October 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

A year or so ago, they were saying that the economic cycle had been following the sun’s path across the Anglo-Saxon world. It started in Australia, then went on to the UK, and finished in the US. Certainly, the interest rate cycle and the housing market seemed to follow that pattern.

But then this year, it all got thrown out of synch. The US saw itself emerge as an exporter of woe. If bad news was an export that brought in money, the US balance of payments deficit would have turned to surplus a long time ago. All of a sudden it’s unclear which way the cycle is going.

But let’s assume for a moment that the underlying cycle is still running from east to west. If that is right, then we could do a lot worse than take a look down under, to guess what’s going to happen here next.

Australian interest rates are much higher, and even in the weeks leading up to the eruption of the credit crisis in the summer, the central bank down there was busy upping rates. They currently stand at 6.5 per cent, but right now the expectation is for another hike soon.

Why is the prognosis for Australian interest rates so poor? Well, inflation is on the up. In fact in the third quarter of this year, Australian core inflation saw its biggest quarter on quarter rise in 16 years, with prices jumping by a full percentage point over the three-month period. And before you write this off as a one-off, bear this in mind: the inflation measure which soared so high is known as a weighted median and excludes the largest price gains and falls.

The annual rate of inflation in Australia is now 3.1 per cent.

It’s not difficult to give a reason for this. Increases in energy and food prices are taking their toll, as they are in China, where annual inflation is running at 6.5 per cent - a 10-year high.

In Russia, inflation is now approaching 10 per cent. The problem has become so bad that the government has decided to roll up its sleeves and wade into the inflation mess by introducing price controls. According to the FT this morning, the nation’s biggest food retailers are likely to agree to freeze the price of bread, cheese, milk, eggs and vegetable oil until the end of this year.

It’s all very 1970s. Maybe a wage freeze will be next. The UK may have chosen to ditch attempts to control price though government intervention when James Callaghan was Prime Minister, but right now the pink paper says China, Egypt, Jordan, Bangladesh and Morocco are all playing with food subsidies and import tariffs to try and bring down prices.

Meanwhile, of course, it is thought the Fed will be lowering interest rates soon, and many think the Bank of England will join the club for downward changes in the official cost of borrowing. Just bear in mind, however, that these expected changes are at odds with the global trend.

Editors note. Above, we said if bad news was an export that brought in money, the US balance of payments deficit would have turned to surplus a long time ago. Well, in a way that is what’s happening. Bad news is hitting the dollar and US consumer confidence, which in turn is encouraging less imports and more exports. It’s just a slow process.

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October 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

Here is some advice. When the great gurus of investing talk, listen very hard. Yesterday, Jim Rogers, the man who predicted the commodities boom in 1999, and was once the partner of infamous currency trader George Soros, said he was getting out of all assets he held in dollars, buying the Chinese yuan, the Japanese yen, the Swiss franc, and commodities. But the commodity products that will especially get the attention of Mr Roger’s wallet will be agricultural products.

Mr Rogers drew an analogy between the dollar today and the British pound when it lost its status as the world’s currency of choice for foreign reserves. Sterling “lost 80 per cent of its value, top to bottom, as it went through the whole period of losing its status as the world’s reserve currency,” the great man told Bloomberg.

And turning his attention to China, he said that he just didn’t see how one could lose from investing in the currency from behind the Great Wall. “It’s gotta go. It’s gotta triple. It’s gotta quadruple,” he said.

Mr Rogers also anticipates an unwinding of the carry trade over the next few years. The carry trade occurs when the rate of interest is much lower in one country than another. Investors borrow from the country where rates are low and then lend to the other. In recent years, we have seen a carry trade between Japan and the US and UK, with many claiming this trade is one of the factors behind the expanding availability of credit in the West.

But suppose you’re involved in the carry trade. You borrow in yen, and lend in dollars. And then suppose the dollar falls; all of a sudden your cleverness seems more like stupidity. Mr Rogers is in effect saying that investors, fearing the fall of the dollar against the yen, will get out. The carry trade will then unwind, less money will flow out of Japan, and the yen will soar.

