Archive for November, 2009|Monthly archive page

Dubai Debt Crisis: a Case to Review Recovery?

In Economics, Financials on November 28, 2009 at 15:20

On Wednesday the 25th, Dubai World, a government-owned company that manages and supervises government’s investment portfolios, announced a six-month deferral on $59 billion of its total $80 billion debt. The announcement came just before a long vacation for the markets and immediately triggered a sellout in equity markets across the world.

The view is, now, rather blurred in terms of the sustainability of recovery. Gordon Brown and Nicolas Sarkozy poured oil on troubled waters reassuring the global economy was strong enough to absorb a shock of such a magnitude. What is more, international banking institutions are unlikely to be hit by, given their weak exposure to Dubai debt.

Abu Dhabi has already assisted indirectly through the UAE Central Bank and two private Abu Dhabi banks, with $15 billion and is expected to pledge more funds.

Although this is the biggest debt crisis since Argentina in 2001, its effects will seemingly be contained within regional grounds. The Dubai crisis per se is not capable on jeopardising global recovery. The nature of the problem however, raises concerns about the future of other highly indebted nations such as Ireland. A series of debt crises would be a derailing factor to recovery.

by the Self-Seeker

Latin American Inflation Fears

In Financials, Politics on November 25, 2009 at 14:08

My persistent interest in the dollar highlights its paramount importance in the course of the global economy. As the world’s major reserve currency, the dollar value effects extend across the world. Emerging markets seem to be also potential victims of the weak ‘greenback’ as dollar-driven asset bubbles spread towards the continent.

In an effort for Latin American states to stabilise their currencies against the dollar, central bankers have been buying foreign reserves which in turn has increased the money base fuelling domestic inflationary expectations. The Brazilian government has imposed a 2 percent tax on capital inflows destined to its equity and debt markets, to ease the frenetic surge of its currency. Brazil’s ‘real’ has risen more than 30 percent against the dollar this year.

Latin America is expected to grow at almost 3 percent next, much quicker than the developed world. If Latin America is to avoid another currency-crisis, officials should be very cautious on the accumulation of reserves as this may lead to uncontrollably rising inflation and future depreciating pressures on their currencies. Manipulating their interest rates may engender homegrown deficiencies and risk future currency stabilisation. The weak dollar is shucking Latin America’s blood deep and slowly.

by the Self-Seeker


Fed’s Plan on Exit Strategy

In Financials, Politics on November 18, 2009 at 16:44

With the debate on the existence of asset bubbles escalating, analysts are forecasting Fed’s next move on the conduct of monetary policy. This week, Fed’s Vice Chairman, Donald Kohn, said there were no signs of an asset bubble and pledged to continuing expansionary monetary policy. When the time comes and the Fed decides its time to curb inflationary expectations, there is a consensus it will rely on raising the interest paid on banks’ reserves.

Congress granted the right to the Fed to pay interest on banks’ reserves on October 2008 in an effort to address the issue of undercapitalisation in the broader crisis-context. With the Fed paying higher interest on banks’ reserves, it creates a floor on their portfolio returns and forces banks to keep their money with the Fed in case market returns are lower. The objective here is to reduce banks’ aggressiveness and contain their risk-appetite. It also works as an indirect way to withdraw funds from the markets and reduce the likelihood of asset bubble build-ups.

Tagged along to this untested monetary policy, the Federal Reserve is also expected to engage in ‘open market operations’ and sell T- bills for a short-term period to private banks. Federal Reserve Bank of St. Louis President, James Bullard, anticipated that the Fed will not increase key rates until 2012, arguing Fed’s policy record on similar occasions of the recent past.

I happen to find this new policy of higher interest on banks’ reserves a very interesting approach on this issue as it works as the middle solution between the opposing challenges of inflationary expectations and growth. It manages to set a lower boundary on market liquidity without directly forcing money withdrawal and threatening the economy with contractionary spiral effects. Depending on market returns and macro levels, the Fed can accordingly adjust the interest and better influence liquidity.

by the Self-Seeker

Weak Dollar Fuels Oil Price Hikes

In Financials on November 14, 2009 at 13:51

oil on waterDespite record-high inventory levels (rose 4.3 per cent in OECD countries on annual basis), oil prices have exhibited a strong positive momentum primarily driven by global recovery led by the emerging economies. However, Exxon Mobil’s CEO and Chairman Rex Tillerson told CNBC that a big boost comes from the weak dollar.

