Tuesday, April 29, 2008

Oil prices set to correct?

Oil prices have eased by $3 to $115 range now on the back of strengthening of dollar. Similar correction can be seen in gold prices too.

As per OPEC President Chakib Khelil's latest statements, if dollar begins to gain back some significant ground, crude prices may fall of a cliff. He further said that, if the dollar strengthens 10%, there is a good bet that prices will fall by $ 40

Dollar weakness and speculative interests were one of the major reasons for oil price boom (and gold price boom)

Though the dollar had weakened by 10% over the past year, oil had nearly doubled during the same period. That was way out of proportion.

OPEC had throughout maintained that supply is enough and that the price rise is on account of dollar weakening / speculative interests.

Dollar is not expected to weaken much further, even if the Feds drop rates by another 25 basis points.

Monday, April 28, 2008

Global Triggers - 29th April 2008

Oil Shock Continues

Oil and gasoline prices continue to soar Monday on concerns of worker strikes, political turmoil, and speculation of a rate cut by the Federal Reserve. OPEC's president on Monday warned that oil prices could hit $200 a barrel and there would be little the cartel could do to help.

Funny, something that would not have impacted oil prices a year back is now having such a big impact. Wonder what might be driving this. ?

Europe will continue to slowdown

In its latest six-monthly forecasts, European Commission said economic growth in the 27-nation European Union would slow to 1.8 per cent in 2009 from 2.0 per cent this year. Growth in the 15-nation eurozone would fall to 1.5 per cent from 1.7 per cent.

Sunday, April 27, 2008

Which way would the bubbles burst?

Oil and Coal prices are scaling phenomenal highs. Not fully borne out by supply concerns.

Which way would the bubbles burst and what could be the impact?

One thought:-

If the prices remain high, the growth bubble will burst.For Oil, the OPEC has the ability to maintain prices at these and still higher levels.

Are there reasons to keep oil prices at a higher than normal reasons?

If the Oil and coal prices crash, and a crash can happen only if speculative positions unwind, it would be good for the global economy in the long run. But over the period of 12-18 months, the cascading impact will take down quite a few financial and non financial entities.

Detailed analysis to follow

Global Downturn Continues

Oil Prices

Oil prices touched the $118 levels on news about US Navy firing on some Iranian boats carrying crude oil and on reports about BP shutting down its pipelines system supplying 700,000 barrel per day to UK and a pipeline attack in Nigeria

Compared to the global demand supply scenario, these news piece in themselves are not significant enough to warrant such a sharp increase in crude oil prices over the past few days.

One of the indicator of a bubble is high sensitivity and volatility of price's to the most insignificant of news.

Is that what is happening now..?

Some Views on the current downturn in the US economy
  • General Electric CEO Jeff Immelt said the U.S. economy is in the worst condition since the burst of the dotcom bubble and that housing hasn't been in such a bad shape since Great Depression. Immelt feels that things could get worse for the U.S. economy.
  • Nobel prize winning Economist Joseph Stiglitz too feels that this is likely to be one of the worst economic downturns since the Great Depression.
  • As per New York Stern University Professor Nouriel Roubini , Real indicators show consumers cutting back on daily expenses . Financial sector losses on credit cards, auto loans rising, and mortgage defaults likely to increase further
US : Key indicators negative

  • Sixty percent of the public say they are now less comfortable about making a a bigticket financial commitment, such as buying a home or a car, than they were just six months ago,
  • Consumer confidence in US is now at its 26 years low , according to University of Michigan Consumer Confidence survey . The survey found that high food and fuel prices, coupled with falling incomes and falling home values, have driven consumers to save their money rather than spend it.
  • Orders to factories for bigticket manufactured goods fell for a third straight month in March, the longest string of declines since the 2001 recession.
  • The unemployment rate climbed to 5.1% in March as businesses laid off the largest number of workers in five years.
  • Mortgage delinquencies and foreclosure on the rise.

A view gaining more and more momentum is that the US housing will probably go through another round of correction to the extent of almost another 30% from the current levels.

Key Leading indicator for a recovery

As per Peter Bernstein (Financial Historian), the housing trouble has to at least flatten out before a recovery can take place in the US economy. In essence the real estate bubble needs to burst.

