square Bank and their associates when they broke fertile new ground in wildcat drilling funding by offering non-recourse bank debt.  Those were a glorious and heady days for those of us fighting to jam through the front door of the bank, while being jostled by our jowly be-booted brethren like Walmart shoppers on a Thannksgiving midnight.   We thought someone had slipped acid into the coffee that morining.  See, loaning money to drill wildcats is,  in reality, a 1/3^rd for a 1/30^th deal. 

Very nice, heh heh, but alas, unsustainable as a business model.  Why would a banker do this?  I mean, the data clearly tells you that you are going to get barbequed as a lender under these terms, So why do it?  Fees and Bonuses.  Banks paid them every year.  In this case, the bankers learned that if you are paid to generate loans, not on how well they perform, you are going to push to get loans approved, regardless of how they perform.  In other words, “You get what you pay for”.

Bad Behavior Poster Boy Enron, which at one time was a real midstream company with real assets and a real upstream sub, decided, via its McKenzie alum COO Jeff Skilling, that it could do anything in the world and it could somehow similalry de-risk everything it did. 

Essentially, this company would enter into all sorts of businesses, and, like all other businesses, it would write business plans for the businesses it entered.  Unlike all other businesses, it lobbied the Federal Government to allow it to essentially take the profits it anticipated making from their business plan spreadsheets and recognizing them immediately AS profits!  If they didn’t come true, they would take a charge off on them later. 

This brilliant breakthrough virtualized every business on Earth, because it magically made an idea tangibly worth whatever you wrote down you thought it might be able to generate in the future, all because the SEC, a regulatory agency, said so!  Essentially, every idea is worth whatever you could model on a spreadsheet!  A billion dollars!  More!  Except, of course, in reality, when they are not, which is 99.999% of the time. 

Venture Capital firms, all other companies, and house cats already knew that ideas per se weren’t all that valuable.  They all must have forgotten to tell Skilling and Lay, and the Enron Board must not have known any house cats.  They relied on Attorneys and Accountants to tell them it was "alright". An appeals court, and later the US Supreme Court held that the Attorneys and Accountants couldn't be held liable for this blatant misjudgement, since, essentially, they weren't Enron.  Some might fine lawyering went into THAT decision, because it defies all common sense.

Enron would book their future earnings every quarter as real, and manage their earnings by just having more ideas if the earnings were looking a bit weak, like when they didn't generate revenue in spite of the brilliant business plans being passed around.  

Like all financial shenanigans, there was  just one little problem.  It’s called cash flow.  They still had to make a payroll for all those folks having brilliant billion dollar ideas, and those pesky “non-idea” businesses with actual equipment and inventory they had the misfortune to still be in. 

They initially decided to borrow money off their earnings by way of long term bonds.  When that dried up, and the brilliant ideas still weren’t generating any cash, they jumped into what we call “fraud”.  Yep.  Up until this point, what they were doing was perfectly legal, although patently ridiculous.  Their need for cash,  the ony real fuel for the funhouse, drove them into creating their “special purpose vehicles” they called Raptors.  Essentially, to generate cash, they sold iffy assets at high prices, guaranteeing them with corporate stock that they would buy them back again at a profit.  Very nice, EXCEPT that it doesn’t meet the legal or commonsense description of “selling assets”.  Imagine you had a cool picture of a 1966 Mustang Convertible.  Your wife wanted you to sell it, so you sold it to your neighbor at Blue Book for a REAL Mustang, not a picture, BUT you promised to buy it back for twice what you sold it to him for in 2 years, because your neighbor is not an idiot.  And you secured it with a note to your house, because, again, your neighbor isn't an idiot.  Problem is, my wife would not say I SOLD the painting.

The housing market meltdown was driven similarly.  Politicians like to give things away in return for donations and for being well kept in political hog slop, so what better than promising Homes for Everyone?  The problem?  People don’t like to loan money they know won’t be paid back. 