In recent years, Japan has experienced a massive balance of payments surplus. Normally, of course, when trade is in surplus, the local currency rises in value. But for much of this decade, everything has been back to front. The yen has been weak, and the dollar and pound strong.

It’s one of those odd quirks. For years, Japan’s interest rates have been close to zero, but instead of boosting the economy the way it should, a partial result has been to see money flooding out of the country. In the UK and US, on the other hand, higher interest rates have pulled money in, possibly creating inflationary pressures for the future.

So, you can understand why Mr Rogers reckons the yen is a good place for him to park his money.

As for commodities, Mr Rogers remains a bull. He says he expects the commodities rally to last until at least 2014, but could even extend to 2022.

But it’s agriculture where the guru expects the big bucks to be made. He said, “The number of hectares devoted to wheat farming has been declining for 30 years, and inventory levels of food are at their lowest since 1972. Suppose we start having droughts again. God knows how high the price of agriculture is going to go, so that’s where I’m putting more of my money now, than in other things.”

It’s interesting. Not everyone agrees with either of the central planks of Mr Rogers’ predictions.

He is probably right about the yuan. But bear in mind China is still a poor country. There are many more peasants living on a tiny wage, perhaps just above the level of absolute poverty, than there are prosperous Chinese living in the cities. In the West, we often prescribe appreciation of the local currency as a response to rapid growth, and indeed the IMF practically enforced such moves in the late 1990s in many of the Tiger economies of the Far East, and then in Russia. Many believe that this advice only benefited the West, and that economic growth in the respective regions was held back as a result.

Today, we are seeing the consequences of IMF and Western advice to Russia backfire. The resulting economic hardship, the resulting sell-off of State assets to the oligarchs, have caused much resentment, and this explains much of Russia’s seemingly ambivalent attitude to the West that we have been witnessing of late.

But China is wise to all that. This is why she is so reluctant to let the yuan rise too fast, although pressure from the US is bound to take its toll. Going forward, it seems difficult to imagine a scenario in which the yuan does not buy more bucks than it does at the moment.

As for Mr Rogers’ expectations for commodities? Others think the current high prices will lead to more resources being put into exploiting raw materials, leading to a price fall. Others expect to see China’s economy shift away from investment, which in turn promotes commodity inflation, and towards the consumer.

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October 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

My, how the world is changing. You may be aware that there is this thing called a credit crunch that is percolating around the global economy right now. It has now affected the market for Initial Public Offerings (IPOs,) with the latest research from Ernst and Young revealing that the number of IPOs fell by 22 per cent in the third quarter of this year from the previous quarter.

The amount of money raised was also down, by 36 per cent.

But, and this is the interesting bit, IPOs from the BRIC countries: that’s Brazil, Russia, India and China, shot up.

In fact, in the quarter just gone, companies from the four BRIC countries raised $27 billion from 118 IPOs. To put that in context, total money raised from IPOs world wide in the period was $57 billion from 428 IPOs.

Throw in companies from other developing countries, and you find that the overall shares of the IPO market from the developing world was around 70 per cent of all monies raised.

Gil Forer, Global Director of IPO Initiatives at Ernst Young, said “The Global IPO markets still remain strong despite a drop in activity. The record numbers of IPOs in the emerging markets show that it is these countries that are driving global economic growth - international investors continue to look for high return opportunities. Thirteen of the top 20 IPOs were from emerging markets and interestingly only two of those chose not to list on domestic exchanges.” If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

Not so long ago we would be crying over the high price of oil. But not today; at $85.79 a barrel on the New York Mercantile Exchange this morning, black gold is far too high for comfort. But on this occasion, we can celebrate. Sure, oil is too high, but then it was much higher a few days ago; it’s down by $4 a barrel since last week’s peak. Phew.

Last week oil rose, partly on fears of Turkish military action against Kurdish separatists. Now, analysts have come up with the theory that what Turkey does in the region will have little effect on oil.

But perhaps another reason for falling oil is simply fears over the US economy. If Uncle Sam stops growing, then presumably his consumption of oil will fall.

