The End of Las Vegas, Part II

“Because coal is quickly becoming the bastard child of energy sources, with almost two dozen proposed coal projects getting axed since 2006, according to the Department of Energy, the future in our new, climate change-conscious world looks somewhat dim for the resource that launched the Industrial Revolution.

“Not so with natural gas. Its future looks grim for the same reason oil’s does – supply scarcity. Recently, Southwest Gas Corporation delivered a report to the Nevada Public Utilities Commission warning of long-term supply problems in the face of a 4 percent increase in sales per year in Southern Nevada. The report also noted there was no conservation program on line to address it.

“Heinberg says this isn’t unique to Nevada – it’s a national catastrophe in the making. ‘We’re facing a natural gas train wreck. We’re basically drilling all the time, and we’re getting less in return. That means you got to drill more and more wells. Yet the amount that’s being produced is stagnant and really declining.'”

Kevin Capp,
October 5, 2007

Keep reading today’s guest essay here:

The End of Las Vegas, Part II

Now over to Short Fuse, reporting from a rainy day in Baltimore…


Views from the Fuse:

Today is everyone’s favorite day…that’s right kids – it’s Jobs Jamboree Friday! Put on your party hats and let’s dive into some data.

At first glance, the BLS report looks pretty positive – better than last month at least. It turns out that employment in the United States accelerated in September, and the revised figures for August showed an unexpected gain.

The revision of last month’s numbers is a “head scratcher,” says Addison and Ian over at The 5 Min. Forecast.

“The market was expecting 100,000 new jobs…but got a loss of 4,000. The surprise put markets in the hurt locker and essentially sealed the deal on the Fed’s rate cut. This morning, the Labor Department said ‘oops’ and revised those numbers.

“Hmmn, let’s see. Cramer was screaming ‘Armageddon on Wall Street’. The jobs report comes out and justifies a Fed rate cut. Markets recover. Then the loss gets revised away one month later. Hmmnn…

“What’s more, the sector that the Labor Department forgot to mention? Government jobs! In their revision, the BLS added 57,000 government jobs in August, up from the originally reported loss of 28,000. Hmmmmnnn…” reports that firings at mortgage companies are contributing to a slowdown in the labor market, as are declining payrolls at factories and homebuilders. In fact, the country’s biggest homebuilder, Lennar (NYSE:LEN), has cut 35% of its workforce, and has plans to eliminate more. “Lennar last month reported the biggest quarterly loss in its 53-year history.” Ouch.

“The job market is not a disaster, but it is slowing,” Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. (NYSE:LEH) in New York, said before the report. “The Fed won’t be in a rush to cut rates. We expect more rate cuts, but it’s probably just going to happen slowly.”

So here we are again…wondering whether or not the Fed will continue with their rate cuts.

“Most analysts forecast future rate cuts… maybe so, maybe not. We, at Free Market Investor, really don’t care,” writes Christopher Hancock. “We have no idea in what direction interest rates are heading. But we do know this:

“The United States needs more domestic spending. And it needs it now. Every U.S. congressman represents some type of dilapidated infrastructure in his or her district. This shouldn’t be a hard bill to push through Washington. Consequently, the U.S. Treasury must dig a little deeper. More U.S. debt will hit the market. Our government will ask foreign banks to soak it up. Foreign buyers should require a higher rate of return for holding U.S. greenbacks. Interest rates would rise while the race to sell U.S. assets to foreign hands keeps flowing south like the mighty Mississippi.

“Call it the new ‘New Deal.’ Look out for U.S. infrastructure stocks in the coming years.

Remember, $1.5 trillion must be spent just to bring our infrastructure back to standard.”

There is a skit from Saturday Night Live that is making its way around the Internet (and that we are actually using in our documentary, as well):

A couple sitting at the kitchen table is trying to make their bills add up.

“Geez honey, it seems like we’ll never climb out of this hole,” says the husband (played by Steve Martin).

“Credit card debt, does it never end?” she says.

Infomercial-style, the author of a new self-help financial book walks in.

“You know,” says the author, “many Americans face a wall of mounting credit card debt. That’s why I created my special new program, just for those people who might need it. It’s called, ‘Don’t Buy Stuff You Cannot Afford.'”

“Gee,” says the husband, “that sounds confusing.”

“Let’s say I see something I want,” says the wife, “but I don’t have the money. What should I do?”

Says the author: “Don’t buy it.”

“Wait,” says the husband, “what if I don’t have the money, but I want it anyway. Should I buy it then?”

“Nope,” says the author.

“Oh look honey,” says the wife, after opening the book, “It says here, if you see something you really want, you can buy it with ‘savings.'”

“Yeah but, where are these ‘savings’ supposed to come from?” says the husband.

“It’s all there in Chapter Three,” says the author, “in fact, the book is only one page long. And it’s free.”

“Great honey,” says the husband, “we can put it on our credit card!”

Yes, dear reader, the typical American family is about to discover something new and exciting – thrift! T-H-R-I-T…no, T-H-R-I-F-T.

It is going to come as a shock – but not necessarily a completely unpleasant shock. For everything that is lost, something is gained. People won’t have so much money to throw around…but neither will their lives be cluttered up with so much junk they don’t need…nor will their days be taken up with needless trips to Wal-Mart to buy it.

“Where thy purse is, there also is thy heart.”

We’ve been quoting that line from the Bible for many years. We’ve never actually seen it in the Bible and some people think it doesn’t exist. But if it’s not there…it must have been left out by mistake, because it describes how people can’t avoid “talking their own book,” as they say on Wall Street. If you’ve got a hammer in your hand, for example, everything looks like a nail. And if you don’t have a fist full of dollars, not spending money begins to take on a fetching look.

