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May 29, 2010

Issue 98  -  Gulf Disaster

I'm going to talk about the ongoing event in the gulf and the possible outcomes and how that would/could affect the financial world.  If you haven't been paying attention I'll go over the basics of what happened.  In a nutshell, the safety device on top of the manifold, which sits on the floor of the ocean, malfunctioned and allowed gas to rise up to the platform which caused an explosion.  This ripped the pipe rising from the manifold from the platform and it sunk to the bottom of the sea.  This now leaking in two places of these and they are both flowing oil.  As time goes on the flow of oil and sand blow larger and larger holes in the pipe.  I have read that the leak being shown on the live feed is the lesser of the two flows.  The one not being shown is probably much worse.  Here is a visual:
The best case for stopping the flow from the well is to inject heavy mud and debris into the well shaft at a huge pressure.  The engine doing this is 30,000 horsepower.  The idea is two jam up the hole until the pressure is completely stopped.  At that point concrete would be injected and this would "kill" the well.  As you may know by now, this effort failed.  This is VERY bad news.  This was by far the best hope for stopping the well and don't let anyone tell you different.
BP is currently drilling 2 additional holes to try tap into the existing shaft and divert pressure away from the pipes on the sea floor.  Unfortunately, these are a good 60 days from being completed.  This will help but won't stop the flow from the remaining holes.  It could allow them to attempt another top kill with main shaft as it will have a lower pressure.  
The current plan is to try and recap the whole manifold on the ocean floor.  This manifold is huge, some 60 feet high and weighing about 450 TONS.  They are going to try and drop a cap onto the existing rig.  To attach it, they must cut off the leaking pipes.  As you can imagine, this could make things much worse.  The new cap could get blown off from the increase in pressure and then we would have virtual volcano of oil.  If the cap is successfully put in place, the day would be saved.  Even though oil would still be leaking out, the flow would be low.  Only problem is that this process has never been done this deep.
One thing I forgot was the attempt to fill the current manifold cap with debris, this was a separate event from the pipe insertion.  This also failed to stop the flow.  This had very little chance of working.
If the recap doesn't work, or there is a blow off, we are pretty much screwed.  At that point, we need to get lucky.  The only other "solution" I have heard was to nuke it.  The detonation would be done a couple hundred feet above the manifold, it would melt and weld the hole shut.  This is also EXTREMELY risky as it could cause a tsunami or earthquake.
If they can't plug this up, it will be a monumental disaster.  The estimates are that there have been 20 to 40 million barrels of oil already spilled.  These may be low as there is no way to know for sure, a mile under the sea.  If the oil spreads too far it could get sucked into larger ocean currents and taken around other coast lines.  A hurricane could pick up oil and dump it on hundreds of miles of inland acreage.  Yeah, this could be really bad. 
Now eventually this will work out.  The oceans are massive and they can absorb this oil.  Alaska has completely recovered from their oil spill and even have record fish harvests.  The main issue is how long this will take.
Here is BP's video which shows what they are attempting to do.
 Even if this ends fairly quickly, the long term repercussions will be great.  This will entail a lot more printed money and severe damage to the economy.  This could possibly make certain lands uninhabitable.  I totally exited the general stock market this week and believe that this may be the beginning of the long awaited double dip recession. 
This will hit the U.S. extremely hard as most people are expecting an improvement, even if it is slow improvement.  However, most people know the reality of things:
US consumer spending unexpectedly flat in April

WASHINGTON, May 28 (Reuters) - U.S. consumer spending was unexpectedly flat in April, but real disposable incomes recorded their biggest increase in nearly a year as the labor market improved and inflation remained muted, a government report showed on Friday.
The Commerce Department said spending was the weakest since September, when it fell 0.6 percent, after increasing by an unrevised 0.6 percent in March.
Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of U.S. economic activity, to increase 0.3 percent last month.
Despite April's flat reading, analysts expect strong spending in the second quarter as a firming labor market boosts household incomes.
The U.S. consumer is tapped out for the most part, trying to pay down excessive debt.  How much debt?  A lot:
This is staggering.  Remember, this is AFTER a period of contraction.  What will happen as we go forward and have to pay this down further?  Nothing good that I can see.  Here is what the longest lasting financial newsletter writer (over 50 years) recently recommended:

Dow Theorist Richard Russell: Sell Everything, You Won't Recognize America By The End Of The Year


Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:

Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.

