| Rates | Close | Change |
|---|---|---|
| Oil | 134.68 | 5.63 |
| Gold | 930.9 | 10.4 |
| $ to £ | 1.9716 | 0.003 |
| € to £ | 1.2499 | -0.0062 |
| $ to € | 1.5774 | 0.0102 |
Oil, gold, pound, dollar, euro, 2008-05-22
FTSE 100, Dow, NASDAQ, 2008-05-22
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 6198.1 | 6.5 |
| Dow | 12601.2 | -227.5 |
| NASDAQ | 2448.3 | -44 |
Oil: the blame game begins
The oil debate rumbles on. Yesterday saw the release of the latest set of minutes from the Bank of England. The recent inflation report from the Bank made the release of these minutes almost irrelevant. We already knew it was worried about inflation, but that MPC member David Blanchflower wants to see rates slashed and the minutes just confirmed this – with the voting going 8-1 for rates staying on hold.
But the really interesting bit was this paragraph: “Speculative purchases did not seem to be the prime cause of the recent increases in the oil price. More fundamental demand and supply factors had probably been at the root of its steep rise during recent months and there remained considerable uncertainty about the oil price outlook.”
Meanwhile, in the US, oil company bosses were hauled up in front of Congress.
And the Senators roared their displeasure. Top of the pride was Sen. Richard Durbin, D-Ill who said, “You have to sense what you’re doing to us – we’re on the precipice here, about to fall into recession…Does it trouble any one of you – the costs you’re imposing on families, on small businesses, on truckers?”
To which the oil chiefs said, “Hey, it’s not our fault, blame the Arabs – oh, and those environmentalists, blame them too… and the Chinese.”
Well, actually, they put it more diplomatically than that.
Robert Malone, who is both chairman and president of BP America Inc., said, “Today’s high prices are linked to the failure both here and abroad to increase supplies, renewables and conservation.”
John Hofmeister, president of Shell. put it this way: “The market is squeezed by exporting nations managing demand for their own interest [that’s the blame the Arabs bit] and other nations subsidizing prices to encourage economic growth [and that’s the Chinese].
Meanwhile, others said that if only they had been allowed to drill in Alaska and the Rocky Mountains, then there would be plenty of supply.
It seems that everyone is looking for someone to blame.
There is now a growing feeling that consumers of oil need to get together and negotiate in one block with OPEC. And judging by comments we reported on yesterday, that includes the Chinese.
In truth, though, we are seeing the grindings of an ancient wheel. Take as an example of this wheel the Arctic hares and lynxes.
In his book, Why Most Things Fail, Paul Ormerod told the story of how statisticians in Hudson Bay had observed a regular cycle in the population of these two species. Further study revealed that when the population of hares in the region was high, the lynx thrived and its populace increased in size rapidly, until the predators were consuming hares faster than their long-eared prey was able to reproduce. As a result a shortage of hares followed, and a greater effort was required by each lynx to catch its dinner. In time, mass starvation of the lynx occurred, and its population fell rapidly, the hares then found little impediment to their own struggle for survival, until eventuality the cycle repeated itself.
The mistake these two creatures were making was that they were not seeing the big picture. Each boom caused the next slowdown because they failed to take into account that the actions of individual hares and lynxes were being duplicated across the entire population.
Throughout the 1990s, oil was cheap – very cheap. As a result, investment into oil exploration was low. But, more seriously than that, investment into finding alternatives was low too. The US buried its head in the sand over global warming – development of solar, wind, wave and tide power was held back.
Forget about fears over climate change, renewables only really hit centre stage when oil rose above $50 or so.
The period of cheap oil encouraged the use of those great big gas guzzlers we see on the roads – the SUVs.
This is changing. A couple of years ago, if you drove around in a 4-by-4 it said this about you: that you were rich and successful. But now attitudes seem to be changing, and the perception of 4-by-4 is changing. The likes of Jeremy Clarkson with their enthusiasm for burning rubber and noisy engines, seem a little passé.
In the US this change of attitude has manifested itself in the success of Toyota and the decline of GM, Ford and Chrysler.
