Daily Archives: July 21, 2008 @ 11:15 pm (Monday)

Bloomberg: Inflation weakening some currencies

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Interesting how reports of higher inflation have often meant stronger currencies in the short run due to higher anticipated rates from the CB.

Inflation, however, by definition means the currency buys less of most everything; therefore, inflation and a weakening currency are one and the same.

But it can take a long time for markets to discount this.

Emerging-Market Currency Rally Dies as Inflation Hits

by Lukanyo Mnyanda and Lester Pimentel

(Bloomberg) The five-year rally in emerging- market currencies is coming to an end as central banks from South Korea to Turkey struggle to contain inflation, say DWS Investments and Morgan Stanley.

The 26 developing-country currencies tracked by Bloomberg returned an average 0.86 percent in the past three months, down from 1.63 percent in the first quarter, 8.2 percent for all of 2007, and 30 percent annually since 2003. For the first time in seven years, investors are less bullish on emerging-market stocks than on U.S. equities, a Merrill Lynch & Co. survey showed last week.

Confidence in the Indian rupee is weakening after inflation accelerated at the fastest pace in 13 years, stoked by soaring food and energy prices. South Korea’s won will drop this year by the most since 2000, while Turkey’s lira will reverse its biggest gain since at least 1972, the median estimates of strategists surveyed by Bloomberg show.


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NYT: Too big to fail?

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Too Big to Fail?


by Peter S Goodman

Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf.

This is ridiculous, of course. The US, like any nation with its own non-convertible currency, is best thought of as spending first, and then borrowing and/or collecting taxes.

Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds.

Also ridiculous. Japan had total debt of 150% of GDP, 7% annual deficits, and were downgraded below Botswana, and they sold their 3 month bills at about 0.0001% and 10 year securities at yields well below 1% while the BOJ voted to keep rates at 0%. (Nor did their currency collapse.)

The CB sets the rate by voice vote.

And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.

As above.

For one thing, this argument goes, taxpayers — who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel — will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly,

Yes, taxing takes money directly, and it’s contradictionary.

But when the government sells securities they merely provide interest bearing financial assets (treasury securities) for non-interest bearing financial assets (bank deposits at the Fed). Net financial assets and nominal wealth are unchanged.

or the Fed can print more money — a step that encourages further inflation.

This is inapplicable.

There is no distinction between ‘printing money’ and some/any other way government spends.

The term ‘printing money’ refers to convertible currency regimes only, where there is a ratio of bill printed to reserves backing that convertible currency.

Skip to next paragraph “They are going to raise the cost of living for every American,”

True, that’s going up!


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2008-07-21 Weekly Credit Graph Packet

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Looks and feels like spreads will be generally narrowing for a considerable period of time.

Bank earnings are better than expected with revenues growing nicely.

GDP, income, and spending being sustained by a growing government budget deficit, exports, and housing leveling off and no longer subtracting from growth.

‘Inflation’ continues with Saudi’s supporting prices and pass-throughs intensifying.

IG On-the-run Spreads (Jul 18)

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IG6 Spreads (Jul 18)

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IG7 Spreads (Jul 18)

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IG8 Spreads (Jul 18)

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IG9 Spreads (Jul 18)


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Re: Oil as a % of global GDP

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(an email exchange)

>   
>   On Sun, Jul 20, 2008 at 10:46 PM, Russell wrote:
>   
>   Brad Setser, at Follow the Money, presents a couple of graphs on changes in
>   oil export revenue: The Oil Shock of 2008.
>   
>   The following graph shows the Year-over-year change in oil exports as a
>   percent of world GDP (and in billions of dollars).
>   
>   

>   
>   Year-over-year change in oil exports
>   
>   This calculation assumes that the oil exporters will export about 45 million
>   barrels a day of oil.
>   
>   Each $5 increase in the average price of oil increases the oil exporters’
>   revenues by about $80 billion, so if oil ends up averaging $125 a barrel this year
>   rather than $120 a barrel, the increase in the oil exporters revenues would be
>   close to a trillion dollars.
>   
>   Assuming oil prices average $120 per barrel for 2008, the increase in 2008 will
>   be similar to the oil shocks of the ’70s.
>   
>   

Right, the notion that oil is a smaller % of GDP and therefore not as inflationary was flawed to begin with and now moot.

Two more thoughts for today:

First, the second Mike Masters sell-off may have run its course. The first was after his testimony in regard to passive commodity strategies which I agree probably serve no public purpose whatsoever. The second was last week as markets expect Congress to act to curb speculation this week, which they might. Crude isn’t a competitive market (Saudi’s are the swing producer) so prices won’t be altered apart from knee jerk reactions, but competitive markets such as gold can see lower relative prices if the major funds back off their passive commodity strategies.

Second, just saw a headline on Bloomberg that inflation is starting to hurt the value of some currencies.

Third, the Stern statement will continue to weigh on interest rate expectations up to the Aug 9 meeting.

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