That's pretty intense!

Update: By popular demand, here's more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:

And I ask myself, "Am I seeing things? The April 26 high for the Dow
was 11205.03. The Dow is selling as write at 10557 down 648 points
from its April high. If business is even better than expected, then
why is the Dow down over 600 points? And why, if there were 674 new
highs on the NYSE on April 26, were there only 20 new highs on Friday,
May 14? And if my PTI was 6133 on April 26, why is it down 17 points
since its April high?

The fact is that I've been seeing deterioration in the stock market
ever since early-April, and this in the face of improving business
. The D-J Industrial Average is composed of 30 internationally
known top-quality blue-chip stocks. These are 30 of "America's biggest
companies." If Barron's is so bullish on the future of America's
biggest companies, then why isn't the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love
Barron's, I trust the stock market more. If I read the stock market
correctly, it's telling me that there is a surprise ahead. And that
surprise will be a reversal to the downside for the economy, plus a
collection of other troubles ahead

About Dow Theory -- First, we saw the recent April highs in the
Averages. Then we saw a plunge in both Averages to their May 7 lows --
Industrials to 10380.43, Transports to 4298.12, next a short rally. If
ahead, the two Averages turn down and violate their May 7 lows, that
would be the clincher. Such action would signal the certain resumption
of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded,
that my subscribers buy gold, I am now insisting, demanding, begging
my subscribers to get OUT of stocks (including C and BYD, but not
including golds) and get into cash or gold (bullion if possible). If
the two Averages violate their May 7 lows, I see a major crash as the
outcome. Pul - leeze, get out of stocks now, and I don't give a damn
whether you have paper losses or paper profits!

This is an unprecedented call from this guy.  I have subscribed to his letter before and he is fairly level headed in predictions and courses of action, so for him to say "sell everything"  is not comforting to me.  It was part of the reason I bailed last week.  That, and more evidence that our government is lying to us at every turn: 

