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April 2008
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Bagehot’s lesson for the Fed

McKinnon of Stanford makes a good case for the Fed to raise interest rate.
 
 

Why the oil price is so high?

It's the falling dollar, stupid!

The smartest guys in the room: Where’s the economy going?

 
 

A solution to counterparty risk

Wall street is working on a new mechanism to reduce the couterparty risk (illustrated by graph below), reported by WSJ.

Peter Bernstein is worried

Peter Bernstein WSJ interview.  He thinks the current crisis will last longer than most people thought.

WSJ: How long do you think this whole process will take, before we get back to normal?

Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren't the case, I would be talking entirely differently. I would be saying, "What an opportunity we have got." And I just can't believe that the opportunity is here yet. There is too much to unwind.

Market volatility and uptick rule

WSJ reports that market volatility increased when the “uptick” rule was removed last summer. I guess this has more to do with the credit crisis since last August than with the removal of the rule. It just happened to be case that the timing of the removal coincided with the credit crisis. Nonetheless, the debate itself is quite interesting.

[Graphic]

Oil: the mother of all bubbles?

Reported by WSJ:

Benchmark crude futures have registered an electric performance so far this year and now — near $117 a barrel — hover well above some of the highest near-term forecasts. The speed of the ascent has caught many market participants off guard and forced banks and brokerages to repeatedly revise their oil-price outlook upward.

“I personally think this is the mother of all bubbles,” said Michael Lynch, president of Strategic Energy & Economic Research Inc., a consulting firm in Amherst, Mass. He expects prices to pull back to $80 a barrel by late June, and in the long run step down to $50 as pent-up supply in Iraq, Nigeria, Venezuela and other underproducing exporters starts to flow.

[Crude-Oil Futures]

The case for lower oil prices is straightforward: The prospect of a deep U.S. recession or even a marked period of slower economic growth in the world’s top energy consumer making a dent in energy consumption. Year to date, oil demand in the U.S. is down 1.9% compared with the same period in 2007, and high prices and a weak economy should knock down U.S. oil consumption by 90,000 barrels a day this year, according to the federal Energy Information Administration.

Mr. Lynch at Strategic Energy argues the dynamics of supply and demand justify a price of $30-$40 a barrel, while jitters in unstable exporting regions might reasonably double that price.

“But $114? I mean, the run-up in price we’re seeing in the last six weeks or so has happened while the fundamentals have, generally speaking, gotten bearish,” he said.

Another era of global inflation?

Modest inflation in the US and EU may eventually come down, but not in emerging markets, where central bankers are much less experienced in fighting inflation and their capacity is limited…adding to the trouble is the fact that the share of food in total consumption in developing countries' is much higher than developed economies. For example, Chinese spend about 1/3 of their income on food.  
….
with sharp rising food prices worldwide, be ready for another era of global inflation, and potentially more currency upheavals. 
 
 [rise]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(courtesy of wsj)