Volatility in the Price of Oil since Hubbert's Peak and Investment Risk

DID OIL PRICE VOLATILITY CAUSE THE FINANCIAL CRISIS?
THERAMUS 18 January 2009

therramus@gmail.com

Key Words: Peak oil, oil shock, oil spike, resource depletion curve, cycle, turbulence, crude oil, inflation, S&P 500, gold, shadow banking system, credit crisis, financial crisis, economic crisis of 2008, bad behavior, financial industry, Black Tuesday.

SUMMARY
'''A cause for the financial crisis is described that differs from the emerging conventional wisdom. '''It is proposed that a shift in interest occurred within the global financial industry in the mid-2000s that altered incentives from protecting shareholders to promoting self-interested "cashing-out". The underlying reason for this shift is suggested to be volatility in the price of oil and its downstream effects on investment risk.

Novel data is provided to demonstrate that a distinct series of pulsed spikes in oil price volatility initiated in the mid to early 2000s (see Figure 9). The price shock of 2008, when oil peaked at over $140 a barrel, is shown not to be an isolated event. Instead, the oil shock of 2008 is the largest of a series of 7 prominent spikes in oil price instability that initiated some 6 to 7 years ago. The multi-year pattern of spiking volatility in oil price  appears to be unprecedented, is ongoing and may be a natural process that results from being on the down-slope of the production curve since "Peak Oil".

Importantly, the individual spikes in oil price variance  since 2000  each precede corresponding pulses in volatility in the inflation rate, the S&P 500 index and the price of gold - indices strongly tied to the confidence of financial professionals to make accurate predictions about investment risk. It is proposed as evidence consolidated that growing unpredictability in oil-price was causing increasing uncertainty to investment outcomes, the necessary and sufficient conditions emerged for:

1) Expansion of the "shadow banking system" and

2) Unregulated value extraction (i.e. looting) from this sequestered pool of capital.

Finally, it will be shown that the "Black Tuesday" stock market crash of October 1987 could have provided the first unequivocal demonstration that an upstream spike in oil price volatility is sufficient in its own right to induce a sudden increase in investment uncertainty (see Figure 14). Lessons learned on the downstream consequences of large transient variances in the price of oil from the hereto unexplained events of "Black Tuesday" are suggested to have guided the avaricious response of the global financial industry to the present crisis.



.

INTRODUCTION
The former chairman of the US Federal Reserve Alan Greenspan provided the following response during questioning about his “ideology” before a committee of the US congress on the 23rd Oct 2008:

Greenspan said: "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact...."

A reflexive media and commentators jumped on a bowed Greenspan for the usual depressing reasons. However, was it possible that Mr Greenspan had let his mask slip for a moment ? The attention grabbing part of his sentence was “…how significant or permanent…”. Could it have been that Mr Greenspan was not saying he’d been wrong ? Instead, was he implying that conditions in the economy had changed unexpectedly and fundamentally in a manner that now made his old way of thinking flawed ?

This idea explores the possible causes for Mr Greenspan’s distress. In short, it proposes the outline of a mechanism for how volatility in the price of oil might have contributed to the apparently irrational actions of the financial industry. In particular, it speculates how recognition of the implications of this volatility might have rationally and quickly changed the incentives of the global financial industry. The idea also proposes that in coming years, unpredictability in the price of oil will become broadly understood as one of the most serious and pressing threats to our economy and democracy.

Consider the following hypothetical sequence of events:

1. Global oil production peaks around the yr 2000 as predicted by Hubbert.

2. A new pattern of volatility in oil prices emerges shortly thereafter and this pattern continues to build through the present (and into the future).

3. This type of volatility is in the nature of being on the production down slope of a finite resource in great demand (i.e., oil). Variance and occasional very large movements were certainly evident in the upslope of the production curve. However, the frequency and severity of oil price movements that characterize the new pattern on the downhill side of the production curve are envisaged to be of a different pattern and order of magnitude.

4. Owing to the singular role of oil in the economy, volatility in its price begins to propagate in variable degrees into the volatility of the price of nearly everything else.

5. A general increasing volatility in prices translates into increases in risk of investment - indeed, due to unknowns in future prices and most especially of oil itself, real financial risks across the board are probably rising exponentially relative to price volatilities.

6. A smart, knowledgeable and initially small number of insiders anticipate and confirm the implications (as outlined broadly in 1 through 5) of being on the down slope of the global oil production 4-8 yrs earlier than the rest of us. These people don't need to know each other, but do need to have specialized knowledge and be capable of uncommon insight.

7. With financial risk increasing, and a still small, but growing number coming to understand what is going on, the incentives within markets shifted rather quickly from protecting the interests of shareholders, to figuring out how to “cash out” quickly. This shift in incentive is the fundamental change (of uncertain permanence) that may be the real cause of Mr Greenspan's distress.

8. The behavior of the primary few spreads within the global financial industry and perhaps beyond. Most secondarily affected individuals are probably oblivious to the ultimate cause (i.e., oil price volatility) of their choices and actions. A fin de seicle ethos becomes pervasive. There is an unspoken or perhaps even quietly discussed urgency that time is running out for you to make your “nut” (i.e., sufficient money to retire wealthy) and get out. Greed, self-interest and/or stupidity do the rest.

How the "cashing out" occurred is a matter of some complexity. But this part of the story does seem to conclude with tens possibly and hundreds of trillions dollars in probably worthless ("toxic") assets in the "shadow banking system" (http://en.wikipedia.org/wiki/Shadow_banking_system). It is speculated that the primary mechanisms of "cashing out" did not directly involve the accumulation wealth in the "shadow banking system" per se. Instead, the evidence suggests that extraction of value involved the taking of fees, salaries, bonuses, stock options and other mechanisms leveraged against the "toxic assets" by the exclusive group that have access to this pool of capital. Government bailouts of "systemically important institutions" is possibly the last gasp of this use of leverage against the "shadow banking system" by insiders. Whatever the specifics of the mechanism - we know the rest - credit crisis, stock and housing market crashes, job losses and a looming depression.

Why this is all about oil
The tank of gas that powers your car for a week contains more energy than 6 people doing manual work for a year. It is silly, but imagine paying 6 people to drag your car around rather than using the car's engine. At minimum wage your "car team" would set you back more than $100,000 a year (vs ~$2000 a year for gas), and be slow to boot. You'd need another person  to wave a fan at you to replace your air conditioning. Now multiply what machines powered by inexpensive gas do across the entire economy and you start to get the picture. Think about this $100,000+ next time you feel bummed about paying $40 to fill up. Oil is cheap and makes life easy. It so important that we all but eat the stuff.

Oil has long replaced the gold standard as the guarantor of fiat monetary value. The essential role of oil in finance and powering modern life is also why fluctuations in the price of oil have the potential wreak havoc and also why it is front and center factor in the hypothetical mechanism above. The shadow banking system itself is a child of oil. What else could have underwritten the expansion of this pool of sequestered value that at its peak came to equal many multiples of the GDP of the entire planet ? What else but the greatest material prize in history - the oil reserves of the world.

Readers may be taken aback by the apparent assumption in the essay that "Peak Oil" has already occurred. However, it was never the author's intention to convey that this was a given. Care has been taken to emphasize that the timing provided in the hypothetical sequence is based on a prediction. The starting point was M. King Hubbert's famous paper presented to the American Petroleum Institute in 1956 where he provided a mathematical analysis that indicated that the worldwide peak in oil production would occur around half a century from 1956. Hubbert's authority was later cemented when his prediction of the peak in US domestic oil production in the early 1970s turned out to uncannily accurate. This being said, as the writing and analysis of this essay has proceeded I have become convinced of the following:  Future historians will determine that actual (i.e., as opposed to predicted) global "Peak Oil" occurred sometime in the decade between 1997-2007. As will be later explained, this was inferred from data and analysis that was generated as part of this essay.

The fin de seicle ethos
The concept of what is described above as a "fin de seicle ethos" is an important psychological element of how financial insiders interests became uncoupled from the broader economy. To get a sense of this try and remember whether you had worries about the economy three or four years ago - not an easy task. For example, I recall commenting to a friend and fellow bike commuter back in spring 2004, "...that it seemed to me that we were living in a fool's paradise". The friend agreed, replying he had similar concerns. My comment was not based on facts or learning, just a feeling of deep unease about the sustainability of the economic arrangements of the country. Times seemed prosperous, but I believe my friend and I were not alone in our sense of unease. What would be the difference between me and financial insiders at that time ? Opportunity. Opportunity provided by proximity to expert knowledge and gossip, the necessary focus that comes from being a financial professional and access to the vasts pools of "money" in the "shadow banking system".

So how did the sequence of events play out ? It is imagined that a small number of knowledgeable financial insiders were among the first to deduce that increasing risk was going to make easy money progressively harder to wring out of the system. Subsequently, larger numbers of individuals came to deduce or intuit the outlines of this looming obstacle to their personal enrichment. Unease about events beyond ones control (e.g., peak oil), are presumed to be unsettling to the ambitious type who dreams of making their "nut" (e.g., millions secured in gold) and retiring early. For such a person, the palpable fear that as each day passes the chance to "cash out" recedes is presumably a powerful motivator. In its culminating stages, the "fin de seicle ethos" would come to infect larger and larger numbers of individuals within the industry, most of whom were presumably oblivious to primary causation.

Downstream of the agency of increasing investment risk, cynicism and the realization that what is going on is just too crazy and fraudulent to be sustained become additional factors expediting the process. Anticipation of an approaching end to business-as-usual and the fear that one may "miss the boat" drove the "fin-de-seicle ethos". At the peak of this epidemic of bad behavior, wholesale fraud came to permeate the entire system and collapse was all but inevitable. To outsiders, the construct as a whole and its actors appeared to be irrational. But, if one starts to mentally reconstruct the motivations and thought processes over time of the circles of individuals who had the opportunity to tap the shuttered riches of the "shadow banking system", the nuts and bolts from which the financial crisis were fashioned start to make a good deal more sense.

