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Black Swans for 2011





The hardest trick is to predict the onset of a black swan event.  Yet I have been pretty good at it for asingle reason.  The serious black swansare able to take advantage of preexisting conditions in the market and acceleratethem

I anticipated the market meltdown in 1987 which was completely unexpectedat the time.  I understood that themarket before 9/11 was specifically vulnerable to such an event (it did notreally affect the market itself but the signals were red flagging) and was notsurprised but stunned at how large the event itself and the reactionbecame.  I also anticipated the crisis of2008, but that one was patently obvious to all but the willfully blind.

This writer tries to list several prospective black swans, most of whichare not.  In the list, please payattention to Chinaconstruction, national defaults, and fossil fuel production.  The rest are not significant enough for thepresent.  My first comment unbelievably isthat they are not important enough, although they certainly can createheadlines.

China is converting internal currency into nonproducing capital stock in the form of housing and is using it as a stimulusprogram to sustain the development of the economy.  I hope that there are better solutionsdeveloping, but we can live with this. In the meantime Chinacontinues to own a ton of UScurrency which is been converted into assets as quickly as they can which isgreat for the global dollar cased economy. It is not going to stop soon, although inflation is chewing things upnow.

Spain et al will be patched in the same way the rest was patched.  Again, the money has long since been spentand the printing press is covering the losses.

Energy is the big story and it is not known which way the press will runwith it.  A major loss of conventionalproduction would cause a price burst that will give us a rerun of 2008 of agentler nature.  The real story is thatwe can use fresh oil production to keep the US on an oil diet for some years tocome, but this is not obvious yet.  Mostimportant all that new production is coming on stream internally and we areabout to begin displacing imported oil in its entirety over the next decade asexternal production continues to face serious declines.

So yes, these are all plausible sources of market shocks during 2011, butnot in the form of a serious black swan unless we have a major oil production crisissomewhere.  That could be a sharp loss inSaudi production.  I still do not thinkthe vulnerability is that particularly high.

The big black swan would be for Focus Fusion to announce a major economic successin the production of fusion energy at an obviously cheap price structure.  Such could be rolled out at great speed andthe entire global energy industry becomes terminally obsolete.  Equally plausible is the ultracapacitor businessemerging this year making the E car truly viable.  Both are now possible and increasinglyprobable.  Both are capable of replacingand dominating their sectors extremely fast. Everything else is a side show.

On the front of bad black swans, we really have nothing to worry abouteconomically, because all the excess is sorting itself out.  It could be better and much faster but it isat least sobering and perhaps we can avoid a repeat for another eighty years orperhaps forever.  We remain on track toestablish a modern middle class global civilization and we are already past thefifty percent mark and are now starting to quickly chew up the balance.  We may reach the ninety percent mark insideof as little as twenty years and by that I mean everywhere at the same level asChina today.

Politically is another issue.  Ithink that Iranis ready to collapse and end its problem. I also think North Korea is presently terminal.  No one else particularly matters and willdisappear in the mopping up that will take place over the next two decades.  That leaves us with the question of how thosetwo plan to die.  Obviously all arefocused on arranging a soft landing for both.

As an aside, ongoing Islamic economic failure is steadily undermining Islamicextremism and we are now experienced in confronting it.  They will continue to trash around for sometime longer until they grow tired of been the ditch diggers to the rest of theworld.

In whole I am an optimist for the coming year and think that we willcontinue to muddle along quite well.



Ten Black Swans for 2011

By Christian A. DeHaemer| Thursday, December 30th, 2010

On April 17, 1793, three French soldiers brokeinto the tomb of Michel de Nostredame, a man we know as Nostradamus.
Legend has it that one man, a Corporal Adelaide,picked up the skull in an attempt to gain the power of the long dead seer.
His fellow soldiers bore witness that his eyesopened wide as he gained full knowledge, then was immediately struck down andkilled by an errant bullet, fired from the nearby riots.
A plaque around the neck of the corpse read 1793.
It is by channeling the ghost ofNostrodamus — as if drinking blood from the very skull itself — that Igive you my Black Swans for 2011.

BlackSwans
For those of you who don't know, Black Swans areunpredictable events that destroy prediction models.
After 20 years in the derivatives industry, NassimTaleb created the BlackSwanTheory to explain:
  • The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
Thenon-computability of the probability of the consequential rare events usingscientific methods (owing to their very nature of small probabilities).

The psychological biases that make people individually and collectively blindto uncertainty and unaware of the massive role of the rare event in historicalaffairs. In other words, you can't create a mathematical certainty in themarket. Long Term Capital Management taught us that. Computer models and baseprobabilities on bell curves... Yet it's the three percent on either end thatmakes all their algorithms fail. And by the very nature of statistics, an eventthat's 1% likely to happen willhappen— if you wait long enough. Today I bring you ten events that couldbe that unpredictable, disruptive long shot for 2012.

