Global Correction

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"-Some Beijing hotels have cut rates 30% as demand for Olympics hasn't materialized

-Many two- to four-star hotels have cut their rates by 10 to 20% compared to May, June"

During the 18 months, Beijing hotel rates have multiplied by a factor of 5-10. The fact that the rates have softened 10-20% isn't too much of a hit for them. Following the Olympics, China will institute new taxes and regulations, and the resort won't be pretty. Too, that information has been well-known to many people for the past couple years. Your month-old predictions might come true.

[bingobongo]

this is too easy.........cambodia/LOS border issue and internal political strife........it will soon be time to short the baht and SET........

Thais clash in anti-government rally, 13 wounded

About 700 government supporters armed with wooden planks, axes and slingshots broke through a police blockade to clash with 150 unarmed anti-government demonstrators in the city of Udon Thani, 650 km northeast of Bangkok, television footage showed.

http://uk.reuters.com/article/latestCrisis...K22375820080724

[sonicdragon]

Hi Sonic - welcome back sorely missed.

I wonder if you could help me with a question I am confused about - GH (whose posts I also appreciate) gave this perspective (SIPP UK term Self Invested Personal Pension)

Do you have a view as to why cash, (in a SIPP) which is in such short supply, is not performing particularly well in terms of interest rates?

It's a curious point.

I was looking at the bonds various banks/building societies where offering a few weeks back - It is possible to get reasonable interest rates (not sky high) and oddly the interest rates for 9 month bonds were better than those for 12 months.

My conclusion on this is that the banks are playing a bet that money supplies will increase in the next 9 months. I also think they are playing something of a balancing act trying to get sufficient funds through the door without committing to the longer term liabilities that longer term bonds entail.

The conclusion I draw from that is perhaps the cash crisis is not as bad as it is made out to be.

--

Sorry I didn't respond to this until now. I'm not checking TV very often these days.

I don't think it's true that cash is in short supply and/or there is an excess demand for cash. Central banks are making ample liquidity avaialble. What has been happening is a contraction in credit - as a result both of banks being less willing to lend but ALSO because borrowers are less willing to borrow. This is one reason why traditional monetary policy instruments are not very effective at the moment. Bank have been less willing to lend in order to repair their balance sheets, as a short term measure, but ultimately the repairs will be effected by making profits - that is, borrowing at a low rate and lending at a higher rate and using leverage (albeit less than before) to enhance the process. So, while you might find some banks offering very attrative rates for deposit in periods of crisis (either general or specific to them), that won't be the the general case.

SD

[lannarebirth]

Yeah, that'll work. What could go wrong?

Another recent development is "selling" underwater leveraged loans to hedge funds. Say you have a leveraged-buyout loan on your books that's worth 80 cents on the dollar. You could sell it in the market and take a big writedown, or you can get some hedgie to buy it for 90 cents on the dollar.

That seems like a dumb thing to do, but it makes perfect sense, provided the bank also lends the hedge fund the money to buy the loans, at some suitably below-market rate of interest. The hedge fund gets a cheap bet on their chances of recovering more than they paid - and they put up hardly any cash of their own for the transaction so the returns are attractive for them - and the bank takes a smaller writedown, which boosts its profits or cuts its losses as the case may be, and gets some toxic waste off its balance sheet. Of course, it also borders on criminal fraud, so it needs the willing blindness, if not outright collusion, of auditors and regulators alike.

http://www.theglobeandmail.com/servlet/sto...PStory/Business

[bingobongo]

its over kiddies, the short covering on the DOW has ended, but there may be another bounce into the 11750 to 12000 range which would be the time to sell, as for the SET, forget about it, use any bounce to sell, 725 is the ceiling

once the olympics are over (which is already projected to be a financial bust ), its over for asia

Edited July 25, 2008 by bingobongo

[Paul MBMG]

its over kiddies, the short covering on the DOW has ended, but there may be another bounce into the 11750 to 12000 range which would be the time to sell, as for the SET, forget about it, use any bounce to sell, 725 is the ceiling

once the olympics are over (which is already projected to be a financial bust ), its over for asia

To be fair to UBS (who we usually knock), we were quite taken with a piece of their research that we read last month, which stated that China’s foreign currency reserves, which are currently the world’s largest, could be cut in half over coming years if grain prices were to double again from existing levels. Having until recently been a significant grain exporter, the China of 2010 is forecast to be importing the equivalent of 40% of US corn exports. Niels Jensen of Absolute Return Partners mischievously suggests that as the largest wheat exporters today comprise the US, Canada, Russia, the European Union, Kazakhstan and Australia, they might wish to set up between them an OGEC (an Organization of Grain Exporting Countries) to match the economic clout (and vested self-interest) of OPEC in oil. As Niels Jensen indicates,

“ …investors will increasingly differentiate between the ‘ haves’ and ‘have nots’ (in food production). And the ‘haves’ are those countries which control the world’s resources….few countries are net exporters of both oil and foods on a large scale. Come to think about it, it is less than a handful. And no Asian country is on the list.”

