Monday, December 08, 2014

An Oily Black Swan?

A "Black Swan" in economic terms is an outlier event that is large and unexpected enough to shake the markets.

In June if I told you oil would be under $65/barrel by December you would have laughed, yet here we are.  The impact of this move is starting to spread as I hinted last night.  The increased amount of leverage and use of exotic financial instruments in the commodity markets means that we are setting the stage for some rough days in the oil patch.

* Venezuela is the third largest exporter to the US of crude oil and 9th largest overall and Venezuela could be the first domino of this black swan event.  This is a chart showing the cost of insurance on Venezuelan 5 year debt.  Note that the last time insurance was this expensive was when Lehman collapsed and oil plunged to $30/barrel.  If you were a holder of Venezuelan debt you might buy this insurance in case you felt there was a risk they could not repay you.  It seems like a lot of people are questioning their ability to meet their obligations.

* I read today that the slide in oil prices has caused Canadian Energy companies to lose a combined  $100 Billion in market capitalization.  That's a lot of Timbits.

* Finally, the good old Baltic Dry Index (loosely defined as an index measuring the cost to ship things around the world) is back to its lowest level since.... yep, you guessed it, Lehman in 2008.

This is unrelated to the topic oil but it speaks to the issue of the recovery in the US and how it has been largely a stock market and corporate recovery.  The sarcastic tone in the chart was not inserted by me but the original poster (@rudyhavenstein).  This chart shows the number of individuals enrolled in food stamps in the US.  With 316 million people in the US and close to 45 million on food stamps I think it is clear that the recovery has not been widespread.


No comments: