Market Commentary - Blog
Market Commentary - Blog

Every day, the world consumes 93 million barrels of oil, which is worth $4.2 billion.

Oil is one of the world’s most basic necessities. At least for now, all modern countries rely on oil and its derivatives as the backbone of their economies. However, the price of oil can have significant swings. These changes in price can have profound implications depending on whether an economy is a net importer or net exporter of crude.

Net exporters, countries that sell more oil abroad than they bring in, feel the sting when prices plunge. Less revenue gets generated, and this can impact everything from balancing the budget to the value of their currency in the world market.

Net importers, on the other hand, benefit from lower prices as it decreases input costs for production. For example, a country like Japan only meets 15% of its energy needs domestically, and must import 3.5 million barrels of oil each day. A lower oil price significantly decreases these costs.

Currency Swings

For many major net exporters of oil, changes in oil prices are highly correlated with their currencies. With oil prices crashing over the last year, currencies such as the Canadian dollar and Russian ruble have been highly impacted in terms of USD.

For example, the ruble is down over 40% since the price of oil began to crash in 2014. With a breakeven cost of $105/bbl, the dropping price of crude as well as dwindling ruble have sent ripples through the Russian economy.

Central Bank Policy

The impact of oil on currency depends on how central banks approach policy:

Floating exchange rate: The exchange rate is determined by supply and demand.

Fixed exchange rate: Countries with fixed exchange rates continuously arrange intervention to keep the rate the same.

Managed float: The central bank occasionally intervenes to “smooth out” the exchange rate.

Currency Correlations

The price of oil typically has the largest effect on countries with floating exchange rates such as Canada, Norway, or Mexico. Over the last 15 years, the loonie (-0.42), krone (-0.46), and peso (-0.31) have all had large negative correlations in exchange rates (paired with USD) against the price of oil.

Meanwhile, countries that have pegged their rate tend to feel the impact of oil price swings elsewhere in their economy. This is because such countries have to buy or sell currencies on the open market to maintain the currency peg. Another method that can be used is to enforce a particular exchange rate by making it illegal to trade currencies at other rates, but this can often create a black market.

As a result, countries with fixed-rate policies such as Venezuela, Saudi Arabia, and Qatar have little to no correlation in their exchange rates (paired with USD) against the price of oil.

 

 

Courtesy of: Visual Capitalist

Saturday, 24 October 2015 00:00

Geopolitics and the Pitfalls of Provocation

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Words matter in seeking to explain the actions of states and individuals and to divine the response that would best protect the national (or business or personal) interest. Complexities abound, and assertions based on minimal facts often must be made.

Oversimplification is frequently a necessary step to explain and understand the motivations — whether compulsions or constraints — of the various actors. That simplification, which accounts for complexity but peels away these layers to a core "truth," may not be entirely nuanced. But it does allow for more effective communication, and thus for building a more reasoned preparation or response.

There are risks, however, to moving from the simple to the simplistic. Complexities are often ignored in favor of a single reason for actions, frequently relying on moral judgments rather than reasoned understandings.

A Historically Charged Term

One term analysts, journalists and government officials use that frequently falls into the simplistic, rather than simple, category is "provocation." In itself, the term is not problematic. It can, however, become a catchall for describing anything one's political, military or cultural opponent might do. A highly moralized term, it frequently denies any justification for the actor's action and fully justifies any response from the recipient of the action.

In a simple sense, a provocation is an act designed to engender anger in, or trigger some response from, another. In a legal sense, provocation provides cover for the provoked entity to respond, even if the return action is violent: An assertion of provocation can reduce a murder charge to voluntary manslaughter, for example.

But what does provocation mean in the daily balance of power among states? Has the meaning of the term changed? Does it still hold the same significance it once did? Is it a viable term of explanation, or is it marked by moralism and simplicity? Are analysts and policymakers risking coming to the wrong conclusions, and thus making flawed assessments and policies, based on the misuse or overuse of "provocation?"