So who is on it? In the developed world only one - Canada. In the grey zone (emerging economics but not necessarily young and dynamic populations) perhaps two – Russia and Kazakhstan.

Amongst full on emerging economies? No-one today, although Brazil has the potential to turn itself into a winner and so does Africa, it if can sort itself out” which explains China’s preoccupation with the economic colonization of the ‘dark continent’ Maybe they really do know something that we don’t!

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

The Shanghai Composite Index, currently at 2,874 after a high of 6,124 only 8 months ago whereas commodity positions have prospered significantly. Mind you most commodities still look short term overbought despite easing off the recent highs - as we predicted in the coverage in Bangkok Post and The Nation at teh start of last month. All usual disclaimers apply - this is not to be construed as investment advice and no liabilities accepted etc....

[Naam]

once the olympics are over (which is already projected to be a financial bust ), its over for asia

what is your advice Bingo? to which non-asian country should we move and live when Asia sinks? i am quite worried!

[Paul MBMG]

once the olympics are over (which is already projected to be a financial bust ), its over for asia

what is your advice Bingo? to which non-asian country should we move and live when Asia sinks? i am quite worried!

Canada sounds better than Russia or Kazakhstan!!!

[Naam]

once the olympics are over (which is already projected to be a financial bust ), its over for asia

what is your advice Bingo? to which non-asian country should we move and live when Asia sinks? i am quite worried!

Canada sounds better than Russia or Kazakhstan!!!

we were considering Canada a few years ago. but the taxes put us off

[j_cheung]

once the olympics are over (which is already projected to be a financial bust ), its over for asia

what is your advice Bingo? to which non-asian country should we move and live when Asia sinks? i am quite worried!

Canada sounds better than Russia or Kazakhstan!!!

we were considering Canada a few years ago. but the taxes put us off

Not to mention, the CRA ("Canada Revenue Agency") had been interested in any offshore trusts held by its residents since '03 ...

http://www.ey.com/GLOBAL/content.nsf/UK/Ta..._12_DC_-_Canada

[Paul MBMG]

once the olympics are over (which is already projected to be a financial bust ), its over for asia

what is your advice Bingo? to which non-asian country should we move and live when Asia sinks? i am quite worried!

Canada sounds better than Russia or Kazakhstan!!!

we were considering Canada a few years ago. but the taxes put us off

Not to mention, the CRA ("Canada Revenue Agency") had been interested in any offshore trusts held by its residents since '03 ...

http://www.ey.com/GLOBAL/content.nsf/UK/Ta..._12_DC_-_Canada

not my field of expertise but there used tp be a 5 year shelter avaialble using an approved trust - is that still available?

[ace]

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

..................

Just a note of caution on commodities, my commodities ISA has suffered perhaps the most of all my ISAs recently. I believe I am being hit by a "double wammy": The companies share price seems to decrease on bearish market sentiment and commodity price volatility. This is invested mostly in mining companies. Might have just chosen the wrong fund though.....and bought less than 2 yrs ago.

[Paul MBMG]

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

..................

Just a note of caution on commodities, my commodities ISA has suffered perhaps the most of all my ISAs recently. I believe I am being hit by a "double wammy": The companies share price seems to decrease on bearish market sentiment and commodity price volatility. This is invested mostly in mining companies. Might have just chosen the wrong fund though.....and bought less than 2 yrs ago.

did you see our piece in the Bkk Post and The Nation at the start of June? - warning of a pullback in commodities before another buying opportunity

TBH I tend to think that commodities are so volatile and complex that inidvidual investors shouldn't manage their own commodity exposure - massive opportunity but huge risk and hard for individual investors to come out on top

[lannarebirth]

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

..................

Just a note of caution on commodities, my commodities ISA has suffered perhaps the most of all my ISAs recently. I believe I am being hit by a "double wammy": The companies share price seems to decrease on bearish market sentiment and commodity price volatility. This is invested mostly in mining companies. Might have just chosen the wrong fund though.....and bought less than 2 yrs ago.

did you see our piece in the Bkk Post and The Nation at the start of June? - warning of a pullback in commodities before another buying opportunity

TBH I tend to think that commodities are so volatile and complex that inidvidual investors shouldn't manage their own commodity exposure - massive opportunity but huge risk and hard for individual investors to come out on top

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Edited July 26, 2008 by lannarebirth

[Paul MBMG]

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

..................

