Scary Stuff

“Halloween featured some very scary sights this year: Crude oil at $95 a barrel and gold at $800 an ounce. These frightening visions of runaway commodity prices must be terrifying to anyone who trusts the Federal Reserve to preserve the dollar’s value. On the other hand, individuals who invest in oil, gold and other types of commodities can derive a ghoulish delight from the dollar’s slow demise. These individuals are making money…and they are likely to make even more money, as the world comes to grips with a genuine shortage of crude oil.

“Two weeks ago, I attended the convention of the U.S. branch of the Association for the Study of Peak Oil & Gas (ASPO), held in Houston. The news was, as you might expect, pretty bleak. Slide after slide, chart after chart, speaker after speaker told the tale of the world’s oil fields peaking in output and, in due course, going into irreversible decline.”

Byron King
November 2, 2007

Now over to Short Fuse reporting from California…

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Views from the Fuse:

Yesterday saw the biggest dump of liquidity in the markets since immediately following 9/11 – to the tune of $41 billion. Well, not everyone “saw” it – this action went highly underreported by the financial media.

That aside, what warranted this injection by the Fed?

“Here’s one possibility: The market for commercial paper has fallen 26% since the beginning of the credit debacle in August,” writes Addison in today’s issue of The 5.

“Sizeable losses in such a short time have mortgage companies, lenders, and banks strapped to find sources of funding.

“Citigroup, for example, was rumored yesterday to need a whopping $30 billion to keep some of its funds afloat. If other banks and lenders are anything like Citi, we’re sure the bat phones were all alight at the Fed. ‘Faced with falling asset values and a tight credit market,’ comments Dan Denning, ‘Citigroup, perhaps, turned to the only source of funding left in the market yesterday: the Fed, the lender of last resort.’

“Citigroup said they may be forced to cut dividends to help preserve capital. The stock got whacked for 7%, making it one of yesterday’s biggest losers.”

“Digital equity”, huh. For a few years now, cities across the country have been looking into how to make Internet access cheap – or even free – for everyone. The thinking here was that citywide Wi-Fi could “bridge the digital divide between rich and poor, foster economic development, and improve communications for firefighters and police,” says the Atlanta Journal-Constitution.

“Cities could recoup the costs of such systems by charging users a fee for home service, much like they do for water or trash pickup, while providing free access in city buildings, parks and other common areas.”

Sounds pretty nice…especially in an era where working remotely is becoming more and more common. However, critics of muni Wi-Fi, not unlike Bill, (who voiced his opinions, above) are wondering if widespread Wi-Fi can live up to the hype.

Our technology guru, Jonathan Kolber, believes it can – and that new technological advancements can take it one step further.

Right now, the movement for muni Wi-Fi is aimed mainly at large cities, still leaving those in rural areas in the dust. According to Jonathan, many living in homes far away from main roads or outside existing cable TV networks are using very slow, dial-up Internet access – now considered horrifyingly archaic in the tech world.

“It just costs too much for the length of the wire and the labor to run it to justify bringing service to the end user,” Jonathan informs your non-techie editor.

Existing wireless transmission options for bridging what’s being called the “last mile gap” have failed. But Jonathan tells us that this is all changing – and all because of “WiMAX.” WiMAX is a new and exponentially more powerful and wide-ranging standard in wireless transmission of the Internet.

“Instead of the roughly 100-foot radius that current wireless solutions can cover with a broadband signal, a single WiMAX base station can blanket a radius of up to 30 miles with high-speed microwave-based Web access for hundreds of users…”

Right…and the bottom line for all of the non-tech savvy readers out there: there is major potential for profit.

“As great as WiMAX will be for densely populated areas, its vastly extended microwave range makes it downright revolutionary for rural broadband. The best part for profit-minded investors who get in now is this:

“A Sprint-Nextel/Clearwire deal aimed at locking up metropolitan wireless Web access virtually ensures that one small firm can do the same thing for the hinterlands – and fast…”

Ai yi yi…

Yesterday, it looked like what was going to happen to Nigeria was already happening to the U.S. stock market.

Nigeria is our neighbor’s prize bull. He’s going to be slaughtered, because he’s getting old and is no longer earning his keep.