It’s one of those self-correcting mechanisms of global economics. Oil rises when times are good, higher oil causes the economy to slow, forcing the price down.

Except that this time around it may not be that simple.

It depends on who you believe. Some say that the price of oil always goes in cycles. The price goes up and then it goes down, and such will be the experience this time around.

Maybe this prediction is right. But there is another side to the argument. This morning, the Energy Watch Group is due to release a report suggesting that oil production has already peaked. The report will predict that oil production will fall by 7 per cent a year from now on.

Hans-Josef Fell, EWG’s founder, was reported in the Guardian as saying, “The world soon will not be able to produce all the oil it needs, as demand is rising while supply is falling. This is a huge problem for the world economy.”

Whether EWG is right or not remains to be seen. But claims that oil will necessarily fall right down in price, repeating the pattern of the past, will eventually prove to be absurd. Sooner or later oil production will fall. Oil has taken billions of years to form and man has really only been extracting it for around 100 years.

The turkey living on a farm that hears the farmer’s plan to serve it up for dinner one day may laugh at these rumours. Every day, the prophecies of doom prove false, and the turkey becomes more certain that each day will just be like every other, until, that is, Christmas arrives.

The 100 years of oil exploitation may be analogous to a year in a turkey’s life. Have we reached December yet? Or are we still in spring? Demand for oil is rising so fast that it seems inevitable that when peak oil production does occur, it will be sudden, and shocking, and surprising. That’s why other forms of energy are so important and why George W, so long a cynic over global warming, has suddenly woken up to the challenge of finding alternatives to oil. Fast. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

After the Dow Jones collapsed 367 points on Friday, many feared the worst. Would there be a rout in London and Europe? Would shares fall in the wake of the US sell-off? Well, in the end, it seemed as if the panic was over nothing. Sure, shares fell, and so great was the anticipation of a shares rout that the small sell-off made the headlines, but somehow something got lost in the translation and the TV and radio media talked of plummeting shares. But the FTSE 100 ended the day just 68.60 points down. It was a bad day, but not that unusual. Then, last night, the Dow gained 44.95 points. Okay, it was a long way from regaining Friday’s losses, but it was a start.

There seems to a feeling out there at the moment that recent falls on the Dow have created a buying opportunity. It’s been a similar story in London. According to research from Capita Registrars, private investors have been moving back into equities with a vengeance.

Apparently, for the 10 months up to the beginning of August, private investors had been betting on a correction, withdrawing £7.4 billion worth of stock. But since August, they have been buying, with the stock market seeing a net inflow of £1 billion from this source since the credit crisis first struck.

When shares fell this summer many investors and journalists said, “Told you so.” No doubt, for many the smugness was justified, although we suspect many others were merely being wise in hindsight.

When you think about it, if the stock market saw £7.4 billion going out over 10 months, and then £1 billion coming back in, then that leaves an awful lot of investors holding back: holding back at a time when valuations remain low. Why are they so shy? Maybe because they know that the economic axis is shifting and that maybe for the next few years, the real growth in shares will not be in London and New York, unless, that is, you invest in overseas companies choosing London and US stock markets as their home. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

Just for once the iPod wasn’t the star of the show - even the iPhone was relegated to the ranks of the also-rans. No, this time, the highlight in Apple’s latest quarter came in the shape of a much bigger and rather swankier box. It was the Mac’s turn to shine. In the quarter just gone the company sold 2.164 million Macs. To put that in context, until 2005, the company’s quarterly sales of computers were less than one million, and this time last year, Mac sales were 34 per cent lower.

You may recall us writing before about the halo effect. This is the idea that people are so chuffed with their iPods that they go out and buy a Mac. Well maybe that’s part of the reason. Maybe another factor is that customers are simply cheesed-off with the traditional PC; maybe Vista has been a disappointment for many. As those ads featuring the two blokes from Mitchell and Webb proclaim, the Mac has become fun, the PC dull.

Maybe it’s becoming more important that our computers look good in the home. PCs are machines that lurk behind desks, hidden out of the way, never seen, and only the quiet hum of their fans is heard. Macs, on the other hand, will often sit in pride of place, gleaming and gorgeous. Turning heads, and drawing envious glances from PC owners.

