I don't think you can draw that type of conclusion (world decoupling from the U.S.) from the fact gasoline hasn't followed oil up. Oil is a pretty speculative market and now you have all sorts of players making bets on oil prices. Right now, some of this is merely a bet that the dollar will fall further.
I've been wondering if the suject of decoupling might be rendered moot if the BRIC countries have a classic cyclical slowdown that begins 6-12 months after our debt/housing bubble created slowdown.
There may be a big investment falloff in China after next summer's Olympics.
Countrywide CEO's new stock sales raise eyebrows
The lender's chief executive Angelo Mozilo is accused of 'stuffing his pockets' amid shareholder losses; September mortgage fundings sink 44 percent.
Did you read the recent Wall Street Journal article about oil storage?
It seems to support my suspicion that oil is simply being leveraged to oblivion, and that oil is being hoarded in storage facilities to service futures contracts, which according to the article have increased 3x in recent years. Long positions in oil futures have also been increasing dramatically (last I checked).
If speculation is mostly behind this, we could be headed for another oil bust.
From a broader perspective, this is precisely what you would expect from a speculative mania, and this has happened before.
ac, I tend to agree with you. I think we have a lot of hedge funds keeping oil prices floated. The spread between oil and gasoline has deminished over the last few months that tells me demand is not that brisk to keep oil prices this high. It could be a Wile E. Coyote moment.
This evidence supports the "decoupling" argument: that the U.S. economy could slow, but economic growth in the rest of the World would stay strong.
In the short-term, perhaps, but notice that ex-petroleum import prices have fallen two months in a row despite a rout in the dollar.
This suggest that there might be a huge erosion in profit margins going on overseas, and that supply/capacity overseas is beginning to have a negative effect.
Also note the slowing Euro economies and falling house prices there now.
That's an interesting observation. Look at the stock chart for WPO traded on the Toronto Stock Exchange. The company owns and operates petroleum product storage facilities. Its anecdotal, but the chart would tend to support your speculation.
There is a lot of evidence that oil, copper, etc. - pretty much all the hard commodities - are being manipulated by futures traders. The idea is that they go long tons of futures contracts and then hoard the physical commodity to produce an artificial shortage, shooting prices higher. Because the futures market is much larger than the tangible commodities market, this can be done quite easily.
A few months ago this kind of manipulation was exposed in the nickel market - a large hidden stockpile was discovered, and the price dropped 50% in a few months after running up earlier in the year. My guess is in the next couple of years you'll see the same thing in oil, with the current "demand" proving to be mostly artificial.
Theres some kind of cheeky memo running around trading desks today designed as a cheat sheet to reacting to data and market releases, with the market reaction be it a soft inflation figure, higher interest rates, or bad earnings turning out always as stocks rally.
BIDU started to fall around 1 p.m. after a negative report by JP Morgan. It dropped over 10% in an hour and a half. I'm guessing it was one catalyst in spooking high P/E tech stocks. BIDU has been a huge favorite of some hedge funds. Highly leveraged in all ways: China, yen carry, enormous P/E, etc.
There is a lot of evidence that oil, copper, etc. - pretty much all the hard commodities - are being manipulated by futures traders. The idea is that they go long tons of futures contracts and then hoard the physical commodity to produce an artificial shortage, shooting prices higher. Because the futures market is much larger than the tangible commodities market, this can be done quite easily.
If this is true, it could be absolutely ruinous to commodity economies such as Australia when things go bust.
This type of speculation does real economic damage.
Saudi Arabian oil declined 8% in 2006. Northern Ghawar (Ghawar is the biggest oilfield in the world) is in a heavily depleted state and will shortly enter a period of irreversible decline
I'm mostly bearish for the long, but have been long Nasdq 100 futures and am also doing well on Asia, Latin America and natural resources).
Bill | 10.11.07 - 9:38 am | #
Well the QQQQ has been a good play so far.
IMHO with these five stocks making up a good percentage of the up momentum in recent weeks and things slowing down. Seems to me once the momentum swings the other way. Could be a risky play at these levels. Good luck.
This would seem to imply that global demand for oil is strong, while domestic consumption is weak. This evidence supports the "decoupling" argument: that the U.S. economy could slow, but economic growth in the rest of the World would stay strong
I think that the evidence supports the theory that world economies are not synchronous (in the same phase of the cycle) rather than decoupled.
"I think that the evidence supports the theory that world economies are not synchronous (in the same phase of the cycle) rather than decoupled."
I am also in the not synchronous but coupled camp.
"It looks like most of the U.S. deficit is oil and China now."
Like it or not, we are in a mutual death pact. Congress shaking its stick at China to revalue its curency.
Ha ha! Who's going to fund our federal and individual deficits?!?!
We desperately need you to give us a detailed view of your take on oil! World production of crude hasn't increased in a couple of years even with record prices. Producers are confident that little competition will emerge in terms of new supply and that they have pricing power. Is peak oil upon us? i.e. The point at which production begins to decline.
I observed a ~12 year rythm in oil prices with a long run-up and then a sharp sell-off at the end of each 12 year span. These sell-offs last happened 1997/98 and 1986. IMO we're soon due for another such sudden and unexpected collapse in oil prices. Before that, I expect prices to rise maybe above 100$ before collapsing to 20-40$. From that point on it will be a slow and long rise again in the next ~12 year cycle.
Currently, we're still peaking in price and the peak-oil propaganda. In two years we'll all scratch our heads and ask us how we could ever assume there was a shortage in oil.
Re coupling vs. synchronicity, I'm reading a book that seems to say that both strengthen when something bad happens: "If correlation increases during turbulent periods and stock market crashes, then the benefits of diversification disappear when they are most needed." Financial Modeling Under Non-Gaussian Distributions, Springer Finance, 2007. This is inferred from (synchronous) correlations of 6-mo moving avg of returns of the SP500, DAX, and FTSE, from 1980-2005. (The Nikkei was the exception.) It will be interesting to see how strongly correlated China is to the U.S. in the coming years.
Just back from the American Enterprise Institute Deflating Housing & Mortgage Bubble conference...the panelists to a man (including Roubini, Thomas Zimmerman of UBS, John Macon of Caxton, Alex Pollock & Desmond Lachman of AEI) expected recession.
