Saxobank: "Be Warned" Of Delayed Market Reaction To "Escalation Of Global Turmoil"

Tyler Durden's picture

Authored by Steen Jakobsen, Chief Economist of Saxobank,

There are causes worth dying for, but none worth killing for” – Albert Camus

The world is increasingly becoming engaged in civil wars and general turmoil where Camus' words could and should play a central but never will. This article is one of the hardest to write as war is never about right or wrong. They are per definition always wrong and extremely personal and emotional. The fact is, however, that we need to put "the risk of wars" into our macro outlook as they are increasing not only in intensity but also in the numbers of casualties.

I will not condone anyone or any party involved in the present conflicts – I learned my hard lesson advocating the removal of Saddam Hussein, only to learn that his successors are just as bad. Therefore, Camus’ words will remain my mantra.

The simplest way to “measure” geopolitical risk is to look at the price of energy. Energy is everything for a macro economist as it’s a tax on the economy when high, and a discount when low. High energy consumption levels makes it a critical part of any projection but despite this, energy assumptions are often exogenous (given!).

Think about this: Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office. Likewise, the rest of your day will be one big consumption of energy. The world's energy resources are primarily extracted from “volatile” or underdeveloped regions, creating a real risk of disruption of supply. Herein lies a clear and quantifiable risk.

The way I measure this geopolitical risk is through measuring the spread between the 5th contract of WTI crude oil and the first contract. Of course, there are other factor at work, but in the absence of a better alternative, I use this.

 Source: Bloomberg, Saxo Bank

As can be seen, since July 15 the “war premium” or more neutral “disruption premium” have increased by USD 2 and the world's consumers are now paying two dollars more per barrel of WTI crude. Overall there are many factors influencing the crude market but the price of energy remains the one component we need to know is stable and preferably falling.

The overall impact from war is negative despite the glorified analysis of how World War II stopped the recession – think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria. Many will argue it’s different this time, back then we were too dependent on the Middle East!  Sure, but prices were only between 10 and 25 US dollars a barrel back then!

historic oil

Now we have lived with an oil rise in excess of  USD 100 more or less since 2007! Crude is now four times higher in price than during the “inflationist” 1970s – the era in which we ended  the Bretton Woods system of monetary management and where central banks started targeting inflation instead.

No, the signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market, however, maintains a steady hand: Israel will be contained inside a couple of weeks, Russia vs. Ukraine will find a solution. The non-acceptance of tail-risk (Black Swans) is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters.

Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant………except for the fact that for world growth to keep increasing we need to continue to see growth in Africa, the Middle East and Eastern Europe.

We need to accept that the world is now truly global – we smiled while globalisation reduced prices and made our companies more profit, now the escalation of wars reflect a world where growth is low, energy is expensive and increasingly hard to get and that we have gone full circle with macro and interventionist policies.

The escalation of turmoil in the world is yet to play a role for the market, but be warned: everything economic has a delayed reaction of nine to twelve month – whenever there is an action there will be a reaction. If the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact on not only world growth but also on markets. But don't ever forget that the real losers are the individual families losing loves ones. No, Camus got it right. There is nothing worth killing for, plenty to fight for.

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ThisIsBob's picture

Yo, Saxo, tell me something that everybody doesn't know.  Like what and when is the trade?

knukles's picture

I figure we'll be lost somewhere in New Jersey when it'll be like the drugs start to kick in, figuring we're just about over the edge, riding along the Great Highway to nowhere just starting to feel comfortable when the buzzer goes off, wishing we'd sold everything yesterday, all over again.  And then be too damned frightened to do anything either.

BuddyEffed's picture

The author may have read this report from Tullet Prebon :

From that article

"One of the problems with economics is that it's practioners preach a concentration on money, whereas money is the language rather than the substance of the real economy.  Ultimately, the economy is - and always has been - a surplus energy equation, governed by the laws of thermodynamics, not those of the market."

"and the critical supply of surplus energy has been in seemingly - inexorable decline for at least three decades" 

"all goods and services on which money can be spent are the products of energy inputs either past, present, or future."

"The appreciation of the true nature of money as a tokenisation of energy also enables us to put debt into it's proper context"

"it becomes apparent that debt really amounts to a claim on future energy"

"exogenous energy inputs (overwhelmingly dominated by fossil fuels) now provides the vast majority of the energy used in the ecomony.

