Strong oil, weak dollar -
The negative correlation between the dollar and the price of oil was much in evidence last week –
The dollar hit a record low against the euro, and is quite weak against most of the major currencies
Oil hit a record high in nominal terms, and not all that far off its 1979 high ($109 a barrel) in real terms …
Dean Baker – and OPEC – argue that the link between a weak dollar and a rise in the price of oil is almost mechanical. When the dollar goes down, oil has to go up in dollar terms to stay constant in say euro terms. There is something to that.
But this isn’t the entire story either.
Over the past few years oil has gone up v a basket of currencies while the dollar has gone down v a basket of currencies. Oil isn’t up as much in euro terms as in dollar terms, but it is still way up.
Plus there have been times – like 2000 – when oil rose in dollar terms even as the dollar was rising against the euro. During that period oil rose very strongly in euro terms. 2005 is a more recent case.
So why then is oil going up when the dollar is going down?
My answer: global growth is strong, while US growth isn’t.
Strong global growth – particularly in conjunction with a fairly limited supply growth – pushes up the price of oil. If easy-to-produce oil is close to peaking (the FT reports that “global oil production is estimated to have shrunk by 650,000 b/d in the third quarter”), the price of oil should be rising in secular terms so long as global demand is going up. Political constraints on more production — whether instability in key oil producing areas or a desire to limit production to keep prices up — would have the same effect. And if easy-to-produce oil outside of the Gulf and other less than stable areas has peaked (Both Cantarel and North Sea production are falling …), the geopolitical risk premium in the price of oil should also be trending up …
And strong global growth and weak US growth – indeed, a growing risk of a recession – are a recipe for a weak dollar.
It should go without saying that the strong oil/ weak dollar mix creates real problems for all the Gulf countries that insist (still) on pegging to the dollar. They are effectively importing a weak currency and low nominal interest rates when there economies are booming. The result: massive inflation and very negative real rates that are adding to the boom now, but risk creating problems later.
Pegging to the dollar has – at least in my view – been a recipe for macroeconomic instability in many oil exporting economies.
There also could be another reason why strong oil adds to dollar weakness – the investment preferences of the oil-exporting states.
This is a bit more speculative, but here is the basic idea.
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A rise in the price of oil, all else kept constant, reduces the current account surplus of Asia (and pushes Europe into a bigger deficit) while increasing the current account surplus of Russia, the Gulf, Norway, North Africa and a host of African economies (Nigeria, Gabon, Angola). If the US responds by cutting into its savings to pay for its higher oil bill, the US current account deficit also rises.
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Let’s assume, for a second, that the rise in Europe’s deficit from higher oil is offset by rising spending on European goods, so there is no net change in Europe’s aggregate balance. This is a bit disingenuous, since there is good reason to think that the oil-exporting economies spending on European goods would be going up even if the oil price had stabilized. But it simplifies things, as it implies that the oil surplus trades off with the Asian surplus.
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Let’s also assume that Asia’s current account surplus shows up as Asian reserve growth, and the oil surplus shows up as reserve growth/ an increase in the assets of the world’s oil investment funds.
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Now suppose that the oil states currently hold – in aggregate – a smaller fraction of their external wealth in dollars than Asia and that they are currently trying to lower the dollar share of their assets. This isn’t totally implausible. Norway has long held only about 35% of its oil revenue in dollars, Russia now has less than 50% of its reserves in dollars and a few Gulf states have also rather clearly trying to reduce the dollar’s share of their (growing) portfolios. In 2000, for example, as much as 85% of the Kuwaiti investment authority’s assets may have been in dollars. That total is now probably under 50% (KIA’s equity portfolio is certainly under 50%). ADIA reportedly shifted toward emerging economies a few years ago. And a host of Gulf funds now want to invest in emerging Asia …
If all these conditions hold, a shift in the world’s current account surplus from Asia to the oil exporting economies might lead to less demand for dollars, and thus contribute to dollar weakness.
