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This is really bad news…

From the Economist”

China’s exports and imports plunged in November. Exports fell by 2.2% last month from a year ago; imports plummeted by an astonishing 17.9%. One analyst sums up the news as “a shock figure”.

The gloom is spread all over the place. Exports dropped across all big traded goods and all parts of the world. Exports to America fell by 6.1%; those to the ASEAN countries, which had grown by 21.5% in October, fell by 2.4%. The faster decline in imports meant that China’s monthly trade surplus reached a record $40.1 billion. Exports last fell in 2001.
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Such numbers would be nasty enough for any big economy, but they are particularly shocking because China’s racing trade has been an engine of world trade, and thus global growth. During the 1990s China’s exports grew at an annual average of 12.9%; from 2000 to 2006 that growth nearly doubled to 21.1% each year. China’s rapidly rising imports have also driven growth elsewhere. The chief economist of a Chinese bank calls the latest figures “horrifying”.

The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceeding months; exports grew by more than 19% from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.

The consequences for the Chinese economy, which has seen dizzying rates of growth since economic reforms began in 1978 (growth in the 1990s averaged 10.5%), could now be dire. Its growth is unusually driven by its exports, which have made it the world’s factory. According to the World Bank, 27% of world GDP in 2006 came from exports (up from 21% in 1990). The corresponding figures for China that year show it to be particularly dependent on exports: 40% of its GDP came from exports in 2006, compared with 30% for highly open America and 11% for Britain. Thus the potential for a drop in exports to drag down China’s growth is correspondingly greater.

If China is not exporting, the world is not buying, not just the US. Further, much of the international growth that has fueled US exports, is due to China’s strength. should that wane as it appears to be, the US is due for another leg down.

Here is the tough part. The US can fuel export by cheapening the dollar. The problem with that is then oil and energy price rise as they are imports and the cheaper dollar buys less of them.

The cheaper dollar then leads to increased demand for agricultural exports, raising their prices here at home, more expensive food.

What to do? The world economy is going to slow no matter what governments around the world do. Credit is tight and until is gets looser, thing will slow. The trillions of dollars pumped into the system will not caused credit to flow, it will just go to cover losses on existing credit. What gov’t can do is stop the decline of the dollar and keep food and energy prices low. Will they do it? Sadly…no…

How to play it? Ag giants like ADM (ADM), Gold ETF (GLD) and Oil ETF’s (DXO), (DBO).

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Disclosure (“none” means no position):Long ADM, none
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It isn’t that things are getting better but that recent laws have moved the bar…

RealtyTrac® released its November 2008 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 259,085 U.S. properties during the month, a 7 percent decrease from the previous month but still up 28 percent from November 2007. The report also shows one in every 488 U.S. housing units received a foreclosure filing in November.

RealtyTrac publishes the largest and most comprehensive national database of foreclosure and bank-owned properties, with over 1.5 million properties from over 2,200 counties across the country, and is the foreclosure data provider to MSN Real Estate, Yahoo! Real Estate and The Wall Street Journal’s Real Estate Journal.

“Foreclosure activity in November hit the lowest level we’ve seen since June thanks in part to recently enacted laws that have extended the foreclosure process in some states, along with more aggressive loan modification programs and self-imposed holiday foreclosure moratoriums introduced by some lenders,” said James J. Saccacio, chief executive officer of RealtyTrac. “There are several indications, however, that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months.

“Delinquencies on loans not yet in the foreclosure process jumped to nearly 7 percent in the third quarter, a record high, according to the Mortgage Bankers Association,” Saccacio continued. ”And more than half of the homeowners who received loan modifications to reduce monthly mortgage payments in the first half of 2008 are already delinquent on their loans again, according to the U.S. Office of Thrift Supervision. Many of these delinquencies could turn into foreclosures next year.”

In other words, things in housing are still getting worse, not better. Because of recent rule changes, we will probably see a nice fat surge in the beginning of next year and home currently not allowed to be foreclosed on and have no chance of saving hit the market….