America is getting caught in the “Stagflation Trap,” says economist Gary Dorsch. Prices are rising; the economy is weakening. People are going to have less purchasing power. They’ll be poorer. Will they be less happy? Well, we don’t know…but we remember when we were poor. We don’t remember being any less happy. In fact, we liked being poor. We liked scrounging for things…”making do” with things…getting by…

…we especially enjoyed using our imaginations rather than our credit cards. When we were down and out in London and Paris, a long time ago, we would take Elizabeth to fleabag hotels for $20 a night and share a bathroom with other guests. But, oh, the romance of it! The smell of the café au lait – brought to our room, no extra charge. The clank and fizz of the radiators…the steam on the windowpanes…the beds that sank down in the middle like hammocks. The dirty carpets…the noise on the streets…and no hot water! Ah the memories…we wouldn’t trade that for a night at the Four Seasons!

“Oh yes we would,” says Elizabeth.

But getting back to our point…

Americans are going to rediscover the quaint, almost forgotten art of making ends meet. Until recently, ends remained total strangers to each other. They didn’t have to meet because there was so much credit available on such forgiving terms. Thanks largely to “Easy” Al Greenspan down at the Fed, they could always stretch one end of their budget – the spending end. “Just put it on the credit card, honey…we’ll extend the equity line if we need to.”

But now the equity line is snapping back and hitting them in the face. The big hump in mortgage resets has just begun…September was a big one. October is even bigger. And then, right up through the spring of 2008, millions of people are going to have to face significantly larger mortgage payments.

The effects of these ARM resets are going to be felt all up and down the street. We saw a chart of employment in the construction industry. Ten years ago, there were about 5.2 million people nailing 2 x 4’s and installing granite countertops. At the peak, the number rose to about 7.7 million. Now the numbers are coming down again. In September, 20,000 more jobs were lost in construction – the 12th month of losses out of the last 13. And judging from the chart, there is a long way to go – because building permits have fallen to the same level they were 10 years ago. If construction jobs fall a similar amount – which they should – there will be 2.5 million jobs lost.

Meanwhile, the value of all the houses in America is about $21 trillion. Those houses are going down in price; even Easy Al says it wouldn’t surprise him to see the average house lose more than 10% of its value. Let’s say the average loss is 15%. That’s still $3 trillion of “equity” that goes poof.

While his wealth declines…and his job prospects dim…the poor American working stiff still has to face higher prices for almost everything. That’s what stagflation is all about. Corn futures rose almost 10% last month. Soybeans were up 21%. Milk has gone up 70% in the last year. Oil is about 30% higher.

Consumers have to be feeling a little put upon…a little squeezed…maybe a little out of sorts, especially when buying groceries or filling up their gas tanks. But…if you’re positioned properly in the commodities markets, high prices for natural resources equal big gains for you. Just ask Kevin Kerr’s dedicated Resource Trader Alert subscribers.

In the past few weeks, by following Kevin’s simple instructions they’ve seen profits of up to 155% on the second half of their December gold 2007 700/750 call option spread…which is on top of the 97% taken on the first half of the same trade. Add that onto the incredible gains of 50% and 100% from soybean oil options and their November soybean options spread at 73% and 200%. And last, but not least, their March 2008 wheat trade, which gave us 146% profits on the first half and 241% on the second.

Last night, we went out to visit old friends. We wanted to know what was really going on in Argentina.

“Well, first…there is an invasion of Americans,” said a friend who’s been here since the ’70s. “It used to be, I’d go to the U.S. and the plane would be full of Argentines. Now the plane is full of Americans. I’m not sure what they’re all doing here…but I doubt that they really understand this place.

“What I mean is that Argentina doesn’t work like the United States. This place is really screwed up in ways that Americans can’t even imagine. Just little things are next to impossible sometimes…so you need to know the tricks. For example, now it’s very hard to get cash. You go up to the cash machines; they’ll only give you 300 pesos each time -and you can only use each card three times per day. But Argentina functions on cash. You want to buy something – even a washing machine – and you have to come up with cash.

“Meanwhile, the cash is always a bit funny. Nobody trusts it – or anything else for that matter. This spring, there was a big problem with mosquitoes. Naturally, everybody went to buy OFF. But there wasn’t enough in the stores. So now, everyone is afraid that there won’t be any available the next time the mosquitoes come…so, they’re hoarding it. You have to go all over town looking for the stuff. That sort of thing is typical.

“And because they’ve been holding down prices…and lying about the numbers…I’m sure there is a big problem coming. Another crisis, for sure. I just hope Cristina (the Hilary Clinton of the pampas) wins the election. She’ll keep things going for a little bit longer. Of course, the crisis will be worse…maybe even as bad as 2002.”

“No,” said an old Argentine friend. “We’re really not in that bad shape. Of course the government has messed things up. It always does. But we’re a country that exports soybeans. We’re in a very good position. We’re making the stuff that is going up in price. And as long as commodity prices don’t go down too much, we’ll be alright. I expect a mild crisis, not a big crisis like we had in 2002.”

“You did what?”

Our new friend Paola, who writes the Spanish version of The Daily Reckoning, was astonished. She hadn’t realized that we could be that stupid.

“You sent your farm manager 70,000 pesos…to buy hay? Ha…ha…ha… And how many cows do you have? Have you ever actually seen these cows? How do you know they’re there? I’ll tell you what… I bet they didn’t use that money to buy hay – even if they show you a receipt. The hay they didn’t buy…that’s the hay they didn’t feed to those cattle…because the cattle don’t exist either. This is not America.”

Until next week,

Bill Bonner
The Daily Reckoning