One scenario for the credit collapse

I like it when I find a believable scenario for the coming credit collapse, not because I am looking for a roadmap of what is to come, but because it often helps me sort through the many factors that have led to the current crisis and understand the interconnections better. This essay by Charles Hugh Smith gave me a better feel for the different tensions that need to be resolved as things unwind in the next few years.

The credit collapse continues

Mike Shedlock publishes an excellent weblog on economic trends. His posts are always detailed, with lots of links to primary sources, and his writing is clear and pleasant to read. Still, his subject matter is often tedious and not often tittilating. Here’s an excellent example, a post that tracks the unfolding collapse at American Home Mortgage, which could rival the Bear Stearns collapse in importance.

As far as the depth of the coming collapse, the post contains one worrisome aside:

I happened to talk to a commercial real estate developer going back some 30 years …. Somehow we got to discussing the Florida condo situation and other real estate woes when all of a sudden he exclaimed, “Commercial real estate is through”. I asked him why and he told me about cycles: Residential followed by commercial followed by industrial, and how they peak in that order. He went on to tell me about how Sam Zell marked the top in commercial and there was at most one year left or so in industrial. The developer I was speaking to “cashed out” over the past few years.

Coal mining songs

Chris and I are learning some coal mining songs for an upcoming performance. One I like a lot is called “Miner’s Prayer,” written by Dwight Yoakam in honor of his grandfather. Although the chorus and the first two verses are plaintive and downtrodden, as are most coal mining songs, the tempo and melody are upbeat, almost jaunty. (The tune is a variation of Columbus Stockade Blues, but done at a bit slower pace.)

The secret, I think, is found in the third verse. This is a man who understands that the goodness of life is in large part something you create for yourself, by living well. The death of his brother, the grief of his mother, the fearsomeness of his work—all are transformed by his acceptance of the limits that God has placed upon him, and his faith that at the end his Savior will welcome him home with a hard-earned “Well done, good and faithful servant.”

When the whistle blows each morning
And I walk down in that cold, dark mine
I say a prayer to my dear Savior
Please let me see the sunshine one more time

When oh when will it be over
When will I lay these burdens down
And when I die, dear Lord in heaven
Please take my soul from ‘neath that cold dark ground

I still grieve for my poor brother
And I still hear my dear old mother cry
When late that night they came and told her
He’d lost his life down in the Big Shoal Mine

I have no shame, I feel no sorrow
If on this earth not much I own
I have the love of my sweet children
An old plow mule, a shovel and a hoe

The pursuit of the good life is in large part a matter of accepting the life that God has given you and learning to live it well. Dwight Yoakam’s miner knew that, and it allowed him to persevere to the end under circumstances that would crush many of us.

Ron Paul

Not being interested in politics, I’m not interested in Ron Paul as a politician, but I am interested in him as a man of obvious integrity whose line of work is inherently corrupt and corrupting. Christopher Caldwell is a good writer, and he’s written a profile of Ron Paul for the New York Times Magazine.

Adventures in medicine

It has been a disrupted week for us. I will write a longer account once I have some more information, but here is the short version. Over the weekend Peter began eating poorly and sleeping quite a bit. By Tuesday afternoon we were concerned enough to take him to a pediatrician, who after a blood test sent us to Kosair Children’s Hospital in Louisville. Three days and $13,000 later Debbie and Peter are home again, the battery of tests and examinations having turned up nothing more than slight dehydration. For the past couple of days Peter has been awake, alert, and eating enthusiastically; whatever the problem was seems to have passed.

Random financial notes

Prices of basic food ingredients are up more than 30% in the past twelve months:

Prices of all kinds of ingredients that are put into packaged food and drink products are rising rapidly, with many showing no signs of slowing down any time soon.

In the first half of the year, Lehman Brothers’ ingredients cost index – which covers cocoa, coffee, oats, tea, soyabeans and milk among other commodities and is based on spot rates – rose 14.9 per cent. This follows a 16.5 per cent increase in the second half of 2006.

The biggest increase has been in powdered milk prices, which have almost doubled compared with the same period a year ago. Barley prices have shot up by 53 per cent, while corn prices are up 68 per cent.

Ian Shackleton, Lehman’s food analyst, said European consumer companies appear to be facing the most sustained increases in ingredient costs in at least a decade. “We’ve been used to one or two years of ups and downs . . . but we seem to be having much more consistency of uplift [in prices].”

