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Tuesday, June 17, 2008

As The Asian Countries Are Hit

I've been writing about this for some months now, and the moves here have very little to do with Fed policy. They have to do with fundamental economics.
The central bank has raised rates to 8pc to curb inflation and halt a run on the rupee, but critics still say the country waited too long to tackle overheating. The current account deficit has shot up to near 3.5pc of GDP. A plethora of subsidies has pushed the budget deficit to 9pc of GDP.
Russia, Brazil, India, Vietnam, South Africa, Indonesia, Nigeria, and Chile - among others - have all had to raise interest rates or tighten monetary policy in recent days. Most are still behind the curve.
The currencies of Korea, Thailand, the Phillippines, and Malaysia have come under pressure this week as investors scramble for dollars in moves that echo the East Asia crisis in 1997-1998.
Yes, it is long past time to say yikes and head for the exit, but exactly how does anyone believe that this will support world oil prices? This pyramid is about to execute a Tower of Babylon impression.

Argentina's getting hit too. Brazil still relatively stable, but.... Shanghai (SSE) has taken a pasting.

The next collapse of funds is on its way as predictably as the sun is going to rise. However, it should be noted that the sun may predictably rise, but it sure doesn't exude a lot of heat these days.

MoM, please forgive what is not stupidity, but ignorance on my part: I simply do not understand the implications of this either here or abroad.

I know you have an actual life - but if time permits, your additional comments would be most welcome.
Have you read what life in Argentina is like? Check out this blog. I shudder to think what it will be like with things getting worse there.

I guess this means that the decoupling theory is history.
Well, Burnside, the world is not globally decoupling, but coupling at a ferocious rate. Worse, it is coupling both financially and in the "real" economy due to energy.

One does not get extreme economic conditions without a change in correlation. Normally, bad economic circumstances run so far and then introduce their own counterbalancing effects.

For example, the wave of foreclosures in say CA has dropped prices enough to generate a whole new crop of FTHB who can now qualify, and also as people get out from under their huge mortgages, they have more spending power. Thus although that is bad, it is not a one-way street economically speaking.

What you are watching here is a historic event. It is caused by human stupidity - the same stupidity that assumed that home prices could go up forever while wages remained stagnant.

At current May Market oil prices (probably around $100), the ability of the financial systems of the world to sustain consumption of oil are clearly breaking.

At $130 a barrel, you can't even substitute coal in some utilities, because the cost of oil is pushing the net cost of coal too high.

Thus those claiming oil will go for $150 a barrel are developing an investment theory equivalent to claiming that RE in San Diego will continue to go up because Captain Kirk will get into one of those time warps, appear over San Francisco, and have a nasty accident causing the SF population to flee out and buy SD real estate.

This is ludicrously destructive, and is now threatening the countries which should be profiting the most. The ME OPEC countries are all huge importers of goods, and now they find themselves being hit with huge inflationary increases. Because they do not have diversified economies with relatively good spreading of income, they are very unstable states.

Still, the speculators continue to bet. There will no be another wave of financial disaster created by this as trade breaks down along with currencies and people get caught out on the far end of this fiasco. Another round of failures of funds. Another round of capital destruction. More financial instability, but now it will hit on top of weakened real economies which are losing capital, and growing world overcapacity in major industries.

It's also cutting the supply of food, because a lot of poorer farmers can't buy fertilizer, thus raising the price of food.

We should all take some time this summer to contemplate the awesome power of human stupidity.
Teri, how extremely disturbing. It sounds a lot like South Africa.
Like I said in an earlier thread, the commodities bubble is the last great chance for those who missed the tech bubble and housing bubble to lose money. The plunge is liable to be rapid when it finally comes.
And all the Apocalypse Porn (Total Global Economic Collapse as well as the usual Rapture Countdown) is going gangbusters in bookstores and on the Web.
This won't be the apocalypse, just a great opportunity to lose money yet again.

If you're a boomer who bet wrong on all three bubbles, you'll think it's the apocalypse when you try to retire.
BP's 2008 Statistical Review is now out. Here is the link to the oil highlights: http://www.bp.com/subsection.do?categoryId=9023761&contentId=7044545

Poke around BP's site and you'll note that global oil production fell by .2% to 81.5mm bpd while demand grew by 1.1% to 85.2 mm bpd. Shades of Boone Pickens.

How can demand exceed production? By destocking existing storage. Gobal oil storage fell and is probably "tanking" (pun intended) right now. Here is link to the BP chart of global inventory for 2007: http://www.bp.com/sectiongenericarticle.do?categoryId=9023774&contentId=7044204

Until we destroy enough demand and or take the oil price high enough, the long specs would appear to be on the right side of the trade. If we can't build enough inventory by late summer in preparation for the northern hemisphere's 2009 winter, you'll know it; prices will be through the roof by early fall.
I must amend my BP post somewhat. The chart of stocks is of OECD commercial inventories and not of global storage. A smaller subset for sure and probably a reasonable proxy. Actual global stocks must be drawing down but the real behavior is unknowable, just like the real Good Production Practice capacity of Saudi Arabia is a mystery (max G.P.P. is the maximum sustainable production that does not harm ultimate recovery).
Anon - I really don't know. I spent two days trying to figure out the real northern US temps, and it looks like heating oil demand will be way up come winter. EXCEPT THAT PEOPLE WON'T BE ABLE TO PAY FOR IT.

That's the bottom line. People may hit their homes to 55 instead of 65, or 62 instead of 68, but it is madness to assume that people will buy what they can't afford.

At these prices, you should see a lot of replacement effects.

Also, on demand, crude is easy to store. You can pump it into a hole in the ground, use depots, etc. So I would think there is some around. It appears to me that the refineries are being very cautious on their usage after getting caught with refined product on which they couldn't make much of a profit later last year.
In other news ... just about the entirety of Europe has already promised to farmers, truckers, even people simply taking a vacation that they will use govt. handouts to lower oil prices.

This while demand is about 1% above production, and production, despite saudi promises to the contrary, continues to fall.
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