When economists look at historical trends they often seem to forget how new things are. Sure we can trace the price of oil back over 100 years now, but actually the world has changed so much over that period, that it seems unlikely there are many lessons to be drawn today on how oil behaved in the past.
The current pressures that are pushing up the price of oil are different to those that were in place in the 1970s.
But human nature and the laws of economics do not change. Oil at $130 a barrel is simply unaffordable. Countries which subsidise their oil will soon find this is just too expensive.
The only way oil will remain at current levels will be if the global supply of money expands and inflation soars – globally.
And the jury is still out on whether that is a real fear.
US and UK growth forecasts changed again. Why do the statisticians get it wrong?
Why do official statistics lag behind what we all know?
Yesterday both the Fed and the Bank of England spoke. The Fed kind of had bad news. At least, bad news in the sense that it told us things were tough in the US, but only kind of, because we already knew that, and the real surprise seems to be that it has taken the Fed so long to realise it.
As for the Bank of England, well, it seems to be ahead of the curve, and the real question mark in Blighty should be applied instead to the Treasury, which still seems to be stuck in the land of delusion.
Yesterday, the Fed revised its estimates for US growth this year. And it has gone from bull to bear. As recently as January, it was projecting growth of between 1.3 and 2 per cent this year. Given all the doom and gloom that was about at that time, those projections seemed remarkably good, even a tad unbelievable. Well, now the Fed has released its latest set, and this time it is predicting growth of between 0.3 and 1.2 per cent. Now that makes a lot more sense, although even that range still seems a little optimistic.
But it is curious how official data gets it wrong – continuously erring on the optimistic side when things are getting worse. We have a sneaky suspicion that when the pick-up finally occurs, the Fed will once again be behind the curve, but this time will be too cautious.
But the Bank of England, on the other hand, seems altogether more switched-on to reality.
According to this morning’s FT, the Bank of England is now forecasting growth of 1.5 per cent next year. Twelve months ago, it was predicting growth of 2.8 per cent in 2009, but then a year ago things were very different, and perhaps you can’t blame the Bank for that.
The Bank’s pessimistic prognosis differs starkly with the Treasury, which still expects growth of between 2.5 and 3 per cent, so that is a huge discrepancy.
Mind you, even the Bank of England’s more pessimistic forecast still seems to be on the high side. If you believe the UK is lagging 12 months behind the US, then expect next year’s economic performance to be worse even than that.
The National Institute of Economic and Social Research has also been forecasting highish growth. For example, it recently forecast growth of 1.3 per cent in the US this year, and 1.8 per cent for the next.
It may be, of course, that the predictions for the various central banks and the NIESR are right. But, frankly, it seems more likely that they have grossly failed to grasp the seriousness of the current situation.
Maybe in their models they take insufficient account of human psychology, and have failed to grasp the factors that motivate us – factors such as house prices.
After all, both US and UK growth have been down to high consumer borrowing. Consumer borrowing that in a previous era would have been considered irrational. Official statistics just seem to assume things will go on as before. That consumer behaviour is somehow an external factor; what an economist, or indeed a biologist, would call exogenous.
But in reality, human behaviour should form a part of these economic models. When things are going well, we all get optimistic and scream out for more stuff to buy and use phrases like “retail therapy.”
When things are not so good, we start saving and cut back, and stay at home and watch the Apprentice. This in turn makes the economic environment less favourable still.
So maybe human nature is in fact endogenous, and maybe that is why economic models fail to get it right.
Is deflation the real threat?
Inflation is the big fear at the moment, right? Prices are soaring, the money supply is expanding, buy gold quick.
Well. Don’t be too quick.
There is a school of thought to say the real problem is deflation.
First off, remember, rises in the price of oil and food do not necessarily mean an upward inflation spiral. Long-term inflation only really results if wages rise too, and that normally requires a sharp rise in the money supply.
And the money supply has expanded. Recently, the growth in the US M3 money supply hit a 37-year high. Well, actually, there are no official estimates of this measure any more. The US government doesn’t bother, but Capital Economics does, and it is their measure we refer to here.
