2009-08-22 Goodbye to All That.pdf

8/10/2019 2009-08-22 Goodbye to All That.pdf

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GoodbyetoAllThat

ADiapasonResearchReportbySeanCorrigan

Tangible

IIIIIIdeasAug/Sept

2009


2/15

Goodbye to All That Aug/Sept2009

_____________________________________________________________________

Diapason Commodities Management

Lausanne & London1

GoodbyetoAllThat

Ifsilverandcoinconstitutewealth,willincreasingthequantityof[them]resultinprosperity?Inthecaseofasingle

family...yes.Butifweconsidertheentireempirethennothingcouldbefurtherfromthetruth.Thegreaterthequantityof

silverandcoin,themoreexpensivegrainandclothbecomeandthegreateristhedearththatensues.Thus,inearlierages,

rulersfearedthatfuturegenerationswouldwantnotfor[money]butratherforgrainandcloth.

XuGuanqi,TheOmnibusofHusbandry1640

Thoughevidenceofprocessesofexchangecanbe

foundfarbackinthearchaeologicalhistoryof

mankind,testifyingtoanearlyrealizationbyour

speciesofthesignificantmutualbenefitswhichit

confers,therehasalwaysbeenaparticularglamour

attachedtothoseengagedinforeign asopposedto

domestictrade:

from

Marco

Polo

and

the

Venetians

tothemerchantadventurersofStuartEnglandand

itsrivalsintheDutchRepublic;fromthesemi

mythicalPytheastheMariner,viatheoutright

fictiveSinbadtheSailor,toJamesOnedin(akindof

mercantile,VictorianCaptainKirktothosenot

familiarwiththesingulardelightsof1970sBritish

TV).

WorldTrade1991todate

$3,000

$7,000

$11,000

$15,000

$19,000

Jan91

Jan93

Jan95

Jan97

Jan99

Jan01

Jan03

Jan05

Jan07

Jan09

Volume2000$

Value

Figure1:ASplendidExchange

Similarly,oneofthedefiningfeaturesofthelate

Boomwasthesingularlyrapidexpansionofworld

tradeitencompassed.ThiswaveofpostColdWar

globalization toemployatermthatthe

MetropolitanMarxistsandEastSideecowarriors

aliketendtoregardasapejorativesawtrade

volumesacceleratefromthecompoundannualrate

of~6.3%recordedinthepreviousbusinesscycle

(comprisingtheperiod19912001)totheimpressive

8.3%registeredbetweentheendof2001andthe

thirdquarterof2007,allthewhilecombinedG7

GDPchuggedalongupwardsatanunchangedand

littlevaryingtrendrateof2.5%preannum.

Ofcourse,

to

leave

off

the

tale

at

such

ahigh

level

of

aggregationwouldbetomissoneofitsessentials

viz.,theriseoftheemergingmarkets asthetaipans

oftheWesternMNCsandtheireagerlocal

compradorespouredevermoreinvestmentintoshiny

newfactoriesandkeyboardclackingsoftware

houses,allalongtheSouthEastAsianlittoraland

deepwithintheunceasingbustleoftheregions

teemingmegacities.Thus,whiletheadvanced

economiessawtwowayvolumesincreaseby6.1%

and6.8%CARinourtwoperiods(stillnotably

faster

than

their

overall

growth),

their

less

developedcounterpartsuppedtheirowntempo

fromalively7.1%allegrotoagalloping13.2%presto.

Invalueterms,thedifferencewasstriking,too,with

EMtradeswellingfromjustmorethantwofifths

thesizeofthattakingplaceintheadvancednations

toslightlymorethanfivesixthsofabenchmark

itselfexpandedmorethanfourfoldintheinterim.

Inseemingtestimonytothegreaterefficiencies(and,

hence,thehighersocialwelfare)beingachieved,

overalltradeprices(onceweadjustforchangesin

theTWIoftheUSdollarinwhichtheyarequoted)edgedupatbarely0.3%perannumoverthefirstof

theseperiodsbeforequickeningmodestlytoastill

insubstantial1.5%p.a.duringthecourseofthe

second.


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Lausanne & London2

WorldTraderegimesduringthecycle(CAR%)

(25.0)

(15.0)

(5.0)

5.0

15.0

199101 2002S07 S07J08 J08TD

WORLDVOL

ADVVOL

EMVOL

TWIPRICE

Figure2:TheWheelsofCommerce

Again,bysplittingthedatadownalevelwearrive

atanotherinstructiveresult,forthepriceof

manufacturedgoodswereessentiallyunchanged

during

the

first

eleven

years

(actually

falling

at

an

0.3%p.a.rateafteragaintweakingforvariationsin

theUSD)beforeedging0.9%ayearlowerinthe

latterfiveandahalf.Notethatherewehaveyet

moreproofthat,forallthemainstreamangst,

deflationi.e.fallingpricesarenotinconsistent

withgreaterprosperity.

Meanwhile,commodityprices(usingtheIMF

measure)gentlyrose0.7%ayear(comprisedof

1.8%energy;0.5%industrialmetals;0.8%

comestibles)beforeour2001watershedandroared

awayata12.7%(17.8%energy;11.8%metals;3.9%comestibles)clipafterit.

WorldTradepriceregimesduringthecycle(CAR%)

(70.0)

(35.0)

0.0

35.0

70.0

199101 2002S07 S07J08 J08TD

Food&BEV

IndMETAL

ENERGY

MfGGoods

Figure3:TheBullandtheBear

Whattheperceptivereaderwillrecogniseinthis

constellationofdatathatadecidedshiftinrelative

pricestookplacewithinthechangeinabsolute

levelsandwherethesewereexpressedacross,

ratherthanwithin,bordersalsointhetermsof

tradebetweentheresourcerichandthefactory

fertilewiththeformersexportsofcoal,cotton,and

copperbuyingafargreatervolumeofthelatterscars,cranes,andCNCmachinetools.Indeed,asthe

tradewindsbleweverstrongertheyalsoveeredto

blowdirectlyinthefacesofAmerica,Japan,Europe

andindustrializedAsiawhilefillingthesailsof

EasternEurope(principallytheFSU)andtheGulf,

butalsotheoreladenAgritopiaofLatinAmerica.

