‘Gold's advance to super cycle indicates demise of dollar, collapse of economy’
By Jijo Jacob
The runaway rise in gold prices is here to stay. And that is not just bad news to the U.S. economy. A sustained gold and oil boom indicates that the dollar is slipping into grave danger and the economy closer to collapse.
"... when these commodities go up in price it is a sign that the U.S. dollar is dying and that our country is getting closer to economic collapse," Michael Snyder wrote in Daily Markets on Thursday.
In simple words, the gold and silver boom indicates that investors everywhere in the world are losing trust in the dollar and the U.S. government treasuries. And they seek out something they can trust more.
A Standard chartered Bank report on Thursday said dollar will further weaken against the Chinese yuan and Indian rupee.
Synder blames the quantitative easing for the loss of dollar value. He says the policy of pumping huge amounts of money into the financial system is highly inflationary and a form of cheating.
He says it is "like playing Monopoly with someone that reaches under the table and pulls out a bunch of extra money when they are almost broke."
"The U.S. has been running trillion dollar deficits for several years now, and this has created a lot of new money." And he says the rest of the world is now seriously doubting the sustainability of U.S. government debt. And this is reflecting in the commodities boom.
The Standard Chartered bank report said gold prices could reach $2100 by 2014 per ounce and that as high a price as $5000 per ounce by the end of the decade is possible.
Gold prices have currently crossed the new record peak of $1460, which is a manifold jump from a lowly $265 at the start of the decade.
The bank said gold prices are yet to hit the super cycle as demand from the emerging economies like China and India will scale to peak levels later in the current decade.
"We find that there is a powerful relationship between income per head in Asian emerging markets and the gold price, which suggests further significant upside for gold," the report says.
Besides gold, silver is inching to another peak of $40 and there is already talk that it will soon touch $50. While the rise of oil prices is owing to different a set of reasons, this also implies serious troubles for the U.S. economy.
Snyder says high oil prices are indicative of greater damage to the economy than high gold prices.
Showing posts with label supercycle. Show all posts
Showing posts with label supercycle. Show all posts
14 April 2011
16 September 2009
One Year After Financial Crisis, Reform Questions Loom
Watch
JUDY WOODRUFF: Jeffrey Brown looks now at where things stand one year later.
JEFFREY BROWN: And joining me for that are Nassim Taleb, a statistician, trader and author of several books on probability and risk, including "The Black Swan." He's an adviser to Universa Investments and teaches at New York University.
Donald Marron is chairman and CEO of Lightyear Capital, a private equity firm, and former chief executive of Paine Webber.
And Alan Blinder, professor of economics at Princeton University, he was vice chair of the Federal Reserve from 1994 to 1996.
Donald Marron, you were at the speech today. Was the president right to warn of complacency on Wall Street? Has enough changed in the year since Lehman collapsed?
DONALD MARRON, Lightyear Capital: Yes, I think a lot has changed. He was very straightforward. I think he gave an outstanding speech. He was articulate. He certainly knew the issues.
Basically, he said three things. The first one is, we need an agency to protect individuals against others who create products and against themselves. Secondly, we need more regulation to regulate all these securities firms and banks. And, third, we need legislative power to make sure this never happens again, that somehow it can be stopped before it goes over the edge.
And I think he delivered each of those positively. Obviously, God is in the details on these things. But this is certainly a speech and a set of issues that wouldn't have occurred a year or year-and-a-half ago. It was an important change.
JEFFREY BROWN: Well, Nassim Taleb, you had warned of instability for many years before what came to pass occurred. So where do you think we are now?
NASSIM TALEB, New York University: Still the same situation. We have the same leverage in the system that we had before. The too-big-to-fail effect is right there, no different from what it was before. And banks are taking the same reckless risks they don't understand as they did before with the very same pseudo-scientists managing the risks.
So I don't see what changed. And we have 6 million Americans at home now more than we had before. I don't see what changed. The risks are still there. We need to lower the leverage, make the world more robust, and it's not.
JEFFREY BROWN: All right, a lot of things to pick up there, but let me bring in Alan Blinder. First, a kind of general assessment. The president did talk about growing stability and gave credit to his team for bringing that about. You've talked about that on this program in the past, the need for all of that. What do you think now?
ALAN BLINDER, Princeton University: Well, I think things look enormously better than they were, say, six months ago, I guess the bottom of the stock -- I think President Obama called the bottom of the stock market on March 9th.
I think things his team has done have helped a lot. I think things the Fed have done have helped even more. The Fed's not part of his team, I might point out. It's an independent agency and needs to stay that way.
But between the Treasury and the Fed and the FDIC and a few others, I think they've made an enormous difference doing, by the way, extraordinary things that I'm sure if you asked any of them two years ago would they ever do something like that, they would have said no.
Nassim Taleb
Author, The Black Swan
I think what's happening is both risky and immoral.
The problem of too-big-to-fail
JEFFREY BROWN: Well, let's pick up on some of the issues you've all raised. Mr. Marron, Mr. Taleb was talking about the too-big-to-fail doctrine. Now, in part of the consolidation of the industry of the last year, part of it was to allow a lot of institutions to survive. So have we created larger institutions that are still too big to fail or even bigger than they were before?
DONALD MARRON: Yes, it's a key question. I think what we did, first of all, is we brought a larger percentage of Wall Street under the banking regulators, the Fed. And that was a necessary thing to do. I'm not sure it was the best thing to do, but we had to do it. And that, in turn, has resulted, obviously, in lower leverage in various controls that are going there.
The other thing that we did, obviously, is tell the public and the clients and the world that there's a few institutions that are going to be there no matter what. The result of that is they are getting bigger proportionally to the rest of the system. I'm not sure that's a great thing.
And I think one of the questions you have to ask about too big to fail, are they too big to manage? Part of this whole business that we don't talk about is talent, the talent to manage all these complex products, services that are produced. And this is an industry that can easily spawn other organizations.
So I think what you're going to see going forward, particularly with the limitations on compensation, is a lot of talent moving to smaller organizations, finding a way to build them and to compete in the real world. The question is, will the new regulatory environment encourage that? Or will it discourage it?
This country and Wall Street is built on being entrepreneurial. The trend that we're going to now is basically the reverse.
JEFFREY BROWN: But, Mr. Taleb, you're taking this further.
NASSIM TALEB: Yes.
JEFFREY BROWN: You see the chance for continued major failures looking ahead?
NASSIM TALEB: Well, I think what's happening is both risky and immoral. Why immoral? Number one, we're transforming private debt into public debt. Private debt normally with a system of transforming debt into equity or through bankruptcy would disappear. When you fail, you disappear.
We're transforming that into debt for our children. And, of course, we're going to have to raise bonds with the deficits, and that may cause inflation.
The other problem is that the Obama administration has been rewarding failure, OK? Instead of strengthening people who are countercyclical, just like they gave a deal with the Cash for Clunkers to people who bought the wrong car -- I bought the right car, I'm not eligible for Cash for Clunkers, so I'm subsidizing the one who made the mistake, likewise, you have a raise of taxes, penalizing those who are countercyclical, doing OK in 2009, and giving a tax break to those who got us here, the Wall Streeters.
I have not seen from the Obama administration the right kind of leadership that we should be having. I haven't seen anybody stand up and said, "We need blood, sweat and tears." Let's reduce the debt in the system, and let's not tax our children with all these stimulus programs, have not seen that.
The only people who are talking about are the U.K. Conservative Party. Outside of that, I have not seen anything. The risk in the system is being transferred to our children. That's not acceptable.
Alan Blinder
Princeton University
[W]e're a lot better off today than if we had tried to balance the budget on the backs of a dying -- I don't want to say a dying -- a sick economy at the beginning of this year.
Grading Obama
JEFFREY BROWN: Mr. Blinder, why don't you come back on that? Because you're talking about the role of the government in trying to intervene and at the right time, so respond.
ALAN BLINDER: Yes, let me separate that into two responses, very briefly. First is the fiscal stimulus. The argument for this is as old as Cane's. When there's not enough demand in the system to get people employed or to prevent them from losing their jobs, one thing the government can do is spend more or cut people's taxes and get them to spend more or something else to induce spending, but all of those things raise the deficit transitorily, not forever, but transitorily, and we're still in that position.
And we're a lot better off today than if we had tried to balance the budget on the backs of a dying -- I don't want to say a dying -- a sick economy at the beginning of this year. The rest of it, hopefully, will not be spending. It's in the form of guarantees, asset purchases, loans. Some of it, as President Obama has mentioned, has already come back, turning a modest profit to the U.S. government.
Some of it will probably be lost, but lost for a good reason, lost so as to prevent or at least reduce, to de minimis the risk of what Ben Bernanke called Great Depression 2.0. If we had gone down that path, the amount -- the losses to Americans would be a multiple of the debt that's piling up.
Now, one last point. We do need to address that debt. I don't want to sound like I'm completely relaxed about piles and piles of debt, about $9 trillion in deficits over the next 10 years, or maybe more. I'm not relaxed about it; we do need to do something about it. But the paradoxical answer is not yet. It's not time to withdraw that stimulus.
Donald Marron
Lightyear Capital
[W]hat we know for sure, is all the money that's gone into the system, only some of it will work, and some of it won't.
Unwinding government support
JEFFREY BROWN: Mr. Marron, you want to come in on this subject?
DONALD MARRON: Yes, I do, I think. I think the answer is, one has to be very practical about this. Wall Street for 100 years was in the business of making illiquid assets liquid, first bonds, then stocks, even companies with LBOs.
What happened in the last couple of years is, liquid assets, including mortgages, became illiquid. The whole system started to fail because people in big firms and traders, recognizing they made a mistake, couldn't sell what they had to sell -- that was the first thing -- and values declined, as well as the economics that underlied those values. By throwing all this money into the system, the government has certainly improved that.
The second thing is what we know for sure, is all the money that's gone into the system, only some of it will work, and some of it won't. Will the administration be capable of taking the money that isn't worked and redeploying it? That's the key thing.
And, third, what's going to happen to the flow of money in the system? For example, before this started, money market funds had about a billion -- $1.5 trillion or $2 trillion. It's now up to about $3.7 trillion. Why? In the main, because people are scared. You know, putting money essentially in cash, getting no return.
The way markets work and the way a system works is you have to have people having a fundamental confidence in the system. A key element of that is, if they buy something, they're getting value, and they should be able to sell it whenever they want to. That fear of that situation is one of the reasons that we have this problem.
So the final issue for the government now, I think, when it thinks about what to do in building this confidence, it has to raise the ability to lend to small business. It has to raise the ability for people to buy houses.
And in the broader sense, they have to regain the confidence in the system. One way to do that is transparency. We created too many products that nobody, even the pros, can understand. And the second way is standardization, so you have enough of a single product so you can have a market.
It's a simultaneous equation. If we don't do these things, then the Bear story will happen again. If we do these things, then we'll set the base, as Alan said, for going forward, not now, not yet, hopefully soon.