In his now classic paper on the oil-exporting economies, Ramin Toloui of PIMCO calculates that if oil exporting economies invest 60% or more of their rising revenues in dollar assets, an increase in the price of oil is dollar positive (see figure 14). And if they invest less than 60% in dollar assets, a rise in the price of oil is dollar negative.
However, the idea that a shift in global savings from Asia (and potentially Europe) toward the oil-exporting economies is dollar-negative isn’t totally bullet-proof.
There an obvious counter-example: both oil and the dollar rose in 2005, contrary to what the story above would suggest. Of course, a redistribution of world savings toward the oil-exporting economies — and specifically a redistribution of official asset growth toward the oil-exporting economies — is just one of the factors that affects the dollar. Other factors might have just overwhelmed the “oil exporters don’t like dollar assets as much as Asia” effect in 2005. In 2005, Europe’s constitutional crisis, along with the perception of economic weakness left over from 2004, made the euro less attractive. And the combination of the Homeland investment act and rising US rates (v Europe) made the dollar more attractive.
Plus, back then at least one oil exporter (Russia) was putting a lot more of its rapidly growing reserves into dollars (roughly 70%) than it is now (a bit under 50%). It is not inconceivable – given the shift in the composition of Russia’s reserves and ongoing changes in the way that the Gulf manages its money — that a rise in the price of oil was dollar positive (i.e. more than 60% of marginal oil savings flowed into dollars) in 2000 and even in 2005, but not now …
That though leaves the question of why rising oil did help the dollar back in 2003 and 2004. The obvious answer is that that interest rates also matter, and policy rates were low back then.
I would add another component to the story. While there is some debate over the impact of a rise in oil-savings on the dollar, there isn't really much doubt that a rise in oil spending results in a shift in demand away from US assets toward Asian and European goods, and that too has an impact on the market. Work by the IMF indicates that the US current account deficit woudl rise even if the oil-exporting economies spent all of the increase in oil-revenue from higher oil prices, largely because the oil-exporting economies buy so few US goods.
And then there is a final twist. If the oil exporting economies are “diversifying” by investing in Asia, they just end up fueling Asian reserve growth. The oil funds get a claim on an Asian economy – whether India, Korea or China – and the Asian economy gets a claim on the US …
Or some would. India is probably less keen on the dollar than even Russia – and Thailand and Malaysia aren’t much keener on the dollar than the big Gulf states. A lot depends on where the money goes in Asia; not everyone is as wed to the dollar as China seems to be …
Still, it would be rather ironic if the desire of some of the smaller Gulf states to diversify their external portfolios away from the dollar is adding to the dollar’s current weakness – and thus the activities of their investment funds are making it harder for their central banks to sustain their dollar pegs …
Or perhaps the word “sustain” is wrong. So long as the GCC countries are willing to accept high levels of inflation and keep their nominal rates low – probably below US rates to deter speculation – their pegs are sustainable. It is just isn’t obvious why all this is actually desirable.
Brad,
My absolute concurrence. It is just so difficult to accept the current global economic makeup.
Perhaps, the day when nomianl price of oil hits $100, we might be seeing a low in the USD say USDJPY below 100?
Trend is moving, albeit slowly or quietly, away from USD and into other denominations. I wonder if, the Chinese really opens up their CNY, will there be a gret shift from USD assets to CNY backs? By Interest rate differentials, CNY does look interesting.
Will the US cut further into oblivion?
It’s hard to argue with Baker’s actual conclusion (it seems to me you’ve created a bit of a straw man): “In short, much of the recent rise in the price of oil for people in the United States is not actually oil prices rising worldwide, rather it is simply a case of the dollar declining in value against other currencies and also against commodities, such as oil.”
A typo in the first sentence: “The negative correlation between the oil and the price of oil…”
Still, it’s an interesting argument, and one that all who invest in foreign markets and commodity markets need to take to heart.
ibid — thanks for pointing out the (embarassing) type-o. I fixed it.
GCC states do import a fair amount of aviation equipment and military hardware but nothing like to offset the energy we buy.
It may be our oft-speculated tacit understandings with KSA which encourage them to hold the peg.
Unfortunately this is not a provable assertion.
