As I've mentioned, I'm not happy with my level of understanding of Macro Economics. As an Engineer, i was never required to take an econ class, and so like many I've picked up bits and pieces along the way. Micro econ, the stuff we live by every day, is relatively straightforward and intuitive. Macro, at least to me, is neither.
So, after years of thinking I halfway understood the views of Austrians and Keynesians, and the general view of inflation and deflation, and trade balances and commodities and so forth, along came 2007. I was one of the people who saw the advent of peak oil and the impact on economies as pricing rose to match the marginal cost of new production (which it does, thanks to micro econ). Though nobody wanted to admit it, high oil prices were one of they key shocks to the world economy in 2008 that kicked off a cascade of collapses. After crash, of course, oil prices dropped as consumption dropped, pretty much as I and most rational thinkers would expect.
I was not at all surprised by the crash. All of my (meager) assets were in cash and gold, and my family suffered not a whit in the stock market crash, and I was fortunate enough to hold a job through the dip, which was almost as severe as I expected.
So far, so good? Well yes, but then QE came along with bailouts of gigantic proportions. I freely admit that I did not expect the gov't to bail out businesses and banks to the tune of trillions of dollars, nor to continue such spending for years with near-zero interest rates. I knew enough about econ to know what low interest rates do, especially coupled with inflation -- they erode savings, push investors further out the risk/return curve, and create moral hazard for the thrifty by benefiting the risky, especially when risk is backed by boundless backstops.
I honestly never thought the US gov't would so blatantly crush the little guy, while making banks and major corps and investors whole. And even when the intent was obvious, I didn't think it would work. My Austrian leanings anticipated market punishment, with weaker dollar. I was completely wrong.
Well, not completely. Gold was a REALLY good investment, for my modest holdings, and college expenses made me liquidate that later at relatively good time, but that was just luck. Other than that, I failed to join into the risk market, and missed much of the run-up in stocks. Obviously, my understanding was incomplete, so I knew I didn't know enough......and I also knew that the financial pundits don't either, since they missed the crash and the turnaround and everything else beyond fairly obvious currency moves and near-term changes.
Along this time I'd already decided that being on the non-discretionary side of the economy made more sense than where I was, so I voted with my feet and changed industries. I was also back in school, with plenty to do, so I just filed away this need to learn and got absorbed in life for a while.
Fast forward to 2014, and I'm done with school, some of the kids are off at college, and I see stocks at record highs and gold dropping, still with trillion-dollar deficits more or less, and I can't help but be intrigued.
The oil issue was resolved, and so far I'd been right about getting into energy -- oil prices were high, and energy was king. Personally, I'd never really believed the world would adjust to $100 oil as well as it had, but to degree it was clear than it hadn't, with high unemployment, heavy gov't debt, and slow growth the world over. $100 oil was enough to ignite the shale revolution, and though I had indeed expected unconventional oil to grow, it did so better than I'd anticipated. This is worthy of further discussion, too, but not today.
Expensive oil fostered a broad interest in renewables, and essentially enabled a renaissance in wind and solar, helped along by gov't subsidies the world over. The interplay between oil prices and renewables is worthy of a discussion all its own, too, but not today.
So today we have the double-whammy of crashing oil prices with slow consumption and expanding production, with changing fortunes around the globe, and various financial shocks. How will this play out, and what should countries (especially ours!) do? Good question, and I know I don't know enough to answer......yet.
A few points are key: lower energy prices profit consumers and punish producers, on the int'l level and here in this country. It seems pretty intuitive that those countries that are heavy net imports WILL do better, and those that are heavy exporters (like Russia, Venezuela, and much of the MidEast) will struggle. What about those in the middle, like the US?
First, we need to understand how money flows, and double check that "intuitive" part, because I've already proven my intuition doesn't work very well. I understand this is a basic equation in macro econ, and I assume there isn't much argument about its validity (it is a pretty basic assertion, really).
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0
I think I understand this, and its a pretty simple concept: in a given country's money, everything that is owned -- money, whether asset or debt, whether real physical asset or financial instrument -- is either owned by the private population (and that includes corporations!), the government, or by foreigners (those outside the country). This is really basic and intuitive, yet it implies a lot of more subtle and less intuitive consequences, especially when you add in fiat currency, bonds of various sorts, loans, and of the course the complications of changing monetary flows over time. Which is what Macro Econ is all about. And which is pretty much universally understood.
