Economic implications of a SARS/Coronavirus outbreak

over9k said:

50 million barrels released of the yanks' strategic petroleum reserve. Futures have bounced.

The yanks have mountains of shale wells to get back online so this is just a stop-gap after opec refused to up production. So, all a supply side issue.

Edit: Looks like there's a coordinated release between non-opec countries - india's just released 5 million, more announcements to follow.

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We're in interesting times as they say.

Releasing strategic oil stockpiles when there's supposedly no actual shortage and price is ~half of the 2008 peak looks like desperation on the inflation front to me.

Either that or the physical market is quite a lot tighter than anyone's admitting publicly and physical shortage is an actual risk.

Smurf1976 said:

We're in interesting times as they say.

Releasing strategic oil stockpiles when there's supposedly no actual shortage and price is ~half of the 2008 peak looks like desperation on the inflation front to me.

Either that or the physical market is quite a lot tighter than anyone's admitting publicly and physical shortage is an actual risk.

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There is so much manipulation on commodities market: silver price crashes for 2 days yet it is nearly impossible to buy any silver metal right now.
I think oil market is the same, but harder to manipulate...there is actual shortage but financial tools via futures etc are so powerful they change the price tags

It looks as though the relocation of chip manufacturing is well underway.
Nov. 23, 2021, at 4:36 p.m. Samsung is planning to build a $17 billion semiconductor factory outside of Austin, Texas, amid a global shortage of chips used in phones, cars and other electronic devices.2 hours ago

Smurf1976 said:

We're in interesting times as they say.

Releasing strategic oil stockpiles when there's supposedly no actual shortage and price is ~half of the 2008 peak looks like desperation on the inflation front to me.

Either that or the physical market is quite a lot tighter than anyone's admitting publicly and physical shortage is an actual risk.

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Society is only ever one missed meal away from a revolution. Fuel and food prices are basically the only things that are inflation suicide - houses, cars, stocks, basically everything else can go absolutely stratospheric and the public barely bats an eye.

But history shows us that lack of food is the one thing that gets very large portions of the population very violent very quickly.


Skyrocketing energy and food prices are literally the only price inflation that is actual political suicide and the powers that be know it. Hence the strategic reserves being tapped all across the world.

I have no doubt a very strong word has been quietly had with the onshore shale producers too.



The democrats' problem is that politically, they're in a bit of a jam - because they're trying to mandate vaccines and ban people from the workplace (or sack them) for not taking it but as it turns out, all the vaccine-averse types that don't want to take it are the ones that do all the critical things (like drive trucks or pump oil or grow food) that actually keep society functioning.

If the republicans are smart, they'll make some serious political hay out of this.

qldfrog said:

There is so much manipulation on commodities market: silver price crashes for 2 days yet it is nearly impossible to buy any silver metal right now.
I think oil market is the same, but harder to manipulate...there is actual shortage but financial tools via futures etc are so powerful they change the price tags

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Yep.

One word..." J P Morgan"

Well that's sort of three words really, but you get my drift.

over9k said:

Lots of big increases in numbers across europe so lots of pretty hardcore lockdowns. Markets getting pounded as a result. Nothing surprising whatsoever.

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Winter wave now well & truly upon us:



I think I saw a headline showing germany cracking the 300k deaths mark or something like that too.

Numbers rising exponentially everywhere, this is exactly what we expected 12 months ago but markets didn't care then on account of all the vaccines getting announced late oct-early nov.

That was already priced in this time around so markets are obviously just taking the pounding they otherwise would have last time around.

This should be surprising absolutely nobody.

Oh and if things weren't bad enough, there's yet another variant that's been detected.

So we're basically living in groundhog day.



I even made a bet against energy around this time last year based on simple seasonality driving infections but markets obviously completely ignored the short term once the vaccines were announced so it never worked out.

This time around, a lot of refusals to take the vaccines etc have been the proverbial spanner in the works causing the lockdowns and so on, which is a shame as it really shouldn't be happening like this, vaccines SHOULD have been deployed in enough numbers to mitigate the seasonality effect dramatically.

Meanwhile, most of europe is down 3-4%, r2k futures are down near as makes no difference 5%, and then the next worst is the dow followed by the sp500 (which is down 2%, which whilst being bad is only half the losses of europe right now) and nasdaq:



As you can see, crypto across the board is also getting pounded because lockdowns etc obviously mean a hugely deflationary environment and crypto is very strongly correlated with inflation, hence the term "digital gold".

Unsurprisingly, all the other inflation correlated sectors like banks are getting smashed as well.