From19912001,USexportprices,forexample,

outpacedthoseofimportsbyatotalof6.7%,while

thewhatendedbybecomingtheEurozonegaineda

1.9%advantage,

Asia

suffered

a2.3%

headwind

and

commoditydeprivedJapanrowedmanfullyintoa

stiff9.9%adversebreeze.

Relative tradeprices(Mfgdgoods/NonenergyCMDTYs)vChinese2waytradetotal

(6mma,blns)inverted

50.0

70.0

90.0

110.0

Jan91

Jan94

Jan97

Jan00

Jan03

Jan06

Jan09

20

60

140

220

MfG/CMDTYexNRG

China(rhs)

Figure4:ChangingTermsofTrade

However,bythetimewehadreachedthelate

summerof2007andtheloweringfinancialstorm

wasabouttodeepenandintensifyintowhatwe

thencalled

Hurricane

Cassandra

all

were

batteningdownthehatches.TheUSlostseawayto

thetuneof9.9%,theEurozonedrifted3.9%,Asia

wasborneawayby13.8%,andJapanran,storm

riggedandbatteneddownamassive29.3%.


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Lausanne & London3

Toanticipatetherestofourstoryalittle,theperiod

fromSeptember2007onwardwascharacterisedby

twomaintrends:themovebytheleveragedHerd

tobuycommoditiesenmasseasameanstoflee

collapsingcreditandmoneyprintingcentralbanks

(ashiftinstigatedwithinaweekoftheFedfirst

cuttingthediscountratecut,anoffcalendarmove

accompaniedbyitsfirstforayintoprovidingtermfundstoitsmemberbanksi.e.intoimplementing

BlackhawkBenandTwinHueyTimsfinancial

oligarchsearchandrescuemission) andthemove

fromJuly2008,whenthatsameHerdran,lemming

liketowardsandthenoveracliffcalledLehman

AIG,tramplingunderfoottheprovisionofeventhe

mostbasicformsofworldtradecreditinthewild,

headlongstampedetosellout.

Inthelast,frenziedrunup,thetrendsoutlined

aboveintensified

(with

the

exception

of

trade

volumeswhichhadalreadyslowedtoacrawlinthe

bynowailingadvancedeconomies).Tradevalues,

however,soared30.8%annualizedinUSDasprices

shotup24%,ledbyaneardoublinginthedollar

priceofenergy(+98.2%), a44.2%riseinfood&

beverages,andratherbelatedlya17.1%increase

inmanufacturedgoodsastheinflationary

pandemicclaimeditslastvictims.Notwithstanding

thislast,furthertermsoftradelossesbythe

industrialnationswerecounterbalancedbymodest

gains

for

Latam

and

CEER

and

a

monster,

36.8%

surgefortheMiddleEast&Africa.

RateofchangeofWorldTradeVolumevCCI,6mMAd6m%annualized

30.0

20.0

10.0

0.0

10.0

20.0

Aug91

Aug93

Aug95

Aug97

Aug99

Aug01

Aug03

Aug05

Aug07

Aug09

60.0

30.0

0.0

30.0

60.0

TradeVolume(lhs)

CCI(rhs)

Figure5:TheDrivingForce

Conversely,thesubsequentcollapsefromthebase

ofwhosesmokingimpactcraterweareonlynow,

tentatively,beginningtoclimbsawtradevolumes

slumpaneyewatering22%anddollarpricesdive

almost24%(withenergyoff65%,metalsoff51%,

food/bevoff28%,andmanufacturedgoodswhich

thereforedoubledinrelationtocommoditiesinthe

spaceofjusttenmonthsbringinguptherearwith

amere15%slippage).

Totakeaslightlydifferentperspectiveonthis,take

thecaseofoneofthegreatcurrentaccountsurplus,

exportingnationsGermany.Shortlyafter

Reunification,inthedepthsofthetwinERMcrises,

exportsamountedtoaroundjustoveraquarter

andtwowaytradejustoverahalf ofprivate

domesticGDP.BytheheightoftheBoom,inthe

fatefulsummerof2008,thatproportionhadsoared

to65%forexportsaloneandto120%forimports

andexportscombined.Clearly,theMittelstandhad

beeninveigled

in

the

interim

into

becoming

very

highlygearedtothehealthandcreditworthinessof

itsmanycrossborderandoverseascustomers.

GermanTradedependence:Exports&Importsas%ofprivatedomesticGDP

25

50

75

100

125

Sep93

Sep96

Sep99

Sep02

Sep05

Sep08

Import%

Export%

Figure6:AllinthesameBoat

Overallbusinessrevenuesinthecountry,sothe

BUBAtellsus,rosejustover30%fromtheendof

2001toQIII07but,astheydid,theybecameheavily

skewedtowardsexportsales(up49%)ofcapital

(+46.8%)andintermediategoods(+56.2%).Thelast,

desperateheavetothebrinkonlyaddedapercent

ortwotoeachofthesetotalsbeforeDerUntergang

andasickening22.3%overallfall,ledbya28%

dropinthosesame,formerlyflyingofftheshelves

categoriesofexportedcapitalandintermediate

goods.Inessence,thecrisishasservedtowipeout


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Lausanne & London4

whatremainscloseto90%ofalltherevenuegains

madeinthecircasevenyearstothepeak,foraloss

offiveyearsworthofprogressevenaftertaking

intoaccountthelateSpringrebound.

GermanRevenuesyoy%(2000=100)

30.0

20.0

10.0

0.0

10.0

20.0

Jan91

Jan93

Jan95

Jan97

Jan99

Jan01

Jan03

Jan05

Jan07

Jan09

Capital

INTMed

ConsDUR

ConsNonDUR

Figure7:

or

all

eggs

in

the

same

basket?