While it was reassuring that they had a good grasp of the issues, it was unnerving that they all agreed there would be a political "solution" because the pain would be so deep.
I wish I had heard the Sheila Bair speech (freeze mortgage payments) last week and the ensuing dialogue.
The entire panel also agreed that China, Germany and other exporters would not be able to decouple when recession hits here.
Your graphic is useful but the problem is that it backdates reserve growth from existing fields to the date the field was discovered. That seems like cheating to me. Reserve growth has been very substantial in recent years.
I also believe if the US goes into slowdown or severe recession that oil prices will come down. If the US isnt buying all those goods made in China their economy will slow and they will not need as much oil. I dont believe as many do, that the rest of the world is going to keep booming along without the US. I believe the RE boom and all the MEW has created this booming global economy, and can slow it way back down just as fast as it shot it up. IMHO
The idea is that they go long tons of futures contracts and then hoard the physical commodity to produce an artificial shortage, shooting prices higher.
It's less sinister than that....
A lot of speculators enter the futures market because everybody is sure that oil is going up.
The guy holding the oil realizes that he can make more money sitting on the oil than selling at todays spot price. So, he sells a futures contract and sits on the oil instead of selling it into the spot market.
Since the guy holding the oil isn't selling it into the spot market, the price goes up! The speculators and the guy holding the oil each are sitting on a gain.
More speculators enter the market, more oil is stored instead of released into the spot market, and spot prices go even higher.
Eventually, you get stupid situations where tankers are making more money sitting just outside of port acting as temporary oil storage than shipping oil. Lots of oil, but nobody willing to sell today.
When the bubble bursts, tons of oil are released on the market all at once. The spot price drops way below normal and the speculators get burned.
Of course, by that time its mostly retail speculators. The deep pockets can see through the mania and start selling naked futures contracts.
The Federal deficit is dropping if you don't count the cost of the wars in Iraq and Afghanistan, which they don't. Both wars are "off budget" and will be paid for with Mmagic Pixie Dust.
OIL
For the price of oil to fall, either demand shifts downward or supply improves. Or, the risk premium has to be taken out of the equation (an immediate end to the Iraq war, a calmer Israel / Palestine situation, a more passive Iran, no more civil unrest in Saudi Arabia, a less political Russia and no more coups in Nigeria).
IMHO the risk premium will be with us for a while.
As to demand: We know that China and India's demand is rising. We know Europe is marginally trending up. We know the US does not care and will buy it at any price - it has to.
As to Supply: Saudi Arabia's reserves are declining, exploration in Africa is fraught with political unrest, exploration in Canada is now iffy because of possible changes in the royalty structure in Alberta, Russia may hold the key but we have seen these folks like to get max. dollars for oil (and gas in the pipelines! as well as quick financial settlements), exploration in the US seems to be moving forward but Alaska is maybe frozen and the Gulf of Mexico is already dotted by wells. So now on to South America - some politicos dont like the US and are not interested in US demand.
Now we have Iraq selling oil in Yen and Saudi Arabia looking at the same.
Natural gas is another story - it is cheaper to leave it in the ground.
Unless there is a huge demand shock (like no demand) I just dont see the price falling.
You guys are marginally crazy if you think anyone can horde a significant quantity of oil. The world produces over 80 million barrels of oil a day, with each barrel being about 0.159 m^3. It adds up to a cube 233 m to a side (that's over 750 feet). Compared to stockpiling of semi-precious metals, it's just not possible. The world's annual nickel production occupies a volume less than 1/50th that of a day of crude production.
The USA's strategic petroleum reserve is huge, but still less than 9 days of worldwide production:
Pardon my ignorance, but would the sum total of the goods and services deficit over time end up equalling the sum of (a) foreign holdings of US treasury debt plus (b) foreign holdings of US corporate debt and equities plus (c) foreign direct investment or am I missing something?
It would be interesting to see, as a percentage of GDP, how much of corporate and governmental america is owned by foreigners.
How many of you have spent time outside the resorts or fancy hotels in the rest of the world? America is a unique place and Americans are unique people. They have money to spend and places to put the stuff they buy and they believe that buying stuff and filling up their places will make them happy. They are unique.
In most of Europe, people live in apartments and have 6 weeks to 2 months off work each year. They live in an apartments. They are not huge junk collectors. Many/most apartments/houses are small and many are very old. The eurpeans enjoy food and friends and travel much more than they do stuff. They don't even drive very large cars. A few do but they are more likely to buy an expensive sports car than a SUV.
Much of the rest of the world is 3rd world. That means that the rich own everything and the majority are peasants. Small middle class in most of the rest of the world except Canada and Australia which are more like Americans than anyone else but they aren't the majority of the world's population.
For the world to decouple, there would have to be a psychodynamic shift in the distribution of wealth around the world and that isn't going to happen over night. It is irrelevant about the number of Chinese who now have a car and want to buy one in the future. These are the managerial class of the factories that sell mostly to the US. Europe doesn't want or need all the crap that Wal-Mart sells nor do they have any place to put it. Everyone doesn't live in a tract home needing a throw away lawn mower and edger.
I think there is truly a disconnect in this country from any and all reality. Who came up with this disconnect theory anyway? One of the Marie Antoinettes I'll bet.
Isn't it interesting that Bernanke and Paulson stated, under oath, in front of Congress that supply side economics doesn't work?
jag | 10.11.07 - 6:28 pm | #
A lot of new demand for oil is coming from countries where oil is subsidized (Iran, Iraq, Saudi Arabia, Russia, China, Venezuela, etc). Oil subsidies are artificially increasing the demand for oil and draining government coffers. We may see a sudden drop in demand as governments decide to reduce subsidizes to balance budgets.
Investments in many of the largest state owned oil fields have been siphoned off to pay for other government spending (Mexico, Iran, Venezula, etc). Most of these oil fields are using decades old technology. We may see a supply bump as these countries are forced to modernize (or decrease spending).
US and China are both building or topping off strategic reserves. That will eventually come to an end.
Saudi Arabia may "turn on the taps" as an economic blow to Iran.
Demand drops in a recession.
Everybody knows that "oil is going up" so there are lots of speculators in the market.
uuuggg! There is no shortage of oil! The issue is about the price of that oil! Petro economics 101.
koko good to see you here.