In closing here it should be noted that the concept of peak oil has been common knowledge for over 30 years now. Indeed, it would not be surprising to find out in a future presidential archive release that the prospect of peak oil and its potential for disruption to the US economy were front and center of Mr Cheney's hush-hush energy task force. Auspiciously, the energy task force began convening in 2000 in the second week of the Bush Presidency. In any case, the existence and timing of Hubbert's peak is no secret. Its more a matter of whether one is prepared to think realistically about its consequences or not. It is also no mystery that the some of the smartest and most aggressively realistic individuals are to be found are in the upper echelons of the global finance industry. How the implications for investment of price variance associated with peak oil came to be recognized will discussed in detail later in the essay.

The Limits of Conventional Wisdom and the Causes of the Financial Crisis
The hypothetical mechanism imagines a cause for our current economic collapse beyond ordinary human failings such as greed and selfishness. Human frailty is a necessary, but not sufficient factor. Speculating on the cause of this crisis is a weakness of this idea... as it is not so hard to be off track when there are so many unknowns. On the one hand, the workings of complex systems are ineffable....and well...complex. But, even in the most emphemeral of cases, the proverbial butterfly in South East Asia still has to beat its wings to provoke that storm two years later in North Carolina. Some causes are cryptic, but turn out not so hard to be resolve with the right perspective. For example, though not evident until Jared Diamond pointed it out, how the axial geography of Eurasia conspired to give a leg up to certain technological civilizations now seems blindingly obvious to any thinking person.

The above being said, the cause tagged here is more robust than a wing beat. It has taken time to put together my story as it has many intricacies and moving parts. Insights arrived over time, sometimes from unexpected directions. Hopefully, the reader will persist as they are taken through the case step-by-step. But first, put aside the role of human foibles. This is recognized as a contributing factor, but is not the ultimate determinant of our present unpleasant circumstances.

Another much focused on causal factor in the financial crisis is the sub-prime mortgage industry. However, because "experts" keep telling us that sub-prime was the root cause of our present economic difficulties does not necessarily make it so. Similarly, one has to take care not to uncritically accept an explanation because it resonates with one's own experience. The workings of oil markets fall outside the ken of most people, but many understand the mechanics of financing a mortgage. Successful research workers all have stories of how their familiarity with a subject matter sometimes hindered understanding. The Indian tale of the blind men and the elephant provides a classic fable on the treacherousness of a narrowed perspective and half-truths (http://en.wikipedia.org/wiki/Blind_Men_and_an_Elephant). The fact is that securitization of sub-prime mortgages was just one of the more lucrative facets of an otherwise huge and labyrinthine shadow banking system (SBS). More on the role of the SBS in this crisis later.

Sadly, the ultimate mechanisms guiding many events are lost to the past - owing to various factors including acceptance of the conventional ignorance (i.e, wisdom), the tendency of victors to write the history and so on. Nicholas Nassim Taleb has written beautifully on this topic. Also, as alluded to above, how does one read the thoughts of minds from the past as collective actions were prompted and choices made that determined the course of events. No one is going to admit, or perhaps even remember a point in time 3-4 years ago that they came to understand that the financial system was going to hell in a hand basket because of looming oil shocks and that the only rational thing to do was to fraudulently extract as much value one could for oneself. Monsterous yes, but who would own up to such a thing. Thus, though emphemeral, hard to locate or hidden there from view, there are always real physical causes for events in the natural world. This we have learned.

It is perhaps worth emphasizing that the hypothesis posed here does NOT require an organized conspiracy to work. Those caught up in the fin-de-seicle ethos do not have to know each other or directly share their concerns. Given the right seed bed, timely ideas propagate like weeds. Simply put, the idea proposes that anticipation of the economic disruptions that would be wrought by instability in the price of oil following its global peak in production provides a key to understanding the current financial crisis. Indeed, pricing unpredictability in this most fundamental of energy sources is suggested to be ultimately the necessary and sufficient factor in the present debacle (and perhaps future ones as well). All else, bad behavior of the Wall Street included, self-organizes and flows downstream from this consideration.



FOUR PROPOSITIONS THAT LINK VOLATILITY IN OIL PRICE TO BAD BEHAVIOR IN FINANCIAL MARKETS
Events 1 through 8 of the “hypothetical sequence” outline  propositions for which a certain amount of data can be derived. For example, the “hypothetical sequence” suggests the following:

1. Volatility in the price of oil increased after Hubbert's prediction for the peak in global oil production (i.e, "Peak Oil").

2. This increase in the volatility of the price of oil is propagating volatility into the price of other goods and services.

3. Increasing volatility in the price of oil and the prices of things general is resulting in increases in investment risk.

4. And that information must have been in place prior to the crisis to enable anticipation that oil volatility would increase investment risk to levels unacceptable to the financial industry.

The author refers to these as the 4 propositions of the apocalypse - a sad attempt at playfulness and definitely in poor taste. Nonetheless, in the following sections data will be provided to support each of the propositions. It is probably fair to point out at this stage that although propositions propose mechanistic linkages, the actual data presented will be correlative. This is one step better than providing an opinion not backed up by any facts. However, we are all aware that correlation does not imply causation. Proposition 4 will explore how anticipation may have occurred, paying special attention to what could have been learned from the peak in US oil production in the 1970s and the stock market crash of October 1987 called "Black Tuesday". Indeed, it is suggested that the mysterious crash on "Black Tuesday" is key to understanding the present crisis. It is proposed that on this day over 20 years ago the market learned unequivocally that spikes in oil price variance are a standalone determinant of investment risk in their own right.

PROPOSITION 1. Volatility in the Price of Oil Increased after Hubbert's Predicted Peak in Global Oil Production
Getting hold of a free source of historical oil pricing data on the internet is surprisingly difficult. There appeared to be packages that could be purchased, but eventually what seemed to be a reliable and free data base was identified at the Illinois Oil & Gas Association website.

http://www.ioga.com/Special/crudeoil_Hist.htm

This site provides complete monthly data from the mid-1980s up until the present on the “HISTORY OF ILLINOIS BASIN POSTED CRUDE OIL PRICES”. Not perfect, but a start.

The chart in Figure 1 is a simple plot of monthly crude “oil price” over a period from 1986 to 2009.

Figure 1 - Monthly oil price 1986-2009


The sharp rise and fall in oil at the tail of Figure 1 (i.e., the oil shock of 2008) is a part of this story that is all to familiar to motorists.

The next problem was how to calculate an index in the volatility of oil price based on the monthly data. It was reasoned that this index of volatility should reflect the spread or variability in price over successive months. To acheive this a straightforward approach based on parametric statistics together with Microsoft Excel was used. The index was calculated as follows. The monthly oil prices for Jan, Feb and Mar of 1986 were $22.50, $16.00 and $14.00 respectively. First  the standard deviation (SD) of the first 2 numbers (i.e., $22.50 for Jan 1986 and $16.00 for Feb 1986) was calculated as an index of their spread. This SD was 4.60. Next, the standard deviation of the 2nd and 3rd numbers for (i.e., $16.00 for Feb 1986 and $14.00 for Mar 1986) was estimated to give an SD of 1.41. These calculations were carried out for successive pairs of months for all 276 months from Jan 1986 down to Dec 2008.

The chart in Figure 2 plots the index of “Oil Price Volatility” in red in the left-hand Y-axis along with the monthly oil price plotted in blue (now in the right-hand Y-axis). Eyeballing the "seismograph-like twitchings" on this chart suggests that volatility has been increasing, particularly since 2002. Something that is particularly intriguing about this chart is a progression of increasingly larger "peak twitches" that appear to rise notably above a lower background of variance in the volatility index (see small arrows on Figure 2). This could be noise, but these higher amplitude pulses do seem to have pattern which looks as though it may be meaningful. More on this later.

Figure 2 - Oil price volatility has risen since 2000 - A


A few notes on Figure 2 and its underlying assumptions. First, one has to worry about deviance from normality etc. The approach used is not perfect. However, the aim was not to clear the forest, but to cut a narrow path through it. For this purpose, using SD as a proxy for spread seemed sufficient for now. Second, it is understood that variance (i.e., SD squared) is the preferred method by statisticians for estimating the spread of a sample population. Variances were calculated for the list of SDs and these calculations tended to accentuate the trend seen in red in figure 2. However, it was decided that the simpler SD calculation did the job, so it was stuck with. Third, calculating SD for 3 or 5 successive months was also carried out. The same overall pattern resulted from these calculations as was found for the 2-monthly calculations in figure 2. Fourth, it would have been great to get one's hands on daily, rather than monthly, oil price data to do the calculations – but as mentioned, such data is hard find on the internet. Finally, coefficient of variance (i.e., average for the 2 monthly numbers over their SD x 100) was considered as another parametrically based index of volatility. However, on reflection  it was decided that an SD-based index would be better as it reflected absolute, rather than mean normalized, variability in the price of oil.

Qualitatively, the underlying trend in oil price volatility over time in Figure 2 appeared non-linear. Microsoft Excel was used to calculate a 3-factor polynomial fit to the scatter plot. This trend as represented in the pink non-linear regression line overlaid the “red” price volatility data in Figure 3. The R squared of the regression line is statistically significant and so on as provided in the chart. Interesting features of the pink regression line include that it starts to move notably from around year 2000 (i.e., Hubbert’s predicted production peak as in the "hypothetical sequence"). It also climbs in what appears to be an exponential manner from this time to the present (i.e., Jan 2009).

