A 2007 Valedictory

The problem with globalisation is that it cannot globalise politics.

This propos, from a November presentation by Joseph Stiglitz, is self-evident: capital flows unconstrained (mostly) internationally but political economy – and this scribe chooses to define that as the socially judicial art of satisfying unlimited wants with limited resources – remains a national concept whose essence frequently changes at borders.

Thus trade treaties are asymmetric and reflect, more than anything, the existing balance of negotiating power. Even after the often hailed GATT/WTO Uruguay round OECD tariffs for goods from poorer nations are 4 times higher than those from OECD members. No area is more illustrative of this than agriculture where, not only are there high tariffs, but OECD countries subsidise 48% of total farming production. That political attachment to subsidies - recognised, hidden or (especially) re-defined - explains in large part the demise of Doha last summer. Piss-taking has its limits.

Nonetheless, between WTO rules, IMF conditionally and a lop-sided market-economy dogma advocated by the developed there remains an aggregate force that presses down upon developing nations and undermines local culture, social justice, environmental protection and access to developed country intellectual property – most notoriously HIV/Aids medicines.

This is not a moralistic bash-the-North piece. It is an argument that their national politics are myopically getting in the way of a greater (including their own) economic, political and social stability. Examples abound but nowhere, probably, is it more media-obvious than in the havoc being relentlessly wrought upon the environment by capital. Love of sovereignty can have significant negative externalities.

Expecting the scales to drop from the eyes of the developed ahead of future trade discussions, as Mr Stiglitz’s presentation appeared to implicitly hope, is futile. Not much of value has ever been given away by power; and negotiation, rightly, is here to stay. And on this count there is encouragement to be found in Doha’s very failure: it showed that the pivot in the balance of such negotiations can move Southward - 'take it or leave' does not always work. Still, pleasing at it may be, that trend is not yet strong enough to yet help the very poorest.

Happy New Year.

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Clip (includes some effing and blinding) no relation to finance; and tenously linked at best to holiday fare...Happy holidays.


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Today’s data release shows core CPI moving up, annualised at 2.3%. It would be unfortunate were it to continue that way; but for the man who put ‘deflation’ on the Fed agenda when still serving with Mr Greenspan, this is conceivably, for now, a Not Altogether Bad Thing as far as Mr Bernanke is concerned.

Historically speaking, the Fed (probably) need not have the violent inflation shakes yet (Exhibit A). Even assuming the official data have issues of understatement, in the absence of a shock, inflation does not spike. It creeps.

Exhibit A: Cap Utilisation & Core CPI since 1970

Thus various Taylor Rule graphs floating around cyberspace show the next US rate move will still be down. These pictures look somewhat like Exhibit B. Yet the devil etc. Are the sensitivity factors for output and inflation gaps appropriate in light of a newish Chair (Exhibit B assumes Greenspan’s)? Are GDP forecasts understating the effect of the persistently cheap dollar? Do inflation forecasts underestimate the pressure from input prices?

Exhibit B: Simple Taylor Rule model
Near imponderables, really; and through it all it is hard to know - despite all the moves to greater Fed transparency and so forth - what Mr Bernanke is truly the most concerned with. The prime suspect would appear to be seized up credit markets. A scholar, as the media frequently reminds, of the Great Depression it is plausible that he considers Job 1 avoiding an inefficient allocation of capital paralleling that which helped choke economic growth in the 1930s. This is certainly the view underlying Fed futures which, as with the Taylor Rule, imply another lop come January.

That outcome looks likely to cloud the outlook for core inflation significantly; and even in the presence of an unofficial, fuzzy and asymmetric Fed PCE/CPI target, risks ordaining inflation a persistently complicating factor.

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The secret of comedy?

Timing.

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The judges gave mixed reviews to the competitors this week. Bruno Tonioli felt that the European Central Bank and the Bank of England fell out of step and utterly spoiled their rumba:
“Jean Claude, you were masculine and powerful – a French Valentino tonight. And there is little sexier than a younger man dancing with an older woman. But the Old Lady is just too afraid of it. 6!”
Arlene Phillips had this to say of ABN Amro and the Royal Bank of Scotland:
“It was the most disturbing jive I have ever witnessed – at times it looked like the proverbial caricatured Dutchman and Scot fighting over bonus pennies rather than dancing. 5!”
Len Goodman, like all the judges, found pleasure in Northern Rock’s tango with its many partners:
“You could teach us all a thing or two about dirty dancing. It was frenetic, raunchy, passionate stuff - sizzle and sausage! 10!”
Craig Revel Horwood thought that BHP Billiton and Rio had plenty of work to do to make their samba work:
“Marius, you show a freedom of expression not present in Tom’s strangely camp and passive performance. But you’ll need to improve your posture, energy and sex appeal to draw Tom out and make this a really horny routine. 2!”
And everyone was in agreement regarding the Viennese Waltz of departing competitors Sainsbury’s, Asda, Tesco, Morrisons, Safeway, Robert Wiseman, Arla, Lactallis McLelland, Dairy Crest and the Cheese Group:
“Passionate about lowering prices? You did well to maintain your hold until that end bit when you were badly found out. Still, a majestic routine in its own way - but hardly fresh or romantic. You made Charlie Prince look like Fred Astaire.”
Have a grand week-end. In the meantime, US viewers can check out our stateside version, Financing with the Stars.

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Amongst the most sought information on this site is that concerning the Baltic Dry Index (BDI). And, indeed, at a time when equity markets offer little reassurance a rocketing BDI – now over 10,000 – looks a promising place to find comfort.

The last time the BDI was covered here it was just over 7,000. That was in August. The thesis then was that a counter intuitive opportunity existed in the scramble to finance and build new ships. That still holds and one notable development for those interested in riding the idea has been the Suez-EDF merger which will see the former spin-off its environmental waste and recovery activities.

Still, more interest lies closer to current happenings. Volumes of traditional ship financing remain immense (despite some signs of pullback amongst, most visibly, German banks) and are allied with increasing private equity activity. Shipping IPOs in the current quarter are well into double figures and this drive to increase fleet sizes shows up in record ship prices: some existing 7 year old ships (capesize class, for example) are commanding the same prices as similar new build tonnage.

There comes a point where ship buyers have to judge whether freight rates, and the outlook for freight rates, can justify these prices. Sustained by the China and India demand stories they evidently judge that they still can; and in this they are succoured by the q4 seasonal surge in transport prices, typically driven by heating oil demand.

However, a mitigating factor of the profit hopes of ship buyers is the cost of bunkering – in broad terms ship fuel. Shipping consultants McQuilling Services provide a useful insight into how sharply these bite into what appear to be reassuringly strong freight rates. And one shipping CEO this month appears to provide industry confirmation of this. If, as he suggests they must, these bunker costs are successfully passed on down the line they are likely to infiltrate even the core inflation measures of the US.

Yet perhaps the most significant challenge to the China/India decoupling hypotheses comes from the generalised flight to government paper. 10 year US constant maturity rates typically relate positively to the BDI with a lag of 3 to 6 months. There is currently a sharp divergence from this trend which, time will tell, either supports the prevailing shipping enthusiasm for decoupling or may come to be seen as the proverbial warning shot to the head.

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