It ain’t the things that you don’t know that get you, it’s the things what you know for sure, that ain’t so”--Mark Twain
While people at this time of the year are looking for good news, several weak signals point to the reverse..
Look at all the existing global economic imbalances that have not been addressed....trade, debt, zero interest rates, out of whack commodity prices, fiscal imbalances, credit leverage, currency manipulations, supply, unsustainable demand structure, risk exposure, income inequality, hidden US unemployment etc a bunch of little bubbles and one super bubble. The same conditions and circumstances that caused the last financial crisis are still very much in existance today. The only reason why we are not in a global depression are continued government bailouts and more debt.
But it worked in the past, so why won't it work again.... You might ask and rightly so. Everyone was making huge sums of money (up to 2008)...it was financial cleaverness, not risk taking. But Viable Systems Modeling (VSM) shows that this system is unsustainable.
The Goldman Sachs Commodity Index chart below clearly shows that we are at the top of another global commodity bubble (bottom of the chart), with commodities signaling a highly over-bought position (top of the chart). All previous highly over-bought positions were invariably followed by a "bubble pop" and a quickly ensuing recession. (see Baltic Dry Index collapse below)
Growing risks......
Rumors are that Goldman Sachs and other global investment banks will deliberately and simultaneously short their positions on gold, oil/gas and other commodities soon, making even more money on the downside, (on credit default swaps and in the derivatives market), just like they did in the financial collapse after 2008.
That's bad news for commodity exporters. If this happens, commodity-producing countries (such as Canada, Australia, Brazil, many mining dependent countries in Africa, Ukraine and Russia) could be easily pushed over the edge into a double dip recession in 2011-2012 due to the twin pressures from simmering commodity protectionism (ie imposed quotas from the EU, restricting Ukrainian or Chinese steel imports ) and plunging commodity prices that won't cover growing corporate debt, and government deficits from a falling tax base. (watch for growing debt-to-gdp ratios and growing credit default swap CDS spreads).
Oil price rise is being driven by pure speculation (See chart below)and not necessarily by growing demand.
Russian Bond Risks (UPDATED Jan 11, 2011)
The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose 4 basis points yesterday, 66 points below last year’s peak of 217, according to data provider CMA.
Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade, cost 151 basis points, the same as contracts for Turkey, which is ranked four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20. Brazil stood at 110 points yesterday and China at 80. (ie Russia is the most risk prone of all the BRICs)
Default Risks
While everyone's attention is on the EU headlines (Spain, Portugal, Greece, Italy and Ireland CDS and Belgium soon) the possibility of a Russian sovereign debt default or a GAZPROM default is now an ever-growing risk, as the Russian-labeled graph shows. It's being ignored by the mainstream media and all the experts and analysts, who totally failed to see and predict the Russian default last time around in 1998. The same 30-40 signals of collapse the preceeded for fall of the Soviet Union, twenty years ago in 1991, exist today in Russia (and Ukraine too), but that's another story for a future blog post on Smart Economy.
The above chart (in Russian) is an eye-opener and clearly says it all. The blue line is Russian debt (which is growing steadily); the green line shows sovereign wealth funds (which are collapsing exponentially,as you can see. Russia is spending like a drunken sailor and at the current pace its "rainy day" fund should be all but exhausted by Q4 2011) and the yellow bars show the price of Brent crude.
Bloomberg however thinks Russia will run out of money sooner then Q4 2011
"Russia spent about $49 billion from its Reserve Fund as of July 31 and will empty the stockpile by the end of 2010 to plug an estimated budget shortfall equivalent to as much as 9.4 percent of GDP, according to the government."
(Source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apNlfgdzqR8c )
I think the above Bloomberg calculation does not account for an anticipated decline in oil production, in 2011 and hence of oil revenues, e.g. - it is likely too optimistic...
Remember-Crude and natural gas account for about (17 -24 %) of Russia’s economic output , depending on who you listen to and 40% of hard currency export revenues. This lack of diversification is a real weakness and the Achillies heal of the Russian economy.
Could Russia default?
Past history shows that the default option has been an atractive alternative to Russia, which is the 2nd most likely country to default historically on its debt obligations after Greece
UPDATE: Jan 11, 2011- While most bullish, some forecasters turn bearish on Russia
Credit Agricole’s “bearish” view is supported by the bank’s prediction that oil prices will slide back to around $70 to $80 a barrel this year, said Maxim Oreshkin, the Paris-based investment bank’s chief strategist for Russia and the former Soviet Union in Moscow.
“This could result in serious deterioration in Russia’s current account during the second half and force ruble weakness,” Oreshkin said by e-mail Dec. 21.
Source: Top Forecasters See Ruble Rising to Eight-Month High on Oil: Russia Credit http://www.bloomberg.com/news/2011-01-10/top-forecasters-see-ruble-rising-to-eight-month-high-on-oil-russia-credit.htm
UPDATE: Jan 21, 2011 Wall Street Oil Price Predictions for 2011 - $85 to $105/barrel http://www.benzinga.com/press-releases/11/01/c793960/enquirica-research-wall-street-oil-price-predictions-for-2011-85-to-105#
Natural Gas prices show a definate downward trend as well, that won't help fill Russian government coffers either.
