Meltdown

[BachQ]

I just love the optimism of this thread!

The Financial Times newspaper has a very useful commentary section which posts all sorts of market and economic analyses. They have posted 2 pieces here aligning the bailout with "Japanese-style quantitative easing".

http://ftalphaville.ft.com/blog/2008/10/27/17448/the-unthinkable/

http://ftalphaville.ft.com/blog/2008/10/31/17669/where-bailout-money-comes-from/

and the site itself: http://ftalphaville.ft.com/

Very cool.  I visit FT daily, but I never knew of this sub-site. 

[BachQ]

WSJ: Supply Worries Persist in Oil Market, Just Not Now

NEW YORK -- While oil may be at its cheapest in months, prices deep in the future reveal a market with serious concerns about long-term supply.  As evidence, analysts point to charts of crude oil futures. Oil for delivery years from now costs more than oil for imminent sale, and the difference has widened. While front-month crude is down 53% from its July peak, oil contracts for later delivery dates have fallen far less.  For example, as recently as last summer, December 2008 and December 2013 crude-oil futures on the New York Mercantile Exchange cost the same. Now, the 2008 contract is $21.50 a barrel below 2013, an unprecedented discount.  Light, sweet crude for December 2008 delivery closed at $67.81 a barrel Friday, up $1.85, capping the biggest monthly decline ever, while December 2013 crude closed at $89.31, up $3.11.

A pause in the march of world demand helped topple crude from record levels above $145 a barrel. But the current price weakness could set the stage for an explosive move higher when consumption takes off again. Analysts say the fall has been so steep it could diminish investment in new supplies that are only profitable in a high-price environment.  "Low prices are bullish longer term, as they derail whole sets of high-cost projects, exacerbate decline rates and discourage alternatives," said Jan Stuart, an energy economist at UBS Securities LLC. ¶Some signs of slower supply investment are emerging. Marathon Oil Corp. last week said it expects capital spending to decline 15% in 2009. Russia's OAO Lukoil Holdings said next year's planned capital spending could fall if oil prices slide further. Suncor Energy Inc., the second-largest producer in western Canada's high-cost oil sands, has said it would delay a key project to turn tar-like bitumen into high-quality crude.

"The decline in prices is having a greater supply-destruction impact than the rise in prices had in terms of demand destruction," said John Hummel, president of hedge fund firm AIS Group, which manages a $400 million fund invested in commodity and other futures.  Industrialized countries are now daily consuming 1.9% less oil than they did a year ago, according to the International Energy Agency. If economic conditions worsen, oil use will be the poorer.

[BachQ]

Obama's green jobs revolution -- Barack Obama is promising a $150bn "Apollo project" to bring jobs and energy security to the US through a new alternative energy economy.

*** " [The "Apollo project" is] going to be my number one priority when I get into office," Mr Obama has said of his "green recovery" plans. *** [Obama] declared: "We'll invest $15bn a year over the next decade in renewable energy, creating five million new green jobs that pay well, can't be outsourced and help end our dependence on foreign oil." The appeal of the idea that clean energy could help to kick-start the economy is such that Mr Obama's Republican opponent, John McCain, has also promised "millions" of green jobs if he wins. ***

(continued)

[BachQ]

A Nightmare Inheritance: Obama faces the worst US economy since the great depression

*** Inheriting the policies of the previous administration can be a bad thing for an incoming President, but when he is inheriting a $250bn (£154bn) bank capital injection programme through the Treasury's $700bn Troubled Assets Relief Programme (TARP), it may not be quite such a problem. The Treasury Secretary Hank Paulson's measures to prop up the balance sheets of American banks by buying preferred equity stakes have solved the initial problem of a lack of available capital to maintain regulator's adequacy levels. Nine major banks have taken $125bn of capital, with a further 20 regional banks allocated a further $40bn, with the rest of the money to be doled out to institutions deemed worthy by the Treasury.