Thesheerviolenceofthisreversaloffortune

somethingakintothesudden,mortalswoopofa

meltedwaxIcarusafterlonghoursofpatiently

spirallingheavenwardonthethermalsrisingoffthe

Cretancoast hasperplexedeveryonefromHer

BritannicMajestyandherhaplessFirstMinisterto

thefallenidolsofinvestmentpractice,likeBill

MillerandBruceBentyetwhileitspatternmay

beacomplextangleofcircumstances,thereare,in

truth,onlyafewbasicthreadsintheweave,allof

themveryfamiliartothosewithanAustrian

perspectiveonthecase:fiatmoney,gross

governmentinterferencewithmarkets,andtheavid,

rentgrubbingirresponsibilityitfostersineveryone

involvedfromthemostprominentfinancialflesh

eatertothemostpathetic,ForgottenMan

structuredproductstuffee.

But,beforeweproceedwiththecaseforthe

prosecution,pleaseallowusanopeningpreamble

beforethecourt.Afterall,itcannotbethattrade

itselfis

the

culprit

in

the

Aristophenean

comedy

to

whosecastwehavebeenforciblyrecruited.Though

routinelyvilifiedbycrassanticapitalistsand

mindlessgreenworshippersoftheNobleSavage,

tradeisbutaspecialcaseofexchangeand

voluntaryexchangeis,byitsverynature,asource

ofgreatersatisfactionbothtobuyerandseller.

Tradeisanexpressionofthedivisionoflabour.It

bringsthebountyofspecializationoffunction.It

fostersinternationalamityandbroadensmental

aswellasphysicalhorizonsandpromotesa

sharingofideasandtheadoptionofbestpractice

Oratleastitwouldwereitnotsogrotesquely

interferedwithonsomanylevels.Forinstance,thefundamentalpurposeofexportinggoodsistouse

themtopurchasethoseothergoodsthoseimports

whichliehigherinthesubjectivevaluationsofthe

exporter.Itistruethatthesellermaynotwishto

takedeliveryofthosegoodstoday,butmayrather

wishtousetheproceedstolayinaclaimtogoods

tomorrow(somatchingthetradebalancewithan

equalandoppositeentryinthecapitalaccounts),

butthisshouldbeundertakenbytheindividual

himselfashejudiciouslyandcarefullyassessesthe

potentialfuture

benefits

of

his

own,

personal

investmentagainsttherisksofalossofhishard

earnedsurplus.

Itshouldnotthereforebeoverlyweightedtowards

makingsalesforsalessakebyforgoingimmediate

recompensefromdeadbeatcustomerswhowill

onlybeabletomaketheirdeferredrepaymentif

theirlowskillgamblesintheassetmarketshappen,

fortuitously,tobearfruit.Itshouldnotbe

predicateduponasolvencysappinggenerationof

inflationary

credit

by

state

supported,

fractional

reserve,casinobanks.Ontheonehand,itshould

notbecomesubornedbythetired,old,tatist

policiesofMercantilismwhichnotonlymistakes

moneyforwealth,butconfusesfiatmoneyfor

moneyproper! norshoulditplaytheroleof

milchcowtoarrogantsuperpowers,lazilyand

deceitfullydrawingacoverttributefromthe

laboursofothersthroughtheircynicalabuseof

theircurrenciesreservestatus.

Yet,itistooeasytoshowjusthowdeeplysuch

perversionshaveindeedtakenhold,turningtheexpansionoftradefromaboonintoacurse;from

anexpressionofentrepreneurialadventuretothe

mostglaringsymptomofthatinappropriateand

selfdefeatingoverextensionoftheproductive

structurewhichweAustriansrecogniseasboththe

resultoflaxmonetarypolicyandtheprimarycause


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Lausanne & London5

oftheinevitableBustwhichfollowsthecheap

proseccoglamouroftheBoom.

JPNO/SMachinery,GermanForeignFactory&USNonDEFAircraftOrdersv

WorldTrade

40

140

240

340

Jan91

Jan94

Jan97

Jan00

Jan03

Jan06

Jan09

0

25

50

75

100

125TRDVolume(lhs)

TradeValue(lhs)

USXDEFAIR(rhs)

JPNMachOrd

(rhs)

GERFactOrd(rhs)

Figure8:MalinvestmentDefined

WorldTradevMining,Machinery&Marineequities

(rescaled,relativetoMSCIWorld)

80

130

180

230

280

330

Jan99

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

50

150

250

350

450

TRDVolume(lhs)

TradeValue(lhs)

MINE(rhs)

MARINE(rhs)

MACHINE(rhs)

Figure9:MalinvestmentReflected

Forinstance,byconsideringtheIMFdataon

foreignexchangereserves,wecanseethatthese

grewmorethansevenfoldbetweentheendof1991

andSeptember2007,almostdoublingfrom22%of

globaltradeto43%alongtheway,orgaining$1for

every$2ofextratradeflows.Addintheslightly

woollyestimatesofseparatesovereignwealthfund

gains

(largely,

but

not

exclusively,

sourced

from

commoditystabilizationprogrammes)whichthe

BankofSpainthinkspassed$100billionsometime

in2000,onitswayto$2.4trillionin2007and

perhaps$2.8trillionatthe2008highwatermarkand

wearewellonthewaytofinancingfullythree

quartersofthewholeincreaseintradeandhence

themountainousimbalancesinthismostdistorting

ofmanners.WorldForexReserves&SWFAssets,blns(IMF,BIS,BdE)

vMerchandisetrade(CPB,WTO)

$0

$6,000

$12,000

$18,000

Dec80

Dec84

Dec88

Dec92

Dec96

Dec00

Dec04

Dec08

$0

$6,000

$12,000

$18,000

SWF

USD*

Other

Globaltrade

TotalexG3CB

Figure10:GivemebackmyMarbles!

Eventhisdoesnottellthefullstory,forthiscycle

hasalso

been

magnified

by

the

unintended

workingsofthesinglecurrencyinEuropewhere

foreignexchangereservesbydefinition,donot

enterthepicture,thoughdeficitswithouttears

certainlydo.Forexample,couldyouimaginethe

circumstanceswherebyaprofligateSpaincould

passthecyclecasuallyrackingupahalftrillion

dollarsworthofcurrentaccountdeficits,wereit

notnestlingunderthepetticoatsofitscomplaisant

Teutonicneighbourstothenorth,eacheagertodo

businesswithitscowboypropertytycoonson

nothingdown

and

easy

terms

thereafter?

