Posts Tagged ‘deflation’

0 Sep 10 2010 @ 10:58am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, Random, UK natural gas

Burrito Bites

'Bring your pet to the Apple store' day

And please put your hands together for ‘Peak of the Hurricane Season’ Day. September 10th is the day which marks the statistical top for hurricane activity in the Atlantic (based on past data – see previous burrito post), and accordingly natural gas is rallying into the weekend on a potential storm nearing the Gulf of Mexico (and the subsequent oil and gas production that resides there). Prior to this, natty has had a subdued week, easing lower with the general temperature of the US. Crude continues to bluff, baffle and bamboozle the market as it swings from looking tired to tenacious and back again, while ultimately remaining magnetized to oscillate around the $75 level. Enough chat, let’s chow:   

–Talkin’ ’bout a (shale) revolution on the good old BBC.   

–The nitty-gritty on the BP oil spill report, also known as it was the cement’s fault.  

–We crave cash more than brains, youth or good looks.  

–Surge in natural gas production is lowering emissions.  

–BP was Google Adwords biggest spender  post the Gulf disaster.  

–A visual guide to deflation (probably good prep).  

–Mexican drug cartels are crippling oil and natural gas production.

–Artist Banksy makes anti-BP installation.

Timeline: 50 years of Opec.  

–US is addicted to Olive Garden.  

Algae biofuels roadmap (all 140 pages of it…a long road).  

–Pelosi and Markey take a trip to the Canadian Oil Sands.  

–China blacks out towns to meet energy goal.  

Buzz Lightyear carrot lookey-likey.  

The Burrito Deluxe Award of the week goes to Chinese crude imports, which climbed 10% in August versus July, against the expectation that they would be suppressed by a slowing Chinese economy. 

The Burnt Burrito Award of the week goes to leaky pipelines. Crude has been pushed to a three-week high as a pipeline between Canada and the US has been closed due to a leak. The pipeline transports approximately a quarter of all crude into the US and its refineries - meaning possible rising gas prices on the Starboard bow for Summit’s Louisville contingent. 

bear care

The Burrito Quote of the Week: ‘It’s not a good sign when the  government has to intervene to prevent a run on a Bank that is already owned by the government’ -from this article on Ireland.  

The Just Plain Wrongwrongwrong Burrito fact of the week: 3% of Twitter’s servers are said to be dedicated to Justin  Bieber.  
 
Have a rock n’ roll weekend!
5 Aug 20 2010 @ 10:48am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, Random

Burrito Bites

Happy Friday one and all! Let’s start this week’s summary with some fun (goodness knows we need a laugh after this week’s market action). This picture needs a caption; funniest one wins a burrito-related gift. 

As for markets this week, a flight to safety has been the destination of choice for investors, as economic data continues to point an accusatory finger towards a slowing US economy. Crude is hitting 6-week lows, while natural gas is testing levels not seen in the last three months. That’s enough gloom for now; come on, let’s chow!:

–Is a library really more dangerous than a drilling rig?

Whiskey biofuel available in a few years, more potent than ethanol.

Dogs improve office productivity.

–Senior NOAA Scientist admits he lied that the Gulf oil spill is gone. 

Buffett vs Gross, inflation vs deflation.

Pay-as-you-throw…reducing landfills by charging by the trashbag.

9 challenges of alternative energy.

–18-mth low in floating storage points to potential inventory drawdowns for crude.

–Koala negotiates 50mph crash without a scratch. 

–Do 3 shale companies for sale signal the peak in its popularity

–Markets in everything – using parking lot satellite surveillance to forecast retail sales.

–Only 8% of energy stimulus spent.

The Beloit College Mindeset List for the Class of 2014.

–Why Opec doesn’t mind low oil prices.

–Boy, 13, hit by lightning on Friday 13th, at 13.13.

The Burrito Deluxe Award of the week goes to BHP Billiton, for shaking up the M&A landscape (and general markets too) by bidding for Potash - the world’s largest fertilizer producer. There’s a few more twists and turns left in this tale, which should provide some entertainment over the coming weeks.

The Burnt Burrito Award is postponed this week as there were too many losers to choose from.

Have a fantabulous weekend!