Edit: this is intuitive for flows where everything that transfers goes from one party to another; it's less-so for the assets overall over time. If growth in one area has to be offset by debt somewhere else, then growth means offsetting growth of assets and liabilities overall.
Enough for this post...maybe the next one will cover currency first, and and a little about financial assets. And then we'll get back to economics, and maybe eventually the impact of oil shocks.....
Saturday, January 17, 2015
Nature of Reality - Another Imperfect Option
Assuming my free-will is really free, and not some farcical illusion of a pre-ordained mind forced to believe thusly, I still have a few complaints. What kind of sad joke is it to live in universe where free-will enables the broad manipulation of future reality, and not only be limited to a few relatively limited sensory organs to comprehend current reality, but also have to make guiding decisions using a seriously flawed computing engine equipped with logically inconsistent logic routines, faulty usage of "beliefs" where "facts" should apply, essentially no effective engine for statistics, highly limited short-term memory (about 7 items, really???!?!), an error-prone and malleable long-term memory (without change tracking), and a hormonally-attuned "emotional override" circuit that is likely many millennia out of date.
I understand the nature of engineering trade-offs, and the self-learning, auto-correlation, and memory-pruning tools are pretty impressive so maybe some other areas had to give, but I think a little more attention to the conscious decision components would be helpful. It would be SO much easier to make decisions if a few more criteria could be weighted in ad-hoc mode, and it would help every so much if intentional desire to commit info to long-term memory could be more efficient (even if you had to intentionally purge some others). A better interface to that impressive differential math coprocessor that lets NBA players shoot 3-pointers on the move, yet makes it hard for most students to master calculus, would be nice.
But it's really the logical fallacies that are readily allowed by the high-level algorithm engine that needs work. Why have a machine that can self-analyze to find faults, yet have pre-wired sections that difficult or impossible to modify (let alone that the weighting of desire to actually make changes is so weak). Maybe the root flaw is self-certainty -- people are just a little too sure of their obviously error-prone decisions to drive change. Or maybe that derives from the questionable "respect" circuit, where we more heavily weight the opinions of people who seem certain over those who seem uncertain, even in non-crisis situations. And that crisis circuit needs work too -- what's this deal about dumping adrenaline in for routine business situations, and thereby invoking archaic hormonal overrides where cold logic would better apply (and we won't even get into the unnecessary stress effects that causes)?
Let's see if we can't make some wiring and programming changes, shall we? And fix at least the more egregious processor limitations?
I understand the nature of engineering trade-offs, and the self-learning, auto-correlation, and memory-pruning tools are pretty impressive so maybe some other areas had to give, but I think a little more attention to the conscious decision components would be helpful. It would be SO much easier to make decisions if a few more criteria could be weighted in ad-hoc mode, and it would help every so much if intentional desire to commit info to long-term memory could be more efficient (even if you had to intentionally purge some others). A better interface to that impressive differential math coprocessor that lets NBA players shoot 3-pointers on the move, yet makes it hard for most students to master calculus, would be nice.
But it's really the logical fallacies that are readily allowed by the high-level algorithm engine that needs work. Why have a machine that can self-analyze to find faults, yet have pre-wired sections that difficult or impossible to modify (let alone that the weighting of desire to actually make changes is so weak). Maybe the root flaw is self-certainty -- people are just a little too sure of their obviously error-prone decisions to drive change. Or maybe that derives from the questionable "respect" circuit, where we more heavily weight the opinions of people who seem certain over those who seem uncertain, even in non-crisis situations. And that crisis circuit needs work too -- what's this deal about dumping adrenaline in for routine business situations, and thereby invoking archaic hormonal overrides where cold logic would better apply (and we won't even get into the unnecessary stress effects that causes)?
Let's see if we can't make some wiring and programming changes, shall we? And fix at least the more egregious processor limitations?
Swiss Franc Unlocked
"FXCM, the brokerage facing a shortfall of nearly a quarter-billion
dollars after highly-leveraged investors made losing bets on the Swiss
franc, pushed back against U.S. regulatory efforts that likely would
have left it less vulnerable."
