More dependence on external funding, more volatility

Dear Reader,

We compose this short article to commit to paper an idea we feel is non negliable.

There may be a common thread that connects a number of large, long term price trends. We feel that connection is the changing reliance from an internal to an external supplier or demand: or vice versa.

Let us use an example, and the see what consequences we can extrapolate from the current economic environment.

Oil in the US was mainly supplied internally until the early 1970s. However, since the early 1970s the US became more and more dependent on importing oil from abroad (indeed, it contributes almost half of the US trade deficit to this day). This made it possible for OPEC to be born and indeed led to more US demand to be supplied externally. To this day, the oil price has never reached the price when the US was primarily an exporter rather than importer of oil.

Many feel that the increasing Chinese demand for agricultural products and the increasing percentage of basic foodstock being imported will have the same effect on soft commodities.

We also ask whether economies that are more dependent on external funding are the currencies which will depreciate more and have higher borrowing costs. Foreign investors will demand a higher rate of return to convert currency from their base country to a foreign unit in what is perceived an uncertain macro world.


Your sincerely,

Alessandro Sajwani