(continued)

[ezodisy]

BOE rate cut decision today, they have not cut more than half a percentage point since 1993 though with all the calls for a whole % pt they may do so today and I don't think it's priced in. We've got gbp/usd and gbp/jpy moving within these silly little triangulating ranges and I quite unpatriotically want and expect the bugger to plunge for a retest low. As Obama said in a queer, Bush-like way during his acceptance speech, "The road is long, the path is steep" or some such nonsense, he should have carried on, openly and honestly, "The road is long, the path is steep, and at the top we're going to plunge like lemmings".

[BachQ]

BOE rate cut decision today, they have not cut more than half a percentage point since 1993 though with all the calls for a whole % pt they may do so today and I don't think it's priced in. We've got gbp/usd and gbp/jpy moving within these silly little triangulating ranges and I quite unpatriotically want and expect the bugger to plunge for a retest low. As Obama said in a queer, Bush-like way during his acceptance speech, "The road is long, the path is steep" or some such nonsense, he should have carried on, openly and honestly, "The road is long, the path is steep, and at the top we're going to plunge like lemmings".

This was posted today on FT ALPHAVILLE [S ]ome economists are entertaining even more extreme views [than a 1% rate cut]. Former MPC member and LSE professor Charles Goodhart touted on Channel Four news last week the bank may have to lower rates as far as zero. Yes, that's right. Japan-style zero. That view was most recently reinforced by Michael Saunders, chief western European economist at Citigroup in London. He told Bloomberg the bank should be prepared to go that far if necessary.

Some of the latest headlines giving increasing credence for such a move:

-- UK car sales falling no less than 23 per cent in October. That's the sixth consecutive monthly decline reported by the Society of Motor Manufacturers. No surprise the Daily Mail is reporting cases of UK dealers actually offering "Buy one get one free" car sales offers.

-- House prices declining by 2.2 per cent in October alone, according to Halifax data. That compares to a fall of 1.3 per cent in September, the sharpest drop since May. On the year, house prices were down 15 per cent in October - a sharper decline than seen in the early 1990s downturn.

-- The fact politicians are having to beg high-street banks to pass on BoE cuts. That follows statements from the head of HSBC David Hodgkinson, that consumers may not see any benefits in the event of a BoE rate cut.



FT Alphaville is a total goldmine; together with all of the links to other sites & forums, a person could spend all day, every day simply clicking away!

Simon Derrick, chief currency strategist, at Bank of New York Mellon says this:

As regular readers will be aware, we struggle to find anything positive to say about GBP. The forecast that the UK is likely to face the deepest recession of all the G7 nations (driven by the importance of the financial sector within the broader economy and the collapse in the housing market) seems to be a reasonable one and suggests that the bank rate (the highest policy rate within the G7 nations) may still have a long way to fall. We certainly find little to argue with in market forecasts that the MPC could have cut its rate by 150 bp by March of next year, or that 75 bp or more of this could emerge later today.

[Florestan]

FT Alphaville is a total goldmine; together with all of the links to other sites & forums, a person could spend all day, every day simply clicking away!

If one has nothing better to do, of course; like, for instance, working to pay the debts.

[BachQ]

     It's happening right now, and it will speed up. One way it will happen is that hydropower and wind will be hooked up together so excess capacity when winds are blowing will be used to pump water back over the dam, using reservoirs as "batteries". Also, you'll see more sophisticated ways of linking wind farms together so they can cover shortfalls, making them more suitable as base-power generators.

You're correct.  It is happening right now. 

Using renewable energy to power electric cars: "Project Better Place founder Shai Agassi [announced] that Australia will become the third country, following Denmark and Israel, to implement the group's vision of electric vehicles powered by renewable energy.  Better Place and Macquarie Capital Group will raise $1 billion to build a network of 250,000 charging stations and battery exchange stations in key locations along the east coast by 2012. The network will be powered by wind turbines owned by AGL Energy."

[BachQ]

If one has nothing better to do, of course; like, for instance, working to pay the debts.

People can surf the net while working.

[Florestan]

People can surf the net while working.

Sure, but not all day, every day, unless it is exactly that their job.