Nassim Taleb
Author, The Black Swan
[R]egulation can do a good job, but just blind regulation is not the solution. The solution to me is the cancer we have in the system -- too much debt
Pushing for stricter regulation
JEFFREY BROWN: All right, let me let Mr. Taleb back on this, because, I mean, part of this question is about government regulation and what the government might be able to do, while preserving the ability of risk in the system.
NASSIM TALEB: Well, before talking about regulation -- and, again, regulators failed us here -- let's talk about the economic establishment. All these measures I hear, oh, transitory deficit, oh, we'll repay it back, come from people using models that did not predict what's going on. They did not see the elephant in the room -- too much debt -- and all these models are completely unpredictive of anything. So don't predict. Let's try to lower debt so we don't have to predict.
As to the regulators, we have to realize that the regulators got us here by favoring a risk measurement system by banks -- and banks lost $4.3 trillion on failures of risk management systems -- that the regulators (inaudible) the value at risk, and regulators are the ones who help people get into the pseudo-AAA securities, but with these regulations.
So regulations is not a panacea. I agree, regulation can do a good job, but just blind regulation is not the solution. The solution to me is the cancer we have in the system -- too much debt -- and let's stop talking about painkillers. Let's remove the tumor.
It takes, you know, work to remove the tumor. It's painful to remove the tumor. But the sooner we remove it, the better, instead of delaying, saying, "Transitory, transitory, transitory." The debt today is the same debt as we had a year ago. Actually, it's increasing.
JEFFREY BROWN: Mr. Blinder, we just have a minute left. I was thinking of something that Mr. Taleb just said. A year later, nobody comes off looking all that good, do they, the pros on Wall Street, the regulators in government, and the economists in your own profession? I see there's a lot of debate about, what did we know? Were our models all wrong?
ALAN BLINDER: Absolutely. And I wouldn't absolve economists or my own profession from the guilt list. I think the guilt list is very long, not equally weighted, of course, but very, very long, from the government to the private sector and almost anybody you can think of.
The heroes were few and far between. There were a few people that were sounding the alarm. They were not listened to very much.
And, you know, you don't get in to a catastrophe like this with just one or two small errors. It takes a whole lot of very large errors. And that's what we had, unfortunately.
JEFFREY BROWN: All right, we'll leave it there. Alan Blinder, Nassim Taleb, and Donald Marron, thank you all very much.
JUDY WOODRUFF: There's much more about the financial crisis on our Web site, newshour.pbs.org. You can listen to all of President Obama's Wall Street speech, see what experts say about the origins and the impact of the meltdown on Paul Solman's "Business Desk"; and read about lessons learned from the collapse of Lehman Brothers.
JUDY WOODRUFF: Jeffrey Brown looks now at where things stand one year later.
JEFFREY BROWN: And joining me for that are Nassim Taleb, a statistician, trader and author of several books on probability and risk, including "The Black Swan." He's an adviser to Universa Investments and teaches at New York University.
Donald Marron is chairman and CEO of Lightyear Capital, a private equity firm, and former chief executive of Paine Webber.
And Alan Blinder, professor of economics at Princeton University, he was vice chair of the Federal Reserve from 1994 to 1996.
Donald Marron, you were at the speech today. Was the president right to warn of complacency on Wall Street? Has enough changed in the year since Lehman collapsed?
DONALD MARRON, Lightyear Capital: Yes, I think a lot has changed. He was very straightforward. I think he gave an outstanding speech. He was articulate. He certainly knew the issues.
Basically, he said three things. The first one is, we need an agency to protect individuals against others who create products and against themselves. Secondly, we need more regulation to regulate all these securities firms and banks. And, third, we need legislative power to make sure this never happens again, that somehow it can be stopped before it goes over the edge.
And I think he delivered each of those positively. Obviously, God is in the details on these things. But this is certainly a speech and a set of issues that wouldn't have occurred a year or year-and-a-half ago. It was an important change.
JEFFREY BROWN: Well, Nassim Taleb, you had warned of instability for many years before what came to pass occurred. So where do you think we are now?
NASSIM TALEB, New York University: Still the same situation. We have the same leverage in the system that we had before. The too-big-to-fail effect is right there, no different from what it was before. And banks are taking the same reckless risks they don't understand as they did before with the very same pseudo-scientists managing the risks.
So I don't see what changed. And we have 6 million Americans at home now more than we had before. I don't see what changed. The risks are still there. We need to lower the leverage, make the world more robust, and it's not.
JEFFREY BROWN: All right, a lot of things to pick up there, but let me bring in Alan Blinder. First, a kind of general assessment. The president did talk about growing stability and gave credit to his team for bringing that about. You've talked about that on this program in the past, the need for all of that. What do you think now?
ALAN BLINDER, Princeton University: Well, I think things look enormously better than they were, say, six months ago, I guess the bottom of the stock -- I think President Obama called the bottom of the stock market on March 9th.
I think things his team has done have helped a lot. I think things the Fed have done have helped even more. The Fed's not part of his team, I might point out. It's an independent agency and needs to stay that way.
But between the Treasury and the Fed and the FDIC and a few others, I think they've made an enormous difference doing, by the way, extraordinary things that I'm sure if you asked any of them two years ago would they ever do something like that, they would have said no.
Nassim Taleb
Author, The Black Swan
I think what's happening is both risky and immoral.
The problem of too-big-to-fail
JEFFREY BROWN: Well, let's pick up on some of the issues you've all raised. Mr. Marron, Mr. Taleb was talking about the too-big-to-fail doctrine. Now, in part of the consolidation of the industry of the last year, part of it was to allow a lot of institutions to survive. So have we created larger institutions that are still too big to fail or even bigger than they were before?
DONALD MARRON: Yes, it's a key question. I think what we did, first of all, is we brought a larger percentage of Wall Street under the banking regulators, the Fed. And that was a necessary thing to do. I'm not sure it was the best thing to do, but we had to do it. And that, in turn, has resulted, obviously, in lower leverage in various controls that are going there.
The other thing that we did, obviously, is tell the public and the clients and the world that there's a few institutions that are going to be there no matter what. The result of that is they are getting bigger proportionally to the rest of the system. I'm not sure that's a great thing.
And I think one of the questions you have to ask about too big to fail, are they too big to manage? Part of this whole business that we don't talk about is talent, the talent to manage all these complex products, services that are produced. And this is an industry that can easily spawn other organizations.
So I think what you're going to see going forward, particularly with the limitations on compensation, is a lot of talent moving to smaller organizations, finding a way to build them and to compete in the real world. The question is, will the new regulatory environment encourage that? Or will it discourage it?
This country and Wall Street is built on being entrepreneurial. The trend that we're going to now is basically the reverse.
JEFFREY BROWN: But, Mr. Taleb, you're taking this further.
NASSIM TALEB: Yes.
JEFFREY BROWN: You see the chance for continued major failures looking ahead?
NASSIM TALEB: Well, I think what's happening is both risky and immoral. Why immoral? Number one, we're transforming private debt into public debt. Private debt normally with a system of transforming debt into equity or through bankruptcy would disappear. When you fail, you disappear.
We're transforming that into debt for our children. And, of course, we're going to have to raise bonds with the deficits, and that may cause inflation.
The other problem is that the Obama administration has been rewarding failure, OK? Instead of strengthening people who are countercyclical, just like they gave a deal with the Cash for Clunkers to people who bought the wrong car -- I bought the right car, I'm not eligible for Cash for Clunkers, so I'm subsidizing the one who made the mistake, likewise, you have a raise of taxes, penalizing those who are countercyclical, doing OK in 2009, and giving a tax break to those who got us here, the Wall Streeters.
I have not seen from the Obama administration the right kind of leadership that we should be having. I haven't seen anybody stand up and said, "We need blood, sweat and tears." Let's reduce the debt in the system, and let's not tax our children with all these stimulus programs, have not seen that.
The only people who are talking about are the U.K. Conservative Party. Outside of that, I have not seen anything. The risk in the system is being transferred to our children. That's not acceptable.
Alan Blinder
Princeton University
[W]e're a lot better off today than if we had tried to balance the budget on the backs of a dying -- I don't want to say a dying -- a sick economy at the beginning of this year.
Grading Obama
JEFFREY BROWN: Mr. Blinder, why don't you come back on that? Because you're talking about the role of the government in trying to intervene and at the right time, so respond.
ALAN BLINDER: Yes, let me separate that into two responses, very briefly. First is the fiscal stimulus. The argument for this is as old as Cane's. When there's not enough demand in the system to get people employed or to prevent them from losing their jobs, one thing the government can do is spend more or cut people's taxes and get them to spend more or something else to induce spending, but all of those things raise the deficit transitorily, not forever, but transitorily, and we're still in that position.
And we're a lot better off today than if we had tried to balance the budget on the backs of a dying -- I don't want to say a dying -- a sick economy at the beginning of this year. The rest of it, hopefully, will not be spending. It's in the form of guarantees, asset purchases, loans. Some of it, as President Obama has mentioned, has already come back, turning a modest profit to the U.S. government.
Some of it will probably be lost, but lost for a good reason, lost so as to prevent or at least reduce, to de minimis the risk of what Ben Bernanke called Great Depression 2.0. If we had gone down that path, the amount -- the losses to Americans would be a multiple of the debt that's piling up.
Now, one last point. We do need to address that debt. I don't want to sound like I'm completely relaxed about piles and piles of debt, about $9 trillion in deficits over the next 10 years, or maybe more. I'm not relaxed about it; we do need to do something about it. But the paradoxical answer is not yet. It's not time to withdraw that stimulus.
Donald Marron
Lightyear Capital
[W]hat we know for sure, is all the money that's gone into the system, only some of it will work, and some of it won't.
Unwinding government support
JEFFREY BROWN: Mr. Marron, you want to come in on this subject?
DONALD MARRON: Yes, I do, I think. I think the answer is, one has to be very practical about this. Wall Street for 100 years was in the business of making illiquid assets liquid, first bonds, then stocks, even companies with LBOs.
What happened in the last couple of years is, liquid assets, including mortgages, became illiquid. The whole system started to fail because people in big firms and traders, recognizing they made a mistake, couldn't sell what they had to sell -- that was the first thing -- and values declined, as well as the economics that underlied those values. By throwing all this money into the system, the government has certainly improved that.
The second thing is what we know for sure, is all the money that's gone into the system, only some of it will work, and some of it won't. Will the administration be capable of taking the money that isn't worked and redeploying it? That's the key thing.
And, third, what's going to happen to the flow of money in the system? For example, before this started, money market funds had about a billion -- $1.5 trillion or $2 trillion. It's now up to about $3.7 trillion. Why? In the main, because people are scared. You know, putting money essentially in cash, getting no return.
The way markets work and the way a system works is you have to have people having a fundamental confidence in the system. A key element of that is, if they buy something, they're getting value, and they should be able to sell it whenever they want to. That fear of that situation is one of the reasons that we have this problem.