Talk about Karma! Low leverage thresholds usually hurt the little guy, who gets caught short in a bad trade and struggles to cover. But when a big unexpected event occurs, like the Swiss unlocking their rates, ALL of the trades hit stops pretty much, and the volume prevented liquidation before most blew through the capital requirements, so the brokerage goes instantly broke too.
IF the investors cover their losses (any some may not be able to), then the brokerage will be OK. If not, the brokerage folds, and the winners on the other side of trades lose too. As with Lehman, the trouble starts when trades can't net out, and the contagions.
One might wonder why trading with leverage from the trading house that makes money on the trading value is even allowed.
Talk about Karma! Low leverage thresholds usually hurt the little guy, who gets caught short in a bad trade and struggles to cover. But when a big unexpected event occurs, like the Swiss unlocking their rates, ALL of the trades hit stops pretty much, and the volume prevented liquidation before most blew through the capital requirements, so the brokerage goes instantly broke too.
IF the investors cover their losses (any some may not be able to), then the brokerage will be OK. If not, the brokerage folds, and the winners on the other side of trades lose too. As with Lehman, the trouble starts when trades can't net out, and the contagions.
One might wonder why trading with leverage from the trading house that makes money on the trading value is even allowed.
Thursday, January 15, 2015
Oil in Storage Growing
Lots of interesting news, mostly negative. Holiday spending was down, more than expected. Why? Mostly because people are worried, probably.
Big news was the Swiss unlocked their currency without warning, and the Franc promptly blew away the Euro, leaving currency shorts bloody on the floor (30% loss in a day for some!), and Swiss companies bleeding about $100B of value in one day. Others of course made out like bandits. Of course it's a system shock, and most of the effects will ring out over time, but I do wonder what the Swiss were thinking. This knocks the Euro down a rung (which it didn't need), but also will push Switzerland closer to deflation too. Why do countries seem to be some sort of quandary between courting deflation on one hand or QE to banks on the other? It's a false dichotomy, ignoring the option to invest in infrastructure to better stimulate GDP.
So a stronger Franc makes for a marginally weaker dollar, so oil goes up a bit and everybody long on oil heralds the bottom is here, while those who were talking how much good cheap oil would be for the economy were silent. A few days back it was sort of the other way around. Simply, though, one group of Americans spending less on oil to others making less on oil doesn't help or hurt. The fraction saved from imports helps, but strengthens the dollar, so those trying to export hurt. Overall, long-term, cheaper energy is better, but fast, short, shocks cause all sorts of consternation, especially if there isn't time for gov'ts and central banks to react, and more so if some react poorly when they do. Sometimes an economy here or there hits a tipping point, and gets stuck into a new rut; VZ could go into default, or Britain could hit a deflation cycle, or Germany, or the US could, for that matter. All it takes is a flat economy and then most people saying "Hmm, I think I'll just sit on my money and wait for a bit and see how things sort out", and there you go.
I learned there is now maybe 30Mbbl of storage or so leased (some say up to 50Mbbl). In the past up to 100Mbpd has been parked, and I think there is about 200Mbpd of fleet capacity total. And that's pretty impressive, since that's a mobile quantity twice the complex at Cushing (which represents maybe 70Mbpd free, of the 300Mbbl total US free capacity). US storage is only 1/3 full, so it seems silly to use floating storage, but for Brent crude ships may be cheaper.
Different sites say different things, but there is at least 300Mbbl or so capacity free in the US, and at least a couple hundred more around the world. At a couple of Mbpd, filling up will take the most of the year.
Nat gas is up a little, and at $3+, it is still dirt cheap. For comparison sake, that is relatively worth as much as $23 oil. So, even at the lowest stated floor of $30 or so, oil will STILL be worth more than natural gas. I cannot fathom why the US does not try to consume cheap NG to displace imported oil, instead of worrying about drilling expensive US oil and exporting cheap US NG. Displace oil with NG, display coal with solar and wind, and use a little NG for peaking plants as needed, and we'd have a good start toward and energy policy that made some sense. Spend a few public $$ on the power infrastructure and grid, and instead of wealthy bankers maybe we'd have a stronger blue collar economy and better middle-class as well.
And no, I don't think Austrians and their austerity or Keynesians and their loose money and inflation goals are either one correct. Another false dichotomy (or maybe the same one, rephrased), but for another day's discussion.