Elvis the Pelvis's picture

I'm expecting the Dow to hit 30,000.  Bitchez.

Oscar's picture

The trade is to buy gold and silver!  Free technical analysis and pertinent gold & silver news:

Stoploss's picture

You get less growth, less certainty, and more geopol risk out of unemployment--- Steen, ya ate up fucker...

The real price of oil is around 180 because the avg sombich is still paying 3.50-4.50 for gas depending on where they live.

When oil was 140 we were only paying about 30 cents moar for a gal of gas. It might as well still be 140, it wouldn't make a shit bit of difference.

Pheonyte's picture

Just picked this up from Rickards' twitter:

Released today, 7/21/14 (all those 7's, is that right Madame Lagarde?)

Sudden Debt's picture

I'm telling you, I don't think it will crash and it will even go up a lot more.
It's adapting to inflation and at 10 to 15% a year, this is the kind of shit you get after 7 years of mismanagement of the dollar.

That's also why other foreign markets react in different ways than the Us markets. And also why the US market looks more like the Argentinian market.

So yes, it's picking up speed to the upside but it's a warning of inflation and not about a market peak.

And now it:s the European markets that also will start to pick up speed and my guess is that after the summer it's time to go long on EU equities as Drachi is now also printing 700 billion.

disabledvet's picture

Seriously? "The only three countries in the world that allow for truly independent and competitive oil companies are England, Canada and the USA."

We're swimming in product over here and natural gas prices have collapsed yet again.

Solar plays had a huge move up on a down of course did Tesla "yet again."

Once Ukraine seals the border with Russia they will turn their attention to Crimea...and those are a lot of people who are already sick and tired of the Russia occupation.

Should be interesting to see how the negotiations go with Hamas...err, Egypt...err Israel.

Think events have officially spiraled out of control and expect to see rosters "looking for volunteers" soon.

knukles's picture

You're beginning to scare me.  Have you thought of serious professional help?  Or a nice holiday in the Gaza Strip.  Lotta vacancies I hear.
Unfortunately, you're likely way the fuck too right.  It's insanity, but way too right.  Someday I'll figure out how to get back over the regular side of the berm.... just when it'll be too late.

Where's my raw carrot lunch? 
Pass the Jello.

Sudden Debt's picture

I once had a boss who send me to a shrink because he thought I was kind of weird sometimes but all he could figure out was that I had very low empathy and had a little anger management problem but after we discussed the results together with my boss and that shrink, I threathend to sue him and I became kind of normal again.
I'm still not sure he was a real or a good shrink anyway so I don't believe in "professional" help.
I just say, If somebody acts weird, you beat it out of him. And if it doesn't help, use a stick.

knukles's picture

One of mine sent the whole management committee, separately, to her partner who was a shrink.  So she asks me what's wrong and I went on to tell her all I wanted to do was when this prick of a guy died, saw his head off with a dull rusty hack saw blade, put it in a big specimen jar filled with formaldehyde , place it under a spot light in the entry way by the elevators at reception with a plaque that says "Our Founder".
She told me there was nothing wrong with me and all I needed was somebody to talk to and refers me to another shrink.

Ah, the service economy.

Seize Mars's picture

Sudden Debt

Uhhhh, M'kay...

Carpenter1's picture

So, go long at the highest level in history, with every indicator screaming to sell? You first.

There's always a story that the lemmings buy into as to why the market can't go down, this time it's the central planners themselves; probably the most incompetent, ignorant bunch of fools on the planet.

Cattender's picture

Everyone should be Maxing out their Credit Cards Right Now and Buying stock hand over fist... YOU CAN NOT LOSE!!!!

Sudden Debt's picture

As long as the dividends are higher than that 20% interest on your card I don't see why not :)
You know any?

Cattender's picture

it IS Different this Time. the stock market will NEVER crash. ever. no matter what. new normal and shit Bitches!!!!!! LOL...

dirtyfiles's picture

like realy?

I heard this before "market at permanent plato" or something like that back in 1930's

Al Huxley's picture

People weren't as smart back then as they are now.  This time it's different.

SilverMoneyBags's picture

The market is rigged. Global events do not matter unless the news is that the printing press stopped working.

cougar_w's picture

We're inside a nightmare now.