For those who think 2009 was bad…..you ain’t seen nothing yet..

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Gas, Sprint, Jim Grant, Grades

– Are we done freaking out about $4 a gallon?

– Faster and faster

– Fools are buying Treasuries

– Get some sleep

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Here is a great post on oil and its current price level, for a multitude of reasons being too low.

From Gregor.US

4. There is risk that oil re-tests its old high in late 2009. This risk would be zero had oil maintained itself above 80.00. The trip to 40.00 destroys actual supply but more important it damages psychology in the industry. Just watch as global oil producers refuses to spend one penny to increase supply next year. As it stands, oil will return to 80.00 at minimum in 2009.

Try not to laugh at the globally coordinated fiscal stimulus. It’s accurate to use the word gargantuan, to describe the scale of everything that’s been announced. Also, regardless of one’s views about 2009, we also need to price in macro outlook volatility. Government intervention kicks streams out of their beds, and gets them running in different directions. For example: You could wake up one day and realize that all that excess PV that is in oversupply is being quickly sucked up by global governments, to do solar projects. Same too with SPR fills on oil, and metals and fertilizer stockpiling.

Final thought: economic events are both structural and psychological. The credit crunch was both, and, created its own structural mess. But there is still a psychological component. Economics is a social science. What’s at issue is human behavior, not foot-pounds of pressure through pipes. By definition, reflation must eventually result in velocity or there has been no reflation. Once you get that velocity, it is reinforcing. Oil was a very important medium for capital to travel around the world. Low oil prices are just another condition of low velocity.

I am sticking with my view that the FED and global governments will keep reflating until they get strong signals they have succeeded. But, by then, they will have done too much. That’s the key dynamic. They will just keep upping the ante until they get feedback. Which means that they are fated to go too far. Regardless of how one sees the battle between Deflation and Inflation, one simply has to capitulate to the fact that policy makers are now all-in, and will keep doubling down on their reflationary bet until they get returns they like, or lose it all.

Three weeks to go. First week in January we’ll fund the IRA’s and kids college accounts for 2009 and a large portion of that is going into crude…

Will be staying away from USO this time. It is either going to be (DBO) or (DXO) od some combination of the two.

Can anyone find a good reason oil will not go up substantially in 2009-2010?

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Now that the consumer is finally rolling over, the next leg down begins according to Whitney.

I’m not too sure I think the consumer rolling over is the reason for the next leg down. I really think it is the gov’t. By flushing the system with dollars, too many of them, trying to “fix the problem overnight”, the Fed and Treasury are setting us up for much more pain down the road.

The consumer is actually acting totally rationally. They are paring back spending and paying down debt. This is the perfect response to the current conditions. It is the gov’t and economist that are acting irresponsible. They are trying to bait the consumer into spending more and if that does not work, they are going to just do it themselves, wasting more money and driving us deeper in debt.

Meredith is correct that the numbers are too big to fix. The only thing that will help is time. It will take tie for everything to flush itself through the system. The gov’t is trying to force it through at the expense of the future.

Think about it, if only time will help and the gov’t is just printing money, the only scenario down the road is slow to no growth and much higher inflation as the surge of dollars depresses its value. That will drive up commodity prices (oil, food etc). Stagflation…

Anyway, listen to Ms. Whitney.

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Had this emailed to me by a reader…

The risks of risk management Banks now employ thousands of highly-qualified mathematicians to quantify risk for them. So why did they not foresee the credit crunch?

Quantitative finance lecturer Paul Wilmott explains how a failure to see beyond the numbers might be to blame. We have learned the hard way how important it is to measure and manage risk. Despite the thousands of mathematics and science PhDs working in risk management nowadays we seem to be at greater financial and economic risk than ever before.

To show you one important side of banking I would like you to follow me in an exercise with parallels in risk management.

