When it comes to analyzing speculative hedge fund investments, perhaps it’s not a bad idea to ask the man who owns one. According to the FT, investment fund owner George Soros is to tell Congress that the oil market is experiencing a “bubble in the making.” (Of course given his past track record, there’s always the question of which side of the trade he’s really on):

“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987…In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.”…

Mr Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it…But the field got crowded and that profit opportunity disappeared…Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”

Author and consultant Daniel Yergen says that oil has reached its “break point,” where alternatives on both the supply and demand side will be brought to market relatively quickly (although he says that a “missing generation” of investment and people will prolong the oil supply side a bit).

Finally, we note that the phrase “ask the man who owns one” was originally an advertising slogan for Packard. Today’s update of that should probably take note of the forecast that 25% of European cars could be hybrids within a decade. Even if prices were to fall again, as they did in the 80’s and 90’s, we get the sense that people are pretty fed up with OPEC and its posturing this time around, and that trends like hybrids may have found their moment.

A piece of Morgan Stanley research shows that Emerging Market countries now export roughly as much to each other as they do to the EU and US. A central economic question of our time is whether this seemingly greater independence of the EM countries from the the US and EU means a real “decoupling” has happened. No one really knows the answer to this question, which is indeed perhaps the central economic question of our times, because of its implications for the global economy over the next five years at least.

If a decoupling really has occurred, the EM countries can feed on each other for good growth while the West languishes in recession or near recession for a while. This would give continued support to the boom in commodities and oil, which otherwise appears extremely long in the tooth.

As you know, we are very skeptical of the “decoupling” thesis. China’s rather dodgy numbers and other irregularities raise the issue of what happens if growth should slow and people start turning over the rocks to see what has been covered up during this ultra-long, ultra-rare period of hypergrowth. Moreover, China may be a model of transparency and good corporate practice compared to some of the other EM countries.

The Morgan Stanley chart above includes not only China but Argentina, Brazil, Chile, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Thailand, and Turkey — so there is plenty of room for mischief, cooked books, bad loans, and all the rest, which tend to get revealed, to further ill effect, during periods of recession and economic duress. All the projections of a continued super-boom in commodities and oil are premised, to one extent or another, on the decoupling hypothesis. We don’t believe it. We shall just have to see who is right.

“America’s workers should build America’s defense,” announces the Clinton campaign commercial below. But nothing is quite as simple as it seems.

The Clinton campaign in Indiana is featuring an ad (via Gateway Pundit) of a plant that was closed in 2003. The jobs were outsourced to China, and Clinton blames the Bush administration. Run of the mill trade policy ad, you say. Not quite.

The Magnequench plant that was closed was not making waffle irons. The plant apparently manufactured 80% or more of the sintered NdFeB magnets that are used in the US military’s smart bomb guidance systems. Sounds sinister, yes? And an even better ad for the Clinton campaign. But it gets more complicated. All the transactions that resulted in ownership of the plant by Chinese interests occurred during the Clinton administration.

In 1995, according to ABC, “China National Non-Ferrous Metals…and San Huan New Material High-Tech Inc…joined with other interests to purchase the Anderson, Ind.-based Magnequench…The two Chinese companies were headed by the husbands of the first and second daughters of then-Chinese leader Deng Xiaoping.” The 1995 transaction was approved by CFIUS, the responsible government agency. Then, in 2000, Magnequench bought the factory that appears in the campaign ad. So it would appear that if there is an issue about the transfer of sensitive technology to China, it occurred before George Bush was President, rendering some of Senator Clinton’s claims in the ad moot or ridiculous.

But is there a legitimate national security angle to the story in the first place? Former Magnequench vice president Andy Albers says no, via ABC. “‘Nothing was done by Magnequench that aided the Chinese military program or hurt the U.S. military program,’ says Albers, who adds that Clinton’s focus on his former company ‘concerns me because it doesn’t address the main issue, which is how to make U.S. companies more competitive globally at’s the question we should be asking, that’s what we should be addressing. We should not be twisting the truth about that this is a national security issue, because it’s not a national security issue, it’s about global competitiveness’.” Former counsel to Congressman Duncan Hunter, Jeff Green, agrees that the matter is not a national security issue: “‘I think it’s more accurate to say that all the technology and production of these Neo magnets comes from overseas,’ he says, including Japan, Finland, Germany and China.”

So either both the Bush and Clinton administrations are to blame, or neither one did anything wrong. It’s a bit hard to say at the moment, but it appears from the news reports that, on a micro level, the system apparently functioned normally, although there are dissenting voices on left and right alike. However, on a macro level, the picture looks a little different, and raises the question as to whether the procedures in place at the CFIUS arm of the Treasury Department are adequate in a world that changes rapidly. At first blush, they do not appear to be.

One obvious question: does CFIUS track purchases or consolidations that occur after it has approved the sale of a company? For example, there are apparently sources for the Neo magnets in Japan, Finland and Germany, as well as in China. But what if a Chinese company or companies were to subsequently purchase those operations in Japan, Finland, and Germany? Would we ever know? Before it was too late to do anything about it? How? The current transactional approach of CFIUS, even as modified by FINSA, looks sort of like Hart-Scott-Rodino procedures for defense related industries. CFIUS procedures do not seem to take into consideration certain plausible or likely future events which could render its decisions unwise in retrospect. This would appear to bear looking into.

The US economy is at a near standstill, growing 0.6% in the first quarter primarily because of inventory accumulation, which is a problem in itself. The Eurozone is rapidly decelerating too, back to levels not seen in some countries since 2005. FT:

The European Commission’s eurozone “economic sentiment” index has fallen sharply from 99.6 in March to 97.1 in April – the lowest level since August 2005. With the indicator regarded as good guide to growth trends, the unexpectedly steep decline pointed to a marked deceleration in economic activity…

eurozone countries show varying performances. Economic sentiment in Spain, which is at risk of a serious house price correction, has fallen to the lowest level since late 1993. But sentiment in Germany and France remains relatively robust – falling to the lowest levels since February 2006 and December 2005 respectively.

2005 isn’t a long time ago, but you might be a little surprised just how bad things were in much of the eurozone in that year.

89 year old author, investment adviser, and former professor Peter Bernstein’s three “classics” from the 1960’s are being reissued this year with introductions from Paul Samuelson, Paul Volcker and Arthur Levitt, which itself is a certain testimonial to the man. His 1996 book, Against the Gods: The Remarkable Story of Risk, won a number of awards and was well reviewed in both the popular and academic press. He was interviewed in the WSJ on the current outlook, and sees protracted problems:

You don’t get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion…

When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That’s part of the problem going forward. You don’t have a high-growth exit from this, as you’ve had from other kinds of crises. We won’t have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn’t turn up. Or like a U, a flat U. The reason for that is that people aren’t going to get caught in this bind again. They will tell themselves, “I’m too smart to do that again.” And everyone else is going to be saying the same thing…

I’m a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don’t think we are going to feel that way going forward…

If China goes into a recession, God knows…Before, it was investment that made the V at the bottom of the business cycle. I don’t see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won’t do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.

We quote Mr. Bernstein because he sees a number of the same risks we do, and he too does not know how it will all turn out. It is fervently to be hoped that Asia picks up the slack and its growth is not derailed by the slowdowns present in the US and coming shortly to the Eurozone. But it is not at all clear that this can happen in a region so highly dependent on exports for its growth. It is certainly possible that we are nearer to the end than the beginning of the “one-shot adjustment” boost to non-inflationary growth from China and the other nations similarly situated. We’ll keep our fingers crossed that it really will be different this time.

A weak currency has its problems. So does a strong one. Telegraph:

Momentum traders have blithely ignored last week’s accord by the G7 powers, which described “sharp fluctuations in major currencies” as a threat to economic and financial stability. The euro has surged to fresh records this week, touching $1.5982 against the dollar and £0.8098 against sterling yesterday…

Otmar Issing, the ECB’s former ‘High Priest’, said the single currency had started well but could face a “disastrous outcome” if the eurozone failed to embrace a flexible market system. “The ’single-size’ monetary policy would simply not fit at all. In such a scenario, the single currency would risk straining cohesion ” he warned in a new book, ‘The Euro’.