Thats correct you cant hord oil but you can control the traffic of oil. This is the Iran wild card. And as to gas it has been Russia's wild card.
We all make the bold assumption that if difficult times are down the road, that an economies will work together to make it better. ('We are all better off if we work together"). This is after all a fibre in the free enterprize system and global growth.
We have however seen how strained relations can become in difficult economic times. Troubling economic times gives rise to disparity and political action. Political action can never be modeled because it is based on emotions.
Iran on a whim can close a shipping lane that would rock Japan. Russia can close a pipeline and freeze Europe. These are the shocks that sets the risk premiums and consequent economic fallout.
If the US goes so does the world, probably. But unlike earlier times, developing counties might be less-off-better.
A fear I have is that maybe everybody might not want to march to the US adgenda. A first in this is not holding the currency in high regard followed by not holding USD dominated paper.
I am just not sure how the US will take to sovereign funds buying up banks, land, ports...this becomes a political issue, maybe a wild card driven on emotions.
Kicker thx. good points to support a short term position.
My volley would be that govts. can change the rules to suit thier domestic needs. Classic here is the recent interventions in Venezuela to privatize some (read mostly all) private oil exploration and develpoment and Russia's rethinks on the environmental aspects of same. This adds to short term risk and alters long term pricing.
Since there is an near endless supply of oil, it boils down to demand setting the price. Agreed Saudi Arabia might change its domestic policy of (really) cheap gasoline which does not discourage use. Also agree that a recession will moderate consumption and the price. But I dont think this will have a huge impact on international pricing because demand in now shared across a wider consumer base.
Thank you Robert McLeod - I was going to make that point myself (that oil volumes are too damned big to stash)... but you beat me to it... right on!
That is unless you leave it in the ground & not pump it as quickly. In fact if you slow the extraction the recovery yield is usually higher - more total oil produced from the same field. The best way to prematurely deplete a field is pump it hard & fast.
So maybe some of what we see as initial signs of 'Peak Oil' is really market manipulation. I doubt it but have no way to know for sure.
I've been betting on oil & gas getting pricier since 2000. Had some really good returns, especially in 2005.
The latest wrinkle is the export land model. Demand is rising in the oil exporting countries, while production is decling, Together, things are going to get realllly tight, really quickly.
For those who are wondering--I sold my NASDQ futures at 11:00 am for a profit, since I had work that would take me away from my office and computer. I did not get back to check the market until about 3:55 pm. I look at index futures as short term plays that need to be watched carefully.
The dollar is 1/2 the value it was in 2002. Yet, we are at twice the trade deficit.
Ya but against the currency that matters the exchange rate has hardly budged - China. Its gone from something like 8.3 yuan to the dollar to something like 7.5 yuan to the dollar... and that's where most of our deficit growth has come from.
In the case of oil - Saudi Arabia & other Gulf States have also pegged their currencies to USD... instead of a FX shift the cost of oil has doubled.
As CR points out the big increase in deficit is China and oil so the current numbers really aren't that mind boggling when you look at it more closely.
Fly. It is a fact as I watched those same confirmation hearings too. I suspect even a transcript of it would be acceptable to you. Are you a Koolade drinker too?
Currently, the market is backwardated. The price of oil in the future is less than it is today suggesting that high prices are being driven by tight supplies and not by speculation.
I suspect even a transcript of it would be acceptable to you. Are you a Koolade drinker too?
Personally I love Kool Aid and take offense that anyone would suggest it is anything but wonderful.
Now on 'Supply Side' as practiced by BushCo... not so much.
My point is I've heard that claim said over and over - yet have never seen a correctly cited transcript pointing out where either clearly said that or anything close to that.
As far as I can tell Bernanke and Paulson either keep their opinions to themselves regarding the subject OR couch their answers to mean whatever the listener wants to infer.
I would truly LOVE to see where either if not both clearly said 'Supply Side doesn't work'... in those words. Not implied or suggested... but actually spoken word for word.
I'll second dryfly: I'd also like to see a source for Bernanke and Paulson rejecting supply side. Although I expect Paulson doesn't believe in it, and I'm almost certain Bernanke doesn't (I don't think either of them are fools), but given the politics of their positions, I'd be surprised to hear them come out and say it.
So this down turn is not going to be your general run of the mill recession. This one is going to hammer Joe and the county and state he lives in and it doesnt matter what the fed does or the gubbermint. We are in the beginning of a massive deflationary cycle that no amount of printing will solve because neither Joe or his state or county can pay for the services they have already used and have NO income left over to fund additional borrowing. Because with out borrowing, when you have massive debt, it turns into massive deflation.
What is happening with the stock market has nothing to do with what is happening to Joe. It has more to do with dollars freed up from international trade and needing a home. But that home will never be Joes wallet.
No worries on oil C.R., let 'em price the black gold in Euros.
Peak oil is a story about the intersection of physics and economics - we drill the big bumps first and produce the easiest, sweetest, most profitable oil first - once approximately 50% of the total has been produced the rate of production has peaked and gone on irreversible decline. So we keep producing oil for years and years, just at a declining rate with time.
Simplification, but look up Hubbert's Curve for the details and a great blog on the particulars is The Oil Drum.
For my sins I've read all 4 recent Fed governor speeches ( Yellen, Poole, Kohn, Rosengren ) and the minutes of the Fed meeting in Sep. and I've reached a conclusion - I used to think that they MUST know that inflation is higher than their stats, that unemployment is way higher, the GDP growth is distorted, that serial refinancing of ARMs is not really a option for any length of time, that house prices MUST keep a reasonable relationship to affordability and in competition to rents, that a consumption/service industry economy is not viable long term, that deficit funding from China ( vendor financing ) will end sometime,that you can't devalue your way out of trouble - I reckoned they all really KNEW that but wanted to keep spinning to keep that key psychological aspect of economics - CONFIDENCE - up and we muddled our way down in economic wealth with some semblance of dignity. This suggested that they will GET it in short order and do the right things (don't lower rates - let the misallocation and mispricing of capital work itself out ) - and we would have maybe a 2 to 3 year period of nastiness
Reading those speeches, I'm quite persuaded now that these guys drink their own KookAid ( deliberate sp.). And it will take a seachange in accepted economic theory at the TOP before any sort of fix is in. The historical parallel I think of is the 8 year interregnum before Keynesianism was toppled by monetarism in the 70s.