Besides, the US does still count the M2 measure of the money supply and the three-month-on-three-month annualised rate has more than doubled, from 5 per cent at the start of the year to nearly 12 per cent in April.
So if the money supply is rising, inflation will rise too, as sure as eggs is eggs.
But then, as Capital Economics said, “The source of that acceleration is the swelling flow of money into retail money funds, which is more than offsetting a moderation in the growth of money on deposit.
“These flows into retail money funds reflect portfolio shifts, however, as investors flee riskier assets such as equities that aren’t liquid enough to be counted as money. As such, the pick-up is not necessarily inflationary.”
Then there’s house prices. They are falling. If that does not exert a deflationary effect, nothing will.
Finally, you may have heard this one, but right now there is a credit squeeze. And while some are still in denial, it seems highly unlikely that the banks are going to return to their pre-credit crunch days and lend, lend and lend for a very long time.
There is a growing feeling that once the dust has settled on this particular stage, and especially when oil and food start falling in price, deflation will once again be the watchword.
The picture gets a bit more murky, however, when you take into account the likes of China. For many of the BRIC countries, inflation is rising, and that has all the hallmarks of something a lot more permanent too.
Ultimately, it may all depend on the exchange rates and whether China et al allow their currencies to float freely.
It may be we could be heading for a period of low inflation in the West, and high inflation in the East.
It will be interesting to see how it all pans out.
House prices, no crash today, thank you, says world’s greatest newspaper
So the Council of Mortgages of Lenders (CML) have joined the “house prices will fall” club. They now reckon house prices will fall 7 per cent this year. Yet, as one bull turns bear, other bulls strike back. According to the Daily Express, or as it likes to be called, “the Greatest newspaper in the world” – “House prices won’t crash.” After leading with that headline it proceeded to give us a lesson in economics that all economics professors should take note of.
Finally, the Royal Institution of Chartered Surveyors revealed data showing strength is returning to the buy-to-let market.
Not so long ago, CML was still predicting house price growth of 1 per cent this year, an odd prediction, but then as you know, those within the UK housing market do seem be to the last to spot the signs.
Now it is predicting a 7 per cent fall in prices, and net lending to crash to around £55 billion this year, half last year’s £108 billion. It expects to see 45,00 possessions this year, from 27,100 last year, but just 8,200 in 2004.
In all, CML is predicting 770,00 house sales this year, from 1.22 million last year. It is worth keeping an eye on that 770,000 figure. For as long as demand and supply are both falling, prices may not drop by too much. But if there is a jump in supply perhaps because, say, 57,000 second homes come on the market – as was warned here yesterday, or because possessions this year end up being a lot higher than 45,000, then supply may exceed demand, and prices will fall quite fast.
But the real puzzle is this. According to the latest figures from the Halifax, house prices are already 5 per cent down from last summer’s peak, so if the CML is right, then we are already approaching bottom.
Then again, according to John Wriglesworth, housing economist at Wriglesworth Consultancy, “There is no sign of a property crash and never has been. Predictions otherwise have been grossly exaggerated. What we have seen is a small correction from a massive peak and there is very little chance of falling into an abyss.”
At least that is what he told the Sunday Express.
For a good laugh read the comments alongside the article. Since the Express says it is the greatest newspaper in the world, then clearly, since the media never lie, it must be. And clearly they are right and house prices are fine. As one comment on the paper’s own blog said, “I am quite sure the Daily Express headline writers can hold their own in any debate on economics. I am pretty sure some of them have GCSEs and can even spell it, which fills me with confidence.”
Finally, there was RICS. Apparently, owners experiencing difficulty selling their properties, have turned to the rental market to take advantage of rising yields. Twenty-eight per cent more Chartered Surveyors reported a rise than a fall in tenant lettings, up from 17 per cent in the last quarter. Significantly, demand for both family homes and flats increased as many would-be buyers found themselves unable to step on to the property ladder. Rising yields may have stopped the recent retreat of landlords from the market. The percentage of landlords selling their properties when tenant leases expire fell from 4.6 per cent to 4.2 per cent.
