Flavio about Business 2.0

Dramatic events in world markets with volatility reaching the post bubble years:

VXN, Nasdaq 100 Volatility Index

The Dollar is now worth 1.20 Francs again. The last time the Swiss had to pay so much for a dollar was in August 2007. In March 2008 the dollar was worth a mere 0.996 Francs, the all-time low.

In recent months the dollar also gained strongly versus the Euro, now being worth almost 80 eurocents.

What has caused this extreme volitality in exchange rates?

I can only guess, but the arguments I have heard most often and make most sense to me are:

a) In a time of crisis, US Goverment Bonds are still the most secure investment

b) The dollar decline was unjustified in the first place, where it was anticipated that the US would be hit much harder by the mortgage crisis than the rest of the world. It now appears European Banks were carrying a lot of the risk in these subprime mortgages. Now that these will probably never be paid back, credit becomes as unavailable in Europe as it is in the US.

The implication of currency valuation (or devaluation) are further reaching than the average person might assume at first. In the US the low dollar has hurt many people with an immense surge in Gas Prices. The barrel was at 140$! And now is only worth around 60$. Naturally it is anticipated that the demand for oil is and will further decline, but a big part of this is also the recent strength of the US Dollar.

A weak dollar benefits exporters whose base currency is the dollar or a currency tightly attached to it, like for example the Chinese Yuan. With the dollar gaining more than 25% versus the Euro in the last few months, this means that every Chinese Product is now 25% more expensive for Europeans to buy! The strong dollar will hurt the US exporters and thus the US economy, but also the Chinese Economy, which is depending strongly on exports, although maybe less than what is commonly believed.

The strong dollar might also help explain the sharp decline in Google’s market capitalization , which since Q1 of 2008 depends more on Intl. Revenues than domestic.

I just saw the movie Oil Crash at ASPO Switzerland, which I would highly recommend.

The movie contains interviews with some leading oil and energy experts and what they say is pretty clear: We are about to reach to Peak Oil, where we will never be able to produce more oil than right now.

The implications of decreasing oil production will obviously be huge. The demand is rising even more with people in China and India starting to drive more and more cars and their economies growing rapidly.

They talk about Air Travel being available only for a Super Elite. Driving is going to become very expensive, and most of the world’s companies are either directly or indirectly dependent on inexpensive oil.

Why is oil so important? As the movie suggests, it costs only a handful of dollars to get a barrel of oil out of the ground.
But the barrel of oil contains the same amount of energy as do 25′000 (!) hours of human manual labor. Oil is a very, very cheap source of energy and was highly responsible for the world’s creation of wealth during the last one and a half centuries.

Many very intelligent and driving people are looking for ways to encounter this potential energy crisis. I find Jeremy Rifkin’s approach very interesting, suggesting a peer to peer sharing of energy with hydrogen.