Con-tango

May 22, 2006
In Economy, Views
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Inflation ripples?

I must admit Its taken me a while to get some sort of a handle on last week’s surprising drop in securities and commodities prices.

First, I strongly recommend reading Mission Impossible by Bill Gross. I think he summarizes quite clearly the overbearing economic markers of the past few years.

He draws the following picture:

The
thought was this: the center of global production was drifting towards
a high savings rate region – Asia. The resultant “savings glut,” to use
Bernanke’s term, would be recirculated into U.S. and Euroland bond
markets to build up “insurance” reserves but also to place a ceiling on
domestic currency appreciation. China was seen as the main culprit but
even Japan was involved in this game of competitive “real” devaluation.
The deal was a win-win for all parties. Asia got to grow their domestic
economies, Japan got to emerge from years of deflation, and the U.S.
got to import cheap goods and cheap money in order to stoke their
housing/asset markets. Euroland prospered as well.

Although
the “stability” produced many inherent disequilibriums including the
U.S. consuming 80% of the world’s excess savings reflected in an $800
billion current account deficit, there seemed nothing impossible about this
mission, I suppose. And there’s nothing improbable about its continuing
either until China/Japan are in closer proximity to their destinations
– China to eventually have a self-sustaining, internally demand
balanced economy and Japan to have permanently exorcised the D word
from its lexicon.

So, what has changed in this cozy arrangement, although deficit laden, to precipitate the markets; and will this deterioration continue?

May 17, 2006
In Economy, Views
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Copper margin quadrupled

In two weeks Clearnet has quadrupled the margin requirement to trade copper at the LME; no wonder commodities are acting giddily…

Source: KITCO

May 17, 2006
In Economy, Views
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OPEC’s 2006 demand estimate

What a press release… you
can’t get any more words into this OPEC report and shamelessly say less.

What were they trying to convey?

May 16, 2006
In Economy, Views
One comment

The surprise fall in the trade deficit (to $62 billion, as reported last week by the BEA); was taken quite harshly by the markets, and in
particular commodities where prices fell sharply –the
consensus explanation: lower oil imports meant a falling
US demand.

My curiosity was piqued by FTX reneging Brad Setser’s lower oil imports to explain a wishful
declining demand and correcting US trade deficit…

May 8, 2006
In Views
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Iraq, a Vietnam deja vu?

Former US Secretary of Defense, Robert MacNamara expounds "know thine enemy". In furthering this concept, it’s troubling to see the parallels that can be found between the Vietnam and Iraq wars.

In essence, the US not only attacked the wrong enemy, Iraq; but still does not understand the motives behind his enemy, the Muslim jihadist.

May 4, 2006
In Economy, Views
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$900 billion in NPLs in China

Earnst & Young, the accounting firm, puts China’s non performing loans at an unexpected high level, $900 billion USD, surpassing their $875 billion USD reserve level.

FT update May 16: E & Y retracted the report

E&Y retracted the report, saying its estimate of bad debts for the
country’s big four state banks "cannot be supported and … is
factually erroneous".
(big snip)
In a statement issued with the retraction of its report, E&Y
resolved the conflict firmly in favour of its auditors, saying the
official figure was "computed on a regulatory and accounting standard
based on objective evidence of impairment". In a separate statement
yesterday, the accountant said the NPL report had erred by treating "unverified forecast data compiled by others as if it were historic
information".

Humm… an auditor feeling the pinch?