Just a note of caution on commodities, my commodities ISA has suffered perhaps the most of all my ISAs recently. I believe I am being hit by a "double wammy": The companies share price seems to decrease on bearish market sentiment and commodity price volatility. This is invested mostly in mining companies. Might have just chosen the wrong fund though.....and bought less than 2 yrs ago.

did you see our piece in the Bkk Post and The Nation at the start of June? - warning of a pullback in commodities before another buying opportunity

TBH I tend to think that commodities are so volatile and complex that inidvidual investors shouldn't manage their own commodity exposure - massive opportunity but huge risk and hard for individual investors to come out on top

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

That's a bit strong but their expsoure should be managed as part of an actively managed strategy. Hot money in the sector now is scary but there are opportunities although I would always suggest that these be exploited on investors' behalfs by professionals rather than trying to do it yourself. Professionals will always look at every angle, futures, options, physical, equities, ETFs and CFDs - most private investors would struggle to find the time to work through this minefield.

[lannarebirth]

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

..................

Just a note of caution on commodities, my commodities ISA has suffered perhaps the most of all my ISAs recently. I believe I am being hit by a "double wammy": The companies share price seems to decrease on bearish market sentiment and commodity price volatility. This is invested mostly in mining companies. Might have just chosen the wrong fund though.....and bought less than 2 yrs ago.

did you see our piece in the Bkk Post and The Nation at the start of June? - warning of a pullback in commodities before another buying opportunity

TBH I tend to think that commodities are so volatile and complex that inidvidual investors shouldn't manage their own commodity exposure - massive opportunity but huge risk and hard for individual investors to come out on top

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

That's a bit strong but their expsoure should be managed as part of an actively managed strategy. Hot money in the sector now is scary but there are opportunities although I would always suggest that these be exploited on investors' behalfs by professionals rather than trying to do it yourself. Professionals will always look at every angle, futures, options, physical, equities, ETFs and CFDs - most private investors would struggle to find the time to work through this minefield.

It's not the hot money that's screwing up the commodities market it's the people that are pushing it as a "new asset class" and are allocating fixed percentages of their investment capital to it every month. They are long only, buy at the ask morons, that think commodities are similar to stocks. They are elephant sized walking through an ant sized market.

Commodities are a finite resource. Stocks are not. There is only a certain amount of commodities available each year or in some cases, ever. stocks on the other hand are infinite, capped only by the supply of bullshit and ink.

[Naam]

Commodities are a finite resource. Stocks are not. There is only a certain amount of commodities available each year or in some cases, ever. stocks on the other hand are infinite, capped only by the supply of bullshit and ink.

a good one LRB!

[lannarebirth]

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

..................

Just a note of caution on commodities, my commodities ISA has suffered perhaps the most of all my ISAs recently. I believe I am being hit by a "double wammy": The companies share price seems to decrease on bearish market sentiment and commodity price volatility. This is invested mostly in mining companies. Might have just chosen the wrong fund though.....and bought less than 2 yrs ago.

did you see our piece in the Bkk Post and The Nation at the start of June? - warning of a pullback in commodities before another buying opportunity

TBH I tend to think that commodities are so volatile and complex that inidvidual investors shouldn't manage their own commodity exposure - massive opportunity but huge risk and hard for individual investors to come out on top

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Following Mr Masters attached testimony the US Congress enacted new legislation to create transparency of position size in commodities futures markets. Lots of big playersw will be caught out by this and that is why commodities are now selling off and should continue to for a little while to come. That doesn't mean the correct price will be achieved as markets almost always go too far in both directions.

http://www.commodities-now.com/content/mar...80f24810cbbf4d5

[LaoPo]

Whatever they know, there are various ways to play this - we've been unfashionably negative on Chinese equities for a year now. Long term we believe in the Chindia story - but in the short term commodities seemed to be a better way to extract value from that particular new paradigm. Yet again it shows that in the investment universe it pays to be unfashionable sometimes!

..................

Just a note of caution on commodities, my commodities ISA has suffered perhaps the most of all my ISAs recently. I believe I am being hit by a "double wammy": The companies share price seems to decrease on bearish market sentiment and commodity price volatility. This is invested mostly in mining companies. Might have just chosen the wrong fund though.....and bought less than 2 yrs ago.

did you see our piece in the Bkk Post and The Nation at the start of June? - warning of a pullback in commodities before another buying opportunity

TBH I tend to think that commodities are so volatile and complex that inidvidual investors shouldn't manage their own commodity exposure - massive opportunity but huge risk and hard for individual investors to come out on top

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Following Mr Masters attached testimony the US Congress enacted new legislation to create transparency of position size in commodities futures markets. Lots of big playersw will be caught out by this and that is why commodities are now selling off and should continue to for a little while to come. That doesn't mean the correct price will be achieved as markets almost always go too far in both directions.

http://www.commodities-now.com/content/mar...80f24810cbbf4d5

Recently I wrote that commodities would drop and I was laughed at and not-believed by some.

It's a good sign that the US finally are taking (trying to !) steps to control the crooks in the financial world and commodities but I doubt very much if they're able to control such markets and new crooks-with-new-crook-ideas to come.