So the final issue for the government now, I think, when it thinks about what to do in building this confidence, it has to raise the ability to lend to small business. It has to raise the ability for people to buy houses.
And in the broader sense, they have to regain the confidence in the system. One way to do that is transparency. We created too many products that nobody, even the pros, can understand. And the second way is standardization, so you have enough of a single product so you can have a market.
It's a simultaneous equation. If we don't do these things, then the Bear story will happen again. If we do these things, then we'll set the base, as Alan said, for going forward, not now, not yet, hopefully soon.
Nassim Taleb
Author, The Black Swan
[R]egulation can do a good job, but just blind regulation is not the solution. The solution to me is the cancer we have in the system -- too much debt
Pushing for stricter regulation
JEFFREY BROWN: All right, let me let Mr. Taleb back on this, because, I mean, part of this question is about government regulation and what the government might be able to do, while preserving the ability of risk in the system.
NASSIM TALEB: Well, before talking about regulation -- and, again, regulators failed us here -- let's talk about the economic establishment. All these measures I hear, oh, transitory deficit, oh, we'll repay it back, come from people using models that did not predict what's going on. They did not see the elephant in the room -- too much debt -- and all these models are completely unpredictive of anything. So don't predict. Let's try to lower debt so we don't have to predict.
As to the regulators, we have to realize that the regulators got us here by favoring a risk measurement system by banks -- and banks lost $4.3 trillion on failures of risk management systems -- that the regulators (inaudible) the value at risk, and regulators are the ones who help people get into the pseudo-AAA securities, but with these regulations.
So regulations is not a panacea. I agree, regulation can do a good job, but just blind regulation is not the solution. The solution to me is the cancer we have in the system -- too much debt -- and let's stop talking about painkillers. Let's remove the tumor.
It takes, you know, work to remove the tumor. It's painful to remove the tumor. But the sooner we remove it, the better, instead of delaying, saying, "Transitory, transitory, transitory." The debt today is the same debt as we had a year ago. Actually, it's increasing.
JEFFREY BROWN: Mr. Blinder, we just have a minute left. I was thinking of something that Mr. Taleb just said. A year later, nobody comes off looking all that good, do they, the pros on Wall Street, the regulators in government, and the economists in your own profession? I see there's a lot of debate about, what did we know? Were our models all wrong?
ALAN BLINDER: Absolutely. And I wouldn't absolve economists or my own profession from the guilt list. I think the guilt list is very long, not equally weighted, of course, but very, very long, from the government to the private sector and almost anybody you can think of.
The heroes were few and far between. There were a few people that were sounding the alarm. They were not listened to very much.
And, you know, you don't get in to a catastrophe like this with just one or two small errors. It takes a whole lot of very large errors. And that's what we had, unfortunately.
JEFFREY BROWN: All right, we'll leave it there. Alan Blinder, Nassim Taleb, and Donald Marron, thank you all very much.
JUDY WOODRUFF: There's much more about the financial crisis on our Web site, newshour.pbs.org. You can listen to all of President Obama's Wall Street speech, see what experts say about the origins and the impact of the meltdown on Paul Solman's "Business Desk"; and read about lessons learned from the collapse of Lehman Brothers.
20 May 2009
Commodities will recover first and then roar on demand and inflation
This is my position, Don Coxe, Rogers and all those who recognise that the supercycle in commodities was about normalisation of prices, not high prices, historically speaking...
What some call the 'Commodity Super Cycle' is a simple rebound from extreme devalorization of commodities as an asset class over nearly 20 years. The process is intensified by extremely fragile and unrealistic world currency values, within which the Euro is likely the weak link, being a de facto money of resource-depleted Europe, forced into circulation in too many countries, too late. The US dollar’s plight needs no commentary.
Due to the massive fossil energy intensity of the current global economy’s structure, and low appreciation of the critical need for energy transition away from fossil fuels, we can be sure that near-term limits to world oil and natural gas supply capacity will have a strong impact on relative asset value sorting in a generally inflationary context. Even using IEA published data, world oil supply capacity could fall as much as 25 Mbd from now to 2025. Any small net increase in supply would need heroic investments, estimated by the IEA at about 26 000 Bn USD through less than 20 years. If we took an optimistic approach on the decline of world oil export supply or 'offer' from 2010, and assumed that net supply fell at a rate of 4% or 5% annual, perhaps due to energy saving and substitution programs in exporter countries (which at present is unlikely), this would translate to a long-term net annual decline in world export supply at well over 2.5 Mbd. This is close to German or South Korean oil import demand. Two years at this loss rate, would equal a little less than Japan's total import needs.
It is not difficult to identify what impact real structural undersupply will have on traded oil prices. The waiting period will be short. Oil prices can only show a massive rebound from almost the moment there is any sign of global economic recovery. The knock-on effect of higher energy prices on food prices will be rapid, as was shown in 2007-2008. This in turn and already poses a serious threat to the duration of sustainability of any global economic recovery, while also helping to rekindle inflation.
To be sure, this should also rekindle interest in Renewable Energy and Cleantech investing, itself a now highly financiarized asset sector, exposed to exactly the same tensions and volatility as 'mainstream' equities and other traded assets. The certain near-term return of Oil Crisis should however not mask the other resource-linked facets of the depletion crisis facing the straight majority of real resources – including the nominally renewable bioresources.
Raching its peak in the slow-growing real economy of the 1990s, an apparent oversupply of energy and natural resources helped push down the baseline for commodities relative to all other asset classes, in some cases to historic lows. This has dangerously masked the real, almost reverse video picture of hard asset production, supply and therefore price outlooks. To be sure, this ‘resource pinch’ is intensified by the extremely classic and conventional Henry Ford-style economic takeoff of the Emerging Economies. We therefore face accelerating depletion of key natural resources, plus structural resource-limiting factors like climate change and population growth.
Asset Value correlation
As already noted, the neat two-part division of hard asset commodities into ‘renewable’ and ‘non-renewable’ breaks down under the onslaught of current-structure global economic growth. Through 2005-2007, running at around 5%pa in a world of about 6600 million consumers and potential consumers, the pressure on real resource supply was easy to demonstrate. Conversely, equity and derived paper assets can be created in an electronic eyeblink, grow with little constraint, and avoid the problem of credibility as long as there is some growth of the ‘underlying security- - the global economy.
The unrealistic hopes embedded in the fragile ‘Chindia decoupling theory’ are based on the mirage of Decoupled Emerging Economy Growth at near double-digit annual average percentage rates, perhaps for 15 or 20 years, or more. In fact, this poses essentially impossible challenges for commodities production and supply. This concerns the near-term real world future, not some mythic Keynes-type long-term ‘when we are all dead’.
As noted above, there are decreasing numbers of ‘firewalls’ between the two theoretically-distinct asset classes inside the commodities sphere (i.e. renewable and non-renewable), as well as between Equities and Commodities. Due to present structure global economic growth, this trend is self-reinforcing. Thus price correlation and linkage, both inside the asset classes as well as between, is a strong real world trend. This again clearly supports the argument for near-term and possibly extreme of most Commodity prices.
This ‘re-linkage’ or new correlation can be observed with almost any real resource commodity. One example is the ags and softs, specially the grains and oilseeds, simply due to the 2005-2007 biofuels boom and slump. This left behind the price linkage of oil with food, but not the massive amounts of biofuels promised by various leaders, such as the RFS program of G W Bush. One major supply-side cause of this is the energy intensity of current agroindustrial production techniques, downstream processing, and transport of these commodities. For sugar and corn ethanol, and soybean or rapeseed biodiesel production, this’ energy price linkage’ is now powerful, providing another quick acting transmission vector for inflationary contagion within the real resources space.
To be sure there is considerable resistance on the part of economic and political deciders, but increasing reactivity and transparence in the pricing system, to pass-through upstream and absolute price rises for energy and food commodities. In other words this means there is now the certainty of ‘dam breaker’ surges in energy, food and fiber prices at the consumer level, both in OECD and in other countries. This sets the likely timeframe for a very sharp upturn in OECD country inflation, and fast growth of Commodity prices, to the near-term, probably Q2 2009 – Q2 2010. Prospects for the majority of real resource prices, as we noted in this article, include nearly stepwise upward change. Whenever there is clear break in price trends for Equities relative to Commodities – signaling deconvergence – this upward movement is likely to amplify and reinforce itself. This may start in Q3-Q4 2009.
span>
http://www.financialsense.com/editorials/mckillop/2009/0519.html
What some call the 'Commodity Super Cycle' is a simple rebound from extreme devalorization of commodities as an asset class over nearly 20 years. The process is intensified by extremely fragile and unrealistic world currency values, within which the Euro is likely the weak link, being a de facto money of resource-depleted Europe, forced into circulation in too many countries, too late. The US dollar’s plight needs no commentary.
Due to the massive fossil energy intensity of the current global economy’s structure, and low appreciation of the critical need for energy transition away from fossil fuels, we can be sure that near-term limits to world oil and natural gas supply capacity will have a strong impact on relative asset value sorting in a generally inflationary context. Even using IEA published data, world oil supply capacity could fall as much as 25 Mbd from now to 2025. Any small net increase in supply would need heroic investments, estimated by the IEA at about 26 000 Bn USD through less than 20 years. If we took an optimistic approach on the decline of world oil export supply or 'offer' from 2010, and assumed that net supply fell at a rate of 4% or 5% annual, perhaps due to energy saving and substitution programs in exporter countries (which at present is unlikely), this would translate to a long-term net annual decline in world export supply at well over 2.5 Mbd. This is close to German or South Korean oil import demand. Two years at this loss rate, would equal a little less than Japan's total import needs.
It is not difficult to identify what impact real structural undersupply will have on traded oil prices. The waiting period will be short. Oil prices can only show a massive rebound from almost the moment there is any sign of global economic recovery. The knock-on effect of higher energy prices on food prices will be rapid, as was shown in 2007-2008. This in turn and already poses a serious threat to the duration of sustainability of any global economic recovery, while also helping to rekindle inflation.
To be sure, this should also rekindle interest in Renewable Energy and Cleantech investing, itself a now highly financiarized asset sector, exposed to exactly the same tensions and volatility as 'mainstream' equities and other traded assets. The certain near-term return of Oil Crisis should however not mask the other resource-linked facets of the depletion crisis facing the straight majority of real resources – including the nominally renewable bioresources.
Raching its peak in the slow-growing real economy of the 1990s, an apparent oversupply of energy and natural resources helped push down the baseline for commodities relative to all other asset classes, in some cases to historic lows. This has dangerously masked the real, almost reverse video picture of hard asset production, supply and therefore price outlooks. To be sure, this ‘resource pinch’ is intensified by the extremely classic and conventional Henry Ford-style economic takeoff of the Emerging Economies. We therefore face accelerating depletion of key natural resources, plus structural resource-limiting factors like climate change and population growth.