Figure 3 - Oil price volatility has risen since 2000 - B


The trend in oil price volatility is isolated in Figure 4. From this it can be seen that volatility based on the calculation approximately doubled between yrs 2000 and 2004 and then approximately doubled again between 2004 and 2006. What happens next is an interesting question ? A clue to this might come from a smaller bump in volatility occurring during the 1990s (see Figure 4). Based on this pattern it is speculated that the current exponential rise will flatten as time proceeds and eventually becoming a second bump, albeit of higher amplitude than that occurring during the 1990s. After completion of the current bump, one imagines that a large rise and fall in volatility has the prospect to occur all over again, if and when economic recovery occurs. With tightening supply, cycling variance in the price of oil on the downside of Hubbert's peak will be a stomach churning ride. Policy makers trying to force a recovery by flooding the economy with "stimulus" might consider this unwelcome possibility. The fruit of their efforts may simply be to prematurely spark the next waiting surge in oil price!

Figure 4 - Regression of oil price volatility trend 1986-2009


The regression line in figure 4 was recalculated for different time frames in an attempt to figure out when in the past the trend line would have indicated a significant uptick in oil price volatility. This was done to test a speculation in point 6 of the “hypothetical sequence” in which it was posed that data on rising oil price volatility and its implications on investment risk  may have been available to financial insiders 4-5 yrs ago. This was achieved by removing yr 2008 and then calculating the regression line, and then doing the same with yrs 2008 and 2007 removed from the regression and and so on. Doing this, it emerged that the signal for the rising trend in oil price volatility was faintly evident (in an empirical sense) from the end of 2003 and continued to build over successive years from that time. Prior to 2003 it would have been very tough to pick up the rising trend signal from the approach taken here.

'In conclusion, looking back from 2008 there is quantitative evidence for a rising trend in the volatility of the price of oil that commenced from around year 2000 coinciding with Hubbert's predicted global peak in oil production. The signal confirming the start of this upward trend in volatility would have been evident 4 to 5 years ago from around the end of 2003.'

PROPOSITION 2. Increases in Oil Price Volatility is Propagating Instabilities into the Price of Other Goods and Services
As a first step, the monthly year-to-year inflation rates between 1986 and 2009 were used to derive an index of general price volatility in goods and services. Unfortunately, there is evidence that the Government may "monkey" with statistics on inflation. One would imagine that under-reporting inflation has benefits for the "powers that be" that would include making them look good or "rigging the table" on payouts of inflation-proof bonds and so on. While it may be easier to manipulate absolute levels of an index, it is assumed that cloaking the pattern of a second order variable such as volatility is more difficult for would be cheats - more on this later. So, one won't be ungracious. The authorities are taken at their word on their monthly inflation calculations - at least to start with.

Monthly numbers on historical inflation rate (calculated from the so-called CPI-U) were obtained from:

http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

Figure 5 shows a co-plot of monthly inflation (orange as calculated from the consumer price index - CPI-U), the index of inflation volatility based on bimonthly SD (green), and the trend in the inflation volatility index (light green line) over the period between Jan 1986 and Jan 2009. Bimonthly SD was calculated as an index of volatility of CPI-U/inflation exactly as was described above for the index of oil price volatility. As was the case for oil price volatility, a trend line was also calculated by Microsoft Excel as a 3-factor polynomial fit to the CPI-U/inflation volatility data (equation and R square value are provided on the chart).

Figure 5- Volatility in the Govt. consumer price index (CPI-inflation) has risen since 2000


The pattern for CPI-U/inflation volatility is different in subtle ways from that of oil price volatility. Nonetheless, a commonality of increasing volatility from the late 90s rising until the present is evident. The dark green line indicating the CPI-U/inflation SD switches with increasingly greater amplitude over this period. The lighter green regression line confirms the trend.

Figure 6- Trends in volatilities of oil price and Govt. inflation appear not to coincide


In Figure 6 the trends in monthly oil price and inflation (CPI-U) volatility are plotted together on the same time scale (i.e., Jan 1986-Jan 2009). A rise from the late 1990s to the early 2000s in the trends for both indices is apparent. However, an important problem is that the inflation SD trend appears to reach it lowest point in 1997, slightly earlier than the oil price SD trend (which as discussed above bottoms around 2000). This feature is referred to as a "non-coincident bottom" on the plot. This lack of coincidence in the lowest trough of the two plots is problematic for the "hypothetical sequence" in which it is implied that oil price variance should causally underlie inflation volatility. It is also an issue from the point of view of suggesting that some sort of coincidence occurs between the timing of Hubbert's prediction of global peak oil (i.e., yr 2000) and inflation volatility kicking off. One can perhaps account for this "non-coincidence" as a statistical error, the effects of more than one time-dependent factor on inflation, the result of government manipulation and so on. Nonetheless, this discrepancy is a concern and further clarification is required.

What happens with if "honest" numbers on inflation rate are used ?
There is much question as to whether the "official" US inflation figures reflect the actual rate of inflation in this economy. An interesting website that provides alternate calculations of inflation is "John Williams Shadow Government Statistics":

http://www.shadowstats.com/

At this site, inflation numbers are calculated using methodologies that were utlized in 1980s. A site newsletter indicates that this "Alternate Consumer Inflation measure, reverses the methodological gimmicks of the last 25 years". In other words, the site suggests that Government "cheating" on inflation has been removed from estimates so that the true variance in inflation over time can be seen. Interestingly, a strong advocate for the current "monkeyed with" Govt. version of inflation calculation was none other than Mr Alan Greenspan of the current distress. Unfortunately, shadowstatistics.com does not provide its numbers free, and as there was no money or desire to purchase  said data, the numbers were interpolated from a plot helpfully provided at the website. I might add that if I been caught by my partner paying just under $200 "for just some numbers off the web!"... there would have been serious repurcussions. Though the coming "the end of the world as we know it" is being reflected upon here, the author has no wish to sleep alone with the cats during the interim. The plot below in Figure 7 provides the fruits of the effort to (re)generate data on "honest" inflation and inflation volatility from publicly available information. And MAN... it is a doozy !

Figure 7 "Honest" inflation rate and inflation volatility since 2000


What we see from the "honest" numbers in Figure 7 is that volatility is now picking up slightly later into the 2000s than calculated from the official Govt. stats. Indeed, it appears that shadow inflation rate volatility does not start a new pattern of more vigoruous "twitching" until after 2000. The light green plot of the volatility trend confirms a low point for the shadow numbers occurs from around the year 2000. Figure 8 co-plots the trend for oil price volatility and shadow inflation (CPI-U) volatility and from this it can be ascertained that the pattern of variance of the two indices since the mid 1990s is very similar. The non-linear exponential rise in the inflation volatility curve is now apparently lagging a little behind the rise in oil price volatility. Most importantly, the low point of the two trends curves now share a "coincident bottom" and a coincident bottom is a lovely thing.

Figure 8 The trends in oil price and "honest" inflation rate volatilities coincide


A feature of the plot for inflation are larger twitches or pulses of volatility (Figure 7). Similar, though somewhat less distinctive pulses were noted earlier on the plot of oil price volatility (Figure 2). To improve resolution of these larger twitches by reducing noise, 3-month moving averages of the inflation and oil price were calculated (Figure 9), and then the volatility indices for inflation and oil price were re-calculated based on these moving averages. These plots reveal fascinating patterns. Prior to 2000, spiking in the two "smoothed" indices occurs, but it is rather irregular. However, after 2000 the spiked pulses of volatility appear to assume an organization. In particular, 6 distinct pulses in inflation volatility are evident in the period (green arrows on top panel) between 2004 and 2009, the most recent of the 6 occurring ~December 2008, being particularly large. An early seventh uptick in inflation rate instability is also marked on the chart that peaks in 2001-2002. Although a possible harbinger, it is not clear whether this 2001-2002 peak is truly part of the 2004 to 2009 series, as it is not as sharp as the subsequent 6 pulses or primary volatility events. There seems to be regularity to the pulses - and thus a temptation to assume that the sequence is an oscillating wave. However, if one looks at the spaces between the green arrows marking the pulse tops, they are NOT consistent. The interval between the spikes gets shorter and shorter as one approaches 2009. If this is an oscillating wave, it is rather complex.

Figure 9 A series of spiked pulses in inflation and oil volatility emerged after yr 2000


Now... if one looks at the "smoothened" oil price volatility index over the period between 2004 and 2009, almost the same pattern is seen (lower panel Figure 9). A distinct series of pulsed spikes (red arrows), each spike being separated by increasingly shorter intervals of time. It should be noted that the words "almost the same" are used in the prior sentence. The reason for this becomes apparent when the plots for the oil and inflation indices are overlaid between 2000 and 2009 (Figure 10). Although the two patterns are very similar, individual "pulse" peaks for inflation and oil price do NOT show precise alignment in time. Instead, in 5 out of 6 of the spikes in the series between 2004 and 2009, a pulse in inflation volatility lags slightly behind a leading pulse in oil price volatility. The exception being the first inflation spike in the sequence occurring at the beginning of 2005, which precedes (albeit by a hair), rather than follows, a pulse in oil price volatility. A further notable feature of the plots is that the amplitude of the volatility spikes, and in particular those of oil,  show progressive increase over time.

A coincident bottom is one thing, but agreement at six points ? If this were a crime scene finger print, one would reasonably assume that a match was likely. Moreover, inflation pulses tend to be downstream, from the spikes in oil price volatility. This would be consistent with, although not confirmatory of, oil price variance determining inflation rate variability, and not vice versa. And not to be boring about it, but these curiously well-organized and co-related patterns, spring up ~3 years after 2000, Hubbert's predicted year for peak oil. Figure 10 can also be viewed from another perspective. If the 6 volatility peaks are diagnostic of peak oil, then the global crest in oil production may have already occurred.