This is already occurring. North and South have diverged further. While Germany and Holland have prospered under the strong euro, most of southern Europe and Ireland is in trouble. Current account deficits have reached 9.2pc of GDP in Spain and may touch 15pc in Greece. The European Commission’s economists fear that the loss of competitiveness against Germany over the last decade may have passed the point of no return. At best, these countries face years of belt-tightening as their property booms deflate…

A key reason for the 30pc rise in the euro against the dollar over the last two years has been the move by Asia central banks and Mid-East wealth funds to parking huge sums of newly acquired wealth in European bonds as an alternative to the dollar.

BNP Paribas said Asian surplus countries and commodity exporters have accumulated $1,160bn in reserves over the last year alone. US Treasury data shows that only 19pc of this was invested in dollar assets. This is a sharp break with past practice. A large chunk of the money was invested in euro-zone securities. The question is whether China, Saudi Arabia, and others, have now reached euro saturation.

We noted the stresses in the eurozone a few years ago, and they seem to be getting worse. The European Central Bank recently revealed, for example, that foreign direct investment (FDI) into the eurozone has contracted by €269bn over the last two years. It’s getting hard to keep track of all the stresses in the financial system.

You remember Shanghai 6000, don’t you? It was only a few months ago, as we observed the other day. How time flies. Now there’s a 50% off sale going on. WSJ:

The benchmark Shanghai Composite Index ended Friday’s trading down 4%, and has lost 50% from its mid-October record high of 6124.04. Despite this, analysts at Bespoke Investment Group estimate the forward price-to-earnings ratio of the index at 20.90, which ranks second among 13 major world indexes, trailing only the tech-heavy U.S. Nasdaq Composite Index…

the Shanghai index is further from its 52-week high than 21 other major world equity markets. “I don’t know that the froth is still there, but whether it’s inexpensive enough to step back in, well, the Chinese government is still trying to slow the economy to a certain extent,” says Malcolm Polley, president and chief investment officer at Stewart Capital Advisors. “The danger is that it slows a bit too much and in that case, I think you still have to worry about valuation.”

For what it’s worth, we think that the slowdown in the US will migrate to Europe and beyond, and that the combined consumer spending sluggishness will slow China’s overall exports, much as has already happened to its exports to the US. In turn, this slowdown in the developing world will translate into some curtailment of grand infrastructure spending and capacity expansion, as the countries that have been growing 9-11% in recent years confront a world they have not experienced in a long time — where there is little need for such capacity expansions and the foreign exchange isn’t piling up like it used to. And then the bank loans run into trouble, and the usual things of a recession transpire, like commodity prices reverting to the mean, and so forth. No one has repealed the business cycle to our knowledge. But of course we’ve been saying this for quite a while and it hasn’t happened yet. So it really may be different this time around. But that’s really not what the half price sale in the Shanghai stock market would appear to foretell.

The IMF report that we discussed below has a lot of interesting information. For example, the chart above shows that the current booms in oil, aluminum, copper and foodstuffs are in some cases multiples of their previous price escalations, and the duration of the current boom has been significantly longer than in past economic cycles — no doubt in large measure due to the rise of China and the BRIC-like nations. There is also no doubt that, at least judging by historical standards, a correction of significant magnitude and duration is overdue.

The IMF has released a nearly 300 page report on prospects for world economic growth that raises some of the same questions we wrote about the other day, including whether the de-coupling of the developing world from the US and Europe is real this time around. No one knows the answer to that question. Here are some excerpts from the IMF Report:

Although Chapter 3 shows that the particular dynamics of the housing market in the United States are not matched by those in other countries, it also shows that housing may now play a more marked role in the business cycle more broadly — as the nature of mortgage financing has changed and as valuations have increased almost everywhere over the past 10 years.