Asset Value correlation
As already noted, the neat two-part division of hard asset commodities into ‘renewable’ and ‘non-renewable’ breaks down under the onslaught of current-structure global economic growth. Through 2005-2007, running at around 5%pa in a world of about 6600 million consumers and potential consumers, the pressure on real resource supply was easy to demonstrate. Conversely, equity and derived paper assets can be created in an electronic eyeblink, grow with little constraint, and avoid the problem of credibility as long as there is some growth of the ‘underlying security- - the global economy.
The unrealistic hopes embedded in the fragile ‘Chindia decoupling theory’ are based on the mirage of Decoupled Emerging Economy Growth at near double-digit annual average percentage rates, perhaps for 15 or 20 years, or more. In fact, this poses essentially impossible challenges for commodities production and supply. This concerns the near-term real world future, not some mythic Keynes-type long-term ‘when we are all dead’.
As noted above, there are decreasing numbers of ‘firewalls’ between the two theoretically-distinct asset classes inside the commodities sphere (i.e. renewable and non-renewable), as well as between Equities and Commodities. Due to present structure global economic growth, this trend is self-reinforcing. Thus price correlation and linkage, both inside the asset classes as well as between, is a strong real world trend. This again clearly supports the argument for near-term and possibly extreme of most Commodity prices.
This ‘re-linkage’ or new correlation can be observed with almost any real resource commodity. One example is the ags and softs, specially the grains and oilseeds, simply due to the 2005-2007 biofuels boom and slump. This left behind the price linkage of oil with food, but not the massive amounts of biofuels promised by various leaders, such as the RFS program of G W Bush. One major supply-side cause of this is the energy intensity of current agroindustrial production techniques, downstream processing, and transport of these commodities. For sugar and corn ethanol, and soybean or rapeseed biodiesel production, this’ energy price linkage’ is now powerful, providing another quick acting transmission vector for inflationary contagion within the real resources space.
To be sure there is considerable resistance on the part of economic and political deciders, but increasing reactivity and transparence in the pricing system, to pass-through upstream and absolute price rises for energy and food commodities. In other words this means there is now the certainty of ‘dam breaker’ surges in energy, food and fiber prices at the consumer level, both in OECD and in other countries. This sets the likely timeframe for a very sharp upturn in OECD country inflation, and fast growth of Commodity prices, to the near-term, probably Q2 2009 – Q2 2010. Prospects for the majority of real resource prices, as we noted in this article, include nearly stepwise upward change. Whenever there is clear break in price trends for Equities relative to Commodities – signaling deconvergence – this upward movement is likely to amplify and reinforce itself. This may start in Q3-Q4 2009.
span>
http://www.financialsense.com/editorials/mckillop/2009/0519.html
7 March 2009
Satyajit Das: Commodities become individuals
“Holes in the Ground” - The End of the Commodity Super Cycle
by Satyajit Das March 02, 2009
Super Short Super Cycles
The commodity “super cycle” proved super short. The commodity “boom” is now officially a “bust.” Mark Twain once described a mine as “a hole in the ground with a liar standing next to it.’’ The end of the commodity price cycle has revealed that standing next to the liar is a crowd of hapless bankers, analysts and investors. So what happened?
The rise in commodity prices was driven by the confluence of a number of factors. Debt driven growth in major developed countries drove strong growth (both export and domestic) in emerging markets, such as China and India. This, in turn, fueled demand for resources. In a virtuous cycle, the growth drove demand in major commodity producers, such as Russia, the Persian Gulf, Australia, Canada and South Africa, whose strongly growing economies fueled further growth globally by way of increased consumption and investment.
The effect of increased demand on prices was exacerbated by decades of significant under-investment in commodity infrastructure (mineral processing; refining) and transport infrastructure (shipping, ports, pipelines), driven in part by low commodity prices.
The commodity boom was aided and abetted by investors, especially leveraged investors such as hedge funds. Hedge funds used commodities to bet on strong global growth and catch the updraft in emerging markets indirectly reducing problems of direct investment. Commodities also provide significant leverage making them more attractive to hedge funds.
Traditional investors also embraced commodity investments. Commodities were seen as a separate investment class with low correlation to traditional investments enabling investors to improve investment returns and reduce risk simultaneously.
The last factor was inflation. Rising commodity prices and strong growth fueled rising prices. This encouraged further investment in commodities as a hedge against inflation. The higher prices went the greater the threat of inflation and the increasing flow of funds into commodities. The momentum was irresistible.
Engaging Reverse Gear
In 2008, each one of these factors went sharply into reverse. The global financial crisis (GFC) resulted in reduced availability and higher cost of debt affecting commodities through several channels. Leveraged investors were forced to liquidate their positions as leverage was reduced and investors redeemed capital. The reduction in debt also reduced global growth sharply and the demand for most resources.
The reversal was exacerbated by several factors. Rising prices and anticipation of higher demand had led to significant investment in certain commodities and infrastructure. The time needed to build capacity meant that this increase in supply coincided with reducing demand, further pressuring prices.
The GFC also reduced cross-border capital flows and global trade. The Institute for International Finance forecasts net private sector capital flows to emerging markets in 2009 will be less than $165 billion ─ 36% of the $466 billion inflow in 2008 and only one fifth the record amount in 2007. The projected decline in capital flows is around 6% of the combined gross domestic product of the emerging countries. This compares to a decline of approximately 3.5% of combined GDP in the Asian financial crisis and 1.5% in the Latin American crisis.
Global trade is also declining. In late 2008, the World Bank forecast a fall in global trade volumes for the first time in over 25 years. The Baltic Dry Index, a measure of supply and demand for basic shipping materials, has fallen 90% since mid 2008. Exports from Japan, Korea, Taiwan and China fell between 10% and 40% in late 2008 and early 2009, also signaling reduced demand for commodities.
Financing pressures also mean that it is increasingly difficult to finance trade. Some countries have had to resort to barter to obtain essential foodstuffs.
Self Harm
Resources companies compounded the problems by aggressive acquisitions that were sometimes debt financed. Expectations of strong global growth and demand, especially from China and other developing countries, encouraged leading firms in the steel, cement and mining industries to undertake ambitious acquisitions in 2006 and 2007.
For example, steelmaker ArcelorMittal undertook a cash-and-stock-financed merger. India’s Tata Steel completed a leveraged takeover of Anglo-Dutch Corus. France’s Lafarge, the world’s biggest cement producer, bought Orascom Cement of Egypt, while its competitor, Mexico’s Cemex, purchased Rinker, a big Australian rival. Xstrata, the mining industry’s serial acquirer, entered into a number of debt-financed acquisitions. Rio Tinto purchased Alcan, increasing its leverage significantly.
Declining sales and cash flows, debt refinancing requirements, difficulties in selling assets and limited opportunities to raise equity to deleverage further complicates the commodity bust. Some companies are seeking state financial assistance to survive. For example, Corus has sought assistance from the British government.
High oil prices also led to aggressive investments in alternative energy technologies that are not economic at lower prices, further complicating the price cycle.
Laws of Financial Gravity
Commodities posted their worst performance on record in 2008. Commentary on commodity markets reflects Mark Twain’s remark that, “I am not one of those who in expressing opinions confine themselves to facts.’’
Unlike financial assets, commodities, for the most part, are subject to the laws of economic gravity – supply and demand. Individual commodities are also highly idiosyncratic – you can’t drink oil, nor can you run your car on gold though, they seem to go quite well on corn tortillas!
The key to commodities is demand. Higher oil prices, for example, led to a sharp reduction in demand as people lowered consumption or used substitutes. Falling prices shift this balance, especially in energy importers such as China, Japan and India.
It is not clear how much lower global growth is impounded in commodity prices. The falloff in exports in Asian countries and the collapse in freight rates is especially worrying. Inevitable protectionism (buy “local” and currency “manipulation” to gain export competitiveness) is also a concern.
Ultimately, commodity prices will depend on recovery in growth, consumption, housing markets, durable goods (especially motor cars) and stability in financial markets and resumption of more normal financing activity. None of this seems likely in the short term.
A key dynamic is whether deflationary pressures (falling prices) emerge. In a deflationary environment, commodities will be hit hard as demand falls further. The lack of income and high real rates of interest will affect prices. In contrast, inflation would be supportive of prices as investors switch from monetary to real assets. Despite strenuous rhetoric and monetary actions by central banks, it is not clear whether debt deflation can be avoided.
Aberrant Tendencies
Short-term factors also affect the outlook. Falling prices have placed enormous pressures on companies and state treasuries dependent on resource based revenues.
Companies with large debt service commitments are being forced to produce at uneconomic prices simply to generate cash flow. Some oil exporters are producing below operating cost to maintain revenues to finance ambitious spending plans conceived in more prosperous times. This overproduction distorts prices.
There are growing supply constraints in some markets. Junior miners are unable to bring resource properties into production because of financing pressures. New investment and expansion has been deferred or abandoned. These bottlenecks may cause short-term supply disruptions creating significant volatility in prices.
A “known unknown” is the performance of the dollar. There is a complex and unstable relationship between commodity prices and the dollar. An International Monetary Fund study noted that a 1% increase in the value of the dollar results in a decrease in oil and gold prices of greater than 1%. This means the elasticity is around 1. It appears to be higher for gold than oil prices. Continued volatility in currency markets, reflecting pressures as sovereigns attempt to finance their budget and financial system bailout requirements, will be mirrored in commodity prices.
Individuals All!
Oil prices may have further downside, in the short run, reflecting continued reduction in demand as growth slows. Production cuts by the Organization of the Petroleum Exporting Countries (OPEC) may not be effective as revenue-strapped sovereign producers adjust volumes to generate cash flow. Ultimately, the laws of supply and demand, production costs and a finite, constrained resource will support the price.
The outlook for alternative energies is less sanguine. Most alternatives require high oil prices to be economic. Support for alternative cleaner energy is likely to wane as the GFC forces governments to defer climate change initiatives in the face of harsh economic conditions.
The dislocation in financial markets has benefited gold. Gold’s performance reflects increasing suspicion about “paper” money and lower interest rates. Governments continue to attempt to reflate domestic economies by traditional Keynesian spending, increasing concern about possible inflation and providing support for gold. There is a fear of a return to a gold standard, leading to hoarding of gold stock. Emerging market demand for gold, a traditional store of purchasing power, may be fueled by the threat of increased social unrest.
Other precious metals, platinum, palladium and silver, are likely to be affected by decreased demand, especially given the problems in the automobile sector globally.
Industrial metals (aluminum, copper, lead, nickel, zinc and tin) and bulk commodities (iron ore and coking coal) have been a major proxy for global economic growth, particularly demand from a rapidly industrializing and urbanizing China and India. Slower growth and problems related to inventories and oversupply may mean a continuation of weakness.
The performance of agricultural prices is puzzling. After falling in line with commodities generally throughout 2008, in December agricultural products decoupled from other assets. For example, some grains rose sharply in prices by 10% to 20%.