That suggests that we are in for a lengthy twisty and bendy downward path lasting many years - a decade or more. O shit.
We are in the beginning of a massive deflationary cycle that no amount of printing will solve because neither Joe or his state or county can pay for the services they have already used and have NO income left over to fund additional borrowing. Because with out borrowing, when you have massive debt, it turns into massive deflation.
Unless the gov't prints & circulates money - which is what it is likely to do in spades. Money supply growth IS inflation regardless of all the rest.
Inflation doesn't mean we are 'richer' just that we have more money... if so Zimbabwe would be the richest country in the world. But deflation they don't have and won't have as long as their presses run.
Neither will we if we REALLY decide to fire up the presses.
Reading those speeches, I'm quite persuaded now that these guys drink their own KookAid ( deliberate sp.). And it will take a seachange in accepted economic theory at the TOP before any sort of fix is in. The historical parallel I think of is the 8 year interregnum before Keynesianism was toppled by monetarism in the 70s.
Except Monetarism IS Keynsianism - just a different yet complementary shade of same.
But I do think there will be a seachange as soon as the dollar 'monopoly' turns into an 'oligopoly' of major currencies... yen, dollar, euro and yuan, possibly ruble, all with approximate parity. Then the Fed, Congress and POTUS will have to REALLY consider what is happening outside the dollar's immediate sphere of influence or else. Right now they think dollar zone effects only.
Money supply growth IS inflation regardless of all the rest.
Its probably just us two in this thread - I prefer the original statement "inflation is always a monetary phenomenon" - It was interpreted by the Thatcher govt as a money supply issue as in : "if you control money supply you control inflation" and so they set explicit money supply targets and I watched their travails as they undershot, and overshot and changed to M2, M3, MZM definitions of money and what they would target and control and still really didn't get it right.
It illustrated to me that while the central statement is right - we still haven't freakin' got a good handle on "what is money" and "what is money supply". I look at the slosh report on the temporary market operations of the Fed, the SOMA numbers, the adjusted monetary base and I STILL can't get a sense of any sort of correlation connection between any of those numbers and what I call REAL inflation.
I think the Fed believes that those numbers I quoted ARE money supply and they do feel they control it and then they measure inflation wrongly and feel in control of it.
(I've ignored velocity in this discussion ) and even though my training and livelihood is in math and stat I want to avoid a math look at this. There's something really mysterious about this fiat money business that the equations don't capture.
I'm puzzled. Meantime, living in the USA costs more - that's clear - and its striking to me that I visit Turkey with friends from England and at their $2 to 1pound ratio now - compared to $1.50 to 1 pound 7 years ago - guess who's feeling poor when we go out to restaurants ! The worm turned.. What I mean is - it costs me MORE, that's inflation ( whatever the low Fed Adjusted Monetary Base numbers, M2 numbers say - and seriously I can't see why M3 is anything other than a circuitous way that M2 gets multiplied up and rerepresented ) - that's my story and I'm sticking to it and react to fix it too !
The problem with the "inflate it all away" solution is that 90% or so of the population is growing poorer and poorer. They are not seeing all this extra money, so we can't inflate out of the problem unless everyone gets huge pay raises soon.
What happened to the markets around 2:00? Some bad news must have leaked.
Likewise, if anybody has any inside information on the markets I'd also like to hear it.
We're seeing real time "decoupling" as the US economy slows like CR alludes to.
They must be reading Calculated Risk
Actually there is a boom in housing...Foreclosures
http://shimg.ny.publicus.com/apps/pbcsi.dll/bilde?Site=SH&Date=20071011&Category=NEWS&ArtNo=71010027&Ref=AR&MaxW=460
full read ..my bad
New boom is in home foreclosures | HeraldTribune.com | Sarasota Florida | Southwest Florida's Information Leader
CR,
I don't think you can draw that type of conclusion (world decoupling from the U.S.) from the fact gasoline hasn't followed oil up. Oil is a pretty speculative market and now you have all sorts of players making bets on oil prices. Right now, some of this is merely a bet that the dollar will fall further.
I've been wondering if the suject of decoupling might be rendered moot if the BRIC countries have a classic cyclical slowdown that begins 6-12 months after our debt/housing bubble created slowdown.
There may be a big investment falloff in China after next summer's Olympics.
I heard that JPMorgan lowered BIDU esitmates - and apparently that tanked the U.S. market. No link.
Best to all.
Countrywide CEO's new stock sales raise eyebrows
The lender's chief executive Angelo Mozilo is accused of 'stuffing his pockets' amid shareholder losses; September mortgage fundings sink 44 percent.
Mozillo is a POS....
link:
Business, financial, personal finance news - CNNMoney.com
Bob_in_Mass, I don't buy into the decoupling argument, but this data seems to support it. I'll add my disclaimer to the post.
It looks like most of the U.S. deficit is oil and China now. I'd expect everywhere else to start slowing down soon.
Best Wishes.
On the subject of oil, how much has the price risen in Euros over the last couple months? It must be close to zero...
Moody's: another $23.8 bln of mortgage securities may be cut
Moody's downgrades $33.4 bln of subprime mortgage securities
CR,
Did you read the recent Wall Street Journal article about oil storage?
It seems to support my suspicion that oil is simply being leveraged to oblivion, and that oil is being hoarded in storage facilities to service futures contracts, which according to the article have increased 3x in recent years. Long positions in oil futures have also been increasing dramatically (last I checked).
If speculation is mostly behind this, we could be headed for another oil bust.
From a broader perspective, this is precisely what you would expect from a speculative mania, and this has happened before.
Moodys downgraded $33.4 bln of securities backed by subprime mortgages.
The securities, issued in 2006, represent 7.8% of the original dollar volume of securities rated by Moodys according to a statement by the company.
ac, I tend to agree with you. I think we have a lot of hedge funds keeping oil prices floated. The spread between oil and gasoline has deminished over the last few months that tells me demand is not that brisk to keep oil prices this high. It could be a Wile E. Coyote moment.
This evidence supports the "decoupling" argument: that the U.S. economy could slow, but economic growth in the rest of the World would stay strong.
In the short-term, perhaps, but notice that ex-petroleum import prices have fallen two months in a row despite a rout in the dollar.
