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I think that oil and financial problems are very closely tied together, more closely than a lot of people realize. Part of the reason for the tie is the higher cost of oil being transferred through to people's spending, leaving less for mortgages and other needs. Part of the tie is the fact that we are dealing with a finite world, and infinite credit expansion simply cannot work, even though we have built a system depending on it. There is also some academic work tying the two together, such as the work by Robert Ayres.
I think that TOD needs to have some articles on the link between oil and financial problems. I have written some, and plan to write others next year. I believe what the TOD Canada site is doing is an important part of the education process, and thank the editors for working so diligently on their effort.
In the next year, I expect financial problems will trump the direct oil problems. It is important that readers understand the whole situation, not just the number of additional barrels of oil planned in Saudi Arabia and other countries.
Counterparty Credit Risk Management.
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=133
This article is from September 21, 2005
.
"The issue of unconfirmed CD trades began to fester earlier this year when Ford (NYSE:F), GM (NYSE:GM) and their key parts suppliers, Visteon (NYSE:VC) and Delphi Corp (NYSE:DPH), were subjected to multiple credit downgrades by the major rating agencies. At the time, we predicted that Detroit's slow-motion progression towards default would eventually destabilize the US financial markets (GM, Ford and Health Care: Was Hillary Right?)
"The next shock to the system came with the bankruptcy filings of Delta and Northwest airlines last week, two events where disputes regarding CD contracts may actually test the legal standing of derivatives generally. So far, the securities industry has managed to conceal the true scale of the legal problems involved with the CD market under the hideous veil of mandatory arbitration, but the growing number of large corporate bankruptcies may eventually force a federal judge to rule on some basic issues, such as when the assignment of a derivatives contract is "final" - even when the trade is in dispute or has not been confirmed or properly documented.
It's no accident that all issues above concern transport industries.
From Day 1 I argued that GM was/is bankrupt.
That GM was still joined at the hip with Delphi.
The parallel with CDO's is eerily similar.
Trying to offload risk while maintaining cash flow.
September 16, 2005 (Sep 05 was a busy month
for the Fed14- 8)
http://www.nytimes.com/2005/09/16/business/16credit.html?_r=1&oref=slogi...
"What Mr. Corrigan and bankers at the Federal Reserve are more worried about is what happens in the event of a corporate bond default.
Credit derivatives are bets on whether a company will pay its debts. In the event of a default, the party on the losing side of a trade must compensate the institution that holds the other end of the bet.
The problem is Wall Street has been overwhelmed in keeping track of these trades - and if corporate defaults, which are at an 11-year low, suddenly rise, it could have a mess on its hands.
"From Day 1 I argued that GM was/is bankrupt."
http://finance.yahoo.com/q/bs?s=GM On paper they are $7Billion in the hole. But they have considerable assests including $24B in cash. This would make them a take over target by another automaker that is swimming in wealth (Toyota? http://finance.yahoo.com/q/bs?s=TM&annual). But I don't see them actually disappearing. Many bankrupt companies have come back to life with a White Knight.
See Chrysler/Cerberus for details.
China or the KSA will buy Chrysler.
The other will buy GM.
CalculatedRisk-
"Back in August, when the sale of Chrysler to Cerberus was closed, the investment banks were unable to sell $10 billion in debt and had to take the debt on their balance sheets. This played a role in the credit crunch in early August.
The banks, led by JPMorgan Chase, and including Goldman Sachs Group, Bear Stearns, Morgan Stanley and Citigroup, have tried several times to sell some of these loans, and each time the offering has been postponed."
"Frustrated ECB promises banks infinite money at a discount."
Infinite = death
I second that call for more on the conection between oil and finance.
Consumption is the common denominator IMO.
I have this quote on my wall of worry at the shop;
Cancer requires exponential growth, ultimately consuming the life supporting elements of the host.
Corporate capitalism requires exponential growth, ultimately consuming the life supporting elements of the planet.
IMO, you have to kill your consumption before your consumption kills you.
Killing consumption affects those whose livelihoods depend on that consumption.
"In the next year, I expect financial problems will trump the direct oil problems."
I agree. I'm working on predicting what will happen in 2008. In 2007 we had a rise in oil prices of about 20%, because supply remained stagnant and demand climbed. I suspect supply will remain stagnant in 2008, and if 2008 is a normal year we could see another 20% climb.
Instead I suspect housing will lead us into recession in 2008, and my best guess is that oil prices may only grow 10% because recession driven demand stagnation.