Jim Cramer Gets Married - Best Wishes to the Love Birds

Jim Cramer Marries Lisa Detwiler

NY Times,19-Apr-2015

By Vincent M. Mallozzi

Lisa Cadette Detwiler and Jim Cramer were married Saturday evening at the Liberty Warehouse, an event space in Brooklyn. Aran Yardeni, an archeologist and friend of the couple who became a Universal Life Minister for the event, officiated.

 

The bride, 49, is a real estate broker for Corcoran Group Real Estate in Brooklyn Heights. She graduated from Trinity College in Hartford. She is a daughter of Joan B. Cadette and Walter M. Cadette of Millbrook, N.Y. The bride’s father retired as an economist for J.P. Morgan in Manhattan. Her mother retired as an English teacher at Dominican Commercial High School in Jamaica, Queens.

 

The groom, 60, is the host of “Mad Money With Jim Cramer,” a weekday show on CNBC that analyzes investment opportunities. He is also an anchor of “Squawk on the Street,” a weekday stock market show on CNBC. He graduated from Harvard, from which he also received a law degree.

 

He is the son of the late Louise A. Cramer and the late N. Ken Cramer, who lived in Philadelphia. The groom’s mother was an artist. His father owned International Packaging Products in Philadelphia, which sold wrapping paper, boxes and bags to retailers and restaurants.

 

The bride’s first marriage ended in divorce, as did the groom’s.

 

The couple, set up by a mutual acquaintance, met in January 2006 at a bar in Manhattan. At first, Ms. Detwiler balked at the idea of meeting Mr. Cramer, who is known for his on-air histrionics.

 

“I remember saying that there was no way I was going to go out with that bald, screaming man,” she said, laughing. “But then the person who set us up reminded me that I had been spending too much time at home watching television with my dog.”

 

So she went along, but not before establishing a few ground rules. “We were both separated with children and in the process of getting a divorce and trying to start over in our lives,” said Ms. Detwiler, who had three children from her first marriage. “So the deal was that we would meet for a drink, and if he liked me, he would ask me out for a burger later that evening. And if I liked him, I would have to accept that offer.”

 

Much to Ms. Detwiler’s delight, she and Mr. Cramer hit it off immediately. “I didn’t really care about him as a TV person, but he was so well versed on so many different topics,” she said. “He had wonderful life experiences to share. And most of all, he placed his children above everything else in life. And after all I had been through, that really hit home with me.”

 

During their initial conversation, Ms. Detwiler told Mr. Cramer that two years earlier, her 2-year-old daughter, Grace, had died as a result of cardiomyopathy, a chronic disease of the heart muscle.

 

Mr. Cramer, who has two children of his own, was overwhelmed. “I’m looking at this woman who just shared with me this horrible tragedy that happened in her life, and I’m thinking to myself, how does she even have the strength to get up in the morning?” he said. “I thought I was tough, but it takes a really tough person to come back from something like that.”

 

When their date ended, Ms. Detwiler got into a cab and thought that was probably the last she would see of him. “I figured that Jim, because of who he is and what he does, is meeting incredible women all the time,” she said. But at 4 that morning, she received an email from Mr. Cramer that read, “Sometimes in life people who are special need to be told they are special.”

 

Two weeks later, they went on another date. “I wanted to get serious with her right away because I was afraid someone else would meet her,” he said. “I kept thinking that anyone who can handle what she has been through can easily handle the train wreck that is Jim Cramer.”

 

 

A Tweet Worth $2.4 million

How a Wall St. trader made $2.4mln thanks to a reporter tweet

MarketWatch, 2-Apr-15

By Bruce Golding

A savvy stock trader scored a $2.4 million windfall by using a tweet about a possible tech deal to outrace a herd of rival bulls.

 

The unidentified Wall Street whiz paid $110,530 on Friday afternoon for the right to buy around 300,000 shares in computer-chip maker Altera at $36 a share, according to reports.

At the time, Altera ALTR, +2.32%   was trading at about $34.76 a share, and the trader’s “call” options cost a measly 35 cents each because the stock ordinarily wouldn’t be expected to hit the $36 mark.

