Tangible

IIIIIIdeas

Aug/Sept2009

GoodbyetoAllThat

ADiapasonResearchReportbySeanCorrigan

Aug/Sept 2009

Goodbye to All That

GoodbyetoAllThat

Jan09

Jan07

Jan05

Jan03

Jan01

Jan99

Jan97

Jan95

Jan93

Jan91

Ifsilverandcoinconstitutewealth,willincreasingthequantityof[them]resultinprosperity?Inthecaseofasingle
family...yes.Butifweconsidertheentireempirethennothingcouldbefurtherfromthetruth.Thegreaterthequantityof
silverandcoin,themoreexpensivegrainandclothbecomeandthegreateristhedearththatensues.Thus,inearlierages,
rulersfearedthatfuturegenerationswouldwantnotfor[money]butratherforgrainandcloth.

XuGuanqi,TheOmnibusofHusbandry1640

Thoughevidenceofprocessesofexchangecanbe
(comprisingtheperiod19912001)totheimpressive
foundfarbackinthearchaeologicalhistoryof
8.3%registeredbetweentheendof2001andthe
thirdquarterof2007,allthewhilecombinedG7
mankind,testifyingtoanearlyrealizationbyour
GDPchuggedalongupwardsatanunchangedand
speciesofthesignificantmutualbenefitswhichit
confers,therehasalwaysbeenaparticularglamour
littlevaryingtrendrateof2.5%preannum.
attachedtothoseengagedinforeignasopposedto

domestictrade:fromMarcoPoloandtheVenetians
Ofcourse,toleaveoffthetaleatsuchahighlevelof
tothemerchantadventurersofStuartEnglandand
aggregationwouldbetomissoneofitsessentials
viz.,theriseoftheemergingmarketsasthetaipans
itsrivalsintheDutchRepublic;fromthesemi
oftheWesternMNCsandtheireagerlocal
mythicalPytheastheMariner,viatheoutright
fictiveSinbadtheSailor,toJamesOnedin(akindof
compradorespouredevermoreinvestmentintoshiny
mercantile,VictorianCaptainKirktothosenot
newfactoriesandkeyboardclackingsoftware
familiarwiththesingulardelightsof1970sBritish
houses,allalongtheSouthEastAsianlittoraland
TV).
deepwithintheunceasingbustleoftheregions

teemingmegacities.Thus,whiletheadvanced
WorldTrade1991todate
economiessawtwowayvolumesincreaseby6.1%
$19,000
and6.8%CARinourtwoperiods(stillnotably
Volume2000$
Value
fasterthantheiroverallgrowth),theirless
$15,000
developedcounterpartsuppedtheirowntempo
fromalively7.1%allegrotoagalloping13.2%presto.
Invalueterms,thedifferencewasstriking,too,with
$11,000
EMtradeswellingfromjustmorethantwofifths
thesizeofthattakingplaceintheadvancednations
$7,000
toslightlymorethanfivesixthsofabenchmark
itselfexpandedmorethanfourfoldintheinterim.

$3,000
Inseemingtestimonytothegreaterefficiencies(and,

hence,thehighersocialwelfare)beingachieved,
Figure1:ASplendidExchange
overalltradeprices(onceweadjustforchangesin

theTWIoftheUSdollarinwhichtheyarequoted)
Similarly,oneofthedefiningfeaturesofthelate
edgedupatbarely0.3%perannumoverthefirstof
Boomwasthesingularlyrapidexpansionofworld
theseperiodsbeforequickeningmodestlytoastill
tradeitencompassed.ThiswaveofpostColdWar
insubstantial1.5%p.a.duringthecourseofthe
globalizationtoemployatermthatthe
second.
MetropolitanMarxistsandEastSideecowarriors

aliketendtoregardasapejorativesawtrade
volumesacceleratefromthecompoundannualrate
of~6.3%recordedinthepreviousbusinesscycle
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Diapason Commodities Management

Lausanne & London
1

Aug/Sept 2009

Goodbye to All That

Whattheperceptivereaderwillrecogniseinthis
constellationofdatathatadecidedshiftinrelative
pricestookplacewithinthechangeinabsolute
levelsandwherethesewereexpressedacross,
ratherthanwithin,bordersalsointhetermsof
tradebetweentheresourcerichandthefactory
fertilewiththeformersexportsofcoal,cotton,and
copperbuyingafargreatervolumeofthelatters
cars,cranes,andCNCmachinetools.Indeed,asthe
tradewindsbleweverstrongertheyalsoveeredto
blowdirectlyinthefacesofAmerica,Japan,Europe
andindustrializedAsiawhilefillingthesailsof
EasternEurope(principallytheFSU)andtheGulf,
butalsotheoreladenAgritopiaofLatinAmerica.

From19912001,USexportprices,forexample,
outpacedthoseofimportsbyatotalof6.7%,while
thewhatendedbybecomingtheEurozonegaineda
1.9%advantage,Asiasuffereda2.3%headwindand
commoditydeprivedJapanrowedmanfullyintoa
stiff9.9%adversebreeze.

WorldTraderegimesduringthecycle(CAR%)
15.0

5.0

(5.0)

WORLDVOL
(15.0)

ADVVOL
EMVOL
TWIPRICE

(25.0)
199101

2002S07

S07J08

J08TD

Figure2:TheWheelsofCommerce

Again,bysplittingthedatadownalevelwearrive
atanotherinstructiveresult,forthepriceof
manufacturedgoodswereessentiallyunchanged
duringthefirstelevenyears(actuallyfallingatan
0.3%p.a.rateafteragaintweakingforvariationsin
theUSD)beforeedging0.9%ayearlowerinthe
latterfiveandahalf.Notethatherewehaveyet
moreproofthat,forallthemainstreamangst,
deflationi.e.fallingpricesarenotinconsistent
withgreaterprosperity.

Meanwhile,commodityprices(usingtheIMF
measure)gentlyrose0.7%ayear(comprisedof
1.8%energy;0.5%industrialmetals;0.8%
comestibles)beforeour2001watershedandroared
awayata12.7%(17.8%energy;11.8%metals;3.9%
comestibles)clipafterit.

