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Posts Tagged ‘recession’

1 Aug 11 2011 @ 9:36am by Matt Smith in Crude Oil, Economy, Global Energy, Natural Gas, risk management, Risk Strategy

What Would Winston Do?

In times of market turbulence like this, I find it useful to do two things: make simple observations, and seek solace in the wisdom of others. So this week I have turned to the most voracious voice of reason, Winston Churchill, to help me make some sense of this all. This is what he has told me: » read more

0 Aug 5 2010 @ 10:58am by Matt Smith in Capital Markets, Economy, risk management

The Sunny Side of the Street

I am a sucker for Satchmo, so presently we are going to take a walk on the sunny side of the street. Mixed economic data has made it easy to fret about the validity of a global recovery since we exited ‘the great recession’ last year, even though market behavior has indicated there is nothing to worry about (Treasury Secretary Tim Geithner says there still isn’t).

However, now that skepticism is growing that we may double dip (go to Google insights here to see its growing popularity), I find the contrarian in me wanting to look out in the great wide open to find some indicators that illustrate a positive picture. And trust me, it’s not that easy to do. However, here is what you can find if you direct your feet…to the sunny side of the street.

First up, a key barometer of economic activity: manufacturing. After a synchronized swan dive by the manufacturing sector across the world in 2008, activity has rebounded just as stomach-wrenchingly swiftly, like a sudden bout of turbulence. The chart below shows Purchasing Managers Indices for the manufacturing sector across time for major economic regions. It illustrates that manufacturing (the lion’s share of industrial production) across the globe has shown expansion for at least ten consecutive months ( a reading above 50 on the PMI indicates expanding economic activity). And although recent months have shown a slowing across the sector, we remain in positive terrain:

This next data point involves Warren Buffett’s favorite indicator – US weekly rail traffic. The Sage of Omaha follows this with fervor, as railcars are considered the lifeblood of the American economy, shipping goods across the country. The data illustrate that although rail traffic may not be showing stellar improvement (while also being well below pre-recessionary levels), it shows a steady pace of improvement year-over-year, a trend that a number of other economic indicators are illustrating:

We go no less random as we head to our final indicator – the US savings rate. The below chart illustrates how savings rates have bottomed out in the US in the last five years, as the over-leveraged US consumer has realized (or been forced to realize through tighter credit constraints) the need to borrow less and save more. But this rise in the savings rate is not necessarily a cause for concern – China’s savings rate of 38% certainly indicates an economy can grow rapidly even while saving significantly. So while a higher savings rate may mean somewhat less consumer spending, it also provides the fuel for investments in new productive assets in our economy, the ultimate long-term source of growth:

So there we have it; some reasons to be cheerful, 1-2-3. Sometimes it is easy to get swept along in a sea change of market sentiment, and it is good to look at the opposing view, regardless of if you buy into it or not. But if this has left you feeling rather fretful, just remember you can always put on some Satchmo, kick back, relax, and be swept away elsewhere.

0 Jul 9 2010 @ 10:52am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas

Burrito Bites

Anyone seen my keys? (...a waterpark, Chinese style...)

As we make a splash into the midst of summer, the temperatures have been rising, but not the price of natty, as hurricane fears abate for now. Crude, on the other hand, has been rejuvenated by a few scraps of info (IMF report and retail sales data, take a bow). Meanwhile, equities have also moved higher in this holiday-shortened week, and the euro has rallied once more. Enough of the small talk, let’s take some big bites:

–How many DOE (Dept. of Energy) workers does it take to change a lightbulb?

–Moving from coal to natural gas is the cheapest way to cut carbon emissions…but hang on, it would cost hundreds of billions to implement.

–Feed indian food to sheep to save the world.

The rise (and fade?) of gas Opec.

–Predicting the long-term trajectory of the Gulf oil spill by NOAA. 

–Truth and lies about the oil-skimming statistics for the Gulf spill.

–Cheaper flight tickets through standing-room only flights.

–Searching ‘double dip’ on Google goes crazy.

–The commodity bull corner…time to be bullish on coal?….and $100 oil: coming sooner than you think.

–Simple yet genius…a new economic index – The Coffee Indicator.

BP-themed board game foreshadows the Gulf spill by a few decades.

–Solar-powered plane flies through the night  (brave pilot) for 26 straight hours.

–Psychic octopus chooses the winner of The World Cup…

Energy efficiency to have twice the impact of renewables, nuclear and clean coal, combined – by 2020.

Never slaughter a chicken in front of a monkey.

The Burrito Deluxe Award of the week is split; it goes to retail sales data, which gives some hope of a continued economic recovery through consumer spending (in the face of weaker data everywhere else)…. and to Katie Schultz and ‘Singapore Dave’, for their energy limerick responses to Wednesday’s post. Katie, a giftcard is winging its way to you; ‘Singapore Dave’, if you find a burrito in Singapore, send me your bill.

The Burnt Burrito Award of the week goes to prompt natural gas prices. Not a lot has changed since last week; a hurricane threat to offshore production has come and gone, temperatures have been above the norm across much of the US (in NY, 11-year highs – el  scorcho!), yet a storage number erring to the bearish side, and prices have sold off with vehemence.

Have a terrific weekend! 

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.