What will be the best performing asset-class in 2008?
crude oil?
10%
[ 8 ]
natural gas?
5%
[ 4 ]
metals?
5%
[ 4 ]
precious metals?
28%
[ 21 ]
agricultural commodities?
40%
[ 30 ]
emerging market equity?
1%
[ 1 ]
bonds?
1%
[ 1 ]
other (please specify)?
8%
[ 6 ]
Total Votes : 75
Author
Message
Pretorian Light Sweet Crude
Joined: Apr 08, 2006 Posts: 1239 Location: Somewhere there
Posted: Fri Jun 27, 2008 7:40 am Post subject: Re: Trader's Corner 2008
Bill, I am trying to play aud/jpy, cad/jpy longs while shorting gbp/jpy and usd/jpy, with a bit of accent on longs when market rises and on shorts when it goes down. I am always trying to be interest-positive, at least slightly, and trying to be exposed only on gbp and usd. So far I did very well, thinking that usd and gbp are in spot for a bigger trouble than "commodity" currencies. But always worrying of course, especially of inflation in AU.
So i wanted to ask what do you prefer to trade, and what margin percent do you keep while trading?
Posted: Fri Jun 27, 2008 8:31 am Post subject: Re: Trader's Corner 2008
I was playing EUR/CAD and CAD/JPY, so by default also EUR/JPY. My long position is EUR as I am paid in euros now. Used to be US dollars, but I managed to close that losing position. However, I consider myself short CAD as I still want to buy more land and property there.
So my natural position is long EUR, short CAD. Therefore, I need to sell EUR and buy CAD on EUR rallies. That also fits with my own view of the resource play.
I stopped playing CAD/JPY (EUR/JPY) for a while because I lost some money on a steep correction higher in EUR/CAD, so instead of closing that position I decided to cut my JPY exposure instead. Basically, piss poor trading on my behalf, but I need those CAD someday, so it is all about averaging in anyway.
I trade for my personal account (PA) through the discount brokerage arm of a major European bank. All electronically. The transaction costs are quite low. I could trade with 1:100 leverage, but I purposefully asked to limit that to 1:20 leverage. Basically, there is no difference, but I just wanted to keep the leverage lower as this is a long-term investment strategy and not day trading.
I do have exposure to other currencies through stocks, bonds, mutual funds and money markets, but those are traded through other accounts with other major banks and large funds to reduce my counterpart risk with any one firm. Segregated accounts in German banks enjoy very high levels of bankruptcy protection. The brokers are regulated and required to belong to an investor compensation scheme by their regulators. I do not know if it is perfect, but this works for me. Making a profit is nice, but capital preservation is more important!
Good luck! ; - )) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Feb 20, 2005 Posts: 2679 Location: Uppsala, Sweden
Posted: Fri Jun 27, 2008 11:37 am Post subject: Re: Trader's Corner 2008
MrBill wrote:
Seismic? I would look at Schlumberger, Haliburton or Baker-Hughes, but they are all expensive.
Yes, I know. That's why I chose a small, cheaper and less known one.
MrBill wrote:
Any small boutique firms that just do seismic would have to be considered on a case by case basis. Some of those father and son type operations are as famous for going broke as for striking it rich!
Alas, that's the risk.
Anyway, the company I bought into yesterday is the Norwegian Petroleum Geo-Services. Only a small part of my portfolio, but still.
Market cap of about $4 billion. Looks pretty cheap from a p/e perspective and so on. Like it has been forgotten by all the big analysts as it's in Norway or something.
Anyway, I stupidly missed that it is also listed as an ADR in New York. If I'd shopped there instead I'd saved $10. _________________ Peak oil is not an energy crisis. It is a liquid fuel crisis.
Joined: Apr 08, 2006 Posts: 1239 Location: Somewhere there
Posted: Fri Jun 27, 2008 12:33 pm Post subject: Re: Trader's Corner 2008
MrBill wrote:
Making a profit is nice, but capital preservation is more important!
- ))
Yes thats true. Taxes in USA are utterly insane for a trader. They want tax on all earned interest and don't discount interest spent. they want you to pay tax every 3 months regardless that you may lose a lot of money in the middle. They won't let you write off your office if a kid happened to cross it eventually. same goes to a computer, books, trips you name it.
