Unemployment as a lagging indicator -- Is this time different?
Rogue trader sends oil to year-high on $10m gamble
| Do demand, supply, and price really follow a law? Yes, but the outcomes in a geonomy would not be severe, since competing alternatives would lower the demand for oil and a Citizens Dividend from recovered “rents”, not to mention zero tax on earnings, would lower demand for jobs. We trim, blend, and append two 2009 articles from (1) Financial Times Online, July 3, on a rogue trader by Susan Thompson and Miles Costello, and (2) the Los Angeles Times, July 6, on stocks and jobs by Tom Petruno. |
by Susan Thompson & Miles Costello and by Tom Petruno
- Rogue trader sends oil to year-high on $10m gamble
PVM Oil Futures, a London-based division of the world’s biggest broker of over-the-counter derivatives, has lost almost $10 million (£6 million) after falling foul of a rogue trader.
The unauthorized trades in the early hours of Tuesday morning are reported to have been brokered by a senior, long-standing trader in futures.
The rogue trades are widely believed to have caused global crude oil prices to spike to their highest level in more than eight months -- a leap that traders and analysts had struggled to explain. Oil breached $73 a barrel during Asian trade on Tuesday, up by more than $1.50 a barrel in under half an hour at around 2am.
More than 16 million barrels of Brent crude oil traded in just over half an hour, an unprecedented amount for a market that typically trades less than one million barrels before Europe opens. The volume of crude traded during Asian trading was almost double the current daily output of Saudi Arabia, the world’s largest oil exporter.
When PVM discovered that it was sitting on "substantial volumes" of unauthorized oil futures contracts, the positions were closed in an orderly fashion. PVM suffered a loss totaling a little under $10 million.
PVM Oil Associates reported net profit of $5.88 million in the year ending July 31, 2008. PVM Oil Futures recorded a net profit of about $1 million in the same period.
In May, a former commodities trader at Morgan Stanley in London, who shorted oil futures without permission after an alcohol-fuelled lunch, was banned by the FSA for trying to conceal his trades.
JJS: From one insider inflating the price of oil to many outsiders deflating the price of stocks.
- For some stock sectors, the 'correction' is already here
Many stock market bulls view the employment situation as a bad indicator of where stocks are headed. The job market always is the last thing to recover. So investors are more likely to take their cues from other economic signposts in deciding whether stocks deserve higher prices.
Pimco CEO Mohamed El-Erian, however, takes issue with the idea that unemployment is a lagging indicator in the current recession. He writes on Pimco's website:
"The unemployment rate is traditionally characterized as a lagging indicator and, as such, is viewed as having limited forward-looking information. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground -- or so says conventional wisdom.
"This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviors and outlooks.
"Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system."
Pimco, of course, is mainly a bond investor, so stock bulls will accuse El-Erian of talking his book. Bill Gross, El-Erian's co-chief investment officer at Pimco, also has been arguing for some time that the economy's structural challenges (too much debt, too little savings, etc.) will mean very slow growth, at best, in any recovery -- an environment that could favor many fixed-income investments over stocks.
The question is whether, despite high unemployment, many companies will be able to get their earnings back on a growth track with even a very modest increase in demand (which might well come from places outside the U.S.). Reviving earnings, after all, is what all the corporate cost-cutting of the last nine months has been about. And it's the expectation of rising earnings that draws investors back to stocks.
The market's spring rally was built on the assumption that the economy was no longer in a free fall, and that some kind of recovery was on the way -- a reason to hope.
After the dismal June employment report, two big tests now loom for Wall Street: Will other data this month support the optimists' view that the worst has passed for the economy overall, if not for jobs? And will companies in their second-quarter earnings reports provide guidance for the rest of the year that offers enough incentive to investors to stick around for better times?
---------------------
Jeffery J. Smith runs the Forum on Geonomics.
|
Also see: While the 2008 recession set some new records
How can the price of a stock change so fast?
Why pay more at the pump? There are solutions |
| Email this article | Sign up for free Progress Report updates via email |
What are your views? Share your opinions with The Progress Report:
| Page One | Page Two | Archive |
| Discussion Room | Letters | What's Geoism? |