At one point, provocation was seen as a direct attempt to provoke some immediate response, usually a negative response. One would talk of agents provocateurs seeking to turn a rally violent to trigger and justify a harsh security crackdown. Provocations could also be small violent actions aimed at triggering a military response by the opponent in order to justify a larger counter-action by the provocateur. The initial actor's escalation thus appeared to have been caused by his opponent. But provocation now is rarely used with this same meaning in mind.

Current Uses of 'Provocation'

Although not the only case, explanations of North Korean actions embody perhaps the most excessive application of the current use of provocation. For example, a joint statement issued Oct. 16 by the White House following President Barak Obama's meeting with South Korean President Park Geun Hye begins:

The United States-Republic of Korea alliance remains committed to countering the threat to peace and security posed by North Korea's nuclear and ballistic missile programs as well as other provocations. We will maintain our robust deterrence posture and continue to modernize our alliance and enhance our close collaboration to better respond to all forms of North Korean provocations.

North Korea's ballistic missile and nuclear programs are specifically cited as provocations. Other forms of provocation are not specified (though they certainly appear to be contributing factors to the developing political and security relationship between South Korea and the United States). Little sense of the levels of significance of the so-called provocations can therefore be had. If North Korea launches an Unha rocket and places a satellite in orbit, that would be a provocation, but so apparently would be the test of a short-range anti-ship missile. If North Korea carries out an underground nuclear test, that would be a provocation, but Pyongyang claiming it could turn Seoul into a "sea of fire" would be, too. North Korean soldiers firing a few rounds across the border would be a provocation, but so would North Korea sinking a South Korean navy corvette in South Korean waters. Thus, there apparently are no bounds to what the term provocation can cover.

A quick look at geopolitical language in the past few weeks illustrates similar overreach in the use of provocation. Russian armed military aircraft flying over Turkish territory near Syria is a provocation. Turkey claiming that its military shot down a Russian drone is a provocation (not because the drone crashed, but because Turkish military reports suggested it was Russian and that Turkish warplanes shot it down). The United States warns China against provocations in the South China Sea via its militarization of artificial islands. China has warned the United States not to carry out provocations in the South China Sea via naval patrols. Protesters in the Czech Republic have called the visit of the Russian Army Choir a provocation. The Ukrainian Foreign Ministry has said the visit of a group of Polish children to Crimea is an act of Russian "political provocation." Taken together, provocation apparently can mean anything from letting children visit a place to violating national sovereignty.

The Trap of Simplistic Assumptions

There is an inherent moralizing in the use of the word provocation in its current context, and this can quickly lead to false or simplistic assumptions. It is not that morality has no place in foreign policy, but that in analysis one needs separation from moral or cultural impositions on the subject. By relying on provocation as a catchall phrase, the assertion is that whatever "they" have done is wrong and without justification, while whatever "we" do in response is right and justified. But if one fails to take the time and effort to understand the motivations and constraints of "they," then one risks creating an entirely counterproductive policy response. While moral and cultural elements may come into play in choosing the "right" response from the options available, without the initial nonjudgmental assessment of the opponent, the viable policy options may go unidentified.

(At this point, contrary forces emerge against the analyst: Those who seek to explain the "other's" actions beyond simply labeling him evil or crazy risk being accused of supporting the opponent.)

Another defect in calling everything a provocation is that all acts receive the same significance no matter how large or small. The North Korean case is illustrative again. There is an assumption that North Korean behavior has little purpose beyond provoking a response. Where provoking the largest guy in the bar can be expected to end badly, with North Korea the assertion is that provocations are designed to yield talks and concessions. While North Korea could be pursuing this strategy, it is rather risky.

If the generally accepted assessment that the South Korean and U.S. forces are far superior to the North Korean forces is correct, and thus any war would yield a U.S.-South Korean victory, why would North Korea continue to provoke its much stronger opponent? Moreover, if North Korea has had to escalate the provocation chain up to testing nuclear weapons and sinking South Korean ships, just how extreme must provocation become to force a positive response without triggering a negative response?