Posted: Mon Jun 30, 2008 1:54 am Post subject: Re: Trader's Corner 2008
I am not an accountant, but perhaps you should consider incorporating yourself, so that all your trading costs, including interest, are tax deductible?
Quote:
Speculators, Index Investors, and Commodity Prices
Addressing the questions...
As WTI crude oil prices push on toward $140/bbl, questions have been raised regarding the role that the speculators and index investors are playing in the continuing rise in commodity prices. In addressing these questions, we stress the common theme that the speculators and index investors perform different economic roles in the commodity futures markets, and that these differences in economic roles imply different influences on commodity prices.
The role of speculators is to bring to the market informed views on the future supply and demand fundamentals. Consequently, speculative buying and selling can move commodity prices to the extent that other market participants believe that it is conveying relevant information on forward supply and demand fundamentals.
The role of index investors is to hold the commodity price risk that the producers wish to hedge. Because they buy and sell mechanically and consequently do not bring information to the market, index investors do not move commodity prices in the same way as speculators.
By lowering the cost of capital to commodity producers, however, the participation of index investors in the commodity futures markets can help lower commodity prices over the long run.
source: Goldman Sachs Commodities Research
June 29, 2008
I am not sure that is an adequate response. It seems more like an automatic knee jerk reaction. Sure in the long run it may lower the cost of capital, but its not the cost of capital driving commodity price inflation at the moment. Arguably real interest rates net of inflation are already negative, and that is causing inflation and therefore investment in physical assets as a hedge. So lowering the cost of capital is a mute point.
UPDATE: deleveraging will raise the cost of capital and cause asset prices to fall
Quote:
Deleveraging, cutting back on the amount borrowed as compared to equity, is the dominant theme in markets and economics in 2008 as the financial system recoils from the massive losses in structured finance and the housing bubble.
Those losses -- which are still mounting and being recognized -- have piled up faster than banks can raise new capital, leaving the system today more extended than it was before the crisis began.
JP Morgan has estimated that banks have raised more than $300 billion in new capital, as compared with $400 billion in recognized losses, a figure others have estimated could ultimately reach $1.3 trillion.
And since markets are now more volatile, which requires more equity as a cushion, and in light of what will be huge regulatory pressure to take less risk, investment and commercial banks will be trimming their sails for a long time to come.
While banks and other financials are scrambling to cut back on their lending, there is also pressure to make what debt financing remains longer term, especially among investment banks chastened by the flameout of Bear Stearns.
"Broker-dealers were very reliant on short-dated funding," said Jan Loeys, head of global asset allocation at JP Morgan in London.
"To avoid all going the Bear Stearns way they are scrambling to get proper long-dated funding. That is an avalanche at the moment which the bond market is having trouble absorbing."
Borrowing short and lending long, the basis of all banking, was taken to extremes though numerous bank-affiliated schemes that counted on the willingness of money market investors to provide a steady stream of funds for that little extra in interest.
Loeys thinks those schemes, which provided $5.9 trillion in financing at their peak, were actually a large contributor to the "bond conundrum" that puzzled Alan Greenspan in 2005 when long-term rates fell even as he hiked short-term ones.
So now that's over, what will be the costs?
Loeys argues that the cost of borrowing will go up across the board, but even more for those who wish to secure long-term funding. He expects inflation-adjusted government bond returns to return to their historic averages. That implies an extra 1.75 percent of yield on a 10-year bond above current rates at today's expected rate of inflation.
While a steeper and higher yield curve will help banks to make money, ultimately easing the credit crunch, structurally higher interest rates will be a big brake on economic growth, hitting both businesses and consumers.
Posted: Mon Jun 30, 2008 1:34 pm Post subject: Re: Trader's Corner 2008
Mr. Bill et al,
This is sorta on thread considering the implication for long term future contracts as well as long term stock positions. But mostly I'd like to see what some of the smarties out here think about this thought:
Here's a thought which popped to mind while reading Saudi's latest press release. I believe these statements from Saudi Arabia could be taken as an admission the kingdom now believes they have reached Peak Oil.
Consider the KSA’s base positions:
1)The market is adequately supplied.
2) Much of the price run up is due to speculation.
3)The KSA has sufficient excess capacity to deliver significantly more oil to the market should there be a demand for it.
Now consider the new press releases from the KSA:
1)Khurais Field will come online next June at 1.2 million bopd.
