Reperfusion Injury: The Economic Thaw

Posted by jeff

Wed Dec 2nd, 2009 05:23 PM

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Reperfusion Injury - Damage to tissue caused when blood supply returns to the tissue after a period of ischemia.

Above is the definition of reperfusion injury from Wikipedia. Yes you are reading Urban Digs, and no I have not completely lost my mind....although I did recently herniate a disc in my back. Lately, I have been pondering reperfusion injury as it relates to the economy (maybe it's the pain pills). What damage is being caused by the rapid re-introduction of economic oxygen into the system?

A year ago, the global capitalist populace was collectively hiding under their beds, occasionally poking their heads out to watch another scary story on T.V. about economic Armageddon. What few realized was that this behavior resulted in a cessation of economic activity roughly equivalent to throwing gasoline on a fire. The bear market already in effect was finally punctuated by an all-out panic. In response to the conflagration of world markets, central banks brought out the BIG monetary and fiscal hoses to quell the blaze.

Fast forward to today and the massive streams of stimulus have rapidly re-floated market boats. My feeling is that the neck snapping rebound in both financial and economic markets has caused some underlying damage that may by felt in the next 12 to 18 months (or sooner in the case of my own cervical spine, which is obviously a finely tuned market barometer).

So what are the likely symptoms of economic reperfusion injury?

1) Hallucinations/Frothing at the Mouth - Several markets have levitated on highly questionable supply/demand fundamentals (ex speculation)....I can name a handful off the top of my head: natural gas, aluminum, the baltic freight index. That's not to say that fundamentals have not turned the corner for these products and services; however all of the above have an excess of current supply versus both current and historic demand and fairly positive supply outlooks for the next few years. The fluff in prices is in my book the mark of speculation and indicates increased market risk from easy money. (Isn't this what put us in the soup in the first place?) Check these charts of aluminum inventories and prices: inventories are near bubble highs and prices, which leapt off the lows like a scalded cat, are breaking out again to the upside. I understand why it's happening....it just doesn't make economic sense.






2) The bends (micro bubbles) - Outside of financial markets asset bubbles are being re-flated, as evidenced by big rebounds even in assets with little or no income potential, like gold and art and the outright calling of bubble activity even in the best growth areas of the world. Goldman Sachs reportedly just raised its Gold price forecast from $960 to $1,350 for 2010....I'm trying to recall how their $200 oil call worked out.

3) Deceleration trauma - The magnitude of last year's market/economic drop and the incredible G-Force of the recent pop represent risks in and of themselves. Of course, this is a unique market/economic time period for any of us not active in the markets in the 1970s, or not veterans of Japan's lost decade. For traders it probably offers great opportunities. However, for business planning it's a nightmare. Just as folks get comfortable enough with their survival to loosen the reins on cost containment, there is as likely as not to be a micro bubble bursting or hallucinatory supply/demand pseudo equilibrium being jolted out of alignment. Just one example of the perils of business planning in this environment is the air freight market. Just six months ago that market was swimming in over-capacity and supply chains were being contracted to reduce excess inventory; the need for high speed delivery was nil. In reaction to economic realities, passenger airlines, which carry a great deal of the overall air freight in their bellies, were grounded. This large reduction in capacity in the market, coupled with retailers' overly pessimistic ordering patterns for the Christmas season, has resulted in a late mad dash to bring popular goods to store shelves and a spike in air charter activity and rates. Does anyone want to bet their business that these higher rates will last, with tons of capacity on the sidelines that can come back to market?

Questions about how sustainable global growth is, tight lending markets and economic/market volatility are a bad mixture for business confidence and a robust recovery. Add "Reperfusion Injury" to your worry list. This is not to say the economic patient won't survive, but my bet is we will still be in the recovery room for some time to come, with bouts of both fever and chills....we have seen some of the fever already.....might be time to make sure you have a blanket handy.