Trulywearewellintothebusinessofkeeping

JacquesRueffstickgrantingtailorhappyor,to

switchtohisother,trenchantsimile,wehave

elevatedthechildishgameofmarbles(under

whoserulesthewinnerofeachroundreturnshis

gainstothosewhoearliersufferedtheirloss)tothe

statusofaSuperbowl,anAshesTestmatch,anda

Formula1WorldChampionship,allrolledintoone.

Thereasonthishasbeensoperniciousisthatithas

circumventedtheverybusinessofreserve

managementandsohasturnedwhatshouldbethe

semiautomaticselfequilibrationoftheclassical

specieflowmechanismintoapositivefeedbackof

everwidercurrentaccountgaps,evermore

profoundmisallocationofcapital,evermore

inflation albeitonemaskedintermsoffinished


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Lausanne & London6

goodprices,aswehavealreadyseen,bythesupply

sideimpactofshiftingproductiontowherelabour

ischeapandthelocalpolitburoishappytoconnive

withitsbuddiesinthestateownedenterprisesto

providenearcostlessfinance,inexpensiveland,

exporttaxincentives,andevensubsidisedutilities

toaproducerwhoisthereforerelativelyindifferent

tothepricehehastopayforhiscommodityinputs(rememberthoserelativepricetrendswediscussed

earlier).

Inafairsystem,basedonaproper,hardcurrency,

thecountryrunningadeficitsettlesupbylosingthe

bulliononwhichitscirculationisbased:domestic

creditthencontracts,pricesfall,activityshiftsto

importsubstitution,andcompetitivenessishence

restoredanadjustmentquickenedbythefactthat

equalandoppositechangesaretakingplaceinthe

surpluscountry.

The

monetary

sin

of

the

West,

however(toemployanotherRueffism),isthatwhile

thesurpluscountrytodayusesitsexcessforeign

exchangereceiptstoexpandthestockofhigh

poweredmoneyathomeandsotriggersitsown

productionlengtheningcycle,itsimultaneously

loansthosesamereceiptsstraightbacktotheir

creators,preservingtheircreditpyramidinturnand

thusencouragingthemtocontinuetheirgrossover

consumption.

Adding

to

the

dangers,

the

deficit

nation

central

bankseesthelowpriceimportsandartificially

stabilizedexchangerateashelpingachieveits

monophthalmicgoalofsuppressinginflation

whichbeingtypicallymainstreaminitsanalysis

itimaginestoconsistonlyofrisesinitsfavourite

(usuallypared)consumerpriceindex.Itisthus

perilouslypredisposedtorunningfartoolooseat

thesametimeasitsforeigncounterpartisrelaxing,

alldespitetheobviouswarningsignwhichthe

tradedeficititselfconstitutes,namely,thatdemand

hasalreadyoutstrippedthepotentialfordomestic

outputtomeetit.

Inevitably,intheoverfinanced,speculativemilieu

inwhichwelive,theexcesscreditthuscalledinto

existencesoonspillsoverintoassetmarkets(whose

inordinaterisedoesnotatallfigureinthewholly

navepolicysettingsbeingfollowed)andsobegins

thatunstablespiraloffinancialconvectionwhich

seesnotionalnetworthincreasingandeffortlessly

generatingthefreshcollateralwhichwillformthe

basisforyetmoreassetpriceboostingloansinthe

nextiteration.Temptedbythecapacitytoengineer

illusoryandprematurelycapitalisedprofitsin

suchaconducivecurrent,theevermorehubristic

bankersbynownotsomuchonCristalRoedererasoncrystalmeth(metaphoricallyspeaking,of

course)soonallowtheirhiredin,mathematical

idiotsavantstoferretouthighlyexplosivewaysto

cheatshareholdersandregulatorsofduedisclosure

andsoarrangetoheapaPelionofnonlinearity

uponanOssaofoverleverageandunder

capitalization.

Inaworldwheretheguidingbureaucratsthink

theyshouldnotpresumetoknowmorethana

marketthey

themselves

have

already

vitiated

beyondrepairandwhereallfurthercompensatory

actionisprecludedinfavourofanindulgentaunts

JacksonHoleintentiontowaituntilthepartyiswell

andtrulyoverbeforemoppingupthemess,the

MastersoftheUniversewillhavelongsince

workedoutthattoobigtofailequatestobonus

chequestoobigtobounceandsothebandplayson.

Insuchadelinquentsystem,evensoaring

commodityprices,farfromdampeningtheardour

of

those

forking

out

at

the

petrol

pump,

can

come

insteadtoinflamethepassionsfurther.Howcould

thishaveactedasataxwhenonecouldslakethe

thirstofonesshiny,new,highLTVSUVby

drawingonahomeequitylinebeingrefilledjustas

quicklyasthetankbythetheoreticalappreciation

inthepriceofoneshome?Whywouldhigher

priceshavechokedoffdemandiftheyentailedno

greatersacrificeofincome,simplyafurther,

painlessrecoursetomoreborrowing?

Thus,astheBoomprogressed andasits

undoubted,realsectorimpactmeantenergyusebegantoclimb,too priciercrudeimpliednothing

moredifficultthananotherroundofWestern

borrowingtomeetitsimportbills,andsoled

straightawaytogreaterpetrodollarreceiptsnotso

muchattheexpenseof,butinadditionto, the

outlaysbeingmadeoneverythingelse.Thelow


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Lausanne & London7

absorptionpotentialinmanyoftheproducer

countriesonthereceivingendofthisresultedin(a)

lessandlessdisciplinedoutlaysbeingmadeon

(usually)stateinspiredwhiteelephantsandsky

scrapingOedificecomplexesallhorribly

unproductivesquanderingsofcapitalmeans and

(b)billionsmorechildishmarblesindiscriminately

beingreturnedtosourcesoastoensuredollartrackinglocalcurrenciesdidnotsufferany

untowardpressuretoappreciateawayfromtheir

adoptedyardstick.Atthepeakof85.4million

barrelsadaybeingconsumedandsellingfor$145

each,wewere,afterall,brieflytalkingofaneedto

disposeofsomethinginexcessof$1/2billion

dollarsanhourjustintermsofoil.

