Getting Our Perspectives Right



(Important Posting)

The US economy is in shock. Is $900 bn enough to create a bottom for the markets? Will there be more failures in store? Will Bernanke lose all of his beard due to stress? Will Bush Junior say "thank God I'm outta here in a few weeks"? Will Paulson quit to take up the high paying CEO post at Nomura-Lehman International? Will Palin attempt to say something sensible about the bailout and end up arguing it being a strong advantage for her to have been living so close to Russia??!!? ... and on that subject if McCain is elected (vomit), and with him having a high probability of dying in office ... can Americans really accept Palin as the new President??? If McCain decides to step through the Pearly Gates during his reign as President, can the CIA/FBI whisk Palin and lock her up for a few years in a warehouse in San Francisco (they will never look for her there), and install Tina Fey as the President instead.... but I digress.

Just how bad is the US economy and the global economy for that matter. Recent events over the last couple of weeks have been hard to stomach. The uncertainty is palpable. Will we still have our jobs in 3 months time? What about 6 months time? How delayed will be the delay effect? Is there a sledgehammer hanging over me?

We need to get some perspective on the whole situation. We are like being tossed and turned by a hurricane in a teacup. We don't know where we are, or whether we will get out unscathed. A simple way to make some sense of the whole thing is to look at the price of oil.
Oil is still the engine of the global economy. Its a brilliant indicator of the pulse of the global economy, although there have been bouts of excessive speculation which may have distorted prices somewhat but as an indicator it is still very useful.

We can say that the US economy and some parts of the gobal economy have been trying to factor in the weakness and potential recession everywhere. Things look pretty dire and bleak. Pessimism rules the day. In fact we may even argue that investors in general are trying to discount more than what is necessary in all assets. With all that doom and gloom, the price of oil has fallen from artificial high of $147 to just $93 or thereabouts.

At current levels, many industries are breathing a huge sigh of relief. Mind you OPEC has not cut production, and the major hurricanes in recent months did not disturb production. Even the Iran-Israel thing did not boilover yet. Hence supply is more than adequate ... and yet despite the streams of bad news on the US economy, global economy, contagion effects, demand destruction ... the price of oil is at $93!!!???


What is so significant about $93? A year ago the price of oil was at $70 ... now compare the economic conditions a year ago and now ... why are we still at $93???
When oil burst through $100, its mainly a dramatic repricing of oil to the "real cost of finding oil over the next 10 years". At $70 and below, the global demand growth, the new economic order, and the cost of finding oil all combined to push the price of oil to a new "sustainable rate". More importantly is the growth of the global economy.

The world is no longer that dependent on the US. In 2000 till today, the entire global economy has grown by 70%. Seventy percent!!! Much of the growth came from globalisation and the emerging middle class consumers from emerging markets. Year on year, the global economy has been expanding like an enlarging circle, and at the same time diminishing the influence of US on the global economy.

I am in now way saying the decoupling is on. In fact, the decoupling never really happened. Thanks to globalisation, all market are closer than ever before. Just look at ALLL Asian bourses, all of them have lost a lot more in value since the beginning of the year THAN the Dow or S&P500!!! Where is the bailout again? I think it was in the US ..., and why then have Asian markets lost an arm and a leg in the process? Asia as a whole have tried to discount (and over discount) the ill effects of the American dream turning into an American style-horror-movie nightmare.

Emerging markets have MORE than discounted the ill effects. Bailouts passed. Don't know if these bailouts are sufficient. BUT THE PRICE OF OIL IS AT $93. That should tell you something about the underlying global economy. Same time last year it was $70, which is to say with the weight of the world on Atlas shoulders, the price of oil is still up 33% year on year.


Can you imagine if we did not have all the bad news??? The commodities run is not over by a mile. The global economy is more resilient than most would like to think.


p/s photos: Sammi Cheng (as I will be traveling over the next 2 weeks, the postings may be erratic or even under the influence ... )

Comments

random said…
wah.. where u going? holiday ah?
Salvatore_Dali said…
randy,

I am trying to sneak into UK and find work there as a kitchen hand ... no lah... traveling to Tokyo and then New York... mostly holidays
Datuk said…
It's understandable and inevitable for the financial market to be in the crisis cycle earlier than the comodities market as the risk exposure and profile are difference altogether.

In the financial market or paper economy, the leverage and risk factors involved can be many times more than its face value while in real economy as in the comodities market, the risk involved is just limited to the face value.

However, both are governed by the ultimate law of demand and suppy. Any bias away from that fundamental will create imbalances in the risk and reward equation that are not sustainable and leading to a new equilibrium.

As a matter of fact, the inter-dependence of paper and real economy will ultimately heading them to the same direction.

Hence, the collapse of comodities market is not a question anymore. It has already taken place.....

i) copper dropped from US$ 8000 - US$ 6000 in 6 weeks.

ii) nickle collapse from US$ 26000 - US16000 in 6 weeks

iii) Iron - drop from US750 - US$ 350 in 5 weesk.

My projection as below:

Oil - US$ 60 per barrel after the winter season in europe and us.

Palm oil = RM1000 by June 2009.

Bursa = 750 by june 2009.

I'm happy if my projection out of target...completely!
yj said…
Datuk, I think u should be our Finance Minister...
Philip Lee said…
not a good time to travel except for the japanese with the strong yen. how long trip? Check out the Nikko autumn leaves...1.5 hrs from Tokyo.

http://daddyparentingtips.blogspot.com/
solomon said…
Our global economies are inter-dependent. Even though most people are pessimitic over the future outlook, it is good times to streamline our daily life.

Commodities have come down drastically the last few weeks. I am optimistic that it will stabilised in the next few weeks. People can say I am crazy. When you are on the globe travelling, you will notice that consumption are good and will rise over times with growing population. Demand still good in China for some goods.

The fundamental Central Banker should adopt is to guarantee the savers' deposits. Save the good money and re-circulate back to the economies.

Dali, why you line up for the Nomura -Lehman job since u are one of the ex-Nomura??
clk said…
dear datuk, despite your predictions of an impending fall in prices, I for one am hoping for the prices of the following to fall as it affects my pocket more than any other things:

i) fresh meat/chicken + fish
ii) cooking oil
iii) bowl of noodles or nasi lemak from the hawker
iv) flour, maggi mee, soya sauce, vermicelli, rice etc.
v)fresh vegetables
vi) pump petrol/ LPG prices
vii) electricity tariffs
viii) MYR mortagage interest rates
Ivan said…
Dali,

you are super funny :)

thanks to keep upload and share with us your idea, view via sharing.

I sincerely appreciate it...
Not sure when market will at bottom . .. not yet?

DJIA adi breakdown 10k today .. still have a huge room to step down?
Support will be at level 8k ? then klci how wo.? 800, ok?
see said…
Hope you watched SNL with Sarah Palin skits it was hilarious. Tina Fey was brilliant! On the note of decoupling theorists....booo to them....if anything the China toxic milk is proof of interdependency more so than ever....btw I ate a "Product of China" snickers bar so dunno if will see plastic plate in my stomach next time I x-ray
rask3 said…
I'm not exactly sure if there is a direct correlation between the price of oil and economic performance, though too high a price will likely curtail many activities.

When the price of oil was about $70
same time last year, it was looking to go up. Now it is under $93 and looking to go down quite a lot. See the difference? It's not where we are but where we are headed.


Rask