However, as far as commodities are concerned, it wasn't too difficult to predict that commodities would drop as demand is sliding, fast, especially in China and India.

My wife and I know quite a few business people in China and/or people working for hotels, factories, plants, real estate etc. but also European business people importing from China.

Since 2 or 3 months ALL OF THEM are worried and/or complaining, fearing for their businesses, their jobs, their income and sliding orders/production.

And we are talking HUGE numbers in commodities if orders/production drops.

It's a simple result from declining consuming in the Western parts of the world..simple as that and Asia* is going into a difficult period, together with the West.

The advantage Chinese people have over their Western fellow world citizens is that they ALWAYS save money; most families save at least 30-35% of their income, year in year out. It's in their culture, whilst Westerners spend..........spend and spend, promoted by their governments and legalized mafia bankers.

Until the bubbles explode(d); the same bubbles (mortgage industry) created by the same governments and bankers...

* Asia: Thailand included ! Thailand will suffer also and it's a matter of a few months before exports will drop and tourism will get a big blow. I wrote about that earlier but few believed me; it's not that I am so smart, it's a question of looking around what's happening in the world.

Most people however are only looking into their own small circle and once they get hit by a massive hammer it's too late to avoid or dive for the blow....

LaoPo

[lannarebirth]

However, as far as commodities are concerned, it wasn't too difficult to predict that commodities would drop as demand is sliding, fast, especially in China and India.

My wife and I know quite a few business people in China and/or people working for hotels, factories, plants, real estate etc. but also European business people importing from China.

LaoPo

This is where most of the people get this story wrong. Commodity prices are/were high because the demand for the instrument that prices commodities was high. Demand for the underlying commodity is but a peripheral story and has very little to do with what's happening now. If the markets become properly regulated that may change .

[LaoPo]

However, as far as commodities are concerned, it wasn't too difficult to predict that commodities would drop as demand is sliding, fast, especially in China and India.

My wife and I know quite a few business people in China and/or people working for hotels, factories, plants, real estate etc. but also European business people importing from China.

LaoPo

This is where most of the people get this story wrong. Commodity prices are/were high because the demand for the instrument that prices commodities was high. Demand for the underlying commodity is but a peripheral story and has very little to do with what's happening now. If the markets become properly regulated that may change .

You're an optimistic chap Lannarebirth !

But........since when is a(ny) government able to control/regulate instruments like the commodity market(s) or any other instrument (banks, financials, mortgage banks, insurance companies) ?

I don't believe that will work. They (USA) might be able to control some institutions, firms, companies, banks on a short term but not long term.

In fact the US government didn't learn a single thing from the ENRON debacle (New CFTC Powers In Farm Bill To Close 'Enron Loophole', as used in your link) otherwise the mortgage debacle wouldn't have happened. Instead many small new Enron-like crooks emerged from the dead Enron Giant.....

It's like trying to control and wipe-off criminality.....impossible. There will always be new criminals, also in commodities, banking, mortgages, real estate cs.

Wouldn't it be nice...? a country without jails ?

LaoPo

[cloudhopper]

However, as far as commodities are concerned, it wasn't too difficult to predict that commodities would drop as demand is sliding, fast, especially in China and India.

My wife and I know quite a few business people in China and/or people working for hotels, factories, plants, real estate etc. but also European business people importing from China.

LaoPo

This is where most of the people get this story wrong. Commodity prices are/were high because the demand for the instrument that prices commodities was high. Demand for the underlying commodity is but a peripheral story and has very little to do with what's happening now. If the markets become properly regulated that may change .

Well I still don't see what the problem is - someone eventually takes delivery so the supply/demand equilibrium price will always prevail in the end (won't it?). Some speculators win and others lose - it's a zero sum game isn't it? Are you addressing the intervening disruption?

Edited July 27, 2008 by cloudhopper

[lannarebirth]

However, as far as commodities are concerned, it wasn't too difficult to predict that commodities would drop as demand is sliding, fast, especially in China and India.

My wife and I know quite a few business people in China and/or people working for hotels, factories, plants, real estate etc. but also European business people importing from China.

LaoPo

This is where most of the people get this story wrong. Commodity prices are/were high because the demand for the instrument that prices commodities was high. Demand for the underlying commodity is but a peripheral story and has very little to do with what's happening now. If the markets become properly regulated that may change .

Well I still don't see what the problem is - someone eventually takes delivery so the supply/demand equilibrium price will always prevail in the end (won't it?). Some speculators win and others lose - it's a zero sum game isn't it? Are you addressing the intervening disruption?

No, that's not true. These funds continuously bid this stuff up and roll their contracts out into the future while building ever bigger positions. Hedge funds won't get hurt too bad as they'll buy put options on their positions and make it both ways. It's the 401K'ers that are making a one way long term bet that will be left holding the bag.....again.

