Author Archives: WARREN MOSLER

Re: Oil prices

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(an email exchange)

>   
>   On Wed, Aug 6, 2008 at 4:45 PM, Craig wrote:
>   
>   It seems that the ‘right’ price for them to set oil at is not
>   necessarily the highest price possible.
>   

All the 911 passports were Saudi; so, they might have other agendas.

>   
>   If I were them it would seem like the best policy to maximize
>   the total value of their oil holdings over the life of those
>   holdings. By cranking the price up ‘too high’, they incent
>   substitution and potentially kill their sales in the long term.
>   

Right, classic monopoly analysis.

>   It would seem their goal would be to keep the price as high
>   as they could w/o setting off a chain of
>   substitution/invention/philosophy which would move the world
>   meaningfully away from oil (or towards increased oil exploration
>   or towards invading them). There is also the little matter of
>   how much money do they really need (a somewhat silly question
>   but this situation does create an embarrassment of riches/market
>   dislocations in excess of where a rational accumulation might lie).
>   

Yes, understood.

>   
>   It looks to me that on the highs they got everybody’s attention.
>   There may still be political responses towards
>   innovation/substitution/conservation at these levels, but it seems
>   likely that at or above the old highs, US folks will be making their
>   next car a hybrid, beating their government to get prices down
>   (including pluggables/nuclear – a long term threat to Saudi
>   dominance) and the like. Then there’s China’s slowdown and food
>   riots. I’d have thought quietly bleeding the world would be better
>   business than actually setting it on fire.
>   

Yes, but again, it’s their ‘political choice.’ There is no ‘market price’.

Also, with only 1.5 million bdp in total excess capacity, it might be too close to the line for them, and they might want to get prices high enough to build their excess capacity by a million or two bpd.

Otherwise they risk losing control of price on the upside, as happened a couple of years back when output briefly hit 10.5 million bpd when the funds were buying intensely enough to cause builds of physical inventory and a large contango as storage went to a premium.

>   
>   Of course, even if this is all true, they may be looking at it
>   differently.
>   

Worst case for us is they understand that they can hike all they want if they spend the extra revenues on imports of real goods and services. This keeps foreign GDPs muddling through in positive territory as they exact ever higher real terms of trade and they increasingly prosper at our expense.

And out leaders think more exports and less consumption is a good thing and are encouraging more of same.

Almost seems from the data this is exactly what they are up to?

Think they read my blog???

:)

warren

>   
>   Craig
>   


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Q&A: Oil prices

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Russel asks:

Any reason why the Saudi’s are allowing the price of oil to slide?

Just a guess. The futures liquidations were large enough such that holding spot prices up and letting futures free fall would have made it obvious the Saudis are price setter.

There also could be some liquidation of physical inventory going on in which case they would have to let inventories fall before resuming control of prices, or else actually buy in the spot markets which is out of the question of course.

It’s like if some pension fund had a hoard of NYC subway tokens and decided to sell them ‘at the market’. The price would go down from the current $2 price until that selling pressure abated. Then the price would go back to whatever NYC was charging.

So most likely they just let this inventory liquidation run its course, and then work prices higher again.

Much like happened in Aug 2006 with the massive Goldman liquidation and again in a smaller way at year end back then.


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Re: UK economy

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(an email exchange)

>   
>   
>   On Wed, Aug 6, 2008 at 12:25 AM, Prof. P. Arestis wrote:
>   
>   Dear Warren,
>   
>   Just received the piece below. The situation over here is getting
>   worse but pretty much as expected.
>   
>   Recession signalled by key indicators of British economy
>   
>   
>   Best wishes, Philip
>   

Dear Philip,

Yes, seems tight fiscal has finally taken its toll and is now reversing the ugly way – falling revenues and rising transfer payments.

Without support from government deficit spending, consumer debt increases sufficient to support modest growth are unsustainable.

And with a foreign monopolist setting crude oil prices ‘inflation’ will persist until there is a large enough supply response,

It’s the BoE’s choice which to respond to, though ironically changing interest rates is for the most part ceremonial.