The second potential vulnerability is, of course, commodity prices. Chapter 5 examines the role of commodity prices in contributing to the strong performance of many emerging and developing economies in recent years. It is striking how the surging tide of commodity prices over the past five years has lifted almost all commodity-based boats around the world. Although there is some reason to believe that the countries exporting commodities are now better able than in the past to withstand a serious downturn, we continue to urge caution: commodity prices have fallen, on average, by 30 percent during significant global slowdowns over the past 30 years.

All eyes now turn to the world’s leading emerging economies. They have come of economic age in the past half-decade— diversifying their exports, strengthening their domestic economies, and improving their policy frameworks. It is conceivable that their strong momentum, together with some timely policy adjustments, can sustain both their domestic demand and the global economy. At this moment, however, these emerging economies find themselves beset not by impending recession, but rather by inflation pressures. In particular, the financial dynamics of dollar depreciation and increasing financial market uncertainty have combined with continuing strong demand growth in the emerging economies and sluggish supply responses by commodity producers in such a way as to keep upward pressure on food and energy prices despite the darkening clouds over the global economy. Therefore, at the very time when preparations for countercyclical measures would seem to be warranted, leading emerging economies find themselves trying hard to take the edge off inflation…

The overall balance of risks to the short-term global growth outlook remains tilted to the downside. The IMF staff now sees a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009 — equivalent to a global recession…

What explains the resilience of the emerging and developing economies? Will they be able to effectively decouple from the substantial slowdown — and possible recession — in the advanced economies in 2008? There are two main sources of support for these economies: strong growth momentum from the productivity gains from their continuing integration into the global economy and stabilization gains from improved macroeconomic policy frameworks. What is important is not just how these factors have evolved in individual countries, but also how they have interacted across countries to change the dynamics of global growth.

there have been two important shifts in the growth dynamic of the global economy. The first is that growth in global activity over the past five years has been dominated by the emerging and developing economies — China has accounted for about one-quarter of global growth; Brazil, China, India, and Russia for almost one-half; and all the emerging and developing economies together for about two-thirds, compared with about one-half in the 1970s. Growth in these economies also is more resource-intensive, given their patterns of production and consumption (see Chapter 5 of the September 2006 World Economic Outlook). One consequence of these trends is that the increasing demand for key commodities such as oil, metals, and foodstuffs is now driven by growth in these economies — they account for more than 90 percent of the rise in consumption of oil products and metals and 80 percent of the rise in consumption of grains since 2002 (with biofuels representing most of the remainder).

This has contributed to the sustained strong increase in commodity prices observed over the past year, despite moderating growth in the advanced economies, and has been an important factor behind the strong recent performance of commodity-exporting countries in Africa and Latin America, as well as oil exporters in the Middle East. The second, related shift is the growing importance of emerging and developing economies in the structure of global trade. These economies now account for about one-third of global trade and more than one-half of the total increase in import volumes since 2000. Moreover, the pattern of trade has changed. Almost one-half of exports from emerging and developing economies is now directed toward other such economies, with rising intraregional trade within emerging Asia most notable…As a result, the advanced economy business cycle may play a less-dominant role in driving swings in activity for the emerging and developing economies,

We have a couple of takeaways from this excerpt of the report. First, if China (and the BRIC-like countries) have not achieved the decoupling that the IMF clearly hopes has happened, there are nasty implications for world GDP growth. As the report says: “China has accounted for about one-quarter of global growth; Brazil, China, India, and Russia for almost one-half; and all the emerging and developing economies together for about two-thirds.”

Second, what will happen to commodity prices this time around? The IMF warns: “commodity prices have fallen, on average, by 30 percent during significant global slowdowns over the past 30 years.” Will it happen again this time?

How self-sustaining has developing nation growth become? This is one of the most interesting economic and political questions of our times. We’re going to find out the answer (or answers) pretty soon.

The US is more or less in a recession. Europe isn’t far behind in growth dropping to de minimis levels — and that’s without factoring in the strains, sure to increase, between the Club Med countries and Germany and others regarding monetary and fiscal policies in the Eurozone. The Middle East can of course continue its outsized expansion as long as the oil bubble remains intact, but its history and traditions have not to date demonstrated that that region has developed the attributes to sustain indigenous economic growth, including innovation, labor force participation, or other characteristics that are typical among affluent economies.

