And the Lord said unto Noah, “Come thou and all thy house into the ark; for thee have I seen righteous before me in this generation.

“Of every clean beast thou shalt take to thee by sevens, the male and his female: and of beasts that are not clean by two, the male and his female.

“Of fowls also of the air by sevens, the male and the female; to keep seed alive upon the face of all the earth.

“For yet seven days, and I will cause it to rain upon the earth forty days and forty nights; and every living substance that I have made will I destroy from off the face of the earth.” […]

And all flesh died that moved upon the earth, both of fowl, and of cattle, and of beast, and of every creeping thing that creepeth upon the earth, and every man:

All in whose nostrils was the breath of life, of all that was in the dry land, died.

And every living substance was destroyed which was upon the face of the ground, both, and cattle, and the creeping things, and the fowl of the heaven; and they were destroyed from the earth: and Noah only remained alive, and they that were with him in the ark.

– Genesis

POITOU, FRANCE – And so it came to pass that a hard rain fell upon the Earth… in buckets did it come down.

More than had been seen since The Flood.

Cedar Bayou in Texas reported more than 4 feet of water… more than ever recorded in the continental U.S.

How could the heavens hold so much water? people asked. What miracle kept it aloft? And why did it then suddenly fall upon the heads of God-fearing Texans?

What sin had these people committed? What stain was on them that needed to be washed away by such a tide?

In the next 1,000 words, we aim to think about it. And we offer a warning: Houston has more trouble coming.

Unlimited Financing

The immediate problem now is not the rain coming down, but what to do with it.

Where can all this water go?

There was a time when it sank into the swamps, grasslands, and bayous… eventually draining into the Gulf of Mexico. But that was before the feds provided cheap flood insurance and bailout protection.

With taxpayers from coast to coast behind them… and the feds’ fake money providing what seemed like unlimited financing… Texas developers built out the whole floodplain, just as they had done in New Orleans.

A complicated system of reservoirs, drainage ditches, and government financing allowed Houston to expand.

Like so many things made possible by central planning and fake money, the secondary and tertiary effects were ignored. It was all very well to pave a parking lot and send the runoff into the bayou. But in a really big downpour, the bayou will overflow its banks. So will the reservoir you made to hold the excess water.

Which is what happened last night. For the first time ever, the banks of Addicks Reservoir in Houston overfloweth. The Washington Post:

The U.S. Army Corps of Engineers confirmed Tuesday morning that water was spilling from the north end of the Addicks Reservoir, which has been overwhelmed by extreme rainfall from Hurricane Harvey. Officials said they expect the Barker Reservoir, to the south of Addicks, to begin overflowing similarly at some point Wednesday.

No Skin in the Game

Water, like money, has to go somewhere. You can divert it. You can dam it up. You can control it… but only to a point.

Everyone likes to look at the good money can do – vacations, luxuries, and insurance against nature’s foul moods. Here at the Diary, we look at the other side – the downstream consequences… the negative feedback loop that floods your trailer park.

That is what has happened in Houston. Too much money made for too much building in too many places that were too low.

This was done because the feds provided subsidized flood insurance… reduced the price of credit… and goosed up Houston’s economy.

As our friend Nassim Taleb (mentioned yesterday) would say, the people making these decisions had no “skin in the game.”

Yes, money was at risk. But the skin came off the hides of people from Oregon, Kentucky, and all over the U.S.… people who lived hundreds of feet above sea level with no particular interest in subsidizing malls and split-levels on low-lying land on the Texas littoral.

Boom Town

Houston has the distinction of being America’s number one Oil Town. The black goo was discovered in the area in 1901.

That elixir turned the city into a boom town. But in recent years, like so much else in the U.S. economy, the boom has had an ersatz quality… like a cowboy hat on a city slicker.

Money has to go somewhere. In the period from 2010 to 2014, the Fed and other central banks brought forth a deluge of it – about $15 trillion.

