Monday, October 06, 2008
Getting Our Perspectives Right
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 ... )