It is unknown, as of this writing, whether the BRIC countries, and in particular China, can sustain their phenomenal growth rates in the current global environment. (We tend to believe not, as you know, and some of the evidence is beginning to point our way.) No less an official source than the Peoples Daily has said that China is 70% dependent on foreign trade for its growth, so we shall soon see just how self-sustaining the Chinese economy has become during its remarkable transformation of recent years.

General Electric has a large exposure to GDP growth rates in the developing world. (BTW, it only covers 63% of its CP with bank lines.) Its orders were up 8% in the quarter, though earnings disappointed. Its “infrastructure” segment, the company’s largest, had $15 billion in sales was 23% higher than a year ago, principally due to orders from Asia and Latin America. The company would appear to be a good window into trends in the developing countries, so from now on, we’ll be watching it a little more closely to see if it sheds any light on the question of just how self-sustaining developing nations growth has become — when the consumers of the US and Europe slow down their spending.

The WSJ says that the G7 are huffing and puffing about the low value of the dollar.

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and their counterparts from the Group of Seven nations said in a statement: “Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” Their words, though mild at first glance, mark a departure from the communiques the officials issued after previous G-7 meetings and appear intended to demonstrate the group’s desire to put a floor under the falling dollar…

The dollar has been in a fairly steady decline since 2002, although it hit its peak against the euro — 82.7 cents per euro — on Oct. 25, 2000. A euro bought $1.5828 at Friday’s 4 p.m. close, marking a 15% fall in the dollar’s value against the common currency during the past year and a 7.8% slide since Dec. 31.

Likewise, the dollar is down 15% against the yen during the past year and 9.5% since the end of 2007. Measured against the currencies of 17 U.S. trading partners, the dollar is down 9.8% from a year ago. The International Monetary Fund, in a report issued this past week, said that the dollar’s 25% inflation-adjusted decline since 2002 is “one of the largest dollar depreciation episodes” since the early 1970s.

You’d think that it might be more effective to say nothing and then engage in market actions that put some of the wise guys out of business. Or perhaps it might have been advisable for the Fed to lower interest rates quickly and in large enough increments not to have produced a virtually risk free environment for currency/commodity speculators over the last eight months. Evidently, the market doesn’t care too much about words, at least so far, if stratospheric oil prices in the face of falling demand are any indication. Forbes:

Oil turned lower as the International Energy Agency’s reduction of its 2008 oil demand forecast encouraged some end-of-week profit-taking, though weakness in the dollar limited losses. The IEA on Friday cut its 2008 oil product demand forecast by 310,000 barrels per day in light of fears the United States-led economic slowdown could reduce consumption growth, weighing on prices. However, with the dollar remaining on the backfoot, prices have been well supported as investors continue to buy into commodities in a bid to hedge against the tumbling U.S. currency…New York’s West Texas Intermediate crude for May delivery was down 52 cents at $109.59 a barrel. On Wednesday, WTI hit an intraday record high of $112.21.

Remember, in the new economy of oil, just like the new economy of real estate in this decade, or the new economy of the internet from 1997-2000: “The new rules are: There are no rules.” Or try this chestnut: “Oil prices have reached what looks like a permanently high plateau.”

The FT had an article trumpeting a trillion dollars in bad loans, but changed it to this: IMF puts cost of credit crisis at $945bn. Meanwhile, former Fed Chairman Alan Greenspan said on CNBC that things are bad, but it’s not his fault:

Greenspan said Fed decisions on his watch were rationally constructed based on evidence at the time. “I have no regrets on any of the Federal Reserve policies that we initiated back then because I think they were very professionally done…Clearly, certain of our anticipations of what would happen as a consequence of those policies were off but there’s no way of avoiding that…Consumers are beginning to shrink in, the automobile markets are beginning to contract, production is beginning to ease, and we are in the throes of recession”…

By the way, that same IMF that is now retailing the trillion dollar story “predicted a year ago that any ripple effects from a subprime mortgage crisis would be limited.” So it goes.