All the best,
Warren


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2008-08-06 US Economic Releases

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MBA Mortgage Applications (Aug 1)

Survey n/a
Actual 2.8%
Prior -14.1%
Revised n/a

Nudging up a tad. Still looking soft. Mortgage bankers losing market share to banks. Even this low level equates historically to higher levels of sales and new starts.

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MBA Purchasing Index (Aug 1)

Survey n/a
Actual 315.2
Prior 309.5
Revised n/a

Up some, muddling along. Most of the resets are past.

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MBA Refinancing Index (Aug 1)

Survey n/a
Actual 1121.8
Prior 1074.4
Revised n/a

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MBA ALLX 1 (Aug 1)

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MBA ALLX 2 (Aug 1)

“The refinancing applications index climbed 4.4 percent to 1,121.8 last week, while the home purchase applications gauge rose 1.8 percent to 315.2 on a seasonally adjusted basis, the MBA said.”

Government spending will lift housing along with aggregate demand in general, as it always does, and there are numerous signs it’s already happening.

And history will probably see it as the Fed’s rate cuts of a year ago as it always does.

They say monetary policy ‘works’ with a lag, but seems to me the lag is always until fiscal spending kicks in.

It was the fiscal package of 2003 and not the low interest rates that got housing going the last time around.

(And history blames Greenspan for the housing ‘bubble’ rather than Bush.)

Now and then the private and foreign sector can provide the spending power by spending by ‘reducing its savings’/going into debt but that process is ultimately unsustainable without the support of government deficit spending.

The recession has again been pushed forward a quarter or two, with street firms now saying Q3 will be ok, but Q4/Q1 will be weak.

With the latest GDP revisions it’s looking more and more like Q4 2007 was the bottom, and the government deficit looking to move towards 4% of GDP should be sufficient for continued muddling through.

Demand isn’t high enough for ‘full employment’ so labor markets (whatever that actually means) should remain soft.

And more people previously not looking for work now looking for work (they now desire more income due to higher prices) will probably keep the unemployment rate elevated.


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NYT: Mortgages

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(an email exchange)

>   
>   On Mon, Aug 4, 2008 at 7:50 AM, Russell wrote:
>   
>   I am more and more convinced housing is not near a bottom.
>   Granted, I have no idea what the recent Housing Bill will do. But I
>   think housing problems are going to cover the entire swath of
>   America – not only Subprime, but also Alt A and even Prime.
>   
>   

could be, but would be very unusual in an economy with a growing gdp supported by what may now be endless fiscal packages.

the actual housing slump could be mostly old news unless/until gdp softens again as most are forecasting in q4.


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Re: CFTC reclassifies crude oil position

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(An email exchange)