Relativetradeprices(Mfgdgoods/NonenergyCMDTYs)vChinese2waytradetotal
(6mma,blns)inverted

20

110.0

60
90.0

140
70.0

MfG/CMDTYexNRG
220

China(rhs)

WorldTradepriceregimesduringthecycle(CAR%)

IndMETAL
ENERGY

35.0

MfGGoods

0.0

(35.0)

(70.0)
199101

2002S07

S07J08

Figure3:TheBullandtheBear

J08TD

Jan09

Jan06

Jan03

Jan00

Jan97

Food&BEV
70.0

Jan94

Jan91

50.0

Figure4:ChangingTermsofTrade

However,bythetimewehadreachedthelate
summerof2007andtheloweringfinancialstorm
wasabouttodeepenandintensifyintowhatwe
thencalledHurricaneCassandraallwere
batteningdownthehatches.TheUSlostseawayto
thetuneof9.9%,theEurozonedrifted3.9%,Asia
wasborneawayby13.8%,andJapanran,storm
riggedandbatteneddownamassive29.3%.

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Diapason Commodities Management

Lausanne & London
2

Aug/Sept 2009

Goodbye to All That

tentatively,beginningtoclimbsawtradevolumes
slumpaneyewatering22%anddollarpricesdive
almost24%(withenergyoff65%,metalsoff51%,
food/bevoff28%,andmanufacturedgoodswhich
thereforedoubledinrelationtocommoditiesinthe
spaceofjusttenmonthsbringinguptherearwith
amere15%slippage).

Totakeaslightlydifferentperspectiveonthis,take
thecaseofoneofthegreatcurrentaccountsurplus,
exportingnationsGermany.Shortlyafter
Reunification,inthedepthsofthetwinERMcrises,
exportsamountedtoaroundjustoveraquarter
andtwowaytradejustoverahalfofprivate
domesticGDP.BytheheightoftheBoom,inthe
fatefulsummerof2008,thatproportionhadsoared
to65%forexportsaloneandto120%forimports
andexportscombined.Clearly,theMittelstandhad
beeninveigledintheinterimintobecomingvery
highlygearedtothehealthandcreditworthinessof
itsmanycrossborderandoverseascustomers.

Toanticipatetherestofourstoryalittle,theperiod
fromSeptember2007onwardwascharacterisedby
twomaintrends:themovebytheleveragedHerd
tobuycommoditiesenmasseasameanstoflee
collapsingcreditandmoneyprintingcentralbanks
(ashiftinstigatedwithinaweekoftheFedfirst
cuttingthediscountratecut,anoffcalendarmove
accompaniedbyitsfirstforayintoprovidingterm
fundstoitsmemberbanksi.e.intoimplementing
BlackhawkBenandTwinHueyTimsfinancial
oligarchsearchandrescuemission)andthemove
fromJuly2008,whenthatsameHerdran,lemming
liketowardsandthenoveracliffcalledLehman
AIG,tramplingunderfoottheprovisionofeventhe
mostbasicformsofworldtradecreditinthewild,
headlongstampedetosellout.

Inthelast,frenziedrunup,thetrendsoutlined
aboveintensified(withtheexceptionoftrade
volumeswhichhadalreadyslowedtoacrawlinthe
bynowailingadvancedeconomies).Tradevalues,
however,soared30.8%annualizedinUSDasprices
shotup24%,ledbyaneardoublinginthedollar
priceofenergy(+98.2%),a44.2%riseinfood&
beverages,andratherbelatedlya17.1%increase
inmanufacturedgoodsastheinflationary
pandemicclaimeditslastvictims.Notwithstanding
thislast,furthertermsoftradelossesbythe
industrialnationswerecounterbalancedbymodest
gainsforLatamandCEERandamonster,36.8%
surgefortheMiddleEast&Africa.

GermanTradedependence:Exports&Importsas%ofprivatedomesticGDP
125
Import%
Export%

100

75

50

RateofchangeofWorldTradeVolumevCCI,6mMAd6m%annualized

30.0

0.0
0.0
10.0

30.0
20.0
TradeVolume(lhs)
CCI(rhs)
60.0
Aug09

Aug07

Aug05

Aug03

Aug01

Aug99

Aug97

Aug95

Aug93

Aug91

30.0

Figure5:TheDrivingForce

Conversely,thesubsequentcollapsefromthebase
ofwhosesmokingimpactcraterweareonlynow,

Sep08

Sep05

Sep02

Sep93

10.0

Sep99

25

60.0

Sep96

20.0

Figure6:AllinthesameBoat

Overallbusinessrevenuesinthecountry,sothe
BUBAtellsus,rosejustover30%fromtheendof
2001toQIII07but,astheydid,theybecameheavily
skewedtowardsexportsales(up49%)ofcapital
(+46.8%)andintermediategoods(+56.2%).Thelast,
desperateheavetothebrinkonlyaddedapercent
ortwotoeachofthesetotalsbeforeDerUntergang
andasickening22.3%overallfall,ledbya28%
dropinthosesame,formerlyflyingofftheshelves
categoriesofexportedcapitalandintermediate
goods.Inessence,thecrisishasservedtowipeout

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Diapason Commodities Management

Lausanne & London
3

Aug/Sept 2009

Goodbye to All That

whatremainscloseto90%ofalltherevenuegains
madeinthecircasevenyearstothepeak,foraloss
offiveyearsworthofprogressevenaftertaking
intoaccountthelateSpringrebound.

GermanRevenuesyoy%(2000=100)
20.0

10.0

0.0

10.0

Capital
20.0

INTMed
ConsDUR
ConsNonDUR
Jan09

Jan07

Jan05

Jan03

Jan01

Jan99

Jan97

Jan95

Jan93

Jan91

30.0

Figure7:oralleggsinthesamebasket?

Thesheerviolenceofthisreversaloffortune
somethingakintothesudden,mortalswoopofa
meltedwaxIcarusafterlonghoursofpatiently
spirallingheavenwardonthethermalsrisingoffthe
CretancoasthasperplexedeveryonefromHer
BritannicMajestyandherhaplessFirstMinisterto
thefallenidolsofinvestmentpractice,likeBill
MillerandBruceBentyetwhileitspatternmay
beacomplextangleofcircumstances,thereare,in
truth,onlyafewbasicthreadsintheweave,allof
themveryfamiliartothosewithanAustrian
perspectiveonthecase:fiatmoney,gross
governmentinterferencewithmarkets,andtheavid,
rentgrubbingirresponsibilityitfostersineveryone
involvedfromthemostprominentfinancialflesh
eatertothemostpathetic,ForgottenMan
structuredproductstuffee.