It’s different this time around, or so says the WSJ. This time around, countries that produce commodities or industrial goods won’t be much affected by a US recession, in important part because the BRIC countries and others continue to have robust growth. There won’t be a domino effect this time around:

Here’s a big lesson of the first international financial crisis of the 21st century: Some old-fashioned economies are weathering the storm better than those that borrowed big to spur growth or those that bet heavily on debt-strapped American consumers…

“The remarkable difference between this period of financial upheaval and those in the past is the performance of developed and developing countries,” World Bank President Robert Zoellick said in a speech on Wednesday at the Center for Global Development, a Washington, D.C., think tank. “Not only has the epicenter of the quake shifted [away from developing countries], but so far the tremors have shaken markets differently.”…the global economy looks well positioned to weather the turmoil, unless the U.S. falls into a deep, lingering recession. The global economy is expected to grow 3.8% this year, compared with 4.7% a year earlier…

Resource-rich countries — including Russia, Brazil and Australia — are poised to keep prospering. Vast appetites for raw materials in China, India and elsewhere give commodity producers alternatives to the U.S. market, and have lessened the chance of a commodities crash…

When the U.S. economy last tanked in 2001, machine-tool maker Mori Seiki, in Nagoya, Japan, showed a loss for the first time in years. But it has since diversified its customers and this time it expects to turn a profit, says its president, Masahiko Mori. About 25% of Mori’s world-wide sales are to the auto industry, which have already been affected by a downturn in U.S. consumer spending. But Mr. Mori thinks demand from other countries will make up for this. “Of course the U.S. market is still important,” he says. “But our increase of business from BRICs [Brazil, Russia, India and China] and Europe means we’ve diversified our risk.”

Of course it just might be different this time around. The US is a smaller part of the world than it used to be, after all. But the US is still over a quarter of world GDP, and supports the growth of many of the export driven countries — so we won’t be a bit surprised if it’s not terribly different this time around.

Germany’s BaFin estimates that we’re about three quarters of the way through the mortgage mess. A Reuters story says that Der Spiegel has gotten hold of an internal report by the bank regulator that estimates total losses at $430-600 billion:

The $600 billion figure represents a worst-case scenario for losses linked to the financial turmoil sparked by the meltdown in the U.S. subprime mortgage market, Der Spiegel magazine said in a story released in advance of publication on Monday. “Based on current knowledge and the market situation, we believe $430 billion is more likely”…BaFin calculated that banks had already acknowledged about $295 billion in losses, of which Germany accounted for around 10 percent, the magazine said.

It took an awfully long time — from creation until 1800 — to get to 1 billion people on earth. It took until 1930 to get to 2 billion. Next year there will be 7 billion on the planet:

The slope of that increase is impressive to behold:

In recent days we’ve had occasion to observe the world from vantages in Europe, Asia and all over the US. The world has become one endless traffic jam. It is more than a little disconcerting.

The US would appear to be in a somewhat different position than it was in the last century. When FDR was elected, Americans numbered 122 million and were over 6% of the planet’s relatively tiny population. Now the population of this crowded world is almost 7 billion, and the relative US share of its population has fallen by almost a third to the 4% range. Americans are awash in a sea of other humans.

These are among the strangest economic times we have seen. Commodity inflation is surging, with oil hitting new ($107.58) highs early and often, yet Treasury securities have yields so low they have not been seen since the early fifties. SWF’s have trillions of dollars, but they are doing little to redeploy them. The dollar hits new lows against the Euro and other currencies, yet there is little indication foreign corporations or governments are taking advantage of the situation to participate in the Yard Sale of the Century — that is, buying US equities.

There is a double whammy in doing so. Stock prices are down, so is the dollar, and equities will participate in future economic growth, plus a recovery in the currency when relative interest rates readjust. Logic would suggest that the foreign surplus entities should be on a buying spree in the US. Indeed, the recycling of surpluses is an economic necessity for the system to function. So where are the buyers at the Yard Sale of the Century?