This suggest that there might be a huge erosion in profit margins going on overseas, and that supply/capacity overseas is beginning to have a negative effect.
Also note the slowing Euro economies and falling house prices there now.
REBear, is there a link to those Moody's downgrades?
ac, I added a disclaimer - I haven't bought into the decoupling argument. And I also expect oil prices to fall, perhaps signficantly!
Best Wishes.
ac,
That's an interesting observation. Look at the stock chart for WPO traded on the Toronto Stock Exchange. The company owns and operates petroleum product storage facilities. Its anecdotal, but the chart would tend to support your speculation.
World Point Terminals Inc. - Google Finance
I think ac is right about oil.
There is a lot of evidence that oil, copper, etc. - pretty much all the hard commodities - are being manipulated by futures traders. The idea is that they go long tons of futures contracts and then hoard the physical commodity to produce an artificial shortage, shooting prices higher. Because the futures market is much larger than the tangible commodities market, this can be done quite easily.
A few months ago this kind of manipulation was exposed in the nickel market - a large hidden stockpile was discovered, and the price dropped 50% in a few months after running up earlier in the year. My guess is in the next couple of years you'll see the same thing in oil, with the current "demand" proving to be mostly artificial.
Say it ain't so:
Theres some kind of cheeky memo running around trading desks today designed as a cheat sheet to reacting to data and market releases, with the market reaction be it a soft inflation figure, higher interest rates, or bad earnings turning out always as stocks rally.
Market Whiplash - MarketBeat - WSJ
BIDU started to fall around 1 p.m. after a negative report by JP Morgan. It dropped over 10% in an hour and a half. I'm guessing it was one catalyst in spooking high P/E tech stocks. BIDU has been a huge favorite of some hedge funds. Highly leveraged in all ways: China, yen carry, enormous P/E, etc.
The PPT is trying to calm things down now.
I think ac is right about oil.
There is a lot of evidence that oil, copper, etc. - pretty much all the hard commodities - are being manipulated by futures traders. The idea is that they go long tons of futures contracts and then hoard the physical commodity to produce an artificial shortage, shooting prices higher. Because the futures market is much larger than the tangible commodities market, this can be done quite easily.
If this is true, it could be absolutely ruinous to commodity economies such as Australia when things go bust.
This type of speculation does real economic damage.
I think it bears watching closely.
Saudi Arabian oil declined 8% in 2006. Northern Ghawar (Ghawar is the biggest oilfield in the world) is in a heavily depleted state and will shortly enter a period of irreversible decline
Hillarious comedy !
CR,
nope. Saw those headlines on Marketwatch.
George Bush just told Maria B. of CNBC that the housing recession is only regional, not national.
I guess it's regional if 30 blocks in NYC are holding steady but the rest of the nation is collapsing....
here is the link - Moody's downgrade
Moody's downgrades $33 bln of subprime mortgage securities - MarketWatch
REBear, thanks!
I'm mostly bearish for the long, but have been long Nasdq 100 futures and am also doing well on Asia, Latin America and natural resources).
Bill | 10.11.07 - 9:38 am | #
Well the QQQQ has been a good play so far.
IMHO with these five stocks making up a good percentage of the up momentum in recent weeks and things slowing down. Seems to me once the momentum swings the other way. Could be a risky play at these levels. Good luck.
AAPL 8.98%
MSFT 5.92%
QCOM 5.32%
GOOG 4.49%
RIMM 2.27%
26.98% of QQQQ
Topher | 10.11.07 - 10:16 am | #
Sorry I decided to sell! Didn't mean to start somthing.
This would seem to imply that global demand for oil is strong, while domestic consumption is weak. This evidence supports the "decoupling" argument: that the U.S. economy could slow, but economic growth in the rest of the World would stay strong
I think that the evidence supports the theory that world economies are not synchronous (in the same phase of the cycle) rather than decoupled.
As far as oil today goes. I heard they want to keep filling the strategic reserves, maybe war in the spring with Iran. We need to top it off.
I sure dont understand why the hell its not already full.
"I think that the evidence supports the theory that world economies are not synchronous (in the same phase of the cycle) rather than decoupled."
I am also in the not synchronous but coupled camp.
"It looks like most of the U.S. deficit is oil and China now."
Like it or not, we are in a mutual death pact. Congress shaking its stick at China to revalue its curency.
Ha ha! Who's going to fund our federal and individual deficits?!?!
CR,
We desperately need you to give us a detailed view of your take on oil! World production of crude hasn't increased in a couple of years even with record prices. Producers are confident that little competition will emerge in terms of new supply and that they have pricing power. Is peak oil upon us? i.e. The point at which production begins to decline.
Lying and Republican. The two words are now synonymous.
I observed a ~12 year rythm in oil prices with a long run-up and then a sharp sell-off at the end of each 12 year span. These sell-offs last happened 1997/98 and 1986. IMO we're soon due for another such sudden and unexpected collapse in oil prices. Before that, I expect prices to rise maybe above 100$ before collapsing to 20-40$. From that point on it will be a slow and long rise again in the next ~12 year cycle.
Currently, we're still peaking in price and the peak-oil propaganda. In two years we'll all scratch our heads and ask us how we could ever assume there was a shortage in oil.
O-Joe
"Lying and Republican. The two words are now synonymous."
I would say Lying and Politician. The two words are now synonymous. Everywhere
Re coupling vs. synchronicity, I'm reading a book that seems to say that both strengthen when something bad happens: "If correlation increases during turbulent periods and stock market crashes, then the benefits of diversification disappear when they are most needed." Financial Modeling Under Non-Gaussian Distributions, Springer Finance, 2007. This is inferred from (synchronous) correlations of 6-mo moving avg of returns of the SP500, DAX, and FTSE, from 1980-2005. (The Nikkei was the exception.) It will be interesting to see how strongly correlated China is to the U.S. in the coming years.
Just back from the American Enterprise Institute Deflating Housing & Mortgage Bubble conference...the panelists to a man (including Roubini, Thomas Zimmerman of UBS, John Macon of Caxton, Alex Pollock & Desmond Lachman of AEI) expected recession.
While it was reassuring that they had a good grasp of the issues, it was unnerving that they all agreed there would be a political "solution" because the pain would be so deep.
I wish I had heard the Sheila Bair speech (freeze mortgage payments) last week and the ensuing dialogue.