None of this is to say that many commodities aren't more valuable now than in the past and might become more valuable still; I don't know. I only mention that what has been going on in these markets is not legal and in the short term will get unwound.

[LaoPo]

About Commodities:

Prices Headed Down for Most Commodities

At last, a glimmer of relief is on the horizon for businesses -- and ultimately consumers -- in the form of lower prices for key metals.

By Jim Ostroff

July 28, 2008

Prices for many commodities will decline in 2009. Copper, stainless steel, nickel, lead and zinc will fall from highs that have crippled businesses over the past two years. Lower costs for wiring, pipes, tubing, tools and other items will raise profit margins for manufacturers. The reversal in the relentless surge in prices will also help consumers, at least a little, by easing pressures on product manufacturers to boost prices on myriad products ranging from automobiles to batteries and even the kitchen sink.

What’s causing the decline? The dynamics of supply and demand. High prices will cure high prices by triggering more production by mining companies, which will buoy supplies. Lead leads the pack in cost reductions. Prices for this battery essential and industrial chemical component should average 77¢ a pound in 2009, down 25% from an average of $1.02 this year and 35% lower than in 2007. While most consumers don’t focus on the ups and downs of nickel, a big-time ramp-up in nickel production will help keep a lid on what they pay for autos, appliances, furniture and even motor fuel. That’s because the plunge in nickel will reduce the cost of stainless steel, which is vital to the production of those products. The cost of stainless will fall 10% in 2009 to $1.80 a pound, on top of a 15% price drop this year.

There’ll be a milder price swoon for zinc, down 6%, and copper, off 5%, but this will help hold the line on prices for batteries, corrosion resistant building materials, electrical wiring that’s used by the hundreds of yards in buildings and homes, as well as for appliances and consumer electronics.

The cost outlook isn’t all rosy, though. Consider aluminum. Lower production levels in Australia, China and South Africa resulting from weather and electricity grid problems spell a 10% price increase next year. With few substitutes available, at least some of this increase will be passed through to manufacturers that produce aircraft, lighting, appliances, containers and more.

Don’t count on a break in natural gas prices, either. The huge jump that prices took this spring -- up about 66% from last year’s average -- will set a new floor. Look for prices to peak at around $13 per million British thermal units (MMBtu) this summer, then slip back to around $11 per MMBtu in the fall.

Figure on annual increases of a quarter or two through 2013. Production is rising about 1% a year, only half as fast as demand. Waning output at older sites isn’t being offset by new finds. Imports of liquefied natural gas would help augment supplies and temper prices, but most of it has been grabbed up by Asian nations, led by South Korea and Japan.

As for crude oil, we still expect prices to abate in the coming months. Demand in the U.S. and elsewhere is falling, though the supply cushion remains tight. Relative to historical oil prices, a barrel of crude will remain painfully expensive.

From: http://www.kiplinger.com/businessresource/...ies_080728.html

LaoPo

[LaoPo]

A very interesting article on Commodities:

Commodities such as oil could be the latest bubble about to burst

By Roger Bootle

Over the past two weeks, the price of soft commodities has fallen by 10pc and the price of oil has dropped by $20 per barrel. Could this be the beginning of a pronounced fall?

It is much too early to say. Although the recent drop in commodity prices looks particularly sharp, during the long upswing there have regularly been falls in prices. It is as though the market has needed to pause for breath before going on to each new peak. This is fully in accordance with most financial markets, which never go all in one direction. The need to take profits leads to frequent corrections in a trend which may continue for years. It is perfectly possible that this will happen again to commodities.

But I believe that a fundamental correction is due at some point. This could be it. In the short term, both supply and demand are pretty unresponsive to prices. On oil, for instance, decisions have been made on heating and transport equipment and costs have been sunk, for both individuals and companies. Habits of consumption are ingrained. Meanwhile, for suppliers, it is often not possible to raise production immediately. Costs have to be incurred to raise production capacity. But, given time, both supply and demand can respond.

It is very striking that there have recently been real signs of changes in driving behaviour in both the US and the UK. In fact, the UK's oil consumption has barely risen in 20 years despite a 70pc rise in GDP. The reason is increased energy efficiency spurred by the high level of oil prices.

But what about the unique change that the rise of China and India imply? Doesn't this mean rising commodity prices as far as the eye can see? Not necessarily. It does imply a higher ratio of commodity prices to manufactured goods prices, compared with what it would have been without their rise. After all, their rise has increased the supply of manufactures while raising the demand for commodities. But what would have been the path without their rise? For most of industrial history the real price of commodities has been falling, and that includes the 1950s and 1960s, when the world economy was last growing as fast as it has been recently, driven by rapid growth in Japan and Europe.