Labeling each action a provocation therefore can leave analysts misled by their own simplicity into considering each event as isolated, or if not isolated, as tied more to the desire to engender an immediate political response than as part of a broader, longer-term strategic plan. By relying on the shorthand of provocation, the only perceived continuity is the propensity toward provocative behavior. Provocation thus becomes an end unto itself, and all policy based on provocation becomes short-term policy.

In the case of North Korea, the persistent propensity toward provocations must mean that the North Korean leadership is illogical or even unpredictable; illogical because it continues to try to provoke a much larger power with limited gain, and unpredictable because provocations are seen as ends unto themselves, and thus can take any shape or level of severity and any time. In the case of Russia, the assertion is that President Vladimir Putin is crazy or bent on domination and that all the provocations by Russia are just a sign of the personality leadership of the Russian president. Provocations by Russia reflect Putin's subjective desires, and thus have little objective reality behind them.

The failure to assess logic in the opponent, or to seek objective realities that may compel or constrain actors such as North Korea's Kim or Russia's Putin — or America's Obama for that matter — leaves the opposite policymaker struggling for any cohesive long-term counter-strategy aside from concession or containment. There is no room for negotiation, no alternative path for engagement or resolution, because it has already been determined that the opponent is bent on provocation, and provocation is unjustifiable.

Avoiding the Provocation Trap

So how does the analyst, at least, avoid falling into this trap? Part of the process is to allow the analyst to be an analyst, to be free, during the analysis, from moralizing and judgmental assessments. While this requires the cooperation of the ultimate end-user of the analysis, first and foremost it requires strict discipline by the analyst.

One tool that can overcome the simplistic overuse of catchphrases is empathetic analysis. This is not "feeling" for the subject of study, nor is it determining what you would do in another's place. Rather, it is seeking to understand what the other will do in the other's place. Empathetic analysis seeks to understand the forces shaping and constraining the subject, from cultural and historical influences to bureaucratic structures, education, and personal experiences.

It is not a psychological profile, but rather a cultural and historical assessment coupled with an understanding of the relationships of power and authority, the structures of influence, and the forces that propel or drag on decision-making. Empathetic analysis is an ongoing process, one that must re-examine the subject as circumstances change. Done right, it can often "predict" behavior and responses before the actor decides, because it looks both at the actor and the objective realities around him to see not the myriad options, but rather the limited number of options.

As one tool in an analyst's toolkit, empathetic analysis provides a check on the tendency to oversimplify the complex to the point of simplistic assertions. But even without that level of rigor, it is important to be aware of the overuse of popular terms and phrases to "explain" actions. For provocation is just one of many words that have evolved and led to oversimplifications in analytical and journalistic assessments and political discourse, depriving the observer of valuable insights into decision-making.

 

 

"Geopolitics and the Pitfalls of Provocation is republished with permission of Stratfor."

Saturday, 24 October 2015 00:00

China vs. United States: A Tale of Two Economies

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The United States has had the world’s largest economy for about 140 years, and it roughly accounts for 22% of global GDP. However, in recent times China has overtaken the US by at least one measure of total economic strength, which is GDP based on purchasing power parity (PPP).

Either way you slice it, the economies are the two strongest globally in absolute terms.

That’s where the similarities end. While comparable in total size, the makeup of each economy is totally different. United States is a sophisticated and highly diversified economy that is based on services, finance, and consumption from the middle class. China has similar aspirations in the future, but right now it is resource-intensive growth engine making the transition from a manufacturing hub to a consumer-driven economy.

Today’s infographic looks at the economic differences between each country: total reserves, foreign direct investment, demographics, imports, exports, GDP per capita, energy, education, and much more.

Original graphic by: SCMP

 

 

 

Courtesy of: Visual Capitalist

Friday, 23 October 2015 00:00

A look at the U.S. Debt Ceiling from 1970-2015

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Current lawmakers divided on current proposal for $19.6 trillion ceiling.

