Worldwide economy recession rooted in Sub-prime crisis

How about the world economy now? it really steps into a concession or just in the process of adjustment? The answer may lie behind the volatility of world commodity.

 

Crude oil after a rally time, hit $147/ barrel historical high in July 11, now comes back to today $111 barrel. Even the most pessimistic forecast that crude oil will drop below $100 per barrel now looks not so ridiculous. Especially when we think about how long it took the crude oil price to reach the peak and how quick it fell down? The last $111/barrel was traded at April 11, since then the crude oil future was traded in the orbit of rocket until July 11 touching the ceiling. Then it falls down against all kinds of so-call bullish factors, like Georgia conflict and hurricane Gustav. Usually these kinds of factors simply push the crude oil price higher due to the worry on supply. But this time they fail to work, even they come together.

 

The same story happened in the agriculure world in past one year. At the peak time, the soybean was traded close to 1700 cents per bushel, equal to almost $625/mt. But now it was only 1330 cents per bushel, equal to $489/mt. 135 dollar or 922 rmb per matric ton down in several months!!!  However during the same time, almost the major bullish factors are still there, China demand, weak dollar, relatively world tight supply, but who cares! The comodities price like a free hamer hit ground heavily and quickly.

 

What´s the reasons behind that? The first looking seems because of less confidence to the world economy. But if you ask a further question what caused the confidence faded? Then you reach the root cause. It is American sub-prime crisis. Yes, it is, even it is such an old topic. As the important participants, the funds, banks and other financial institutes normally take stock, security, future and other financial derivatives as investment tools. But when they are misled by those rating companies, like Moody´s and S&P to stick into sub-prime crisis, they have to liquidate their long position in the stock, in the future to meet the requirement both from the investor for money back and the regulators for capity ratio. Due to their huge scale, any liquidation made by them will pull down market dramastically. And even worse, the loss in the sub-prime is not as small as peanut that can be covered by a small and temporary liquidation. Those small size funds or banks have to apply bankruptcy after they liquidated everything they can liquidate but still stuck in the mud. For those big guys, it is also a hard time, they either are forced to sell part of their assets/shares for the liquidation or introduce the sovereignty fund which they resist before.

 

The dark west doesn´t mean the same story in the east. Due to less connection with America sub-prime mortgage, most of east banks perform well. ICBC became the world biggest and profitable bank, surpass HSBC at the end of first half 2008. China Life Insurance Corp announced he already liquidated half of its share in Visa for potential acquisition opportunity during the sub-prime crisis.

 

But what a pity, the world economy already merger into one. And China´s economy engines are not well allocated. Investment, demand and export, the pattern of these 3 engines is like the medals we got in Beijing Olympic Games, 2:3:5 (bronze, silver and gold), instead of well-balanced 3:3:3. China rely on exportation heavily. When the world economy became weak due to sub-prime crisis, the biggest engine of economy slows down as well.

 

The winter is really coming! Now the only question isn´t not whether you ready for that, we are already in the winter time. The question is are you already well positioned yourself to survive it!