“Bribery is costing the world $1 trillion a year… the World Bank said yesterday…” http://business.guardian.co.uk/story/0,,2123174,00.html
“…Increasingly, they say, prices also are being guided by a continuing rush of investor funds into oil markets…” http://www.econbrowser.com/archives/2006/04/contango_specul.html
“…As oil entered record territory, Exxon Mobil rallied 3.4%…” http://www.ft.com/cms/s/0/703f4d52-623e-11dc-bdf6-0000779fd2ac.html
see one-decade chart: http://mwprices.ft.com/custom/ft2-com/html-quotechartnews.asp?FTSite=FTCOM&q=XOM&searchtype&expanded=&countrycode=us&s2=us&symb=XOM&company=NEW
For the past few years, oil (in dollar terms) has been a 20%-30% volatility price. The EUR has been a 5%-6% volatility price. A simply correlation triangle would suggest that oil, not the dollar, has been the primary explanatory variable there.
While there clearly has been a cause and effect issue recently (oil producers receive dollars but buy mostly non-dollar stuff), it does not necessarily hold that commodity pries and the dollar are negatively correlated. As Brad alludes, it was only a few years ago that high energy prices were used as an excuse for abject euro weakness. And the mid-late 1980’s were a period of exteme weakness for both oil and the dollar.
If one plots the correlation of the dollar and, say, oil over long periods of time, you see that the long-run corelation is actually close to zero.
The Gulf may well feel that it cannot decouple from the US dollar until its nations are free of the risk of further US military and political intervention given an eighty year history of it.
In that case a “tar baby” strategy of getting the US to bankrupt its finances and destroy its military in Afghanistan, Iraq and Iran makes a great deal of sense for GCC states, eliminating local threats from the Taliban, Saddam and the Mullahs and the long range US threat of further intervention at the same time.
Cozying up to China and India with long term development, resource and investment treaties in the meanwhile - as Saudi has done aggressively - insulates the Gulf from the economic dislocation of the US sprial downwards. After all, only 10 percent of Gulf imports come from the US (airplanes and weaponry). 80 percent of exports go to Asia, and 40 percent of imports come from Asia, 40 percent from Europe. Dependency on the US is really quite low once the threat of military intervention is removed.
While the US implodes, the Gulf states are positioned to earn more than $24 TRILLION over the next 20 years from the higher oil prices engineered by recent wars in the region.
When the GCC states move to common currency - the Khaleeji - they can shed the dollar link and be positioned to hold one of the strongest currencies on the planet. The Khaleeji may happen in 5 years or 10 years. It doesn’t really matter, as when it does happen the Khaleeji will be a spectacular reserve currency - equivalent to holding oil in the bank.
With a higher oil price, the share of global GDP priced in US dollars is higher.
Why wouldn’t this result in higher transaction demand for dollars, putting upward pressure on the dollar?
The rest of the world is much better educated than ever before in financial matters. The drop in the purchasing power value of the US dollar is directly correlated with the rise in oil in nominal terms. Saudi Arabia earlier this year slashed Japan’s quota by 1 million barrels per day. A shortage of crude in Japan hikes the spot oil price in the world for everyone. To compensate for the lower US Dollar which oil is denominated in, the OPEC nations raise the price of crude oil. The oil industry backed Bush Administration’s military protection racket in the Gulf Arab states doesn’t translate to lower gasoline prices for the US consumers.
Moreover a higher percentage of Saudi oil exports now consists of lower grade heavy crude that yields alot less gasoline than light sweet crude oil produced by Nigeria and the British North Sea. Sure Saudi Arabia has the capacity to increase exports, but of mostly lower grade heavy crude oil. Over the coming decade, the Chinese economy will have an insatiable demand for crude oil, as the per capital consumption of energy remains only a fraction of US consumption. Get use to the fact that the era of cheap energy is over forever and change your lifestyles accordingly.
P.S. I use only compact energy fluorescent bulbs in my house which pay for themselves within a year with the energy savings. They last upwards of 9 years. Last year, I purchased a Toyota Prius which gets me 45 miles to the gallon. If every car on the road in the US was a Prius, the US wouldn’t have to import a drop of oil from the rest of the world. Too bad, the Big 3 Detroit auto manufacturers continue to insist that it is impossible to build quality cars that are high fuel efficiency.