Two more Census workers blow the whistle
John Crudele

You know the old saying: "Everyone loves a charade." Well, it seems that the Census Bureau may be playing games.
Last week, one of the millions of workers hired by Census 2010 to parade around the country counting Americans blew the whistle on some statistical tricks.
The worker, Naomi Cohn, told The Post that she was hired and fired a number of times by Census. Each time she was hired back, it seems, Census was able to report the creation of a new job to the Labor Department.
Below, I have a couple more readers who worked for Census 2010 and have tales to tell.
But first, this much we know.
Each month Census gives Labor a figure on the number of workers it has hired. That figure goes into the closely followed monthly employment report Labor provides. For the past two months the hiring by Census has made up a good portion of the new jobs.
Labor doesn't check the Census hiring figure or whether the jobs are actually new or recycled. It considers a new job to have been created if someone is hired to work at least one hour a month.
One hour! A month! So, if a worker is terminated after only one hour and another is hired in her place, then a second new job can apparently be reported to Labor . (I've been unable to get Census to explain this to me.)
Here's a note from a Census worker -- this one from Manhattan:
"John: I am on my fourth rehire with the 2010 Census.
"I have been hired, trained for a week, given a few hours of work, then laid off. So my unemployed self now counts for four new jobs.
"I have been paid more to train all four times than I have been paid to actually produce results. These are my tax dollars and your tax dollars at work.
"A few months ago I was trained for three days and offered five hours of work counting the homeless. Now, I am knocking (on) doors trying to find the people that have not returned their Census forms. I worked the 2000 Census. It was a far more organized venture.
"Have to run and meet my crew leader, even though with this rain I did not work today. So I can put in a pay sheet for the hour or hour and a half this meeting will take. Sincerely, C.M."
And here's another:
"John: I worked for (Census) and I was paid $18.75 (an hour) just like Ms. Naomi Cohn from your article.
"I worked for about six weeks or so and I picked the hours I wanted to work. I was checking the work of others. While I was classifying addresses, another junior supervisor was checking my work.
"In short, we had a "checkers checking checkers" quality control. I was eventually let go and was told all the work was finished when, in fact, other people were being trained for the same assignment(s).
"I was re-hired about eight months later and was informed that I would have to go through one week of additional training.
"On the third day of training, I got sick and visited my doctor. I called my supervisor and asked how I can make up the class. She informed me that I was 'terminated.' She elaborated that she had to terminate three other people for being five minutes late to class.
"I did get two days' pay and I am sure the 'late people' got paid also. I think you would concur that this is an expensive way to attempt to control sickness plus lateness. I am totally convinced that the Census work could be very easily done by the US Postal Service.
"When I was trying to look for an address or had a question about a building, I would ask the postman on the beat. They knew the history of the route and can expand in detail who moved in or out etc. I have found it interesting that if someone works one hour, they are included in the labor statistics as a new job being full.
"I am not surprised that you can't get any answers from Census staff; I found there were very few people who knew the big picture. M.G."
When I received my Census form in the mail, I filled it out. Nobody had to knock on my door.
I answered truthfully about the number of people living in my household. But I could have just as easily dou bled the number. Why not? Didn't Census ad vertisements imply that my community would get more federal money if the popula tion were larger?
I'm glad people are finding work with the Census. For some it's the only work they have had this year and the chump change they are making for a few hours' work is a godsend.
But wasting taxpayers' money on busywork isn't going to do much for the economy.

Surprised?  Me either.  They can't really be trusted to report accurate numbers.  Look around for yourself.  Judge for yourself.  Does it make sense what they are saying?  IF not, they are probably lying.  Another example as the housing market "improved":
Not so fast, Bloomberg reports…
…The number of previously owned homes on the market jumped 12 percent to 4.04 million, the highest level since July, today’s report showed. At the current sales pace, it would take 8.4 months to sell those houses compared with 8.1 months at the end of the prior month.
Even with the increase, sales were well short of the 6.49 million pace reached in November, showing the tax incentive lost some power after it was extended.
The surge in inventory was larger than normal for this time of year and is not a "healthy" development, the NAR’s chief economist Lawrence Yun said in a press conference. The group cannot pinpoint what is driving the gain, he said. It’s either a release of pent up supply, in which case that implies there is also pent up demand, or it may be investors dumping properties on the market, which may hurt the market, Yun said…
This is now the norm.  Spin and mislead.  There are people catching on to this nonsense.  I think that is why the market is trending down.  The lies only work for so long.  People in Greece are living the ramifications of the lies, first hand.  They are also paying up big for the only financial life raft known to man:

Greek Scramble For Physical Brings Gold Price To $1,700 Per Ounce

Submitted by Tyler Durden on 05/26/2010

And there are those who wonder how Sprott's PHYS could have traded at "ludicrous" NAV premium of over 20%. reports that prices at which the Greek Central Bank is selling one ounce gold equivalents are as high as $1,700 (40% over spot), and prices on the black markets are even higher. The punchline, as Athens slowly returns to a forced gold standard: " A popular spot for street vendors to sell their coins is near the Athens Stock Exchange.  There the traders wait for citizens to bring payments received from unloading their paper assets like stocks and bonds." That's good - downtown Manhattan close to the NYSE has some free space for gold vendors to set up shop as well, they just need to push some of the frontrunning/collocation boxes off to the side. And in other rhetorical ruminations, is it safe to say that the last days of the fiat experiment are among us now that people themselves are bypassing the government and enforcing their own gold standard?

This will eventually happen here, it's only a matter of time.  Protect yourself soon.  I'll end with funny video I found with my kids a few years ago.  Have a great week!