As oil is priced in dollars, the cheaper ‘greenback’ makes oil more affordable and attractive to investors. What is more, oil can also act as a hedge between commodities and the dollar. Oil has more than doubled to above $70 from its $30 lows but is still half of its all time highs back in July 2008. In Tillerson’s view, the weak dollar is contributing about $20 to $25 dollars to the overall oil prices at the moment.

This week, IEA revised oil prices slightly higher for 2010. It also warned that persistent higher prices may derail economic recovery. But is that truly the case? Not necessarily. Firstly, oil prices would have to climb above $140 a barrel to start erasing growth and secondly, even if growth was halted, prices would fall rapidly, supporting a quick recovery.

One should be more worried about the dollar value than the price of oil as its side-effects on the economy are deeper and more complex.

by the Self-Seeker

Investors Waver on Exit Strategy

In Financials on November 9, 2009 at 19:01

investor exit strategyDollar-driven asset bubbles have created imbalances in the financial markets sending mixed signals to investors. With the gold value at all time high levels and the ‘greenback’ on the Mac menu, investors wonder whether this is the time to pull back of the rally.

For how long will commodities keep rising? Rogue investor Jim Rogers sees no ceiling for the gold and other commodities anytime soon, arguing the build-up of inflationary expectations and the push from emerging markets. With the US government trying to solve the crisis with more debt, we don’t seem to have learnt from our mistakes. Creating artificial consumption may be the quick way out of the crisis but it will trigger new ones.

Investors are pondering on Fed’s exit plan instead of focusing on their portfolios exit strategy. A lot will depend on Fed’s commitment to zero rates cause as soon as rates start to increase, the dollar will rebound and bubbles will deflate. I say the asset party can still go on but don’t ride with it too long unless you carefully hedge out risk.

by the Self-Seeker


Swapping Dollars for Bullion

In Financials, Politics on November 5, 2009 at 13:30

gold4The Central Bank of India’s purchase of 200 tonnes of gold from the IMF yesterday took the market by surprise, sending the gold price sky-high to a record of $1087.45 per troy ounce. This 2.6% price rise on the day can also be attributed to speculation among traders that other central banks would follow suit.

India’s finance minister, Pranab Mukherjee said that the 6.7bn dollars worth gold acquisition underlined the power of an economy that had the resilience to attain 9% economic growth in a year. He contrasted this strength to the weakness of the global stage, especially that of Europe and North America.

The diversification of foreign exchange reserves seems to have become a trend among a large class of emerging economies, aiming to rebalance their holdings of dollar denominated assets. Venezuela, Mexico, Russia and the Philippines are also buying, albeit in small amounts. This seems to be a reversal of the past two decades of anti-gold sentiment amongst central banks, where predominantly Asian countries hoarded US Treasuries as their main reserve asset. China for example, is currently investing a portion of its foreign exchange reserves in commodities trading houses, oil fields and mining companies.

The allure of gold reflects concerns about the health of the US dollar and the Fed’s quantitative easing policy. It is not just central banks buying gold. Hedge funds and institutional investors are too, as a means of diversifying their portfolio risk by investing in assets with a negative correlation to the ‘greenback’. This buying surge has been further accentuated with the financial crisis, sending households to seek refuge in gold.

One cannot help asking, was it the pull of gold or the push of the dollar behind the Reserve Bank of India’s swap? Probably the latter..

by the Undercover Economist

Fertility Rates Fall: Good or Bad?

In Misc on November 2, 2009 at 21:40

fertilityRemember the time when Malthus was worried that population growth will eventually absorb all food supplies on the planet? Me neither, but you know what I mean! Fertility rates in developing economies have dropped to as low as 2.1 which is the threshold for the so called ‘replacement fertility’, an indicator of zero population growth.

It is undoubted that economic development and the modernisation of lifestyles across civilizations, have been compressing fertility rates long time now. What was unexpected was the pace at which those rates fell in the developing world. Social changes in developing economies have been far more rapid than in the developed world years ago.

Should we be worried about falling fertility rates? Probably not because as many scientists have claimed, our population has far exceeded the earth’s carrying capacity. Although not a catalyst, overpopulation was always a threat to climate change and biodiversity. Nevertheless, low fertility rates translate in more young workers required to work for each pensioner as more people exit than enter the workforce, something referred to as the ‘dependancy ratio’. This is likely to affect pension schemes as governments will have a smaller platform to absorb funds from.

Even though we’ve reached the replacement rate threshold, population will still keep growing due to positive population momentum  as large parts of the population are of child-bearing ages. Besides the fiscal effects that governments will have to discipline, there isn’t any real threat on the horizon. This is good news..

by the Self-Seeker