 

But within just 28 minutes, Altera shares had soared in the wake of a Wall Street Journal reporter’s tweet that the company was “in talks” to get bought out by Intel INTC, +0.06% reports said.

 

At Friday’s 4 p.m. closing bell, Altera’s price was $44.39 a share, up 28 percent.

 

By exercising the options to buy the Altera stock at $36 a share, then selling it for more, the trader made about $2.4 million in net profit, reports said.

 

Fortune noted on Wednesday that the extremely well-timed maneuver came less than a minute after the Journal reporter’s tweet at 3:32 p.m.

The tweet, along with a simultaneous headline sent out via the WSJ’s newswire service, prompted Nasdaq to suspend trading in Altera at 3:35 p.m.

 

But by then, the trader had already purchased the options and was on the road to riches.

 

Investment strategist Mike Khouw told CNBC there were several ways the trader might have been able to move so swiftly.

 

They include having seen the tweet at just the right moment, or having known about the possible deal ahead of time and reacting as soon as the news broke.

 

Khouw also speculated that an automated computer program — or “bot” — could have alerted the trader to the tweet.

 

“A bot is not as outlandish as it sounds,” Khouw told the cable network.

 

“Traders need to aggregate and filter through tremendous amounts of data quickly and will rely on technology to help if it is available.”

 

Fortune also suggested that the trade itself was automated and was executed by a computer that had been programmed to scan Twitter for the reporter’s tweets and act on any that included key phrases like “is in talks.”

 

Meanwhile, neither Altera nor Intel has confirmed the takeover report, and Altera shares closed down about 1.2 percent on Wednesday, at $42.41 per share.

 

 

Greek Tragedy Averted But Greek Drama Will Continue

Greece and Euro-zone Finance Ministers reached a tentative agreement on extending the Troika's Loan Agreement by 4 months. Hopefully, by then, they hope to sign a more permanent and durable agreement. The bottom line is that Greece is between a rock and a hard place and they can't do anything about it.

 

How did the Greek drama start? As I wrote in, The Greek Problem, the Greek debt crisis erupted in November 2009 when the newly elected Papandreou government announced that the country's deficit to GDP ratio for 2009 would be 12.7%. Just in February that year, the previous government had forecast 3.7% for 2009. Not that the EU's Stability and Growth Pact or the Maastricht Treaty required Euro members to adhere to twin goals (a) deficit/GDP ratio of 3% and debt/GDP ratio of 60%). The reason for this huge upward revision was that the Greek government had consistently mis-reported debt and deficit data to the Eurostat since 2007. This revelation rang alarm bells amongst international investors because Greece needed to roll-over €16 billion of its debt by April/May of 2010.
 
Greece was able to roll-over much of €16 billion debt in 3 tranches by mid-April (€8 billion in January, €5 billion in March and €1.5 billion mid-April) because the government was able to attract investors by passing two austerity bills (February 9 and March 5). However Greece's debt problems were far from over. The government still needed to refinance €54 billion in 2010 and they were due to pay €8.5 billion by mid-May. With multiple downgrades by the ratings agencies and upward revision to 2009 debt to GDP ratio to  13.7% in April 2010, Greece had no choice but to seek help from international agencies.

 

On April 23, the Papandreou government officially requests a bailout loan. On May 2, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points: (1) implementation of austerity measures, to restore the fiscal balance; (2) Privatization of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable; (3) Implementation of outlined structural reforms, to improve competitiveness and growth prospects.
 
To comply with the bail-out plan, the Papandreou government passed the 3rd austerity measures on May 6, 2010 despite massive protest. On July 7, the parliament approved pension reforms and on December 15 passed laws for public companies, which cap monthly wages and cut salaries over €1,800 by 10%. The 4th austerity legislation was passed on June 29, 2011, also despite massive protests. It cut included new taxes and cut wages.

