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Editor's Note #1: 50% Off Everything Must Go at the LAT
Just a reminder that A) everything at the LATOC Store is 50% off and that B) I've posted a series of buying guides if you're buying anything Peak Oil or preparation related from Amazon:
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Editor's Note #2, Point #1: The Real Effect of the Mumbai Attacks, It's Not Body Counts, It's the Cost of Capital, Interest Rates, and the Delivery of "Just In Time" Money That Count to the Fortune 500 and the Dow 30
Scanning the posts to the LATOC Forum and the emails I've gotten regarding the alert I put out last week regarding the Mumbai attacks (See LATOC Red Alert posted Friday, November 28th) it seems a good number of people don't understand the context of the attacks. Whoever pulled off the attack is thinking in terms of financial warfare those of you thinking "oh this is much a do about nothing" are still thinking in terms of conventional warfare. But body counts are pretty much meaningless in the context of global financial warfare as the Fortune 500 are far more concerned about their interest rates than they are a loss of 200 or so human lives. This is why, as Mike Ruppert wrote last week, every world leader with an IQ over 70 is shaking in their boots right now. Reason being the effects of the attacks on the Fortune 500 and Dow 30 will be, at the very least, as follows:
A) the cost of insuring their outsourced operations goes through the ceilingB) the cost of providing security goes through the ceilingC) the cost of capital (interest rate) for any projects outsourced to Indiaand elsewhere just went through the ceilingWith so many companies as highly leveraged as they are, it doesn't take much to push them over the edge. Jack up their interest rates, jack up their insurance premiums while drastically escalating the amount of money they need to spend on security and a whole bunch of them will be plunged right into insolvency.
Point #2: "But won't they just move their operations back U.S. soil, thereby creating more jobs for us Americans?"
Again, this would only serves to raise their operating costs and therefore raise their interest rates. In a different era, where things weren't so mind-bogginly leveraged, a company might be able to absorb these increased costs. But modern Fortune 500 companies rely on "Just in Time" (JIT) financing the same way Safeway and Shell rely on JIT delivery food and fuel. As you already know, it only takes a brief (2-5 day) or small (1-3%) disruption in the JIT delivery of food and fuel to totally shoot the whole system to hell. It's the same with the JIT delivery of money. The companies most affected by these attacks have structured their operations for maximum financial "efficiency".* Maximum efficiency is great for a company's bottom line when times are good and the flow of capital is reliable. But when things get dicey, maximum efficiency means just a small increase in costs, be it in labor, in capital, in insurance rates, in the cost of security, etc. can blow your entire balance sheet to hell.
Key point: the big banks have loaned money to the Fortune 500 under the assumption that the project of globalization will continue, more or less, unfettered. An attack like this therefore detonates one of the basic assumptions undergirding the finances of pretty much every multinational corporation on the planet.
So the answer to the question of "will they be moving their operations back to U.S. soil" is "no, they won't be as the loans they've been getting from the Big Banks are based on the assumption of ultra-cheap outsourced labor. Without these artificially cheap loans, many of them will simply go out of business as their entire business model was predicated on low-cost loans, the issuance of which was predicated on unfettered access ultra-cheap outsourced labor."
Point #3: The Fortune 500 Do Not Have Their Finances Arranged the Way You Have Your Finances Arranged
I don't blame people for failing to understand the context of the attacks as it is only natural for a "normal" person to contemplate the financial situations of the Fortune 500 the way they think about their own personal financial economy. If, for instance, Joe the LATOCer is making $100,000 a year and paying 7% interest rate on his credit cards, then a pay cut to $97,500 coupled with an increased interest rate to 8.5% is not likely to make very much of an impact on his personal balance sheet. Heck, he might even fail to notice if he isn't totally on top of things. But that's not the way it works with Fortune 500 companies as they've already sheered everything to the bone for, as explained previously, "maximum financial efficiency." So people hear what sounds like small numbers and, thinking the finances of the Fortune 500 are structured the same way their own personal finances are structured, they fail to understand how such small numbers can wreak such huge havoc on such powerful companies.
Bottom Line:
The point of all this is that if you want to understand current events, you need to start thinking more in terms of financial warfare. When something like these attacks happen, the Fortune 500 only bother themselves with questions like "how many people were killed?" to whatever degree is deemed necessary by their public relations departments. Behind closed doors, what they are really concerned about are questions like "what is this going to do to our interest rates?" As the answer is "raise them drastically", an attack like this has them completely freaked out.