But,beforeweproceedwiththecaseforthe
prosecution,pleaseallowusanopeningpreamble
beforethecourt.Afterall,itcannotbethattrade
itselfistheculpritintheAristopheneancomedyto
whosecastwehavebeenforciblyrecruited.Though
routinelyvilifiedbycrassanticapitalistsand
mindlessgreenworshippersoftheNobleSavage,
tradeisbutaspecialcaseofexchangeand
voluntaryexchangeis,byitsverynature,asource
ofgreatersatisfactionbothtobuyerandseller.

Tradeisanexpressionofthedivisionoflabour.It
bringsthebountyofspecializationoffunction.It
fostersinternationalamityandbroadensmental
aswellasphysicalhorizonsandpromotesa
sharingofideasandtheadoptionofbestpractice

Oratleastitwouldwereitnotsogrotesquely
interferedwithonsomanylevels.Forinstance,the
fundamentalpurposeofexportinggoodsistouse
themtopurchasethoseothergoodsthoseimports
whichliehigherinthesubjectivevaluationsofthe
exporter.Itistruethatthesellermaynotwishto
takedeliveryofthosegoodstoday,butmayrather
wishtousetheproceedstolayinaclaimtogoods
tomorrow(somatchingthetradebalancewithan
equalandoppositeentryinthecapitalaccounts),
butthisshouldbeundertakenbytheindividual
himselfashejudiciouslyandcarefullyassessesthe
potentialfuturebenefitsofhisown,personal
investmentagainsttherisksofalossofhishard
earnedsurplus.

Itshouldnotthereforebeoverlyweightedtowards
makingsalesforsalessakebyforgoingimmediate
recompensefromdeadbeatcustomerswhowill
onlybeabletomaketheirdeferredrepaymentif
theirlowskillgamblesintheassetmarketshappen,
fortuitously,tobearfruit.Itshouldnotbe
predicateduponasolvencysappinggenerationof
inflationarycreditbystatesupported,fractional
reserve,casinobanks.Ontheonehand,itshould
notbecomesubornedbythetired,old,tatist
policiesofMercantilismwhichnotonlymistakes
moneyforwealth,butconfusesfiatmoneyfor
moneyproper!norshoulditplaytheroleof
milchcowtoarrogantsuperpowers,lazilyand
deceitfullydrawingacoverttributefromthe
laboursofothersthroughtheircynicalabuseof
theircurrenciesreservestatus.

Yet,itistooeasytoshowjusthowdeeplysuch
perversionshaveindeedtakenhold,turningthe
expansionoftradefromaboonintoacurse;from
anexpressionofentrepreneurialadventuretothe
mostglaringsymptomofthatinappropriateand
selfdefeatingoverextensionoftheproductive
structurewhichweAustriansrecogniseasboththe
resultoflaxmonetarypolicyandtheprimarycause

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Diapason Commodities Management

Lausanne & London
4

Aug/Sept 2009

Goodbye to All That

themountainousimbalancesinthismostdistorting
ofmanners.

oftheinevitableBustwhichfollowsthecheap
proseccoglamouroftheBoom.

WorldForexReserves&SWFAssets,blns(IMF,BIS,BdE)
vMerchandisetrade(CPB,WTO)

JPNO/SMachinery,GermanForeignFactory&USNonDEFAircraftOrdersv
WorldTrade

340

$18,000

$18,000
SWF

125

TRDVolume(lhs)

USD*
Other

TradeValue(lhs)

Globaltrade

USXDEFAIR(rhs)

100

240

TotalexG3CB

$12,000

JPNMachOrd(rhs)

$12,000

GERFactOrd(rhs)
75

$6,000

$6,000

50
140

25
$0

Figure8:MalinvestmentDefined

WorldTradevMining,Machinery&Marineequities
(rescaled,relativetoMSCIWorld)
330
TRDVolume(lhs)
450

TradeValue(lhs)
MINE(rhs)
MARINE(rhs)
MACHINE(rhs)

350

230

250
180

150

130

50
Jan09

Jan08

Jan07

Jan06

Jan05

Jan04

Jan03

Jan02

Jan01

Jan00

Jan99

80

Figure9:MalinvestmentReflected

Forinstance,byconsideringtheIMFdataon
foreignexchangereserves,wecanseethatthese
grewmorethansevenfoldbetweentheendof1991
andSeptember2007,almostdoublingfrom22%of
globaltradeto43%alongtheway,orgaining$1for
every$2ofextratradeflows.Addintheslightly
woollyestimatesofseparatesovereignwealthfund
gains(largely,butnotexclusively,sourcedfrom
commoditystabilizationprogrammes)whichthe
BankofSpainthinkspassed$100billionsometime
in2000,onitswayto$2.4trillionin2007and
perhaps$2.8trillionatthe2008highwatermarkand
wearewellonthewaytofinancingfullythree
quartersofthewholeincreaseintradeandhence

Dec08

Dec04

Dec00

Dec96

Dec92

Dec88

Dec84

Jan09

Jan06

Jan03

Jan00

Jan97

Jan94

Jan91

280

$0
Dec80

40

Figure10:GivemebackmyMarbles!

Eventhisdoesnottellthefullstory,forthiscycle
hasalsobeenmagnifiedbytheunintended
workingsofthesinglecurrencyinEuropewhere
foreignexchangereservesbydefinition,donot
enterthepicture,thoughdeficitswithouttears
certainlydo.Forexample,couldyouimaginethe
circumstanceswherebyaprofligateSpaincould
passthecyclecasuallyrackingupahalftrillion
dollarsworthofcurrentaccountdeficits,wereit
notnestlingunderthepetticoatsofitscomplaisant
Teutonicneighbourstothenorth,eacheagertodo
businesswithitscowboypropertytycoonson
nothingdownandeasytermsthereafter?