Also I love my oil stocks, including Petrobras (PBR), PetroChina (PTR), Total (TOT), CNOOC (CEO), Sinopec(SNP). Last year, my oil stocks paid for my hybrid Prius that gets 45 mpg
“…The top sources of US crude oil imports for June were Canada (1.873 million barrels per day), Saudi Arabia (1.501 million barrels per day), Mexico (1.392 million barrels per day)…” http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html
“…The chart below shows the close correlation between Oil and USD/CAD (inverted in graph)…. Furthermore, USD/CAD is already trading not far from its 28 year lows…” http://www.dailyfx.com/page/oil_bottoms.html
“…The U.S. and Canadian dollars rose and fell against the euro in similar patterns 94% of the time since the introduction of Europe’s single currency in 1999 until May… Canada can’t escape a slowdown in the U.S… “It’s a matter of time before the negative events spill over the border… The monetary policy is joined at the hip”…” http://www.bloomberg.com/apps/news?pid=20601083&sid=aDDq8s23MJYY&refer=currency
@ Dave Chiang
Here in the UK where gasoline costs more than $8 per gallon, getting a mere 45 mpg isn’t impressive. It doesn’t even require a hybrid. Most of our cars get excellent mileage, and our diesels even better. My 2001 Rover diesel luxury sedan gets close to 60 mpg on the highway and averages about 40 around town.
Americans have been cheated by the corporatist kleptocrats running the car and oil industries into thinking 25 mpg is a big deal and 45 requires something special. Not true.
Modern diesel engines also last about twice as long as petrol engines, capable of doing 200,000 miles if well maintained. That means the total resource cost of the car to the planet is much less as well. Emissions are also very low, and enforced by strict inspection and licensing laws.
And I too switched over to all low energy bulbs last year.
London banker — why the “Khaleeji” rather than say the dinar or something?
Macroman — good points, as usual.
Guest — transaction demand for dollars is modest compared to demand for savings, whether savings to buy oil in the future or the savings of the oil exporters themselves.
“Top Chinese companies listed in New York have poor quality earnings… different problems at the companies including insufficient cash flow to fund cash needs and a history of negative working capital… which is unsustainable in the long run. The study found signs of possible earnings management with low allowances for bad debt and other provisions not keeping pace with inventory growth… “These companies are government-controlled enterprises masquerading as independent public companies and it is virtually impossible to assess their financial condition given their poor level of disclosures,”… The 10 companies…are: PetroChina… China Petroleum & Chemical… Huaneng Power International, Yanzhou Coal Mining, Suntech Power Holdings and Sinopec Shanghai Petrochemical…” http://www.ft.com/cms/s/0/d4c326fe-647d-11dc-90ea-0000779fd2ac.html
@ Brad Setser
The term “Khaleeji” refers to the dialect of Arabic spoken in the Gulf and is used more broadly for anything truly local to the Gulf region. Colloquially, the Gulf economy is often refered to as the Khaleeji economy. Khaleeji was the name settled on last year in the GCC summit which set the target for currency union as 2010 (although that seems unrealistic).
Local currencies are now rial, dirham and dinar, but Khaleeji makes everyone happy as a compromise. No one has to look like being absorbed by a neighbour’s monetary system.
“Cozying up to China and India with long term development, resource and investment treaties in the meanwhile - as Saudi has done aggressively - insulates the Gulf from the economic dislocation of the US sprial downwards.”
Brad, I’d love to hear your opinion on this sort of comment. (Not on the comment itself, but the broader idea.) You may not be here for this reason, but it’s clear that many regulars and a good amount of nearly every thread here seems dedicated to steering the topic into further evidence of America’s “spiral downwards” into a state of “oblivion,” with a worthless currency and position well down the pecking order on the global stage. It’s become difficult to separate the wheat from the chaffe. Is that your belief as well? Are these regulars latching onto a premise of your blog that I’m missing? I’m just interested in your personal thoughts.