Prices (adjusted for inflation) are around 40% below long-run average prices. Grain inventory levels are low – around two months of global demand. Problems affecting financing of crops and trade, low prices and difficulty of hedging (increased in margins and hedging costs) have meant that plantings have been low. Major seed producers report a sharp decline in sales. The increased problems of food production from climate change also mean the risk of supply disruption cannot be discounted.
Historically, agricultural products have performed well in economic recessions. Tightening supply, risk of supply shocks and the appeal of a recession resistance asset may underpin prices in relative terms.
Agricultural products that have been linked to oil prices (such as corn, palm oil, soybeans and rapeseed) will be dependent on the broader performance of energy prices.
Bridges to Nowhere & Velocity of Pigs
During commodity booms, excesses abound. Oil-rich countries enjoying rapid growth in commodity revenues embarked on grand and expensive projects. For example, in this cycle, Dubai undertook an ambitious expansion program based on real estate, luxury hotels, airlines, financial services and English premier league soccer clubs.
The excesses are notable. The recently opened Atlantis Hotel is at the end of the first (and so far only completed) Dubai Palm, a piece of reclaimed land designed to resemble a palm tree. The Atlantis has its own theme park next door, every shop and restaurant conceivable and a mammoth aquarium (featuring 65,000 marine animals). The Palazzo Versace hotel, currently under construction, features a beach with artificially cooled sand to save guests from the hot sand as they walk from water to the hotel.
The most emblematic project of this cycle is a project proposed by Tarek bin Laden, one of Osama bin Laden’s many half-brothers. The project entails twin cities on either side of the Bab al-Mandib (Gate of Tears) strait at the mouth of the Red Sea linked by a 29-kilometer bridge across the strait. The project cost was estimated at $200 billion.
Recently, an acquaintance in financial markets announced his retirement to a life of rustic simplicity in Umbria, Italy. He had acquired a farm and was restoring it with the help of local “serfs” (his word not mine!) The farm would be self sufficient producing essentials of life ─ wheat, milk, wine and meat. The plan was to avoid the coming financial Armageddon in financial markets and the money economy.
The newly minted farmer was especially excited by the farm’s black pigs that reproduce three times each year. He referred to this as the “velocity” of the pig population. The porcine velocity is much greater, ironically, than the current velocity of money in financial markets as the recession sets in and the implosion of the financial system becomes institutionalized.
Grandiose plans tend to be launched towards the end of the boom cycle. Pigs and food may be well be where the smart money heads in these troubled times.
Fundamental demand for food and energy may emerge as key investment drivers – everybody needs to eat and we are still a fossil fuel-driven society.
Satyajit Das is a risk consultant and author of a number of key reference works on derivatives and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives” (2006, FT-Prentice Hall).
link
by Satyajit Das March 02, 2009
Super Short Super Cycles
The commodity “super cycle” proved super short. The commodity “boom” is now officially a “bust.” Mark Twain once described a mine as “a hole in the ground with a liar standing next to it.’’ The end of the commodity price cycle has revealed that standing next to the liar is a crowd of hapless bankers, analysts and investors. So what happened?
The rise in commodity prices was driven by the confluence of a number of factors. Debt driven growth in major developed countries drove strong growth (both export and domestic) in emerging markets, such as China and India. This, in turn, fueled demand for resources. In a virtuous cycle, the growth drove demand in major commodity producers, such as Russia, the Persian Gulf, Australia, Canada and South Africa, whose strongly growing economies fueled further growth globally by way of increased consumption and investment.
The effect of increased demand on prices was exacerbated by decades of significant under-investment in commodity infrastructure (mineral processing; refining) and transport infrastructure (shipping, ports, pipelines), driven in part by low commodity prices.
The commodity boom was aided and abetted by investors, especially leveraged investors such as hedge funds. Hedge funds used commodities to bet on strong global growth and catch the updraft in emerging markets indirectly reducing problems of direct investment. Commodities also provide significant leverage making them more attractive to hedge funds.
Traditional investors also embraced commodity investments. Commodities were seen as a separate investment class with low correlation to traditional investments enabling investors to improve investment returns and reduce risk simultaneously.
The last factor was inflation. Rising commodity prices and strong growth fueled rising prices. This encouraged further investment in commodities as a hedge against inflation. The higher prices went the greater the threat of inflation and the increasing flow of funds into commodities. The momentum was irresistible.
Engaging Reverse Gear
In 2008, each one of these factors went sharply into reverse. The global financial crisis (GFC) resulted in reduced availability and higher cost of debt affecting commodities through several channels. Leveraged investors were forced to liquidate their positions as leverage was reduced and investors redeemed capital. The reduction in debt also reduced global growth sharply and the demand for most resources.
The reversal was exacerbated by several factors. Rising prices and anticipation of higher demand had led to significant investment in certain commodities and infrastructure. The time needed to build capacity meant that this increase in supply coincided with reducing demand, further pressuring prices.
The GFC also reduced cross-border capital flows and global trade. The Institute for International Finance forecasts net private sector capital flows to emerging markets in 2009 will be less than $165 billion ─ 36% of the $466 billion inflow in 2008 and only one fifth the record amount in 2007. The projected decline in capital flows is around 6% of the combined gross domestic product of the emerging countries. This compares to a decline of approximately 3.5% of combined GDP in the Asian financial crisis and 1.5% in the Latin American crisis.
Global trade is also declining. In late 2008, the World Bank forecast a fall in global trade volumes for the first time in over 25 years. The Baltic Dry Index, a measure of supply and demand for basic shipping materials, has fallen 90% since mid 2008. Exports from Japan, Korea, Taiwan and China fell between 10% and 40% in late 2008 and early 2009, also signaling reduced demand for commodities.
Financing pressures also mean that it is increasingly difficult to finance trade. Some countries have had to resort to barter to obtain essential foodstuffs.
Self Harm
Resources companies compounded the problems by aggressive acquisitions that were sometimes debt financed. Expectations of strong global growth and demand, especially from China and other developing countries, encouraged leading firms in the steel, cement and mining industries to undertake ambitious acquisitions in 2006 and 2007.
For example, steelmaker ArcelorMittal undertook a cash-and-stock-financed merger. India’s Tata Steel completed a leveraged takeover of Anglo-Dutch Corus. France’s Lafarge, the world’s biggest cement producer, bought Orascom Cement of Egypt, while its competitor, Mexico’s Cemex, purchased Rinker, a big Australian rival. Xstrata, the mining industry’s serial acquirer, entered into a number of debt-financed acquisitions. Rio Tinto purchased Alcan, increasing its leverage significantly.
Declining sales and cash flows, debt refinancing requirements, difficulties in selling assets and limited opportunities to raise equity to deleverage further complicates the commodity bust. Some companies are seeking state financial assistance to survive. For example, Corus has sought assistance from the British government.
High oil prices also led to aggressive investments in alternative energy technologies that are not economic at lower prices, further complicating the price cycle.
Laws of Financial Gravity
Commodities posted their worst performance on record in 2008. Commentary on commodity markets reflects Mark Twain’s remark that, “I am not one of those who in expressing opinions confine themselves to facts.’’
Unlike financial assets, commodities, for the most part, are subject to the laws of economic gravity – supply and demand. Individual commodities are also highly idiosyncratic – you can’t drink oil, nor can you run your car on gold though, they seem to go quite well on corn tortillas!
The key to commodities is demand. Higher oil prices, for example, led to a sharp reduction in demand as people lowered consumption or used substitutes. Falling prices shift this balance, especially in energy importers such as China, Japan and India.
It is not clear how much lower global growth is impounded in commodity prices. The falloff in exports in Asian countries and the collapse in freight rates is especially worrying. Inevitable protectionism (buy “local” and currency “manipulation” to gain export competitiveness) is also a concern.
Ultimately, commodity prices will depend on recovery in growth, consumption, housing markets, durable goods (especially motor cars) and stability in financial markets and resumption of more normal financing activity. None of this seems likely in the short term.
A key dynamic is whether deflationary pressures (falling prices) emerge. In a deflationary environment, commodities will be hit hard as demand falls further. The lack of income and high real rates of interest will affect prices. In contrast, inflation would be supportive of prices as investors switch from monetary to real assets. Despite strenuous rhetoric and monetary actions by central banks, it is not clear whether debt deflation can be avoided.
Aberrant Tendencies
Short-term factors also affect the outlook. Falling prices have placed enormous pressures on companies and state treasuries dependent on resource based revenues.
Companies with large debt service commitments are being forced to produce at uneconomic prices simply to generate cash flow. Some oil exporters are producing below operating cost to maintain revenues to finance ambitious spending plans conceived in more prosperous times. This overproduction distorts prices.
There are growing supply constraints in some markets. Junior miners are unable to bring resource properties into production because of financing pressures. New investment and expansion has been deferred or abandoned. These bottlenecks may cause short-term supply disruptions creating significant volatility in prices.
A “known unknown” is the performance of the dollar. There is a complex and unstable relationship between commodity prices and the dollar. An International Monetary Fund study noted that a 1% increase in the value of the dollar results in a decrease in oil and gold prices of greater than 1%. This means the elasticity is around 1. It appears to be higher for gold than oil prices. Continued volatility in currency markets, reflecting pressures as sovereigns attempt to finance their budget and financial system bailout requirements, will be mirrored in commodity prices.
Individuals All!
Oil prices may have further downside, in the short run, reflecting continued reduction in demand as growth slows. Production cuts by the Organization of the Petroleum Exporting Countries (OPEC) may not be effective as revenue-strapped sovereign producers adjust volumes to generate cash flow. Ultimately, the laws of supply and demand, production costs and a finite, constrained resource will support the price.
The outlook for alternative energies is less sanguine. Most alternatives require high oil prices to be economic. Support for alternative cleaner energy is likely to wane as the GFC forces governments to defer climate change initiatives in the face of harsh economic conditions.
The dislocation in financial markets has benefited gold. Gold’s performance reflects increasing suspicion about “paper” money and lower interest rates. Governments continue to attempt to reflate domestic economies by traditional Keynesian spending, increasing concern about possible inflation and providing support for gold. There is a fear of a return to a gold standard, leading to hoarding of gold stock. Emerging market demand for gold, a traditional store of purchasing power, may be fueled by the threat of increased social unrest.
Other precious metals, platinum, palladium and silver, are likely to be affected by decreased demand, especially given the problems in the automobile sector globally.
Industrial metals (aluminum, copper, lead, nickel, zinc and tin) and bulk commodities (iron ore and coking coal) have been a major proxy for global economic growth, particularly demand from a rapidly industrializing and urbanizing China and India. Slower growth and problems related to inventories and oversupply may mean a continuation of weakness.
The performance of agricultural prices is puzzling. After falling in line with commodities generally throughout 2008, in December agricultural products decoupled from other assets. For example, some grains rose sharply in prices by 10% to 20%.
Prices (adjusted for inflation) are around 40% below long-run average prices. Grain inventory levels are low – around two months of global demand. Problems affecting financing of crops and trade, low prices and difficulty of hedging (increased in margins and hedging costs) have meant that plantings have been low. Major seed producers report a sharp decline in sales. The increased problems of food production from climate change also mean the risk of supply disruption cannot be discounted.