The sometimes excitable Ambrose Evans-Pritchard sees more doom and gloom ahead in the oddly titled piece in the Telegraph “Foreign investors veto Fed rescue”:

Asian, Mid East and European investors stood aside at last week’s auction of 10-year US Treasury notes. “It was a disaster,” said Ray Attrill from 4castweb. “We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed.” The share of foreign buyers (”indirect bidders”) plummeted to 5.8pc, from an average 25pc…The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?

The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.

The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo’s Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system. Japanese investors and foreign funds are having to close their yen “carry trade” positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks.

Of course things might get considerably worse from here. It’s hard to say. However, there should come a time, perhaps soon, when shorting the dollar and making bullish bets on commodities and oil ceases the be the riskless strategy that the Fed’s dawdling has thus far made it. In such a scenario, we would not be surprised to see the large foreign investors capitalize on the low dollar and reduced stock prices to recycle some of their exaggerated surpluses into US equities. One way or another, those surpluses have to be recycled or the global financial system cannot function.

The sometimes controversial journalist Ambrose Evans-Pritchard in the UK Telegraph sees mortgage resets peaking in the next few months (see chart above), and dislocations in the credit markets, and he worries:

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports. The authority is a public body, backed by the two states. Yet it had to pay 20% rates in February after the near closure of the $330bn (£166m) “term-auction” market. It had originally expected to pay 4.3%, but that was aeons ago in financial time.

“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York. No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan’s giveaway short-term rates. It has come unstuck. Next in line is the $45 trillion derivatives market for credit default swaps (CDS)….

Leverage is too extreme. Bank capital is too eroded. Monetary traction eludes the Fed. An “Austrian” purge is under way. UBS says the cost of the credit debacle will reach $600bn. “Leveraged risk is a cancer in this market.” Try $1 trillion, says New York professor Nouriel Roubin (sic). Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans…For the first time since this Greek tragedy began, I am now really frightened.

It’s always possible that Evans-Pritchard’s doom and gloom scenario is correct, but he undercuts his argument by using an extreme and misleading example — implying that the Port Authority had to issue bonds at 20% interest. It did not.

There was a failed sale of these dutch auction securities which were devised a quarter century ago to effectively issue long term debt at shorter term interest rates by having the bonds reprice frequently. In such a failed sale, the issuer pays the a penalty rate, per the bond documents, until another auction (in the case of the Port Authority, the new interest rate became 8% at the next auction). Part of the reason the auction failed was the uncertainty regarding bond insurers, a situation that the Treasury moved to address. (In fact, there is a heck of a bull market currently underway, from a buyer’s perspective, in munis and related instruments.)

We’re not saying that things are rosy, only that Evans-Pritchard’s painting with such broad strokes is not really helpful in understanding what is going on in the credit markets. (No doubt NYU Professor and Chairman of RGE Monitor Nouriel Roubini would also like his name spelled correctly in future articles.)

Der Spiegel on the issue we discussed the other day:

The world consumes 86 million barrels of oil a day, but trading volume is 15 times as high. The difference represents bets on future price developments…

Within a year the price of a barrel of crude has doubled, from $50 to last week’s high of $100…Some analysts see prices rising to between $120 and $150, which would have dramatic consequences for the world economy. Similarly spectacular price developments have only occurred four times in the last few decades: in 1973, when the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo for the first time; in 1979, as a consequence of the Iranian revolution; a year later, when Iraq invaded Iran; and in 1990, when Iraq invaded Kuwait…

speculators now hold up to 45 percent of all oil contracts — three times as many as at the turn of the millennium. “Prices are being distorted,” says Senator Carl Levin, the ranking Democrat on the Permanent Subcommittee on Investigations, which is investigating the speculative trading of oil futures. If supply and demand were the only factors, the price of oil would be at least $20 lower.

How could this have happened?…Daniel Jaeggi, a former futures trader for Goldman Sachs, knows exactly how the business changed in the late 1990s. “The big pension funds began to diversify their investments, increasingly putting their assets in oil,” he says. The pension funds, according to Jaeggi, became the “driving factor in the market.”…Goldman Sachs was at the head of the pack. “They invented a new commodities index that also included oil,” says Jaeggi. The new index was wildly successful, and the more major investors put money into it, the more oil contracts Goldman bought and the higher the prices went. An enormous market force had been created.

