BP's giant oil spill mess - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 4 June 2010
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Baltimore, Maryland

Sittin' on the dock of the bay...
Watchin' the tide roll away..

- Otis Redding
We're glad we're not sitting on the dock of the bay in Biloxi or St. Petersburg. There's oil coming that way...and it's not the kind you can burn in your lamp.

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The newspapers say there are huge globs of oil beneath the surface...or floating on the top. You'd think you could just pump it up. At $70 a barrel, you'd think you could make money scooping up the "sea oil" in the gulf. Probably better than shrimping.

Instead, everyone is complaining about it...and threatening to put BP executives in jail. Yesterday's cover story in the Financial Times told us that the head man at BP has admitted error.

"BP 'not prepared' for spill"

We hope he had a good talk with his lawyers. "Not prepared" sounds like an admission of negligence. Maybe criminal negligence.

There are billions in lawsuits coming up...and the attorneys around the Gulf are slicker than an oil spill. The English don't realize what they're up against...an Alabama lawyer in a seersucker suit...talking to an Alabama jury...about how a British billion-dollar company destroyed their lives and livelihood.

They're going to use every word Tony Hayward says against him.

Nobody is going to thank him for keeping his auto running. No one is going to think about where the oil comes from that he uses to heat his house...or how he draws electricity from an oil-fired power plant. No one in the entire state of Alabama is going to stand up for BP...certainly not an elected official.

"You have no idea how this works," said a Washington friend. "The shyster lawyers are all in tight with the lawmakers. Many of them are shysters too. That's why Obamacare is so tilted towards the lawyers and the pharmaceutical companies. They're all in cahoots.

"And now this oil spill is going to set off a feeding frenzy on BP. The shyster lawyers are drawing up their class action strategies now. And you'll see public interest groups get into the action. These guys are smart. And they're very well funded. They're going to short BP shares...and then announce a $20 billion lawsuit. And every pseudo environmental group...and trade organization...and labor union...and city council...and cracker-jack collection of meddlers anywhere within 100 miles of the coast...they're all going to be looking at that pay day...when BP settles for...what?...$100 million...$1 billion...who knows. But they can invest millions in the case, because they know the payoff will be huge. They're just fighting for position now...seeing who can put together the winning jackpot case... It's sickening."

Legal advice to BP: deny everything. You weren't there. Deepwater what? Then, tell litigants that you will never settle any case, no matter how big or how rich. That will vastly increase the investment capital the shysters need to raise.

BP's share price has plummeted. Some people think it is time to buy. Might be a little too soon. Our guess is that estimates of the damage are going to balloon even higher as more and more lawyers begin to see that thanks to BP they can win the lottery without buying a ticket.

Also, we suspect that a downturn is coming in the entire energy sector. Why? Because energy use grows with GDP growth. And we suspect we're in Deep Doo-Doo there too.

Savings rates are rising all over the world - in developed economies and in emerging economies. That means GDP growth should turn down.

From Yahoo Finance:

Americans pulled back on their spending in May after a tepid April, underscoring how fragile the consumer spending recovery remains, new data released Thursday show.

Cool weather and a quirk in the calendar -- a late Memorial Day weekend that hurt May's business but should boost June's figures -- dampened spending on almost everything from clothing to major appliances. The figures, from MasterCard Advisors' SpendingPulse, include spending in all forms including cash from May 2 through Saturday.

But weakness in the past six weeks is due to more than thermostat and calendar flukes, analysts said. They cited unemployment, stock market jitters and the end of government funded rebates on energy-efficient appliances.

"I don't think you can explain away all the weakness just based on the calendar shift," said Michael McNamara, vice president of research and analysis for SpendingPulse.
People are reluctant to spend for all the usual reasons...and some new ones. In the past, people have feared losing jobs. Never before in recent history have they feared that the government would go broke.

Just ask young people what they expect to get from Social Security or the new Medicare program. They know the score. The old folks stacked the deck against them. All the aces come up first - while the boomers are still in the game. Then, nothing but low cards.

"'Sittin' on the dock of the bay' was a protest song," a communist friend once explained. "It's about blacks who came to look for work in San Francisco and then couldn't find a job."

Maybe so.

Another report tells us that the corporate bond market is practically dead. Corporations can't raise money for expansion...and don't seem to want to. They're being shut out of the credit market by government - particularly the US government. Bond rates are so low buyers don't have much to look forward to - whether they buy the corporates or the Treasuries. They figure they might as well go for Treasuries. At least they'll be sure to get paid back.

This year, the US government is expected to borrow an additional $3 trillion. That doesn't leave much money for the private sector. Which is why the Wall Street Journal report is surely correct; more and more people are going to be sitting on the dock of the bay....or watching TV. Unemployment is still increasing in most cities.

China Daily seemed to capture the underlying trend better than anyone. It's headline:

"West moving towards deeper financial abyss."

Into the Deep Doo Doo in other words.

*** Sad news from nearby chocolate-town.

Hershey is closing its old plant:

The Patriot-News, in Hershey, Pennsylvania

As the Hershey Trolley carried tourists past the chocolate plant that Milton S. Hershey built, workers walked to their cars Tuesday carrying white envelopes with information about the company's plans to close the historic factory.

Workers said they will vote Friday on whether to accept the company's plan to transfer jobs to the newer West plant, with a severance package offered to those who don't make the cut.