Pulse 2 in oil price volatility is interesting. Its initiation toward the end of 2005 corresponds roughly to Hurricane Katrina. Many in the US will remember the sharp rise in oil prices at the time and how conventional wisdom (especially in the media) noisily focused on the hurricane as the primary causal factor in the sharp ascent of gas prices. However, the big picture view provided in Figure 9 indicates that the "Katrina-induced" spike in oil price is actually part of a larger pattern of volatility pulses, including one that preceded it by a year and the third pulse in the sequence that followed roughly a year later. As with 2005, 2004 also had an active hurricane season. However, 2006 was comparatively quiet. The point is that while events such as Hurricane Katrina may act as triggers, they are certainly can not be the ultimate cause of, multi-year instabilities of the type illustrated in Figure 9. To believe otherwise would be a classic "missing of the wood for the trees". Or is it trees for the wood ? - never can get that one straight.

How does one analogize these phenomena to create a mental picture of what is going one here. Grasping the underlying concept of volatility is itself unfamiliar territory for most. Imagine a flag gently fluttering in a steady breeze, a single volatility event could be pictured as the flag suddenly being flapped vigorously back and forth by a strong gust of wind. Or how about a running tap plumbed into an artesian well ? When the well head is high, water runs smoothly from the tap. But when the well is running dry, air gets into the water line causing flow to splutter and choke. How about the temporal correlation between the behavior of variance in oil price and inflation ? One analogy could be the relationship between bioelectricity and the heart beat. The heart beat literally results from a traveling electrical impulse (think oil volatility spike) that triggers a reactive twitch in the muscle of the heart (think inflation rate spike ). Taking the analogy a little deeper, the electrical impulse originates from instabilities (i.e., volatility) in the bioelectrical properties of the heart's pacemaking cells which coalesce at regular intervals to form the impulse. Astute readers will be thinking, but the heart beat is regular. Well, yes it is - except just before a heart attack. The pattern of variance shown in Figure 9 has a scary resemblance to an electrogram trace of a beating heart becoming chaotic and entering ventricular fibrillation !

Figure 10 Volatility spikes in oil price precede pulses of volatility in inflation


These findings are gratifying in the sense that a case can now be made from the data that the pattern of volatility in general pricing (as reflected by the shadow inflation (CPI-U) volatility plots) is plausibly downstream from oil price volatility, at least since peak oil. However, there are caveats that must be born in mind. First, close and convenient correlations in the timing and shape of the two patterns of variance is not proof of causality. Second, by accepting the shadow statistics inflation over those of the Government, multiple errors are possible. For example, the mistake of confirming one's own preconceived ideas has to be watched for. When building a story from a tableau of similar, but subtly differing facts it is all to easy to assume that the data variant that best seems to fit the narrative is the data that must be right. Also, the Govt. may NOT be lying. Yes, yes, I know.... but one must keep an open mind. However, even if the inflation numbers have been "monkeyed" with, it is hard to conceive that the intent of the change in the 1980s was to uncouple the appearance of a connection between volatility in inflation and oil price that would occur some 20 years later. Even  Maestro Greenspan could not have such prescience. The "monkeying" in the 1980s was likely done for more mundane reasons. All the same, the effects of this messing with the inflation numbers provides a salutory lesson. Never fuck with the fabric of reality, as it may stop you from seeing something else that is unexpected and really, really important !

'In conclusion, it is cautiously proposed that there is evidence of a correlative link between volatility in the price of goods and services, as reflected in the shadow CPI-U, that coincides with increasing volatility in the price of oil from year 2000. The strongest support for this link comes from a distinct and unprecedented series of pulses in oil price instability that occurs over the period between 2004 and 2009. Each pulse in this series is matched by a coincident or downstream twitch in volatility in the inflation rate  '

PROPOSITION 3. Increasing Volatility in the Price of Oil Is Causing Increased Investment Risk
Deriving an accurate measure of investment risk is  hard. How does one get at such an intangible ? Certainly not in real time or in the future - otherwise one would be wealthy. To look back at how investment risk may have varied over the last decade or so a leaf was taken from the preceding sections. It seems silly to say it, but first let's accept that stock markets reflect investment activity. One of the broadest and deepest stock indices is the US S&P 500. A measure of risk of investment risk based on the S&P 500 would be its volatility over time. Certain readers are now thinking. There he goes again - on and on about volatility. To a hammer, everything looks like a nail (such an irksome cliche) and so on. But stick with it, if you can.

Imagine that the S&P had been on a gently rising trend with very few ups and downs over an extended period of months. With such a pattern in place, most investors could safely bet that tomorrow the index would still be on this same unwavering trend. In this environment the day-to-day risk of investment, if a number could put on it, would assumed to be low. By contrast, if there were a great deal of turbulence in the S&P 500, then one would be much less certain that an investment made today would look wise tomorrow. This would be a high risk environment, a situation that unfortunately reflects the current reality of the S&P 500. Since last October the S&P 500 has been in enormous flux, building and melting (mainly melting) over time intervals of weeks and months. Any reader who transferred 401k monies away from stock-based mutuals last October (2008) and returned in December 2008/January 2009 only to be  battered again in February 2009 appreciates the perils of the last 6 months.

Figure 11 Volatility spikes in oil price generally precede pulses of volatility in the S&P 500


Figure 11 is a co-plot of the "smoothened" volatility of the S&P 500 stock index (calculated as for inflation and oil in Figure 9) and oil price volatility over the period from 2000 to the present. It has to be said that the correlation in the peaks of volatility is not as nice as that seen between oil price and inflation volatility over the same period (e.g., Figure 10). Between 2000 and 2004, there is turbulent "froth" in the S&P that presumably corresponds to the recession in the aftermath of the tech boom of the late 1990s. However, between the all important 2004 and 2009 period, the same general pattern observed previously applies. There are coincident spikes in volatility in the S&P 500 (blue) and oil price (red) between 2004 and 2009, with pulses in the oil-based index generally leading surges of volatility in the stock index. There are exceptions. A spike in the S&P occurs between pulses 3 and 4 that appears to have no matching spike in oil price change (indicated by a question mark on Figure 11). Perhaps there is an abortive uptick at the base of the "question-marked" spike. Also, pulse 5 in the S&P is more a shoulder on pulse 6, than a distinct spike in its own right. So, on the basis of Figure 11, squinting a little and using one's imagination - you may convince yourself that the idea has not quite fallen apart.

An analysis of the subsequent Figure (12) provides a juicier meal. This plot shows the "smoothened" volatility of the price of gold (as measured from http://www.lbma.org.uk/stats/goldfixg - gold in USD) over the period from 2000 to 2009 (gold line). The gold index is co-plotted with the trusty, jagged plot of "smoothened" oil price volatility (red line). Gold is an interesting commodity. In days gone by it provided the foundation of the means of exchange i.e., it was regarded as money. Gold may well return to this status. However, for the moment, and over the last 60 or so years, evidence is strong that oil supplanted gold as the primary guarantor of value around the world. Many professional economists point to the Bretton Woods conference or President Nixon, as fixed events or personalities that occasioned the decoupling of gold and paper currency. However, it seems that such these were may have been mere "anchor" events that acknowledged a changing reality where oil had supplanted gold as the new king. King oil may be spluttering and dying, but king it remains.

The above being said, reading the economic literature, one comes across charts of the inflation-adjusted price of gold which suggest that over the last 150 to 200 years gold has continued to hold its value. By contrast, owing to the acidic affects of inflation, a dollar in 2009 retains only a tiny fraction of its purchasing power to a dollar spent at the turn of the 20th century. For this reason gold is treated as a safe haven by investors wishing to protect against inflation. For example, a scan of smart finance websites like the "marketoracle.com" are presently full of exhortations by various "experts" to buy gold as a hedge against the inflationary and potentially dollar-debasing policies of the Bush and Obama administrations. This use as a store of value confers an interesting property on fluctuations in the price of gold. The vigorousness of its movements up and down reveal the sentiment of people of means who are able to buy gold to offset investment risk. In other words, volatility in the price gold provides an index of how safe or risky sophisticated investors judge the investment environment to be - a measure of investor nervousness if you will.

Figure 12 Volatility spikes in oil price precede pulses of volatility in gold


As with oil price volatility, fluctuations in the price of gold shows a general rising trend over the period between 2000 and the present. Looking at the detailed geometry of the ups and downs within this trend, it can be seen that Pulse 1 in oil price volatility is matched by a downstream peak in the gold index. What comes next is a shocker. BANG ! Pulse 2 in oil price volatility (the Hurricane Katrina pulse) appears to ignite a huge surge in gold price variance. Its almost as if the pulse 1 was a warning shot and then a second confirmatory slug of oil price turbulence convinces a bunch of savvy investors to run for cover - big time. Pulse 3 in oil occurs and there follows a modest surge in gold price variance. Then the more dramatic pattern repeats. With the rise of pulse 4 in oil volatility, there is second a dramatic and sharp run up in variance associated with gold price. This huge spike in the gold index coincides with the first swallows (vultures ?) of the credit crisis: Bear Stearns collapse, Bernanke assuring us that the sub-prime market is contained and so on. The cycling pulses in oil price volatility 5 and 6 follow, with all too predictable downstream spikes in gold volatility.