“…Demand for water in Qatar grew 16% in 2006 and in the first quarter of 2007, and this pattern shows no sign of slowing… There is a water shortage…” http://www.thefreelibrary.com/QATAR+-+Power+Cuts+&+Water+Shortage.-a0168174468
my guess is that the us will be less central to the global financial system in the future than in the past, tho as the world’s biggest debtor and the world’s biggest consumer market, a lot of people still depend heavily on the us. the ability for tighter linkages with China to help insulate the Gulf from a US slump hinges on two things:
a) financially, how much Gulf money china is willing to accept (remember, china doesn’t need gulf money any more than it needs american money; its own savings more than suffice) and the performance of China’s markets (and currency) v. the US.
b) China’s capacity — really all of Asia’s capacity — to grow on the back of its own demand, not imported US demand (and more recently imported Gulf and european demand)
London banker — thanks for Gulf monetary history 101.
Anonymous, Does the name of this man answer your question on America’s “spiral downwards” into a state of “oblivion”?
“Little” George Bush as the Chinese nickname him.
Why the accounting sheets of US Banks can’t be trusted
Financial institutions have been running virtual savings and loans through special-purpose entities with flexible accounting and little oversight. No wonder they’re in trouble now.
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BanksDarkOffBalanceSheetWorld.aspx
For those folks who can’t quite wrap their arms around what an SIV, an SPIV (special-purpose investment vehicle) or a conduit is, those names all stand for pretty much the same thing: special-purpose entities that reside off balance sheets. Think of them as virtual savings and loans that can be quite sizable. There are no real rules that govern what they can buy. And because they’re off balance sheets, they operate with little regulation.
Citigroup notes that the leverage in this particular vehicle, Beta Finance, is “only 14.24 times.” Thus, Citigroup, a leveraged entity, owns a gaggle of leveraged S&Ls. That helps illustrate a point I’ve made many times: that the well of liquidity that bulls were citing two months ago as a reason to be bullish was just a wall of leverage. (It’s worth noting that the net asset value of Beta Finance has declined 19% from its high and that Citigroup’s other conduits are apparently down a similar amount.)
It just boggles the mind how much leverage is employed by financial institutions and how little knowledge the world has of their workings. As to why these infinitely leveraged black boxes (with extremely flexible accounting and disclosure rules) exist in the first place, I think we know the pat answer: so that financial institutions can employ them and utilize even more leverage than they are legally allowed to.
“Anonymous, Does the name of this man answer your question on America’s “spiral downwards” into a state of “oblivion”?”
Does a denigrating Chinese nickname for a man sitting as POTUS for all of 8 years, and who is already on his way out the door forever, answer my question? I’d have to say “no” on that, David, though certainly the it’s not as though there’s anything new in detractors piling on and predicting not just the waning but the imminent demise of America as any sort of world power at all, particularly when the U.S. is experience a bad patch.
Anonymous, Like it or not, the days of the unipolar US power are over for good. Americans will have to learn how to live in a multi-polar world with other civilizations. Unrecognized by the insular Washington Consensus, the third wave of globalization is taking place without the participation of any of the former Western powers. Brazil, Russia, China, India and even South Africa negotiate multi-billion dollar trade, technology and investments deals that don’t involve the United States. For instance, China BaoSteel will build one of the world’s largest steel mills in the Brazilian Amazon jungle. India and China co-develop oil fields in Syria, Sudan, and Ecuador. China and Brazil co-develop oil fields in Angola. Russia and China co-develop oil fields in Venuezuela and offshore Cuba.
“…China’s breakneck economic development has resulted in the world’s fastest-growing toxic-algae problem… In May a blue-green algae bloom on Lake Tai caused mass panic when it contaminated the water supply of 2 million residents…” http://www.msnbc.msn.com/id/20790113/site/newsweek/
MikeM, I can’t answer for Brad on America’s spiral downwards.
Because Nouriel predicted economic weakness due to the housing market while others were predicting continued growth, this site attracted a number of bears (and bulls to bait them).