2)The plan is to increase their current 11 million bopd capacity to 12.5 million bopd.
3)The cost to build this expanded deliverability is $10 billion.
If the KSA believes the market will require an additional 1.2 mm bopd next June they currently have, by their own admission, the capacity to meet the demand: 11 mm bopd – 9.6 mm bopd (current production rate) = 1.4 m bopd. Thus why spend $10 billion to add unneeded capacity. Granted in time the extra capacity will be required but according to their statements current deliverability is more than adequate to meet any demand increase in the immediate future.
You’re really left with only two conclusions (but please off any others that pop to mind):
1)The KSA didn’t really have a better use for the $10 billion right now and doesn’t mind the new production facilities sitting there idle. (and that’s a really bad idea: such equipment doesn't “age” very well if it’s not being utilized)
2)The KSA knows their true production capabilities and decline rates better than anyone else and projects a real demand for the additional NET capacity in a year.
Even if there’s a significant global recession (as there was in the early 80’s) and the price of oil drops 75% (like it did in 1986) to $40/bbl then the new production would still earn the KSA about $13 billion net (I’m guessing lifting costs of around $10/bbl...gonna pump a whole lot of water from the get-go).
Hmmm….recover the new costs with less than a year’s production even if the global economy slumps and consumption drops (like it did in the early 80’s). And then the KSA can open the wells up and grab a bigger chunk of market share just like they did when they drove oil down to $10/bbl in 1986.
Double Hmmm…..if a global recession puts PO off a few more years than the KSA is in a great position to capture more of the market and still make a handsome return. And if the world figures how out to prosper (or at least survive) with high oil prices then the KSA is in a great position to capture more of the market and make an more handsome return.
Posted: Tue Jul 01, 2008 1:29 am Post subject: Re: Trader's Corner 2008
Happy Canada Day!
Rockman, I probably posted my answer in the wrong forum. Sorry. But all valid points. Thanks.
Quote:
Agriculture
Harvested loss better than expected...
... but risks to acreage and yields
still skewed to the downside
Acreage report slightly bearish corn, but risks to acreage and yields still skewed to the downside
6/30's USDA Acreage update indicates 87.3 mn planted corn acres - +150 bp vs. 3/31's Prospective Plantings and -6.7% vs. 2007. This is slightly higher than consensus and our expectations published in our June 22 note and therefore can be interpreted as slightly bearish. However, concerns over ongoing flood damage - which was not fully reflected in the report - present downside risk to acreage estimates as well as to yields. We maintain that risk to our corn price forecast of $7.70/bu is skewed up.
Report neutral for soybeans but risk to our forecasts skewed up
2008E planted soybean acreage at 74.5 mn acres is neutral vs. consensus' 74.4 mn, but is clearly above our last acreage estimates published in April. Further, risks around estimated harvested acreage at 96.8% are also skewed to the downside, in our view. As a result, risks to our soybean price forecasts (6-month forecast is $15.30/bu) are skewed to the upside and these forecasts are currently under review.
Acreage slightly ahead of our forecasts, but uncertainty remains
Planted spring wheat acreage at 14.2 mn acres is +8% vs 2007 but slightly below consensus. Given these numbers and recent shifts in the corn and soybean balances, our wheat forecasts ($ 9.00/bu) are also under review.
source: Goldman Sachs Commodities Research
June 30, 2008
UPDATE: I pulled this chart of OECD broad money supply versus industrial production from a PDF document, but my photoshop skills are limited, so the IMG chart is distorting the page. To view click on the link and expand chart to full-size. Thanks.
Broad Money Supply vs Industrial Production
Quote:
Bond markets should not be too worried about excessive money supply growth
It is becoming a significant theme amongst Central Banker’s, appearing even at the recent UK Treasury Select Committee meeting by King and colleagues. The issue is one of excess liquidity. We have highlighted the problem in the chart below which shows the level of broad money growth for the OECD relative to the level of growth for OECD industrial production. Whilst the OECD does not include the entire world (there being notable absences of China, Russia and Brazil), were these countries to be included, the theme of excess liquidity growth does not disappear.