And,yes,inthislast,madfewmonths,evenasthe

icebergloomedlargeunderabowcuttingcarelessly

throughthe

treacherous

seas

surrounding

it,

speculatorsdiddrivethecontracttoofar,toofast.

But,werethiswholemadmonetarypolicynotin

place;hadtheFednotbeenslashingratestoa28

yearlow,negativereal3%;hadthedollarinwhich

commoditiesarepricednotbeentacitly

encourageddowntoanalltime,tradeweighted

low;werethebanksnotbothfreedfromall

effectiverestraintandmadefartooconfidentin

theimpliedsupportofferedthembythepublic

purse;

were

governments

everywhere

not

frustratingthepricemechanismbyencouraging

consumptionthrougharaftofsubsidies,tax

breaks,andwelfarepayments(agoodly

proportionofwhichwerethemselvesfinancedin

aninflationarymanner);wereperceivedshortages

ofgrainandfertilizernotbeingexacerbatedby

panickyexportbansandemergencyimport

tenders,doyoureallythinkthatoilandtheothers

couldeverhavebecomesuchaonewaybet,that

suchleveragecouldhavebroughttobearonthem

inmakingthatbet,orthattheywouldhavestarted

theirfinal,screamingshortsqueezefromsohighabaseastheydid?

No,themanypoliticalWitchfindersGeneralneedto

peermorecloselyinthemirrorwhentheyengagein

theirhuntforcandidatestosendtothestakeforthe

sinofbeinginleaguewiththeforcesofdarkness.

Now,ifallthepiecespsychological,institutional,

andpolitical seemtohavebeeninplacetohosta

globespanningorgyofmalinvestment,withthe

revellersfewremaininginhibitionsdispelledbythe

headynarcoticofirresponsibleoverconsumption,

and,hence,ifwewereheadedforwhatwas

perhapsTHElargestandmostsevereBoomBustin

history,wewouldexpectdear,oldfriendCredittohaveplayedaroleinallthis.

Perhapsthequickestandcleanestwaytoshowthis

wasindeedthecaseistolookatthebehaviourof

theBISseriesformembercountrybankingbalance

sheetsovertherelevantperiods.Indeed,ifwe

considerthatinflationi.e.excessmoneycreation

is,thesedays,primarilyanincreasein(demand)

liabilitiesatbanks,itisinstructivetolookatthe

explosionintheirsize(here,strictlyspeaking,we

haveperformed

our

calculations

on

the

other

side

ofthebalancesheetforconvenience,butthe

differenceisnotsignificant).

BISBankAssetInflation

$0

$14,000

$28,000

$42,000

Sep78

Sep82

Sep86

Sep90

Sep94

Sep98

Sep02

Sep06

Creditdoublingsandcompoundannualrate:

Sept79Dec83 41/2yrs 18.5%

Dec87 4 yrs 19.2%

Jun97 91/2yrs 7.2%

Sep04 71/4yrs 9.8%

Mar08 31/2yrs 21.7%

Figure11:DoubleandQuits

Inthe3yearstotheMarch2008quarterlypeakof

$40trillion,totalbankingclaimsgrewvirulentlyat

a~22%compoundannualrate,achievingthefastest

nominaldoublinginathreedecadedataseries.

Thoughittookawhileforconsumerpricesto

respond,ifyouwantedinflation(properlydefined),

youcertainlyhaditinspadesgoingintotheCrash!

Comparingtherateofcreditextendedtoonshore

nonbanks(i.e.toafirstapproximationofthereal

economy)inthevarioustimesliceswehave


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Lausanne & London8

identifiedwiththedifferentregimesabove,we

achieveanothernotableconsonance.

Intheperiod199101inclusive,BISclaimsrosea

compounded6.7%ayearwhiledollartradevalues

grewby4.6%p.a. volumesby6.3% asprices

eased.DuringoursecondphasetoSeptember

2007claimsgrowthacceleratedto19.7%ayearwhile,youmayrecall,tradevaluesspedupto

17.1%withvolumegrowthof8.3%nowbeing

accompaniedbythefirstsignsofdisruptioninthe

formofpricesrising7.1%annually.Whenthings

wentballisticoverthenextthreequarters,credit

growthhitapeakof25.1%p.a.,tradevalueshurtled

skywardata30.8%annualpacewithominously

pricegainsof24%farsurpassingabadlyfaltering

volumeincrementof4.8%.Finally,astheBubble

thatBroketheWorldburst,bankclaimsdropped

17.3%and

trade

plummeted

~40%

split

fairly

evenly

betweenavolumecontractionandapricedecline.

BISClaimsonOnshorenonbanksvTrade(CAR%)

40.0

20.0

0.0

20.0

199101 2002S07 S07J08 J08TD

BISCredit

TRD$Value

TRDVolume

TRDPriceIndex

Figure12:TheBubblethatBroketheWorld

Nowitisundoubtedlytruethatevenahealthy

extensionoftheproductivestructureespecially

onegrowingverticallyupthroughlayersof

specialisationandoutacrossbordersislikelyto

callformorecredit(thoughnotnecessarilymore

moneywhichisacrucial,ifoftenoverlooked,

distinction).Simply

put,

amanufacturing

company

whichusedtoperformitsaccountsinhousewould

havegivenrisetofewerclaimsthanonewhichnow

givesthecontracttoaBPOoutfitinBangalore.

