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Real-Time Streaming Charts

Global Roundtable

Reports and Expiration Notices

September 21st, 2006 — Issue #345

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Global Roundtable

from Man Global Research, Nick Kalivas

The source and sustainability of the Asian and OPEC savings pools:

The savings pool in OPEC is related to the sharp rise in energy prices. The outsized rise in oil prices in recent years has provided a windfall of income to oil producing nations, especially the Middle East, which have low cost of oil production. The OPEC savings pool will be directly related to the price of oil. To the extent that oil prices remain high, there will be excessive savings. On the other hand, falling oil prices will reduce the savings pool. Economies in the Middle East have tried to diversify, but oil remains the main driver of economic activity. Looking forward, the savings pool at OPEC nations may be diminished for the following reasons:

• Global central bank policy is set to crush inflation and the demand for commodities. Monetary base growth in Japan and the US is at historically low levels. China and India have also tightened monetary policy.
• Investor interest in commodities as an asset class is waning given poor returns and contango markets. Speculative money flow played a role in lifting the price of crude oil above economic equilibrium.
• Global growth has moderated and petroleum substitution has picked up.

The pool of savings in Asia is related to strong export linked economies and cultural behavior. In recent years, robust global growth and expansionary bank credit in India and China have added to the savings pool by lifting economic activity. Going forward, the pool of savings is at risk due to more restrictive monetary and governmental policies, which are aimed at preventing boom/bust economies. The export driven nature of Asian countries will likely keep savings rates structurally high and allow for the Asian savings pool to remain strong relative to Europe or the U.S. In the near term, a U.S. recession which cuts into the Asian trade surpluses is most likely to undermine savings from the Asian region. However, this would be more cyclical than secular and recession risks are limited at this juncture. Asian policies toward capturing export markets are unlikely to change in the medium term. The reluctance of China to let the yuan free float is an example of the desire for export markets. Cultural change, which could cut into Asian savings by increasing consumption, may take a generation(s) to develop. The introduction of consumer credit could help quicken cultural change, but to date has had little impact.

Capital market implications:

• Real interest rates have tended to shrink when oil prices rise. This is a function of excess OPEC savings looking for an investment home, and a slowdown in consumption at non-oil producing nations. Real rates were negative in the 1970's during the oil shock. Today, the relatively low level of 10 year yields is an example of excessive savings relative to investment in part created by higher oil prices and Asian savings.
• U.S. interest rates will trade at a premium to saver nation interest rates due to the fact that investment is stronger than savings.
• Credit spreads are likely to trade "tight" as investors look for yield.
• M&A deal flow can be active as fixed income financing is relatively cheap. Tight credit spreads and low treasury yields make investment hurdle rates low. The recent popularity of private equity may in part an offshoot of high global savings
• OPEC savings flows that coincide with high commodity prices are a benefit to emerging equity kets which are commodity and credit spread linked. Lower energy prices will benefit non- material stocks in Asia and U.S. shares. U.S. large cap shares could out perform if global savings pools dry up.
• Capital markets are developing Islamic based bonds. These bonds are mostly sold out of London or Asia. The bonds are aimed at attracting the Middle Eastern savings pool. At the margin, these bonds could compete with treasuries or European debt. The desire to capture savings in the Middle East and diversify investment has facilitated the development of bonds which confirm to Islamic law.

Mike Malpede: Foreign Exchange and the global savings glut:

A. Source of global savings glut:

1. OPEC recycling of petrol dollars from oil revenue
2. China buys U.S. treasuries to manage the Yuan
3. Investor search for yield/ U.S. interest rates higher than most of the G-7

B. IMF estimates world savings stood at 25.4% of GDP in 2005 (11.8 trillion dollars):

C. Impact of savings glut:

1. U.S. current account complacency-dollar support
2. Deflationary pressure because of cheap labor in Asia
3. Helped fuel global commodity boom

Conclusion:

As Fed rate hike cycle peaks the dollar should weaken pressured by asset diversification from Asia and oil producing nations. We could see a bust in commodity price bubble and less demand for U.S. treasuries and dollar. The Dollar should grind lower, with greater loss to Asia.

TIC data a warning?

Edward Meir recommends the following paper from the IMF: Petrodollar Recycling And Global Imbalances

Disclaimer:

Trading commodity futures and options involves substantial risk of loss. The recommendations contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results. This is not a solicitation of any order to buy or sell, but a current futures market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!

Economic Reports and Expiration Notices

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!