For nominal bond yields it does not matter whether the growth in the money supply is being soaked up by real GDP growth or by price growth. In the medium term, nominal GDP growth feeds into nominal yields. Whether the increase in broad money feeds into nominal GDP growth depends upon how many times a year each dollar, euro etc. is spent or put another way, it is the ratio between spending and the stock of money and sometimes called the velocity of money.
Clearly, the chart below shows that the velocity of money has been decreasing over the period of the chart. What is important to understand is that structural breaks in the velocity of money take place. For example, there is a well-documented structural upward shift in US M2 velocity in the early nineties (soon after the S&L crisis), which Orphanides & Porter (2001) then estimated to be heading back to past trends thereafter.
The point we take away from this is that whilst broad money growth is firm, it does not necessarily imply higher bond yields in the future (although clearly, the chances do increase). The velocity of money is the missing link, and with all the craziness linked to the credit crunch we can imagine that there will be a precautionary need to hold higher money balances by individuals. Doing so decreases the velocity of money further and breaks the link between broad money growth to nominal GDP to bond yields.
Our conclusion is simple. We are concerned by the rise in money on a global scale, but we do not yet see an automatic rise in bond yields as the ultimate conclusion.
That conclusion is generally at odds with what many other commentators are saying, but it is good to hear a good, solid counter-argument. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Tue Jul 01, 2008 7:57 am Post subject: Re: Trader's Corner 2008
Quote:
World oil supplies will be tight until 2013: IEA
World oil supply will rise more slowly than expected by 2013, leaving little spare capacity on the market despite weaker demand growth, the International Energy Agency said on Tuesday.
In its Medium-Term Oil Market Report, the energy adviser to 27 industrialized countries said global supply capacity will reach 95.33 million barrels per day (bpd) by 2012, 2.7 million bpd less than its previous forecast a year ago.
The outlook comes as supply concerns and robust demand in Asia and the Middle East have helped drive crude oil prices to record highs above $140 (U.S.) a barrel, adding a strain to the world economy.
“Structural demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture over the medium term,” the Paris-based IEA said.
High prices and slower economic growth are expected to weigh on world demand, although it is forecast to expand faster on average than additions to global supply in the next five years.
Consumption will rise by an average 1.6 per cent a year between 2008 and 2013, or some 1.5 million bpd on average, the IEA said. That is down from a previous medium term forecast of 2.2 per cent.
Annual supply growth will match or exceed that level through 2010 but slow to less than 1 million bpd from 2011 to 2013. Average total supply growth in the period stands at 1.15 million bpd a year.
The IEA also said additional global refining capacity over the next five years would lag expectations, adding to the challenge of meeting rising demand for diesel and other distillate fuels.
Additions to capacity by 2012 are 1 million bpd less than last year's forecast.
Accelerated declines at mature oil fields and long delays and cost overruns at new projects account for the lower supply growth forecast.
The IEA, which has been steadily lowering its forecast for world oil demand during 2008 due to high prices and slowing economies, said the size of the cut to supply was unexpected.
“We thought we would be seeing lower demand, but what surprised us is the scale of the supply revision,” said Lawrence Eagles, head of the IEA's Oil Industry and Markets Division and editor of the report.
“Despite the demand revision, we still end up with a similar picture to that of a year ago.”
The IEA's previous medium term report said there was a risk of a supply crunch developing in the period to 2012.
Output in 2012 from outside the Organization of the Petroleum Exporting Countries, source of about three in every five barrels, is now expected to be 1.4 million bpd less than previously thought.
Supply will rise to 51.1 million bpd in 2013 from 49.9 million bpd in 2008, the IEA said. Output of non-OPEC crude alone will remain flat or fall in the next five years.
Production capacity in OPEC countries, also facing cost overruns and delays at new projects, is also expected to lag earlier expectations.
OPEC usually holds part of its production capacity in reserve to make up for supply breaks or to meet unexpected rises in demand. That margin is expected to wane by the end of the period.
The group's effective unused production will rise from 2.5 million bpd in 2008 to more than 4 million bpd in 2009, before declining again in 2013 to about 1 million bpd, the IEA said.
“Spare capacity is likely to dwindle to minimal levels by 2013 in the absence of accelerated supply-side investment or further efforts to stem demand growth,” it said.