The entire panel also agreed that China, Germany and other exporters would not be able to decouple when recession hits here.
"Just back from the American Enterprise Institute"
Ahh yes. The nutjob globalista slave masters. What a wonderful group.
The key to understanding the future of oil is this graphic:
http://www.dissidentvoice.org/May06/image005.jpg
X how 'bout this one from our dictator:
" the deficit is the lowest in years due to a business friendly tax-rate, we must keep taxes low."
Forgot to mention that there's an upward trend in the SP500/DAX/FTSE correlations from 1980-2005. Looks like we've got coupling, with Europe at least.
Lying and Republican. The two words are now synonymous.
Dazed&Confused | 10.11.07 - 5:07 pm | #
Yep, they replaced Clinton and lying...at least until 2008
F. Federson,
Your graphic is useful but the problem is that it backdates reserve growth from existing fields to the date the field was discovered. That seems like cheating to me. Reserve growth has been very substantial in recent years.
I also believe if the US goes into slowdown or severe recession that oil prices will come down. If the US isnt buying all those goods made in China their economy will slow and they will not need as much oil. I dont believe as many do, that the rest of the world is going to keep booming along without the US. I believe the RE boom and all the MEW has created this booming global economy, and can slow it way back down just as fast as it shot it up. IMHO
The idea is that they go long tons of futures contracts and then hoard the physical commodity to produce an artificial shortage, shooting prices higher.
It's less sinister than that....
A lot of speculators enter the futures market because everybody is sure that oil is going up.
The guy holding the oil realizes that he can make more money sitting on the oil than selling at todays spot price. So, he sells a futures contract and sits on the oil instead of selling it into the spot market.
Since the guy holding the oil isn't selling it into the spot market, the price goes up! The speculators and the guy holding the oil each are sitting on a gain.
More speculators enter the market, more oil is stored instead of released into the spot market, and spot prices go even higher.
Eventually, you get stupid situations where tankers are making more money sitting just outside of port acting as temporary oil storage than shipping oil. Lots of oil, but nobody willing to sell today.
When the bubble bursts, tons of oil are released on the market all at once. The spot price drops way below normal and the speculators get burned.
Of course, by that time its mostly retail speculators. The deep pockets can see through the mania and start selling naked futures contracts.
The Federal deficit is dropping if you don't count the cost of the wars in Iraq and Afghanistan, which they don't. Both wars are "off budget" and will be paid for with Mmagic Pixie Dust.
Full disclosure: I am long Magic Pixie Dust.
OIL
For the price of oil to fall, either demand shifts downward or supply improves. Or, the risk premium has to be taken out of the equation (an immediate end to the Iraq war, a calmer Israel / Palestine situation, a more passive Iran, no more civil unrest in Saudi Arabia, a less political Russia and no more coups in Nigeria).
IMHO the risk premium will be with us for a while.
As to demand: We know that China and India's demand is rising. We know Europe is marginally trending up. We know the US does not care and will buy it at any price - it has to.
As to Supply: Saudi Arabia's reserves are declining, exploration in Africa is fraught with political unrest, exploration in Canada is now iffy because of possible changes in the royalty structure in Alberta, Russia may hold the key but we have seen these folks like to get max. dollars for oil (and gas in the pipelines! as well as quick financial settlements), exploration in the US seems to be moving forward but Alaska is maybe frozen and the Gulf of Mexico is already dotted by wells. So now on to South America - some politicos dont like the US and are not interested in US demand.
Now we have Iraq selling oil in Yen and Saudi Arabia looking at the same.
Natural gas is another story - it is cheaper to leave it in the ground.
Unless there is a huge demand shock (like no demand) I just dont see the price falling.
Thoughts, please.
You guys are marginally crazy if you think anyone can horde a significant quantity of oil. The world produces over 80 million barrels of oil a day, with each barrel being about 0.159 m^3. It adds up to a cube 233 m to a side (that's over 750 feet). Compared to stockpiling of semi-precious metals, it's just not possible. The world's annual nickel production occupies a volume less than 1/50th that of a day of crude production.
The USA's strategic petroleum reserve is huge, but still less than 9 days of worldwide production:
Strategic Petroleum Reserve Inventory 2005
Pardon my ignorance, but would the sum total of the goods and services deficit over time end up equalling the sum of (a) foreign holdings of US treasury debt plus (b) foreign holdings of US corporate debt and equities plus (c) foreign direct investment or am I missing something?
It would be interesting to see, as a percentage of GDP, how much of corporate and governmental america is owned by foreigners.
thanks,
(a so.cal. land use lawyer)
Isn't it interesting that Bernanke and Paulson stated, under oath, in front of Congress that supply side economics doesn't work?
All this talk of decoupling is crazy.
How many of you have spent time outside the resorts or fancy hotels in the rest of the world? America is a unique place and Americans are unique people. They have money to spend and places to put the stuff they buy and they believe that buying stuff and filling up their places will make them happy. They are unique.
In most of Europe, people live in apartments and have 6 weeks to 2 months off work each year. They live in an apartments. They are not huge junk collectors. Many/most apartments/houses are small and many are very old. The eurpeans enjoy food and friends and travel much more than they do stuff. They don't even drive very large cars. A few do but they are more likely to buy an expensive sports car than a SUV.
Much of the rest of the world is 3rd world. That means that the rich own everything and the majority are peasants. Small middle class in most of the rest of the world except Canada and Australia which are more like Americans than anyone else but they aren't the majority of the world's population.
For the world to decouple, there would have to be a psychodynamic shift in the distribution of wealth around the world and that isn't going to happen over night. It is irrelevant about the number of Chinese who now have a car and want to buy one in the future. These are the managerial class of the factories that sell mostly to the US. Europe doesn't want or need all the crap that Wal-Mart sells nor do they have any place to put it. Everyone doesn't live in a tract home needing a throw away lawn mower and edger.
I think there is truly a disconnect in this country from any and all reality. Who came up with this disconnect theory anyway? One of the Marie Antoinettes I'll bet.
its mind boggling.
The dollar is 1/2 the value it was in 2002. Yet, we are at twice the trade deficit.
Isn't it interesting that Bernanke and Paulson stated, under oath, in front of Congress that supply side economics doesn't work?
jag | 10.11.07 - 6:28 pm | #
I'm sure that's exactly what they did.