0 Aug 6 2010 @ 10:58am by Matt Smith in Biofuels, Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, Random

Burrito Bites

I bid you good day, and welcome to another underwhelming Nonfarm Friday. US unemployment data came in poor again, ending a data-rich week which continues to muddy the puddle that is the economic outlook. Crude has continued its adventures in the $80 range, with its fickle-folly flipping between equities, currencies or economic data, yet with little emphasis on its own fundamentals. US natural gas has been shoe-gazing all week, as heat and hurricanes are viewed (for now) as temporary bullish influences in a broader bearish trend. Moving on, let’s whet our appetites on this week’s burrito bites:   

–Amazing blow by blow graphic of the Gulf oil spill.  

1,500 environmental laws broken at Marcellus Shale since the start of 2008.  

Monkeys hate flying squirrels.  

–Globally, fossil fuels get more subsidies than renewable fuels.  

–Shale: the good news on energy.  

–Excellent piece on why ex Fed Chairman Alan Greenspan is worse at forecasting than a certain British weatherman

–Buy a condo for less than a car.  

–Biofuels didn’t cause grain price boom.  

–Toyota recall caused by cosmic rays?! (h/t LB)  

–Why can’t we be friends? Renewables and natural gas should work together.  

–Why A-Rod’s 600th home run may cause tax problems.  

–Paul Krugman answers ‘why is deflation bad?’.  

–Last week the laziest, this week the fattest states in America. 

–While 4 states get more than 10% of their electricity from wind power.  

I think it's Shark Week on The Discovery Channel...

 

–European smart grid to reach $25bln by 2020.  

–World’s largest lederhosen record broken.  

The Burrito Deluxe Award of the week goes to global manufacturing data. Although it is showing slowing expansion, it is showing expansion nonetheless – from China to Europe to the US.  

The Burnt Burrito Award of the week goes to US Nonfarm Payrolls for July for a double whammy of dodgy data. Not only was the 131,000 jobs lost mucho worse than the consensus of -65,000, but the previous month saw a downward revision from -125,000 to -221,000. Not great numbers for an economy which is supposed to be showing early-cycle economic expansion.  

Have a glorious weekend! 

p.s. I’m on CNBC Squawk Box again on Monday - bright and breezy in the US at 7.30 ET, also on in Europe at 12.30 GMT. 

2 Mar 18 2010 @ 6:33am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, risk management, Risk Strategy

A recipe for disaster, or ingredients for success?

I really like the quote that says ‘an optimist invented the plane, whereas a pessimist invented the parachute’. I am not declaring myself in either of these camps (I am obviously a well-balanced realist), but believe it would be misguided not to consider the upside and downside risks to current commodity pricing. Admittedly, some of these issues apply more to some commodities than others, but essentially, the sentiment is an ever present theme. So, let’s kick off with looking at some of the ingredients that could derail markets:     

  1. Economic data turning for the worse, led by housing, manufacturing and employment
  2. A deflationary economic environment
  3. A falling equity market
  4. Excess supply
  5. Emerging markets successfully cooling their economies 

ECRI Weekly Leading Index

Let’s tackle each one of these individually (yet briefly too). First up, economic data turning for the worse. The chart (left) illustrates the ECRI weekly leading index, which takes the temperature of the US economy on a regular and timely basis (ie, erm, weekly). This index bottomed out at the start of the recession (which makes sense as it it is a leading index = forward-looking), and has moved higher at a fair clip ever since. That is, until the last 12 weeks, when it has turned decisively lower. This index is an aggregation of a number of data points, hence its weakness raises a rather large red flag. Next up, a deflationary environment. We are already seeing signs of deflation creeping into markets, be it through wages or rent, or through pricing pressure on everyday goods due to new-found frugality in consumers. And a falling equity market would likely occur through the simple equation of the above bullets: 1 + 2 = 3. As for commodity-specific data, serious risks of surplus supply exist across commodity markets; for US natural gas it is from shale plays and increasing rig counts, for crude oil it is from quota non-compliance by Opec, for UK natural gas it is from LNG; and the beat goes on. Then the final bullet: emerging market risk. This one is a toughie. Too much growth could power commodities to such a high price that they crimp potential growth in lagging developed markets. On the other hand, if governments in these emerging markets (especially India and China) go overboard in efforts to quell excessive liquidity and credit in their economies, they risk putting the brakes on growth, which would surely upset global markets. 

