Navigating through a dark time

James Stockdale, on his 7 years as a POW of North Vietnam, in the "Hanoi Hilton".

Q: "Who didn't make it out?"

A: "Oh, that's easy.  The optimists"

Q: "The optimists?  I don't understand."

 A: "The optimists.  Oh, they were the ones who said, "We're going to be out by Christmas."  And Christmas would come and Christmas would go.  Then they'd say "We're going to be out by Easter." And Easter would come and Easter would go.  And then Thanksgiving and then it would be Christmas again.  And they died of a broken heart"

Which brings us to Stockdale's Paradox:

"You must retain faith that you will prevail in the end, regardless of the difficulties.

AND at the same time…

You must confront the most brutal facts of your current reality, whatever they might be."

In a previous post, I pointed out that it's critical to rationally assess the situation you are in.  Calls for optimism (or pessimism) are ridiculous, because inappropriate behavior for the situation can be hazardous.  Assess rationally, and act rationally.

What is fortunate about this event is that it is unfolding slowly, so you have plenty of time to process information.  In the stress of an emergency it's far more difficult to rapidly determine what is going on and what the correct actions are.  So seek out information - don't let the media decide what information you get.  And once you have sought out the information, assess whether it's accurate or Facebook (urban legend) bullshit.

We are entering some difficult times, and it remains to be seen whether the nation - and in fact the world - will respond appropriately or fail and fall apart.  There is a distinct possibility that the people running our government are so out of touch with ordinary folks that they will fail.  Fail in their oath and duty to protect "life, liberty, and the pursuit of happiness" to humbler people outside of their tennis club.

And so we end up with images like the one below:  Wall Street has the best week since the end of the Great Depression, juxtaposed with 16 million Americans losing their jobs.  The market ripped higher on news of a bailout of... stock market investors. 

The government seems intent on making billionaires and millionaires whole, while throwing a handful of pennies to Americans who really need a lot more help.  Meanwhile, the truly desperate, helpless, and powerless are being ignored, as they have been for a long time. 

On April 20, I watched and took a few screenshots as the May futures contract for West Texas Intermediate Crude oil collapsed from an already low $22/barrel into deep negative digits.  In the previous post I mentioned autos and homes going into a deflationary spiral, but I overlooked commodities.

Oil is very sensitive to changes in economic activity, and that's because supply and demand have to be somewhat well matched to maintain a consistent price.  For one reason or another, 40-60 $/BBL is considered the Goldilocks zone for both producing and importing countries.  It's out of the Goldilocks zone in a major way right now.

It was with a great deal of awe that I watched the price of a barrel of crude oil fall from the cost of a McDonald's meal for two, to the cost of a Big Gulp, to a bag of M&Ms, and then go deeply negative.

7:16 AM

9:13 AM

1:32 PM

 2:00 PM

2:58 PM

We obviously have a serious mismatch between the supply of WTI crude and the demand for it.  This mismatch is reflected in the price.  What happened is that demand for oil products (gasoline) has dropped by about 1/3.  Millions of people are no longer driving to work every day, so demand for gasoline is down quite a bit.  The crude oil has already been purchased and promised for delivery.  But there is no storage available for this excess crude oil.

Below, a chart showing at the left, the normal use of storage capacity.  At the right, crude oil supply approaching the max capacity of 1.2 billion barrels.  Full tankers are at anchor offshore, being used as storage tanks for crude oil. 

This is a stark example of price deflation appearing suddenly, almost out of nowhere.  Obviously, drilling rigs will be going into lay-up, and we will soon add many oil and gas industry employees to the ranks of the unemployed.  This will put further pressure on prices, because soon they won't be driving either.  I anticipate similar, if less drastic deflation in most of the commodities markets: Industrial metals, agriculture, and energy.

Commodities will eventually be followed by the stock markets.  The markets were the last to go south during the previous event, and this one is worse than that by far.  There is a lot riding on stock values - pensions and 401(k) savings - so there is a lot of pressure to attempt to keep the markets at elevated values.  Unfortunately, it's impossible to deny reality indefinitely, so the market will eventually have to reflect the loss to the economy of 26 million newly unemployed Americans no longer shopping at Wal Mart, Amazon, Costco, and Starbucks.

Let's look at some early signs of where things are heading.

The wholesale used auto market, as I had suggested, has already been hit, and I'm quite certain that we are just getting started on this particular index.

Housing too.

Below, the port of Los Angeles Import data.

