Chile and Peru Terms of Trade Reversal Looms Large

September 28, 2011

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    A reversal in the terms of trade is a leading indicators of financial crises, according to Rogoff and Reinhart. Similarly, commodity cycle booms and busts is also a leading indicator. Copper prices have plunged, as documented back in the Niederhoffer contest entry.

    The Terms of Trade figure is simply exports – imports. Governments collect export taxes. It can be a significant portion of government revenue in some cases. Saudi Arabia and oil is an extreme case.

    During boom times, governments become accustomed to the abnormally high tax revenues, They accumulate a bunch of fixed costs by making hallow promises to their citizens. When then the tax revenue dries up, governments are often left with a bunch of commitments they can not honor.

    It’s like living a lavish lifestyle, then getting an unexpected huge pay cut. There are certain bills you can not quickly eliminate.

    Peru and Chile are considered fiscally sound, like Australia and Brazil. But this stems from strong exports of industrial metals to China. All of these names will be hurt.

    While a recent report shows Saudi Arabia gets into trouble below $80 crude oil, I’m not sure what the copper pain threshold is for Peru and Chile. Hopefully some analyst will tell us in the days ahead.

    Whenever you see an asset move as quickly as it did, you have to assume someone is getting hurt. Also in this camp are those Chinese financial schemers that will be dumping copper on the market to meet margin calls soon enough.

  1. China Manipulation Behind Cotton and Copper Booms, says

    historysquared.com/…/china-manipulation-behind-cotton-and-copper

    Apr 1, 2011 – Copper. “Chinese speculators have leased copper, using letters of credit as the collateral. Meanwhile, Cotton farmers are hoarding · image

  2. Dr Copper Looking Sick, as Commercial Shorts Hit Extreme, says

    historysquared.com/…/dr-copper-looking-sick-as-commercial-shorts-…

    May 1, 2011 – If China does reduce the amount of it’s fixed asset investments, Financial Times has a series of posts related to Copper hoarding and

    More Stats and Stories on China’s House of Cards

  3. historysquared.com/…/more-stats-and-stories-on-chinas-house-of-car…

    Mar 27, 2011 – By some estimates, demand from China is behind half the rise in global commodity prices, such as copper, oil, nickel, iron ore, coal and potas

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