I have been told by a reliable source that the IEA has been forbidden by the US administration from updating their absurdly cornucopian oil supply and demand scenarios until the report that comes out late this year (after the election); that report, which will publish the result of a "bottom-up" analysis (ie a summary of all existing oil fields, their production and/or prospects) is epxected to show that oil production is unlikely to reach the levels that so many have blithely assumed - notably on the basis of previous optimstic IEA reports. The IEA, which was deemply unhappy about the current lies to was supposed to present and support, has been leaking word of the expected content of that new report for many weeks now, including an increasingly alarmist tone in its official reports, such as today's Medium Term Market Outlook:
The IEA said it believed Saudi Arabia was having bigger problems than the kingdom, the world's largest exporter, was willing to admit to, despite its national oil company having gone to great lengths last month to reassure energy ministers gathered in Jeddah that, except for Khursaniyah, its capacity editions were running on schedule.
And now I feel far less sure about Saudi Arabia than I did 5 minutes ago!
I have on many occasions said that it is my belief that PO will really break thorugh media-wise after the IEA Energy Outlook is published in November (with the bottom-up study!). Suddenly I get the feeling we mightn't need wait that long. _________________ Peak oil is not an energy crisis. It is a liquid fuel crisis.
Posted: Wed Jul 02, 2008 12:46 am Post subject: Re: Trader's Corner 2008
Quote:
Energy Weekly
The anti-hoarding: physical and financial de-stocking at play
Global de-stocking has driven timespreads down at the same time that fundamentals continue to tighten, as weak demand growth continues to be off-set by even weaker supply growth. This has left the oil system extremely vulnerable to adverse supply and demand shocks and underscores the risk of higher price spikes and volatility.
Current timespreads imcompatible with current inventory levels...
Looking only at the flat-to-contangoed shape of the oil forward curve these days, it would appear that inventories are high and building. In fact they are low, in some case extremely low, and tightening. This disconnect between the shape of the oil forward curve and inventories has raised concerns that OECD inventory data may be misleading, i.e., stocks may be building in other parts of the world which are not tracked by official statistics, likely motivated by some form of hoarding.
...likely caused by a physical de-stocking in the oil market...
We believe that the oil market is reflecting exactly the opposite of hoarding - namely a global "physical de-stocking" induced by a combination of constrained credit conditions, weak end-consumer demand, poor margins and high oil prices that force refineries and other consumers in developed economies to cut working inventories.
...which has been exacerbated by a financial de-stocking
The impact of physical de-stocking is exacerbated by "financial de-stocking", as speculators continue to cut long positions amid concerns over deteriorating demand in mature economies. At the same time, passive investors are liquidating some of their commodity positions, driven by the rise in commodity prices and the sell-off in equities, which has led their portfolios to an "overweight" allocation in commodities relative to other assets.
Source: Goldman Sachs Commodities Research
July 1, 2008
I think translated that means that the only real demand out there are the Chindia's of the world that are willing and able to afford subsidies on fuel imports, while everyone else is reacting predictably to higher oil prices and credit costs by scaling back consumption.
And we know that India, for example, cannot keep subsidizing both food and fuel for very much longer based on their budget and current account deficits as well as weaker demand for their exports into a slowing global economy. Pakistan yesterday announced that they were raising fuel prices in order to cut the subsidies they must pay between domestic and world prices. Others have or will follow.
World growth will be below trend going forward. That is not a global recession, but excess capacity and higher unemployment. However, central banks can only react to slower economic growth at the expense of exacerbating already high worldwide inflation due to their excessive money supply growth. This worldwide train wreck started gathering speed back in 2002, and now we can only sit here gobsmacked and watch it happen.
UPDATE: not really Trader's Corner stuff, but something new to think about - The Carbon Productivity Challenge
Quote:
Any successful program of action on climate change must support two objectives—stabilizing atmospheric greenhouse gases (GHGs) and maintaining economic growth.
Research by the McKinsey Global Institute and McKinsey's Climate Change Initiative finds that reconciling these two objectives means that "carbon productivity," the amount of GDP produced per unit of carbon equivalents (CO2e) emitted, must increase dramatically.
To meet commonly discussed abatement paths, carbon productivity must increase from approximately $740 GDP per ton of CO2e today to $7,300 GDP per ton of CO2e by 2050—a tenfold increase. This is comparable in magnitude to the labor productivity increases of the Industrial Revolution. However, the "carbon revolution" must be achieved in one-third of the time that economic transformation took in the Industrial Revolution if we are to maintain current growth levels while keeping CO2e levels below 500 parts per million by volume (ppmv), a level that many experts believe is the maximum that can be allowed without significant risks to the climate.