Big news was the Swiss unlocked their currency without warning, and the Franc promptly blew away the Euro, leaving currency shorts bloody on the floor (30% loss in a day for some!), and Swiss companies bleeding about $100B of value in one day. Others of course made out like bandits. Of course it's a system shock, and most of the effects will ring out over time, but I do wonder what the Swiss were thinking. This knocks the Euro down a rung (which it didn't need), but also will push Switzerland closer to deflation too. Why do countries seem to be some sort of quandary between courting deflation on one hand or QE to banks on the other? It's a false dichotomy, ignoring the option to invest in infrastructure to better stimulate GDP.
So a stronger Franc makes for a marginally weaker dollar, so oil goes up a bit and everybody long on oil heralds the bottom is here, while those who were talking how much good cheap oil would be for the economy were silent. A few days back it was sort of the other way around. Simply, though, one group of Americans spending less on oil to others making less on oil doesn't help or hurt. The fraction saved from imports helps, but strengthens the dollar, so those trying to export hurt. Overall, long-term, cheaper energy is better, but fast, short, shocks cause all sorts of consternation, especially if there isn't time for gov'ts and central banks to react, and more so if some react poorly when they do. Sometimes an economy here or there hits a tipping point, and gets stuck into a new rut; VZ could go into default, or Britain could hit a deflation cycle, or Germany, or the US could, for that matter. All it takes is a flat economy and then most people saying "Hmm, I think I'll just sit on my money and wait for a bit and see how things sort out", and there you go.
I learned there is now maybe 30Mbbl of storage or so leased (some say up to 50Mbbl). In the past up to 100Mbpd has been parked, and I think there is about 200Mbpd of fleet capacity total. And that's pretty impressive, since that's a mobile quantity twice the complex at Cushing (which represents maybe 70Mbpd free, of the 300Mbbl total US free capacity). US storage is only 1/3 full, so it seems silly to use floating storage, but for Brent crude ships may be cheaper.
Different sites say different things, but there is at least 300Mbbl or so capacity free in the US, and at least a couple hundred more around the world. At a couple of Mbpd, filling up will take the most of the year.
Nat gas is up a little, and at $3+, it is still dirt cheap. For comparison sake, that is relatively worth as much as $23 oil. So, even at the lowest stated floor of $30 or so, oil will STILL be worth more than natural gas. I cannot fathom why the US does not try to consume cheap NG to displace imported oil, instead of worrying about drilling expensive US oil and exporting cheap US NG. Displace oil with NG, display coal with solar and wind, and use a little NG for peaking plants as needed, and we'd have a good start toward and energy policy that made some sense. Spend a few public $$ on the power infrastructure and grid, and instead of wealthy bankers maybe we'd have a stronger blue collar economy and better middle-class as well.
And no, I don't think Austrians and their austerity or Keynesians and their loose money and inflation goals are either one correct. Another false dichotomy (or maybe the same one, rephrased), but for another day's discussion.
People are DUMB!
I heard a rather depressing story on NPR on the history of handwashing for infection control, and found a write-up online:
"In the mid-1800s, studies by Ignaz Semmelweis in Vienna, Austria, and Oliver Wendell Holmes in Boston, USA, established that hospital-acquired diseases were transmitted via the hands of HCWs. In 1847, Semmelweiss was appointed as a house officer in one of the two obstetric clinics at the University of Vienna Allgemeine Krankenhaus (General Hospital). He observed that maternal mortality rates, mostly attributable to puerperal fever, were substantially higher in one clinic compared with the other (16% versus 7%).50 He also noted that doctors and medical students often went directly to the delivery suite after performing autopsies and had a disagreeable odour on their hands despite handwashing with soap and water before entering the clinic.
He hypothesized therefore that “cadaverous particles” were transmitted via the hands of doctors and students from the autopsy room to the delivery theatre and caused the puerperal fever. As a consequence, Semmelweis recommended that hands be scrubbed in a chlorinated lime solution before every patient contact and particularly after leaving the autopsy room. Following the implementation of this measure, the mortality rate fell dramatically to 3% in the clinic most affected and remained low thereafter.
