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Monthly Archives: May 2008

Lehman economist says oil in ‘asset bubble’

Edward Morse, chief energy economist at Lehman Brothers says high oil prices constitute an “asset bubble,'' and discusses U.S and Chinese strategic petroleum reserves. This is audio clip. (source: Bloomberg) 

Hamilton: understanding crude oil prices

Jim Hamilton, the renowned econometrician and an expert on oil price prediction came out with this research paper. I recommend all who are interested in the issue should read the whole paper.

He listed three theories for current high oil prices:

1. storage arbitrage (the investory story)
2. index future speculators (the speculation story)
3. the recent feature of scarcity (the limited supply story)

Here are some really nice charts from his research (click to enlarge, hat tip to Jim Hamilton):

The US is less reliant on oil.

How much will be the impact?

Not very promising on the supply side:

Commodity index speculators

The graph says it all.

(click to enlarge. source: Michael Masters’ congress testimony)

Inflation mugger is back

Inflation is back. Developing countries without tightly anchored inflation expectations will suffer most from the inflation serial killer. Developed countries with better monetary policy shouldn't feel too complacent, either.  While wage is not likely to rise in America where labor unions have much less negotiation power than 70s, Europe could face a tough fight. 
 
Ultimately, to fight inflation, central banks in developing countries will have to raise their interest rate significantly.  And this raises the question of how to control the flow of hot money: the diverging interest rate policies in the US and developing world, thus the increasing interest differentials, will likely dramatically increase hot money flows out of the United States.
 
Read more on the issues at Economist.com
 
 
RONALD REAGAN once described inflation as being “as violent as a mugger, as frightening as an armed robber and as deadly as a hit-man”.
 
In countries such as China, India, Indonesia and Saudi Arabia even the often dodgy official statistics show prices have risen by 8-10% over the past year; in Russia the rate is over 14%; in Argentina the true figure is 23% and in Venezuela it is 29%. If you measure the numbers correctly, two-thirds of the world's population will probably suffer double-digit rates of inflation this summer.
 
 
 
 
 
 

Pension funds and commodity speculation

 
"[Commodities] are experiencing demand shock from a new category of speculators: institutional investors like corporate and government pension funds, university endowments, and sovereign wealth funds," said Michael Masters, managing member of Masters Capital Management, a Virgin Islands-based hedge fund. "Index speculators are the primary cause of the recent price spikes in commodities."

…Masters distinguished between traditional speculators and what he calls index speculators, or passive investors who enter the commodities markets as a long-term hedge against inflation. Commodities exchanges limit the number of positions an investor can take in the market, but Masters says the Commodity Futures Trading Commission has allowed unlimited speculation in these markets through a loophole.

Speculative activity in commodity markets has grown dramatically over the last several years. In the past decade, the share of long interests—positions that benefit when prices rise—held by financial speculators has grown from one-quarter to two-thirds of the commodity market. In only five years, from 2003 to 2008, investment in index funds tied to commodities has grown twentyfold, from $13 billion to $260 billion.

Foreign intervention and democracy

Do superpower interventions to install and prop up political leaders in other countries subsequently result in more or less democracy, and does this effect vary depending on whether the intervening superpower is democratic or authoritarian? While democracy may be expected to decline contemporaneously with superpower interference, the effect on democracy after a few years is far from obvious. The absence of reliable information on covert interventions has hitherto served as an obstacle to seriously addressing these questions.

The recent declassification of Cold War CIA and KGB documents now makes it possible to systematically address these questions in the Cold War context. We thus develop a new panel dataset of superpower interventions during the Cold War. We find that superpower interventions are followed by significant declines in democracy, and that the substantive effects are large. Perhaps surprisingly, once endogeneity is addressed, US and Soviet interventions have equally detrimental effects on the subsequent level of democracy; both decrease democracy by about 33%. Our findings thus suggest that one should not expect significant differences in the adverse institutional consequences of superpower interventions based on whether the intervening superpower is a democracy or a dictatorship.

 

 
 
 
 

Unemployment and Recession: initial claims vs. continuing claims

Today’s initial unemployment claim came out with a benign number: 365k, well below the historical average required for recession: 375k-400k. So what’s going on? Are we not in recession?

Barry Ritholtz thinks we may need to shift our focus to the continuing claims and he presented a convincing graph to show that we are already in recession.

“Observe the CUIC (continuing unemployment insurance claims), YoY, 4 Week MA:
Every time this has moved above 10%, we have been in a recession. If you want a margin of safety, use 15%. The current reading: 19.5% — is deep into recessionary levels — despite INITIAL CLAIMS being below 400k”.


(click to enlarge)

Theory linking Hepatitis to China’s ‘missing women’ invalidated

This woman (Emily Oster) stirred the academia with her intriguing finding that attributes China's skewed male-female birth ratio to the high Hepatitis-B rate in China. Now the theory is being invalidated, by herself.