The macroeconomic costs of this carbon revolution are likely to be manageable, being in the order of 0.6–1.4 percent of global GDP by 2030. To put this figure in perspective, if one were to view this spending as a form of insurance against potential damage due to climate change, it might be relevant to compare it to global spending on insurance, which was 3.3 percent of GDP in 2005.
Borrowing could potentially finance many of the costs, thereby effectively limiting the impact on near-term GDP growth. In fact, depending on how new low-carbon infrastructure is financed, the transition to a low-carbon economy may increase annual GDP growth in many countries.
If we do not increase our carbon productivity, the consequences will be stark, the report suggests. Meeting commonly discussed abatement target would require a per-person carbon budget of 6 kilograms of CO2e per day. If one had to live on such a carbon budget with today’s low levels of carbon productivity, one would be forced to choose between a 40 kilometer car ride, a day of air conditioning, buying two new T-shirts (without driving to the shop), or eating two meals. So without a major boost in carbon productivity, stabilizing greenhouse-gas emissions would require a major drop in lifestyle for developed countries and would hinder economic development in low income countries.
Using energy more efficiently: An interview with the Rocky Mountain Institute's Amory Lovins
Quote:
Saving energy went out of style when oil prices plunged during the second half of the 1980s and much of the 1990s. But Amory Lovins and the Rocky Mountain Institute—an entrepreneurial, nonprofit think tank he cofounded in 1982 to develop and implement advanced solutions for energy and resource efficiency—soldiered on.
Today’s surging energy costs are helping the always outspoken and sometimes controversial Lovins to find an increasingly interested audience when he exhorts business executives to look for savings in the nooks and crannies of offices and factories.
In an interview with McKinsey’s Matt Hirschland, Jeremy Oppenheim, and Allen Webb, Lovins argues that businesses acting quickly to make their operations more efficient will gain a significant competitive advantage. He also discusses why executives often overlook seemingly simple energy- and money-saving solutions, describes the relationship between energy and carbon efficiency, and suggests that companies and their markets will outpace policy makers in the race for solutions.
When Ken Nelson was at Dow Louisiana, he held a contest on the shop floor to see who could come up with the best ideas for saving energy and reducing waste. The employees came up with ideas that yielded a 173 percent return on investment. Twelve years and nearly 900 implemented projects later, they had added $110 million a year to Dow Louisiana’s bottom line. Their average ROI was over 200 percent, confirmed by audit. Toward the end of Nelson’s tenure, the returns and the savings were trending upward because he had created a culture of measurement, curiosity, and improvement.
Ken had the interesting theory—which I expect was right for that culture but may not be everywhere—that you should not give people bonuses for suggesting such savings, because then they might think it’s not part of their job descriptions. And he had the even more interesting theory that he shouldn’t tell other executives and managers what he was doing, because management attention would spawn all sorts of management mantras and bureaucratic procedures that would slow things down.
_________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu Jul 03, 2008 1:42 am Post subject: Re: Trader's Corner 2008
Problem number one was that BRIC was always a better sound bite than a sound investment strategy. The differences between these economies were as stark as their similarities.
Secondly, using Micheal Pettis' corporate finance model* to assess self-reinforcing inflows and outflows into emerging markets (see Trader's Corner - not sure when) it was clear that so long as the sun was shining, and the world economy growing quickly, that India would be rewarded with lower spreads and a higher credit rating (hence the term self-reinforcing), but when that dynamic goes into reverse they are punished by those same forces. That India was running a substantial budget and current account deficit, including broadly subsidizing food and energy, made them particularly vulnerable to a change in sentiment in capital markets, de-leveraging and higher inflation. Especially for food and fuel.
And thirdly, the high tide were Q2'07 US corporate earnings. We said at the time that we just did not see them getting any better. And they have not. They have deteriorated every since and still are. The sub-prime crisis was just the tipping point. The build-up of problems was already there. Then we extrapolated that it would spread around the globe from the US to the UK, the EU and CEE, and finally Asia. Evidence for 'the decoupling theory' was sparse, and its case is not getting any stronger. So we predicted the final shoe to fall some time in H2'08 following the Beijing Olympics. Countries like Vietnam are already imploding under the strains.
