Thursday May 14, 2009 - 12:47:27 GMT
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Poking at a little thing called demand, again.
Key Reports Due (WSJ):
8:30 a.m. Initial Jobless Claims For May 9 Week: Expected: +10K. Previous: -34K.
8:30 a.m. Mar Producer Price Index: Expected: +0.3%. Previous: -1.2%.
8:30 a.m. Mar Producer Price Index,ex-food & energy: Expected: +0.2%. Previous: 0%.
10:00 a.m. DJ-BTMU Business Barometer For May 2: Previous: -0.8%.
10:30 a.m. May 8 EIA Natl Gas Inventories, in billion cubic feet
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âVery little of the great cruelty shown by men can really be attributed to cruel instinct. Most of it comes from thoughtlessness or inherited habit. The roots of cruelty, therefore, are not so much strong as widespread. But the time must come when inhumanity protected by custom and thoughtlessness will succumb before humanity championed by thought. Let us work that this time may come.â
FX Trading â Poking at a little thing called demand, again.
Let me quick say that stocks and the US dollar have turned this week. Sure, I may have been a few days early in expecting the move; but in watching the reaction to the news so far this week, risk-appetite has a few extra days (at least) to go hungry. As it pangs, weâll find out whether a resumption of investor confidence and growing risk-appetite is in order ... or whether potential renewed economic and/or financial concern surfaces to significantly pressure risk-bound investments.
Ever since the beginning of bailout and stimulus efforts, the goal became: resurrect demand. It was almost an obvious plan of attack, since thatâs what bolstered emerging markets, powered cheap-goods China, empowered consumption-happy Americans, emboldened risk-blind investors and virtually pumped the global economy along.
It was when demand hit the brakes that this whole system came unwound. [See Richard Bookstaberâs A Demon of Our Own Design where he discusses âtight couplingâ if you want a more academic account of how and why most everything came unraveled at once.]
The demand for natural resources â a very popularized topic during the inflationary boom time â was among the first indications that the global economy was shifting. Metals, energy and other materials used in manufacturing and construction took the hit. Specifically, when crude oil plummeted from record highs at nearly $150/barrel to roughly $45/barrel in less than six months, well ... letâs call it an âoil price shock.â
Crude would eventually push a few bucks lower. Since then it rallied to just over $60/barrel as of this week. But $60/barrel is a critical level, alone offering resistance to climbing oil prices.
The thing is, though, a chart of crude oil and a chart of the S&P 500 look a lot alike:
(Charts unavailable in text format.)
Crude oil has followed the S&P 500 on the same dominant risk-appetite theme that had its grip around the markets for many, many months now. The potential for recovery drove stocks higher; rising stocks drove confidence higher; rising confidence garnered further risk-taking in the form of rising commodity prices. In other words, potential recovery implied potential demand. Demand (along with supply) drives commodity prices.
I saw a headline yesterday, I think it was, talking about OPEC and their decision to increase the supply of crude oil ... thinking theyâve now done enough to stem falling oil prices.
Then this morning: IEA predicts sharp fall in oil demand. For 2009, the International Energy Agency expects the sharpest decline in oil demand since 1981.
Itâs news like this, absent less-bad-than-expected optimism thatâs dominated the last two months, and softening prices that are going to have investors reconsidering the potential for recovery. Whether you think the answer to the economic crisis lies in demand stimulation or not, it seems obvious that prosperity wonât ensue until something major happens.
That may mean substantial demand growth. Or it may mean something more, structural rather than cyclical, if you will. Maybe China holds the key to door number one; or maybe theyâre trying their hardest to pick the lock. But itâs going to take more than China to unlock door number two, in case door number one is welded shut. [I also noticed Chinese exports fell 23% in April, compared to only 17% in March. Thatâs not exactly zoom-zoom to me.]
Whatâs bad for crude is good for dollars:
(Chart unavailable in text format.)
Crude is an inflation hedge of sorts. And the degree to which deflation will shock the crowd, we think it will be seen in oil prices quickly. And of course, creeping deflation despite its insidious impact on the overleveraged, tends to be good for the world reserve currency at the moment.
John Ross Crooks, III
Black Swan Capital LLC
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