Deleverage, Deleverage, Deleverage!

“Deleverage” is the new hot word in the global economy. Both McKinsey (requires subscription) and the Economist say that now it’s the time to deleverage. But who should deleverage and what exactly?

That’s the tricky question. An enlightening article by Satyajit Das tells us that “(d)e-leveraging requires liquid markets and buyers with capital to purchase the assets. Ultimately, prices of risky assets must adjust to market clearing levels as the system reduces debt.”

Today we are looking at the deleveraging of corporate and personal balance sheets. One of the channels of deleveraging will be, obviously, unemployment. Another important channel will be company defaults. The negative feedback loop will inevitably lower asset prices. We also need to keep an eye on inflation, and especially on energy prices.

Who will lose: Everyone that doesn’t have a sustainable cash-flow and a stable business model. The real estate sector.

Who will profit: The banks, sort of. The bankruptcy lawyers. Everyone who can develop demand-creating innovation.

Will Greece Hold?

Unit labor costs in Greece and Germany (1998 = 100). Source: Peterson Institute for International Economics.

Many eyes are now set on Greece: the eurozone underperformer. The question is – will Greece hold or succumb to pressures due to its huge fiscal deficit?

Nobody knows. Edward Hugh does a very good job disclosing the dirty play of Greek politicians that want maximum support from the EU with minimum reform. This mindset is not sustainable – it sent Greece into trouble in the first place. But the Greek example is a very good sign of the times. Reactive politicians are slow thinkers and they do too little, too late.

Bailing out Greece seems more and more probable.

Comment: It has become very difficult to choose a reserve currency. The dollar is well, in the red, while the euro is shaky due to Greece.

Who can profit: Anyone with a crystal ball. Otherwise pay attention to the Swiss franc, gold, and the Brazilian real.

Who can lose: Everyone without a crystal ball. But exporters around the world face some really hard challenges and rising currency hedging costs.

Steel in Volatility

Financial Times has a good interactive feature on iron ore prices. Iron ore is a very important commodity that is still traded in two separate trading systems – a transparent spot market, and an intrasparent system of benchmark prices. The FT notes the current shift from benchmark to spot prices.

Comment: Looking at the forecast production and export maps, it is quite obvious that some countries – China, Australia and Brazil are the hotspots of the iron ore market. The movement toward spot prices can create new opportunities on the market, but it can also fuel volatility.

Who can profit: Mining companies can and will profit from rise of demand for steel products. Steelmakers, however, face a tougher challenge in strategically positioning their investments on the market. The big steel makers SHOULD profit from a more volatile market only if they have the pricing strategy capability in place.

Who can lose: Everyone else. Volatile steel prices can add a burden to the global economy, and the direction of volatility is also worrying. Just like oil, high steel prices send shockwaves throughout economies. Here’s a short list of steel-intensive infrastructure and industries: roads, railways, power generation, household appliances, construction and manufacturing industries.

Ventures Follow the Oil

Thomas Meyer from DB Research shows that venture capital volume in the US has followed strictly the oil price dynamics during the last decade.

He claims that nowadays venture capitalists invest heavily in energy-related startups with fresh ideas about how to solve our energy problems.

Comment: Peak oil is out there somewhere and early birds will get the cream.

Crazy idea: Start a venture capital fund focusing on energy today!

IMF: Commodities Will Rise in 2010

The International Monetary Fund says that prices of many commodities are likely to increase further in 2010. However, the fund estimates that the probability of another commodity price spike would seem remote over the near term.

Demand is expected to continue rising at a solid pace as industrialization continues in emerging and developing economies.

Comment: We like commodities and will watch them carefully on “The Adaptive Shark” throughout the year. Expect much more from us on separate commodities, production cycles and new business opportunities.

Who will profit: Commodity producers, commodity traders, food processing industry.

Who will lose: Automakers, airlines, low-value-added manufacturers, governments (especially in poor and developing countries).

Crazy idea: Develop commodity monopolies.

Welcome Aboard!

Welcome to “The Adaptive Shark”!

Today we start an exciting journey into the world of economics, politics, psychology and everything else that can get you ahead of the competition. We will together follow trends, evaluate news, argue and fight over issues. We will scrutinize methodologies, sieve through data and play in mud. We will enjoy ourselves while making money.

This is the spirit of the blog. It is meant to be a hub for knowledge, discussion and debate. The gloves are off and many taboos will fall. You can rely on an honest approach and total transparence. Ask any questions, make any claims and challenge any wisdom! Truth is not static and no one has monopoly on it.

Let’s go!