Everyone jumped into the game. Morgan Stanley, Deutsche Bank and many other financial giants dramatically expanded their trading volume in oil contracts. Investment banks like Goldman even established their own oil reserves, acting as if they were energy companies like BP. They hoped to gain better insight into market events.

As a result, the trading volume in crude oil has almost tripled in the last five years, while demand for the liquid itself grew by only 1.9 percent per year.

Finally, some conflicting views of traders:

“Supply and demand cannot explain the high prices,” says Fadel Gheit of Oppenheimer & Co., a leading commodities analyst. Like many in his profession, Gheit believes financial investors are driving up prices. He’s reminded of the Internet bubble around the turn of the millennium. According to Gheit, oil is also seeing “excessive speculation” at the moment…

“I trade in news,” says Chris Motroni, 29. He earns his money as a small, independent trader on the NYMEX, with smaller trades and a lot of self-confidence. “The prices will increase to $115,” he says. Motroni loves the mood on the trading floor…

Question: what is the sound of an oil bubble that bursts? Does an oil bubble “pop” or “plop”? HT: Doug Martin

UPDATE

The AP on 3/10/08 discusses the shorting of the dollar and oil prices:

Light, sweet crude for April delivery rose $1.73 to $106.88 on the New York Mercantile Exchange after earlier setting a new trading record of $107.

Energy investors shrugged off a relative stabilization of the dollar and a cooling in tensions between Venezuela and its neighbors Colombia and Ecuador.

Many analysts believe speculative investing attracted by the weak dollar is the primary reason oil has risen so far so fast in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

“We’ve got a Fed(eral Reserve) meeting on the 18th that could see a sizeable rate cut,” said Brad Samples, an analyst with Summit Energy Services Inc., in Louisville, Ky. “So, it’s not over.”

Indeed, while the dollar fluctuated against the euro on Monday, many investors believe the greenback is likely to keep falling as the Fed continues to cut rates. Many analysts believe the rise in crude prices is not supported by the market’s underlying fundamentals, noting that supplies are generally rising while demand is falling.

Gabor Steingart in Der Speigel says that Senator Obama’s rhetoric reminds him of an elevator pitch in the heady days of NASDAQ 5000:

when I hear him speak, I have to think of the crazy days of the New Economy. It was a magical time, even for the most levelheaded of business executives. For several years, wild promises seemed to be the most valuable currency in circulation. Profits? No big deal! Experience? Unnecessary! Realism? More of an obstacle than anything else. While some entrepreneurs undoubtedly had realistic business models and administrative talent, most of them were simply peddling ideas.

World economic output grew by 80 percent in real terms between 1980 and 2000. But the value of shares rose by about 1,000 percent within the same period. The market hit its zenith on March 10, 2000, and then the bubble burst. Suddenly the billion-dollar companies listed on the NASDAQ collapsed like so many cold soufflés. These days, Bernie Ebbers, the former CEO of Worldcom and one of the stars of the new economy, no longer appears on Larry King Live. Instead, he is currently serving a prison term in Louisiana for fraud and conspiracy…

there is no room for thoughtfulness in the turbulent world of Obamania. Hillary Clinton, his rival in the fight for the Democratic nomination, suffers from the same problems as traditional companies in the automotive and engineering industries did when confronted with the hype of the New Economy. She is out of touch with his supporters. She uses language to explain, while Obama uses rhetoric to intoxicate. She tells voters what she is bringing to the table. He tells them what they can become. If Clinton is a solid stock, Obama is an option. If she’s a secure investment, he is speculation.

When the New Economy reached its conclusion, people suddenly realized that their hopes were dashed and their cravings for quick riches left unfulfilled. In 2002, Worldcom’s stock price fell to less than 10 cents. If democracy functions only half as well as the market economy, the Obama bubble will burst. The burning question is: When?