Then there is the role of speculation. This has been the subject of much dispute. The battle lines are roughly drawn between the left-wing interventionists on one side and the markets-can-do-no-wrong merchants on the other. Joined by some big-gun economists, so far the latter group appears to have won the argument. Their case is that, if speculation has raised the price of commodities above what would rule in response to the forces of fundamental supply and demand alone, then this would have to be accompanied by the accumulation of stocks of commodities, hoarded for future sale. The information that we have indicates that there has been no large-scale build up of stocks. Accordingly, speculative actions cannot have driven up the price above where demand and supply would have caused it to be anyway. QED.

But I am not convinced. Where demand or supply are unresponsive to price, or where they are responsive in roughly equal amounts and in opposite directions, then speculation might drive up prices without building up stocks. It's true there must be the desire and preparedness to build-up stocks, but if prices rise in response then the need to actually build up the stocks is dissipated. If speculation drives prices up to where the speculators think prices will eventually end up, what is the point in building up stocks in order to sell them at a profit later on? Once current prices have risen, there is no prospective profit left.

This apparently odd upshot is not the result of some peculiar property of commodities. It is a result of the fundamental properties of supply and demand. Think of the demand to hold a share in a company. If the demand rises, the price will increase. Yet there will be no more shares in existence. If we try to measure demand by the number of shares owned, we will of course always get the same answer, implying that nothing ever changes. Yet the desire to hold the shares may change constantly, and changes in price are the result. I believe that something like this may happen with commodities, including oil. If this is right, it seems that the apparent absence of a build-up of stocks is no proof that speculation has not contributed to the rise in prices.

Something like this was the conclusion recently reached by the arch-speculator George Soros in his evidence to the US Congress. It would be surprising, I think, if things were otherwise. After all, best estimates are that at least $260bn has been invested in commodity index funds. It beggars belief that this could have happened without having an impact on the price of commodities.

My suspicion is that commodities, including oil, are the last in a series of bubbles built up over the past 15 years in the era of free-for-all finance and low interest rates: the first was the emerging market bubble which burst with the East Asian crisis of 1997-98. The second was the dotcom boom. Then came the property bubble in both residential and commercial real estate, pretty much simultaneously with the bubble in risk and credit instruments. Commodities are the market to which the bubble-blowing machine which is the modern financial system turned its attention once the property bubble looked like bursting. If I am right, then the potential size of the fall in commodity prices will be greater and it could come sooner.

If commodity prices do fall sharply then this news will be predominately good, undermining one of the two forces which have weakened world growth and threatened the stability of the financial system. For lower commodity prices would reduce headline inflation rates everywhere and put more money in consumers' pockets. Lower interest rates would still not be a done deal because increased consumer purchasing power could be construed as strengthening the forces bearing on non-commodity inflation. But my guess is that this would be outweighed by the easing of inflation fears, allowing central banks to bring some relief to the beleaguered housing and financial sectors through lower interest rates.

Mind you, not everyone would be a winner. In such a scenario all of those who had bet on sharply higher commodity prices would lose out. Would some banks find themselves nursing substantial losses on commodities? Believe me, if there's a way of losing money lying out there somewhere, they will find it.

From:

http://www.telegraph.co.uk/money/main.jhtm.../28/ccom128.xml

LaoPo

[lannarebirth]

However, as far as commodities are concerned, it wasn't too difficult to predict that commodities would drop as demand is sliding, fast, especially in China and India.

My wife and I know quite a few business people in China and/or people working for hotels, factories, plants, real estate etc. but also European business people importing from China.

LaoPo

This is where most of the people get this story wrong. Commodity prices are/were high because the demand for the instrument that prices commodities was high. Demand for the underlying commodity is but a peripheral story and has very little to do with what's happening now. If the markets become properly regulated that may change .

Well I still don't see what the problem is - someone eventually takes delivery so the supply/demand equilibrium price will always prevail in the end (won't it?). Some speculators win and others lose - it's a zero sum game isn't it? Are you addressing the intervening disruption?

No, that's not true. These funds continuously bid this stuff up and roll their contracts out into the future while building ever bigger positions. Hedge funds won't get hurt too bad as they'll buy put options on their positions and make it both ways. It's the 401K'ers that are making a one way long term bet that will be left holding the bag.....again.

None of this is to say that many commodities aren't more valuable now than in the past and might become more valuable still; I don't know. I only mention that what has been going on in these markets is not legal and in the short term will get unwound.

Here's an excerpt from a previously posted interview that highlights what I'm talking about. This has nothing to do with the supply/demand stuff you read in newspapers. That stuffs all bullshit. Follow the money:

It's silly season. I saw a headline this morning

</B>

http://www.investmentpostcards.com/wp-cont.../06/montier.pdf

saying that the IEA is about to slash its

"The IEA has cut

their forecast

for oil demand

again and again

and again, compared

to where

they were

at the beginning

of this year, and

yet the price

has totally

detached itself

from those

fundamentals.