There was a mix of sadness and anger among the workers, most of whom said they'll vote for the proposal to save at least some jobs.

"There is really no option," said Todd Zulick of Lebanon, who said he's worked at the plant for 30 years. "There was no negotiating they said this is the way it's going to be."

*** And here is something interesting. Want to buy the Parthenon? Maybe the US could do something similar. Auction off the Grand Canyon, for example.

Greece to Sell Assets to Help Pay Down Deficit

Greece announced Wednesday its plans for a big sale of state-owned assets, as the struggling government moved to shrink its huge budget deficit and fulfill the terms of an international rescue package.

The government will sell 49 percent of the state railroad, list ports and airports on the stock market, and privatize the country's casinos, the Finance Ministry said after a cabinet meeting in Athens. The government will also sell minority stakes in water utilities serving Athens and Thessaloniki, sell 39 percent of the post office, and combine its vast real estate assets into a holding company to be listed on the stock market.

The sales are intended to help raise 3 billion euros, or about $3.7 billion, from 2011 to 2013. The government agreed to raise a billion euros a year over that time as a condition of the 110 billion euro aid program it received from the European Union.

Greece has been under pressure to get its finances in order since the Socialist government announced last autumn that its center-right predecessor had greatly understated the size of the deficit, which is now running at about 13.6 percent of gross domestic product.

***

Honohan, meet Havenstain
By Bill Bonner

One of the most puzzling questions from history is why smart people do such moronic things. Bonaparte was warned; it seemed obvious to anyone who knew the lay of the land that the Russian campaign was foolhardy. In WWI, both sides should have called it quits by 1917. And what was Rudolf von Havenstain thinking? The president of the Reichsbank printed up billion-mark notes; surely he must have known they would cause trouble.

But people come to think what they must think when they must think it. One decision leads to another one. Each one is rational, as far as it goes. But put them together and you are on your way to hell. Von Havenstain was just trying to keep the economy from collapsing. In the pageant of unwelcome possibilities, he judged inflation less ugly than a Bolshevik uprising.

The US central bank had its Havenstain moment last year, in March, when it began buying private sector securities - effectively adding billions to the world's money supply. A worldwide bull market followed. Equities rose about 70%. At the end of March a year later, the "quantitative easing" program came to an end. After spending $1.2 trillion, the feds withdrew and the bull market ended. Since then, the S&P has lost 8% of its value. The Shanghai stock market has just hit a 12-month low and is now down 60% below its January 2008 high.

Now we see both how our modern monetary system began...and how it will end. In the sunny days of August, 1971, Richard Nixon was merely solving another problem caused by another solution. The solution to the world's problems in the '60s was to spend money on the war in Vietnam and the War on Poverty. The spending of the '60s created the debts that Nixon had to reckon with - particularly to the French. Rather than pay the foreigners in gold, as had been customary for hundreds of years, the Nixon team defaulted.They changed the world's monetary system, beginning the monetary equivalent of Napoleon's march on Moscow.

They thought they were doing the world a favor. A more 'flexible' currency system would give financial authorities another powerful weapon with which to fight downturns. Instead of holding gold as their main monetary reserve, nations switched to holding each other's paper. Henceforth, one's reserve assets were another's liabilities - all netting out to zero.

With this new weapon in their hands the feds won every battle - from the Latin American debt crisis of the '80s to the mini recession of 2001. But the trouble with money that grows on trees is that you are soon raking it off your lawn. The pile of international reserves, other than gold, grew from under $300 billion in 1971 to more than $8.5 trillion today. Prices rose too. As measured in Britain, consumer prices rose as much in the last 40 years as in the entire preceding 700.

According to Alan Newman, daily trading volume has ballooned more than 25 times since the 1970s. The financial industry has gone from a minor activity representing only 3% of GDP in the '70s, to a substantial 7.5% of GDP today...and its single major source of profits.

This financial dervish produced plenty of dust but less and less forward motion. Net private investment in the US hit a high in 1978 at about 8% of GDP. It has been declining ever since, recently hitting zero. After WWII, wages and real GDP increased steadily. But without investment in new plants and equipment, hourly wage gains stopped in the 1970s, while real GDP gains declined. People kept up appearances by borrowing heavily. But that only caused another problem.

The private sector is now solving the problem of too much debt by cutting back. Consumer credit is falling. Commercial and industrial loans are falling. The money supply, as measured by M3, is deflating at the fastest rate since the Great Depression - more than 9% annually. And prices - as measured by the US core CPI - are going up at the slowest paces since 1966.

This correction is natural and normal. But the feds want to stop it anyway. What can they do? ECB council member Patrick Honohan, from Ireland, has the answer. He applauds an "important new weapon," referring to the very same hot cannon that blew up in Rudolf von Havenstain's face 9 decades ago. The ECB has begun its own program of quantitative easing. It bought 35 billion euros of bonds in the first 3 weeks of the program.

"Restoring market confidence in the solidity of governments' finances is absolutely crucial," Honohan said.

Mr. Honohan is neither evil nor stupid. He is merely putting one foot in front of the other. He judges the need for confidence greater than the risk of inflation. Reasonable...as far as it goes. But where does it lead? The Rhine, the Niemen, and the Volga have all been breached. Sooner or later, he will be on the banks of the Berezina.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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