The patterns in Figure 12 are astonishing. Volatility in the price of oil genuinely appears to be leading investor sentiment - each pulse heralding large changes in fluidity in the gold market. Again, it must be reiterated that it can not be concluded that actual investment risk is rising based on Figure 12. This gets back to the "through a glass darkly" problem in measuring investment risk in real time alluded to at the opening of proposition 3. But what we can say is that the type of people with resources and knowledge to "play" the precious metal markets, "the gold bugs", are certainly acting as if they believe that investment risk has risen over the last 5 years. It should also be noted that if one eyeballs the area under the curve of the gold plot, around 50 % of total activity occurred prior to early 2007. This strongly suggests that there was a cohort of smart people who were expecting BIG TROUBLE long before the rest of us had ever heard of a credit default swap or indeed AIG. This needs to be reflected on for those who hold the position that continues to be promulgated by our nearly useless news media that, "No one saw this coming".... or (Imagine comely female news anchor) "Nouriel Roubini. You are one of the few people that predicted this...blah..blah...blah". Well, the gold data suggests that a whole bunch of savvy people anticipated what was coming and many of these individuals are probably now doing very nicely, thank you.

Figure 13 Volatility of gold, the S&P 500, inflation and oil are on upward trends


The data analysis section initially focused on comparison of volatility regression trends. However, as we have gotten deeper in, the multi-pulse pattern in oil price volatility and downstream fluctuations in gold, inflation and the S&P 500 have taken precedent. The theory, as we elaborate in the paragraphs above, is that the pulses or spikes provide reference markers in time, that enables interpretation of relationships between different variables in greater temporal detail. For example, pairwise analysis of the "smoothened" volatility plot for oil indicates 6 pulses of variance between 2004 and 2009. Each pulse in the oil plot stands as a staging post for a subsequent unitary spike of heightened fluidity in inflation rate, the S&P 500 stock index and gold price.

The trend analysis nonetheless remains a valuable tool. Figure 13 plots regression lines for the trends in volatility of oil, gold, the S&P and inflation indices between 2000 and 2009. The Y axis values for each variable was normalized (highest measurement to 1) to enable plotting on the same graph. The most striking and obvious feature that can be drawn from Figure 13 is that volatility in all 4 indices display exponentially rising trends. The non-linear trend in "honest" inflation rate bottoms coincidently, or perhaps even a little after that of oil (as indicated previously). In turn, the S&P 500 demonstrates a recent nadir that occurs subsequent to both inflation and oil price volatility.

So far, so good. The trend data for oil, inflation and stock prices concur with the hypothetical sequence. The exception is the gold volatility index. The regression trend for variance in gold price genuinely seems to bottom out around yr 2001, a time preceding the other 3 indices, including oil. However, to reiterate, the "pulse" analysis governs. When volatility is examined at higher resolution (e.g., as in Figure 12), it is seen unequivocally that over the last 5 years individual pulses in oil price fluctuation precede those of gold. The interpretation of what is going on here harks back to the special status of gold as a safe haven. The early rise in fluidity of the gold market after yr 2000 perhaps reflects the anticipation of the coming age of turbulence by a number of keyed-in individuals. It suggests the existence of prescient actors who despite the Himalayan up and downs of the gold market and the existence of manifold lucrative and less risky opportunities for investment elsewhere (at least prior to 2007), were systematically hedging wealth with gold in increasing amounts.

A final word and a return to caveats associated with estimating investment risk. The most damnable thing is that the further into the future one goes, the less accurate the estimate of risk becomes. Anyone who has ever extrapolated a regression trend understands how error bounds bloom the longer the line goes into uncharted territory. Its not only a vexing problem for this analysis, but also generates a paradox that unsettles the advise given by many well-meaning "investment advisors" - namely that such-and-such an investment is good for the long-term. The further one goes into the future, the likelihood that something completely unexpected will wipe out a specific investment increases. Indeed, over long enough time frames (e.g. generations) it becomes almost certain that most individual investments will go to zero value. A limitation of the approach used so far in proposition 3 is that it is restricted to estimates of short-term variation over monthly sequences. Obviously, it may help the robustness of the analysis that the S&P is comprised of many opportunities rather, than a single investment. However, if there is one thing that the financial crisis has taught us, the assumed protections of portfolio diversity can rapidly evaporate when nearly everything starts moving in the same direction i.e., precipitously down. One approach that may be worth exploring is to use the historical data to generate what is imagined as 3D surface of risk volatility trends between investments separated by varying lengths of time ....but this will be for another day.

'In summary, evidence is provided for a correlative link between volatility in the price oil and two indices of investment risk. Fluctuations in the S&P 500 stock index and the price of gold. Again, six pulses in oil price instability are seen to be matched by unitary twitches of volatility in the stock index and gold price over period between 2004 and 2009. The detailed correspondence between the oil and gold indices is particularly striking. It is concluded the environment for investment over the last 5 to 9 years has been marked by risk that is increasing in a non-linear, perhaps even exponential manner.'

When Black Tuesday Came
''Occam's Razor - Of several acceptable explanations for a phenomenon, the simplest is preferable. ''

Figure 12 provides evidence that massive hedging in gold was occurring prior to the onset of the financial crisis in spite of the short-term unpredictability of gold as an investment. One reason for this paradoxical phenomenon is that gold is a barometer of perceived investment risk. Proposition 4 examines how it  came to be understood that oil volatility was adding unprecedented levels of uncertainty to investment outcomes through the 2000s - as reflected in indices such as the price of gold. The main question posed is whether specific information was available that could have led to a change in incentive within the financial industry from protecting shareholders to unregulated "cashing out".

Exhibit A in Proposition 4 is Figure 14. It may take a while to study and verify this complex chart. However, once you have familiarized yourself with its implications, your view of how economic events in the modern world are shaped may be changed - perhaps not in a happy way. In a nutshell Figure 14 shows that spikes in volatility of the price of oil have occurred immediately downstream to almost all US recessions and stock market crashes since 1966. Put aside for a moment the explanations trotted out by experts on the vagaries and fortunes of the US economy -- sub-prime, the Fed, interests rates, the business cycle etc etc etc. Figure 14 teaches the single factor common to virtually every US recession and market crash for nearly half a century is that each has been preceded by a prominent transient spike of instability in the price of oil. The one exception with no preceding pulse is the shortest recession of this period, which occurred in 2001 in the wake of the so-called dot.com bubble in technology stocks. There is debate as to whether dot com actually met the formal definition of a recession, as it did not comprise 2 successive quarters of negative GDP growth. Semantics aside, it is notable that a volatility spike was coincident with this recession, so the 2001 downturn might be considered not inconsistent with the general pattern identified  here.

Figure 14 - Geopolitical and Economic History of Oil Price Volatility


Looking at Figure 14 in detail, the now familiar recent 6-7 volatility spikes of 2000 to 2008 can be seen at the far right of the plot. Each of these transients in price variance are asterisked and referred to as "primary volatility spikes" on the plot. A new, more recent pulse can be observed to be building in 2009. While this upstroke shows signs of flattening, it has already risen to the point where it is currently the 5th largest spike in oil volatility of the last 50 years.

The left hand of Figure 14 covering the period between 1966 and 1980 provides new food for thought. Against the background of the turbulence of the last 10 years the volatility transients (again asterisked) in this era are almost imperceptible. However, by expanding the Y axis (right hand inset Figure 14) we can see the definite nubs of variance that coincide with the oil shocks of the early 1970s. And these are indeed primary volatility spikes in the context of their era, as they rise above a background which maintained at near-zero levels until ~1980. It should be noted that the oil markets were heavily regulated by commercial and government interests during this period. Hence, although squelched, volatility appeared to squeak out in spurts when it could no longer be constrained. All the same, two official recessions and a stock market crash can be recognized proximal to and downstream of notable volatility spikes between 1966 and 1979.

The period between 1980 and the early 1990s is fascinating. Within this time, frame three recessions and one stock market crash occurred. Again the "one on one" and upstream relationship of primary volatility spikes to economic events is maintained. Perhaps the most interesting event of this period is the stock market crash known as "Black Tuesday". The crash that began on Tuesday the 19th of October 1987 appeared to come out of nowhere, occurring during a period of steady gains in growth in the US economy. While "Black Tuesday" remains the greatest single-day loss that Wall Street has ever experienced, no convincing answer to what caused it has ever been forthcoming. There are speculations on the role of computer trading, herd behavior by market players and derivatives. However, in the historical perspective provided by Figure 14 it can be seen that an overlooked factor is a large oil volatility transient that peaked shortly prior to this market crash. This spike was caused by a failure of OPEC to stabilize prices owing to "cheating" by cartel members on production quotas. The honorable Saudi's tired of their role as a production "buffer" to counter misbehavior by OPEC siblings and temporary chaos (and hence volatility) ensued in the oil markets.

"Black Tuesday" may turn out to be one of the most significant lessons in the dark arts of the markets ever. It came as if a meteor in a time before telescopes or knowledge of heavenly bodies. It singularity and inexplicably is just the "exception that proves the rule" that good scientists are always on the look out for. The unexpectedness of this stock market crash spared it a tidy accounting by the press and the mendacities of conventional wisdom. In the context provided by Figure 14, that "Black Tuesday" was the immediate downstream product of an unusually large spike in oil volatility now becomes a totally reasonable proposition. Indeed, it may be the only explanation that makes any sense. A precipitous induction of investment risk by an oil variance pulse in the absence of an economic downtown. In other words, OPEC gave us an experiment on the effects of a primary volatility spike controlled for the confounding influence of declines in US GDP. Sweet. No need to invoke the God's of randomness to explain "Black Tuesday" then.

It is speculated that inquiring minds watching the events that unfolded over 20 years ago on October 19th 1987 may have become early adopters of the conclusions regarding oil price stability and investment risk outlined in this essay. The insights provided by the oil shock's of 1970s probably laid out the principle for anyone awake and motivated enough to recognize the pattern. Similarly, oil  volatility pulses at the beginning of the 1980s and the 1990s provided further confirmation of the correlation. But in all these cases, one could still have argued that the poor investment environment resulted from the economy being in poor shape. But "Black Tuesday" sealed the deal, by showing that a primary spike in oil price variance was sufficient, in it own right, to inject uncertainty into investment markets, even during a period of steady growth in GDP. Students of "Black Tuesday" likely now hold some of the most senior and influential positions in the Global Financial Industry.