Credit spreads have also predictably shot up like they always do whenever the economic shite hits the fan and I'm happy to explain this to anyone that doesn't know why it happens:








So, why are the markets the way they are?

It's actually quite simple:

Nasdaq futures look the best for two reasons: First, when everyone are locked indoors, everything's back to going electronic/with tech as we all work from home and stay inside watching netflix instead of going to the pub and so on and so forth, so the tech heavy nasdaq weathers this particular storm much better. Zoom is a classic indicator of this.

Secondly, when the whole market is smashed, everyone runs to safety (meaning bonds) so bonds run hard, dropping interest rates and therefore running p/e. Considering that the USD is also the flight to safety with currency, it is therefore not just bonds but USD bonds that markets run to when the proverbial hits the fan and we see 2, 5, 10 etc year rates just plummeting now, as well as the USD running hard against all other currencies (including crypto and the AUD).

So combine the nasdaq being tech heavy (so getting a boost from working etc at home) with it being both growth stocks (which are effected by p/e's changing, which are effected by bond yields) and U.S dollar denominated, we see it getting two simultaneous cushions from two different flights to safety occurring at the same time (both bonds and USD running) as well as a nice bounce from an actual increase in demand for a lot of the tech companies that it is composed of.

The AUD's even dropped >1% today already and we have the whole weekend to go yet. That exchange rate drop alone is enough to cushion basically the entirety of the nasdaq's futures drop, meaning a nasdaq tracking ETF like QQQ is actually basically flat by AUD value today, despite the smashing that global markets are seeing.



I know I might have bored everyone else to tears here but the way in which markets respond to things like this and why they respond the ways they (always) do is absolutely fascinating to an economics nerd like myself. If you'd asked me or any other econ propellerhead which markets would have responded in what ways to another variant and huge spike in cases like this I would have said every single thing that we're seeing right now and wouldn't you know it, every single thing you'd think would happen has happened to the letter. There's been literally no unpredictable/unexpected response to any of this whatsoever. None. It has happened *exactly* like last time with the delta variant, and the time before that when the pandemic first hit. EXACTLY.




Our only real curveball now is energy/oil, which are going to see a huge demand drop from the lockdowns but also may have major supply issues too. Which of these will be proportionately greater is a little difficult to say. Oil itself is obviously seeing a massive short term demand drop:



But it's the supply side that has me well & truly paying attention. If that gets choked off then all hell is going to break loose because that means big inflation of everything but an economy on its knees because of lockdown.

You know, stagflation.

To state the bleeding obvious, if the word "stagflation" starts to get mentioned in the news then it's well & truly time to panic.




I know my trigger finger is itchy as I haven't had a good degen trade in a while. I might buy some NRGU, BTU, GUSH etc within the next day or two. Monday's going to be very telling.

Watch this space!

over9k said:

Our only real curveball now is energy/oil, which are going to see a huge demand drop from the lockdowns but also may have major supply issues too.

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On the physical side of that, for those not already aware an oil or gas well doesn't in most cases suddenly stop producing in an instant. It's not like someone turning the lights out etc. Rather, what happens is more akin to a torch battery running down - the flow slowly but surely declines until a point is reached where it's not worth continuing.

The issue there being that drilling fell in a heap rather spectacularly with the pandemic. That's a lack of development as distinct from the also intentional shutting in or throttling of wells in production.

The ultimate effect of that lack of development is falling capacity. To the extent actual production is running below capacity that doesn't need to result in lower production immediately, but it's falling capacity nonetheless. Individual well flow rates diminishing, some reaching end of life completely. If you don't keep drilling then supply falls away.

In terms of the adequacy of supply, it's apparent that LNG (as distinct from natural gas in countries not trading it) really can't keep up. When LNG's being sold at a price premium to oil, well that's akin to someone saying that silver is worth more than gold or that economy class travel costs more than business class. It's a reversal of the established norm such is the extent of market tightness and that being so, it's a fair assumption that anyone who can produce is doing so right now.

Coal has the major complicating factor that the Chinese government has a substantial influence on production given that China accounts for ~half of world production and its government does exercise significant control. That's not intended as a political comment but simply a practical observation - there are forces other than purely market economics at work and the accuracy of production data is also questionable for many countries given that illegal coal mines are a thing, poorly policed taxation policies may encourage under-reporting and so on.

For oil well OPEC does publish claimed spare capacity but trouble is that nobody other than them really knows how accurate it is. It's entirely plausible that for political or market reasons the published figures might not match reality, or are perhaps calculated in a manner that's technically correct but only if interpreted in a way that's not what most people would take capacity to mean.