Economic situation gets worse and the EU consider 2nd bail-out for Greece. After torturous negotiation, on October 26, 211 the EU and Greece agreed to a new bail-out that included a 50% hair-cut on privately-held bonds or €100 billion and reduction in interest rates on debt. To comply with the requirement, the Papandreou government wanted to hold referendum on the austerity measures. Under tremendous international pressure that was shelved  but the government fell. A new technocratic government was formed under Lucas Papademos and with support from 2 major parties, the 5th austerity measure was passed on February 12, 2012. On February 21, the Troika (EU, IMF, ECB) approved €130 bail-out, which required it to finance all Greek financial needs from 2012 to 2014 through a transfer of some regular disbursements.

To replace the technocratic government election was held on May 6, 2012 but no party wins a majority seat. So there was another election on June 27, which resulted in a coalition government under Alexis Samaras. This government request a 3rd bail-out. Technically, it asks the Troika to make payments beyond 2014 into 2017 given worsening economic situation.

On November 5, 2012, the parliament approves 6th austerity measures to get the Troika's disbursement. In November, Troika decides not to disbursed the money but the money was re-shuffled to make the debt math work. On July 27, 2013, it approves the 7th austerity measures.

While the economic situation is getting tenuous, politics is also become more unstable. in May 25, 2014 election of the  European Parliament, the coalition of the far left SYRIZA wins. And on December 29, the parliament fails to elect the ceremonial President and new election for January 25, 2015 is announced.

On January 25, 2015 election SYRIZA won the most seats but not the majority by promising to get debt reduced and austerity measures ended. It forms a coalition government with the far right Independent Greeks.

 

 

References:

How We Got Here: Chronicling the Debt Crisis in Greece

Greece Crisis - Reporting Issues (PDF)

Greece’s Debt Crisis: Overview, Policy Responses, and Implications (PDF)
Timeline: The Unfolding Eurozone Crisis
Wikipedia - Greek Debt Crisis Timeline
Wikipedia - Greek Government Debt Crisis

 

 

Daniel Yergin on Crude Oil - Crude's Discount Days Are Numbered

Crude's Discount Days Are Numbered

Nikkei, 22-Jan-15

 

Crude oil prices will turn upward again next year as U.S. output declines, predicts energy expert Daniel Yergin. The author of "The Prize," a Pulitzer Prize-winning history of the oil industry, Yergin serves as vice chairman of IHS, a U.S. think thank. He recently spoke with The Nikkei.

 

Crude prices have been dropping since summer. What is happening?

There are three things that brought us to these prices. First is this huge surge in supply -- U.S. oil production [is] up 80% since 2008. [That is an increase of] 4 million barrels a day. There have only been three other times in history, going back to the 1930s, when you've seen this kind of sudden surge in supply come into the market. That's the first factor.

 

The second thing that happened, starting in about August, was a sense that the world economy was weaker. And demand was weaker. The third thing that happened was [that] Libyan production quadrupled. That was the trigger for the collapse. Then the Gulf Arabs, led by Saudi Arabia, made the historic decision to resign [from] their job, saying, "We're not the manager of the oil price anymore."

 

If they'd cut production in November, they would have just had to cut production again, and they were going to lose market share not only against U.S. shale, but [also against] oil from all over the world, in particular Iran and Iraq.

 

Your most recent book, "The Quest," mentioned that technological advancement boosted the oil supply. One example is U.S. shale. Do you think the shale revolution will continue?

I think right now you're going to see producers cut back. They're going to focus on their most productive assets and cut back on the other things that they're doing. This is a very innovative industry, so there's going to be a lot of focus on continuing to improve productivity and decrease costs. I think it's going to go through a difficult period, but I think this revolution's going to continue. Just not in a straight upward line.

 

For U.S. shale producers to stay in business, does the oil price need to be more than $50 a barrel?

There are tiers. We thought that at $70 a barrel 80% of U.S. growth would continue. We think that up to $60, about half of the shale oil is economic. But what's going to happen is costs are going to come down. We did a scenario two years ago called Vortex which showed oil going below $50 a barrel. And no one took it seriously.

 

Maybe the average price for oil will be in the neighborhood of $50 this year. Then next year we think we'll certainly see an oil price that might be 10-30% higher.

 

Will we ever see $100 oil again?

