Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets

Outlooks for 2009

Few observations and thoughts from reading:

- Goldman Sachs December 11, 2008 Commodities 2009 Outlook: Pricing Supply destruction. (GS)

- Societe Generale Cross Asset Research December 08 2008 Commodities Review. (SG)

Whoever has paid the hefty price for the subscription to these marvels of modern financial forecasting can read the original. I have no authority to distribute this work. In a nutshell, both teams predict rapid appreciation of commodity prices to resume second half of 2009.

It appears that both teams of analysts (and perhaps the economic models they rely on) ignore the profound changes in the society from the recent extreme price action in energy and agricultural commodities and of course, the simultaneous financial turmoil partially a consequence of that. Both teams seem to think that everything returns to the same it was within about 6 months. We have seen similar thinking from Fed for some time now. For some time now Fed, ECB, as well as the renowned analysts of these (and other e.g. IEA, … you name it) highly respected institutions have been constantly and dramatically revising their predictions exactly because they ignored the changes in attitudes of the society, changes in economy due to extreme price action. Unfortunately, their economic models seem to be too simplistic to be useful for predicting the future state of world economy. IMHO, it would be better for these folks to state that they don’ know rather than fool people to think that in 6 short months everything will be same as it was: prices of all commodities will again be exponentially appreciating and … surprisingly, everyone will be happy about it! I can understand that GS and SG will be happy to get back brokering large funds into commodity markets, but I am not sure the rest of the world will cooperate ;-)

Different from these folks I see some fundamental changes in US attitudes unlikely to revert back independent of Fed actions or Democrat’s stimulus packages. For as long as US holds a substantial part of the world economy it is unrealistic to expect China, India, Korea and Japan (all very much dependent on export to US)  to grow.  Chinese government efforts to boost domestic consumption are welcomed, but temporary. Cultural changes in people attitudes will take much longer time and possibly democratization of the government.

Why pessimistic?

- Demand for all components of energy keeps falling independent of the price and winter weather. Apparently, people drive less and conserve energy.

- The financial turmoil has hit hard the affluent public. Neuman Marcus, Saks 5-th Ave, … are in trouble, while Walmart is doing fine. Wealthy folks have fueled  recoveries by investing in real-estate and buying stocks previous downturns. Stimulus checks will not make back what they have lost from recent scams in financial industry and fall of hedge funds. Of course, equities slump does not help either. Most importantly, the financial services industry the way we knew it (investment banks) does not exist any more and the confidence is at its lowest on any financial services provider because of abundant Ponzi schemes and scams. I don’t see how trust and credibility can be restored by interest rates, nor stimulus checks.

- Substantial part of our manufacturing is autos. In its current incarnation Big Three are not viable with roots deep in historic structure of these businesses. Bail-out money in any amounts will only delay the inevitable and will not fix the root cause of the problems. It is clear that if not Bush then Democrats will dump billions into Detroit couple of times before giving up on this. We’ll likely see this card house collapsing some time late summer 2009. It surely will take longer than 6 months for some to pick up the bits and pieces and build something viable from the fall-out of this industry. Good example of the real trouble is the hailed Volt 1 car – the so called GM savior — that takes $85k to manufacture (add health care, legal, sales, … costs for actual price) and will drive 40 miles with one load. Perhaps our new president can afford to buy one, but I don’t see this being a vehicle for anyone else.

- As of now the bottom in housing is yet to be found. While Obama’s massive infrastructure spending may get some relief to the construction industry, it does nothing to eliminate oversupply in housing. What it is also likely to do is promote investment in solar and wind energy improvements (via federal rebates) which, in turn, reduces the need for oil. Yet, this is a niche industry unlikely to spur general recovery. Banks are still struggling to keep the people who have no money to pay in their houses.

- The emerging markets are still to fall. Countries like Venezuela, Iran, Russia, Argentina, and bunch of smaller South American and African countries that fed their growth from unsustainable commodity prices are starting to fail their loans. Bolivia, Senegal, … list to grow. European banks are far out on the limb for these countries while US has very little exposure. This may very well turn into the fall of EU financial industry. With global slowdown I see no way to expect IMF funding all of them. This is because of deeply corrupt governments and IMF’s current largest contributors themselves are out of money. They would need to turn over China, India and Arabs that sit on larger reserves. While Arabs have been listening some times China has not at all. Besides, China and India have their expensive internal problems to cope with

It appears that the world is still “drunk” from the economic boom of recent years, just starting to approach the “hangover” phase. It will take time to emerge from it and many things will be different once we do.


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