With that in mind, several OPEC members do seem to be struggling to meet production quotas. To be clear they're producing too little not too much as has been a problem in the past. That being so, it does raise questions as to why they're underproducing? Is it a short term problem? Is it intentional for political reasons etc? Or has capacity shrunk to the point that's all they've got?

More about that point here: https://www.energyintel.com/0000017c-7064-d8cb-a9ff-fbfe0cb70000

Smurf1976 said:

On the physical side of that, for those not already aware an oil or gas well doesn't in most cases suddenly stop producing in an instant. It's not like someone turning the lights out etc. Rather, what happens is more akin to a torch battery running down - the flow slowly but surely declines until a point is reached where it's not worth continuing.

The issue there being that drilling fell in a heap rather spectacularly with the pandemic. That's a lack of development as distinct from the also intentional shutting in or throttling of wells in production.

The ultimate effect of that lack of development is falling capacity. To the extent actual production is running below capacity that doesn't need to result in lower production immediately, but it's falling capacity nonetheless. Individual well flow rates diminishing, some reaching end of life completely. If you don't keep drilling then supply falls away.

In terms of the adequacy of supply, it's apparent that LNG (as distinct from natural gas in countries not trading it) really can't keep up. When LNG's being sold at a price premium to oil, well that's akin to someone saying that silver is worth more than gold or that economy class travel costs more than business class. It's a reversal of the established norm such is the extent of market tightness and that being so, it's a fair assumption that anyone who can produce is doing so right now.

Coal has the major complicating factor that the Chinese government has a substantial influence on production given that China accounts for ~half of world production and its government does exercise significant control. That's not intended as a political comment but simply a practical observation - there are forces other than purely market economics at work and the accuracy of production data is also questionable for many countries given that illegal coal mines are a thing, poorly policed taxation policies may encourage under-reporting and so on.

For oil well OPEC does publish claimed spare capacity but trouble is that nobody other than them really knows how accurate it is. It's entirely plausible that for political or market reasons the published figures might not match reality, or are perhaps calculated in a manner that's technically correct but only if interpreted in a way that's not what most people would take capacity to mean.

With that in mind, several OPEC members do seem to be struggling to meet production quotas. To be clear they're producing too little not too much as has been a problem in the past. That being so, it does raise questions as to why they're underproducing? Is it a short term problem? Is it intentional for political reasons etc? Or has capacity shrunk to the point that's all they've got?

More about that point here: https://www.energyintel.com/0000017c-7064-d8cb-a9ff-fbfe0cb70000

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Good post. Also worth noting which products usually get refined into what daughter products vs the alternatives when the primary unrefined supply dries up.

Some things you can make with gas if you can't get oil, some you can make with oil if you can't get gas, some can only be made with one but not the other, so on and so forth. The overwhelming majority of stuff only uses gas if there's no other choice on account of gas being so much more difficult to transport than oil.

A big one for inflation is fertiliser.

Great piece by wendover on the shipping sh!tshow:

Awwwwwwwww yeah:



And to think I nearly pulled the trigger at open.

Worst day since the start of the pandemic. New variant has been designated as "omicron".

Fauci wants more data before closing the borders. No doubt there's going to be a lot go on this weekend. The vaccine makers and stay at home stocks like zoom, peloton, docusign etc ran HARD.

Dona Ferentes said:

View attachment 133475

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Transitory only....?

AAAAAAAAAAAAAAAAND HERE IT IS!

over9k said:

AAAAAAAAAAAAAAAAND HERE IT IS!

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Toilet rolls in? Check, Netflicks paid up? Check, prepare for lockdown. ?

sptrawler said:

Toilet rolls in? Check, Netflix paid up? Check, prepare for lockdown

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Line of credit. Check.
Shopping list of oversold stocks. Under revision

I do not know if any of you are even trying to fly out of the country, as a qld and australian inmate, it is very VERY hard
initial plan was australia europe americas and back-> just a wish list
Now we are down to Australia ->1 transit via LA then central america;
Not only logistic nightmare, you can easily imagine with the test and check recheck but also
VERY expensive with (nearly mandatory) insurance around $2k for 2 persons, worse will NOT cover you if our SMART travel recommendation switch to do not travel...
so basically 2k, quasi mandatory and probably useless and covering you zip.
Reset is here and toward completion of plan.
Escape is getting very HARD and only for the 1%
Add a nice market crash and we will soon gather in herds to take or boo cattle? trains filled with non Green check wearers..