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  1. #1
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    Oil Supply Shock caused the current crisis

    I can't stop thinking that the current financial crisis is strongly linked to the oil supply shock we had for the last 18 months,

    once you start having inflation, all financial instruments valuation start to go wrong. The oil supply shock put inflation back in the game, and since it came at a surprise, the shock effect was stronger than expected.

    Why does inflation fucks up all financial instruments ? because the majority of those instruments valuation are based on a nominal risk-free rate + some spread or risk premium, which are fine when inflation is stable as it doesn't fuckup the real interest rate,

    as soon as you introduce inflation fear or inflation, expected interest rates change and the spread risk increase, participants want to be compensated for inflation. This is equivalent to a large increase in nominal interest rates, or a rate shock, which always lead to a credit crunch. If the Fed doesn't act quickly to kill inflation fear by raising nominal interest rates, real interest rates becoming negative, and borrowing becomes a better alternative than earning interest rates. Borrowing actually becomes an incentive to finance projects with real positive interest rates as the spread widens between borrowing money and making money. This is exactly what fueled the property market. Borrowing at real negative interest rates while flipping properties at a positive rate. It was foolish not to take "free" money to turn it into positive cash flow.

  2. #2
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    if the oil shock started it then bailing out them too big to fail set it in stone

  3. #3
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    drop in demand from China post Olympics must figure in there also .

  4. #4
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    bailing out without raising interest rates is foolish,

    the liquidity should be there to increase the banks ratio, so the bailout could be very useful

    we need a credible Fed, Greenspan pussy whipped policies have discredited completely that institution. Investors are now looking for guidance in the Fed current interest rates policy,

    Without Fed guidance, we will be fucked for a while

  5. #5
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    Yep, markets peaked as hundreds of billions extra went to the oil producers...didn't make much sense then, and makes even less now.

    My guess is they knew it was coming and also that it would be a horror, but hoped it would happen after the US election.

  6. #6
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    yep, it was all about speculation, and yet some foolish souls thought it was all about real demand for oil, never was, no matter how many Chinese were buying cars

  7. #7
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    the good news is actually the recession,

    inflation fear has been eliminated now with oil dropping, and demand for products and service is also affected, we might even see deflation

    with deflation, real interest rates will increase, restoring incentive for investors and savers alike, but at the cost of unemployment and lower activity and growth,

  8. #8
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    Quote Originally Posted by Butterfly
    and demand for products and service is also affected,
    My partner in Bangkok purchased 1,000 tons of plastic raw material resin from a Singapore trader for 50 Baht a Kg 1 week ago. He thought it was a good deal as the same resin cost 76 Baht per Kg 2 months ago.

    This order was paid for up front, is being prepared for shipment as I type and after I told him not to do so 2 weeks ago. I had heard through the grapevine that plastic resin (being a petrochemical, oil based by-product) was going drop dramatically in price but he would not listen.

    Today the price per Kg is 36 Baht and still dropping.

    Good for the end purchaser and the economy in general as plastic packaging prices will plummet but bad news for us being 14 million Baht down because of speculation, being too greedy and not taking qualified advice.

    Well I suppose you win some and you lose big when you do lose.

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