Trulywearewellintothebusinessofkeeping
JacquesRueffstickgrantingtailorhappyor,to
switchtohisother,trenchantsimile,wehave
elevatedthechildishgameofmarbles(under
whoserulesthewinnerofeachroundreturnshis
gainstothosewhoearliersufferedtheirloss)tothe
statusofaSuperbowl,anAshesTestmatch,anda
Formula1WorldChampionship,allrolledintoone.

Thereasonthishasbeensoperniciousisthatithas
circumventedtheverybusinessofreserve
managementandsohasturnedwhatshouldbethe
semiautomaticselfequilibrationoftheclassical
specieflowmechanismintoapositivefeedbackof
everwidercurrentaccountgaps,evermore
profoundmisallocationofcapital,evermore
inflationalbeitonemaskedintermsoffinished

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Diapason Commodities Management

Lausanne & London
5

Aug/Sept 2009

Goodbye to All That

goodprices,aswehavealreadyseen,bythesupply
sideimpactofshiftingproductiontowherelabour
ischeapandthelocalpolitburoishappytoconnive
withitsbuddiesinthestateownedenterprisesto
providenearcostlessfinance,inexpensiveland,
exporttaxincentives,andevensubsidisedutilities
toaproducerwhoisthereforerelativelyindifferent
tothepricehehastopayforhiscommodityinputs
(rememberthoserelativepricetrendswediscussed
earlier).

Inafairsystem,basedonaproper,hardcurrency,
thecountryrunningadeficitsettlesupbylosingthe
bulliononwhichitscirculationisbased:domestic
creditthencontracts,pricesfall,activityshiftsto
importsubstitution,andcompetitivenessishence
restoredanadjustmentquickenedbythefactthat
equalandoppositechangesaretakingplaceinthe
surpluscountry.ThemonetarysinoftheWest,
however(toemployanotherRueffism),isthatwhile
thesurpluscountrytodayusesitsexcessforeign
exchangereceiptstoexpandthestockofhigh
poweredmoneyathomeandsotriggersitsown
productionlengtheningcycle,itsimultaneously
loansthosesamereceiptsstraightbacktotheir
creators,preservingtheircreditpyramidinturnand
thusencouragingthemtocontinuetheirgrossover
consumption.

Addingtothedangers,thedeficitnationcentral
bankseesthelowpriceimportsandartificially
stabilizedexchangerateashelpingachieveits
monophthalmicgoalofsuppressinginflation
whichbeingtypicallymainstreaminitsanalysis
itimaginestoconsistonlyofrisesinitsfavourite
(usuallypared)consumerpriceindex.Itisthus
perilouslypredisposedtorunningfartoolooseat
thesametimeasitsforeigncounterpartisrelaxing,
alldespitetheobviouswarningsignwhichthe
tradedeficititselfconstitutes,namely,thatdemand
hasalreadyoutstrippedthepotentialfordomestic
outputtomeetit.

Inevitably,intheoverfinanced,speculativemilieu
inwhichwelive,theexcesscreditthuscalledinto
existencesoonspillsoverintoassetmarkets(whose
inordinaterisedoesnotatallfigureinthewholly
navepolicysettingsbeingfollowed)andsobegins

thatunstablespiraloffinancialconvectionwhich
seesnotionalnetworthincreasingandeffortlessly
generatingthefreshcollateralwhichwillformthe
basisforyetmoreassetpriceboostingloansinthe
nextiteration.Temptedbythecapacitytoengineer
illusoryandprematurelycapitalisedprofitsin
suchaconducivecurrent,theevermorehubristic
bankersbynownotsomuchonCristalRoederer
asoncrystalmeth(metaphoricallyspeaking,of
course)soonallowtheirhiredin,mathematical
idiotsavantstoferretouthighlyexplosivewaysto
cheatshareholdersandregulatorsofduedisclosure
andsoarrangetoheapaPelionofnonlinearity
uponanOssaofoverleverageandunder
capitalization.

Inaworldwheretheguidingbureaucratsthink
theyshouldnotpresumetoknowmorethana
markettheythemselveshavealreadyvitiated
beyondrepairandwhereallfurthercompensatory
actionisprecludedinfavourofanindulgentaunts
JacksonHoleintentiontowaituntilthepartyiswell
andtrulyoverbeforemoppingupthemess,the
MastersoftheUniversewillhavelongsince
workedoutthattoobigtofailequatestobonus
chequestoobigtobounceandsothebandplayson.

Insuchadelinquentsystem,evensoaring
commodityprices,farfromdampeningtheardour
ofthoseforkingoutatthepetrolpump,cancome
insteadtoinflamethepassionsfurther.Howcould
thishaveactedasataxwhenonecouldslakethe
thirstofonesshiny,new,highLTVSUVby
drawingonahomeequitylinebeingrefilledjustas
quicklyasthetankbythetheoreticalappreciation
inthepriceofoneshome?Whywouldhigher
priceshavechokedoffdemandiftheyentailedno
greatersacrificeofincome,simplyafurther,
painlessrecoursetomoreborrowing?

Thus,astheBoomprogressedandasits
undoubted,realsectorimpactmeantenergyuse
begantoclimb,toopriciercrudeimpliednothing
moredifficultthananotherroundofWestern
borrowingtomeetitsimportbills,andsoled
straightawaytogreaterpetrodollarreceiptsnotso
muchattheexpenseof,butinadditionto,the
outlaysbeingmadeoneverythingelse.Thelow

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Diapason Commodities Management

Lausanne & London
6

Aug/Sept 2009

Goodbye to All That

Now,ifallthepiecespsychological,institutional,
andpoliticalseemtohavebeeninplacetohosta
globespanningorgyofmalinvestment,withthe
revellersfewremaininginhibitionsdispelledbythe
headynarcoticofirresponsibleoverconsumption,
and,hence,ifwewereheadedforwhatwas
perhapsTHElargestandmostsevereBoomBustin
history,wewouldexpectdear,oldfriendCreditto
haveplayedaroleinallthis.