Historically, agricultural products have performed well in economic recessions. Tightening supply, risk of supply shocks and the appeal of a recession resistance asset may underpin prices in relative terms.
Agricultural products that have been linked to oil prices (such as corn, palm oil, soybeans and rapeseed) will be dependent on the broader performance of energy prices.
Bridges to Nowhere & Velocity of Pigs
During commodity booms, excesses abound. Oil-rich countries enjoying rapid growth in commodity revenues embarked on grand and expensive projects. For example, in this cycle, Dubai undertook an ambitious expansion program based on real estate, luxury hotels, airlines, financial services and English premier league soccer clubs.
The excesses are notable. The recently opened Atlantis Hotel is at the end of the first (and so far only completed) Dubai Palm, a piece of reclaimed land designed to resemble a palm tree. The Atlantis has its own theme park next door, every shop and restaurant conceivable and a mammoth aquarium (featuring 65,000 marine animals). The Palazzo Versace hotel, currently under construction, features a beach with artificially cooled sand to save guests from the hot sand as they walk from water to the hotel.
The most emblematic project of this cycle is a project proposed by Tarek bin Laden, one of Osama bin Laden’s many half-brothers. The project entails twin cities on either side of the Bab al-Mandib (Gate of Tears) strait at the mouth of the Red Sea linked by a 29-kilometer bridge across the strait. The project cost was estimated at $200 billion.
Recently, an acquaintance in financial markets announced his retirement to a life of rustic simplicity in Umbria, Italy. He had acquired a farm and was restoring it with the help of local “serfs” (his word not mine!) The farm would be self sufficient producing essentials of life ─ wheat, milk, wine and meat. The plan was to avoid the coming financial Armageddon in financial markets and the money economy.
The newly minted farmer was especially excited by the farm’s black pigs that reproduce three times each year. He referred to this as the “velocity” of the pig population. The porcine velocity is much greater, ironically, than the current velocity of money in financial markets as the recession sets in and the implosion of the financial system becomes institutionalized.
Grandiose plans tend to be launched towards the end of the boom cycle. Pigs and food may be well be where the smart money heads in these troubled times.
Fundamental demand for food and energy may emerge as key investment drivers – everybody needs to eat and we are still a fossil fuel-driven society.
Satyajit Das is a risk consultant and author of a number of key reference works on derivatives and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives” (2006, FT-Prentice Hall).
link
28 January 2009
Eight Structural Factors Undermining Any Turn-Around
by Simon Smelt January 26, 2009
Beyond rescue efforts and hopes of restoring confidence, deep structural forces remain unresolved. Current actions could make matters worse. Consider these eight factors:
First: We are off the map. The U.S. Federal Reserve and Treasury, like their counterparts around the world, face unprecedented challenges. Bank deposits with the Fed, the monetary base, interest rates in the United States and United Kingdom are all at historic highs or lows. Sophisticated tools of economic management are deployed, yet there is no sign that financial leaders have found maps to guide them beyond the immediate need for survival. They can’t even agree the cause: was it a global savings glut (former Treasury Secretary Henry Paulson) or bankers’ behavior (former Fed Chairman Alan Greenspan). They just want to get out of the hole quick. Little is heard of how to tackle America’s empire of debt.
Second: The compass is gone. The focus of monetary policy around the world has been keeping inflation (as measured by the Consumer Price Index) under control and, subject to that, encouraging economic activity through low interest rates. But, this assumes that: (1) The market – guided by light-handed regulation – would look after the rest, notably risk; and (2) prices not covered by CPI – such as asset prices – didn’t matter much for the purposes of monetary management.
Well, wrong on both counts. Result: there are no clear, long-term policy settings for central banks to follow. This makes life unpredictable – just what markets don’t like.
Third: The transmission and steering are shot. The stimulus of competition and the market is being weakened by the growing role of government. More lobbying and more rescue packages will weaken economic performance.
Unlike other central banks, the Fed is not part of government, yet it is a key player. At international level, the elaborate Basle II accord to regulate banking has proved ineffective because it does not catch securitisation.
Fourth: The engine room has throttled back. The engine for global growth has been the U.S. consumer. This stems not from real wage growth but from the availability of cheap credit and the wealth effects of asset price inflation. Growth of 12% plus per annum in household borrowing is unsustainable. Consumption will stay shut down because of reduction in both the supply of credit (factor five) and the demand for credit.
U.S. households have consistently grown their wealth by 3% per annum, compounded, in the medium to long term. In the last 20 years, this has been achieved through capital gains not savings – boosting consumption and encouraging borrowing. The 2008 shock removes those gains. Households will save more, lowering consumption. A return to previous savings rates would result in a $1 trillion per annum decline in U.S. gross domestic product (GDP).
Fifth: The fuel supply is low. Much has been written about the reduced availability of credit. The government and Fed are stepping in to fill the gap in various ways. But:
Sixth: The tugboat can’t do it. There are three big problems.
First, government’s operational limits. In the United States, government accounts for 20% of GDP. The harsh transition to a post bubble world is putting pressure on government to expand to replicate the size or pattern of lost economic activity or to enforce spending and lending; e.g. coercing banks to lend more, regulating old cars off the road so as to speed the replacement cycle for cars, and so on.
Second, monetary policy carries dangers. With reduced leverage by banks and reduced consumption by households, both the quantity of money and the velocity of its circulation will fall. This shrinks nominal GDP. For the Fed’s monetary levers to precisely counterbalance this fall is impossible. If the Fed undershoots, this leads to deflation and recession. Fed Chairman Ben Bernanke will err towards overshoot but the resulting inflation will be difficult to control.
Third, U.S. government debt is climbing, whilst reduced economic growth makes it harder to absorb consequent claims on future revenue. Increased borrowing by government is a burden on future generations of taxpayers.
These three problems show that the boundaries for government action will be pushed hard. However great a leader new President Barack Obama may be, the U.S. government cannot fulfil its long to-do list from the downturn, and repay increasing borrowings, and meet its growing future obligations and ensure a healthy and competitive economy. Yet, political as well as borrowing pressures encourage it to try.
Seventh: Confused signals. Taxpayer funded bailouts seek to save businesses, avoid outright nationalization and forestall panic exit of remaining private capital.
But, in consequence, government’s role has grown from providing welfare insurance to financial insurance. A net transfer from the prudent to the imprudent and from future generations to this is enforced. Consequences of mistakes are borne by those who did not make them.
The signals are perverse and reinforced by leaders. In a guilt free society, Paulson and Treasury Secretary-designate Timothy Geithner view greedy and unwise U.S. consumers and bankers as victims of Asian lenders: “China made me do it!”
Eighth: Stormy international waters. The United States is the world’s main debtor and its dollars provide liquidity to global trade. Eighty-five percent of international trade is in the world’s reserve currency – the U.S. dollar. Foreigners buy 80% of U.S. Treasury bills. To keep its factories churning, China and other exporters buy U.S. dollars – effectively providing goods on credit. All this is of vast benefit to the United States but could change.
The tipping point may come in 2010 from the mundane issuance of government bonds. New government spending programs and the downturn in tax revenues will require many governments massively to expand bond issues to cover their debt.
This will mean: (1.) Downward pressure on bond prices (higher yields), and (2) sufficient supply of non U.S. government bonds that big money can shift from U.S. assets. A lot of parked investment money will be looking for a good home. How much more exposure to U.S. debt – and “victim” psychology – will investors want?
These eight factors are a formidable combination to overcome. Lifeboats anybody?
Simon Smelt is a New Zealand-based economist and policy analyst.
Beyond rescue efforts and hopes of restoring confidence, deep structural forces remain unresolved. Current actions could make matters worse. Consider these eight factors:
First: We are off the map. The U.S. Federal Reserve and Treasury, like their counterparts around the world, face unprecedented challenges. Bank deposits with the Fed, the monetary base, interest rates in the United States and United Kingdom are all at historic highs or lows. Sophisticated tools of economic management are deployed, yet there is no sign that financial leaders have found maps to guide them beyond the immediate need for survival. They can’t even agree the cause: was it a global savings glut (former Treasury Secretary Henry Paulson) or bankers’ behavior (former Fed Chairman Alan Greenspan). They just want to get out of the hole quick. Little is heard of how to tackle America’s empire of debt.
Second: The compass is gone. The focus of monetary policy around the world has been keeping inflation (as measured by the Consumer Price Index) under control and, subject to that, encouraging economic activity through low interest rates. But, this assumes that: (1) The market – guided by light-handed regulation – would look after the rest, notably risk; and (2) prices not covered by CPI – such as asset prices – didn’t matter much for the purposes of monetary management.
Well, wrong on both counts. Result: there are no clear, long-term policy settings for central banks to follow. This makes life unpredictable – just what markets don’t like.
Third: The transmission and steering are shot. The stimulus of competition and the market is being weakened by the growing role of government. More lobbying and more rescue packages will weaken economic performance.
Unlike other central banks, the Fed is not part of government, yet it is a key player. At international level, the elaborate Basle II accord to regulate banking has proved ineffective because it does not catch securitisation.
Fourth: The engine room has throttled back. The engine for global growth has been the U.S. consumer. This stems not from real wage growth but from the availability of cheap credit and the wealth effects of asset price inflation. Growth of 12% plus per annum in household borrowing is unsustainable. Consumption will stay shut down because of reduction in both the supply of credit (factor five) and the demand for credit.
U.S. households have consistently grown their wealth by 3% per annum, compounded, in the medium to long term. In the last 20 years, this has been achieved through capital gains not savings – boosting consumption and encouraging borrowing. The 2008 shock removes those gains. Households will save more, lowering consumption. A return to previous savings rates would result in a $1 trillion per annum decline in U.S. gross domestic product (GDP).
Fifth: The fuel supply is low. Much has been written about the reduced availability of credit. The government and Fed are stepping in to fill the gap in various ways. But:
Sixth: The tugboat can’t do it. There are three big problems.
First, government’s operational limits. In the United States, government accounts for 20% of GDP. The harsh transition to a post bubble world is putting pressure on government to expand to replicate the size or pattern of lost economic activity or to enforce spending and lending; e.g. coercing banks to lend more, regulating old cars off the road so as to speed the replacement cycle for cars, and so on.
Second, monetary policy carries dangers. With reduced leverage by banks and reduced consumption by households, both the quantity of money and the velocity of its circulation will fall. This shrinks nominal GDP. For the Fed’s monetary levers to precisely counterbalance this fall is impossible. If the Fed undershoots, this leads to deflation and recession. Fed Chairman Ben Bernanke will err towards overshoot but the resulting inflation will be difficult to control.
Third, U.S. government debt is climbing, whilst reduced economic growth makes it harder to absorb consequent claims on future revenue. Increased borrowing by government is a burden on future generations of taxpayers.