No doubt it’s a combination of all those factors, but the fact is, right now, it’s been estimated that the Mac now has an 8.1 per cent share of the US PC market.

Although in comparison with the Mac, the iPhone sat in the shade, it didn’t do half bad either. Sales in the quarter came in at 1.2 million.

But if there was a disappointment, it was the iPod. Sure, sales were up 17 per cent on this time last year, but at 10.2 million they were lower than expected.

Even so, with profits coming in at $904 million, compared to $546 million a year ago, and just $106 million three years ago, this is heady stuff from Apple.

But what really made analysts sit up were the company’s projections for the next quarter. Usually the company’s estimates are lower than market projections, but not this time. This time the company expects sales and profits to be even greater than the level predicted by the markets.

Earlier this year there were all sorts of rumours of an Apple tie-up with the Beatles, and talk of the release of an iPhone in the shape of a yellow submarine, and including every Beatles song ever released. It seems a reasonable bet to assume that the big Beatles launch will occur this Christmas. It also seems a reasonable bet that the iPhone is going to see sales rise rapidly.

How long can it last? There are threats to Apple. The Mac will face new opposition over the next few years, in the shape of Linux PCs. Linux software, which is after all, open source, and therefore all and sundry can develop for it, is improving all the time. There is also talk that Google is planning a move on the mobile phone market, with Linux-based operating software.

Mac’s problem has always been that it takes on the world. Microsoft dominated Apple, despite many believing Apple software was superior, because Microsoft had a host of PC manufacturers on its side.

In the world of mobile phones, the Google plan poses serious opposition, because the onus is on encouraging other phone makers to make their products Google compatible.

Right now, the iPod has become synonymous with listening to music. We used to talk about records, then it was CDs, now it’s the iPod. But we all know, as the stories of Bic and pens, and even Hoover and vacuum cleaners, tell us, that making your product name synonymous with the generic product is no guarantee of success in the longer-term.If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

I have a feeling of déj#224; vu. Cast your mind back to the late 1980s - the era of the Lawson boom. Back then few predicted the trouble that was to follow, and the reason was this: economists were often out of touch with what was really going on with the average consumer. Forward-wind to today and nothing has changed.

One of the most absurd pieces of logic we have seen permeate the business media of late is that the housing market is safe from a crash because repossession levels remain low. This is a ridiculous argument for the following reason.

Up until recently it was actually quite difficult to get yourself into so much financial trouble that your property ended up being repossessed. Why? Well, any time you had even a hint of financial problems, all you had to do was use the combination of soaring asset prices and easy availability of credit to top-up your mortgage.

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October 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

On Friday the record went to 61 quarters. It’s now been 15 years and a quarter since the UK last experienced a three-month period of negative growth.

And in the quarter just gone, the economy expanded by 0.8 per cent, at least so say the provisional estimates from the Office for National Statistics.

The UK has enjoyed quarterly growth of 0.8 per cent for four quarters in a row now. Annual growth is 3.3 per cent.

Some time ago the UK broke the record for the longest run of economic growth ever achieved. At least, it is the longest run for as far back as we have records. But then again, considering that before the Industrial Revolution the economy was agrarian, and therefore depended on the harvest, it seems unlikely the UK has ever enjoyed such an extended period of growth. Not ever, not since the time of William the Conqueror, Julius Caesar or even the builders of Stonehenge.

And if the economy does slow next year (well, it almost certainly will) then at least it is starting from a relatively strong position.If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

Let’s face it, with England’s loss on Saturday, with Lewis Hamilton’s inexplicable, disastrous race yesterday, we could do with some good news. And then, right on queue, comes the ITEM Club from Ernst and Young. “The credit crunch is an opportunity to re-balance the economy,” it says, “tighter lending conditions for homebuyers#133;will (not) lead to a serious correction in UK house prices,” and, “the threat of a major credit crunch seems to be receding at a speed which few people would have anticipated a month or so ago.”

The UK economy is, as you know, out of balance. We have become too reliant on consumer and government borrowing. That’s the reason why the ITEM Club appears to be welcoming the credit crunch with open arms.

