Economic climate change…

Relentless rises in commodity price emissions is increasing the inflation content of the world’s economic atmosphere threatening the universal life force of the world economy – ie growth.

Economic climatologists aka central bankers are beavering away trying to contain the inflation content while scratching their heads about how to tackle spiralling commodity prices.

Or as Mervyn King would have it at a press conference this morning, a sequence of cost shocks is coming from abroad. No prizes for guessing what – oil, food, energy yada yada. OPEC’s not pumping enough, Indians eating too much (see below) etc. This is the increasingly heavy monkey on the back of a Bank looking to loosen monetary policy – mainly by cutting interest rates.

Dear readers looking for good news stop reading now and return in what Mr King calls the medium term, say 2010ish. By that time the economy may be growing at trend again, inflation may be back around 2%, a deflated sterling will have helped iron out the current account deficit and boost tourism and this increasingly wounded government finally will have been put out of its misery by the electorate. Recapitalised banks will be expanding their lending as they report bumper profits from the higher margin business they have been doing for the past couple of years…

Consumers will have rediscovered the wonderful bargains at charity shops and the benefits of making do. They have bought a cash ISA or two. First time buyers have returned to a more affordable housing market to snap up the bargain repos and negative equity distressed sellers. There’s a dearth of estate agents to help them out, though.

Meantime, back in the present, fasten your seatbelts say the Bank of England Inflation Report: “The near term outlook for inflation has deteriorated markedly over the past three months,” it begins. Rising prices will squeeze consumer spending and so cut growth “perhaps sharply”. Commercial property prices have fallen 16% since last summer and house prices are now falling too. Though Mr King agrees with your editor on one point on the housing market…

The ‘90s house price crash was precipitated by a doubling of interest rates he said (as a consequence of the ERM straightjacket) and a big increase in unemployment. Neither of which are present today. At least not yet. The Evening Standard reports the City is clocking up job losses at the rate of 300 a week. But are these the kind of types to linger on the rock and roll (dole) for months on end? Odds against methinks. New opportunities no doubt beckon in Dubai, Singapore and all points East. Time to follow the money.

The net net for the UK economy is the climate’s changed and we’re all affected. Or in Bank speak, the economy is “rebalancing”. It’s a process that’s going to take some time and could yet be torpedoed by Johnny Foreigner and those unwelcome “shocks from abroad”.

*** Americans should go on a diet…

They should rethink their energy policy too.

That’s the angry response from India at perceived slights from the Bush administration. Official comments appeared to lay the blame for rising food prices on India reports the International Herald Tribune.

Americans on average consume 50% more calories than Indians says Pradeep Mehta, the secretary general for the Centre for International Trade, Economics and the Environment. And if they would slim down to the weight of the average middle class Indian “many people in sub-Saharan Africa would find food on their plates.” He added money saved from the fall in liposuctions could be channelled into famine relief. Lardy Brits could no doubt chip in a bob or two on that score as well.

As to the comments, we can’t be sure but there appears to have been something lost in translation here. According to reports Bush commented in a press conference that “ when you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.” In our book that is no more than stating how it is. Basic economics.

Aggregate demand goes up; price follows it to a new place where supply can once again eyeball demand. If there was criticism in Bush’s words, it was of a subtle and coded nature which belies his plain speaking Texan reputation.

Perhaps the Indians are being a little sensitive…certainly more assertive. 300m middle class Indians is an awesome prospect. It’s the equivalent of the entire US population driving SUVs… demanding air conditioning, flat screen TVs and more calories. Their economic progress, amongst others, will prove an increasing shock to ours.

Regards,

Rob Mackrill
The Daily Reckoning

Source: Cost Shocks From Abroad 

“If you lived your life in London you would often be left with the impression that the economy is about to fall off a cliff. From my visits around the country I can assure you it is not.”

