Thursday September 1, 2005 - 11:40:52 GMT
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Black Swan Capital - www.blackswantrading.com
Supply or damand: Volatility could hike up...
“The ultimate paradox of maintaining proper trading psychology is to depersonalize what is, after all, an intensely personal activity.”
F.J. Chu, The Mind of the Market
Supply vs. demand was supposed to be somewhat easy to understand. Yet, often it gets very twisted. Maybe that’s because in the financial world the intelligentsia seem to prefer good stories to facts. The supply and demand dynamics driving crude oil is the best most recent example. It’s a lot sexier to talk about geo-political intrigue and conspiracy on the supply side than it is to say rising global growth has increased demand faster than “rising” supplies of crude.
“Most practicing economists saw the surge in energy prices over the past 1 1/2 years as a supply shock instead of an outward shift in the demand curve for oil, yielding a higher equilibrium price and a higher equilibrium quantity. (The price rose because we demanded more.),” writes Bloomberg columnist Caroline Baum.
“Finally we get the supply shock economists have been talking about, and the first thing they do is focus on demand-side effects, such as the impact on consumer spending,” she laments.
Ah yes. And now we expect the Fed to ride in on its white horse to “stimulate” demand.
“For the first time since mid-July, federal-funds futures prices imply the central bank's overnight rate may not reach even 4.0% before the end of the year,” the Journal said this morning.
Is it another reason to buy bonds; the Fed throwing more liquidity at the market? Well, not so fast.
Miss Baum points out: “If productive capacity and, hence, the economy's potential growth rate, have just been reduced [because of the damage from hurricane Katrina], why stimulate demand for the limited supply?”
Hmm…! Does that last sentence sound familiar? Doesn’t it sound a lot like: Too much money chasing too few goods, which is the classic definition of inflation? Yes, the same type of inflation that has been viciously squeezed out of the long end of the curve.
And a friend sent us this list of goodies from the Bank of Montreal yesterday. It is titled “Hurricane may temper growth”
* Oil prices, and the Canadian dollar, will continue to climb.
* Demand for lumber will rise, as thousands of U.S. homes will need to be rebuilt.
* Natural gas prices will be “much, much higher” during the heating season.
* The likelihood of a slowdown in U.S. consumer spending has increased.
* Some hedge funds may have sold oil short, a move which could cause liquidity problems and hit banks and other lenders.
* The chance that the U.S. Federal Reserve will pause in raising rates this year has risen.
* U.S. wholesale and retail prices could increase.
* U.S. retailers, along with companies in the insurance, tourism and transportation industries could suffer.
* Energy costs will rise around the world, “with the more oil-intensive economies, many in developing Asia, hardest hit.....”
Bottom line: With the possibility of rising prices, rising liquidity, rising global financial risk, and rising concern about Asia, the volatility in all financial markets could hike up considerably. So, from day to day, our ability to recognize a trend in currencies (assuming we ever possessed such abilities) will likely become much harder.
Black Swan Capital
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