by MrBill » Mon 17 Dec 2007, 09:52:33
MrBill writes:
$this->bbcode_second_pass_quote('', 'H')i, sorry the quotes are just my own. I find when I post this charts that it distorts the screen size, so I just wanted to frame the comments so that they can be read in one line without having to scroll. I would like to know how to size charts in photobucket.com or elsewhere before I post them to avoid this problem.
I have to agree that the difference between available supply and potential demand is such that the dynamics for higher crude prices are quite different from metals and agricultural commodities per se. I think that available supply for these other commodities should react to higher prices, and even over-supply if there is a full-blown recession.
However, as we know crude is a different animal this time around due to limited worldwide production and excess global demand - two-thirds of new demand growth coming from Chindia alone. Therefore, if you buy the decoupling theory - I do not - that Asia could keep growing rapidly even if there is a slowdown in the USA then demand increases should only possibly slow without any 'real demand destruction' other than 'potential demand that does not materialize'. Potential demand is harder to measure.
Those new finds in the coastal waters off Brazil are a minimum of two kilometers under the water and then they need to drill through at least another one kilometer of hard salt and rock before coming into the oil zone. That isn't likely to happen before 2010 at least. In the meantime the timing of that announcement comes on the heels of some very disappointing operating results from Petrobras, so hides some harsh realities about the efficiency of some of these NOCs.
We know that VZL is hiding production shortfalls at PDVSA. Perhaps as much as 1 mbpd. The situation over at PEMEX is not much better as the Mexican government has used them as a cash cow for general operating expenditures and have re-invested very little in exploration and development or maintaining their oil infrastructure. So we find that despite near $100 per barrel that these NOCs are simply not up to the task, but multinationals are effectively blocked from these new finds or even from maturing fields where their expertise is sorely needed.
But even there a global recession might take a good $25 per barrel off the headline price. Swings of +/- 25% are quite dangerous for planning purposes. Policy makers are liable to come to the conclusion that it was all a great deal to do about nothing and therefore fail to plan for permanently higher prices.
Also, and this is key, many governments are still subsidizing energy imports. This alone counts for millions of barrels per day of extra demand. And critically this is not only bad for these governments import bill, but blocks diversification away from imported oil and so exacerbates the problem over time. Wipe out energy subsidies and replace them with tax rebates or direct financial aid to the poorest and not only do you eliminate market distorting signals, but you reduce demand as well.
The reason I do not buy the decoupling argument is that all the countries that are accumulating the excess foreign exchange reserves - OPEC and non-OPEC oil producers and Asian manufacturers - have their currencies either pegged to the US dollar or they are actively intervening in foreign exchange markets to sell their local currency and buy US dollars. This is not only inflationary as global money supply increases, but shows how dependent these exporters are on the USA at the moment.
That is not to say they can never diversify away from US capital markets, but you can bet in the short-term - 2008 at least - that they would face a double dilemma if they tried to let their currencies float at the same time as global growth slowed not just in the USA, but in the UK and EU as well. Ouch, not only would their currencies become less export competitive, but those countries would be importing less due to slower economic growth, and in the case of the US and UK falling housing prices. And shifting those export receipts into the eurozone just makes the euro more over-valued than it already is, while punishing European manufacturers - especially in France and Italy - even more.
As for a recession in the USA it is all but inevitable! There is no question about that. However, define a true recession? A technical recession of falling growth two-quarters in a row - which is the official definition of a recession - might be narrowly avoided. But at what cost to future stability? It is clear that Helicopter Ben and his side-kick Power Ranger Paulson could avoid a technical recession simply by dropping real rates below zero and pumping up another bubble. Probably in the emerging markets, but also in energy, metals and commodities as well. Growth anywhere might just produce enough global economic activity that benefits US firms that export or have operations abroad enough to avoid slipping into an outright recession. That is a big if? But that would be very inflationary!
Just as worryingly is that it does not just have to be Team USA that ignites global inflation. It can also come from any number of central banks and governments that try to offset slower growth in the US, UK and EU by operating their own printing presses. Yes, technically only the US government and the Fed can produce US dollar zone inflation, but excess money supply growth elsewhere can cause external inflation and that can filter into imported US inflation from higher energy prices for example. If the Fed took a tightening precaution against that imported inflation all would be fine, but what are the chances of that happening when the US is in or near recession? None as far as I am concerned.
Perhaps that is why I would be concerned about the forward price of copper falling. Traders are aware that the US dollar is under pressure. They also see the inflationary pressures building in the system. And still they are liquidating copper longs. They can only have concluded that future global growth prospects have also moderated. Are they right? Dunno? But buy, Buy, BUY may have turned into wait and see or wait and buy on dips?
By the way, any slowdown originating out of the USA and spreading to the UK and EU is bound to trigger a drop in export income for China. I can imagine the policy response to that will be to increase export volumes by dropping prices and sacraficing margins. In economic jargon that is producing to cover your variable costs while ignoring your fixed costs. That is going to be a world of economic hurt for other manufacturers. Say those that do not live in a communist country and have to cover their own long-term costs including the cost of their capital. Or those that have shareholders that can dump their shares and starve them of access to capital markets.
The China Effect while global markets are booming can be quite different than that effect when they are slowing down and literally exporting deflation in the form of excess capacity! ; - )
Again, sorry about the sizing issue!
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
