17 Dec Will the Arab Spring be Nothing as Compared to the Potential Arab Winter?
The two day FOMC meeting concludes today with a 2:00 P.M. statement. Will the phrase “considerable time” be omitted? I will argue no given the impact of the collapse of oil prices is not yet known. Speaking of which, will the Central Bank comment about the sudden implosion of oil?
I reiterate we are not talking about companies failing but rather countries. How much longer can Venezuela and Russia remain current on their obligations? Will social unrest occur leading to production outages and possible regime change occur?
Is this a radical thought? Maybe in Russia but not in many underdeveloped countries such as Venezuela, Iran, Iraq, Nigeria, Syria and Libya where unrest is already bordering on anarchy. Will the Arab Spring be nothing as compared to the potential Arab Winter?
I believe the odds are around 60% the market will shift emphasis to country risk rather than corporate event risk. The vast majority of the west’s technology is light years ahead of most of the developing world’s technology thus suggesting the West (i.e. Canada and the US) are the lower cost producers.
Some are beginning to compare today to 1997-98 and the collapse of Long Term Capital Management (LTCM), the spectacular hedge fund implosion because of leverage bets on Russian debt. Russian debt and currency collapsed partially because of the plunge in oil prices.
Oil prices in 1998 collapsed about 45% in eight months and then rebounded 85% in the next six months and by 185% in 12 months.
Will today follow yesterday’s precedence?
Perhaps the only concrete statement to make is the longer crude remains at current levels the more damage will occur, the outcome of which is infinite and unquantified.
Equities were volatile yesterday alternating between triple digit losses and gains. The averages ended about 100 points lower. All must remember that Friday is quadruple witching hour which may have added to the volatility.
Last night the foreign markets were down. London was down 0.69%, Paris down 0.38% and Frankfurt down 0.60%. Japan was up 0.38% and Hang Seng down 0.37%.
The Dow should open moderately higher on belief the Fed will not change its post meeting statement because of the calamity in the oil markets which is effecting the economies and bond/currency markets of many of the emerging markets.
As noted many times, the global economies are multipolar and interconnected The question at hand will Russia, Venezuela, et.al. implode, descend into some type of xenophobic isolationist country? Capital flight in both countries is huge and the risk of such flight accelerating in many developing countries whose economies are tied to commodities is considerable.
The 10-year is off 11/32 to yield 2.09%.