Much of it went into Houston’s major industry – oil. The price of a barrel of petroleum was so comfortably above $100 that analysts could not imagine it would ever again trade below $75… let alone below $50. They were thus aghast when it dropped to $29 in January 2016.

But there was good news. Or so they said. The oil industry used cheap credit to revolutionize U.S. production.

In particular, the engineers, machinists, and day laborers who filled Houston’s suburbs, shopping malls, and parking lots had revitalized the shale oil industry. And now they were producing so much oil that not only would America be self-sufficient in oil, but also it would soon be exporting the stuff.

“Together, we are going to start a new energy revolution,” announced President Trump earlier this year. It will be “one that celebrates American production on American soil.”

But the revolution was fake.

Since the crisis of 2007–09, most of America staggered and slumped, with little real recovery. But money rolled over the mountains, across the plains, and down the rivers – to Houston.

The city serviced the oil industry with rigs, drills, hoses, and tanks. Then it loaded the petroproducts on ships in its port.

Shale Oil Ponzi Scheme

Cheap or expensive oil – and cheap credit – kept Houston growing. In 2014, Forbes magazine counted 14 Houston billionaires.

But there were secondary and tertiary effects. When economic researcher Chris Martenson examined the shale oil industry, he found it was never profitable… not when oil was $100 a barrel… or when it was $40 a barrel.

It was an industry created by artificial credit priced artificially low. And it produced an artificial industry that never made a dime of profit. Martenson:

The bottom line is this: The U.S. shale industry resembles a fraudulent Ponzi scheme much more so than it does any kind of “miracle.”

How do I know that? Because, collectively, U.S. shale companies have lost cash in every year of their existence. [They] burned through cash when oil was $100 – and again when it was $90, $80, $70, $60, $50, $40, and $30 a barrel. They burned through cash in 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016.

You don’t have to be a finance guru to appreciate or understand that any industry that persistently burns through cash is a bad deal. Especially one whose prime product – shale wells – principally deplete (-85%) in roughly three years.

If you’ve been in business for nine years drilling wells that mostly run out in three years, and you haven’t managed to produce positive cash flow at any point along the way, then it’s time to admit that your business model simply doesn’t work.

Unlike art galleries and design studios, you get little status from having oil stains on your overalls.

And when the next downpour comes, you should expect a washout in Houston’s oil businesses. Marginal producers will get out. And marginal workers – attracted to Houston by the hope of higher wages – will move out.

As always, we urge readers to stay on high ground.




P.S. Recently, we introduced you to our newest colleague, Jeff Clark. Unlike your editor – an old fuddy-duddy when it comes to investing – Jeff is a trader. And very different from our Diary’s “big-picture” view, Jeff believes you can spot short-term trading opportunities by studying the numbers alone.

It’s not our usual fare here at the Diary. But it’s a good counterbalance to the public spectacle we discussed above.


Investing Insight: Preparing for a Market Crash

By Jeff Clark, Editor, Jeff Clark’s Market Minute

bill bonner

Stock markets don’t crash when everyone is looking for it to happen. And crashes don’t happen when the important moving averages are in a bullish configuration.

So, while there is certainly the potential for a 5–7% correction over the next month or two (September is approaching, after all), we probably won’t see a larger decline than that until sometime next year.

The easiest way to prepare for that is to raise cash. It is far easier to sell stocks in a rising market (where there are plenty of willing buyers) than to sell stocks in the middle of a sharp decline (where everyone is rushing for the exits).

Raising your protective stops on your holdings is also a good idea. But the use of stops is not as protective as you might think when stocks gap sharply lower. That’s why I prefer to raise cash by selling stocks into strength.

Of course, owning typical “safe-haven” assets like precious metals and precious metals stocks can also help when the broad market sells off. Money flows out of “risky” assets and into perceived “safe” assets like gold and silver. Owning gold and silver ahead of time is a good way to prepare.