Here another curious thing. The arrow hanging over "Black Tuesday" on the chart proper is actually an error. It got accidentally left there whilst Figure 14 was being prepared in Photoshop. But I'm going to leave the "hanging" arrow there as in the "The Omen". You know...there were those creepy blurred lines that hovered over pictures taken of the doomed priest.

Figure 15 - Primary Oil Price Volatility Spikes 1966-2009


In the penultimate step of the data section of this essay, an attempt will be made to "drag the beast" into the "light of day" as fully as possible. The root cause of our economic woes is postulated as to what the essay now refers to as primary volatility spikes -   variance transients in the price of oil. It is suggested that primary volatility spikes can be thought of as a class of discontinuous phenomena in their own right within the broader category of volatility. The focus here is on oil, but as has already demonstrated, the variance patterns of other economic variables (e.g., inflation), also display similar discrete spikes.

The ability of variance transients in oil price to cause economic shock in the past appears to some extent to be dependent on the era in which they occurred. For example, relative to those of the last decade, the absolute magnitude of spikes in the early 1970s were small (e.g., inset Figure 14) - nonetheless their dire economic ramifications are all too well remembered by anyone over the age of 45. In the following paragraphs, a simple arithemetic device will be used to provide an appreciation of the relative impact and frequency of primary volatility spikes over the last half century.

The top panel of Figure 15 again shows the plot of oil price volatility (darker red line) from 1966 through to 2009, though this time with a 60-month moving average (thick pink line) co-plotted on the same axes. This pink line provides the mean level of volatility within rolling 5 year time frames as a backdrop to appreciate individual peaks in oil price variance against. We can take this a step further and divide the volatility level at any time point along the darker red line against the moving average at that same time. This is called a normalization and the results of this math trick can be seen in the lower panel of Figure 15.

"Normalization" brings into the "light of day" some 30 primary volatility spikes. For the first time we now are able to gain a sense of the unitary nature of spikes in oil price variance from era to era  - albeit imperfectly. The spikes within the 43 year time span are clustered into 5 groups (Figure 15). The first cluster of spikes is in the early 1970s, corresponding to the period in which US "Peak oil" occurred, the second, third and fourth clusters are centered on the 1986 "Black Tuesday" spike and the fifth is the largest and most recent group that has been the main focus of this essay.

One surprise outcome of "normalization" is that it provides evidence that the latest (i.e.,fifth) cluster of instability in oil pricing may have initiated in the mid 1990s, rather than in the early 2000s as was indicated from earlier charts in this essay. If this earlier onset is the case, it has interesting implications. For example, if the new pattern of volatility seen in cluster 5 is diagnostic of the aftermath of Hubbert's peak, then it could infer that the worldwide crest in oil production occurred prior to 2004.

The actual timing of Hubbert's peak will only be settled by a future economic historian with retrospective data in hand. All the same, if one were hedging bets, a safe-ish guess is that "Peak oil" probably occurred sometime between 1997 and 2007. It would certainly have been a remarkable piece of prognostication if Dr Hubbert turns out to have hit the mark both times in in his 1956 prediction that 1970 and turn of the millenium would correspond to when the US and world reached their respective maxima in crude oil production.

Figure 16 - Primary Oil Price Volatility Spikes and Gold Price Movements 1966-2009


Figure 16 returns us to the theme of this essay. Namely, the effect of volatility in the price of oil on investment risk. Gold was fingered earlier on as both a store of value and an extremely sensitive indicator of perceived market risk by sophisticated investors. Figure 16 provides a beautiful illustration of how primary volatility spikes presage and accompany surges in the price of gold. Using this chart it is straightforward to guess which is the "horse" (Theramus suggests the volatility spikes) and which is the cart (gold) of the pair. Interestingly, a small upward blip in gold price (yellow arrow, Figure 16) can even be seen to occur toward the end of 1986, prior to the "Black Tuesday" stock market crash. But consistent with the hypothesis outlined in this essay, this small surge in gold price and the large market crash of the following October, both occurred after the initiation of the 3rd cluster of oil price variance spikes.

Finally, note how the start of the fifth and most recent cluster of volatility in the late 1990s precedes the kick-off of a relentless climb in the value of gold over most of the 2000s. If you're curious about what happened to money lost during the financial crisis, then one perhaps does not have to look too much further than this veritable mountain of gold with its foothills nestling in the year 2000. If you wish to recover the money back from your dropping house value or evaporating 401k plan, one place to turn your attention too would be the vast amount of wealth that has been accumulated in gold over the last 5 or so years by certain individuals. Good luck with that, by the way : &gt;)

'In summary, based on the data of this and preceding sections, the concept of a "primary volatility spike" or "variance transient" is introduced. It is shown that primary volatility spikes in the price of oil show an uncanny proximal and upstream correlation with all major US recessions and stock market crashes since 1966. Of specific interest, the stock market crash of "Black Tuesday" may have provided a controlled experiment demonstrating that a primary volatility spike was sufficient to cause a major induction in investment risk independent of other factors. Lessons learned over the last 40 years on the effect of oil variance transients on investment risk are suggested to have guided the response of the global financial industry to the present crisis. In particular, this information may have provided the rationale for shifts in incentive that led to: '

1) the uncoupling of the interests of the financial industry from the broader economy, 

2) the expansion and looting the shadow banking system and 

3) the aggregation of wealth by prescient actors in "value stores" such as gold.

Volatility in the Price of Oil is a Natural Consequence of Hubbert's Peak
This idea wiki began in January 2009. At the time, the cost of a barrel of oil had receded to around $40, after reaching a peak of over $140 some months earlier. When this sub-section of the essay was first being drafted in May 2009, oil had crept up to just under $60 a barrel. Now, as of early July, price is falling again and a new variance transient has climbed to the point that it is now the 5th largest primary volatility spike since 1966. Not the monster of 2008, but nothing to sniff at by the same token.

The chart of daily oil price over the last 2 years traces an eye-catching internal momentum. The line describing its prominent surges and falls appears to follow a tight curvilinear trend over the weeks and months. Naturally there are wobbles, but the oil price chart progresses as if under a geometric law. The reason for this conformity probably has a simple explanation. The daily price of oil is being determined by the same endogenous mechanism that governs the multi-year pulses in variance (i.e., cluster 5 of Figure 15) brought to light earlier in this idea.

Unpleasant as it is, the state of affairs that we now find ourselves is likely to be part of a natural process – hence the reference to an “endogenous mechanism” above. The type of volatility occurring is in the nature of being on the down slope of a finite resource in great demand (i.e., oil). Cyclic fluctuation in the value or availability of a resource (especially non-renewable ones) is characteristic as that resource becomes depleted. "The oil drum" website has some great discussions on this topic. Examples include the whipsaw changes in the price of whale bone in the 19th century as this material used for hooped dresses, corsettes etc became more and more scarce (http://www.oilcrisis.com/History/whaleOil20040913.pdf). In a more recent example, Atlantic cod numbers landed off New England have shown similar surges and falls over time in response to over fishing. The potential for ups and downs in oil price also has interesting parallels to the interlinked changes in predator-prey numbers in the wild. Given the recent uptick in oil price to ~$60 a barrel, the next volatility spike of the series shown in Figure 9 may be with us shortly.

It is argued in this idea, that human fraility is a necessary, but not sufficient causal factor in the financial crisis. To conclude that greed and hubris is at the center of gravity of the crisis is an error of reasoning not so far from the rationale for sacrificing virgins for a good harvest, blaming homosexuals for Katrina, or the evening news assigning a cause to the day’s movement on the Dow Jones Industrial Average. Such actions and utterances make emotional connections - but they have no basis in objective reality. The process that is currently unfolding is more about the laws of physics than it is directly about us. What we are experiencing is characteristic of a resource depletion curve and follows inevitably from Hubbert’s peak.

There May be Few Historical Parallels for the Current Economic Crisis
The idea that the present economic crash has much in common with previous speculative "bubbles" is a widely held point of view. Supporters of this camp note parallels in a lineage that can be traced back to the Dutch tulip mania of the 1600s and before. A certain wise and beloved Father-in-law opines that "What is happening now has happened before and will happen again. People forget. Folk will be folk". There is much truth to the particulars of this statement. This being said, the evidence suggests that the unpleasantness of late may have features that have not been encountered before. The scale of the crisis is off the map in comparison to every other preceding downturn. The Great Depression of the 1930s was also a global event, but in terms of the amount of wealth involved and lost it can not hold a candle to the level of deleveraging that we are currently experiencing.

Perhaps the most troubling distinguishing characteristic is that it is difficult to see where the energy to power new growth will come from. In the 1970s, Mr Reagan turned to the giant Saudi oil fields as a substitute for declining US production. Iraq is thought to sit on the world's second largest oil reserves. But it remains to be seen whether Mr Cheney's actions in "cordoning-off" and altering the political arrangements in Iraq mitigates the situation. The cost of ensuring a stable flow of energy from the Middle East for the West has increasingly been shouldered by the US and its military. This task becomes a harder and bloodier slog with each passing year. The lack of a reliable source of new fuel for economic growth makes the outcome of the present crisis unique in its uncertainty. And if there is one thing that the “animal spirits” of the market can not and will not stand for it is uncertainty.