Those were predictions made in London in June of 2007 to our bankers. We have been more right than wrong. Perhaps surprised at the speed at which crude has climbed sheltered by subsidies that mask those higher fuel prices from consumers, and the effect that is having on inflation. The pace of acceleration has been sobering to say the least. We went from expecting the ECB to ease in Q2'08 (or this summer) to fully expecting two rate rises out of them this year. One likely today. Unless your timing is perfect you can get caught out very quickly. The pace with which the German bund yield curve shifted up really surprised us. Keeping in mind that the ECB has better inflation fighting credentials than the FED to be sure.
I think a year ago we were still arguing whether this was stagflation. Now practically everybody is openly using this term. The Minister of Finance in S. Korea used those same words today to describe the situation there. We are in a period of profound deleveraging caused in part by staggering losses to the banking sector. Any money they can attract to plug those holes in their own balance sheet is not being used for new lending, but just to shore up capital adequacy ratios. That is money, from high food and fuel prices for example, that is not being reinvested into the global economy, but just going to cover the losses of previous poor investment and lending decisions. As such they can be compared to rebuilding a house after it burns down. No new wealth is created. At least not for the homeowner that experiences the loss.
Far from believing the worst is over we are still very much in defensive mode. With or without peak oil, and its implications for growth, it will take maybe another year or two of sub-par global growth to work the imbalances out of the system and destroy excess capacity. If anything that is being optimistic. Global growth has already dropped by half this year over last, while inflation has roughly doubled. You're living through history. Enjoy it! ; - ))
*The Volatility Machine, Emerging Economies and the Threat of Financial Collapse. Micheal Pettis. Oxford Press. 2001 _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu Jul 03, 2008 4:57 am Post subject: Re: Trader's Corner 2008
Do you guys think the NZD will go up or down against GBP?
I'm intending to emigrate to NZ at some point in the future at the moment the exchange rate is quite favorable but looking at historic charts NZD is now quite high against GBP.
The UK having ~40m people in the same land mass doesn't have a hope in hell and thus will have to import food or see people starve. The UK north sea oil is depleting fast.
My problem is I do not fully understand what will happen to the UK finance industry (our main export) in a PO world, will it be the case that more and more wealth is held in fewer hands and thus those people will need financial experts to look after the money OR will it be that as resources and economies constrict society won't be able to afford so many people playing with paper money?
My bet is on option 2, but I accept I do not understand this so well.
Posted: Thu Jul 03, 2008 6:12 am Post subject: Re: Trader's Corner 2008
Hi BG! I do not have an opinion on Kiwi per se. It is a high yield currency that has benefited from the yen carry trade.
Generally, high yielding currencies are compensating the holder from either elevated levels of inflation and/or the possibility of devaluation. This is the basis of forward interest rate parity.
If this were not the case there would be an arbitrage to sell the low yielding currency, essentially borrowing in that currency, buying the high yield currency, essentially sellling it forward, and collecting an unearned carry. That can and does happen, but it is speculation, and therefore entails risk or the expectation that the carry will remain in place without the weaker of the two currencies suddenly appreciating.
You might want to ask Vietnamese investors how that is working out for them right about now, as they have all borrowed cheaply in US dollars, and now the dong is losing value against the US dollar, so they have to pay back more dongs in dollars to repay their loans. There ain't no free lunch. Even when you're betting against a worthless fiat currency like the US dollar.
Basically, if there were a real, fundamental reason why the NZD should be significantly stonger or weaker against the GBP it would be. In the trillion dollar a day forex markets very little undiscovered value goes unnoticed. That is not to say you cannot make money trading FX, but it is not as easy as it looks. So my advice to you - caveat emptor - is that if you are serious about moving the NZ, and need NZD then you should use rallies in the pound to average into kiwi (see my post above on selling euro and buying Canadian dollars for the same reason).
If, and I stress the word, if, the yen carry trade was to go into reverse (again) on global risk aversion and deleveraging then you would see much more attractive entry points to sell Sterling and buy kiwi.
I am probably not as bearish on the UK as you are. Maybe I am biased? However, that depends on how you define the peak oil crash and your time-line? As a UK taxpayer I would certainly be worried about North Sea declines as well as turbulence in The City that cuts tax
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