This bull market on Wall Street, such as it is, is getting old too. And yesterday, the butchers were sharpening their knives.

The Dow fell hard – down 362 points.

Why?

Commentators said investors were disappointed with the measly quarter point rate cut delivered by the Bernanke Fed on Wednesday. What? How could that be? Nine out of 10 economists saw it coming. Why would investors have such surprised looks on their faces?

Maybe it is because the Fed signaled that it there were not a lot more rate cuts where this one came from. But who would believe that?

Nah, dear reader, the explanations don’t make much sense. But why bother looking for a reason? All bulls get slaughtered – sooner or later. That’s just the way it works.

As stocks went down, both gold and oil lost a little ground…but not much. Oil is still over $93. The price of gold is over $793.

Which brings us back to numbers – we have become suspicious of them. There are only ten basic digits…but just look at them. Since we gave up Roman numerals, our numbers aren’t straight. Who can trust the number 5, for example? The squiggly little humbug! It is crooked. It has a straight bar across the top, which makes it appear on the up and up…but then it stabs down and then hooks around to the bottom. Very devious.

Still, when they are on their own, numbers – like men – seem to be fairly reliable and decent. You have one dollar. We have three chickens. The team scored nine runs. But mix ’em and match ’em…put ’em in a crowd …and you can get any combination and any scammy result you want.

We mentioned yesterday that after the feds got finished scrambling the GDP numbers, they revealed growth of precisely 3.9% per year. We pointed out that “growth” itself doesn’t mean much. Life imitates academia; we begin to act like dead economists say we should act. The professors tell us that digits are important. The next thing you know people are worrying about their cholesterol count and their return on investment. Not only that, but they’re putting their wives to work in order to increase the digits in their household incomes…and watching the Fed to see what it will do with the digits in short-term interest rates.

And lo! Their interest in digits…in making money and spending it…causes the digits in the GDP to go up. Instead of cutting their own lawns or baking their own cookies, our new digitally-enhanced citizens pay someone else to do these things so they can spend their own time making more digital money.

Ah yes…dear reader…we’ve come to that. Even those ‘paper’ dollars are often not even paper. They are computer fantasies. Your bank tells you that you have a certain number of dollars in your account. You take it for granted that the dollars are there. But there are no dollars…just a spectral trace of dollars in digital form.

So, you tell someone that you have 10 dollars and 22 cents. What do you have? Ten what? It sounds precise…but the precision is as much a fantasy as the money itself. You don’t know what you have. Maybe you have nothing at all…or something that could become nothing pretty darned fast. Ten dollars was what we earned for two days’ hard labor in the tobacco fields when we were 15 years old. Now, it is what we earn every five minutes. Yes, we are older and wiser…and people pay us more money today than they did 40 years ago. We’re not the same person we were then…and the money isn’t the same either. While we gained value in the workplace, our money lost value.

The feds say the inflation rate is less than 3%. How could inflation be running at less than 3% per year while prices on the most important things in commerce – food and energy – are increasing 10 times as fast? We don’t know; it’s one of the reasons we’ve lost faith in digits. They lie.

The only way the feds could get the inflation rate down was by smashing it on the head. And guess what happened? The GDP rate popped up. Yes, dear reader, real output is calculated by subtracting the inflation rate from nominal output. The lower the inflation rate, the higher the GDP number. So, if you can beat down the inflation number, that GDP number will get bigger. Neat, huh?

John Crudele, writing in the New York Post:

“The trouble is, the GDP only grew that much because the government somehow manufactured a big drop in inflation.

“According to the Commerce Department report, inflation was only 0.8 percent in the third quarter.

“When you look at real economic growth – meaning, after inflation – every tick down in inflation causes a tick up in economic growth.

“The rate of inflation was 2.6 percent in the second quarter of 2007 and 4.2 percent in this year’s first quarter. Wall Street was expecting 2 percent inflation this time.

“Inflation at a slow 0.8 percent rate would certainly be welcome – if only it were credible.

“But even less believable is the fact that the inflation rate nose-dived at the same time oil prices were heading toward $90 a barrel – which it now exceeds.