Kokopelli,
Great post...
> I also expect oil prices to fall, perhaps significantly!
Put down the crack pipe and step away from the edge of the building.
Barley,
Some factors working against oil (short term).
A lot of new demand for oil is coming from countries where oil is subsidized (Iran, Iraq, Saudi Arabia, Russia, China, Venezuela, etc). Oil subsidies are artificially increasing the demand for oil and draining government coffers. We may see a sudden drop in demand as governments decide to reduce subsidizes to balance budgets.
Investments in many of the largest state owned oil fields have been siphoned off to pay for other government spending (Mexico, Iran, Venezula, etc). Most of these oil fields are using decades old technology. We may see a supply bump as these countries are forced to modernize (or decrease spending).
US and China are both building or topping off strategic reserves. That will eventually come to an end.
Saudi Arabia may "turn on the taps" as an economic blow to Iran.
Demand drops in a recession.
Everybody knows that "oil is going up" so there are lots of speculators in the market.
uuuggg! There is no shortage of oil! The issue is about the price of that oil! Petro economics 101.
koko good to see you here.
Thats correct you cant hord oil but you can control the traffic of oil. This is the Iran wild card. And as to gas it has been Russia's wild card.
We all make the bold assumption that if difficult times are down the road, that an economies will work together to make it better. ('We are all better off if we work together"). This is after all a fibre in the free enterprize system and global growth.
We have however seen how strained relations can become in difficult economic times. Troubling economic times gives rise to disparity and political action. Political action can never be modeled because it is based on emotions.
Iran on a whim can close a shipping lane that would rock Japan. Russia can close a pipeline and freeze Europe. These are the shocks that sets the risk premiums and consequent economic fallout.
If the US goes so does the world, probably. But unlike earlier times, developing counties might be less-off-better.
A fear I have is that maybe everybody might not want to march to the US adgenda. A first in this is not holding the currency in high regard followed by not holding USD dominated paper.
I am just not sure how the US will take to sovereign funds buying up banks, land, ports...this becomes a political issue, maybe a wild card driven on emotions.
Kicker thx. good points to support a short term position.
My volley would be that govts. can change the rules to suit thier domestic needs. Classic here is the recent interventions in Venezuela to privatize some (read mostly all) private oil exploration and develpoment and Russia's rethinks on the environmental aspects of same. This adds to short term risk and alters long term pricing.
Since there is an near endless supply of oil, it boils down to demand setting the price. Agreed Saudi Arabia might change its domestic policy of (really) cheap gasoline which does not discourage use. Also agree that a recession will moderate consumption and the price. But I dont think this will have a huge impact on international pricing because demand in now shared across a wider consumer base.
Thank you Robert McLeod - I was going to make that point myself (that oil volumes are too damned big to stash)... but you beat me to it... right on!
That is unless you leave it in the ground & not pump it as quickly. In fact if you slow the extraction the recovery yield is usually higher - more total oil produced from the same field. The best way to prematurely deplete a field is pump it hard & fast.
So maybe some of what we see as initial signs of 'Peak Oil' is really market manipulation. I doubt it but have no way to know for sure.
Yes, global economy will continue to grow. especially india & chind.
I've been betting on oil & gas getting pricier since 2000. Had some really good returns, especially in 2005.
The latest wrinkle is the export land model. Demand is rising in the oil exporting countries, while production is decling, Together, things are going to get realllly tight, really quickly.
For those who are wondering--I sold my NASDQ futures at 11:00 am for a profit, since I had work that would take me away from my office and computer. I did not get back to check the market until about 3:55 pm. I look at index futures as short term plays that need to be watched carefully.
"For those who are wondering--I sold my NASDQ futures at 11:00 am for a profit"
Don't take this personally, but nobody I know cares how a pseudo-anonymous stranger's daytrade worked out.
Made a million, lost a million, have big puffy bunions that predict sector snaps and double bottom patterns? Not interested.
"Reserve growth" is a complex issue, but a lot of it is basically expectations management on the part of oil companies.
But, of course, there's never been a reason to distrust big businesses. . .
Isn't it interesting that Bernanke and Paulson stated, under oath, in front of Congress that supply side economics doesn't work?
But, of course, there's never been a reason to distrust big businesses. . .
Nor OPEC which are really just REALLY big companies masquerading as nations.
Isn't it interesting that Bernanke and Paulson stated, under oath, in front of Congress that supply side economics doesn't work?
Source please...
"Source please..."
Both stated so at their confirmation hearings.
The dollar is 1/2 the value it was in 2002. Yet, we are at twice the trade deficit.
Ya but against the currency that matters the exchange rate has hardly budged - China. Its gone from something like 8.3 yuan to the dollar to something like 7.5 yuan to the dollar... and that's where most of our deficit growth has come from.
In the case of oil - Saudi Arabia & other Gulf States have also pegged their currencies to USD... instead of a FX shift the cost of oil has doubled.
As CR points out the big increase in deficit is China and oil so the current numbers really aren't that mind boggling when you look at it more closely.
Both stated so at their confirmation hearings.
Source please... transcripts with those words or close paraphrae would do.
Fly. It is a fact as I watched those same confirmation hearings too. I suspect even a transcript of it would be acceptable to you. Are you a Koolade drinker too?
80 million barrels of oil a day, with each barrel being about 0.159 m^3. It adds up to a cube 233 m to a side (that's over 750 feet).
There are about 7-8 billion barrels of oil in storage at any given time. There is plenty of room to store oil if the price is right.
Read the section on Costs and Profits (doe.gov). for an explanation.
Currently, the market is backwardated. The price of oil in the future is less than it is today suggesting that high prices are being driven by tight supplies and not by speculation.
I suspect even a transcript of it would be acceptable to you. Are you a Koolade drinker too?
Personally I love Kool Aid and take offense that anyone would suggest it is anything but wonderful.
Now on 'Supply Side' as practiced by BushCo... not so much.
My point is I've heard that claim said over and over - yet have never seen a correctly cited transcript pointing out where either clearly said that or anything close to that.
As far as I can tell Bernanke and Paulson either keep their opinions to themselves regarding the subject OR couch their answers to mean whatever the listener wants to infer.