One of the lessons in oil is never say never. Remember, the oil price went up on the emergence of ISIS (Islamic State group) to $115. You have to be aware that turmoil in oil-producing areas could be very important.

 

Market Recap (2-Jan-15)

The tone of the US market on the “first” trading day of 2015 was unabashedly awful. The main culprits were Europe and Oil. Stocks opened down and moved lower as the day went by. DJIA fell 331 points, S&P500 37 and Nasdaq 74.

 

European markets plunged as the Euro touched the lowest level against the US$ since March 2006 after Der Spiegel reported that Chancellor Angela Merkel was ready to accept Greek exit in case the extreme left Syriza wins, as polls suggest, the January 25 election.

 

WTI fell below $50 for the first time since April 2009. There was no proximate cause for a 5% drop in oil price but strengthening US$ combined with negative headlines regarding strong supplies from Iraq and Russia could have been the reasons for the sharp decline. Needless to say Energy was the worst performing sector in the S&P500.

 

VIX captured investors sentiment as it rose 2.13 points to reach 19.92. Given the risk-off tone of the market, 10-year treasuries rallied 8bp to 2.3%. Gold also saw bounce.

 

Elsewhere, the WSJ highlighted the political tug-of-war over net neutrality in the upcoming Congress. The outcome could impact a broad swath of industry from cable to the internet. The fight over HCV drug market continues. GILD won CVS for its drugs Sovaldi and Harvoni after losing to Express Script last month to ABBV's Viekira Pak last month. With investors focused on the fall in oil price from $80 to $50, the decline in cotton price from $80 in June to $60 in December has been overlooked. This could benefit apparel makers including GPS, which was upgraded by Jefferies for that reason.

Wall Street Strategists Forecast More Stock Gains in 2015

Wall Street Strategists Forecast More Stock Gains in 2015

WSJ, 4-Jan-15

By Alexandra Scaggs

 

Wall Street has a message for U.S. stock investors: Don’t fear the Federal Reserve in 2015.

 

The U.S. central bank is expected to raise short-term interest rates this year for the first time in nearly a decade, but strategists still expect U.S. stocks to end the year with gains.

 

The Fed’s aggressive stimulus efforts have helped support stock-market gains since the financial crisis, analysts say, so some fret that higher interest rates could put the brakes on stocks’ multiyear rally. Last year, as the U.S. economy heated up, central-bank officials started to discuss when and how they would raise interest rates.

 

But many strategists say any rate increase should be viewed as an endorsement of the U.S. economy’s ability to withstand higher borrowing costs.

 

Wall Street strategists see the S&P 500 rising 8.2% this year, based on the average forecast of banks and money-management firms polled by research firm Birinyi Associates. Accelerating economic expansion in the U.S. and strong corporate-earnings growth will continue to power the rally, they say.

 

That would come after 2014’s rise of 11.4% for the broad stock index, which ended up performing better than most prognostications and notching 53 record highs. On Friday, the S&P 500 was nearly unchanged, closing at 2058.20.

 

“There’s this obsession with the potential headwinds from the Fed,” said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. “But we’re talking about very good stock-market returns for two to three years from now.”

 

Stock strategists are a perennially bullish bunch: Since 2000, the average forecast has called for higher share prices each year. Analysts didn’t foresee the dot-com bust of the early 2000s or the financial crisis. But last year, many undershot the index, leaving them scrambling to raise their targets.

 

This year, even the least bullish analysts think the Fed’s rate increase isn’t likely to deal a lasting blow to stocks. Everyone polled by Birinyi expects U.S. stocks to end the year higher.

 

Investors have been concerned that rising interest rates could prompt declines in the stock market, because they could make high-yielding stock sectors less attractive compared with bonds. And some worry higher rates could dent companies’ profit margins as it gets it pricier to borrow.

 

While stocks could take a brief hit from a rate rise, strategists say, the Fed move would be a sign that the economy is strengthening, which should be good for stocks. Studies from banks and money-management firms show that stocks can continue to climb during periods of rising interest rates, especially in the early stages of a tightening cycle.