Measures from the US Government

  • The U.S. Treasury will start sending tax rebate checks to Americans next week in order to pump $50 billion into the U.S. economy by the end of May
  • Fed has already cut the benchmark borrowing costs to 2.25 percent from 5.25 percent since midSeptember. Fed might drop the rates another 25 basis points, but overall they are plan to step away and observe if all the efforts going on will work or not.
It seems like too little, too late.


  • Inflation continues on its upward trend
    and rose to 7.33 % during the week ended April 12, compared to 7.14
    %according to data from the Ministry of Commerce and Industry. The rise
    in inflation was driven by increasing cost of food items and rising
    iron and steel prices
  • GDP growth estimates now in 7% range compared to more than 8% that was expected till a few months back
  • Rising fuel prices have an impact which runs across sectors including steel, cement and power generation sectors. This in turn seeps through the rest of economy by way of higher prices. Oil now rules in the $118 range compared to $ 60 range just a year back. Coal price have doubled (or more in certain cases) over the past one year. This is largely on supply side concerns as against oil, where there is likely to be a significant speculative interest.
  • Real estate prices have corrected in pockets, but not consistently enough. Expect another 20 to 30% overall correction
  • Slowdown beginning to make its presence felt in the 2007 Q4 corporate results. Next couple of quarters likely to show a more severe impact
  • Wages and increment in Indian corporates starting to get impacted
  • Interest rates ruling high, thus curbing investment and growth
  • Inflation eating into Indian consumers disposable incomes.
US Recession
  • General Electric CEO Jeff Immelt said the U.S. economy is in the worst condition since the burst of the dotcom bubble and that housing hasn't been in such a bad shape since Great Depression. Immelt feels that things could get worse for the U.S. Economy. Similar views being shared by Nobel prize winning Economist Joseph Stiglitz and Prof. Nouriel Roubini (New York Stern University)
  • Consumer confidence in US is now at its 26 years low , according to University of Michigan Consumer Confidence survey .
  • The unemployment rate climbed to 5.1% in March as businesses laid off the largest number of workers in five years.

Exports have driven Japan’s economy in recent years, contributing close to half of its GDP growth on average from 2002 to 2007. But there is concern that Japan’s growth engine may be stalling. Export growth fell to 2.3% yoy in March the slowest pace in three years


As mentioned in my previous posts, housing problem surfacing in UK markets. Bank of England would be issuing bonds in exchange of mortgage backed securities. However that does not tackle the fundamental problem of overvalued real estate. UK economy likely to go the US way to a large extent.


Consensus expects slower growth this year. In the range of 9% compared to 11% range expected earlier. Still a healthy growth rate, but the slowdown is unmistakable. Will it get worse, especially due to higher oil prices and linkage with US economy.

Monday, April 21, 2008

Key Global Triggers - April 21st 2008

Hedge funds increasing investments in India

Interest in India’s economic growth and potential has prompted a flurry of fresh opportunities for sophisticated international equity investors to gain exposure to the market through futures and exchange traded funds.. Hedge funds are also looking for instruments to help them play the Indian markets on the way down as well as up. Another bubble..?

Economic Scenario Negative

- The National Association for Business Economics said Monday , about 30 percent of respondents expected gross domestic product to decline in the first half of 2008 compared to only 10 percent January.

The head of a U.S. business executives group warned Thursday that the world's largest economy could endure a "double dip" recession if efforts by the authorities fail to spur growth. This is expected to be happen if the economic stimulus package is not able to put the US economy back on track.

- The International Monetary Fund said Monday that the global credit crisis and persistent gloom over the U.S. economy have dampened the outlook for European economic growth. The agency said that the advanced European economies would see a decline in real growth to 1.5 percent this year from 2.8 percent in 2007. The emerging economies' GDP would drop to 5.5 percent from 6.9 percent in 2007.

Oil Price and Speculation

The International Monetary Fund warned that commodity prices, especially those for food and energy, had reached levels where they risked becoming a destabilizing force in the global economy.