That was all a bit hectic. Let’s have a brief interlude of humor before we truck on with the flipside of the coin:

Alrightee. Now to the path that could lead prices higher. In all fairness, it is pretty much the polar opposite of the pessimistic points:      

  1. Improving economic data  - especially industrial production / manufacturing
  2. An inflationary environment
  3. Continuing strength in equities
  4. Continuing demand growth for goods / commodities
  5. Continuing emerging market strength
Bloomberg Financial Conditions Index (Mar 07 – Mar 10)

For the prosecution of falling prices, I would like to present exhibit number one – a chart which illustrates an improving environment in financial markets – aptly named the Bloomberg Index of Financial Conditions. This shows that financial conditions have continued to improve at a trampolining rate since the financial meltdown-panic heydays of late 2008, an indication that the market is continuing to normalize after the shocks of recent years. Essentially, we have clambered over the wall of worry and beyond the territory of financial woes.    

As you well know from my rants, markets are all interlinked, hence bullets 1,3, 4 and 5 go essentially hand-in-hand here. Improving economic data (1) will undoubtedly be driven by higher demand for goods (4), boosting equities (3), while continuing emerging market strength (5) from domestic growth will too spur on global investor sentiment (back to 3, then 4, then 1). It is as inevitable as wrinkles and gray hair that inflation will once again rise up, although when this will arrive it is impossible to say. But one thing is for sure, a commodity rally will be a natural by-product of both an inflationary environment or an improving economic environment. It is on the horizon. 

I don’t know what’s going to happen. I can make a guess, but that is all it would be – a guess. It is much more important to to keep an open mind, but also be aware of all eventualities. So I sign off as I began; with a good quote – ‘the pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails’. I believe we are poised between the devil and the deep blue sea, and all we can do is hang in there, and sail broad reach. Ahoy.

0 Feb 25 2010 @ 7:40am by Matt Smith in Capital Markets, Economy, Global Energy, Random, risk management

Negative inflation starts with a ‘d’ and ends in tears

a deflationary environment would make it cheaper to phone home.

I made the above comment in my daily market update last Friday, before realizing the gravity of the adverse CPI (= consumer price index, aka inflation) number released that morning. The core CPI index (which differs from the ‘headline’ number, as it removes two of its most volatile components – food and energy prices) showed a negative print. ‘Big deal, burrito boy’, I hear you cry. But wait, my friend; this was a doozie of a print because it was the first negative print since 1982. Yep, we’re talking the year of E.T., the album Thriller, and the birth of Ben Roethlisberger. Let’s take a quiet moment reflect on how really, really long it has been since then.

Ok, lets move on.

Last week actually saw a double doozie of data releases – the first being the aformentioned 28-year breaking of a duck, while the second designated doozie was from the Federal Reserve (= the Fed), who raised the discount rate from 0.5% to 0.75% late Thursday evening. The discount rate is the interest rate charged to banks for direct loans, so although it doesn’t necessarily directly impact us mere mortals, it does issue a battle cry from the Fed that they are ready to fight the enemy – whatever form they may take.

But herein lies the problem: armed with the weapons to fight inflation doesn’t mean you can do the absolute opposite to avoid deflation. War against inflation lends itself to raising interest rates or decreasing the money supply as two of the more common weapons wielded (incidentally, the latter is where Ben Bernanke got his ‘helicopter Ben’ moniker from; back in 2002 he said the best way to invoke inflation was to throw money from a helicopter). On the flip side, the onset of deflation can be staved off through the promotion of confidence in an economy, but like a bite from a vampire, once deflation sets in, all you can do is let it run its course (ie – become undead).

Japan proffers a deflationary horror story twicefold; not only because it suffered a ‘lost decade’ starting in the early 1990′s, but because the US is on a similar trajectory (a real estate bubble + equity market bubble = zero interest rates and quantitative easing….sound scarily familiar??). That’s not to say the Fed are not aware of the perils of their decisions – quite the opposite. And that’s why we should worry – if we can see them using their silver bullets, we know all too well how many they have left.

deflation = more zombies, less thrills

Now, to wrap this up in our all-encompassing tortilla. Deflation, by its very definition, is a general decline in prices. I am not declaring that we have lost the battle to deflation, I am merely highlighting that deflation is a real and potential risk to our economy. And if this were to happen, energy commodity prices would be dragged lower with every other asset class. Even worse, if the engine-room of the current global recovery – emerging markets – were to avoid such a deflationary environment, it would only exacerbate the problem in the US by continuing to boost global commodity prices. A horrifying prospect indeed. On that bombshell, I’ll leave you with this; the conundrum of how to deal with deflation reminds me of Woody Allen…he once said ‘I got this powdered water – now I don’t know what to add’. The answer for this is the same as it is for deflation…….silence.