Friday, May 23, 2008

Smaller Asian Countries Begin to Buckle Under Oil - I'm Closing iShares Signapore (EWS)

And so it begins... I've been writing how this price of oil will put us on path of global recession if it continues. Further, the true market price is being surpressed in many countries, especially Asian and Middle East so true supply/demand dynamics are not playing out like they are in the US where the embattled consumer is shriveling quickly into his home (until he is foreclosed upon).

First, some bookkeeping - I'm CLOSING iShares Singapore (EWS) on the deteriorating outlook for Asian economies as global commodity prices begin to seriously cause issues. No need to take the risk here. I like Signapore for the long run but we have some major issues encroaching the region. I sold earlier today the last of my 0.6% stake in the $13.30s. I took some profit in early April [Locking in Some Profits in iShares Singapore] in the $13.20s just 2 weeks after restarting the position in the $11.70s in mid March, so I missed the top here in the $14.00s+ but good enough. I don't know if Signapore itself subsidizes energy to its citizens but its the financial hub for the region - and since I am now concerned about the region, it's a regional call.

Now on to the fun stuff....

While I'm a near term energy/commodities bear [Oil Looks Toppy to Me - Starting Ultrashort Oil & Gas (DUG)] my comments are more longer term in basis. Essentially we are going to go through years of "World of Shortages" in which commodities trail upward on a long wide slope, punctuated by some dramatic selloffs and bubble like runs up. (of which we have just seen one). But at some point as we've been pointing out, it stops making sense to build things due to commodity costs - either steel [Fast Rising Steel Prices Set Back Big Projects] or energy. Only "not truly free markets" are in fact holding us up - Asian and Middle Easterners willing to pay almost any price to keep their growth going. This cannot continue forever or at any price. This is a major distortion and few countries can keep this up or their budgets will be blown up (we don't mind that in the United States of Subprime; we just will print more money to "fix things" when we have massive deficits) - however not every country is so irresponsible so we now are beginning to see the first signs of economics trumping the distortions in the smaller Asian economies. Now if China/India follow suit a lot of things will be changing in this world.

I wrote in [May 21: American Airlines Cutting Jobs and Routes]

The only reason we are not seeing major slowdowns (yet) globally are many countries subsidize the true cost of energy to their consumers... namely China and India. At some point this will subside or reverse. The true forces of the market are not allowed to play out in these countries - since their consumers are not feeling the pinch - so they have no reason to restrict demand.

And now the first dominoes begin to fall....
  • Asian governments are split on ways to cope with record oil prices, with some subsidizing costs for consumers to contain inflation and others raising energy prices to lower the effect on their budgets.
  • Indonesia and Taiwan have both pledged payments to low-income families to help them cope with planned fuel-price increases and Finance Minister Michael Cullen of New Zealand announced tax cuts designed to help workers struggling with living costs.
  • Malaysia said it plans to announce cuts to a 53 billion ringgit, or $16.5 billion, fuel subsidy in a couple of months, a move that may raise costs and fan accelerating inflation.
  • On Friday, the South Korean energy ministry is considering boosting nuclear power output and raising electricity costs in the second half of the year to cope with soaring oil prices and other costs of producing energy, Reuters reported.
  • China, suffering the deadliest earthquake in 32 years, said this week that it has no plans to remove fuel-price caps.
  • "We see fiscal positions deteriorating in countries that subsidize the local cost of oil," said Robert Subbaraman, chief economist at Lehman Brothers Asia in Hong Kong. "If oil prices stay persistently high at these levels, these kinds of measures can do more damage than good."
  • Oil has more than doubled in the past year, and prices of grains such as rice, corn, wheat and soybean reached unprecedented levels in 2008. The increases have stoked social tensions and led to wider fiscal deficits as governments subsidize food and energy expenses for their people. (US solution? Print more money - try it guys; oh wait that creates MORE inflation. No it does not... if you have the correct government reporting which makes inflation disappear like magic)
  • Indonesia's president, Susilo Bambang Yudhoyono, facing elections in 2009, is raising fuel prices for the first time in almost three years to reduce subsidies. The government would have to spend 190 trillion rupiah, or $20 billion, on subsidies if fuel prices were not increased
  • Taiwan, which plans to increase fuel prices on June 2, will distribute 20 billion Taiwan dollars, or $659 million, in subsidies to middle and low-income families to offset higher energy costs.
  • In China, the government said Thursday that speculation that it may remove curbs on fuel prices as early as next month is "baseless." China caps fuel prices to limit their impact on inflation in the world's most-populous nation.
  • Chinese consumer prices rose 8.5 percent last month, close to the fastest pace since 1996. Inflation rates in Sri Lanka and Vietnam have exceeded 20 percent, while Singapore's consumer price gains have reached levels not seen since 1982.
  • Rising oil prices are giving a "big shock" to Japan's economy.
Conclusion: Ok folks let's review. Almost every country has soaring inflation, but us (and Canada). As long as you don't eat, drive, or have a home that requires heating or cooling. Fantastic. Therefore we can cut rates from 5.25% to 2% to save our lightly regulated, banking system which is out of control. (Free markets solve everything after all)

Further, our stock market LOVES high oil prices because well... it's just good. Meanwhile the world's consumers and producers will suffer. But that's ok - somehow that is good too, I just need to figure out how. Hopefully a hedge fund computer or NYC trader can email me with the details (I'd prefer a hedge fund computer please)

But on a serious note as I keep saying, inflation is a tax on all things, and on all consumers and producers. Only in our stock market do we think it's not an issue ... because most believe in government statistics that show it's not an issue. Only normal Americans living normal lives are seeing inflation - not anyone trading stocks I guess. I do believe we are going to see a serious correction here in commodity/energy prices - in the end, higher prices are the best solution to higher prices. It will lead to a major slowdown - except in the US as we will somehow skirt recession (if you use government figures of course). In fact here in the US, we are headed for a 2nd half recovery. (mmmm, Kool Aid).

As predicted government subsidies will have to begin to slow/stop in many smaller countries or they will be going bankrupt. China will hold out; we'll see how long (post Olympics). If they have to pass along those prices to their consumers - you're going to see a major shock to the system there. Social unrest is their #1 concern - so they might be backed into a corner. But either way it is all shaping up (if energy/commodities hold these prices or even stay anywhere near i.e. within 10-15%) for a very nice global recession of 2009 (except in the US which is not allowed to have a recession, per government rules). So we'll be fine in the US - no worries. Buy stocks.

As well all know this scenario is completely priced into stocks. Frankly I am surprised the market is not 20-30% higher from here, now that we know everything will be ok. Further, July 1, 2008 - the 2nd half recovery begins. Getting closer by the week.

Long Ultrashort Oil & Gas in fund and personal account

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