Nouriel has basically been proven correct, though not in the details. The bulls have all but vanished, leaving a number of bears. But Nouriel and Brad seem to me to simply be calling it as they see it.
I’ve made a fair amount of money due to paying attention to what they say, whether I liked it or not.
As for our president, the sad fact is that he is not well regarded, either in this country or abroad. He is a primary steward of our economy. He is responsible for adding roughly $7T in debt to our national government (I am being generous in discounting the costs of war). Economic growth under his presidency has been tepid. Our trade deficit has hit record levels. Lack of regulation– his responsibility– led to the housing crisis. Recession is likely.
If the record were different, I’d give him credit for our economy. But the record is as it is. As an investor, the United States looks riskier and riskier.
Some years ago, a Bush advisor derided his political opponents as being part of “the reality-based community.” He boasted that Bush made his own reality.
Unfortunately, it turns out to be a pretty ugly reality.
I’ve stayed with the “reality-based community,” which means hearing what people say, whether you like it or not. It seems to work pretty well as an element of an investment strategy.
london banker: “Premier Ho…” http://www.rgemonitor.com/blog/setser/212228/ - (wonder what the chinese call him?)
you don’t think it matters if the ’sexier wife’ (in your view) has AIDS…
perhaps we should also be more concerned about london bankers’ health: “…”Britain is threatened by its position as globalisation’s epicentre. Any seize-up of global financial markets affects London and the British economy more than any other…” http://politics.guardian.co.uk/economics/story/0,,2170751,00.html
DC: As to why these infinitely leveraged black boxes (with extremely flexible accounting and disclosure rules) exist in the first place, I think we know the pat answer: so that financial institutions can employ them and utilize even more leverage than they are legally allowed to.
And the reason that this works is that if the SPV’s go bust then the bank is not responsible for their debts. This allows a bank to employ leverage in a way that limits the losses of the SPV’s to whatever capital the bank puts into them. The Federal Reserve keeps track of all of this.
Also about my comment on keeping checking accounts safe, that’s not an easy job, and it requires huge numbers of people doing simulations. FDIC insurance is useful in keeping some confidence in the system, but if things ever get bad enough so that FDIC is needed for a large bank, then we are in for serious, serious trouble. There are lots of people working behind the scenes to make sure that we never get anywhere near that point.
Also note that pension funds are *NOT* going broke and neither are most homeowners with prime mortgages. The reason that pension funds are *NOT* going broke is that the securities they bought from investment banks in general had provisions that the IB would be responsible for defaults. This puts the risk of default on the IB’s and not the pension funds, and *that* is where all of the people running computer simulations come in. The IB then attempts to sell the risk to the gamblers of the world (hedge funds and rich people).
As far as assets under management, it depends on the type of asset and the type of management. If you are managing assets to be put into treasury securities, then the going rate is tenths of percent. If you are managing assets that are going to be put into private equity startups, then the going rate is 10%-20%. The big banks have all sorts of different things for whatever the customer wants.
bush is not to blame for the mortality of empires or other large scale themes of global history. the general attitudes of the democratic party show that others are afflicted by the same ‘zeitgeist’ or spirit of the age. bush is an honest man (definition : a man who once bought, stays bought.) don’t mind alan greenspan - at the moment he is busy selling a book, and books, like blogs, thrive on the more colourful and extreme views. greenspan says that iraq is about oil. but geopolitics is almost by definition not about whatever they say it is about. you think greenspan is a born again truth teller ? i wonder . . .
i think - dave chiang - that you also reflect bushspeak. what are the characteristics ?
- consistency, simplification, and constant repetition.
and the attitude of the insiders will be to use bush’s departure, when he goes, to get clean up the establishment’s current image - (which is not good) -
‘are you leaving us george ? could you shut the door please, and since you are going, could you put out the trash ?’
@ Guest
London always suffers when financial markets hit a downswing, but it always comes back again because this is the global capital of the capital markets. As long as business is being done somewhere on the planet, London will be part of the financial intermediation of that business. Besides, I’m brushing up on Arabic and my kids are learning Mandarin.