These three problems show that the boundaries for government action will be pushed hard. However great a leader new President Barack Obama may be, the U.S. government cannot fulfil its long to-do list from the downturn, and repay increasing borrowings, and meet its growing future obligations and ensure a healthy and competitive economy. Yet, political as well as borrowing pressures encourage it to try.
Seventh: Confused signals. Taxpayer funded bailouts seek to save businesses, avoid outright nationalization and forestall panic exit of remaining private capital.
But, in consequence, government’s role has grown from providing welfare insurance to financial insurance. A net transfer from the prudent to the imprudent and from future generations to this is enforced. Consequences of mistakes are borne by those who did not make them.
The signals are perverse and reinforced by leaders. In a guilt free society, Paulson and Treasury Secretary-designate Timothy Geithner view greedy and unwise U.S. consumers and bankers as victims of Asian lenders: “China made me do it!”
Eighth: Stormy international waters. The United States is the world’s main debtor and its dollars provide liquidity to global trade. Eighty-five percent of international trade is in the world’s reserve currency – the U.S. dollar. Foreigners buy 80% of U.S. Treasury bills. To keep its factories churning, China and other exporters buy U.S. dollars – effectively providing goods on credit. All this is of vast benefit to the United States but could change.
The tipping point may come in 2010 from the mundane issuance of government bonds. New government spending programs and the downturn in tax revenues will require many governments massively to expand bond issues to cover their debt.
This will mean: (1.) Downward pressure on bond prices (higher yields), and (2) sufficient supply of non U.S. government bonds that big money can shift from U.S. assets. A lot of parked investment money will be looking for a good home. How much more exposure to U.S. debt – and “victim” psychology – will investors want?
These eight factors are a formidable combination to overcome. Lifeboats anybody?
Simon Smelt is a New Zealand-based economist and policy analyst.
29 July 2007
Be wary of buy and Hold
Those receiving conventional buy-and-hold advice from their brokers and advisors should be leery. We referenced Barton Biggs', former Chief Global Strategist with Morgan Stanley, book Hedgehogging in our April 2006 issue, Losers: Why We Invest with Them.
"Secular cycles, both in markets and sectors of the market, make a big investment management firm a very conflicting enterprise to manage if you are a businessperson, because the rational things to do to maximize short-term profitability are exactly the wrong things from both an investment and a long-term profitability point of view. For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominated management, acted like businessmen: they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy. Management was not evil; they were doing what they thought was right. Large amounts of public money were being raised and very quickly lost. Short-term sales profits were collected at the expense of, not only the public, but the firm's long-term credibility and profitability."
Those who are looking for warnings from our "trusted" government officials should consider their track record. On July 12th of this year, U.S. Treasury Secretary Paulson declared, "This is far and away the strongest business economy that I have seen in my lifetime." Several days prior, on July 2nd, he stated, "In terms of housing, most of us believe that we are at or near the bottom."
If the truth is not already obvious to us, history can be instructive. With the help of Dr. Mark Thornton, of the Ludwig Von Mises Institute, one needn't look far to find examples of misleading statements at major market and economic turning points. Paul Warburg, an early advocate of the Federal Reserve, was on the Federal Reserve Board when he made this statement in January of 1930.
"Happily, we have now turned our backs upon the events of this unfortunate event."
Even more incredulously, on November 22nd of 1929, William Green, President of the American Federation of Labor, stated:
"All the factors which make for a quick and speedy industrial and economic recovery are present and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored."
As a final word of warning, we leave you with the words of Dr. Carroll Quigley, a noted historian, former professor of history at Georgetown University, and consultant to the U.S. Defense Department, the Smithsonian Institute, and NASA. His tome, Tragedy and Hope: A History of the World in Our Time was used as a resource in our December 2006 issue: Mind Games.
"All past history shows that espionage has been generally successful and intelligence has been generally a failure. By this I mean that no country had much success in keeping secrets, in the twentieth as in all earlier centuries,but neither has any other country had much success in evaluating or in interpreting the secrets it obtained. The so-called 'surprises' of history have emerged not because other countries did not have the information, but because they refused to believe it. The date of Hitler's attack on the West in May 1940 had been given to the Netherlands by the German Counterintelligence Office as soon as it was decided; the Western countries refused to believe it. The same was true of every one of Hitler's surprises. Stalin was given the date of the German attack on the Soviet Union by a number of informants, including the United States Department of State, but he refused to believe. Both the Germans and Russians had the date of D-Day, but ignored it. The United States had available all the Japanese coded messages, knew that war was about to begin, and that a Japanese fleet with at least four large carriers was loose (and lost) in the Pacific, yet Pearl Harbor was a total surprise."
While the evidence of trouble has just begun to surface in U.S. equity prices, the love affair with credit, as demonstrated by record profits in the banking and brokerage industries, has only made investors, especially large institutional investors, more attached to this bullish run than ever. But, with the continuing contraction in the housing sector, and its impact on borrowing, the early warning signals are blowing.
The following is an excerpt from the email we sent our subscribers last Thursday, July 19th, regarding our latest issue of The Investor's Mind:
"We are releasing this month's Investor's Mind early because a variety of technical indicators are pointing to an end to the bull market run that began in the fall of 2002. I thought it important to release this piece on three high-level financial meetings that have taken place over the last few months, which I believe make it clear that those at the top of the money game have known for some time that the end of this period will bring massive shifts to the global capital markets."
Doug Wakefield
"Secular cycles, both in markets and sectors of the market, make a big investment management firm a very conflicting enterprise to manage if you are a businessperson, because the rational things to do to maximize short-term profitability are exactly the wrong things from both an investment and a long-term profitability point of view. For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominated management, acted like businessmen: they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy. Management was not evil; they were doing what they thought was right. Large amounts of public money were being raised and very quickly lost. Short-term sales profits were collected at the expense of, not only the public, but the firm's long-term credibility and profitability."
Those who are looking for warnings from our "trusted" government officials should consider their track record. On July 12th of this year, U.S. Treasury Secretary Paulson declared, "This is far and away the strongest business economy that I have seen in my lifetime." Several days prior, on July 2nd, he stated, "In terms of housing, most of us believe that we are at or near the bottom."
If the truth is not already obvious to us, history can be instructive. With the help of Dr. Mark Thornton, of the Ludwig Von Mises Institute, one needn't look far to find examples of misleading statements at major market and economic turning points. Paul Warburg, an early advocate of the Federal Reserve, was on the Federal Reserve Board when he made this statement in January of 1930.
"Happily, we have now turned our backs upon the events of this unfortunate event."
Even more incredulously, on November 22nd of 1929, William Green, President of the American Federation of Labor, stated:
"All the factors which make for a quick and speedy industrial and economic recovery are present and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored."
As a final word of warning, we leave you with the words of Dr. Carroll Quigley, a noted historian, former professor of history at Georgetown University, and consultant to the U.S. Defense Department, the Smithsonian Institute, and NASA. His tome, Tragedy and Hope: A History of the World in Our Time was used as a resource in our December 2006 issue: Mind Games.
"All past history shows that espionage has been generally successful and intelligence has been generally a failure. By this I mean that no country had much success in keeping secrets, in the twentieth as in all earlier centuries,but neither has any other country had much success in evaluating or in interpreting the secrets it obtained. The so-called 'surprises' of history have emerged not because other countries did not have the information, but because they refused to believe it. The date of Hitler's attack on the West in May 1940 had been given to the Netherlands by the German Counterintelligence Office as soon as it was decided; the Western countries refused to believe it. The same was true of every one of Hitler's surprises. Stalin was given the date of the German attack on the Soviet Union by a number of informants, including the United States Department of State, but he refused to believe. Both the Germans and Russians had the date of D-Day, but ignored it. The United States had available all the Japanese coded messages, knew that war was about to begin, and that a Japanese fleet with at least four large carriers was loose (and lost) in the Pacific, yet Pearl Harbor was a total surprise."
While the evidence of trouble has just begun to surface in U.S. equity prices, the love affair with credit, as demonstrated by record profits in the banking and brokerage industries, has only made investors, especially large institutional investors, more attached to this bullish run than ever. But, with the continuing contraction in the housing sector, and its impact on borrowing, the early warning signals are blowing.
The following is an excerpt from the email we sent our subscribers last Thursday, July 19th, regarding our latest issue of The Investor's Mind:
"We are releasing this month's Investor's Mind early because a variety of technical indicators are pointing to an end to the bull market run that began in the fall of 2002. I thought it important to release this piece on three high-level financial meetings that have taken place over the last few months, which I believe make it clear that those at the top of the money game have known for some time that the end of this period will bring massive shifts to the global capital markets."
Doug Wakefield
23 June 2007
Systemic fallout dead ahead?
The Tip of the Iceberg?: "The near-collapse of two big Bear Stearns hedge funds heavily invested in highly-speculative packages of subprime mortgages indicates that the severe housing recession is spreading to the financial arena and is threatening the occurrence of systemic fallout. It is estimated that various institutions own about $6 trillion of mortgage-backed securities of which about $800 billion are subprime. About 13% of subprime mortgages are currently in default, and foreclosure rates on these loans are soaring.
In addition about $2 trillion of mortgage securities are backed by adjustable rate loans (ARMS) that have been or will soon be reset at higher rates. An estimated 29% of all mortgages issued in the last three years were ARMS. Home buyers who took out ARMS in 2004 have already seen their rates rise by about 40%, adding about $290 a month in additional payments on a $300,000 mortgage. Many of these buyers will not be able to refinance at fixed rates as a result of higher mortgage rates and stricter regulations that will disqualify would-be borrowers."
In addition about $2 trillion of mortgage securities are backed by adjustable rate loans (ARMS) that have been or will soon be reset at higher rates. An estimated 29% of all mortgages issued in the last three years were ARMS. Home buyers who took out ARMS in 2004 have already seen their rates rise by about 40%, adding about $290 a month in additional payments on a $300,000 mortgage. Many of these buyers will not be able to refinance at fixed rates as a result of higher mortgage rates and stricter regulations that will disqualify would-be borrowers."
13 June 2007
Stocks to correct 15% by year end
If there is a single salient truth about the U.S. stock market, it
is that 2007 is a record setting year from almost every aspect.
While there are a few rare exceptions that place either 1929 or 2000
in the spotlight instead, our overall impression is that the mania
for stocks appears to be at least as emphatic now as it has ever
been. We have repeatedly illustrated margin debt extremes and the
historically low mutual fund cash-to-assets ratio as evidence, but
the best picture of the continuing mania for stocks remains the
sheer volume of trading. Not only is the volume of trading at a
historic high, the velocity of transactions have exceeded the
previous highs with such ease that one's only choice is the
assumption that a veritable mania is still in progress, and in fact,
never really ended. Apparently, the collapse and bear market that
endured from March 2000 to March 2003 was only a corrective phase to
the greatest stock market mania of all time.