WorldTradePrices&Volumes vBISClaimsonOnshoreNonBanks(YOY%)

20.0

10.0

0.0

10.0

20.0

30.0

Dec91

Dec93

Dec95

Dec97

Dec99

Dec01

Dec03

Dec05

Dec07

20.0

10.0

0.0

10.0

20.0

NFinA(lhs)

TradePX(rhs)

TradeVOL(rhs)

Figure13:CreditandDebit

Itisalsowellnighimpossibletountanglethe

virtuousprocessofmakingexantesavingsoutof

currentincomeserveascapital(whetherofthe

fixedor

circulating

variety)

in

order

to

facilitate

moreefficientandmoreprofitableproduction

processesandthedeviantshadowofconjuringup

suchcapitalmeansoutofanunbacked,banking

bookentryandthenpointingtothewhollyexpost

buildupofdepositstowhichitgivesriseasan

exampleofaglobalsavingglut,ratherthan

recognisingitfortheinflationarycorrosionof

valueswhichitreallyrepresents.

Thus,oneithercount,tohopetorenderarigorous

quantitativereckoning

of

the

cumulative

danger

beingdoneiswhollyillusory.Butthoughtheblind

empiricistswhoruletheworldofeconomicsmay

notwishtoadmitit,aworkablequalitativeanalysis

isnolessachievablethanisasounddiagnosisgiven

toapatientbyafamilydoctor,longbeforethe

resultsofthepathlabandCTscannerhavebeen

received.

So,whenweseeimbalancesbuilding,perspiration

freeprosperitybeingacclaimedbyallasa

birthright,theregulardeliveryofoutlandish

investmentreturnsamiddepressedinterestrates

andcreditspreadsandwhenwestarttoseereal

sideactivitygaininspeed,accompaniedbymore

andmoreovertpricerises,wecansurelynotavoid

drawingtheglaringconclusionthatweareheading

forawreck.


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Lausanne & London9

Incidentally,itisatenetofAustrianBusinessCycle

theorythattheendemicdiscoordinationof

entrepreneurialplansandconsumerpreferencesto

whichthecreditexpansionleadsapproachesits

endgamewhentheurgetoenjoythehigher

monetaryincomesbeingpaidoutsoliberallyeffects

anadverseshiftinthematrixofrelativefactorand

endsellingpricesuponwhichthebusinesscaptainshadbeenplanning,sojeopardisingnotonlytheir

profitability,butoftentheirveryphysical

attainability,too.Sometimes,howeverespecially

duringsupplysiderevolutions(howevershakily

founded)whenpricesseemmoresubduedthan

theyarewonttodo,oneneedstoknowwhereto

lookfortheevidence.

Infact,thoughthepeakmonthlyvaluerecordedin

July2008forOECDCPIoflessthan5%was,byall

recenthistorical

standards,

unexceptionable,

this

notonlyrepresentedthebiggestdeviationfromthe

trailingfiveyearnorm(andhence,effectively,from

theleveltowhicheconomicdecisionmakershad

becomeattuned)sinceatleast1975,butitalso

entailedthefastestaccelerationinendprices

(normalizedornot)intwodecades.

VariationofOECDCPI(100sigmasdivergencefromrolling5yrmean)

(720.0)

(360.0)

0.0

360.0

Dec75

Dec80

Dec85

Dec90

Dec95

Dec00

Dec05

(320.0)

(20.0)

280.0

580.0

880.0

YOY%(lhs)

d2YOY%(rhs)

Figure14:Timepreferencetriumphant

Back

at

the

very

beginning

of

the

year,

we

summarizedouroutlookbymootingthepossibility

thatmarketsmightbefooledbytheexpected

reboundfromthefreezinghellofwhatwecalled

theSnowballEarthepisodeoftheLEHAIG

collapseintoimaginingthatwecouldalsoavoida

moreprotractedLittleIceAgeofloweredprivate

entrepreneurialactivityafterthispartialthaw.

USSP500RealEarningsGrowthFactorviaBAAYields

(12.0)

(8.0)

(4.0)

0.0

4.0

8.0

Dec36

Dec46

Dec56

Dec66

Dec76

Dec86

Dec96

Dec06

Figure15:DiscountingaMiracle

Wealsoemphasisedthatduringtheprevioustwo

pricecollapsesin192021and193033once

moneybegantoflowintothesystemoncemore,

pricesof

risk

assets

and

commodities

rose

sharply

(especiallywherethelatterwerehelpedbythe

accompanyinggovernmentpoliciesof

stockpiling).Westatedasforciblyaswecouldthat

weexpectedthesametohappenagain,while

qualifyingtheremarkwiththegloomyobservation

thatsuchapricerisewasnottobetakenasasignal

ofareturntotheGildedAgeofstatusquoante.

USCreditqualityandBAAUSTbondspreads

90

215

340

465

590

Dec80

Dec84

Dec88

Dec92

Dec96

Dec00

Dec04

Dec08

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

BAAUST(lhs)

Chargeoffs(rhs)

Delinquencies(rhs)

Figure16:Cheap aslongastheypayup

Eightmonths

on

and

we

find

ourselves

with

BAA

yieldspreadsalmostbacktotheirthreedecade

normevenaschargeoffsanddelinquenciesare

goingstratospheric.Weseeasreportedstock

marketP/Esintripledigitsand,combiningthetwo,

wehaveanimplicitforecastoflongtermreal,risk

adjustedearningsgrowthwellinexcessofthe


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Lausanne & London10

previoustwospeculativepeaksin1987and2000

andcertainlywellbeyondthepointwhereanailing

economycaneverbeexpecteddeliversuchan

improvement.

RateofchangeofworldtradevolumevMSCIEMrelativetoMSCIWorld

30.0

20.0

10.0

0.0

10.0

20.0

Aug91

Aug93

Aug95

Aug97

Aug99

Aug01

Aug03

Aug05

Aug07

35.0

17.5

0.0

17.5

35.0

Traded6mmaann

d6MXEF/World (rhs)

Figure17:EMs CreaturesoftheTrend

Wefindemergingmarketsattheirbestrelative

levelssincetheTequilacrisisdespitetheir

elevatedtradeandvendorcreditdependenceand

wehavecrudeoilbackat$70/bblandfast

approachingfourhoursaveragewageswhereit

sisalreadybacktosecondoilshockleveldespite

verylacklustredemandandswellingstockpiles.