>   (3) The reclassified trader is quite a special one:
>   
>      (a) The reclassified trader has interests in only a few
>   commodities (I have highlighted the reclassified ones in the
>   chart).
>   
>      (b) The trader is heavily focused on crude oil. The
>   reclassified positions include 330 million bbl of WTI contracts,
>   45 million bbl WTI calendar spread options, 20 million bbl of
>   crude oil calendar swap options, 15 million bbl of European style
>   crude oil options and about 15 million bbl of financial WTI crude
>   oil futures and options.
>   
>      (c) In some of these contracts, the trader’s reclassified
>   positions are enormous. For example, in the WTI contract, the
>   traders 330 million bbl of reclassified positions amounted to
>   about 11% of all the open interest in this contract. In the WTI
>   calendar spread options, the trader’s 45 million bbl position was
>   equivalent to about 35% of all open interest. So the trader was
>   a very big participant in these markets.
>   
>      (d) The trader has a few other reclassified interests, mostly
>   in natural gas, with little or no reclassified interest in electricity
>   derivatives or petroleum products such as RBOB gasoline. But
>   the reclassified positions in these markets are tiny in relation to
>   open interest and the trader does not appear to have been a
>   significant participant, at least from its reclassified positions.
>   
>   The CFTC has not revealed the identity of the reclassified trader
>   – which remains confidential. But given the scale of positions
>   which the CFTC has reclassified, there are only a few types of
>   institutions which could be running this type of book: oil
>   companies, refiners, distributors, merchants, banks, index funds
>   and swap dealers.
>   
>   
>   And the CFTC staff obviously examined the numbers and concluded
>   that “commercial hedging or risk-management activities did not
>   constitute a significant part of the overall trading activity”. In other
>   words, the CFTC concluded that this was all or almost all
>   speculative.
>   
>   Now we don’t have full information about the revisions going all
>   the way back to Jul 2007 for all the contracts. But we do have
>   information about the basic WTI position for this trader. Back in
>   Jul 2007, this trader had a position of about 180 million bbl that
>   has been reclassified. But by Jul 2008, this traders’ reclassified
>   position had grown to 330 million bbl. This traders’ positions
>   have been growing faster than the market as a whole so its
>   share of total open interest in the WTI contract has risen from
>   9.1% in Jul 2007 to a massive 11.5% in Jul 2008.
>   
>   The reclassification is so large it affects understanding of the
>   whole market. Under the old classification, non-commercial
>   traders accounted for about 38% of the total open interest in
>   the WTI contract. But now that one large trader has been
>   reclassified, non-commercial traders account for 49% of the
>   market — half rather than one third.
>   
>   Assuming that one individual trader did increase their already
>   large 180 million bbl position in the WTI spreads in Jul 2007 to as
>   much as 330 million bbl in Jul 2008, and that the additional
>   positions were not hedging an underlying exposure, it seems
>   impossible that the massive accumulation would not have
>   disturbed the market at least somewhat.
>   
>   It is interesting, though perhaps coincidental, to note that
>   crude oil prices peaked around Jul 4-14, a few days before the
>   CFTC announced its reclassification on Jul 18.
>   
>   These positions are so large that they clearly exceed the
>   NYMEX position limits by a substantial margin (no more than
>   20,000 contracts in all months; no more than 10,000 contracts
>   in any one month; and no more than 3,000 contracts in the last
>   three days of trading in the spot month). Presumably, the
>   holder of these positions has received a waiver from NYMEX and
>   the CFTC on the basis that it is hedging under the normal
>   hedging exemptions. But if the CFTC no longer believes that the
>   holder of these positions is using them for “hedging or risk
>   managing” to any significant extent, will they still be allowed to
>   qualify for the waiver (a question I am not qualified to answer).
>   
>   

thanks,

any idea who holds that large position?

A liquidation of this size is more than sufficient to drive down futures prices and even cause a liquidation of some portion of spot inventories.

The Saudis could keep prices high as this happens but that would make it obvious they are setting prices as swing producer.

So instead, as in Aug 06 during the Goldman liquidation, they instead lower their prices as futures prices fall, but with a small lag, until the liquidation is over.

They then go back to setting/hiking prices

Warren

>   
>   
>   The CFTC has published revised Commitment of Traders data
>   back to 3 Jul 2007 to take account of the reclassification of one
>   or more positions from the commercial to the non-commercial
>   category.
>   
>   CFTC has published both the original and the revised data for a
>   single point in time (15 Jul 2008) to help users understand the
>   impact of the change. It is has NOT published identical
>   historical data sets of both original and revised data. However,
>   I still have the complete data as originally reported — and of
>   course the revised numbers from the CFTC website. Comparing
>   the two series gives a fascinating insight into what the CFTC
>   has done (this is a little sneaky because I don’t think the CFTC
>   staff meant to identify the position of an individual trader quite
>   so publicly).
>   
>   (1) The revisions over the entire period from Jul 2007 onwards
>   affect just one very large participant in the crude oil market
>   each week (and presumably the same participant over time).
>   
>   (2) In each case, the positions seem to have been almost
>   entirely in the time spread. A large number of positions that
>   were originally reported as separate “long” and “short”
>   commercial positions are now being reported as a combined
>   non-commercial “spread” position with a small balance reported
>   as an non-commercial short position each week.
>   
>   (3) The attached chart gives some indication of the impact of
>   the reclassification back through Jul 2007 (as far back as the
>   CFTC staff have so far been able to recalculate the data). The
>   scale of the reclassified position is very large (see chart) and it
>   has been growing over time. The position which CFTC has
>   reclassified has grown from around 190,000 contracts in Jul
>   2007 to 320,000 contracts in Jul 2008. By the middle of Jul this
>   year, this one massive trader held spread positions equivalent to
>   about 25% of the entire market for non-commercial spread>   positions.
>   
>   (4) Interestingly, we can also look at the residuals — ie the
>   part of the commercial long-short position that was not
>   reclassified as a commercial spread position. The residual has
>   varied over time between about 1,000 contracts (1 million bbl)
>   and 11,000 contracts (11 million bbl) and every week it was a
>   residual short position rather than a long one. None of the
>   CFTC reclassifications affect the non-commercial long side of
>   the market at all. It doesn’t necessarily imply that this trader
>   was always short overall (they might have had offsetting long
>   positions somewhere else). But interestingly, those short
>   positions have been gradually cut over time (see chart)
>   although as of the middle of last month (15 Jul 2007) the
>   reclassified trader was still net short almost 4,000 lots (4 million
>   bbl).
>   
>   


