Wednesday, June 17, 2009

"A Wall Street Fairy Tale"

Great read from Brad DeLong A Wall Street Fairy Tale

"When American high finance hedged its mortgage risk by buying derivatives from AIG, it did not perform due diligence to figure out if AIG could in fact meet its obligations. This failure cost American high finance an amount that may ultimately reach $300 billion. And it would have been fatal had the government not come to their rescue.

Had the government stepped in by discounting AIG paper in return for warrants and notes at fair market values, the banks' life support apparatus would have been obvious. It is only because the government stepped in by nationalizing AIG and guaranteeing its debts that American high finance now has healthy stock prices, and that the senior executives of the big banks—except Citi, Bank of America, Lehman, and Bear-Stearns—are congratulating themselves for their skillful navigation through the crisis."

Sunday, June 14, 2009

A Simple Asset Allocation

Zerohedge has an interesting post on asset allocation: A common Sense Guide to Investing. The following table is helpful.

Weird Stuff Going on in Natural Gas ETF

Excellent little summary of the issues surrounding commodities etfs from FT Alphaville.

Friday, June 12, 2009

Back to Normal

Brad DeLong informs us: TED spread is back to normal, pre-crisis level.

Thursday, June 11, 2009

China and the World

Econbrowser has the charts:


In current dollars:

Saturday, June 6, 2009

"The Relationship Between Crude Oil and Natural Gas Prices"

43 pages added to the pile!

Natural Gas Prices are here

Crude Prices are here and they moved up strongly while nat gas are lagging.

Summary from above paper p. 40f:
"Economic theory suggests that there is a relation between natural gas and oil prices, but the influence of an increase in oil prices may conflict in its effects on natural gas supply, and therefore, prices. Production of natural gas may increase as a co-product of oil, or may decrease as a result of higher-cost productive resources. While the net effect of an increase in oil prices on natural gas supply may be ambiguous, the effect on natural gas demand is clear, resulting in a positive relation between oil and natural gas prices. Given the relative inelasticity of natural gas supply in the short term owing to factors such as a 12-18 month lag in the production response to drilling changes, it appears that the effect of oil prices on natural gas demand is dominant in the short run.
The analysis supports the presence of a cointegrating relationship between the crude oil and natural gas price time series, providing significant statistical evidence that WTI crude oil and Henry Hub natural gas prices have a long-run cointegrating relationship. A key finding of the analysis is that natural gas and crude oil prices historically have had a stable relationship, despite periods where they may have appeared to decouple.
The estimation of the model resulted in identifying evidence of a stable relationship between natural gas and crude oil prices. The statistical evidence also supported the a priori expectation that while oil prices may influence the natural gas price, the impact of natural gas prices on the oil price is negligible. With crude oil prices weakly exogenous to natural gas prices, the short-run response of the natural gas price to contemporaneous changes in the oil price was found to be statistically significant."

Monday, June 1, 2009

World Electricty Consumption

Via Paul Kedrosky an other consequence of the global recession: world electricity consumption expected to decline yoy for the first time since WWII.