You are in the audience at a small, intimate theatre, watching a magic show. The magician hands a pack of cards to a random member of the audience, asks him to check that it is an ordinary pack, and to give it a shuffle.

The magician turns to another member of the audience and asks her to name a card at random. “Ace of Hearts,” she says. Pick a card, any card The magician covers his eyes, reaches out to the pack of cards, and after some fumbling around he pulls out a card. The question to you is what is the probability of the card being the Ace of Hearts? Think about this question while I talk a bit about risk management. Feel free to interrupt me as soon as you have an answer. Oh, you already have an answer?

What is that, one in 52, you say? On the grounds that there are 52 cards in an ordinary pack.

It certainly is one answer. But aren’t you missing something, possibly crucial, in the question? Ponder a bit more. One aspect of risk management is that of ‘scenario analysis.’ Risk managers in banks have to consider possible future scenarios and the effects they will have on their bank’s portfolio.

Assign probabilities to each event and you can estimate the distribution of future profit and loss. Not unlike our exercise with the cards. Of course, this is only as useful as the number of scenarios you can think of.

You have another answer for me already? You had forgotten that it was a magician pulling out the card. Well, yes, I can see that might make a difference. So your answer is now that it will be almost 100% that the card will be the Ace of Hearts – the magician is hardly going to get this trick wrong.

Are you right? Think just a while longer while I tell you more about risk and its management. The risks of probabilities Sometimes the impact of a scenario is quite easy to estimate. For example, a bank might ask what will happen to the value of their assets if interest rates rise by 1%.

After some mathematical analysis they will come up with an answer – which will depend, for example, on how many bonds they hold.

But estimating the probability of that interest rate rise in the first case might be quite tricky. And more complex scenarios might not even be considered. What about the effects of combining rising interest rates, rising mortgage defaults and falling house prices in America?

Hmm, it is rather looking like that scenario didn’t get the appreciation it deserved. Back to our magician friend. Are those the only two possible answers? Either one in 52 or 100%? Suppose you had billions of dollars of hedge fund money riding on the outcome of this magic trick – would you feel so confident in your answers?

(A hedge fund betting on the outcome of a magic show, how unrealistic! But did you know that there is at least one hedge fund that ‘invests’ in poker players, funding their play and taking a cut of their winnings? So who knows what they will think of next?)

When I ask finance people this question, I usually get either the one in 52 answer or the 100% answer. Some will completely ignore the word ‘magician,’ hence the first answer. Some will say “I’m supposed to give the maths answer, aren’t I? But because he’s a magician he will certainly pick the Ace of Hearts.”

Rather frighteningly, some people trained in the higher mathematics of risk management still don’t see the second answer even after being told.

Human behaviour This is really a question about whether modern risk managers are capable of thinking beyond maths and formulas. Do they appreciate the human side of finance, the herding behaviour of people, the unintended consequences – what I think of as all the fun stuff?

There is no correct answer to our magician problem. The exercise is to think of as many possibilities as you can. For example, when I first heard this question an obvious answer to me was zero. There is no chance that the card is the Ace of Hearts. This trick is too simple for any professional magician. Maybe the trick is a small part of a larger effect – getting this part ‘wrong’ is designed to make a later feat more impressive…the Ace of Hearts is later found inside someone’s pocket.

Or maybe on the card are the winning lottery numbers – which are drawn randomly 15 minutes later on live TV. Or maybe the magician was Tommy Cooper. When I ask non mathematicians, this is the sort of answer I get. Once you start thinking outside the box of mathematical theories the possibilities are endless. And although a knowledge of advanced mathematics is important in modern finance I do rather miss the days when banking was populated by managers with degrees in History, who had been leaders of the school debating team.

A lot of mathematics is no substitute for a little bit of commonsense and an open mind

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Is it just me or does Rick win this hands down?

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OJ, Commodities, Self-control, Cars

– “At least I didn’t kill no one this time“

– Due for a bounce

– Do you have it?

– No one buying

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