Realities and elusions
A highly recommended piece: David Goldman Bloomberg interview today.
What to take away? 1) More trouble to come for US banks; 2) Asian inflation serious macro concern, the biggest challenge for Asian economies since 1997.
Soros give four reasons for high oil
Soros’ testimony (#2 is the most intriguing one):
First, the increasing cost of discovering and developing new reserves and the accelerating depletion of existing oil fields as they age. This goes under the rather misleading name of “peak oil”.
Second, there is what may be described as a backward-sloping supply curve. As the price of oil rises, oil-producing countries have less incentive to convert their oil reserves underground, which are expected to appreciate in value, into dollar reserves above ground, which are losing their value. In addition, the high price of oil has allowed political regimes, which are inefficient and hostile to the West, to maintain themselves in power, notably Iran, Venezuela and Russia. Oil production in these countries is declining.Third, the countries with the fastest growing demand, notably the major oil producers, and China and other Asian exporters, keep domestic energy prices artificially low by providing subsidies. Therefore rising prices do not reduce demand as they would under normal conditions.
Fourth, both trend-following speculation and institutional commodity index buying reinforce the upward pressure on prices. Commodities have become an asset class for institutional investors and they are increasing allocations to that asset class by following an index buying strategy. Recently, spot prices have risen far above the marginal cost of production and far-out, forward contracts have risen much faster than spot prices. Price charts have taken on a parabolic shape which is characteristic of bubbles in the making.
Zhou says hot money into China exaggerated
Maybe by a little bit, but it's still hard to explain the recent large increase of the FX reserves.
Source: China Daily
U.S. Federal Reserve's interest rate cuts have helped increase liquidity, but have also led to rising prices in commodities, Zhou Xiaochuan, governor of the People's Bank of China, said on Friday.
Source: China Daily
U.S. Federal Reserve's interest rate cuts have helped increase liquidity, but have also led to rising prices in commodities, Zhou Xiaochuan, governor of the People's Bank of China, said on Friday.
The central bank governor said this has affected the anti-inflation policies of emerging markets.
Zhou was speaking at a conference following the release of a report by the Commission on Growth and Development, an international organization that focuses on policy consultation in emerging markets, and provides reference for aid programs.
"The U.S. Fed has significantly reduced interest rates on the other hand, global commodity market prices have risen. A lot of developing countries are now suffering from rising inflation," Zhou said.
The central banks of the world should cooperate more closely to tackle the inflation problem, he said.
On another issue, he said experts may have exaggerated the amount of "hot money" which has flowed into China.
"I've always held that it is not a comprehensive approach to simply look at trade surplus and FDI (if you calculate speculative capital inflows) you have to make a comprehensive check of the overall international balance of payments," he said.
Hot money, which triggered the Asian financial crisis in 1997, is being carefully watched in China, especially with the appreciation of the yuan and high inflation.
China's reserves, the world's largest, have increased rapidly this year. By the end of March, the reserves stood at 1.68 trillion U.S. dollars, increasing by 154 billion follars in the first quarter.
During the same period, China's trade surplus was 41.4 billion dollars while the FDI was 27.4 billion dollars. Many analysts suspect the 85 billion dollars gap was hot money that flowed into China in anticipation of the yuan appreciating.
In April, the stockpile grew by a further 74.46 billion dollars, with the total reserves swelling to 1.76 trillion dollars, a Reuters report said, citing a source familiar with the data.
The increase in the reserves in April was about 50 billion dollars, more than the total of China's trade surplus of 16.7 billion dollars plus FDI of 7.6 billion dollars.
However, Zhou said many of the various accounts in the country's balance of payments could contribute to the expanding foreign exchange reserves.
"For example, we also have services trade and income on the current account (that affects the level of the reserves). And the financial markets are increasingly more sophisticated now," Zhou said, referring to the complicated currency derivatives that can affect the level of foreign exchange reserves.
Bernanke links falling dollar to rising inflation expectations
Bernanke acknowledged dollar's slide against other currencies has led to an "unwelcome" rise in U.S. inflation and may be a factor in inflation expectations. Full speech here.
Good thing about high oil price
From WSJ today:
General Motors CEO Rick Wagoner said the company plans to cease production at
four North American plants that build pickups, SUVs and medium-duty trucks amid
the sharp rise in oil prices and the "significantly more difficult" auto market.
The company plans to fund its Chevy Volt electric vehicle for commercial
development and hold a strategic review of its Hummer brand. Auto makers are
scheduled to post monthly sales results later today.