Posted by: thefinancedude | May 22, 2008

Two Pennies – May 22, 2008



This week has seen a dramatic surge in oil contracts dated as far forward as 2016. Futures have moved higher than the spot price, a rare event known as “contango”. This can cut both ways: either as a sign of an impending supply crunch years hence; or that the futures market has become unhinged from reality.


Almost all emerging nations have to slam on the brakes in coming months to curb inflation before it starts spiralling out of control. Inflation has hit 30pc in Ukraine, 22pc in Vietnam, 8.5pc in China, and double digits across most of the Gulf.


The countries that account for the most of the growth in oil demand over the last two years are almost all nearing the limits of easy economic growth.


Oil wells follow a simple production curve whereby at some point they begin to produce less than before forming a bell curve.  Logic will bring you to the conclusion that since each little well follows a bell curve, the sum of them all forms a bell curve. 


We’re on to something now.  Discovery of more oil than the year before peaked in 1980.  We have been discovering less and less oil for nearly thirty years.  Over that time other countries have begun to contribute to the demand for crude.


When you reach the apex of the curve you’ve reached roughly half the total supply available.  The first half was easy to find; just stick your finger in the ground.  The second half is harder and costlier to extract (middle of the ocean, 2 miles deep).  Therefore the only direction prices may move is higher, due to higher costs to secure it.  Throw in the dollar being trashed (everytime i-rates get cut) and we arrive at oil prices today.


We’re missing the entire point of high prices on crude.  We need to step back and examine historical changes in energy availability and plan accordingly.  Trolleys will once again ride as a supplement to dense urban transit networks supplement again.


Top banks call for relaxed writedown rules

The IIF’s proposals, which were sent to US and European central banks, governments and accounting watchdogs, underline financial groups’ view that the credit crunch will inflict long-lasting damage on their business.

So in effect the bank is saying, if you don’t allow us to move the goal posts once again, we will not be able to score another touchdown.  So tell me why we should save you to keep this charade going?  Are you hoping to be the last one in the last chair?  The only solution to this is learning from this mistake.  We repealed all the banking laws in the mid nineties and they all competed to naturally to be the most cost efficient, not risk adverse, which required economy of scale. 


However when one becomes too big they are not allowed to fail and instead the mal investment that got them into it continues until they make the problem bigger with governments helping hand.  We’ve been doing this reflate at all costs since the eighties.  It’s not working so those who can’t comprehend change – step aside.  We should separate the banks so this RISK is FULLY contained and we don’t worry about a bank failing and bringing the entire economy down with it.


The economy is like an organism moving vital fluids around to consumers.  The mistake is building an organism that resembles humans in their concentrated frailty.  The economy, if resembling a creature such as an octopus, would be able to absorb losses anywhere and everywhere without the greater whole affected.  It would be a minor issue to let a simple bank or [fill in the blank] fail then to continue putting tourniquets attempting to keep the whole sum alive.


The IIF’s paper says: “The writedowns required under current interpretations may be substantially in excess of any actual or reasonably probable loss on many instruments”.


I hope someone in academia can do some type of analysis on the differences between these two methods.  I suppose it’s already underway since the obvious need for a good comparison is a daily joke.


However, accounting standard-setters in the US and Europe so far resisted pressure to relax fair value rules. Other regulators have also criticised financial companies for proposing rule changes that would reduce the impact of a crisis triggered in large part by their aggressive lending and underwriting practices. The IIF declined to comment.


The IIF will output their spin, but they won’t defend any failings on their own behalf.  This is what we’re rewarding.  The Banks are Pavlov and we’re the damn dog.  Every time a warning bell goes off, we don’t salivate, we’re being cut off. We use our brains to make the drugs aka money aka credit – last longer.


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