while most of our predictions for 2006 here at the santa barbara office involve which of our friends will get engaged this year and whether or not we'll all be gainfully emplyed at year's end, accomplished
painter and author of
the long emergency,
james howard kunstler, speculates on some truly meaningful...uh,
speculations:
You can only introduce so much perversity into an economic system before distortions cripple it. From 2001 through 2005, consumer spending and residential [...]construction had together accounted for 90 percent of the total growth in GDP, while over two-fifths of all private sector jobs created since 2001 were in housing-related sectors, such as construction, real estate and mortgage brokering. Much of the money spent did not really exist except as credit -- incomes as yet unearned, hallucinated liquidity, wished-for wealth, all based on the expectation that house values would continue to rise at 10 to 20 percent a year forever. It became a reckless racket, all predicated on sustaining an economy that had lost its other means for generating wealth -- foremost its infrastructure for making things besides suburban houses.
[...]
The foregoing is the background of my predictions for 2006, which will be the year that the hardships and difficulties I lump together as The Long Emergency get some serious traction.
The world oil allocation system is now so fragile that any disturbance in one producing region can send damaging shock waves around the planet. There is no more "swing producer." The US squeaked through the huge loss of oil production capacity this fall by taking oil from our own strategic petroleum reserves and from Europe's. These actions kept oil prices in the high fifty-dollar-range through the holidays, giving Americans a false sense of festive security. Those withdrawals are now over. Global demand for oil is still increasing. The strategic reserves will now have to be refilled (they're called strategic reserves for a reason). This will start oil prices moving upward again -- they already have moved above $61 as of this morning.
I can't predict whether some maniac will drive a Zodiac boat into a tanker in the straits of Hormuz, or fire a shoulder-launched missile at an Arabian refinery. If nothing like that happens, the first year of post-peak will express itself in turbulent oil markets. Fear of not getting enough will rule. Futures will be overbought and then dumped or shorted and then overbought again. This will at least increase the violence of the ratcheting effect in the markets. Overall I expect to see $100-a-barrel oil at some point this year. Last year I made a bet with a friend that oil would end 2005 at $75. I lost the bet. But it is a fact that the price of oil altogether ended the year 40 percent higher than 2004, so it is not as if the markets did not show extraordinary stress.
New laws regulating gasoline mixtures will also contribute substantially to higher gasoline prices (perhaps as much as 40 cents a gallon). So I will predict gasoline breaking through the $4-a-gallon mark sometime this year.
Our natural gas situation is pretty dire. Prices shot up for a while above $17 (per one million btu's), but that was the energy equivalent of $100-a-barrel oil) and based at the time on the enormous damage in the Gulf of Mexico prior to the start of the heating season. The heating season so far as been abnormally mild in the northern US and prices have slumped back to the $11 range -- which is still a lot higher than the $7 range in 2004. Unlike oil, we will get no quick relief from international gas sources if the rest of winter turns sharply colder. We're short of terminals to receive significant quantities of imported liquefied natural gas and they cannot be built quickly (or cheaply). The natural gas markets in the US respond very sharply to current conditions. A warm week and the prices sink. A cold one and the price shoots up. Our gas storage for the year is slightly below 2004 levels. Even if we have a mild winter overall, there will be spikes of cold. Our production is still crippled in the Gulf. Therefore, I'll predict that methane gas prices will spike above $20 sometime before May.
High gasoline, heating oil, and methane gas prices will absolutely kill the housing bubble for reasons I've already outlined. The production home builders will be idle, stuck with huge inventories in places that never should have been suburbanized in the first place. A lot of Americans holding "creative" mortgages -- no money down, interest only, adjustable rate, what-have-you -- will be crushed by the expense of their obligations. Many of them will go bankrupt under new bankruptcy laws that leave no wiggle room for escaping partial repayment. Their houses will flood the real estate markets in an orgy of distress selling. "Greater fools" will snap up these "bargains," failing to realize that many of the logistical liabilities will remain -- namely remote locations and huge heating costs of enormous McHouses -- even if the ownership terms are less hazardous than the previous owner's. At some point in the future, after several flippings perhaps, all those 4000 square foot houses 44 miles outside Denver (or Cleveland, or Seattle) will be seen as the mistakes that they are, and their cash value will reflect that.
With the cratering of the housing bubble, the US economy has to fall on its ass. The global economy is likely to fall on its ass, too, since so much of it depends on the decisions of Americans to take out exotic loans for buying houses they can't afford. Large numbers of jobs will vanish in construction, remodeling, real estate sales, and the various mortgage rackets -- those things precisely related to the recent gains in GDP.
The sheer falloff in new mortgages will send a tsunami through financial markets addicted to continuous supplies of new "money" to preserve the illusion of expansion. I'd called for a Dow-4000 late in 2005. I think that was just an error in timing, and still call for the Dow to sink into that range, or worse, in 2006. This will represent a moment of painful clarity for market professionals, as they realize that an industrial economy and the finance that serves it must be based on the expectation of generating real future wealth, not on zero-sum rackets, games of monetery musical chairs, or casino legerdemain. Hedge funds, which depend on predictable stability, will be especially vulnerable. They will certainly take some large banks down with them when they go. I'll call for the so-called government sponsored entities of Fannie Mae and Freddie Mac to groan under and then drown in a sea of non-performing loans, probably with overtones of criminal irresponsibility.
so, i guess there's no better time than the present to learn some
new skills...