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2008-08-05 US Economic Releases

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ICSC-UBS Store Sales WoW (Aug 5)

Survey n/a
Actual 0.0%
Prior 1.2%
Revised n/a

Flat, but year over year still looking ok.

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ICSC-UBS Store Sales YoY (Aug 5)

Survey n/a
Actual 2.9%
Prior 2.6%
Revised n/a

Continues higher into today’s meeting.

By itself, generally not an important number for the Fed.

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Redbook Store Sales Weekly YoY (Aug 5)

Survey n/a
Actual 3.5%
Prior 2.9%
Revised n/a

Also moving up, even after rebates have gone out.

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ICSC-UBS Redbook Comparison TABLE (Aug 5)

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ISM Non-Manufacturing Composite (Jul)

Survey 48.8
Actual 49.5
Prior 48.2
Revised n/a

Better than expected, seems to be holding at muddle through levels.

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ISM Non-Manufacturing Composite ALLX 1 (Jul)

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ISM Non-Manufacturing Composite ALLX 2 (Jul)


Karim writes:

  • Employment up, export orders and prices paid down were largest movers. Number is for July, so employment number doesn’t seem consistent with NFP data for same month.
  • Export orders do seem consistent with recent data out of Europe and Japan (Eurozone retail sales for June that came out today showed down 3.1% y/y).

    • “Our business remains at about the same level as the previous month, with continued focus on cost reduction.” (Finance & Insurance)

    “The general state of the home-building industry has not changed since last month; however, with the commodity and code changes going into 2009, we face much higher construction costs and reduced margins across the entire supply chain.” (Construction)

    Right, prices to rise even as volumes remain low, as headline leaks into core via cost push.

    “Continue to see slowdown in local economy.” (Health Care & Social Assistance)

    “While still positive, the overall outlook for 2008 for our company is not as high as earlier in the year.” (Wholesale Trade)

    “Governmental spending for services is up this period.” (Professional, Scientific & Technical Services)

    Yes, government deficit spending on the rise.

    July June
    2008 2008
    Index 49.5 48.2

    While below 50, this still implies positive GDP growth and is not collapsing as feared.

    Activity 49.6 49.9
    Prices Paid 80.8 84.5

    Still way high.

    New Orders 47.9 48.6
    Employment 47.1 43.8

    Agreed – not in sync with other employment indicators, but the other numbers reflect large numbers of new entrants to the labor market – a higher labor force participation rate.

    So these companies maybe planning employment increases, but falling short of those new people now reported to be looking for work

    Export Orders 47.5 52.0
    Imports 49.0 50.5

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    FOMC Rate Decision (Aug 5)

    Survey 2.00%
    Actual 2.00%
    Prior 2.00%
    Revised 2.00%

    Fisher voting to hike, and others placated by stronger anti-inflation rhetoric.

    History will not be kind to this Fed.


    Karim writes:

    • Bland statement-1 dissent (Fisher)
    • Dovish-
        <
      • Economic activity ‘expanded’ in the 2nd qtr (no mention of ongoing expansion)
      • Labor markets have softened further and markets remain under considerable stress
      • No mention that downside risks to growth have diminished (as they did last time)

    Hawkish-Upside risks to inflation are also of ‘significant’ concern (new)

    Bottom Line: No guidance of anything imminent (i.e., Sep move is off the table). October 29 meeting is 1 week before election and Nov payrolls report, so December meeting earliest likely to see a move, if any.