Perhapsthequickestandcleanestwaytoshowthis
wasindeedthecaseistolookatthebehaviourof
theBISseriesformembercountrybankingbalance
sheetsovertherelevantperiods.Indeed,ifwe
considerthatinflationi.e.excessmoneycreation
is,thesedays,primarilyanincreasein(demand)
liabilitiesatbanks,itisinstructivetolookatthe
explosionintheirsize(here,strictlyspeaking,we
haveperformedourcalculationsontheotherside
ofthebalancesheetforconvenience,butthe
differenceisnotsignificant).

BISBankAssetInflation
$42,000

Creditdoublingsandcompoundannualrate:
Sept79Dec8341/2yrs18.5%
Dec874yrs19.2%
Jun9791/2yrs7.2%
Sep0471/4yrs9.8%
Mar0831/2yrs21.7%

$28,000

$14,000

Sep06

Sep02

Sep98

Sep94

Sep90

Sep86

Sep82

$0
Sep78

absorptionpotentialinmanyoftheproducer
countriesonthereceivingendofthisresultedin(a)
lessandlessdisciplinedoutlaysbeingmadeon
(usually)stateinspiredwhiteelephantsandsky
scrapingOedificecomplexesallhorribly
unproductivesquanderingsofcapitalmeansand
(b)billionsmorechildishmarblesindiscriminately
beingreturnedtosourcesoastoensuredollar
trackinglocalcurrenciesdidnotsufferany
untowardpressuretoappreciateawayfromtheir
adoptedyardstick.Atthepeakof85.4million
barrelsadaybeingconsumedandsellingfor$145
each,wewere,afterall,brieflytalkingofaneedto
disposeofsomethinginexcessof$1/2billion
dollarsanhourjustintermsofoil.

And,yes,inthislast,madfewmonths,evenasthe
icebergloomedlargeunderabowcuttingcarelessly
throughthetreacherousseassurroundingit,
speculatorsdiddrivethecontracttoofar,toofast.

But,werethiswholemadmonetarypolicynotin
place;hadtheFednotbeenslashingratestoa28
yearlow,negativereal3%;hadthedollarinwhich
commoditiesarepricednotbeentacitly
encourageddowntoanalltime,tradeweighted
low;werethebanksnotbothfreedfromall
effectiverestraintandmadefartooconfidentin
theimpliedsupportofferedthembythepublic
purse;weregovernmentseverywherenot
frustratingthepricemechanismbyencouraging
consumptionthrougharaftofsubsidies,tax
breaks,andwelfarepayments(agoodly
proportionofwhichwerethemselvesfinancedin
aninflationarymanner);wereperceivedshortages
ofgrainandfertilizernotbeingexacerbatedby
panickyexportbansandemergencyimport
tenders,doyoureallythinkthatoilandtheothers
couldeverhavebecomesuchaonewaybet,that
suchleveragecouldhavebroughttobearonthem
inmakingthatbet,orthattheywouldhavestarted
theirfinal,screamingshortsqueezefromsohigh
abaseastheydid?

No,themanypoliticalWitchfindersGeneralneedto
peermorecloselyinthemirrorwhentheyengagein
theirhuntforcandidatestosendtothestakeforthe
sinofbeinginleaguewiththeforcesofdarkness.

Figure11:DoubleandQuits

Inthe3yearstotheMarch2008quarterlypeakof
$40trillion,totalbankingclaimsgrewvirulentlyat
a~22%compoundannualrate,achievingthefastest
nominaldoublinginathreedecadedataseries.
Thoughittookawhileforconsumerpricesto
respond,ifyouwantedinflation(properlydefined),
youcertainlyhaditinspadesgoingintotheCrash!

Comparingtherateofcreditextendedtoonshore
nonbanks(i.e.toafirstapproximationofthereal
economy)inthevarioustimesliceswehave

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BISClaimsonOnshorenonbanksvTrade(CAR%)

20.0

0.0

BISCredit
20.0

TRD$Value
TRDVolume
TRDPriceIndex

40.0
199101

2002S07

S07J08

J08TD

Figure12:TheBubblethatBroketheWorld

Nowitisundoubtedlytruethatevenahealthy
extensionoftheproductivestructureespecially
onegrowingverticallyupthroughlayersof
specialisationandoutacrossbordersislikelyto
callformorecredit(thoughnotnecessarilymore
moneywhichisacrucial,ifoftenoverlooked,
distinction).Simplyput,amanufacturingcompany
whichusedtoperformitsaccountsinhousewould
havegivenrisetofewerclaimsthanonewhichnow
givesthecontracttoaBPOoutfitinBangalore.

WorldTradePrices&VolumesvBISClaimsonOnshoreNonBanks(YOY%)
30.0
20.0
20.0

10.0
10.0

0.0
0.0

10.0

10.0

NFinA(lhs)
TradePX(rhs)
TradeVOL(rhs)
Dec07

Dec05

Dec03

Dec01

Dec99

Dec97

Dec95

20.0
Dec93

20.0
Dec91

identifiedwiththedifferentregimesabove,we
achieveanothernotableconsonance.

Intheperiod199101inclusive,BISclaimsrosea
compounded6.7%ayearwhiledollartradevalues
grewby4.6%p.a.volumesby6.3%asprices
eased.DuringoursecondphasetoSeptember
2007claimsgrowthacceleratedto19.7%ayear
while,youmayrecall,tradevaluesspedupto
17.1%withvolumegrowthof8.3%nowbeing
accompaniedbythefirstsignsofdisruptioninthe
formofpricesrising7.1%annually.Whenthings
wentballisticoverthenextthreequarters,credit
growthhitapeakof25.1%p.a.,tradevalueshurtled
skywardata30.8%annualpacewithominously
pricegainsof24%farsurpassingabadlyfaltering
volumeincrementof4.8%.Finally,astheBubble
thatBroketheWorldburst,bankclaimsdropped
17.3%andtradeplummeted~40%splitfairlyevenly
betweenavolumecontractionandapricedecline.

Figure13:CreditandDebit

Itisalsowellnighimpossibletountanglethe
virtuousprocessofmakingexantesavingsoutof
currentincomeserveascapital(whetherofthe
fixedorcirculatingvariety)inordertofacilitate
moreefficientandmoreprofitableproduction
processesandthedeviantshadowofconjuringup
suchcapitalmeansoutofanunbacked,banking
bookentryandthenpointingtothewhollyexpost
buildupofdepositstowhichitgivesriseasan
exampleofaglobalsavingglut,ratherthan
recognisingitfortheinflationarycorrosionof
valueswhichitreallyrepresents.