Opec ministers reiterated there was no need to pump more oil and blamed speculators for high oil prices. They also said that, in fact , there’s some surplus on the market

US Finance sector turmoil continues

- Bank of America Corp.'s quarterly profits plunged 77%. BOA is the largest retail bank in the US. The fall in profit was more than expected.

- Citigroup Inc., the biggest U.S. bank by assets, may cut its dividend for a second time this year as losses escalate

- Fear of a meltdown at mortgage financing giants Fannie Mae and Freddie Mae.

Sunday, April 20, 2008

Key Global Triggers

Positive sentiments on Wall Street
Sentiment on Wall Street is clearly better than it was earlier this year. However, the market can rise only so much due to mediocre news - no matter how much investors have already priced in a recession.

UK Housing worsens
As mentioned in my previous posts, housing problem surfacing in UK markets. Bank of England would be issuing bonds in exchange of mortgage backed securities. However that does not tackle the fundamental problem of overvalued real estate. UK economy likely to go the US way to a large extent.

Wall Street Job Cuts
Large scale job cuts expected in wall street investment banks. Anywhere between 100,000 to 200,000 in the next 12 to 18 months

Dollar declines leads to higher profits for some
Declines against world currencies make U.S. products look cheap overseas, and translate into big returns when sales are converted back into dollars. Resulting in strong overseas profit for companies like Coca-Cola ,IBM, Google, Caterpillar, and eBay (all rallied this week because of strong overseas profits.)

US Housing to worsen
Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners in US will have zero or negative equity by the end of June, or 21 percent of first mortgage holders. Banks and other investors in mortgages, will take further hits to their already weakened capital. This means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still.

Bear Market rally expected in Europe
European stocks may stage a relief rally next week, with financials leading the way higher.

Global financial crisis
As per Government of Singapore Investment Corp, a global financial crisis and recession was increasingly likely due to spread of financial contagion beyond US.

: Oil prices hit a record high $117 a barrel

Monday, April 14, 2008

Dens of Gambling - Oil and food bubble about to burst ?

Commodities markets seem to have become a den of gambling. With commodity derivatives being packaged into financial instruments, these are now traded like stocks and behave like stock market. And will most likely fall like the stock markets.

For instance, the rise in price of crude oil to around $110 now from $ 50 a year back is not justified by purely demand-supply issues. The world production of oil as well as physical inventories are enough to meet the current consumption needs.

I believe we will hit the bottom of the economic cycle with the oil, food and real estate bubbles bursting. Crude oil bubble would most probably be the first to burst followed by others. Only then will the recovery cycle will begin.

Here is what's happening

Pure financial investors are investing in commodities, creating an artificial demand. They are not interested in buying bags of wheat or barrels of oil, but are keen to make a sell it off at a profit without taking delivery.

When inflation is on the way up, the price of commodities rise faster and become a still better avenue of investment. It just becomes a self feeding loop.

And what about the non speculative reasons.

They are absolutely there and here the key demand-supply related reasons:-

- Rising demand for commodities from countries like China and India to fuel their growth engines

- Use of foodstock as biofuels across the major economies of the world

- Increase in the consumption of meat in countries like China, resulting in lower resources being allocated to food production

- Accidents and calamities in some of the food producing areas, thereby impacting supply.

How much is real and how much speculative

So how much of the commodity price rise is 'real' and how much is speculative. Here are some rumblings across the globe that I came across by :-

- As per Commodity Futures Trading Commission, which regulates commodity futures in US speculators account for around 37 percent of outstanding contracts in U.S. crude oil.

- There is a research carried out by a researcher in Korea very recently where the researcher has tried to approximate the % contribution of key factors (speculation, demand-supply, dollar weakness and geopolitical reasons) in the commodity price rise. It seems for oil and wheat more than 40% of the price rice has been contributed by speculative interests and another approx 40% by demand-supply reasons

- Oil ministers from nearly all the OPEC countries from Saudi (the biggest) to Qatar (smallest producer) are vociferous in their statements that there is no shortage of oil, that the inventories are piling up and the price rise has been driven by speculative interests. Is anybody listening to them ?

So what's likely to happen ?

Here's my directional estimates of sequence of events :-

Step 1

Oil, food or the real estate bubble will burst, very close to each other. The prices of these commodities will correct significantly.

