Oil and Economy - Different scenarios

Standard Charted provides a matrix which envisages effect of oil on economy and different assets in all the scenarios possible

Source Standard Charrted, pragcap.com

Oil and Demand Destruction

The ratio of Oil prices to World GDP has reached to a record level. Its a classic case of demand destruction where these high prices would end up hurting economies and killing the price surge. Moreover High prices would also make the oil producing countries to produce extra and glut would again destroy the prices. But right now its difficult to guess when and how...

Source : FT

Inflation in emerging markets

in many emerging-market countries, inflation is already running near the top of official target ranges. Indonesia and Turkey are seen at risk of falling behind in the inflation fight—if they haven't already—which could force much more aggressive rate increases down the road. This is especially bad news for bond investors, who see the value of their fixed-income returns eroded as inflation rises.

"We currently view overheating within the emerging-market complex as the greatest macro peril facing the global economy," Michael Shaoul of Oscar Gruss & Son wrote in a research note Friday.

Even before scenes of pitched battles in the streets of Egypt dominated the news, investors were growing nervous about inflation, turning tail on some markets. For the week that ended Jan. 26, emerging-market stock funds suffered their biggest spell of withdrawals since the third quarter of 2008, according to EPFR. The MSCI emerging-markets index has lost 2% this year even as the Dow Jones Industrial Average is up 2%.

While most of the moves in emerging markets haven't been big, they mark a change in the outlook from 2010 when their fortunes seemed much brighter than that of struggling developed markets.

Many observers are especially cautious about the near-term outlook for bonds denominated in local currencies. This had been a particularly popular investment in 2010.

With interest rates near zero in the West, investors bought higher-yielding bonds in places such as Indonesia, India and Brazil. As these economies grew, the theory went, monetary authorities would lift interest rates, which would attract even more investors, forcing up currency values and giving an added boost to returns.

Wall Street Journal

Inflation and India

Ajay Shah's INteresting take on inflation in India

"I would argue that it was the currency policy from 2003 onwards (large purchase of dollars with partial sterilisation) which gave us this mess, which was then compounded by repeated RBI speeches saying that inflation is not important, and RBI actions which were soft on inflation.

The weakness of macroeconomic thinking in official circles is visible, with government actions including banning exports, sending the police to raid traders and hoarders, etc. I believe there is an iron law of economic policy: across each doubling of GDP, you have to reinvent government. The trouble in India is that we are getting each doubling of GDP in a decade or less, giving a very large gap between the structures of government and the underlying conceptual frameworks, when compared with the requirements of the economy. With agriculture at only 15% of GDP, one has to think differently about the role of food in inflation as a macroeconomic phenomenon."

The pieces just don’t add up

The pieces just don’t add up.

Credit card debt outstanding has fallen 27 straight months for a total decline of $177.2 billion.

The unemployment rate has been stuck above 9 percent for 20 months.

Average hourly earnings rose 1.9 percent in 2010.

Personal income rose less than 4 percent in the 12 months ended November.

About 23 percent of homes with mortgages are worth less than the amount of the loan.

Faced with these not insignificant hurdles, what did the U.S. consumer do? Why, he spent like there was no tomorrow.

Retail sales jumped an annualized 14 percent in the fourth quarter, a spending pace that’s been equaled only once in the last 18 years. (The Census Bureau changed the methodology for calculating retail sales in 1992 and says the data aren’t comparable to earlier measures.) For the year, retail sales rose 7.9 percent, matching the 2004 increase and the biggest since 1999.

With inflation low, the gains in nominal retail sales should translate to a 3.9 percent increase in real consumer spending in the fourth quarter, according to the median forecast of a Bloomberg News survey of 62 economists.

Is the American consumer back to his old shop-’til-he-drops ways? It sure looks that way on the surface.

And who can blame him? All the incentives are urging him to spend, spend, spend. The interest earned on checking and savings accounts is so minute it’s hard to find on the monthly bank statement. Economic theory teaches that high real interest rates are an inducement to defer consumption. Low real rates encourage consumers to spend today.


Opinion piece on Bloomberg

Baltic Dry Index

Generally with commodity prices heading north, we see a lot of activity in bulk cargo shipping.. surprisingly Baltic dry index seems cold and not abuzz with activity. could it be a real lack of cargo moevement or another demand supply mismatch which might push commodities higher

Commodity Inflation

Are we heading for another Commodity spiral. Bad news for the developing and under developed nations. They pay price for the inane economic policies of developed countries

The Great Fed Dilemma

The Fed has taken criticism over the recession and Wall Street bailouts, but in the financial overhaul this year, it helped defeat proposals to strip away its power to regulate and supervise banks.

Mr. Bernanke, who had thought the worst was behind him, was unsettled by the suddenness of the recent attacks. He has said that the Fed was in a no-win situation; if it had not acted, it would have been criticized for ignoring the painfully slow pace of the recovery.

The situation forms an odd corollary to the early 1980s, when Mr. Greenspan’s predecessor, Paul A. Volcker, sharply raised interest rates, setting off back-to-back recessions in a painful but effective war on inflation.

Liberals attacked Mr. Volcker, a Democrat, as an inflation-fighting zealot who disregarded the plight of the unemployed. Now conservatives are portraying Mr. Bernanke, a Republican, as trying too hard to stimulate growth and underestimating the risk of inflation.

Read More http://www.nytimes.com/2010/11/23/business/economy/23fed.html?_r=1

Inflation

Food Inflation

These are powerful macro trends at work. The rapid wealth expansion of emerging economies, supply side constraints and the growth of market speculation make a strong case for this macro trend to continue in the coming years