 Below:  US rail traffic since 2018. 

It may not be obvious yet if you aren't looking for it, but the economy has already been hammered.  13 years ago, when the housing bubble burst, I was also paying close attention.  Back then, it was a much more drawn-out affair.  Along the way, there were plenty of very loud denials that housing and finance were collapsing.  The denials even came from the chairman of the Federal Reserve, Ben Bernanke, who believed that the financial damage was contained to a small sector of the economy, called Subprime Lending.  Sometimes the experts are wrong.  I *knew* he was wrong, and as we all know now, it was not contained.

The loudest denials that something was wrong came from those who stood to lose the most.  People in the finance sector, realtors, people who had borrowed against the inflated price of their house.  They had believed their own lies, drank their own Kool-Aid, and those who ignored reality the longest were hurt the worst.  Pay attention to reality, because it has a way of punishing those who ignore it the hardest.  Healthy skepticism is... healthy. 

I also want to share a couple of current, local examples of misplaced optimism - or denying reality.

There is a large new housing development a couple of miles down the road to the East of us.  Earth-moving trucks are up and down our street all day long, bringing in the gravel for the new road base.  I'm not sure where this guy thinks his the buyers will be coming from.  When 1/3 of the workforce is unemployed, under-employed, or fearful of losing their job, will they really be house-shopping?

I'm pretty confident that this developer will go bankrupt in short order, and the half-developed parcels will be foreclosed on.  The parcels will sit in that condition for several years while the economy slowly recovers, and the bank will slowly unload them at a loss as buyers return.  We've all seen this movie before - except for the developer, apparently.

Below: What a bankrupt housing developer leaves behind.

At the other end of our road is a new supermarket, an anchor store for a handful of smaller businesses.  The developers just now broke ground on 5 new buildings.  There is an incredible surge  of earth-moving, trenching and surveying - just as we fall into a great depression.  Maybe the greatest depression.  If those buildings get completed, I expect them to sit empty for a while - because it makes no sense to try to expand or open a business when there is no business happening.

Right now there is currently quite a bit of discussion about "opening up the economy".  It's difficult to see how that's going to work out with Covid-19 running amok in the population.  I'm also having a hard time telling how much of it is people desperate to return to normal life, and how much of this is being manufactured to *seem* as though there is a lot of public support for returning to normal.

Once again, I find myself frustrated with the attitude of family and colleagues, who seem to think that we should go right back to whatever we were doing.  Normal is not going to happen, because a lot of people are now frightened and cautious.  If these folks get their desired return to "normal", just don't be surprised when the grim reaper makes a grand entrance into the ballroom full of stunned revelers.  

Our state is about to begin re-opening.  I'm going to remain hunkered down for a few extra weeks, and see what becomes of the people who want to be the lab rats in this experiment.  I'm in favor of following the "Precautionary Principle" with regard to this new virus, considering it has cost over 200,000 lives in the handful of months it's been on the loose. 

The "Precautionary Principle" says that if some course of action carries even a remote chance of irreparable damage to the ecology, then you shouldn’t do it, no matter how great the possible advantages of the action may be. You are not allowed to balance costs against benefits when deciding what to do.

— Freeman Dyson, Report from 2001 World Economic Forum

 The chart below doesn't suggest that we should return to normal.  That would send the red line  higher than it already is.  Instead we should take care of the unemployed for as long as is necessary, and provide basic income (for food and shelter) and debt relief.  It shouldn't be that big of a deal to pause the operation of bowling alleys and nail salons, and other non-essential business, if we just take care of those people who are affected.

As society and the economy re-open, at the insistence of whomever, I'll be paying attention, charting and discussing it.  This is probably one of the defining points in our country's history, and it will be worth recording thoughts about it. 

What's possibly most laughable about all of this is how incompetent our business and political leadership has proven to be.  The one guy who actually had his shit together and did the right thing was removed from command of his Aircraft Carrier.  This just re-affirms my opinion that people most eager to have authority should probably be the last ones to get it.  They always push responsibility and blame down to lower levels, but cling tightly to the authority.  Absolutely disgusting behavior, but very common.

Joe Rogan seems to feel the same way.

I've pissed into the wind enough for today.  Time to post this.  Minor milestone:  This is the 500th post on this blog. The first post was April 20, 2006 and the second post was about the pre-housing bust economy and how long would it be before it fell apart.  That was at least a year before the smart people figured it out.  Some things don't change all that much.