Perhaps it was poor taste, but when a group in the City were discussing what would happen if Bush bombed Iran, someone chimed in that London would absorb 500,000 Iranian refugees and the housing market would recover. The diaspora that populates London is one of its great strengths in globalised markets.
@ Anonymous
You’re going to have to grow a thicker skin if you’re going to rub shoulders on blogs with people who aren’t constantly subjected to US media propaganda and are capable of judging US conduct by objective results and the historical record. Weakened morally by its conduct of the Iraq war (more anonymous mass graves than Saddam) and financially by borrowing excessively for consumption (McMansions and wide screen TVs won’t ever show a return on investment), America is going to take a lot more cuts in the public opinion stakes before it hits bottom. I believe America will spiral slowly down as confidence in the American economic, social and political model is confronted with a reality that is in sharp contrast to the rhetoric. As gillies notes accurately, the problems are much broader and deeper than just Bush and will likely continue after Bush is gone.
Watch Fox news if you want happy talk about dear leader and flag waving. We in the real world call it as we see it. But then we read the Financial Times, Asian Times or Gulf News every day. (Each is an excellent and comprehensive global paper that puts the New York Times and WaPo to shame as shallow and insular.)
Twofish,
That would make a great story in the Neo-con operated Wall Street Journal on how the Wall Street Investment Banks are really altruistic in helping the general public, and absolutely not interested in padding their own personal pockets. However, a synopsis of what’s really happening in the AAA rated subprime toxic waste arena was recently penned by Bloomberg writer David Evans in a story titled “Banks Sell ‘Toxic Waste’ CDOs to Calpers, Texas Teachers Fund.”
http://www.bloomberg.com/apps/news?pid=20601109&sid=aW5vEJn3LpVw&refer=home
” The beauty of Wall Street is they put lipstick on a pig. . . . Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans. They (Wall Street) spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses. Those losses will be enormous, and we’ll see an incredible witch hunt when these pension funds are left holding the bag. “
I didn’t say that anyone in Wall Street is altruistic. You have a bunch of people who are trying to line their own pockets. As long as you have snake oil salesmen selling things to other snake oil salesmen, things work well. If you have snake oil salesmen selling things to widows and orphans, then things fall apart.
I would hope that most pension fund managers have the ability to do basic portfolio analysis……..
London Banker, rubbing online shoulders with someone who doesn’t believe Fox News, or ABC/CBS/NBC/CNN for that matter, is one thing. Having to wade through the same off-topic invective from the same people in virtually every post on this blog is something. Mr. Setser has asked participants to stay on topic, and only to link stories that pertain to the subject of his posts, but these requests are neither followed nor enforced. I may only be a lurker, but I find myself coming here less often as a result.
That may be no great loss, but I have observed that other readers who formerly provided valuable contributions to the discussion have also vanished without a trace. Perhaps it’s a coincidence…or perhaps others are turned off by the off-topic same-old, same-old.
Getting back to the topic at hand…..
The basic problem is that you have two trends, oil going up, and dollar going down, and there are a number of reasons for thinking that the trends could be entirely independent from each other. In order to show that there is a connection, one would have to look at something like month-to-month data and find examples where both trends went in the opposite direction at the same time.
One other thing that adds to the connection. The big SOE’s that are making the most money in China are the state owned oil companies.
Hi Guest,
Apparently you are looking for specific answers to problems which are interlinked.
Economics is both a science and an art. You cannot just say 1+1=2. There are conditions, sub conditions and many other more disclaimers (think ceteris paribus??)
Well, some of us might appear to be droning on and on, it remains your own choice to discern what’s noise or not. While I do respect your right to voice your own views, I do hope you do respect our rights to our views too. Perhaps we might be boring, but then again aren’t Economists meant to be so?
I have always interpreted “Little Bush” as “Bush Junior”. It is used because “President Bush” was used to describe a different person who is now “Bush Senior” or to DC : “Big Bush”.
London Banker: “Gulf News … is an excellent and comprehensive global paper.”
wow, that’s a credibility-buster if ever i saw one. persistent reading of the gulf news (known to accelerate neuron loss) might explain some of the posts though