Finally, you can hedge your portfolio with a well-timed short sale or two. Selling stocks short offers the possibility to profit as the market falls. The profits on your short trades will help offset some of the damage on your long portfolio.

But – and here’s the tricky part – you have to get the timing right on your short trades. If you go short too early and the stock runs 10% higher, then you won’t get much of a benefit to a subsequent 10% drop in the market.

Most folks, including yours truly, tend to be early on short trades. If you can patiently wait for the broad stock market to reach extremely overbought levels, then you’ll have a better chance of getting the timing right.

By far, though, the most important thing to do to prepare for a large market decline is to simply raise cash. That way, you’ll suffer less when the market falls and you’ll have plenty of money available to go bargain shopping after the bear has torn everything to shreds.

Jeff Clark

P.S. Every morning the market is open, my Market Minute newsletter tells readers where the action is headed for the day… including which sectors to watch and which to avoid.

If you’re an active trader, it’s a valuable tool for preparing your day. If you’re not an active trader, you’ll learn tips that’ll make you a vastly better investor. To automatically receive the Market Minute for free right in your inbox, click here.

Featured Reads

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In today’s mailbag, the conversation is all Trump

Why is Trump getting so much praise? There is constant turmoil and turnover in his own White House staff. Is that because of Congress or the liberals? Or is it because Trump loves chaos and conflict? Trump insults everybody except Putin, the Saudi king, and white supremacists. And no major legislation has been passed this year!

Can the people that love Trump’s insults point out one case where insulting everybody has brought everybody together? People will say that I must be a liberal if I don’t like the way that Trump insults almost everyone. But, when has that ever worked for a conservative?

– Don H.

The idea that things can be paid for with debt only lasts as long as growth allows it. At some point, enough stuff has been built but not paid for. Never mind that under current monetary policy, it can’t possibly be paid for. When you can’t free yourself from an intractable debt, you are in fact not free.

This is the thing Trump can’t change. In fact, only the people themselves could change it once sufficiently educated to what’s actually going on. Seldom in all human history has such a state of enlightenment existed on a scale to support a truly free people. I don’t think you’re critical of Trump, but just realistic about what one man in his position can truly be expected to accomplish.

My recollection is the last man to inspire free people and free government was Jesus, and we all know how that story ended…

– Mike R.

It doesn’t matter how much people try to get rid of President Trump. I have read the Bible through many times and I have noticed from the Bible that God puts leaders of countries up and puts them down when he wants to. I’m so glad President Trump loves Israel. I just finished reading a history of how many times God destroyed nations that came against Israel by all kinds of disasters.

Some say President Trump is like Cyrus in the Bible. God helped Cyrus defeat many enemies until he started taking the credit for himself rather than giving it to God. Then God allowed him to be defeated. I keep praying that President Trump keeps saying that God is helping. All the prophecies about the end of time are fast being fulfilled.

– Janice N.

I applaud your equal-opportunity essays, but having the same twisted logic cited ad nauseam is getting tiresome. Your readers say that nobody’s giving Trump a chance but somebody must have voted for him, that Trump isn’t responsible for all the swamp critters, etc., etc.

It’s getting a little wearing. Both sides are out for numero uno, so perhaps a moratorium on the wishful thinkers and breath-holders. Of course I’m not at all suggesting you abandon your reader base, so maybe a better solution is to find someone more in tune with this crowd. From what I see, there is quite a market out there… Or, I could just enjoy your columns and pass on the letters…

– Dave H.

In Case You Missed It…

In the next few weeks, Apple will reveal the iPhone 8. It’s expected to have a host of new features, like wireless charging and 3D face scanning.

Colleague and tech expert Jeff Brown recently identified three small-cap tech companies that are helping Apple make these new features a reality. And once the iPhone 8 is revealed, these little-known tech suppliers will be primed to skyrocket. Get all the details right here.