Warren Buffet, famously observed that "“You only find out who is swimming naked when the tide goes out”. A seaside aphorism might also used to make an observation on the failure of honest reflection on the causes of the present crisis. A tidal wave of oil volatility washed over us in 2008, yet nearly everyone is still standing on the beach wondering why they're wet. In fairness, the oil shock of 2008 appeared to be an isolated and unexpected event that occurred after the visible onset of the financial crisis in 2007. This sequence of events may have led to an impression that the bubble in oil price was caused by the financial crisis, rather than vice versa. However,  Figure 9, reveals that the large wave of 2008 was actually one of a series of at least 5 earlier surges in oil price turbulence, the first of which appeared to have initiated toward the end of 2003. The swell of a new 7th primary volatility spike has evidently built during the initial part of 2009. Pontificating on sub-prime, lack of regulation or sighing and wisely intoning on the wretched greed and excess of Wall Street may work for a while, but at some point insouience will have give way to a recognition of an unpalatable truth. Growing unpredictability in the price of oil is probably at the root of our problems.

The Expansion of the Shadow Banking System and Hubbert's Peak
The above being said, that uber opportunists of the global financial industry have behaved unacceptably in the face of the current predicament remains to be confronted. Their greed has been truly exceptional. These statements may seem contradictory given the "natural process" line argument made above. However, to reiterate, it is proposed here that the expanding and looting of the shadow banking system (i.e., the bad behavior of the financial industry) is a knock-on from the effect of oil volatility on investment risk - a downstream consequence of being on the oil resource depletion curve. The prescient and avaricious few that have taken advantage of this situation have unfortunately ensured that the ride down from peak oil will be much more difficult than it would have otherwise been.

For a good part of its operation over the last 20 or so years, the function of many of the instruments of the shadow banking system (SBS) was to reduce risk. In one example, airlines could buy oil in so-called futures contracts to make the costs of jet fuel more predictable, thereby easing business uncertainty. However, from around the year 2000 the SBS began morphing into something darker. From the turn of the millenium its instruments began to be used as a cover, enabling powerful and secretive interests to aggregate what amounted to the wealth of the entire planet and then some.

"Expert" commentators on the SBS tend to focus on its individual components - its devilishly complex derivatives and investment vehicles. The securitization of mortgages within instruments such as collaterized debt obligations (CDOs) is one of the more important and popularly discussed elements of the construct. What is missed by many trying to come to grips with the causes of the financial crisis is that the shadow banking system is more than the sum of its individual parts. The malign evolution that the SBS underwent can only be appreciated if one steps back and examines its characteristics as a whole from a distance.

The first and most important of the meta-level characteristics of the SBS is that it expanded to a huge sum of money – one half quadrillion to one quadrillion dollars by reliable estimates. One quadrillion is a 1 with FIFTEEN 0s after it ! By comparison, the GDP of the world in 2008 was only ~ one twentieth of this at around $ 60 trillion. Hold up a minute and think about this. What these numbers mean is that the SBS had a cash equivalent in it equal to 10 to 20 times the annual productivity of all humans presently living and working. Mother Earth was evidently not big enough for these people – their needs run to the annual output of at least 10 planets.

Second, there is a curious mindset that the obligations of the SBS are somehow more theoretical than actual. An interesting manifestation of this is that one often hears the evasive qualifier "notional" placed in front of estimates held within the SBS. However, as speculated previously, the SBS came to assume functions that were not foreseen at its inception. Of these roles, the one of primary interest to financial insiders was the use of the SBS to extract salary, bonuses, fees, stock options and other very real monies leveraged against its now famous "toxic assets". This use of the SBS took place mainly prior to the onset of the financial crisis in 2007. Thus, the window of time in which the largest extraction of real money by insiders occurred has long since past.

Stock options appear to be among the most important and pernicious means of value extraction from the SBS pre-2007, when the share prices of many institutions were at their most fraudulently bloated. As such they will be given some consideration in the following couple of paragraphs.

Options were given under the premise that they induced "alignment of interest" with shareholders. On this basis, huge numbers of stock options were handed out by Boards of Directors. However, shareholders should have paid more attention to the numbers of options being distributed and vesting schedules. If they had done so, they would have noticed that extraordinary amounts of value were being given away at their expense. For all practical purposes, the hypothesis that the recipients of stock options underwent a beneficial "alignment of interest" has been falsified by the events of the financial crisis.

One might go further in decrying stock options. The real purpose of stock options was not alignment with shareholders, but alignment with senior management in their goal of enriching themselves. The way it worked was that stock options were hung over those lower down company food chain by company executives in the manner of a Damaclean sword. Contract provisions were in place to retract options the moment an employee acted in a manner judged by executives to be out of line. One imagines that paradoxically options were frequently taken away when employees were caught acting in the interest of shareholders at the expense of management. Stock options are perhaps one major reason that were so few whistleblowers as the fraudulent structure of the SBS grew to gargantuan proportions.

Be that it may that the shadow banking system is now a hollowed out shell, it is noteworthy that in 2008 when AIG was used by the Bush Treasury as a conduit to funnel billions of tax payers dollars to settle credit default swaps (CDSs) with Goldman Sachs et al., the CDSs were valued at a non-notional 100 cents on the dollar. Also, the change in so-called mark-to-market accounting rules allowed by the present administration enable banks to continue the fantasy that their "toxic assets" are worth more than expired lottery tickets.

It might also be argued that both the Bush and Obama administrations have abetted this potential fraud by using taxpayers money in attempts to take the "toxic assets" off the books of so-called "too big to fail" financial institutions. If the hypothesis posed in this essay has merit, one has to admire the "double dare" audacity of the financial industry. First, engineering the expansion and looting of the SBS and then convincing the powers-that-be that the implosion of the SBS caused by the fraud that they had instigated necessitated taxpayer-funded bailouts.

The third key meta-characteristic is that the labyrinths of the shadow banking system operated in secrecy. Even the financial press largely ignored its significance until 2007. Anyone now awake enough to notice, have become alarmed to discover that the sum value of its various instruments, came to dwarf traditional investment vehicles. The fact is that investments ordinary people considered prudent, such as stocks and bonds, were viewed as a “chumps’ game” by financial insiders. Meanwhile, the CDSs, SIVs, CDOs and the rest of the SBSs constituent alphabet soup were used to quietly aggregate a monumental stash. Only the annointed few had access to this private "piggy bank". Without most people knowing what had happened, the financial industry changed the rules of the game and then took the ball away.

Fourth, the shadow banking system was unregulated by the authorities. This part of the tragedy is so grand, one has to weep and laugh in turns. But “look not on the mote in your brother’s eye” for the sins of omission and commission that lead us to this place. All of us share blame for not saying STOP. Perhaps one noteworthy factor here was our passivity in buying the argument that campaign contributions are a form of speech protected by the constitution. Acceptance of this idea allowed access for financial and banking interests to lobby for, and in some cases actually write the law changes that led to this fiasco. This interpretation of the speech provisions of the constitution enabled compliant politicians to take the money in good conscience.

To pull back from the sermon a little here, the net effect of the SBS not being policed was that a small group within the global financial industry engineered the largest unregulated transfer of wealth in the history of mankind. Did anyone do anything illegal ? Probably not. "Path smoothing" was seen to by a string of politically connected fixers over years, including Messrs Gramm, Summers, Greenspan, Rubin and Paulson. The necessary law changes were bought and paid for under the guise of "protected speech" from Congress.

Now that the shadow banking system has collapsed, ordinary folks have had the punctured ball handed back. The money that evaporated from the value of your house decreasing by 25 to 60 %, the amount lost when your 401k dropped by a half, your job and future employment prospects, those crushing interest rates that you'll soon be paying and the taxes that you and our children will fork over to cover Government deficit spending – guess where it all is going or went. To pay the tab ran up on the shadow banking system. Realize also that the losses so far are but a down payment on the debt incurred. House prices and stocks have further to fall. Taxes, interests payments and inflation resulting from the excess of the greedy few will increase to consume a good chunk of what is left of your savings and to garnish the earnings of our children and their children.

Moreover, as large as President Bush and Obama's bailout spending seem, their efforts are modest compared to the giant vortex of "notional" obligations that have been created within the shadow banking system. A class 2 tornado of Govt. spending compared to a category 5 hurricane of "toxic assets" on the books of financial institutions. This is why the initial incarnation of Mr Paulson's TARP plan was never going to work and why Mr Geithner's PPiP program is stumbling. The pols can stiff the taxpayer from here to kingdom come and there still probably would not be enough money to repair the damage done to bank balance sheets. This is also the reason that the current President's "stimulus" is struggling. The SBS continues to churn at the center of the economy - a huge black hole from which neither matter nor light escapes.

To summarize: 1. The shadow banking system quietly expanded to a huge fortune equal to many times the wealth of the world, 2. Its secret operation is not policed, 3. The only people that have access to this fortune are denizens of the global financial industry and 4. This giant black hole is stifling economic recovery. The common sense of folk tales dictates what pirates do when they find themselves in a secret cave filled with a vast treasure. The immaculate logic of the fairy story also teaches us what pirates will do when told.... ''Me 'arties there be but a day or two before the treasure is swallowed up into the bowels of the earth. Aaaarrrg...PLUNDER!'' The tremors of volatility in oil price were the portent that this day is coming and the devil has already taken the hindmost. The wiliest pirates are long gone lugging what booty they could manage. The slower or perhaps more audacious villains are still busy accepting bailout monies courtesy of the US taxpayer.

The Global Financial Industry has Acted Immorally
The current version of capitalism has a fatal flaw. Its general rule has been that it is every man for himself. But at some point the case arose that the only rule became that it's every man and woman for themselves. And most efficient it has been in operating in this manner. The speed with which its most ardent practitioners sniffed out the coming oil-induced economic collapse and rounded up as much of world's wealth as they could manage to gather for themselves was remarkable. Future generations will no doubt regard us as profoundly foolish for allowing a small clique to gather and fence off value equal to the entire wealth of world and then subject it to a 10-fold leverage. Being at the tail end of one hundred years of oil has coddled us into thinking that we are special. Time to think again.