Thus,oneithercount,tohopetorenderarigorous
quantitativereckoningofthecumulativedanger
beingdoneiswhollyillusory.Butthoughtheblind
empiricistswhoruletheworldofeconomicsmay
notwishtoadmitit,aworkablequalitativeanalysis
isnolessachievablethanisasounddiagnosisgiven
toapatientbyafamilydoctor,longbeforethe
resultsofthepathlabandCTscannerhavebeen
received.

So,whenweseeimbalancesbuilding,perspiration
freeprosperitybeingacclaimedbyallasa
birthright,theregulardeliveryofoutlandish
investmentreturnsamiddepressedinterestrates
andcreditspreadsandwhenwestarttoseereal
sideactivitygaininspeed,accompaniedbymore
andmoreovertpricerises,wecansurelynotavoid
drawingtheglaringconclusionthatweareheading
forawreck.

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VariationofOECDCPI(100sigmasdivergencefromrolling5yrmean)
880.0

360.0

USSP500RealEarningsGrowthFactorviaBAAYields
8.0

4.0

0.0

(4.0)

(8.0)

Dec06

Dec96

Dec86

Dec76

Dec66

Dec46

Dec56

(12.0)
Dec36

Incidentally,itisatenetofAustrianBusinessCycle
theorythattheendemicdiscoordinationof
entrepreneurialplansandconsumerpreferencesto
whichthecreditexpansionleadsapproachesits
endgamewhentheurgetoenjoythehigher
monetaryincomesbeingpaidoutsoliberallyeffects
anadverseshiftinthematrixofrelativefactorand
endsellingpricesuponwhichthebusinesscaptains
hadbeenplanning,sojeopardisingnotonlytheir
profitability,butoftentheirveryphysical
attainability,too.Sometimes,howeverespecially
duringsupplysiderevolutions(howevershakily
founded)whenpricesseemmoresubduedthan
theyarewonttodo,oneneedstoknowwhereto
lookfortheevidence.

Infact,thoughthepeakmonthlyvaluerecordedin
July2008forOECDCPIoflessthan5%was,byall
recenthistoricalstandards,unexceptionable,this
notonlyrepresentedthebiggestdeviationfromthe
trailingfiveyearnorm(andhence,effectively,from
theleveltowhicheconomicdecisionmakershad
becomeattuned)sinceatleast1975,butitalso
entailedthefastestaccelerationinendprices
(normalizedornot)intwodecades.

Figure15:DiscountingaMiracle

Wealsoemphasisedthatduringtheprevioustwo
pricecollapsesin192021and193033once
moneybegantoflowintothesystemoncemore,
pricesofriskassetsandcommoditiesrosesharply
(especiallywherethelatterwerehelpedbythe
accompanyinggovernmentpoliciesof
stockpiling).Westatedasforciblyaswecouldthat
weexpectedthesametohappenagain,while
qualifyingtheremarkwiththegloomyobservation
thatsuchapricerisewasnottobetakenasasignal
ofareturntotheGildedAgeofstatusquoante.

USCreditqualityandBAAUSTbondspreads

YOY%(lhs)
590

d2YOY%(rhs)

7.0
BAAUST(lhs)

580.0

Chargeoffs(rhs)

6.0

Delinquencies(rhs)

0.0
465

5.0

280.0
4.0
340

(360.0)

3.0

(20.0)
2.0
215
1.0

Figure14:Timepreferencetriumphant

Backattheverybeginningoftheyear,we
summarizedouroutlookbymootingthepossibility
thatmarketsmightbefooledbytheexpected
reboundfromthefreezinghellofwhatwecalled
theSnowballEarthepisodeoftheLEHAIG
collapseintoimaginingthatwecouldalsoavoida
moreprotractedLittleIceAgeofloweredprivate
entrepreneurialactivityafterthispartialthaw.

Dec08

Dec04

Dec00

Dec96

Dec92

Dec88

0.0
Dec84

90
Dec80

Dec05

Dec00

Dec95

Dec90

Dec85

Dec80

(320.0)
Dec75

(720.0)

Figure16:Cheapaslongastheypayup

EightmonthsonandwefindourselveswithBAA
yieldspreadsalmostbacktotheirthreedecade
normevenaschargeoffsanddelinquenciesare
goingstratospheric.Weseeasreportedstock
marketP/Esintripledigitsand,combiningthetwo,
wehaveanimplicitforecastoflongtermreal,risk
adjustedearningsgrowthwellinexcessofthe

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previoustwospeculativepeaksin1987and2000
andcertainlywellbeyondthepointwhereanailing
economycaneverbeexpecteddeliversuchan
improvement.
RateofchangeofworldtradevolumevMSCIEMrelativetoMSCIWorld
20.0

35.0

10.0
17.5

0.0
0.0
10.0

17.5
20.0
Traded6mmaann
d6MXEF/World(rhs)

30.0
Aug07

Aug05

Aug03

Aug01

Aug99

Aug97

Aug95

Aug93

Aug91

35.0

Figure17:EMsCreaturesoftheTrend

Wefindemergingmarketsattheirbestrelative
levelssincetheTequilacrisisdespitetheir
elevatedtradeandvendorcreditdependenceand
wehavecrudeoilbackat$70/bblandfast
approachingfourhoursaveragewageswhereit
sisalreadybacktosecondoilshockleveldespite
verylacklustredemandandswellingstockpiles.

HoursworkedperBarrelofOil(rhs)&yoychange(lhs)
DubaicrudevUSprivatesectorearnings

8.00

150.0

yearlows;whereexenergyproductionlessvehicles
hasstuckatasixteenyearlow;andwherethereare
almosttenpeopleinthepoolofavailablelabour
foreveryprivatejobonofferisnotlikelysimplyto
joltoutofitsnightmarelikeBobbyEwingquitting
hisreveriesintheshower.