Its annual conference starts today, and a recent survey of British business finds “resilience” in the face of the credit crunch. Only about a quarter of firms have found it tougher to raise finance and 60% have left their business plans unchanged. The pound’s fall against the euro also helps exports and rebalance Britain’s yawning current account deficit.

*** News from the mortgage frontline…

“Mortgage fees have tripled,” Quentin tells me at the week-end.

He plies a book-keeping and mortgage business from a quiet village in Gloucestershire and gave us an update on the credit crunch from the business end.

Continues below …

Recommended

You could make THOUSANDS every month – TAX FREE!

A brand new service offers you the chance to make tax free profits trading the market.

But you need to be quick – there are only 100 additional places available for the next trade. And it could be placed within days…

Make sure you don’t miss out on this unique opportunity!

Click here to find out more

Spread betting is not suitable for everyone – ensure you fully understand the risks involved. Trades recommended carry a high level of risk to your capital. Prices can move rapidly against you and resulting losses may be more than your original stake or deposit. Fleet Street Publications Limited 020 7633 3600

And the new HSBC offer to match your previous fixed rate appears to co

“A client looking to re-mortgage £150,000 on a £400,000 valuation and more than £70,000 income can get the money at the same rate, but HSBC want a fee of £4,900 for their trouble! When I suggested that was verging on the extortionate for a quality customer they said they might be able to do something if my client agreed to swerve his property insurance to them. They’re not supposed to be able to do that anymore!”

Well, business is business. The strong survive and charge ‘what the market will bear’. The weak get crushed. The bit part players of the UK mortgage scene have either been extinguished or sidelined. The door is now wide open for those left standing to pick up both market share and margin.

*** Brazil may have struck oil big time with first its Tupi discovery (est. 8bn barrels), and more recently its Carioca discovery (est. 33bn barrels), which jointly could put them into the super league of oil exporters but but but… the technical changes are greater than ever.

Their latest offshore find will have go six miles below sea level, reports Bloomberg. It’s almost twice as deep as the world’s current deepest offshore well. To suck out the oil they will need for equipment that can withstand pressure that would crush a truck, pipes that can carry boiling hot oil at 500 o Fahrenheit (260 o Celsius) and drill bits that can bore through a mile of rock salt sea bed.

Exxon Mobil and Chevron’s deep water drilling attempts in the Gulf of Mexico saw diamond encrusted drill bits disintegrate and steel pipes crumple.

Such a huge engineering challenge calls into question whether the discovery is of any use. It may useless, says Tina Vittal, an S&P oil analyst:

“A big find might not be a good find if it costs so much to develop that it’s not commercially viable. We don’t have any idea at all yet of all the costs that are going to be involved. Those costs are going to set the floor for oil prices.”

And today’s floor for the oil price is almost $119.

Today, OPEC president Chakib Khalil gives warning oil could hit $200 on account of a weak dollar. Though, interestingly, Lehman Bros note though that about $20-30 of the price is “hot money”. It believes the oil boom may be coming to an end as new refineries and new projects come on stream.

So are commodities another bubble in search of a pin? The FT’s Neil Hume adds his thoughts on the subject at the week-end. He looks at the similarities between the mining boom and the dotcom bubble:

1. The Mega takeover. The Vodafone takeover of Mannesmann was the peak of dotcom mania. Will BHP Billiton’s bid for Rio Tinto prove likewise?
2. The FTSE takeover. In 2000, there were ten tech companies and eight telcos in the FTSE100. Today there’s a “similar concentration” of mining and oil groups and accounts for a third of the market cap of the index. A new name arrives to join them (possibly in the FTSE 100) next month – New World Resources. Remember Lastminute.com..?
3. Valuations. Mining companies, while not wildly expensive, are at the top end of their historical range while a bullish consensus prevails among analysts.

Regards,

Rob Mackrill
The Daily Reckoning

Be the first to comment on this article! Now you can post your thoughts, reactions and views on the topics we talk about.
To comment, click here.