Step 2

Across the globe, factor price correction will take place.

- significant drop in price of real estate
- interest rates will come down
- wages would be impacted
- corporate profits would be hit
- government fiscal deficits will rise.

At this point in time the atmosphere would be absolutely dreary and it would seem as if there is no hope of recovery . Exactly the feeling at the bottom of cycles in previous recessions too.

Step 3

Inflation would be down. Consumption will slowly start picking up. Leading to a pick up in investment demand. And that's how the economic cycle will start turning upwards.

Wednesday, April 9, 2008

Cycle turnaround in next 9 -15 months?

Good news has started to trickle in. Will take time to have an impact. Things likely to get much worse before they start to get better.

US Govt pretty aggressive in tacking the situation. UK Govt also likely to be proactive. Chinese govt. is on top of the inflation and growth slowdown in their country. Japan is in initial stages of slowdown, is sensitive to it but is yet to react.

This and some other other factors which are playing out lead me to believe that the economic cycle might start taking a U turn in the next 9-15 months timeframe.

In the next set of analysis, am planning to look at :-

- factors which are likely to drive the economic cycle around

- leading indicators of a turnaround in the economic cycle

- approximate timing of stock market reaction (historically markets

- Historically India and US stock markets have started recovering a couple of months before the economy recovery is underway. Will it happen again?

Monday, April 7, 2008

Global Slowdown? - The Good The Bad and The Ugly

The Good
# Commodity price bubble might burst – inflation to start cooling down
Drop in commodity prices will have a cooling effect on inflation. Will lead to a positive cascading impact on consumption and growth revival. Commodities include food, metals , agri commodities, coal , oil etc. Prices going up consistently for past 3-5 years. The boom typically ends with a slowdown in economic activity. Oil and coal prices might still not come down much due to supply side inelasticities .

# US Housing market debt relief package (!) - support to credit industry
US Senate had begun a debate on a debt relief package to help distressed homeowners from foreclosures. If it goes through, it will result in losses for banks but will provide a degree of support to the US credit industry and majorly positive sentiments.

# Indian Government starting to act
Recent measures on export ban / lowering of import duties likely to start showing results in a couple of months.

The Bad

None of the good news is good enough. It's too little too slow to signal any turnaround. The slide continues

# Commodity price cooling down unlikely to be quick. Process can last anywhere from a 6 to 18 month period.

# Supply side constraints on Oil and Coal will continue to haunt the global economy

# US Housing relief package in right direction but going slow and the relief amounts seem low compared to magnitude of the problems.

# Measures from Indian Govt. likely to have only a marginal impact. Oil price hit yet to be passed on to the Indian consumers. To some extent Govt's hand are tied as we have strong external linkages. Any measure to kickstart will probably result in higher fiscal deficit and an initial hit on growth numbers. Will the Govt. bite the bullet in an election year.?

The Ugly

As mentioned in my previous post, UK housing continues to follow in US footsteps. No change in China and Japan growth numbers reduction. These are all major world economies and have a strong combined linkages across the globe. Are we in the middle of a truly global slowdown.?

What will happen to the stock markets ?

#The Good

If we manage our investments right, we'll probably make more money than in any of the previous cycles. Some might be able retire early.

#The Bad

I believe the whole cycle from now till the super normal returns likely to be in range of 7 years.

#The Ugly

Nothing. Really. Unless the world comes to an end

Wednesday, April 2, 2008

IMF says a 25% chance of Global Recession - Bloomberg

Is the world economy itself slipping into a recession..?

Blomberg reports that the The International Monetary Fund has cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression. The world economy will expand 3.7 percent in 2008, the slowest pace since 2002, The IMF gave a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009, a pace the fund described as equivalent to a world recession. The last time that happened was in 2001.

US Growth
The world's biggest economy projected to expand 0.6 percent in 2009

Japan's economy, the world's second largest, will grow 1.4 percent in 2008

China will grow 9.3 percent this year, slower than the 10 percent projection made in January

It's time to start giving a thought to a global recession scenario, how to best manage it and the opportunities it throws up.....instead of debating weather US is recession or not.