 

Most strategists agree that corporate-profit margins will remain near record highs, even as borrowing costs rise. Jonathan Glionna, head of U.S. equity strategy at Barclays PLC, said companies should be able keep their overall costs under control this year.

 

“Profit margins are going to be key… [and] we can get a little bit of profit-margin expansion,” he said. Mr. Glionna predicts the S&P 500 will rise by just 2% in 2015 because of weak global economic growth, mainly outside the U.S.

 

In contrast, Mr. Golub of RBC is more bullish, saying that global investors don’t have many options apart from U.S. stocks. In 2014, he was one of the first analysts to sharply raise his end-year target for the S&P 500 in anticipation of faster U.S. growth.

 

“The U.S. is going to be a positive outlier, not only for the next year, but for the next decade,” he said. He sees the S&P 500 rising 13% this year to 2325.

 

Japan has slipped into recession and European economies are treading water, Mr. Golub noted. Meanwhile, U.S. bonds are offering relatively paltry yields. The yield on the 10-year Treasury stood at 2.123% on Friday. And commodities markets, which gained cachet among mainstream investors in the 2000s, have been beaten down by excess supplies of raw materials.

 

To be sure, some strategists are concerned about the stock market’s relatively high valuation, saying that it leaves stocks vulnerable to a sharp pullback if earnings disappoint or if the economic outlook darkens.

 

Based on his year-end prediction for the S&P 500, Mr. Golub sees share prices at 16.7 times forecast earnings at the end of 2015. That is above where it closed 2014, at 16.3, and its 10-year average of 13.9, according to data provider FactSet.

 

Rich valuations in the U.S. will prompt investors to gravitate to stocks in Japan and China, which are cheaper, said Russ Koesterich, chief investment strategist at BlackRock Inc.

 

“There’s much less room for [valuation] expansion than there was five years ago” in U.S. stocks, he said. So he is recommending that BlackRock’s clients consider buying stocks in Asia as well.

 

The S&P 500 is also pricey when assessed on another metric, expected sales, which can’t be boosted by share buybacks and cost-cutting, measures that have contributed to buoyant share prices. The index is trading at 1.7 times its expected sales for 2015, nearly 31% above its 10-year average of 1.3, according to FactSet.

 

“There is a clear missing ingredient in terms of earnings, which is revenue growth,” said Barclays’s Mr. Glionna.

 

Mr. Glionna recently halved his forecast for companies’ 2015 revenue growth, cutting it to 2% from 4%. He expects weaker revenue from international markets, due in part to a stronger dollar, and from energy companies, which have been hit by lower oil prices. He trimmed his expectations for profit growth as well, and now expects the S&P 500’s earnings per share to grow by 6.8%, down from his previous forecast of 8.5%.

 

While the Fed has signaled it is moving toward raising short-term interest rates, the central bank has said it will be patient in doing so. Many investors have taken this as reassurance that the central bank won’t rush to raise rates and that, once it starts, the Fed will keep the pace of increases modest.

 

Even with higher rates, Adam Parker, Morgan Stanley ’s chief U.S. stock strategist, believes stocks can rally as long as five more years, taking the S&P 500 to 3000 before the bull market ends. For 2015, Mr. Parker forecasts a climb of 10% to 2275.

 

Like many other strategists, Mr. Parker thinks the nearly 50% plunge in crude-oil prices in 2014 will support stocks. Falling gasoline and other energy costs should continue to bolster consumer spending, a trend that is likely to benefit earnings of retailers and other sectors, he wrote in December.

 

Any ascent in stocks will be bumpy, though, said Dan Greenhaus, chief strategist at New York brokerage firm BTIG. Daily swings in stocks grew bigger and more frequent in the second half of 2014 as investors began to adjust to the likelihood of rate increases.

 

“Stock volatility has risen, and should continue to rise,” Mr. Greenhaus said.

 

He predicts the S&P 500 will gain 6.9% this year.

 

Cramer's Game Plan for Week of December 22, 2014

Week in Review (Dec 15-19)

Week in Review (Dec 15-19)

The most notable events of the week were (1) continuing pressure on crude oil (2) extreme volatility in the Russian Ruble and (3)  FOMC meeting. 