1. Chinareal estate bubble pops
Hedge Fund Manager Jim Chanos said thefollowing about China onCNBC:
Construction is 60-plus percent of GDP, comparedto exports of 5 percent... The problem is that consumption as a percentage ofChinese economy has declined in the last 10 years, from 40 to 35 percent. It’sall real estate...When construction is 60 percent of your economy, and you arebuilding lots of things that people don’t need, the state may let this get outof control... It’s hard to manage this type of bubble.
China BusinessInsider estimates there are 64million vacant homes in China.If the Chinese real estate bubble pops, commodities such as copper,iron, and moly will crater.
2. Spain defaults
High national debt, high inflation, highunemployment, plummeting housing prices, and a second round of bankfailures coupled with political mismanagement sends Portugal into insolvency, followed quickly by Spain.
This overwhelms the EU's 440 Euro bail-out fundand sends U.S. Treasuryyields into the negative as investors flee to safety.
3. Decadeof natural gas
The U.S. Department ofEnergy (DOE) more thandoubled its estimate of unproved, technically recoverable shalegas reserves from 347 trillion cubic feet to 827 trillion cubic feet forits 2011 Annual Energy Outlook. This means lower natural gas prices —and twice the production for shale gas.
Furthermore, you should expect an additionaltwenty percent increase in U.S. naturalgas production through 2035 than was predicted last year.
The national leadership won't take advantage ofthe opportunity to end our dependency on imported oil due to the combinedlobbies of big petroleum and green energy.
In any event, natural gas storage facilitiesand pipelines will continue to grow until there is a global network of portsand facilities to transport natural gas in much the same way we transport oil.Right now, natural gas is around $4 in Texasbut $12 inJapan. Obviously, there are opportunities here.
4.Uranium companies surge
Last year, I predicted uranium would surge to $90a pound.
That didn't happen. Instead, it went from $40 to$65. I predict uranium in the $90s again based on the continued building ofnuclear plants around the world.
If you'd listened to my prediction last year andbought uranium miners, you'd have doubled your money:
5. Chinaclings to dollar, riots ensue
China links its currency to the dollar. The dollar isin a state of decline as a policy move to inflate away U.S. debt.
This means that everything in China is goingup in price. The official rate in China is 5.1% for November — butfood inflation is running at 11.7%. The last time food prices jumped in 2007,there were riots at supermarkets.
6. Farmland jumps in price
According to a survey by the Chicago FederalReserve Bank: “Farmland in Iowaincreased in value by 13 percent between the fall of 2009 and fall 2010. Oursurvey for Indianashows that farmland values since 1985 have gone up about 270 percent, or 5.5%per year."
Farmland prices are increasing at more than twice the historical average.This will continue, despite the fact that all other real estate prices arefalling, and create a bubble. Farmers will overextend themselves, crop priceswill fall, and we'll have a raft of farm foreclosures.
Willie Nelson and John Cougar will go on tourfor Farm Aid VII. The national leadership will continue to squeeze food pricesthrough subsidies for ethanol... After all, you can't be president without astrong showing in the Iowacaucus.
7. Dowhas four 10% correction in 2011 — ends the year up 9.7%
Volatility is down to pre-crisis levels. Bernankehas set a paperweight on his laptop number pad. It is adding zeros to thenational debt as fast as his Lenovo will allow.
Last year I wrote: “No one is talking about anextended bull market... The money that is currently being produced by theTreasury and hoarded by the banks could flow to equities and launch anotherbubble."
I predicted Dow 20,000. This didn't happen —but the DJIA did climb18% on pure liquidity from the Fed.
Judging by how few bargains there are out there,I'd say that the market has gotten ahead of itself. The Bernank will continuewith its flood of cash, but expect a lot of mixed signals and volatility...
8. TheYear of the Electric Car
Look for EVs to sell out this year. The NissanLEAF, the Chevy Volt, and the Fisker Karma will hit the ground rolling, givingearly adopters all sorts of smug happiness.
Charging stations are springing up in downtownseverywhere. You will be able to buy them at Best Buy. The Geek Squad willhook them up in your garage.
9. Deadtech revival
Old companies like Intel (NASDAQ: INTC)(which had its best year ever), Cisco (NASDAQ: CSCO), IBM (NYSE: IBM) and Corning (NYSE: GLW) willbreak out of their ten-year sideways range based on the revival of businessspending. These companies are all trading at small P/E ratios and sitting onlarge amounts of cash... Intel has $20 billion; Cisco has $38billion.
10. FidelCastro dies
Cuban Dictator Fidel Castro finally kicks thebucket. His brother Raúl makes overtures by allowing free speech andreleasing all political prisoners. He seeks to open trade talks with the United States.
The State Department continues to spurn alladvancements. Leaders in both parties do nothing because you can't be presidentwithout Florida, and you can't win Florida without theCuban vote.
Have a great New Year,

Christian DeHaemer
Editor, Energy and Capital