I would truly LOVE to see where either if not both clearly said 'Supply Side doesn't work'... in those words. Not implied or suggested... but actually spoken word for word.
That is all I ask.
I'll second dryfly: I'd also like to see a source for Bernanke and Paulson rejecting supply side. Although I expect Paulson doesn't believe in it, and I'm almost certain Bernanke doesn't (I don't think either of them are fools), but given the politics of their positions, I'd be surprised to hear them come out and say it.
"suggesting that high prices are being driven by tight supplies and not by speculation"
I disagree. Prices for today are high because of security of supply.
Guarenteed delivery is always a premium.
Tomorrow might be interesting on the oil markets because of Rices' comments. Lets see if this plays out..the swords are out!
Can the US really fight another war?
So this down turn is not going to be your general run of the mill recession. This one is going to hammer Joe and the county and state he lives in and it doesnt matter what the fed does or the gubbermint. We are in the beginning of a massive deflationary cycle that no amount of printing will solve because neither Joe or his state or county can pay for the services they have already used and have NO income left over to fund additional borrowing. Because with out borrowing, when you have massive debt, it turns into massive deflation.
What is happening with the stock market has nothing to do with what is happening to Joe. It has more to do with dollars freed up from international trade and needing a home. But that home will never be Joes wallet.
No worries on oil C.R., let 'em price the black gold in Euros.
peak oil is that sort of like peak housing, they just dont make land anymore?
Peak oil is a story about the intersection of physics and economics - we drill the big bumps first and produce the easiest, sweetest, most profitable oil first - once approximately 50% of the total has been produced the rate of production has peaked and gone on irreversible decline. So we keep producing oil for years and years, just at a declining rate with time.
Simplification, but look up Hubbert's Curve for the details and a great blog on the particulars is The Oil Drum
.
I'm a firm believer in Peak Oil. And Peak Gold and Peak Copper. The price of each is peaking and will decrease significantly as the recession sets in.
For my sins I've read all 4 recent Fed governor speeches ( Yellen, Poole, Kohn, Rosengren ) and the minutes of the Fed meeting in Sep. and I've reached a conclusion - I used to think that they MUST know that inflation is higher than their stats, that unemployment is way higher, the GDP growth is distorted, that serial refinancing of ARMs is not really a option for any length of time, that house prices MUST keep a reasonable relationship to affordability and in competition to rents, that a consumption/service industry economy is not viable long term, that deficit funding from China ( vendor financing ) will end sometime,that you can't devalue your way out of trouble - I reckoned they all really KNEW that but wanted to keep spinning to keep that key psychological aspect of economics - CONFIDENCE - up and we muddled our way down in economic wealth with some semblance of dignity. This suggested that they will GET it in short order and do the right things (don't lower rates - let the misallocation and mispricing of capital work itself out ) - and we would have maybe a 2 to 3 year period of nastiness
Reading those speeches, I'm quite persuaded now that these guys drink their own KookAid ( deliberate sp.). And it will take a seachange in accepted economic theory at the TOP before any sort of fix is in. The historical parallel I think of is the 8 year interregnum before Keynesianism was toppled by monetarism in the 70s.
That suggests that we are in for a lengthy twisty and bendy downward path lasting many years - a decade or more. O shit.
-K
We are in the beginning of a massive deflationary cycle that no amount of printing will solve because neither Joe or his state or county can pay for the services they have already used and have NO income left over to fund additional borrowing. Because with out borrowing, when you have massive debt, it turns into massive deflation.
Unless the gov't prints & circulates money - which is what it is likely to do in spades. Money supply growth IS inflation regardless of all the rest.
Inflation doesn't mean we are 'richer' just that we have more money... if so Zimbabwe would be the richest country in the world. But deflation they don't have and won't have as long as their presses run.
Neither will we if we REALLY decide to fire up the presses.
Reading those speeches, I'm quite persuaded now that these guys drink their own KookAid ( deliberate sp.). And it will take a seachange in accepted economic theory at the TOP before any sort of fix is in. The historical parallel I think of is the 8 year interregnum before Keynesianism was toppled by monetarism in the 70s.
Except Monetarism IS Keynsianism - just a different yet complementary shade of same.
But I do think there will be a seachange as soon as the dollar 'monopoly' turns into an 'oligopoly' of major currencies... yen, dollar, euro and yuan, possibly ruble, all with approximate parity. Then the Fed, Congress and POTUS will have to REALLY consider what is happening outside the dollar's immediate sphere of influence or else. Right now they think dollar zone effects only.
I don't think that day is far off.
======================
re: dryfly
Money supply growth IS inflation regardless of all the rest.
Its probably just us two in this thread - I prefer the original statement "inflation is always a monetary phenomenon" - It was interpreted by the Thatcher govt as a money supply issue as in : "if you control money supply you control inflation" and so they set explicit money supply targets and I watched their travails as they undershot, and overshot and changed to M2, M3, MZM definitions of money and what they would target and control and still really didn't get it right.
It illustrated to me that while the central statement is right - we still haven't freakin' got a good handle on "what is money" and "what is money supply". I look at the slosh report on the temporary market operations of the Fed, the SOMA numbers, the adjusted monetary base and I STILL can't get a sense of any sort of correlation connection between any of those numbers and what I call REAL inflation.
I think the Fed believes that those numbers I quoted ARE money supply and they do feel they control it and then they measure inflation wrongly and feel in control of it.
(I've ignored velocity in this discussion ) and even though my training and livelihood is in math and stat I want to avoid a math look at this. There's something really mysterious about this fiat money business that the equations don't capture.
I'm puzzled. Meantime, living in the USA costs more - that's clear - and its striking to me that I visit Turkey with friends from England and at their $2 to 1pound ratio now - compared to $1.50 to 1 pound 7 years ago - guess who's feeling poor when we go out to restaurants !
The worm turned.. What I mean is - it costs me MORE, that's inflation ( whatever the low Fed Adjusted Monetary Base numbers, M2 numbers say - and seriously I can't see why M3 is anything other than a circuitous way that M2 gets multiplied up and rerepresented ) - that's my story and I'm sticking to it and react to fix it too !
-K
The problem with the "inflate it all away" solution is that 90% or so of the population is growing poorer and poorer. They are not seeing all this extra money, so we can't inflate out of the problem unless everyone gets huge pay raises soon.