The negative momentum in oil price continued as the OPEC (representing the producers) and the IEA (representing the consumers) lowered their demand forecast for 2015. WTI fell steadily from ~$75 on November 26 to ~$54 by December 16. It tested the $54 level again on December 18/19 before bouncing to $57 to close the week.

Russian Ruble came under pressure after the Central Bank unexpectedly hiked the rate to 17% on December 16 after stopping currency intervention on November 10. The volatility in the currency subsided substantially despite disappointing end of the year press conference by President Putin as the Finance Ministry gave support to the currency and the Central Bank temporarily suspended accounting rules for companies with foreign debt.

This week's FOMC meeting, the last one for the year, was closely watched especially because the expectation was for the Fed to remove the word "considerable period” from the Statement in preparation for a hike around mid-year. Investors were surprised when that phrase stayed in the Statement but confused because they were not sure whether it had the same or a different meaning. The vagueness of the Statement was somewhat clarified by the Fed Chair Yellen at her post-FOMC press conference. She said unequivocally that the Fed will raise interest rate in 2015 but not in the next 2 meetings unless the economy rolls over unexpectedly. Stock markets, which had been under tremendous pressure owing to the sharp fall in oil price and collapse in energy stocks rallied after the Fed decision. By the end of the week, they were back within a striking distance of all-time highs. Even lower guidance from FDX was not able to stop the upward momentum. The best performing stocks for the week were mostly Energy.Volume on Friday was high because of Quadruple Witching.

Monday

• Japan, PM Abe won an easily victory in the snap election. The LDP and Komeito took 326 seats in the lower house, more than the 317 needed for a two-thirds supermajority but voter turnout was 52%, the post-war low.
• Japan’s Tankan large manufacturing index slid to 12 in the fourth quarter of 2014 slightly below market expected and prior reading of 13 in 3Q.
• China revised 2013 GDP by 1% to 3% while the PBoC said growth in 2015 could slow 7.1% from 7.4% in 2014.

Tuesday

• China HSBC flash PMI weaker: 49.5 vs. 49.8E.  
• German ZEW current situation better: 10.0 vs. 5.0E.
• German preliminary composite PMI misses: 51.4 vs. 52.3E.
• Russian rubble under severe pressure amid 6.5% hike in the rate.

Wednesday        

• Fed Chair Yellen was able to reassure investors at her post-FOMC press conference.
• Copper hit new cycle low (below 285).
• The Russian finance ministry announced earlier today that it will sell dollar cash in a total amount $7bn over an unspecified period, starting today.
• FedEx gave negative guidance.

Thursday

• Swiss National Bank introduces negative IR (-.25)
• German Dec expectations survey better: 101.1 vs. 100.5E
• Putin's end of year press conference

Friday

• BoJ Policy Statement: Maintains pace to increase monetary base at rate of ¥80T (as expected).
• German consumer confidence better: 9.0 vs. 8.8E.
• Equity volume was very high because it was Quad witching day.

 

Friday Fun

Man Breaks No. 1 Rule of Meeting Women on the Subway

nymag.com, 16-Dec-14

By Jessica Roy

 

Jeffrey Frankel - Why Are Commodity Prices Falling?

Why Are Commodity Prices Falling?

By Jeffrey Frankel, 15-Dec-14

 

Oil prices have plummeted 40% since June – good news for oil-importing countries, but bad news for Russia, Venezuela, Nigeria, and other oil exporters. Some attribute the price drop to the US shale-energy boom. Others cite OPEC’s failure to agree on supply restrictions.

 

But that is not the whole story. The price of iron ore is down, too. So are gold, silver, and platinum prices. And the same is true of sugar, cotton, and soybean prices. In fact, most dollar commodity prices have fallen since the first half of the year. Though a host of sector-specific factors affect the price of each commodity, the fact that the downswing is so broad – as is often the case with big price swings – suggests that macroeconomic factors are at work.

 

So, what macroeconomic factors could be driving down commodity prices? Perhaps it is deflation. But, though inflation is very low, and even negative in a few countries, something more must be going on, because commodity prices are falling relative to the overall price level. In other words, real commodity prices are falling.