Best of luck,
Matt
*For more on this point see the article "How Efficiency Maximizes Catastrophe"
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Today's News:
The fall nitrogen fertilizer application has been 10% of the norm. A typicalyear would see 50% put on in the fall and 50% in the spring. During thefertilizer application season the 3,100 mile national ammonia pipelinenetwork runs flat out and the far points on the network experience low flowboth fall and spring. If they try to jam 90% of the fertilization into a periodof time when the system can only flow a little more than half of the needmuch of our cropland will go without in the spring of 2009. Finances asmuch as weather are the issue with regards to fertilization this fall. Cropprices have fallen to half of what they were, ammonia prices have droppedbut ammonia suppliers here, receiving 75% of their supply from overseas,still have product in storaged purchase at the highs of last spring/summer.Overoptimization isn't just limited to the banking industry. In fact, it iseverywhere, and it makes for vulnerabilities across multiple fronts thatquite often interact with one another. We've built a system too complex forany human to understand. Therefore, when something major goes wrong,no one can be sure how to correct it. As for the vulnerabilities acrossmultiple fronts, one need look no further than the world's ports. The crisishas slowed many to a crawl as exporters worry that importers on theother side of the ocean may not be able to pay them. Banks are reluctantto issue letters of credit guaranteeing payments when they can't be surethe bank on the other side of the transaction is sound. This has driven drycargo rates down 90 percent from their highs this year forcing someshipping companies to simply idle freighters. In addition, several shippingcompanies are on the verge of bankruptcy. And, that means orders fornew ships are plummeting as well driving shipbuilders toward bankruptcy.Hours later, at least 10 terrorists, having arrived by small craft on theshores of Mumbai, began to sow death and destruction at will acrossIndia's financial capital. Pieced together from interviews with dozens ofwitnesses and officials, this account of the three days of the battle forMumbai shows just how a small but ruthless group of skilled militants,attacking multiple targets in quick succession, managed to bring one of theworld's largest cities to its knees. The human toll was exacerbated by theIndian authorities' lack of preparedness for such a major attack. But thechain of events also points to just how vulnerable any major city can beThe current Treasury has so far struggled to keep up with the task ofhiring enough people to handle the $700 billion financial rescue packagepassed by Congress in October. The man now in charge of running theTroubled Asset Relief Program, Assistant Secretary Neel Kashkari, said thedepartment's Office of Financial Stability is operating at half-staff. Federalbanking regulators, who must approve the applications from banks beforethey go to Treasury, said there is a backlog of unprocessed applications forrelief. Outside observers said the difficulty of quickly building a qualifiedstaff may be one reason the Treasury abandoned its original plans to usethe TARP to purchase assets from financial institutions, deciding instead toinject capital into the banking system. "I don't think that was a small partof why Treasury in the end abandoned the asset-purchase program, saidWayne Abernathy, executive vice president of financial-institutions policyand regulatory affairs at the American Bankers Association. A Treasuryspokeswoman declined to comment on Mr. Abernathy's assertion . . .The federal government committed an additional $800 billion to two newloan programs on Tuesday, bringing its cumulative commitment to financialrescue initiatives to a staggering $8.5 trillion, according to BloombergNews. That sum represents almost 60 percent of the nation's estimatedgross domestic product. Given the unprecedented size and complexity ofthese programs and the fact that many have never been tried before, it'simpossible to predict how much they will cost taxpayers. The final costwon't be known for many years. Most of the money, about $5.5 trillion,comes from the Federal Reserve, which as an independent entity does notneed congressional approval to lend money to banks or financial institutions The Federal Reserve and the Treasury aim to jump-start the economy byboosting consumer spending. The package includes up to $200 billion forinvestors who would lend it for credit card spending, automobile purchases,college tuition and small businesses. The government also could buy up to$100 billion in mortgages held by Fannie Mae, Freddie Mac and the FederalHome Loan Bank to replenish the money supply in the housing market andto lower interest rates. While soaring unemployment, falling values ofhomes and investments, and tightening credit have curtailed consumerspending, analysts are projecting that the economy will worsen next year ifnothing is done. A recent report by Citigroup said consumer spending willcontinue to falter in 2009, which is likely to become the first calendar yearsince 1980 to show such a decline. But the lending plan may be too latefor some small and large retailers, which have been slashing prices to getcustomers through their doors and cutting employees to conserve cash. State governments are forecasting more than $100 billion in budget gapsover the next two fiscal years, according to a report from an associationof state governments. Twenty states have already cut $7.6 billion from their budgets for fiscal 2009, and 30 states have identified additionalshortfalls totaling more than $30 billion, according to a report by theNational Conference of State Legislatures (NCSL) to be released at 11 a.m.Monday. Twenty-five states also have identified shortfalls of $60 billion forfiscal 2010, according to the report provided to