Apart from providing the first evidence that cleansing heavily contaminated hands with an antiseptic agent can reduce nosocomial transmission of germs more effectively than handwashing with plain soap and water, this approach includes all the essential elements for a successful infection control intervention: “recognize-explain-act”.51 Unfortunately, both Holmes and Semmelweis failed to observe a sustained change in their colleagues’ behaviour. In particular, Semmelweis experienced great difficulties in convincing his colleagues and administrators of the benefits of this procedure."
The NPR story was more direct. Basically, the doctors did not appreciate being identified as the transmission agents, and to an extent unknowingly responsible for countless deaths. Rather than embracing the situation, they managed to drive Semmelweis from the clinic, and reverted to previous practices. Semmelweis continued to ardently (and ineffectively) strive to make his case, with a blustery and contentious approach that made very few converts. Eventually he lost his mind (possibly from syphilis, or stress, or who knows what?) and went into an asylum.
These are the same basic genetics in our pool today, so you can bet that people are no smarter, nor more reasonable about looking at data. I would like to think some would just as soon not smell like cadavers when they went about, but really I'm not sure about that. Is it really reasonable to expect our species to make progress expeditiously on less obvious world issues?
Wednesday, January 14, 2015
Recession and nobody noticed?
Oil and economics update.
Oil has bounced around, and we're back in the land of volatility. December (Christmas) spending was down, far more than expected, and Nov was adjusted down, so of course the market shot down. Surprising, oil was up -- probably some people moving money out of stocks pushed it up, and short covering helped.
A few days back I observed "either the world is in a major recession and doesn't know it, or we suddenly have more than 4Mbpd of spare oil capacity, or oil is oversold". I'm thinking that at least part of it is indeed weaker than visible economics, at least in the west.
Part of this drop is due to cheap oil -- oil or gasoline spending counts just like eating out or buying gifts, so cheaper oil all by itself is a hit to spending. Of course some will spend their savings, and indeed food and beverage was up a bit. Other spending was down, though. But isn't cheap oil good, you ask? Well, it will help individual households a bit, but in the short term people save a bit or pay off a bill or two, and it takes a while for cheaper oil to percolate through business costs to make other areas cheaper...and that reduces spending too....and it takes longer for that to turn into more buying and a stronger economy. But then, the dollar is also strengthening, and that makes it easier to import but harder to export, so that part of the economy slows for a while, while the import part expands. And of course, if you're in the oil patch or any of the business areas associated with it, you aren't spending more at all!
Is it a net positive or negative for the US? It'll be positive for the coasts, and a negative for the energy states. Investors will take a bath, as most of the recent capex growth in the US has been in oil. Housing and jobs will take a hit for a while. Overall, the current account deficit will drop as import value goes down for oil, but it should be made up in material imports. Importers will do well, and exporters will struggle a bit more. Tanker rates should drop a bit, while other shipping may go up a bit.
Sure enough, container shipping is up from the recent low, and that indicates some recovery in China and maybe India, and perhaps a little more importing to the US. Since China and India import a higher fraction of their oil (less total, but a higher percentage), they'll benefit a bit more than the US from the cuts. Of course they'll have the same economic hit from lower price, as will the entire world. Unfortunately, most of the world was already teetering along with low inflation, so a cut to spending can tip across to recession, and a little follow-through to prices can turn into deflation. All that needs to happen then is for people to pocket their savings while waiting for prices to drop a bit more, and a deflationary spiral can start. With heavy gov't and individual debt, debt to GDP will then automatically go up, and EU rules and credit agencies will start hammering on the weaker countries.
How does all of this play out? I don't know, other than volatility and uncertainty, but I think the world is at high risk of contagion and a broader market collapse. A slower drop in oil would have helped, and hopefully production cuts back fast enough to moderate prices until economies can digest the savings as stimulus versus deflation.
In other news, floating storage is up to 25Mbbl leased (likely not all full, yet), and US storage is up a few Mbbl since last week. Rig activity is now below a year ago, and it can quickly roll back to the lows of '09 since we don't have rising nat gas prices to stimulate a transition from oil to gas like we had from dry gas to wet plays as gas dropped and oil rose in recent years. It'll just get bad faster this time.
How long will prices be low? Best bet is to watch storage build. If production doesn't drop by the time China fills their SPR, Cushing fills up, and floating storage is loaded, we'll see a harsh new low. If production drops and economies recover, then prices should recover to 65+. Neither can happen quickly, so we're in for a half-year slog of market volatility, at best.