 

The most common explanation is the global economic slowdown, which has diminished demand for energy, minerals, and agricultural products. Indeed, growth has slowed and GDP forecasts have been revised downward since mid-year in most countries.

 

But the United States is a major exception. The American expansion seems increasingly well established, with estimated annual growth exceeding 4% over the last two quarters. And yet it is particularly in the US that commodity prices have been falling. The Economist’s euro-denominated Commodity Price Index, for example, has actually risen over the last year; it is only the Index in terms of dollars – which is what gets all of the attention – that is down.

 

That brings us to monetary policy, the importance of which as a determinant of commodity prices is often forgotten. Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended quantitative easing in October and likely to raise short-term interest rates sometime in the coming year.

 

This recalls a familiar historical pattern. Falling real (inflation-adjusted) interest rates in the 1970s, 2002-2004, and 2007-2008 were accompanied by rising real commodity prices; sharp increases in US real interest rates in the 1980s sent dollar commodity prices tumbling.

 

There is something intuitive about the idea that when the Fed “prints money,” the money flows into commodities, among other places, and so bids their prices up – and thus that prices fall when interest rates rise. But, what, exactly, is the causal mechanism?

 

In fact, there are four channels through which the real interest rate affects real commodity prices (aside from whatever effect it has via the level of economic activity). First, high interest rates reduce the price of storable commodities by increasing the incentive for extraction today rather than tomorrow, thereby boosting the pace at which oil is pumped, gold is mined, or forests are logged. Second, high rates also decrease firms’ desire to carry inventories (think of oil held in tanks).

 

Third, portfolio managers respond to a rise in interest rates by shifting out of commodity contracts (which are now an “asset class”) and into treasury bills. Finally, high interest rates strengthen the domestic currency, thereby reducing the price of internationally traded commodities in domestic terms (even if the price has not fallen in foreign-currency terms).

 

US interest rates did not really rise in 2014, so most of these mechanisms are not yet directly at work. But speculators are thinking ahead and shifting out of commodities today in anticipation of future higher interest rates in 2015; the result has been to bring next year’s price increase forward to today.

The fourth of the channels, the exchange rate, has already been functioning. The prospect of US monetary tightening coincides with moves by the European Central Bank and the Bank of Japan toward enhanced monetary stimulus. The result has been an appreciation of the dollar against the euro and the yen. The euro is down 8% against the dollar since the first half of the year and the yen is down 14%. That explains how so many commodity prices can be down in terms of dollars and up in terms of other currencies.

 

Chart of the Day - Russian Ruble

Chart of the Day - Russian Ruble or Russian Roulette

The Russian Ruble has been amazingly volatile in the past 2 days but it has been especially so today. The magnitude of the intra-day move is just mind-boggling. The intra-day low was 52.2628 per US$ and high was 79.1688. That’s a massive 35.9% move from the bottom to the top in one single session. This huge swing in Ruble occurred on the backdrop of a 6.50% increase in Bank of Russia's Key Rate to 17%, which followed 1% increase just 2 business days ago, on Friday.

In the short-run, the currency volatility might push Russia to impose capital controls. Russia has already spent ~$80 billion defending the currency before it gave up on November 10. The central bank realized that it could not keep spending so much of depleting reserves on currency intervention especially when oil revenue, which accounted for over two-thirds of exports, is falling rapidly.

In the medium, the state of Russian economy and its currency will depend on oil price. The Russian government's initial break-even price for oil was $100, but it lowered that to $80 after the OPEC meeting. If oil price stays below $60, Russia's Economic Ministry says economy will contract by 3.5%-4.0%.

Foreigners who hold Russian debt will be directly impacted by collapsing Russian economy and falling currency. According to the Russian Central Bank, $135 billion debt is due over the coming year - banks alone have $50 billion due.

 

Domestically, Russian oligarchs are not the only ones suffering from the plummeting Ruble. Because of currency volatility, Apple halted online sale of its products in Russia.

 

It will be interesting to see how all this plays out not only within Russia but also in the bigger geo-political context.

Russian Ruble

Bank of Russia's Key Rate