House Republican leaders were slated to propose a bill this week linking a debt ceiling increase to conservative issues. Under the new proposal, the debt ceiling would be increased from $18.1 trillion to $19.6 trillion, and would likely extend through 2018.

However, new reports out of Washington suggest that internal support for the bill from Republican lawmakers is divided, and it is unlikely to go to the floor. Where things go from here are unclear. If it gets down to the wire, Republicans willing to play ball may have to seek Democrat support, but this would likely void any concessions to spending as originally proposed.

Congress is likely on the brink of another deadlock, similar to 2011 or 2013, in which debate will rage on even past the Treasury’s deadline of November 3. The end result is obvious: the limit will be increased. However, in the meantime, there is likely to be no shortage of brinkmanship as both parties do their song and dance.

This week’s chart shows the parabolic increase to the statutory debt limit from 1970 until today. The chart also includes the potential $19.6 trillion ceiling as described in the most recent proposal, as well as the lawmakers in control during each time period.

What is clear from this data is that over the past, the debt limit will increase no matter who is in control. While there may be minor differences, the ceiling as well as federal debt have reached unprecedented levels as a result of both parties. That is why the United States now has 29% of total sovereign debt and also the 2nd highest national debt when measured in terms of debt-to-revenue.

If a compromise isn’t reached, at some point the United States government would become unable to make payments on spending it has already committed to. The result would be a default on its debt obligations.

 

 

 

Courtesy of: Visual Capitalist

 

Tuesday, 20 October 2015 00:00

The Internet and Future for Mobile Technology

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By the time you finish reading this infographic, there will be 3,810 new devices connected to the Internet of Things.

That’s because there are 328 million devices being connected to the internet each month. It’s also why researchers estimate that there are going to be 50 billion devices connected by 2020.

In fact, the future looks very different as we adopt to these technological trends. Already, 71% of Americans using wearable technology claim that it has improved their overall health and fitness. Imagine what will happen with more immersive analytics, a preventative mindset, more metrics of useful health functions, and integration into the health system.

The connected lifestyle means that there could be 500 devices in each home connected to the web by 2022. Every lightbulb, lock, thermostat, appliance, and item with an electronic circuit could be networked together, finding synergy. As strange as it may seem, by 2020 researchers even expect 100 million lightbulbs and lamps to be connected to this grid.

Entertainment and convenience are driving the “smart home” concept, which is expected to be worth $56 billion in 2018. However, there is also the benefit of creating a more energy efficient world. It’s already expected that street lamps could save energy costs up to 80%, so why can’t that be the case in the home as well? Self-adjusting thermostats, lights, and appliances will increase the efficiency of homes to make a big impact on net efficiency.

Original graphic by: Mobile Future

 

 

Courtesy of: Visual Capitalist

Sunday, 04 October 2015 00:00

Visualizing the Emerging Markets of the Future

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China’s rapid pace of growth is slowing, and no one knows if India can become the next China. So who will lead global economic growth?

Today’s infographic looks at the emerging markets of the future, or to say more confusedly, the “emerging” emerging markets.

The data speaks for itself. By 2050, Nigeria will be the 9th biggest economy in the world when measured by purchasing power parity (PPP). Pakistan will jump to 15th, and countries such as the Philippines, Bangladesh, and Vietnam will make big leaps to help round out the top 25.

The Asia-Pacific region, which currently makes up only 4.8% of the world’s middle-class spending, will balloon to the biggest spender by far in 2030 at 32.6%. For comparison, North America will jump from 5.5% to 5.8% in that same time period.

There is plenty of money to be made as well. Ultra high net worth individuals, defined as people with over $30 million in assets, will soar in these countries in the coming years. For example, in Africa as a whole, the amount of these individuals will grow 59% over the next decade, compared to the average global rate of 34% growth.

Original graphic by: Raconteur

Courtesy of: Visual Capitalist
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