“So, in reality, economic growth is probably much slower than is being reported. And inflation is a lot higher.”

We’re convinced; reality and digits don’t hang together anymore. Maybe they never did.

Here’s something interesting…this week, Wal-Mart says it has crossed the ‘digital divide,’ by offering a computer for less than $200. Yes, dear reader, this is a big day for us here at The Daily Reckoning. Now every yahoo with $200 in his jeans can read what we write. This is a big step forward for society, too, say the commentators, because now we will have ‘digital equity,’ meaning everyone can have access to all the digital information, news and opinions they want.

Of all the crackpot notions to come along in recent years, the idea of the ‘digital divide’ was among the looniest. If you didn’t have access to the Internet, they said, you would be left behind…doomed to live in poverty and obscurity all your life.

But what do people actually do when they get a computer? Do they go onto chat lines to exchange interpretations of Kant’s “Critique of Pure Reason?” Do they begin to read Posidonius’s account of the battle of Pydna…or search for solutions to Poincare’s last theorem? No, they play poker…watch stupid videos…or visit porno sites. In other words, digits don’t actually improve people; they just make it possible for them to indulge more abundantly in whatever shiftless pursuit they take up.

The list of famous and successful people who never even laid eyes on a computer is as long as the Encyclopedia Britannica. And even today, many of the smartest and most successful people in the world view them as time-wasting distractions.

But we are beginning to rant, aren’t we? (Colleague Jonathan Kolber will offer his rebuttal to this rant, below.)

Let’s return to the subject – what was the subject, anyway?

Oh yes…price inflation and the perfidy of digits. Well…what do you think the folks at the Department of Commerce make of Wal-Mart’s $199 computer?

We don’t know either…but we can take a guess.

Years ago, the digit persuaders who torture numbers for the government decided that they should make adjustments for quality enhancements. The theory of it was simple enough: if the price of a thing stays the same, but the thing itself is more valuable…it is if it had gone down in price. So, cometh the computer and prices collapsed. People still spent as much as before, but each year the computers became more powerful. Each year, computer consumers got more for their money…so, in theory, the cost of living was going down (even though, in reality, it was going up).

And now, here’s a computer whose price really is lower. At $199 – here’s a number that doesn’t even have to be hammered down. Happy days! With quality enhancements, this computer – according to the Commerce Department – probably costs less than nothing! When they’re finished with it, it will probably enter the inflation calculation as a free computer with a year’s supply of gasoline as a bonus.

Want to get a good return on your money? Iceland just raised its short-term central bank rate to 13.75%. Inflation in Iceland is expected to be only 4.1% this year…giving you a net yield of more than 9%.

But wait, what’s this? An economist at one of Iceland’s leading banks says he thinks the Icelandic currency – the kroner (ISK) – will fall by “almost 14%” next year. Well, easy come…easy go.

Incidentally, our friends at EverBank have an interesting way to diversify your portfolio internationally: with their WorldCurrency CD. They tell us it’s an easy solution to participate in the often complex world of foreign currencies.

(Full disclosure: We have an ongoing business relationship with EverBank. While we may receive an advertising fee if you open an account with them, the relationship we’ve forged allows us to bring you exclusive offers, like the MarketSafe Silver CD, that you won’t see anywhere else during the limited pre-enrollment period.)

“I’m thinking about buying a house in America,” said a Frenchman at a dinner party last night. “Prices are so low. This looks like it could be a good opportunity. You probably won’t believe this, but you go into almost any real estate office in Paris and you’ll find houses listed for sale in Florida. And it’s amazing what you can get for your money…a place on the water, with a swimming pool…in the Tampa area. It’s listed for just $300,000. We couldn’t get anything similar in France for that kind of money.

“One thing that is most astonishing to us in Europe is that Americans don’t really have much money. They earn a lot…or they have earned a lot…but they just don’t have much to show for it. I know people in California who earn very high salaries. Here in Europe, even with our high prices, you would live very well if you earned that kind of money. But they have children in private school…they pay a fortune for health insurance…and they have these gigantic mortgages. After they’ve paid those expenses, they just don’t have much left.”

Until next week,

Bill Bonner
The Daily Reckoning