[BachQ]

     The experiment we're running (let's call it the "real world") suggests that $140/bbl causes compensatory reactions, reduced demand, slower growth, some substitution efforts. The higher the price goes the stronger these reactions get until you reach an equilibrium point. $140 is probably more than enough to cause these reactions, so even higher prices couldn't be maintained for very long. What happens is that the inelasticity you mention becomes elastic as the price goes up and alternatives you don't consider at the $100 price point becomes increasingly attractive as the price goes even higher, and if the price stays high for any length of time a whole new set of solutions is priced into existence. The reason we don't convert Abrams tanks or Post Office vehicles to CNG or vegetable oil or something else is that it's expensive to retrofit a huge installed base, but when the price goes high enough the whole process pays for itself in a few years. There's a lag while planners try to figure out if now is the time or if we still should wait, but plans are being dusted off right now. 

Drogulus, as to our $200/bbl discussion, FYI, as announced by the Financial Times on 5 Nov. 2008, The International Energy Agency (IEA) predicts that the cost of oil will exceed $200/bbl by 2030.  "While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over," the report states.

The developed world's energy watchdog has doubled its long-term price expectation from last year's $108 a barrel for 2030 and assumes oil prices will rebound from today's $60-$70 a barrel to trade, in real terms adjusted by inflation, at an average of more than $100 a barrel from 2008 to 2015.

The IEA's World Energy Outlook has come to this conclusion largely because it believes companies will struggle to pump enough new oil to offset the steep production declines of the world's older fields.

"Current global trends in energy supply and consumption are patently unsustainable," the report states.

The stark assessment comes as companies cancel projects from Kazakhstan to Canada because the collapse in oil prices makes them uneconomical.  The industry will have to invest $350bn each year until 2030 to counter the steep rates of decline of existing fields and find enough extra oil to satisfy the growing demand of countries such as China, the report states. Output from the world's oil fields is declining at a natural rate of 9 per cent, the IEA found, following the most comprehensive review of its kind. This decline rate is curtailed to 6.7 per cent when current investments to boost production are made. However, even with such investments, the decline rate worsens significantly to 8.6 per cent by 2030. The declining rates are steeper than the industry had previously assumed. They are also slightly steeper than an earlier draft of the report because the IEA has expanded the study to 800 oil fields, adding 250 smaller fields.

2030 is a long way off, but at least one authority thinks $200/bbl oil could happen.  But, of course, they do not consider all of the economic substitutions that could counteract that prediction.  Who knows.......

[BachQ]

Sure, but not all day, every day, unless it is exactly that their job.

True enough.  Unless you're a night watchman, and have nothing else to do. 

[Florestan]

True enough.  Unless you're a night watchman, and have nothing else to do. 

Ah, but in this case it would be "all night, every night". 

[ezodisy]

FT Alphaville is a total goldmine; together with all of the links to other sites & forums, a person could spend all day, every day simply clicking away!

Yeah FT A is excellent, great source for info.

I think the guy (or guys) who suggests 0 is way off the mark. BOE has never gone below 2. It ain't gonna happen now.

[BachQ]

ah, crude back at $70, rebounding almost ten bucks in two days. Finally!!!!!! Get your resources while you can!

Oil actually dipped below $60 at one point yesterday for the first time since March, 2007 (17-month low of $59.97/bbl).  What a rollercoaster ride! --- FT link ---   Nevertheless, The Economist notes that the current collapse of crude oil prices "may be setting the stage for another spike."

[BachQ]

I think the guy (or guys) who suggests 0 is way off the mark. BOE has never gone below 2. It ain't gonna happen now.

You are probably right, but yesterday Bloomberg offered this: Zero Rate World May Lie Ahead as King, Trichet Cut (Update2)

The age of free money may be at hand.