Professor Peter Spencer, Chief Economic Advisor to the Ernst Young ITEM Club, said ,”Consumer confidence has been knocked by the credit crunch. However, the labour market remains strong and disposable incomes will improve as mortgage costs fall. We therefore expect a fairly modest slowdown in consumer spending growth, from 3.0 per cent in 2007 to 2.0 per cent in 2008, with demand picking up again thereafter. This is unlikely, however, to be sufficient to lead to a significant recovery in the saving ratio.”

The ITEM Club said it expects growth to slow to 2.1 per cent next year, pick up next year and then hit 3 per cent growth in 2010.

It thinks inflation will stay at around the 2 per cent mark, and as for the interest rate, it expects rates to fall moderately next year and then again in 2009, averaging 5 per cent in 2009 and 2010.
The ITEM Club says that while prices in the housing market have no longer been rising at double-digit rates, demand has been holding up surprisingly well given the increases in interest rates over the last year and the widespread view (until the Northern Rock debacle) that further hikes were pretty much inevitable.
Professor Spencer explains, “But at the same time the change to the interest rate outlook has led to a fall in two-year swap rates, which are key for the pricing of most new mortgages. And with the labour market strong, ITEM still thinks that it is unlikely that there will be a major housing recession.”
There was some bad news in the report. Professor Spencer put it this way: “The new Chancellor, Alistair Darling, is operating under very tight constraints. The January tax revenues, which are normally swollen by company profits, will give the first indication of the hit that Darling and Brown will take. If Darling manages to make Government departments stick to the agreements announced in this month’s spending review, he will effectively halve the real growth rate of public spending, from 4% per cent since 1999 to just over 2 per cent in 2008-09 and subsequent years.”
So then, all in all, then a positive outlook for the UK, with just a few minuses.

Is the ITEM Club right? In its report, a number of dangers do seem to be overlooked. Firstly, the threat of a fall in sterling. The IMF recently said the pound was overpriced. The high value of the pound has to an extent insulated us from some of the rises seen on commodity markets, but should the pound start to fall (which seems a real possibility), then the inflationary effect could be quite severe, and interest rates might need to pick up again.

The ITEM Club also seemed to overlook the shock to the economy that could occur as a result of highly indebted consumers suddenly finding the combination of tighter credit and more-modest growth in house prices, has removed the safety net of being able to release equity in their homes.

The best thing that could happen to the UK in the longer term is a lower pound, and higher interest rates. This will enable a business expansion of the economy going forward.

But, in the short term, such a change will pose a nasty shock, and the real problem facing the UK is how it can truly re-balance the economy, without causing problems en route. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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October 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

And so, in the US, bankers try to save the day with a new $75 billion superfund. The big idea is this: the fund can be used to buy out troubled debt instruments. To sweep up all the nasty particles of bad debt, and wipe them away.

The idea has come under criticism because the fund can not deal with the fundamental problem, which is that debt is soaring. It can not, as if by magic, make debt affordable for people whose loans are too high with respect to their income.

But there is another problem with this superfund. Not only is it trying to use smoke and mirrors to solve a deep-rooted problem, it could also be seen to be promoting the very attitude that got markets into such a mess.

Maybe the real problem that created the credit crunch was that no one seemed to know what their exposure was. Debt was chopped up into segments, thrown into investment vehicles and spread across the banking system like poisoned meat, lurking somewhere in a feast laid on at a top restaurant.

But it’s all rather convenient. Bankers like to put up a wall of complexity between themselves and the public. They quite like it when fog hangs around their activities. The most famous banker of the lot, Alan Greenspan, once said “…if I am making myself clear, it probably means you have misunderstood me.”

And then, this weekend, other bankers said the unthinkable.

Bill Rhodes, vice-chairman of Citigroup, talked about transparency. He even said something more akin to blasphemy. He said that financial institutions need to “take the hits.”

Just imagine that, a system for credit in which investors know the true exposure of the funds they invest in. Just imagine a situation in which banks take responsibility for their own lending. It’s not going to happen is it? If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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