RICS spokesperson James Scott-Lee commented: “The sales market’s loss is the lettings market’s gain. Some would-be sellers are retreating from selling and letting or re-letting their properties as they wait for mortgage lenders to offer buyers more favourable lending criteria. While transaction numbers in the sales market are weak, many are taking advantage of rising rents and yields in the private lettings sector.”
Some even argue that the buy-to-let market will save the housing market. As people choose to rent instead of buying, yields will rise, making it more profitable to invest in properties.
There are two problems with that theory. Firstly it is still a lot cheaper to rent than buy, and yield from rent only covers mortgages if there is a substantial deposit. Surely more buy-to-let investors were driven by a thirst for a growth in their property’s portfolio – yield was just their way of covering costs.
Secondly, in countries where renting is more popular, such as France, house prices are much lower.
FTSE 100, Dow, NASDAQ, 2008-05-21
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 6191.6 | -184.9 |
| Dow | 12828.7 | -199.5 |
| NASDAQ | 2492.3 | -23.8 |
Oil, gold, pound, dollar, euro, 2008-05-21
| Rates | Close | Change |
|---|---|---|
| Oil | 129.05 | 1.78 |
| Gold | 920.5 | 16 |
| $ to £ | 1.9686 | 0.0163 |
| € to £ | 1.2561 | -0.0021 |
| $ to € | 1.5672 | 0.0156 |
Oil bubbles up to $130
To you and me it will soon be summertime, but for oil analysts it’s got another name: the driving season.
It is that time of the year when Americans jump into their massive road wagons, fill up the tank with petrol and hit the road, drinking up gas as hundreds of miles of tarmac disappear behind them. At least that is how it used to be.
As a result, this is a time of the year when oil often goes up in price. Oil is like that, it follows the seasons. There’s the driving season, and then the hurricane season, then things tend to go quiet, providing that there isn’t a war against terror season, until the following year.
But of late, oil has been no respecter of these conventions. One day it seems to go up in price for no better reason than it’s Monday, and then the following day it rises because, well, because it was Tuesday.
Yesterday it was one of those Tuesday-driven oil hikes – but it was enough: enough to push oil all the way up to $129 a barrel, yet another all-time high. But here is the real worry: today is Wednesday, will those mid-week blues send oil over the $130 mark for the first time ever?
Well, actually, additional reasons were given for the latest hike. The latest news came from OPEC, when it said it was not planning any supplementary meeting to discuss rising oil output, so that means the next meeting won’t be until September.
But then the other day, Saudi Arabia said it was upping output by 300,000 barrels a day – but even then the price went up.
It seems that if the news is good oil goes up in price, if it is bad it goes up too.
The Chinese earthquake has also been cited as a reason for oil going up, as damage to local hydro-electricity energy plants will lead to a shortage of home-grown energy.
Yesterday also saw the revelation of the news that the US was now importing less oil than before. According to the US Department of Energy, US oil imports as a percentage of total consumption are expected to fall from 60 to 50 per cent by 2015, before then rising to 54 per cent in 2030.
So the US is trying its hardest to break its addiction to oil, and as it emerges that it is having some success, oil shoots up in price. Does that remind you of anything?
Of course, a raft of reports have been published predicting oil will rise. One moment headlines are made with a prediction of oil at $146, then it’s $150, and now the latest is saying $200 a barrel.
No doubt these stories are right, and oil has got much further to rise in the SHORT-RUN.
The oil bandwagon is getting busy too. Yesterday, Norman Baker, the Liberal Democrats’ shadow transport secretary slammed government transport policy because it was based on the assumption oil will be trading at half the current price at the end of the next decade. “It is absurd to assume that the price of oil will be $70 a barrel in 2020. Nobody outside the government thinks that will be the case,” he said.
Clearly, then, the Lib Dems are experts on commodities – it will be interesting to get their view on the FTSE 100 in 2020.
Right now, oil is far too expensive. People just can’t afford it. Alternatives will be found, fuel-efficient cars will become ever more popular, true renewable energy (not that bio-fuel nonsense) – solar, wind, wave and tide – will become more efficient.
If oil is anything like $200 in 2020 – in current prices that is, then we will have messed up energy policy big time.