    NEW

    Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

    Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

    Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

    OLD

    Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

    The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

    The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.


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Re: Resource allocation

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>   
>   On 8/3/08, Craig wrote:
>   
>   Ok. And the irony is as prices fall, demand increases again.
>   Until consuming governments get their head around that fact
>   and put some kind of floor under crude prices to incent
>   substitution (which may be beyond their thinking and/or impossible
>   politically), it seems like crude prices are gonna play rope-a-dope
>   with consumers.
>   
>   
>   Craig
>   
>   

Crude will be rationed as is everything else (scarcity, etc.).

The question is how. Ration by price or by other things?

Rationing by price is the most pervasive and means the wealthy (by definition) outbid the less wealthy for the available supply.

Make you wonder why the Democrats support higher prices, as that means they support their supporters going without while the wealthy drive any size SUV they want. Much like wondering why Obama supports Bernanke after Bernanke explained to Congress how he’s keeping inflation down by keeping a lid on inflation expectations after explaining the main component of inflation expectations is workers demanding higher wages, meaning Obama, Kennedy, and the rest of the left is praising Bernanke for doing a good job of suppressing wages.

Non-price rationing is less common but not unfamiliar, such as mandating cars get an average of 27 mpg, minimum efficiency standards for refrigerators, windows, etc. This takes an element of rationing by price away and results in the wealthy consuming less and leaving some for the less wealthy to consume a bit.

So seems to me the logical path for the Democrats would be something like my 30 mph speed limit for private transportation, which is ‘progressive’ and also drives the move towards public transportation with non price incentives as previously outlined. But there hasn’t even been any discussion of a progressive policy response. All seem highly regressive to me.

So I expect the world’s new and growing class of wealthy will continue to outbid our least wealthy for fuel and other resources.

Also, there may be limits to how high we want world consumption/burning of fuels for all the various ‘green’ reasons.

That would mean drilling and other production increases are out, as would be increased use of coal via the electric grid for electric cars.

And, again, it would be the world’s wealthy outbidding the less wealthy for consumption of the allowable annual fuel burn, as somehow allocation by price continues to rule.

Most paths keep coming down to the continuing combination of weakness and higher prices.

Warren

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(comments from my brother, Seth, who was cc’d)

>   
>   I think democrats have lots of business and profits waiting
>   in govt subsidies for wind and solar. If oil prices fall that goes
>   away for now and they can’t produce on the subsidies for
>   them-cynical view but probably true
>   
>   There are also a lot of wealthy democrats and they want their
>   votes. Poor people all vote for democrats anyway-even with
>   declining lifestyles they are not going to McCain. So I think
>   Obama is pandering to the wealthy-it might be who he is-no
>   one really knows.
>   
>   With all of their green talk I have not seen any of them reduce
>   air travel, suv caravans or turn off the a/c in the capital. Just a
>   way to get votes and sound concerned. I saw a tv program
>   about how the chinese olympic swimming building is a green
>   sustainable building. It is 7 acres, pools, 25,000 people.
>   they finally said it uses about 25% less energy than a comparable
>   building would have. That is not green or sustainable, especially
>   since the building was not needed in the first place. I think “green”
>   is about making money, not the environment.
>   
>   
>   Seth
>   

I just can’t allow myself to be that cynical like you new yorkers!

:)

Warren

>   
>   
>   I think I am cynical usually, but this green thing drives me nuts
>   it started 30 years ago but is now all about money
>   when I see some lights turned off in Times Square (even in the
>   daytime) or the 5 huge spot lights on the CBS building lighting up
>   Katie Couric’s 50′ x 30′ poster which are on 24 hours a day turned
>   off, then I will believe it is about resources and not money.
>   there is a long way to go.
>   they advertise expensive green buildings here-I am not kidding-the
>   big thing is thermostats with timers on them and bamboo floors-didn’t
>   we have those 30 years ago??
>   
>   they talked about the oscar ceremony being green this year-the
>   celebrities were all giddy about it-what they did was use red
>   carpet made of recycled fibers????? what is that?
>   absolutely nothing-
>   anyway, time to calm down. too much excitement here
>   seth –
>   
>   

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