HoursworkedperBarrelofOil(rhs)&yoychange(lhs)

DubaicrudevUSprivatesectorearnings

0.50

2.00

3.50

5.00

6.50

8.00

Jan64

Jan71

Jan78

Jan85

Jan92

Jan99

Jan06

300.0

150.0

0.0

150.0

Figure18:TheToilforOil

So,is

it

business

as

usual

as

both

the

stock

pundits

andthecommoditysellsidespinnersmaintain?

Hardly,for,totakejusttheexampleoftheUS,an

economyreliantonvastprogrammesof

governmentandcentralbanksupport,wheretrade

volumesandmanufacturingsalesremainat56

yearlows;whereexenergyproductionlessvehicles

hasstuckatasixteenyearlow;andwherethereare

almosttenpeopleinthepoolofavailablelabour

foreveryprivatejobonofferisnotlikelysimplyto

joltoutofitsnightmarelikeBobbyEwingquitting

hisreveriesintheshower.

Ifyoudoubtthis,youhavenotonlynotbeenpayingattentionwhenwewerelayingoutthe

innerworkingsofadynamicnowirretrievably

broken,butyouseemtothinkthatbythrowing

mindbogglingsumsofmoneyattheproblem,

andbysubstitutingsubprimegovernment

borrowingforsubprimerealestateandsub

marginalbusinessborrowing,wecansomehow

unscrambletheomelettewhichoncewentbythe

nameofHumptyDumptyandsethimbackatop

hiswall.

No.Forwhilewecanmaintainthevolumeofcredit

byissuingnewdebtintheplaceofold(andnot

onlyhavetheworldsfederalgovernmentsbeen

performingprodigieshere,butsohaveinvestment

gradecorporatesastheybypassthebanksintheir

grabforthefruitsofallthatjuicyquantitative

easing),wecannotassumethatitwillfinancethe

sameactivities,employthesamepeople,and

generatethesamesalesandcriticallythesame

profitsasbeforetheworldfellapart.

USExtractiveindustry5yearcumulativereal&nominalcapitaloutlay(blns)

$0

$100

$200

$300

$400

$500

1933

1943

1953

1963

1973

1983

1993

2003

$0

$200

$400

$600

$800

Combined

Mining

Oil&Gas

Nominal$(rhs)

Figure19:TwiceBitten,THRICEshy?

Beassuredthatthereislittleobviousdeflation

aroundnotifyoudefineitproperly.Cashin


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Lausanne & London11

circulationandnonfinancialdemandliabilitiesat

banksaregrowingrapidlyinmostoftheworlds

majoreconomiesand,asaresult,theeagernessto

disembarrassoneselffromthatsuffocatingsurfeitof

moneybyswappingitforlessliquidfinancialassets

andclaimsonrawmaterialshasbeengrowing

apace.

USA,Eurozone,China&JapanRealM1YOY%,3mma

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan96

Jan98

Jan00

Jan02

Jan04

Jan06

Jan08

Jan10

CHINA

EUROZONE

USA

JAPAN

Figure20:ILOVEthesmellofnapalminthemorning

Thatithasnotyetdonemorethanbudgethe

variousbusinesssentimentindicesfromthesuicidal

depthstowhichtheyhadfallenisonlytobe

expected.Itisalongwayfromnotgettingany

worsetobecomingnoticeablybetterandthe

receiptofafew,nolongerdeferrablereplacement

ordersis

not

the

same

as

the

prospect

of

another

headlongrushtoafullandremunerativeuseofall

thatidledplantandequipmentwhoseghostly

creaksandrustlingscanstillbeheardonlytoo

plainlyinexecutiveboardroomseverywhere.

Instead,ofaproper,privatelyledrecovery,what

wehaveisghoulishlandscapewherethecreeping

socializationofzombiebusinessesisimpinging

furtheruponthefieldofactionofthegoodones.As

onetellingposterputsit,thebailoutculture

represents

a

particularly

twisted

form

of

interventionism:Fromeachaccordingtohismeans

toeachaccordingtohisinability.

Notonlyarethesocalledrescueprogrammes

clutteringuptheforestwithwholethicketsofdead

woodandtherebydenyingthevibrantsaplings

thelightandspacetheycouldsoreadilyexploitto

growbuttheyaremovingtheeconomyfurther

andfurtherdownapathwhereextremeregime

uncertaintyprevails:wherethecashisdistributed

notaccordingtothedictatesofconsumer

sovereigntyandentrepreneurialaction,butthrough

theshadowyworkingsofVitaminBeziehung

wherecashandfavoursaresoughtandacceptedfor

transitorypersonalandpoliticalendsinstead.

Itishardenoughtoplanproductionschedulesand

calculatereturnsoninvestmentwhenonemust

contendwithshiftingexchangerates,changing

consumertastes,andtheuncertainavailabilityand

varyingcostingofkeyinputs,butwhenyoualso

havetowonderwhetherapitilessfixerlikeRahm

Emmanuelconsidersyourchoicegoodforhis

Masterspollratings,orwhetherBritainsveryown

CardinalRichelieuBaronMandelsonofFoyand

Hartlepoolwill

decide

the

electoral

calculus

pertainingtoyourdeedsisfavourabletohis

particularclique,andthenyouhavetoworry

whetheryouoryourshareholderswillactuallybe

allowedtoenjoytherewardsofanyfuturesuccess

youattain,thetaskbecomesnotsomuchdifficultas

dispiritinglyunknowable.

Givensuchpessimism,thereaderstillsteepedin

themainstreammiasmaofeffectivedemandmay

beforgivenforwonderingwheretheinflationary

impetus

can

come

from.

After

all,

the

argument

goes,ifbusinessesarenotmakinganythingmore

thanthemostnecessitousofoutlaysandworkers

arenotbeingtakenbackonthepayrollinanything

liketherequirednumbers,therewillbenoone

eithercapableof,orwillingto,borrowandthe

stagnationwillthusbeselfperpetuating.

Notnecessarily.Fornotonlycanthegovernment

spendandborrowmoneyintoexistencebut,aswe

havealreadyseen,thecentralbankbuyproperty

titlesinanyconceivableamounttomeetits

perceivedneeds.Thusdeflationthesecondarydepression,ifyouwillcancertainlybeavoided,

butthatisaverydifferentanimalfromassuming

thismeansarestorationofthehealthofthatvibrant

andprofitableprivatesectoruponwhoseefforts

ultimatelyallmaterialwellbeingdepends.