So for me it

isclearly

a speculative

phenomenon."

forecasts of peak production capacities —

Albert: Sure, that's a methodology change,

just like Moody's has to keep doing. On the way

up, methodologies are changed to justify higher

prices. When we're back at $60, and given a

global recession, we will be back at $50 or $60

in a year's time, they'll be changing the

methodology back again.

James: That's the equivalent of moving up the

income forecasts to try to justify valuations.

One of the things about commodities that I

don't think is getting anywhere near enough

attention is the whole idea that because people

have suddenly seen commodities as an asset

class, and you have had these huge institutional

investment inflows into commodities, those

inflows themselves have changed the structure

of the markets. If you're investing in futures,

which most of theses funds tend to do, it used

to be that the market was generally in backwardation,

so you collected a positive roll on your

contracts. But now, because these guys have

driven up the spot prices so much, a lot of

these markets tend to end up in contango,

which means you get a negative roll. That

means that you've got to make 15%-16% per

annum in price move — just to cover the negative

roll. The consultants missed that. The very

process is sort of a demonstration of the

Heisenberg Uncertainty Principle; you cannot

observe without influencing. These guys have

forgotten that their own actions matter. It's

poker, not roulette, that we're playing here.

The behavior of others, their actions, have an

impact on the outcomes.

Albert: One other thing that I like to point out

is the liquidity effect on commodities and

emerging markets. We've had one liquidity

bubble go pop with the credit crunch. But

there's another one still to unravel, which is

the change in the U.S. current deficit. While it

was blowing out, it acted as a huge liquidity

pump for the rest of the world because the

emerging economies intervened to hold their

currencies down. So a chart of EM reserves

goes up vertically and hasn't come down yet.

But what I am highlighting is, hey, if the U.S.

economy is going into a recession now, which it

probably is, then we're moving to a different

phase. Housing was the least import-sensitive

component of U.S. domestic demand. So the

housing crash hasn't really impacted the trade

deficit all that much in the U.S. But now the

credit crisis' impact is moving into consumption,

which is the most import-sensitive component.

So it's likely that you're going to get a

rapid decline in the U.S. current account

Edited July 28, 2008 by lannarebirth

[bingobongo]

Japan Jobless Rate Rises to 4.1%, Highest Since 2006

Japan's unemployment rate rose to the highest in almost two years in June and household spending fell, adding to signs that the economy's longest postwar expansion may be coming to an end.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

[j_cheung]

once the olympics are over (which is already projected to be a financial bust ), its over for asia

what is your advice Bingo? to which non-asian country should we move and live when Asia sinks? i am quite worried!

Canada sounds better than Russia or Kazakhstan!!!

we were considering Canada a few years ago. but the taxes put us off

Not to mention, the CRA ("Canada Revenue Agency") had been interested in any offshore trusts held by its residents since '03 ...

http://www.ey.com/GLOBAL/content.nsf/UK/Ta..._12_DC_-_Canada

not my field of expertise but there used tp be a 5 year shelter avaialble using an approved trust - is that still available?

Still is available starting from the calender year that you're deemed a Canadian resident. But it's too short & after that ...

[Paul MBMG]

once the olympics are over (which is already projected to be a financial bust ), its over for asia

what is your advice Bingo? to which non-asian country should we move and live when Asia sinks? i am quite worried!

Canada sounds better than Russia or Kazakhstan!!!

we were considering Canada a few years ago. but the taxes put us off

Not to mention, the CRA ("Canada Revenue Agency") had been interested in any offshore trusts held by its residents since '03 ...

http://www.ey.com/GLOBAL/content.nsf/UK/Ta..._12_DC_-_Canada

not my field of expertise but there used tp be a 5 year shelter avaialble using an approved trust - is that still available?

Still is available starting from the calender year that you're deemed a Canadian resident. But it's too short & after that ...

thanks for the confirmation - thought so, but wasn't sure

[Paul MBMG]

This is where most of the people get this story wrong. Commodity prices are/were high because the demand for the instrument that prices commodities was high. Demand for the underlying commodity is but a peripheral story and has very little to do with what's happening now. If the markets become properly regulated that may change .

One of our recent pieces that addresses the current issues -

WHAT ARE PRUDENT INVESTMENT STRATEGIES IN A STAGFLATIONARY ENVIRONMENT?

The short term answer is to hold cash, cash and more cash.

The longer term answer is, of course, that cash is only one of multi asset classes and that smart contrarians will always unearth opportunities. What we preach for our clients has been practised by Scott Campbell and the Midas/MitonOptimal team and also by the large US endowments (when asked about similarities between his investment approach and the Harvard & Yale Endowments during his recent Bangkok visit, Scott answered "Those guys basically stole my investment philosophy - about 5 years before I actually conceived it!"). Scott himself noted last week that this approach, in the hands of the ten largest US endowments, has considerably outperformed the median institutional fund, retail funds, indices and also the smaller endowment funds.

