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0 Apr 5 2012 @ 9:13pm by Matt Smith in Capital Markets, Crude Oil, Global Energy, risk management

Loose Lips To Pips To Policy

This post is loosely based on looseness (loosidity?) across various factions of financial markets, as we take a look at some random observations relating to loose lips, loose pips, and loose policy.

First up are lips. The origin of the phrase ‘loose lips sink ships’ is from a propaganda poster made by the US during World War II, the point of which was to warn against speaking about ship movements, as it may compromise the safety of the aforementioned not-to-be-spoken-of ships.

Loose lips last week caused panic across Great Britain, as a government minister advised the public to store gasoline ‘in a jerry can’ in case of a strike by fuel truckers caused shortages. This comment immediately caused a bout of panic-buying across the country as drivers rushed to fill up their tanks (and their jerry cans), causing gas stations to run dry.

But the most harshest of repercussions was to come, as a woman decanting gasoline in her kitchen was badly burned when the fuel ignited. So from the origin of a few rash words from a politician, not only was a woman badly injured, but the UK experienced gasoline shortages up to a week later.

Next up, we look at Pips (with Gladys Knight nowhere to be seen). For pips are at the core of a certain stock….Apple. As we slice and dice up financial market ingredients here on the burrito, it is difficult to overlook a company which is being called an asset class in itself (equities, bonds, commodities, and Apple). The meteoric rise in Apple’s share price means it is now valued at over half a trillian dollars, which is greater than the economy of Switzerland.

Apple, May 2011 - present

But bringing it back to energy, it is Apple’s price chart which has commanded its inclusion in this post, as it looks remarkably similar to another stratospheric rise…that of North Dakota oil production:

North Dakota’s ramp up has been so strong it has now surpassed California as the 3rd largest oil-producing state in the US, with the next target of Alaska in its sights. That said, just as this explosion of oil production in North Dakota is set to slow at some point in the near future, logic dictates that the pips at the core of Apple will be knocked loose at some point, as it is due for a fall…..surely?

Finally, we look at loose monetary policy, and the exploding balance sheets of the key players in the global economy.

source: Deutsche Bank

The key differentiation to make when reviewing this chart is that the US balance sheet has expanded dramatically due to an unfavorable situation, while China’s has expanded for the opposite reason.

The US in recent years has employed loose monetary policy (through low interest rates and printing money) in an effort to avoid a potential depression. As seen by the spike in late 2008 (on the above chart), the Federal Reserve dramatically increased money supply by printing money to purchase toxic bank assets to stop financial markets from seizing up. It has since kept interest rates low and launched two bouts of quantitative easing in an attempt to further stimulate the US economy.

China, on the flip side of this equation, has a growing bank balance due to the ever-swelling proceeds from foreign trade. These proceeds are then converted back into yuan, because it is illegal for individuals to own US dollars in China, while the yuan is kept at an artificially weak level (meaning exporters make even more money…to be converted back into yuan…). This leaves the Chinese central bank printing money with which to buy back the dollars that its exporters are receiving. This is ultimately why the Chinese central bank holds a third of its foreign reserves (= over $1 Trillion) in US government debt: it has more dollars than it knows what to do with.

Anyway, enough random rambling around the current loosliness in financialworld™…until next time, rock on!

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