Anyone thinks there is a trade here somewhere has been asleep at the wheel. There isn't a trade nor is there a way out. The only real move anyone can make is to consolidate their resources and hope the destruction hits someone else first.

knukles's picture

Damn right.  A plasma discharge of cosmic magnitude wipes my neighbor who leaves his fucking trash cans out most the week, right off the face of the planet.  Doom upon his ass i say.  Doom.  You hear me asshole?  On of these days somebody is going to fill your fucking trash can with 97 octane and light the son of a bitch off.  And when the fire department, EMS and sheriff get here, there will be full households of men women and children, the old and infirmed, and yet to be born, in costume, shrieking and dancing merrily about the molten devastation, claiming lightning bolts of the Gods damned your garbage can for the sins of your mother.

hobopants's picture

You need to write a book.

BuddyEffed's picture

speaking of living in a nightmare, this is appropo :

from Pirates of the Carribean.

dvfco's picture

"Doom upon his ass i say.  Doom."

That has to be my favorite line of any comment I've read tonight.  Well done.

That's quality, and I mean Pulp Fiction writing quality.  Love it.

barre-de-rire's picture

great you finally learnt meadows repport, ... fucktards.

Haole's picture

Bankers should be walking around wearing coveralls and goalie masks by now...

medium giraffe's picture

As first worn by a chap called Lehman, iirc.

o.t.p.s's picture

Lets have the crash come, i have some cold beers ready and waiting, Molon labe!

Joebloinvestor's picture

Renewables negate that.


(sarc off)

Keltner Channel Surf's picture

"The simplest way to “measure” geopolitical risk is to look at the price of energy"

An even simpler way is to take the square root of the VIX, then subtract weekly POMO dollars (in $Billions).  If it's less than the weekly scheduled Kardashian TV appearances, then we're fine for another quarter . . . 

Chief Wonder Bread's picture

Easy peasy!

From column of a Certified Financial Planner writing in my local free community newspaper:

"If you are sitting on the fence waiting for a decline in stock prices, just ask yourself if the markets will be higher or lower 20 years in the future. Then act accordingly."

Hohohohohjohhjohhohohoeoeseifesnsxznntt4vnss4ifmm&#*@M where to begin?

dvfco's picture

That's the same asshole who tells everyone he meets that the 'stock market historically returns 10% per year' but leaves out 99% of history, called 'pre-20th Century', where every market that has ever existed(sans metals and food) eventually crashed and lost all value.  

That's when he first calls you nuts.  

Then, when you tell them that every fiat currency ever made has also eventually lost all value, he tells the crowd you should be institutionalized.

They agree.  You leave.  They laugh at you.

Look forward that 20 years . . . You laugh at them, or get very upset when they kill you looking for the gold, silver and stored food.

dvfco's picture

Listening to Lou Dobbs now I realize that every finacial crash is 'ancient history' but the only thing that will always remain in the 'recent past' is the Holocaust.  

He and his guest just reminded me of that, and, to summarize, that Israel is still our only try ally in the entire world, that Hamas is the reason over 500 Palestinians are being killed by Israelis (even though no Israeli citizens seem to have died from those 20 million rockets fired fromt he west bank.  That is, no Israelis died until they invaded.  Now, the Israeli soldiers are the fault of the Palestinians.  Remember, Israel has the ultimate right to defend herself.  

Don't the Palestinians have the right to try to defend their territory, even if it's basically with sticks and stones?

Who the hell asked that question.  Get him out of here.  Cancel that segment.  Cut out his tongue.

SweetDoug's picture




There are causes worth dying for, but none worth killing for” – Albert Camus


"There are causes worth killing for, but none worth dying for" - SweetDoug!




Seize Mars's picture

One way to understand what they guy is saying is the steepness of the oil "lease rate."

If this curve is very steep then geopolitical risk is very high.

Ban KKiller's picture

Golly, war profiteers are also oil profiteers? Of course! Don't forget to go long on concrete...

dvfco's picture

I'm liking that 1981 inflection point noted on the chart as "Iran-Irak War" (sic).  

Seriously, maybe we get ultra-super-lucky and the Syria-Turkey-Irak-Iran-Rest of Middle East War of 2014-2999 will be our next inflection point and we'll have another crash in prices.

Uhm, sorry, I was only dreaming.