Scott took time out to take a look at how they've managed this and how they are positioning now for a very different investment backdrop in the 10 years ahead. Recently the big 10 endowments have entrusted 32% to hedge funds (compare this to 13% in smaller endowments and nothing in retail funds). The "big boys" have achieved this by cutting back listed equity exposure to just 33% (as opposed to 56% for smaller endowments and anything up to 100% for most institutional and retail investment funds. The "top 10" have also invested much more aggressively in real estate, natural resources, venture capital and private equity – more than double the rate of small endowments and beyond compare with funds who often have zero or negligible exposure to these areas that have yielded strong returns of late.

However that still amounts to a snapshot of where everyone should have been allocating their assets - what can we expect going forwards? Scott cited a recent article in the FT which claimed that, following the collapse of the credit bubble, many, if not all, endowments are looking at the opportunities in distressed debt. This my be a very good time to announce that this week MBMG is publishing a research paper on the distressed opportunities afforded by current market conditions. Scott makes the important point that although the endowments have examined several opportunities to buy distressed loans, they are tending to remain on the sidelines as they don't yet consider that the terms are favourable enough and they believe that in the distressed sector thinks will get worse (for sellers) and by implication much better for buyers. This backs up the results of our own research where we conclude that the pricing on leveraged loans has blown out way more than that of distressed and therefore the opportunities are in the leveraged loan sector currently as Scott recently highlighted during his visit to Bangkok.

Concern over climate change is another big area of interest to the superendowments and Scott notes that they are also looking to exploit opportunities in energy and other real assets. Like Scott, they're not looking to make a major move just yet into listed equities generally, although 'Frontier Markets' (the second tier of emerging markets, which have not yet significantly emerged) such as the Middle East, Central Asia and Africa are interesting to them as they are largely uncorrelated with the West and have good growth prospects.

Finally superendowment managers are apparently spending a great deal of time on the receiving end of presentations about farmland (particularly in emerging markets) as agricultural commodity prices are rising sharply due to the increase in developing world demand. Increased supply can only be affected by cultivating new land or by radically improving productivity of existing farmland. The closer that the land is located to the big emerging economies (read Chindia mainly), thereby reducing transport costs, so much the better. This is the ultimate play on the commodity theme and because most western world farmers already operate at full production capacity; farm land in Africa, South America and Asia at a fraction of the price may turn out to be a good politically risk adjusted bet?

WHAT IF THE STAGFLATION THAT WE FEAR TURNS OUT TO BE 'JUST' INFLATION?

Scott points out that traditional Bonds tend to "have a shocker in inflationary times" although inflation linked bonds do have much better defensive qualities. We remain underweight fixed interest although any interest rate spike could be a short term buying opportunity. Gold and other commodities have an inflation hedge element to them and there will be opportunities in both physical commodities and also commodity equities at different times.

In general equities suffer during inflationary periods because of rising input costs causing reduced margins. Profit margins and earnings outlooks depend heavily on a business' pr sector's ability to pass on costs - identifying price takers vs. price makers helps stock pickers outperform the general market significantly. Within our portfolios our major stockpickers are Warren Buffett of Berkshire Hathaway and William Gray of Orbis. We remain confident in their ability to outperform. Overall PE ratios tend to trend significantly lower when inflation is higher than 3-5% (and also indeed when it's below 0%) and therefore the PE sweet spot of recent disinflationary high growth times of is most likely over and stocks are likely to correct until more appropriate PERs for the prevailing conditions are in place. This could imply a Dow closer to 8,000 than its current level of 12,000 and a long time until we regain last November's 14,000 + levels.

Scott notes that Real Estate, both housing and commercial property, was a great inflation hedge during the period of runaway inflation in the 1970s, partly because commercial property offsets inflation with rent increases (many contracts are automatically inflation adjusted) effectively ensuring that commercial property performs like inflation-linked bonds. Also there can be a comfort factor that causes a flight to real rather than paper assets in uncertain times, but this time around that effect has been seriously undermined by the extent to which the commercial property sector the US, Europe, Australasia and UK is significantly overvalued.

Hedge Funds overall have no performance correlation to higher inflation, deflation or stagflation. However certain hedge styles are more correlated with bonds or equities and it goes without saying that it would be a good idea to avoid these and instead to overweight global macro plays, CTA funds, equity market neutral approaches and some arbitrage strategies. Conditions should provide a fertile hunting ground for our hedge partners at Man Investments.

SUMMARY

A portfolio that exploits the upside potential of current conditions but also limits risk in the current uncertain conditions will most likely feature the following factors:

Asset class diversification

Underlying investment manager diversification

Active management

Discipline

Contrarian thinking

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG International cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG International. Views and opinions expressed herein may change with market conditions and should not be used in isolation