Essentially, the banks learned from their earlier mistakes, because, Penn Square, being NOT Too Big To Fail, failed.  The fellows running similar operations thought “I sure like my cozy job and I sure don’t want to fail, so I am not gonna let anyone talk me into makin’ stupid loans on wildcats”.  So  what to do?  Being an entrepreneurial banker, and still liking the flavor of bonus, the best and brightest we diverted from engineering and such, decide that maybe they can sucker… er, talk politicians into taking the risk part of the whole equation for the “good of the voter… er, people”.  Why not let the Federal Government take all the risk via Fannie Mae and Freddy Mac?  Think of the ungodly fees we will make if we aren't on the hook for the loans to these people that clearly cannot pay them back?  Praise the Lord!  Hell, its only taxpayers on the line, and they are less than 50% of the voting public today, and all we have to do is get whore politicians on board, so why the Hell not?  Easy money for those that can’t afford it!  Yehaw!  Plus, it sounds good on the stump.  A Chicken in Every Pot!  We are doing this for the poor people!

In the end, we are merely talking about two things… debt and the ability to become indebted, and fraud. Is debt a good thing?  You bet.  It allows us to live very well and to invest for the future. Should poor people be excluded from accessing debt?  Hell no.  As long as someone, NOT taxpayers in general, are willing to gamble on someone’s ability and propensity to pay back what they own, why get in their way?   If a lender is stupid enough to NOT require documentation, so be it.  If the borrower is stupid enough to buy something that is guranteed to be  taken away from them in the future, so be it.  The failure is that either one of these folks expect US, the taxpayer, to make them whole for their very bad decisions.

Free Markets can only be Free if they are transparent and fair.  Thus, appropriate government regulations.  If you lie to me, you are defrauding me.  Lying and fraud are no more an endemic component to free markets or capitalism  than robbing a bank is endemic to banking.  Both are wrong, and both are illegal.  The reason transparency is so important to Free Markets is that it allows capital flows into lots and lots of bets, but not too much or for too long for bad bets.  It is a self correcting system.  If the bet works, you feed more into it.  If it doesn’t, you quit feeding it.  Bad bets thus don't burn huge amounts of capital.  You need fraud or bad government regulations to waste on epic scales.  

Enron and Bernie Maddoff lied about their results.  Had Enron said “we are booking all our profits before we realize them, and borrowing money to take care of cash flow until we know whether they do or don’t work”, it wouldn’t have been the hot stock to own.  Similarly, had Maddoff said “we really don’t invest anything, we use money coming in to pay the earlier investors a return”, no one would have invested.  Easy Peasy. 

Our regulatory system didn’t require this level of disclosure, nor did they check to make sure the companies were as represented.  Class Action attorneys did a much better job, although they tended to overreach at times, as compared to the regulatory agencies.  I find myself in the uncomfortable position of supporting and applauding the plaintiff bar over regulatory agencies, but why am I not surprised?  Plaintiff attorneys are part of the free market and respond to free market forces, while regulatory agencies are not.  Oh well.  Irony abounds, it seems.

 

South Texas Oilfield Theft a Fallout of our War on Drugs and Illegal Immigration

A disturbing blog article...

http://rancholoslosmalulos.blogspot.com/2011/05/3000-finder-fee.html

How Much of the Price of Oil is Due to Dollar Weakness?

If you have been to Europe lately, you are aware of the ever shrinking dollar. I used to tease my Canadian friends by calling their  "loony", ie the Canadian Dollar, the "North American Peso".   My Canadian friends are having the last laugh, it seems.

Our markets seem very sensitive to the price of oil... to the extent that I read articles about how high oil prices are keeping the economy down.  That begs the question... is it "high oil prices" or "weak dollar"?  Here it is...

This first graph shows the Price of a Barrel of Oil in North American Pesos... er, I mean US Dollars in red, and the Price of a Barrel of Oil in Euros, normalized to US Dollar/Euro exchange one year ago.

This graph shows the variation in $/Barrel.  In other words, this is the component of the price per barrel of oil due strictly to further devaluation of the dollar relative to the Euro (and, in reality, a whole basket of other currencies).

This chart just relates it to the percentage of the price per barrel of oil that can be attributed to dollar devaluation... also known as dollar inflation.  Is it any wonder the Chinese are worrying about their trillion dollar holding of dollars?  20% of it has magically disappeared in the last year, at least in regards to buying energy by this Inconvenient Truth.