The Russian Ministry of Finance (MinFin) has publically stated back in the spring of 2010 that Russia needs oil to be at least at $100 per barrel or more continuously for the next 5 years just to break even.
While oil is hovering at $90 per barrel and may well go over $100, anything above that will dramatically push down demand like we saw in the last recession, sharply reversing oil prices, that will drop back down through the floor.
My contention above is supported by one analyst today:
Oil prices have broken above $90/bbl and we seem to recall that when this happened in 2007, an unexpected recession followed four months later.
Looking at the near record net speculative long positions on the New York Mercantile Exchange as far as light sweet crude is concerned, it is abundantly clear that this run up in oil prices is not merely related to physical demand. Remember that it was this investment-related action in 2008 that ultimately caused the price to head into reverse as the physical demand growth went into reverse (as an aside, speculative longs in copper have also reached five year highs).
Source David Rosenberg's newsletter https://ems.gluskinsheff.net/Articles/Breakfast_with_Dave_010411.pdf
UPDATE: Rosenberg goes on to say (Jan 5, 2011):
Energy prices in the USA― if oil breaks above $100 and gasoline prices approach $3.50/gallon then expect the consumer to sputter. Every penny at the pumps drains $1.5 billion out of household cash flow. At the moment, U.S. gas prices at the pumps are at $3.15/gallon, but consider that back in September, it was closer to $2.70/gallon. This increase in energy prices is hardly the result of booming consumer demand, which we know from the monthly personal consumption expenditure data is down more than 2% from a year ago. This is nothing more than an exogenous negative shock, which, at current levels, is approximately a $50-60 billion annualized drag from the U.S. household cashflow (basically absorbing half of the payroll tax relief). If, as many experts predict, gas prices ultimately go to $4/gallon, then this would siphon another $100 billion into the gas tank. As for oil, the rule of thumb is that a 10% increase in prices shaves off 2.5 percentage points off GDP. This means that oil could be a near-one percentage point hit to GDP growth.
The Geopolitics of Oil
Remember that oil price manipulations are a geopolitical tool or weapon that was successfully used by the USA (Zbigniew Brzezynski and the Reagan government) in an attempt to bankrupt the former Soviet Union. It worked.
A review of the book: The Oil Card; Global Economic Warfare in the 21st Century by James Norman states:
The book assembles a now well-documented chronology of how the US and its allies, including Saudi Arabia, pushed down oil prices dramatically in the 1980s, and kept them low for a decade. It was a concerted and stunningly successful effort to break the former Soviet Union by depriving it of desperately needed hard-currency income.
It then raises the question whether those same price-control levers have lately been pushed in the opposite direction to rein in another target: the oil-short Peoples Republic of China. Contrary to popular perceptions, media commentary and official explanations, the book methodically lays out the geopolitical logic and the market mechanisms behind the stunning 12-fold run-up of oil prices from 1998 to mid-2008. It also offers an explanation for the sudden price drop from almost $150/barrel to under $100 as Russia again flexed its muscle by invading Georgia.
This timely and unorthodox analysis offers a clear and compelling explanation for the huge and otherwise unjustified gyrations in oil and other commodity prices in recent years. It also contains unique viewpoints on the reasons behind the US invasion of Iraq in 2003 and the fall of Russian oil major Yukos. The book will appeal to a broad audience—from students and practitioners of geopolitics to hard-pressed consumers and energy producers wondering how long windfall prices can defy gravity.
UPDATE: Russia admits supporting Arab terrorists
While the USA and Saudi Arabia kept oil prices artificially low in the 1970’s after the spike and 80’s to bankrupt the Soviet Union, Russia tried to raise and spike oil prices by supporting Arab terrorists—Walter Derzko
“Excerpts from Politburo materials indicate that the head of the Committee for State Security (KGB), Yury Andropov, facilitated contacts between the KGB and the Arab terrorists, who sought assistance for terrorist attacks on oil fields in order to keep energy prices high.5 The general resolution was that the Soviet Union should support the Arab terrorists in this battle.6”
.......says Yegor Gaidar, who is director of the Institute for Economies in Transition in Moscow. Between 1991 and 1994, he was acting prime minister of Russia, minister of economy, and first deputy prime minister. Between 1993 and 2003, Gaidar was a founder and a co-chairman of the Russia’s Choice and the Union of Rightist Forces Parties, and a deputy of the State Duma. His most recent book, Gibel’ Imperii: Uroki dlya sovremennoi Rossii [The Collapse of an Empire: Lessons for Modern Russia], was published in 2006.