the Wall Street Journal."It's pretty frightening," said Nault, who has managed the city's financesfor 28 years. "This is a bridge we've never had to cross." As the U.S. automarket marches toward its worst year in decades and dealers close indroves, state and local governments across the country are preparing forserious belt-tightening. More motor vehicles are sold in California than inany other state; in the second quarter, nearly 15.5% of all sales taxeshere, or $193 million . . . Yet because so few cars have been sold thisyear, the Golden State's second-quarter automotive sales-tax receiptswere down more than $30 million short in the second quarter alone from ayear earlier -- contributing to the huge budget shortfall that has led Gov.Arnold Schwarzenegger to propose a sales tax hike and spending cuts . . .Top executives of the Big Three automakers are preparing to return toWashington this week with business plans they hope will lead to a federalbailout. But any government help will probably come too late for thousandsof dealers like Mr. Thomas who sell American brands. They have beenstruggling for years, as Detroit’s fortunes waned, but what remains of theirsales is evaporating along with consumer confidence and credit. Theeconomic toll of a mass failure of dealerships around the country hasalready begun to harm the broader economy. In October alone, 20,000employees of auto dealerships lost their jobs nationwide, more than half ofthose who were newly unemployed in the retail trade . . . The auto dealersare not just businesses, of course. Most of them are deeply rooted in theircommunities, and each is a slice of Americana — their big flags flying, theirradio advertisements compelling attention and their Little League baseballsponsorships and other charity helping to improve the lives of local people.The unemployment rate for the Washington area was 4% in September,the most recent month for which metro-area data are available, a jumpfrom 3 percent for the same time last year and the third consecutivemonth in which it was 4 percent or higher. The last time unemploymentwas over 4 percent was in 2003, in the aftermath of the 2001 recession. Ithit an eight-year high of 4.4 percent in June 2003, as the job marketexperienced a prolonged weakness. The delay between the recession andthe highest point for unemployment came in part because of employers'traditional reluctance to both shed and add jobs, but was particularlypronounced in part because new technology led to productivity gains . . .Cargo volume at West Coast ports, after years of being dominant in U.S.maritime trade, is slumping, clearly the result of the worsening globaleconomic crisis but also because Gulf Coast and East Coast ports aregaining favor, shipping industry executives say. The first priority for thecargo container business, of course, is making good decisions in aneconomy in which consumers have zipped their wallets, orders are afraction of what they were in good times, Asian factories are shuttered . . We are battening down the hatches and being cautious," he says, ignoringhis boss’s frown. "Before the credit crunch we were not as cautious as weare now. We want our bankers to know that. They would be spooked byanyone who showed too much optimism today."And so it goes, as a crisisborn in the mortgage collapse and sent into overdrive by Wall Street’sfinancial disaster now spreads to the broader economy. In this port city,near the mouth of the Savannah River, the downturn is chipping away atexpansion and prosperity, dimming a 20-year boom. The unemployment ate in Savannah has risen sharply, just as it has across the nation . . . The U.S. credit card industry may pull back well over $2 trillion of lines overthe next 18 months due to risk aversion and regulatory changes, leading tosharp declines in consumer spending, prominent banking analyst MeredithWhitney said. The credit card is the second key source of consumerliquidity, the first being jobs, the Oppenheimer & Co analyst noted. "Inother words, we expect available consumer liquidity in the form or creditcard lines to decline by 45%." Bank of America, Citigroup, and JP MorganChase represent over half of the estimated U.S. card outstandings as ofSeptember 30, and each company has discussed reducing card exposure orslowing growth, Whitney said. A consolidated U.S. lending market that ispulling back on credit is also posing a risk to the overall consumer liquidity.Commercial bank exposure via the total amount of credit card loansoutstanding has risen more in the last 10 weeks than it did in the previous10 months cobined. Moreover, the growth in the last 10 weeks — $32.3billion, or roughly $600 million per shopping day — represents nominalgrowth of 9.3%, or 48.3% annualized over the last 10 weeks. According toAmerican Express, delinquencies on credit payments rose to 4.1% of allcredit outstanding in the third quarter, up from 2.5% in 2007, with Bank ofAmerica’s rate rising even more steeply - to 5.9%. Moreover, the pool ofloans deemed uncollectable rose to a high 6.7% in the third quarter,soaring from 3.6% last September. What consumer spending there is hasbeen fueled in part by credit card: The second-largest merchant-vendorfor credit card use is now McDonalds. This suggests that many consumersare in serious distress if they need to get their Big Mac with a credit card.As recession worries deepen, food shoppers are trying to scrimp and save. But eating healthy on a budget is not easy. At a time when wages aredeclining, the nation is experiencing the biggest rise in food prices in 18years. Unfortunately, high-calorie foods such as chips and cookies arecheaper than low-calorie foods, such as fresh fruit and vegetables . . .Life After the Oil Crash
Deal With Reality or Reality Will Deal With You
I recommend the following gear:
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LATOC readers bought the following at Amazon:
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