Most reasonable people do not object to free enterprise, but they do draw the line at licentious enterprise. Sensible adults are also aware of socialism's great failings. Despite the efforts of demagogues on the radio and TV, it is a phoney exercise to cast the issues here in terms of capitalism vs socialism. Ultimately, the case of the shadow banking system is not that complicated. It is not about dead or dying political ideologies, it is about decency vs indecency. What has happened is a deep moral failure. A violation of fairness and natural law. Good people in the US and across the world have been disgusted by the pandemic of immorality that appears to have taken place. Many are no longer buying that the financial crisis is too complex for them to understand. They know right from wrong - their Mama and Papa taught them so.

Judge Richard Posner in a recent book makes the point that the banking and financial industry... "was only doing what the market and consumers expected them to do". This argument is wet, to say the least. Posner was wrong before in his untrammeled support of big capitalism. To rationalize his previous positions he now compounds his error by failing to acknowledge that in the pursuit of self-interest sentient beings have a duty to act as moral agents. For social animals such as ourselves, "nature red tooth and claw" is balanced by "fair’s fair". Fair is fair is not the meek code of losers. The anger of the righteous is a counterveiling force that has consistently mitigated the excesses of powerful elites. When on trial - "I was just doing what I was told to do" or that "I was simply doing what everyone else was doing" is not a defense. It should also be recognized that the jurors will not necessarily be our peers - it will be our children (in the Judge's case his grandchildren) who prosecute the hard questions.

"Don't you know you can't run away from trouble?"
One of the oldest and grandest Universities of Europe, Charles University in Prague has as a motto which roughly translates as - "The truth struggles sometimes, but usually it comes out". A lovely example of the Czech talent for understatement. This more authentically captures the emergent nature of truth than say the bombastic, "You shall know the truth and the truth shall set you free" attributed to Jesus of Nazareth. Another appropro saying, this time from John Kenneth Galbraith. "Wealth is the relentless enemy of understanding". Perhaps not always a "relentless enemy", as knowledge is occasionally useful to wealth, but a foe nonetheless. How about Saul of Tarsus ? "Stand firm then, with the belt of truth buckled around your waist, with the breastplate of righteousness in place, and with your feet fitted with the readiness that comes from the good news (gospel) of peace". Where is the like of St Paul now that such a person is really needed ? Finally, among the wisest of them all, Uncle Remus to Brer Rabbit. "Don't you know you can't run away from trouble?... There ain't no place that far." I'm beating around the bush and for good reason. I am afraid. No mistake should be made. There is a nasty fight ahead over the path that the US will take and the shape of a new world to come.

NB...This part of the essay is a work in progress....



Future Consequences of Oil Price Turbulence for Politics and Freedom
There is a another set of broader societal questions on how we respond to rising oil price volatility in the future. It is argued above that the type of instability in oil price we're now seeing is a natural manifestation of being on the down-slope of the production curve since peak oil. But so what ? And what now ? The political class appears to have taken the position that technocrats like Mr Bernanke and Mr Geithner have the knowledge and tools to "get the economy back on track". But the reassuring fiction that smart folks have the situation under control will likely be blown away by the next major run-up in oil price. The spike of 2009 could develop further, the next big one may be another year or two away. Whatever the case, another dramatic surge in the price of oil is on its way.

Foolish commentators will no doubt attribute daily wobbles during this new spike to irrelevant or bogus causes - e.g., OPEC, oil speculators, Nigerian terrorists, unexpected changes in the oil inventory, and so on. But all of us will know in our hearts that such things are as pin-pricks to a leviathan. What is coming at us is relentless, indifferent and unstoppable as the incoming tide. So, rather than charging around willy nilly spending money on stimulus and bailouts, wise leaders might pause and ask themselves: Where is this going ? How do we prepare for what may be truly hard times ahead ? and What does this weird dream about seven fat cows eating skinny cows mean ?

In the longer term, what becomes of our present democratic-capitalist model with its emphasis on the invisible hand of the market, maximizing individual freedom of choice and relying on enlightened self-interest ? Is this model equipped to deal with the unpredictable consequences of pulsing waves of oil price volatility ? In this "brave new future" "will realizing your dreams", "having it all", "reaching for the top" etc be possible for most. Probably not, at least in the material sense. How will we organize ourselves politically ? Will waves of volatility-induced economic disorder result in more centralized and regulated control by the authorities or chaos. What becomes of political freedoms in such a world ?

Perhaps in the same manner oil price volatility could propagate instability into prices and increases investment risk, could other knock on effects include further lability in social mores and ethical principles ? Could we see the return of unpleasant, albeit longstanding human practices such as slavery ? With the demise of oil, back-breaking labor will still need to get done. Indeed, if one thinks about it, there are uncomfortable parallels in the callous economics of how fossil fuels and slavery (historically) have used been used to do work.

Recent manifestations of oil price volatility induced instability in our democracy might include the election of our first black President (as outstandingly qualified as President Obama may be - he is a notable anomaly), the comic behavior of the congress as "it misses the wood for the trees" reflexively reacting to each "new" crisis, unilateral preemptive acts of war by democracies (e.g., US in Iraq, Russia in Georgia, Israel in Gaza), increased use of unregulated surveillance by the state and the vile justifications for the use of torture as a tool by certain elected authorities and legal figures and some in the media.

Admittedly, the timing of a number of the manifestations listed not fit the time line illustrated in the figures provided in this essay. Nonetheless, the shocks caused by the ongoing effects of fluctuations in oil pricing could make possible other hereto unthinkable changes to the way things are done and also soften us up to accept new draconian impositions. Mr Rahm Emmanuel, a Democrat politician recently said,  "...never waste a good crisis"  - an unfortunately callow statement given the magnitude of the calamity facing us. This being said, our political leaders may be spoiled for choice with future emergencies that will be available for charraling the flock.

On the more hopeful side, a realization of the consequences of oil price volatility could provide individuals who consider themselves "conservative", in the sense it is presently defined in US politics, a rationale for a fundamental change in their thinking. It also would give urgency to the majority of self-identified "moderates" and/or "liberals"  who pay noisy lip service to the idea of "addiction to oil" but don't do anything meaningful about this addiction.

When it becomes understood that volatility in the price of oil is: 1) absolutely ruining our economy, 2) disrupting our governance systems, 3) rending the fabric our cultural and religious institutions, and 4) doing so long before we pump all oil wells dry or burn sufficient amounts of it to kill our beautiful planet, then calculations  in all parts of the political spectrum could change quickly and fundamentally. To put this another way, a beneficial effect of the coming widespread misery induced by price turbulence could be a collective choice to urgently explore  how end to our dependence on oil. This call to action could be far more efficient in changing behavior than less immediate threats such as global warming and the eventual depletion of the resource.

In conclusion,
madness came to global financial markets. However, it is proposed that the monumental level of bad behavior that occurred was not irrational. Instead, it is suggested that increasing fluctuation in oil price following Hubbert's peak (1997-2007?) is the ultimate explanation of the economic crisis. Those with the wherewithall to understand and respond to instabilities in oil price seem to have gathered available resources - positioning themselves for whatever is next. Unless Mr Greenspan among this avaricious few, his distress may be significant and permanent.

Theramus

About Theramus
Theramus is a neutered tom.



Many principled individuals have pointed to how the pay-go variant of American politics is corrupt and would end in disaster. Well, it is and it has.

Cheney and Carter...2 political thinkers... believe history will teach that these were the 2 most impt politicians in the US of last 50 yrs... both realists... but both despised... in reality both had  same analysis... solutions were diameterically opposed.... one called for self sacrifice and conservation.... the other went with what worked.... Saudi for US... then Iraq + Saudi

Cheney.... did act in service of his country... unlike many other so-called captains of industry.... respect for him... though his use of torture makes me physically ill

Obama compared to Bush... to early to tell... but my read is that he may turn out to be more like Cheney. Like Cheney has the brains to be the brains behind the operation.

Sound money, balanced budget, marital fidelity, virtues of hard work and honesty, Govt shouldn't meddle in peoples lives.... i.e. a liberal.

diff.inv.gone.vs.streng.acid

Notable Canada doing OK in crisis...sensible regul of banks... RY Bank of Canada Mkt cap now exceeds BoA... more equitable society... Govt health care... Fairs' fair again.

The over scientification of economics a bad fit... connection lost to economics base in moral philosophy... As a pure scientific discipline, it  at best  a bad imitation of biology. Economists may understand macho concepts such as competition, predation and specialization....the role of chance,. But, it not all red tooth and claw... there are many other clever regulatory processes/mechanisms that Mother Nature has found necessary to invent and/or exploit e.g. compartmentalization, redundancy, compensation, signal transduction networks, negative and positive feed back loops, predator prey relationships, division of labor, commensualism, outlier vulnerability, and so on and so on in one interdependent, heavily regulated, mean reverting, sticktogetheration after another. No doubt if capitalisms' true believers did understd. what Nature has discovered it takes to survive and prosper in this world, they would find its

diverse and elegant strictures anti-free market, anti-free-trade, anti-globalization, pro-union... and downright Un-American.

Bioogy teaches that proximity to feed back correcton is key to stability... and bubble prevention.

Yes, we humans are greedy, foolish and violent - in many ways rather ordinary mammals. But can be extraordinary too. Given sufficient cause and evidence we react with revulsion to immorality. In times of great stress turn our ears to teachers of new rules - e.g. the Golden Rule - Confucious, Bhudda, Mahabharata, Hillel, Jesus, Muhammad, and Miss Karen Armstrong. Many do strive to be their brother's keeper. We also capable of repentance, forgiveness and learning to change our ways. There is hope.