Source: http://www.aei.org/docLib/20070419_Gaidar.pdf
5. A note from Yury Andropov, the head of the Committee for State Security (KGB), to the general secretary of the Central Committee of the Communist Party of the Soviet Union Leonid Brezhnev. “O konspirativnoy vstreche rezinenta KGB v Livane c V. Haddadom” [Regarding the Conspiratorial Meeting of a KGB Resident in Lebanon with V. Haddad.] April 23, 1974. No. 1071-A/OV.
http://www.2nt1.com/archive/pdfs/terr-wd/plo75a.pdf
6. A note from Yury Andropov, the head of the Committee for State Security (KGB), to the general secretary of the Central Committee of the Communist Party of the Soviet Union Leonid Brezhnev. “O peredache V. Haddadu partii inostrannogo oruzhiya i boepripasov k nemu” [Regarding the Handover of a Consignment of Foreign-Made Weapons and Ammunition to V. Haddad]. May 16, 1975. No.1218-A/OV.
http://www.2nt1.com/archive/pdfs/terr-wd/plo75d.pdf
Complexity of Geopolitics
Bruce Bueno de Mesquita, the self-styled "predictioneer", uses game theory to calculate the likely outcome of political negotiations. Complexity theorists, meanwhile, are increasingly confident that they can detect warning signs of imminent collapse in systems such as the global economy.
[N.B....Back in the 1970's and 80's,Cybernetic experts using sytem dynamics modeling in Kyiv and Moscow, predicted the collapse of the Soviet Union by 1990 plus or minus one or two years-not a popular notion at the time, but key people did pay heed. Two years before the collapse of the FSU, Russian and Ukrainian oligarchs started to move their wealth off-shore in 1988-89. These predictions were spot on.
Similar systems dynamics modeling shows that Putinism in Russian and president Yanukowych regime in Ukraine will suffer a similar fate as did the former Soviet Union--Walter Derzko]
UPDATE: Why is Gazprom in trouble?
Ambassador Speaks of Gazprom's Woes in WikiLeaks;
11 January 2011. Reuters
The Kremlin's ambition of turning Gazprom into a global energy titan is undermined by Soviet-style thinking, poor management and corruption, according to leaked U.S. diplomatic cables.
Leaked diplomatic cables from U.S. Ambassador to Moscow John Beyrle portray the company as a confused and corrupt behemoth still behaving like its predecessor, the Soviet Ministry of Gas.
"Gazprom is what one would expect of a state-owned monopoly sitting atop huge wealth — inefficient, politically driven, and corrupt," Beyrle wrote in a 2009 cable published by German magazine Der Spiegel on its web site.
[..]
The economic crisis battered Gazprom, and its market capitalization is now just over $150 billion, less than half its peak of more than $350 billion reached in 2008.
The U.S. cables repeat the view of many Western and Russian analysts that Gazprom's management misjudged the future by betting that soaring European demand would continue to support a seller's market. "Gazprom was simply unprepared for the inevitable leveling off and current decline in European gas demand," the U.S. ambassador said in the cables, adding that Gazprom misjudged the impact of liquefied natural gas imports to Europe. Gazprom is still clearly viewed as an instrument of Kremlin social policy, according to Beyrle, who cited a Gazprom executive as saying that the company's first two priorities were to provide reliable and affordable gas to the domestic population and to "fulfill its social obligations." "A Gazprom that behaved more like a competitive global company would probably find a new path to growth more quickly," Beyrle wrote.
GAZPROM also has a new competitor -genetically modified E. Coli that can produce refined gasoline or deisel from CO2 and sunlight at a cost of abour $30 bbl....watch for this disruptive technology in 2011 2012
Global trade is collapsing again if we use the Baltic Dry Index as a proxy for trade momentum, losing half of its recent gain in three short months. This fact has been totally ignored by the mainstream business media. (Remember it was over 11,000 at its peak in 2008, so a run-up back to 4,000 wasn't much of a recovery) Last week it dipped to below 1,500. Some are dismissing this tumble saying it's due to 200 capesize ships leaving ship yards and adding to shipping capacity. That excuse doesn't hold water, (pun intended) since BDI prices showed weakness all through 2010, dropping 45% last year before new capacity left shipyards and came onstream. Other say it's temperary, due to flooding in Australia and coal shipping cancellations. Well?... that doesn't bother you either? Today it's floods or drought in Australia, tomorrow it wil be extreme weather somewhere else.... China, Russia, Indonesia.
If history is any indication the global economy and the USA in general will slide sideways for the next decade, if we use US stock prices as an economic proxy. Just compare previous historic corrections and resulting decade long stagnation periods and see the mediocre, flat and sideways movements of stocks.
All in all, there are still many risks in 2011 that need to be taken into consideration when planning as well as opportunity searching and design.
I was right about my prediction in January last year**, that earthquakes (Haiti), volcanos (Iceland) and methane burps (which caused the BP oil spill in the Gulf of Mexico) would be the chief newsmakers of 2010, but I hope I'm wrong about Russia triggering a Double Dip Recession in 2011 or 2012. It won't be a pleasant sight.
( **See Predicting or triggering earthquakes, volcanoes and other natural disasters and January 2010 --an active month for natural disasters-volcanoes, earthquakes, methane burps )
Related:
When will the Recession End? Part 133 Why Russia doesn't fit into BRIC
<http://smarteconomy.typepad.com/smart_economy/2010/12/when-will-the-recession-end-part-133-why-russia-doesnt-fit-into-bric.html>
Walter Derzko
It ain’t the things that you don’t know that get you, it’s the things what you know for sure, that ain’t so”--Mark Twain
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