Oil has bounced around, and we're back in the land of volatility. December (Christmas) spending was down, far more than expected, and Nov was adjusted down, so of course the market shot down. Surprising, oil was up -- probably some people moving money out of stocks pushed it up, and short covering helped.
A few days back I observed "either the world is in a major recession and doesn't know it, or we suddenly have more than 4Mbpd of spare oil capacity, or oil is oversold". I'm thinking that at least part of it is indeed weaker than visible economics, at least in the west.
Part of this drop is due to cheap oil -- oil or gasoline spending counts just like eating out or buying gifts, so cheaper oil all by itself is a hit to spending. Of course some will spend their savings, and indeed food and beverage was up a bit. Other spending was down, though. But isn't cheap oil good, you ask? Well, it will help individual households a bit, but in the short term people save a bit or pay off a bill or two, and it takes a while for cheaper oil to percolate through business costs to make other areas cheaper...and that reduces spending too....and it takes longer for that to turn into more buying and a stronger economy. But then, the dollar is also strengthening, and that makes it easier to import but harder to export, so that part of the economy slows for a while, while the import part expands. And of course, if you're in the oil patch or any of the business areas associated with it, you aren't spending more at all!
Is it a net positive or negative for the US? It'll be positive for the coasts, and a negative for the energy states. Investors will take a bath, as most of the recent capex growth in the US has been in oil. Housing and jobs will take a hit for a while. Overall, the current account deficit will drop as import value goes down for oil, but it should be made up in material imports. Importers will do well, and exporters will struggle a bit more. Tanker rates should drop a bit, while other shipping may go up a bit.
Sure enough, container shipping is up from the recent low, and that indicates some recovery in China and maybe India, and perhaps a little more importing to the US. Since China and India import a higher fraction of their oil (less total, but a higher percentage), they'll benefit a bit more than the US from the cuts. Of course they'll have the same economic hit from lower price, as will the entire world. Unfortunately, most of the world was already teetering along with low inflation, so a cut to spending can tip across to recession, and a little follow-through to prices can turn into deflation. All that needs to happen then is for people to pocket their savings while waiting for prices to drop a bit more, and a deflationary spiral can start. With heavy gov't and individual debt, debt to GDP will then automatically go up, and EU rules and credit agencies will start hammering on the weaker countries.
How does all of this play out? I don't know, other than volatility and uncertainty, but I think the world is at high risk of contagion and a broader market collapse. A slower drop in oil would have helped, and hopefully production cuts back fast enough to moderate prices until economies can digest the savings as stimulus versus deflation.
In other news, floating storage is up to 25Mbbl leased (likely not all full, yet), and US storage is up a few Mbbl since last week. Rig activity is now below a year ago, and it can quickly roll back to the lows of '09 since we don't have rising nat gas prices to stimulate a transition from oil to gas like we had from dry gas to wet plays as gas dropped and oil rose in recent years. It'll just get bad faster this time.
How long will prices be low? Best bet is to watch storage build. If production doesn't drop by the time China fills their SPR, Cushing fills up, and floating storage is loaded, we'll see a harsh new low. If production drops and economies recover, then prices should recover to 65+. Neither can happen quickly, so we're in for a half-year slog of market volatility, at best.
Nature of Reality - less fortunate options
I struggle to imagine a more intellectually disappointing reality than having a predetermined life with a mind falsely ordained to presume free-will trudging along a difficult existence driven by suboptimal decisions that are generally obvious in retrospect, thereby inexorably yet pointlessly fated to self-flagellation.
This is really what the argument for determinism amounts to, though. Perhaps artificial intelligence researchers are missing the boat on the quest for consciousness -- they don't need to create consciousness, but must only program the jealous belief that it is conscious. Malevolent divine watchmakers we would be.
Perhaps sometimes one can cut too deeply with Occam's Razor?
This is really what the argument for determinism amounts to, though. Perhaps artificial intelligence researchers are missing the boat on the quest for consciousness -- they don't need to create consciousness, but must only program the jealous belief that it is conscious. Malevolent divine watchmakers we would be.
Perhaps sometimes one can cut too deeply with Occam's Razor?
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