Ifyoudoubtthis,youhavenotonlynotbeen
payingattentionwhenwewerelayingoutthe
innerworkingsofadynamicnowirretrievably
broken,butyouseemtothinkthatbythrowing
mindbogglingsumsofmoneyattheproblem,
andbysubstitutingsubprimegovernment
borrowingforsubprimerealestateandsub
marginalbusinessborrowing,wecansomehow
unscrambletheomelettewhichoncewentbythe
nameofHumptyDumptyandsethimbackatop
hiswall.

No.Forwhilewecanmaintainthevolumeofcredit
byissuingnewdebtintheplaceofold(andnot
onlyhavetheworldsfederalgovernmentsbeen
performingprodigieshere,butsohaveinvestment
gradecorporatesastheybypassthebanksintheir
grabforthefruitsofallthatjuicyquantitative
easing),wecannotassumethatitwillfinancethe
sameactivities,employthesamepeople,and
generatethesamesalesandcriticallythesame
profitsasbeforetheworldfellapart.

6.50

USExtractiveindustry5yearcumulativereal&nominalcapitaloutlay(blns)

0.0

$500

$800

5.00

Combined
Mining

3.50

Oil&Gas

$400

150.0

$600

Nominal$(rhs)
2.00

$300
$400

0.50

$200
$100

2003

1993

1983

1973

$0
1963

$0
1953

1943

Figure18:TheToilforOil

So,isitbusinessasusualasboththestockpundits
andthecommoditysellsidespinnersmaintain?

Hardly,for,totakejusttheexampleoftheUS,an
economyreliantonvastprogrammesof
governmentandcentralbanksupport,wheretrade
volumesandmanufacturingsalesremainat56

$200

1933

Jan06

Jan99

Jan92

Jan85

Jan78

Jan71

Jan64

300.0

Figure19:TwiceBitten,THRICEshy?

Beassuredthatthereislittleobviousdeflation
aroundnotifyoudefineitproperly.Cashin

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circulationandnonfinancialdemandliabilitiesat
banksaregrowingrapidlyinmostoftheworlds
majoreconomiesand,asaresult,theeagernessto
disembarrassoneselffromthatsuffocatingsurfeitof
moneybyswappingitforlessliquidfinancialassets
andclaimsonrawmaterialshasbeengrowing
apace.

USA,Eurozone,China&JapanRealM1YOY%,3mma
30.0
CHINA
EUROZONE

25.0

USA
JAPAN
20.0

15.0

10.0

5.0

0.0

Jan10

Jan08

Jan06

Jan04

Jan02

Jan00

Jan98

Jan96

(5.0)

Figure20:ILOVEthesmellofnapalminthemorning

Thatithasnotyetdonemorethanbudgethe
variousbusinesssentimentindicesfromthesuicidal
depthstowhichtheyhadfallenisonlytobe
expected.Itisalongwayfromnotgettingany
worsetobecomingnoticeablybetterandthe
receiptofafew,nolongerdeferrablereplacement
ordersisnotthesameastheprospectofanother
headlongrushtoafullandremunerativeuseofall
thatidledplantandequipmentwhoseghostly
creaksandrustlingscanstillbeheardonlytoo
plainlyinexecutiveboardroomseverywhere.

Instead,ofaproper,privatelyledrecovery,what
wehaveisghoulishlandscapewherethecreeping
socializationofzombiebusinessesisimpinging
furtheruponthefieldofactionofthegoodones.As
onetellingposterputsit,thebailoutculture
representsaparticularlytwistedformof
interventionism:Fromeachaccordingtohismeans
toeachaccordingtohisinability.

Notonlyarethesocalledrescueprogrammes
clutteringuptheforestwithwholethicketsofdead
woodandtherebydenyingthevibrantsaplings
thelightandspacetheycouldsoreadilyexploitto

growbuttheyaremovingtheeconomyfurther
andfurtherdownapathwhereextremeregime
uncertaintyprevails:wherethecashisdistributed
notaccordingtothedictatesofconsumer
sovereigntyandentrepreneurialaction,butthrough
theshadowyworkingsofVitaminBeziehung
wherecashandfavoursaresoughtandacceptedfor
transitorypersonalandpoliticalendsinstead.

Itishardenoughtoplanproductionschedulesand
calculatereturnsoninvestmentwhenonemust
contendwithshiftingexchangerates,changing
consumertastes,andtheuncertainavailabilityand
varyingcostingofkeyinputs,butwhenyoualso
havetowonderwhetherapitilessfixerlikeRahm
Emmanuelconsidersyourchoicegoodforhis
Masterspollratings,orwhetherBritainsveryown
CardinalRichelieuBaronMandelsonofFoyand
Hartlepoolwilldecidetheelectoralcalculus
pertainingtoyourdeedsisfavourabletohis
particularclique,andthenyouhavetoworry
whetheryouoryourshareholderswillactuallybe
allowedtoenjoytherewardsofanyfuturesuccess
youattain,thetaskbecomesnotsomuchdifficultas
dispiritinglyunknowable.

Givensuchpessimism,thereaderstillsteepedin
themainstreammiasmaofeffectivedemandmay
beforgivenforwonderingwheretheinflationary
impetuscancomefrom.Afterall,theargument
goes,ifbusinessesarenotmakinganythingmore
thanthemostnecessitousofoutlaysandworkers
arenotbeingtakenbackonthepayrollinanything
liketherequirednumbers,therewillbenoone
eithercapableof,orwillingto,borrowandthe
stagnationwillthusbeselfperpetuating.

Notnecessarily.Fornotonlycanthegovernment
spendandborrowmoneyintoexistencebut,aswe
havealreadyseen,thecentralbankbuyproperty
titlesinanyconceivableamounttomeetits
perceivedneeds.Thusdeflationthesecondary
depression,ifyouwillcancertainlybeavoided,
butthatisaverydifferentanimalfromassuming
thismeansarestorationofthehealthofthatvibrant
andprofitableprivatesectoruponwhoseefforts
ultimatelyallmaterialwellbeingdepends.

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Yousee,themistaketheAggregationistsmakewith
theirchildish,toiletflushmodelsoftheeconomyis
thatthemoneytheysummonintoexistenceisnever
neutralandwhileitmaynotbeabletopre
determinethelevelsoflongrunoutput,itcan
certainlygreatlyinfluenceboththecompositionof
thatoutputandthepricesatwhichitisdistributed.