As major central banks slash interest rates with unexpected speed, benchmark borrowing costs are now below core inflation for the first time since the early 1980s, and policy makers are signaling they will go deeper. Yesterday's cuts by the Bank of England and European Central Bank, which came with the Federal Reserve and Bank of Japan on the cusp of zero rates, are a bid to shock life back into their recessionary economies and strained money markets. It may be an uphill battle as consumers and businesses show greater interest in saving than spending, and banks hoard capital rather than lend it.  ``It's the race to zero,'' said Stewart Robertson, an economist at Aviva Investors Ltd. in London, which manages about $230 billion. ``There's no obstacle to more rate cuts.''

more

``It's clear you need to have interest rates that are lower than inflation going forward,'' said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. ``Central banks are rushing to get interest rates down.''  Still, it's ``far too early'' to talk about zero interest rates throughout the industrial world, given inflation expectations remain positive, says Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London.  ``People should be wary of rushing to shift the debate from inflation to deflation,'' he said.

[BachQ]

Ah, but in this case it would be "all night, every night". 

[ezodisy]

Oil actually dipped below $60 at one point yesterday for the first time since March, 2007 (17-month low of $59.97/bbl).  What a rollercoaster ride! --- FT link ---   Nevertheless, The Economist notes that the current collapse of crude oil prices "may be setting the stage for another spike."

Thanks for the links Dm. What's amazing about the oil sector is that all of these exploration & production companies were always factoring a $60 or $70 crude price into their calculations -- their reports on paper never took into account the rise to $140. Yet indiscriminately both large producers and minnows have had their share price thrashed as funds have had to liquidate their positions and so on and so forth. It's just a bear market rally at present yet I do believe a return to fundamental analysis is not far off for oilers as their sector probably is the most oversold in the market. Miners have also taken a beating but I think the oilers will be back soon -- long-term investors are looking at opportunities now and are in something of a wet dream with the possibilities ahead in the next few years. IMO next few weeks up to Christmas will see a lot of these oilers jump 100% as they're so ridiculously oversold. 

[ezodisy]

By the way, I just want to point out some of the manipulation going on in the Forex market as governments do their best to prop up some currencies which in reality should be plummeting (further). Plunge Protection Team are out in force.

NEW YORK (Dow Jones)--The Hong Kong Monetary Authority intervened in currency markets for a second time Friday during the New York trading session to maintain the USD/HKD trading band.
The HKMA said it bought a total of HK$2.480 billion worth of U.S. dollars Friday to add liquidity to the system and defend the Hong Kong dollar's peg against the U.S. currency. The settlement will take place on Nov. 12.
Of that amount, HK$1.32 billion was already bought overnight.
The moves Friday follow buying of HK$3.88 billion worth of U.S. dollars during the New York trading session on Wednesday to boost interbank liquidity.
HKMA intervention is automatic, and is triggered when the U.S. dollar hits HK$7.7500.

And here is a chart showing the intervention which gets triggered everytime the price hits that figure



I can only assume that similar intervention is taking place with GBP as it obstinately remains afloat against both JPY and USD. When you take into account that the ECB reduced its base rate to 3.25% and EUR/JPY is trading at 1.24, and that BOE which has just reduced its rate to 3% yet GBP/JPY trades at 1.53, you can only expect a big significant delicious and in my case very much Faustian drop of GBP to come. It might not be quite that simple, but why complicate things?

[drogulus]

Drogulus, as to our $200/bbl discussion, FYI, as announced by the Financial Times on 5 Nov. 2008, The International Energy Agency (IEA) predicts that the cost of oil will exceed $200/bbl by 2030.  "While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over," the report states.

     Once again, that's projecting current trends. What will happen will not be the end point of a straight line, but the product of different crossing trend lines. The future is hard to read because of that. We don't know all the factors and we don't know how they will interact. The safest bet is that new technologies and new market preferences, acting together, will produce a future very different from the post-apocalypse sci-fi scenario of the pessimists. 

     Besides, is $200/bbl in 2030 worrisome? Why? Houses cost $20,000 in 1960. In the post-apocalyptic present they cost ~$200,000. Therefore, Doomsday has already happened, and we are living in the "nightmare scenario" now. So, how do you like it?