Meanwhile, the financial firm Bear Stearns finally informed its clients that its two hedge funds that invested in subprime (i.e. high-risk) mortgages are now worthless:

Bear Stearns told clients in its two battered hedge funds late yesterday that their investments, worth an estimated $1.5 billion at the end of 2006, are almost entirely gone. In phone calls to anxious investors, Bear Stearns brokers reported yesterday that May and June had been devastating months for the portfolios.

The more conservative fund, the High-Grade Structured Credit Strategies Fund, was down 91 percent by the end of June, investors were told. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, which used extensive borrowings and assumed more risk, has no investor capital left, the firm said.

I’m especially surprised that this revelation hasn’t occasioned more comment. The easy mortgage credit of the past few years has been driven by investment firms like this one, and $1.5 billion is a small fraction of the total subprime mortgage credit that was issued. If the subprime mortgages that Bear Stearns was holding turned out to be totally worthless, how much value is likely to remain in the subprime mortgages held by others?

Blogging award

Reader Kim H was kind enough to nominate me for a Thinking Blogger award. Although I’ve kept a weblog since March 2000 I’m not very good at being a public blogger; as evidence, notice that Cindy nominated me for the same award back in April and I wasn’t gracious enough to mention it then. But I appreciate those kind words from Cindy and Kim, as well as the encouragement I’ve received from other readers over the years.

One of the duties of an award nominee is to nominate five more bloggers for the award. But since the bloggers I might nominate have already received multiple nominations, I thought it might me more interesting for me to list the non-blog sources that provoke me to thought these days.

  • Arts and Letters Daily is by far my most reliable source of good online reading. Every day they will link to three or four essays, book reviews, or articles that are likely to be worth reading all the way to the end. Much of the material I link to on this blog I first found via Arts and Letters Daily.

  • Technology doesn’t play much of a role in my life these days, but I still spend a few minutes per day keeping abreast of the latest trends. CNet is a good site for this. I may read only one in thirty of the articles here, but a quick skim of the headlines and short summaries is enough to keep me as informed as I want to be.

  • The Daily Reckoning, a free daily email which you can also read at their website, has been very helpful in explaining in simple terms today’s puzzling economic situation, e.g. why it is that the stock market continues to boom while the American economy is rapidly disintegrating.

  • The centerpiece of Matt Savinar’s Life After the Oil Crash is a long, heavily referenced article explaining the fact of Peak Oil and its implications for the near future; almost every link in the article leads to another rich source of information on the topic. But the best feature of the website is the Breaking News page, which is updated nearly every day with a breathtakingly long list of links to relevant articles. For a couple of months now I have spent as much time as I can afford studying the articles Savinar digs up. Matt Savinar and I are hardly on the same page philosophically, and I don’t give much attention to some of his topics (like the Iraq war), but Peak Oil is not a philosophical matter and I regularly learn something from the material he unearths.

  • What Matt Savinar is to Peak Oil, Patrick Killelea of is to the housing bubble. There are some good introductory articles on what led to the developing crash of the housing market, but the best feature is the daily list of links to articles which chronicle the crash as it unfolds. I am following the housing situation not because it directly affects us—we own our property free and clear, and don’t plan on moving ever again—but because I think the housing crash will be the first big disruption in a long series to come, all resulting from the economic shift that Peak Oil will cause.

  • Finally there is Wendell Berry, far outside the scope of the internet and defiantly so. Since returning to him last fall I’ve continued to read and sometimes re-read his works, pencil in hand. What impresses me most about Mr. Berry is the coherence of his thought. Over the course of forty years he has explained and elaborated a certain specific point of view, one that grows out of the person he is and the life he has led; I know of no better place to learn how another man thinks. I do not find everything he writes agreeable, but I do find it all admirable, and because of his integrity I must take the parts I like the least as a challenge to be answered in my own thinking.

As I look over these sources, I realize that the selection is much less a reflection of what I’ve learned than of what I need to learn. In other years the emphasis might have been on theology, or contemporary culture, or technology, or Christian practice, or politics (oh, those lost months of late 2000!) or social history. I’m not exactly done with those topics, but I won’t be returning to them again with the same intensity I first experienced.

And there will come a time when I understand enough about Peak Oil and the housing bubble to move on to other things. But whatever the topics du jour, I’ll continue to publish notes on the best that I stumble across, possibly inspiring some of you to further study, hopefully sparing the rest of you much of the tedious detail that I’ve sorted through in search of genuine insights.