Themorethestateitselfmakesthesedecisions,or
themoreitdelegatesthemtoitsmany,undeclared
GSEssuchasG(se)M,G(s)ECC,andGS(e),all
voraciouslysucklingatthepublicteattheless
efficientthriveattheexpenseofthemore;thelower
becomesboththelevelandthequalityofwhatis
produced,andthehigherthepricewhichischarged
forit.

Moreover,aworlddrivenbypoliticiansstrivingto
usethepeoplesownwealthtobuytheirvotesis
notonepredisposedtohighlevelsofforeign
penetrationofthehomemarketforthecompetition
soofferedistooinjuriousfataltotheirvocal
constituenciesofrentseekersandcorporatewelfare
queens.Thus,thedisruptionsufferedalongthe
containerroutesandairfreightcorridorsofthe
worldbythecollapseoftheforexbankcredit
commoditytradepathwayisunlikelytoreceive
muchofafillipfromthejacksinofficewhonow
wishtorunthingsfortheirownbenefit,theway
theyhavelongbeenitchingtodo.

Thereare,asyet,onlyafewportentsofsuch
discriminationlikethecontroversialBuy
AmericanprovisionsortheodddiscordofBritish
jobsforBritishworkersbut,suchthingscan
easilycomeaboutviathebackdoorinthenameof
energyindependence,orfoodsecurity(ameme
currentlythesubjectofabigpropagandapushfrom
theMinistryofTruthinOceaniaitself),notto
mentionthedevilsbargainthatwillbestruckifany
formofcapandtradecarbonlevyisimposed.
Already,inthatcontext,Germanyhasrailedagainst
whatitseesasthenascentecoimperialism
emanatingunderthisguisefromthelikesofFrance.

NowonderPaulKrugmanisanavidsupporterof
thescheme!

Inaworldwhere,forthemany,continuationin
businessisintimatelysubjecttopoliticalcaprice;
wherethehungerforthefundswithwhichto
maintainthepretenceoffiscalrectitudebecomes
ravenous;whereborders,ifnotactuallyclosed,are
certainlymademorecostlytocross;wheremore
andmorepeoplederivetheirlivelihoodseither
directlyfromthegovernmentorasemployeesof
firmswhosebiggestcustomerisLeviathan,itwill
notbetoodifficulttobringaboutanunpleasantmix
ofhighprices,poorcustomerservice,andanaemic
entrepreneurialwill.

Figures21a&b:ProportionofGovernmentworkersto
PrivatevRealWagesUK(upper);US(lower)

Indeed,thepoorrisk:returnconditionsofhighcosts,
governmentsponsoredcompetitorsandaless
profitdependent,butmoreovertlypoliticised,
workforce,meansthatprivatesectorwagesmay
wellbepeggedtoohighforaviablereturntobe
madeonthemintheselessexpansivetimes.The
chronicallyhighprivateemploymentwhichwould

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betheresultofthiscannotfailtoleadtotheurgent
callforfurtherencroachmentsofthepublicsector
aimedatcuringyetanotherexampleofmarket
failureandforyetmoremonetaryquackmedicine
beingprescribedtotrytopricepeoplebackinto
workviainflation.

Beforeyouknowit,AlanGreenspanwillbedusting
offhisWhipInflationNowlapelbadge,angry
windmillmakerswillbepicketingtheHouston
ShipCanal,andWashingtonwillbefutilely
negotiatingpriceandwagecontrolstotrytostop
therot.
Whicheverwayitgoes,itwouldnotbewiseto
bankonareturntothekindofrelativelyfrictionless,
tradeledgrowthwesawoverthefourorsoyears
to2007/early2008.Politicalandsocialantagonism
arelikelytorise,nowthatthemorereadily
identifiablecostcutshavebeenenactedandthe
moredifficultdecisionsregardingthescaleand
formofonesenterprisemustinsteadbetaken.

Despiterisingmoneysupply,profitsarelikelyto
disappoint,too,iftoomuchofitstickstothe
clammyhandsofthegovernmentanditsagents.

Themarketmayhavetosufferanastyboutof
disillusionbeforeitreconcilesitselftothefactthat
thehalcyondaysarelonggoneandthattheclockis
everywheretickingtowardareckoningwiththe
governmentdebtmarket.

Withinsuchaframework,acoreholdingof
commoditiesstillmakessense(assumingthatthe
takingofsuchaprudentialstepisnot
anathematizedcompletely)asprotectionagainst
outrightinflationism,aswellasagainstsupply
disruptionsandthepitfallsoftheheightened
economicnationalismwecanforesee.Likeevery
otherinvestment,finalsuccessalsodependsvery
muchontheentryleveloneachieves,sobuying
intothatnextroundofdisappointment,ifandwhen
itarises,wouldseemtomakeeminentsense.

If,bythen,wealsohavetopaythriceoverforT.
BoonePickensandAlbertArnoldGore,Jr.,tomake
theirlootoutofsendingusbacktothefourteenth
centuryintermsofgeneratingthepowerneededto
runourmines,farms,andfactories,wecanalso
assumeanastyboosttoinputcostsallalongtheline.

Thosestillendeavouringtomakethethingswe
cannotbewithoutandcommoditiesaresurely
amongthemwillnotbeslowtopassthosecosts
onwhenevertheycaninresponse.

SeanCorrigan,
ChiefInvestmentStrategist,
sean.corrigan@diapasoncm.com

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Goodbye to All That

DIAPASONCOMMODITIES
MANAGEMENTS.A.
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SWITZERLAND

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canbemadeonlybytheapprovedofferingmemorandum.Theinvestmentsdescribedhereinarenotpubliclydistributed.
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dealer.Theinvestmentdescribedhereincarriessubstantialrisksandpotentialinvestorsshouldhavetherequisiteknowledge
andexperiencetoassessthecharacteristicsandrisksassociatedtherewith.Accordingly,theyaredeemedtounderstandand
accepttheterms,conditionsandrisksassociatedtherewithandaredeemedtoactfortheirownaccount,tohavemadetheir
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