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Lausanne & London12

Yousee,themistaketheAggregationistsmakewith

theirchildish,toiletflushmodelsoftheeconomyis

thatthemoneytheysummonintoexistenceisnever

neutralandwhileitmaynotbeabletopre

determinethelevelsoflongrunoutput,itcan

certainlygreatlyinfluenceboththecompositionof

thatoutputandthepricesatwhichitisdistributed.

Themorethestateitselfmakesthesedecisions,or

themoreitdelegatesthemtoitsmany,undeclared

GSEs suchasG(se)M,G(s)ECC,andGS(e),all

voraciouslysucklingatthepublicteattheless

efficientthriveattheexpenseofthemore;thelower

becomesboththelevelandthequalityofwhatis

produced,andthehigherthepricewhichischarged

forit.

Moreover,aworlddrivenbypoliticiansstrivingto

usethe

peoples

own

wealth

to

buy

their

votes

is

notonepredisposedtohighlevelsofforeign

penetrationofthehomemarketforthecompetition

soofferedistooinjuriousfataltotheirvocal

constituenciesofrentseekersandcorporatewelfare

queens.Thus,thedisruptionsufferedalongthe

containerroutesandairfreightcorridorsofthe

worldbythecollapseoftheforexbankcredit

commoditytradepathwayisunlikelytoreceive

muchofafillipfromthejacksinofficewhonow

wishtorunthingsfortheirownbenefit,theway

they

have

long

been

itching

to

do.

Thereare,asyet,onlyafewportentsofsuch

discriminationlikethecontroversialBuy

AmericanprovisionsortheodddiscordofBritish

jobsforBritishworkersbut,suchthingscan

easilycomeaboutviathebackdoorinthenameof

energy independence,orfoodsecurity(ameme

currentlythesubjectofabigpropagandapushfrom

theMinistryofTruthinOceaniaitself),notto

mentionthedevilsbargainthatwillbestruckifany

formofcapandtradecarbonlevyisimposed.

Already,inthatcontext,Germanyhasrailedagainstwhatitseesasthenascentecoimperialism

emanatingunderthisguisefromthelikesofFrance.

NowonderPaulKrugmanisanavidsupporterof

thescheme!

Inaworldwhere,forthemany,continuationin

businessisintimatelysubjecttopoliticalcaprice;

wherethehungerforthefundswithwhichto

maintainthepretenceoffiscalrectitudebecomes

ravenous;whereborders,ifnotactuallyclosed,are

certainlymademorecostlytocross;wheremore

andmorepeoplederivetheirlivelihoodseither

directlyfromthegovernmentorasemployeesoffirmswhosebiggestcustomerisLeviathan,itwill

notbetoodifficulttobringaboutanunpleasantmix

ofhighprices,poorcustomerservice,andanaemic

entrepreneurialwill.

Figures21a&b:ProportionofGovernmentworkersto

Private vRealWagesUK(upper);US(lower)

Indeed,the

poor

risk:return

conditions

of

high

costs,

governmentsponsoredcompetitorsandaless

profitdependent,butmoreovertlypoliticised,

workforce,meansthatprivatesectorwagesmay

wellbepeggedtoohighforaviablereturntobe

madeonthemintheselessexpansivetimes.The

chronicallyhighprivateemploymentwhichwould


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Lausanne & London13

betheresultofthiscannotfailtoleadtotheurgent

callforfurtherencroachmentsofthepublicsector

aimedatcuringyetanotherexampleofmarket

failure andforyetmoremonetaryquackmedicine

beingprescribedtotrytopricepeoplebackinto

workviainflation.

Beforeyouknowit,AlanGreenspanwillbedustingoffhisWhipInflationNowlapelbadge,angry

windmillmakerswillbepicketingtheHouston

ShipCanal,andWashingtonwillbefutilely

negotiatingpriceandwagecontrolstotrytostop

therot.

Whicheverwayitgoes,itwouldnotbewiseto

bankonareturntothekindofrelativelyfrictionless,

tradeledgrowthwesawoverthefourorsoyears

to2007/early2008.Politicalandsocialantagonism

arelikelytorise,nowthatthemorereadily

identifiablecost

cuts

have

been

enacted

and

the

moredifficultdecisionsregardingthescaleand

formofonesenterprisemustinsteadbetaken.

Despiterisingmoneysupply,profitsarelikelyto

disappoint,too,iftoomuchofitstickstothe

clammyhandsofthegovernmentanditsagents.

Themarketmayhavetosufferanastyboutof

disillusionbeforeitreconcilesitselftothefactthat

thehalcyondaysarelonggoneandthattheclockis

everywhere

ticking

toward

a

reckoning

with

the

governmentdebtmarket.

Withinsuchaframework,acoreholdingof

commoditiesstillmakessense(assumingthatthe

takingofsuchaprudentialstepisnot

anathematizedcompletely)asprotectionagainst

outrightinflationism,aswellasagainstsupply

disruptionsandthepitfallsoftheheightened

economicnationalismwecanforesee.Likeevery

otherinvestment,finalsuccessalsodependsverymuchontheentryleveloneachieves,sobuying

intothatnextroundofdisappointment,ifandwhen

itarises,wouldseemtomakeeminentsense.

If,bythen,wealsohavetopaythriceoverforT.

BoonePickensandAlbertArnoldGore,Jr., tomake

theirlootoutofsendingusbacktothefourteenth

centuryintermsofgeneratingthepowerneededto

runourmines,farms,andfactories,wecanalso

assumeanastyboosttoinputcostsallalongtheline.

Thosestillendeavouringtomakethethingswe

cannotbewithout andcommoditiesaresurely

amongthemwillnotbeslowtopassthosecosts

onwhenevertheycaninresponse.

SeanCorrigan,

ChiefInvestmentStrategist,

[email protected]


15/15


_____________________________________________________________________


DIAPASONCOMMODITIES

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