We make the distinction of a "corrective phase" rather than a bear
market due to the observable fact that we cannot find one instance
of back-to-back stock manias in the past. Perhaps the semantics and
definitions do not work for some, but nevertheless, we find it
extremely difficult to dispute that the mania never really ended.
Even at the nadir in 2002, Dollar Trading Volume was still at a
level that equated to a 18.3% rate of growth in velocity from 1995,
when we posit the mania actually commenced. This seven year path
would have been extraordinary sans the final manic peak and
subsequent collapse!
As it now stands, DTV has grown 18.1% from last year's record total
and exceeds the fateful year of 2000 by 28.1%. Compared with Gross
domestic Product and total stock market capitalization, we are close
enough to record extremes to posit the possibility that a similar
outcome to 1929 and 2000 should eventually be at hand.
DTV is more than three times the size of GDP
for only the second time in history.
DTV versus market capitalization is 223%, only nominally lower than
the 228% registered in the Roaring Twenties.
If there is only one salient truth about the stock market today, it
is that the mania remains largely unrecognized by professionals and
the public, who blithely continue without concern, taking larger
risks with greater exposures than ever before, while denying
investments in favor of trading, per se.
We define Speculative Fervor as the one-year differential in DTV
compared with the level of GDP. A market that trades an additional
$2 trillion while GDP rises by 3% is more speculative than a market
that trades an additional $1 trillion while GDP rises the same 3%.
Although Speculative Fervor has not reached the levels registered in
1999 and 2000, this indicator has remained at "Roaring Twenties"
levels for four full years. It is easy to posit that recent high
levels have reinforced the notion that stocks can do no wrong, hence
the game is still played to the hilt. We believe it is imperative
to note that Speculative Fervor remained between +15% to -10% for a
stretch of 64 years (!!!) from 1933 to 1996, equating to the
historic norm. A return to these levels will result in a huge
dénouement for traders and investors. In our view, this outcome is
inevitable. We do not expect an identical collapse such as occurred
from 2000 to 2003, but an initial shock followed by a consistent and
steady disenchantment with the inability of stocks to recover over
the long term.
Stocks are overowned and clearly, overtraded.
is that 2007 is a record setting year from almost every aspect.
While there are a few rare exceptions that place either 1929 or 2000
in the spotlight instead, our overall impression is that the mania
for stocks appears to be at least as emphatic now as it has ever
been. We have repeatedly illustrated margin debt extremes and the
historically low mutual fund cash-to-assets ratio as evidence, but
the best picture of the continuing mania for stocks remains the
sheer volume of trading. Not only is the volume of trading at a
historic high, the velocity of transactions have exceeded the
previous highs with such ease that one's only choice is the
assumption that a veritable mania is still in progress, and in fact,
never really ended. Apparently, the collapse and bear market that
endured from March 2000 to March 2003 was only a corrective phase to
the greatest stock market mania of all time.
We make the distinction of a "corrective phase" rather than a bear
market due to the observable fact that we cannot find one instance
of back-to-back stock manias in the past. Perhaps the semantics and
definitions do not work for some, but nevertheless, we find it
extremely difficult to dispute that the mania never really ended.
Even at the nadir in 2002, Dollar Trading Volume was still at a
level that equated to a 18.3% rate of growth in velocity from 1995,
when we posit the mania actually commenced. This seven year path
would have been extraordinary sans the final manic peak and
subsequent collapse!
As it now stands, DTV has grown 18.1% from last year's record total
and exceeds the fateful year of 2000 by 28.1%. Compared with Gross
domestic Product and total stock market capitalization, we are close
enough to record extremes to posit the possibility that a similar
outcome to 1929 and 2000 should eventually be at hand.
DTV is more than three times the size of GDP
for only the second time in history.
DTV versus market capitalization is 223%, only nominally lower than
the 228% registered in the Roaring Twenties.
If there is only one salient truth about the stock market today, it
is that the mania remains largely unrecognized by professionals and
the public, who blithely continue without concern, taking larger
risks with greater exposures than ever before, while denying
investments in favor of trading, per se.
We define Speculative Fervor as the one-year differential in DTV
compared with the level of GDP. A market that trades an additional
$2 trillion while GDP rises by 3% is more speculative than a market
that trades an additional $1 trillion while GDP rises the same 3%.
Although Speculative Fervor has not reached the levels registered in
1999 and 2000, this indicator has remained at "Roaring Twenties"
levels for four full years. It is easy to posit that recent high
levels have reinforced the notion that stocks can do no wrong, hence
the game is still played to the hilt. We believe it is imperative
to note that Speculative Fervor remained between +15% to -10% for a
stretch of 64 years (!!!) from 1933 to 1996, equating to the
historic norm. A return to these levels will result in a huge
dénouement for traders and investors. In our view, this outcome is
inevitable. We do not expect an identical collapse such as occurred
from 2000 to 2003, but an initial shock followed by a consistent and
steady disenchantment with the inability of stocks to recover over
the long term.
Stocks are overowned and clearly, overtraded.
20 May 2007
China – An Historian’s View
The China story is one of the most amazing tales of our time. From the incredible turmoil of civil war and war with Japan arose a Marxist State that bemused boomers like myself as we pondered the “Great Leap Forward” and the famine that followed, the happy smiles of contented workers on model farms and iconic images of millions of Chinese waiving the “little red book” on the television.
Real GDP per capita grew 17% in the Sixties, 70% in the Seventies, 63% in the turbulent Eighties and 175% in the Nineties. While this development has been concentrated in the coastal and southern provinces, efforts have been made in recent years to expand the prosperity to the inner provinces and the industrial North East.
Since the start of the “China story” we often hear how it will all end badly in civil disorder or economic collapse, whereas, Jim Rogers, the commodity guru has argued that the next big correction in China will be a massive buying opportunity, for both commodities and Chinese equities.
Well then, what’s the real deal on China?
Perhaps it might be useful to consult an historian and I found a strong opinion was held by a great one, a man who was awarded the Pulitzer Prize for literature and the highest award granted by the United States government to civilians, the Presidential Medal of Freedom. (President Ford in 1977).
William James Durant (November 5, 1885–November 7, 1981) was an American philosopher, historian, and writer. He is best known for his authorship (and co-authorship with his wife Ariel Durant in the later volumes) of “The Story of Civilization”.
Will Durant received his doctorate in 1917 and worked as an instructor at Columbia University.
The Story of Philosophy was published in 1926 by Simon & Schuster and became a bestseller, giving the Durant’s the means to travel the world several times and allowing Will Durant to spend four decades writing the eleven volume opus “The Story of Civilization.”
This is what Durant wrote sometime in the 1920’s as he concluded his history of China and reflected on its future. (the emphasis is mine).
This nation, after three thousand years of grandeur and decay, of repeated deaths and resurrections exhibits today all the physical and mental vitality that we find in its most creative periods.
There are no people in the world more vigorous or more intelligent. No other people so adaptable to circumstance, so resistant to disease, so resilient after disaster and suffering, so trained by history to calm endurance and patient recovery. Imagination cannot describe the possibilities of a civilization mingling the physical, labor and mental resources of such a people with the technological equipment of modern industry. Very probably such wealth will be produced in China as even America has never known and once again, as so often in the past, China will lead the world in luxury and the art of life.
No victory of arms or tyranny of alien finance can long suppress a nation so rich in resources and vitality…… Within a century China will have absorbed and civilised its conquerors and will have learnt all the techniques of … industry..
Roads and communications will give her unity, economy and thrift will give her funds and a strong government will give her order and peace. Every chaos is a transition. In the end disorder cures and balances itself with dictatorship. Old obstacles are roughly cleared away and fresh growth is freed. Revolution, like death and style, is the removal of rubbish, the surgery of the superfluous; it comes only when there are many things ready to die. China has died many times before and many times she has been reborn.
The History of Civilisation: Our Oriental Heritage Volume One Will Durant
I conclude, therefore, that only a fool would bet against China at this point and we can therefore surmise that Rogers is correct, driven by huge structural change in the global economy – in this case the strong growth and industrialisation of China, the current boom is part of a supercycle that will last for years to come.
I unconditionally recommend Will Durant’s work to readers and await the next major China correction to establish a position.
Real GDP per capita grew 17% in the Sixties, 70% in the Seventies, 63% in the turbulent Eighties and 175% in the Nineties. While this development has been concentrated in the coastal and southern provinces, efforts have been made in recent years to expand the prosperity to the inner provinces and the industrial North East.
Since the start of the “China story” we often hear how it will all end badly in civil disorder or economic collapse, whereas, Jim Rogers, the commodity guru has argued that the next big correction in China will be a massive buying opportunity, for both commodities and Chinese equities.
Well then, what’s the real deal on China?
Perhaps it might be useful to consult an historian and I found a strong opinion was held by a great one, a man who was awarded the Pulitzer Prize for literature and the highest award granted by the United States government to civilians, the Presidential Medal of Freedom. (President Ford in 1977).
William James Durant (November 5, 1885–November 7, 1981) was an American philosopher, historian, and writer. He is best known for his authorship (and co-authorship with his wife Ariel Durant in the later volumes) of “The Story of Civilization”.
Will Durant received his doctorate in 1917 and worked as an instructor at Columbia University.
The Story of Philosophy was published in 1926 by Simon & Schuster and became a bestseller, giving the Durant’s the means to travel the world several times and allowing Will Durant to spend four decades writing the eleven volume opus “The Story of Civilization.”
This is what Durant wrote sometime in the 1920’s as he concluded his history of China and reflected on its future. (the emphasis is mine).
This nation, after three thousand years of grandeur and decay, of repeated deaths and resurrections exhibits today all the physical and mental vitality that we find in its most creative periods.
There are no people in the world more vigorous or more intelligent. No other people so adaptable to circumstance, so resistant to disease, so resilient after disaster and suffering, so trained by history to calm endurance and patient recovery. Imagination cannot describe the possibilities of a civilization mingling the physical, labor and mental resources of such a people with the technological equipment of modern industry. Very probably such wealth will be produced in China as even America has never known and once again, as so often in the past, China will lead the world in luxury and the art of life.
No victory of arms or tyranny of alien finance can long suppress a nation so rich in resources and vitality…… Within a century China will have absorbed and civilised its conquerors and will have learnt all the techniques of … industry..
Roads and communications will give her unity, economy and thrift will give her funds and a strong government will give her order and peace. Every chaos is a transition. In the end disorder cures and balances itself with dictatorship. Old obstacles are roughly cleared away and fresh growth is freed. Revolution, like death and style, is the removal of rubbish, the surgery of the superfluous; it comes only when there are many things ready to die. China has died many times before and many times she has been reborn.
The History of Civilisation: Our Oriental Heritage Volume One Will Durant
I conclude, therefore, that only a fool would bet against China at this point and we can therefore surmise that Rogers is correct, driven by huge structural change in the global economy – in this case the strong growth and industrialisation of China, the current boom is part of a supercycle that will last for years to come.
I unconditionally recommend Will Durant’s work to readers and await the next major China correction to establish a position.
Subscribe to:
Comments (Atom)