pound slides, but so does oil

pound slides, but so does oil

September 28th, 2009

Pound slides, but so does oil Oil slides: why? Is G20 set to take over from G7? US housing recovery stalls Sterling’s fall: blessing or curse?

If you are holidaying on the Med, like the author (Michael Baxter) was last week, then the fall in the pound is bad news. But for UK PLC it’s good, very good. The pound is now back down to 1.1 euros to the pound. That’s way below the level required for purchasing parity, which is reckoned to be somewhere in the mid 1.20s. There are those who argue that a recovery based on falling currencies is not sustainable. But that surely misses the point. The pound was way too high against the euro for years. It was all a part of the UK bubble. The UK boomed on the back of soaring house prices, profits in the City which we now know were built on sand, and consumer debt. But with the pound so high, there was little chance of the export sector making any headway. In many ways we were paying the price of the City’s recklessness twice over. We now know the Square Mile’s profits were based on short-termist policies. And when this short-termism finally corrected, the credit crunch resulted. But not only did the City help create a bubble, it also pushed up sterling too. It is called the Dutch disease, so named after the North Sea oil revenue pushed up the Dutch currency, the guilder, supposedly making the rest of the economy uncompetitive back in the 1980s. Well, the UK, too, suffered with precisely that problem during the heady days when we were an oil exporter. But as North Sea oil ran out the City took up the baton, keeping the pound up high, which in turn had a decimating effect on the rest of the export sector. Given the reversal of fortunes within the financial sector, it is no surprise that sterling has fallen so precipitously this year. The most recent drops have been put down to Mervyn King, his apparent enthusiasm of quantitative easing, and comments that he found the recent weakness in sterling ‘helpful’. But that only explains the movement of the last few days. The overall weakness of sterling is down to more fundamental factors. It doesn’t look good of course. The UK’s machismo is badly affected. People who walk around in the dead of winter wearing just a teeshirt may think they look hard, but most of us think they are being a tad foolish. Those who fret over the fall in sterling, are akin to those who bemoan the wearing of a coat when it is snowing outside.

Oil slides: why?

Oil is back to down the mid 60s. It is almost $10 off the highs seen around 22 August. It does seem there are two clearly contradictory views on oil. On the one hand, there are those who say the rises in oil and other commodities are inevitable as demand from China et al starts to rise again. On the other hand, there are those who say the recent rises in oil were down to speculation, that falling demand from the West is counteracting rising demand from the East; that there is plenty of oil out there, and it is just that the hikes seen over the last few years were down to short-term misalignment of demand and supply. What is quite interesting, however, is that the recent fall in oil has coincided with a collapse in the Baltic Dry Shipping Index. This index is supposed to reflect the cost of shipping commodities. It has halved since the beginning of June. So what is going on? Part of the fall can be put down to a recent increase in shipping capacity. It takes time to make ships, a lot of time. During the boom, demand for new ships was rising, and just lately they have begun to appear in docks around the world. So, in part, the fall in the index is down to there being more ships out there. The thing is, though, the supply of ships has been rising since January, but is only recently that the Baltic Dry Index has begun to fall. Capital Economics reckons the recent fall in the index is primarily down to falling demand for oil from China. If it is right, that is both good and bad. It is good because it means, well, it means oil is down in price for good, solid fundamental reasons. But also it is bad, because we need to ask why Chinese demand is falling. There is a real fear that the recent Chinese recovery is made of straw, and that once the fiscal stimulus ceases, growth will come skidding to a halt.

Is G20 set to take over from G7?

Presumably Bob Geldof is concerned. He may bully Western politicians, and have some of them quaking just a tad when he starts pontificating about how they must do more. But can you really expect the Chinese to be quite so alarmed? Why, it seems most Chinese politicians weren’t even fans of the Boomtown Rats. But the loss of influence of Bob Geldof aside, it seems that the fall of the G7 and the rise of the G20 has ramifications that go even beyond the influence of rock music. Quite honestly, it seems the G7 is on its last legs. Barack Obama wants the G20 to become a permanent thing, with the world leaders meeting regularly, not just when there’s these nasty economic crises. There’s a good chance he will get his wish, not that everyone in the US shares that wish. So it seems that, as a member of the G20, the pressure on China to let its currency float freely will mount. But there are other issues here. Some economists believe the view is wrong that if the yuan was left to the market it would appreciate. The argument runs like this; Chinese citizens have only very limited access to overseas markets. If the Chinese money markets were allowed to float free of government interference, then it is possible the flow of Chinese savings abroad would actually cause the yuan to fall. It just goes to show, things are not as clear cut as some people like to think they are. Meanwhile, the IMF is under threat. The BRIC counties want more say over how the IMF is run; they want more votes. The snag is, if that happens, the likes of the UK and France will lose influence. The US, on the other hand, will still have a power of veto. The thing is, the IMF is deeply unpopular in parts of the world. Many critics say the IMF made the East Asia crisis of 1996 and the Russian crisis of 1997 more serious than they needed to be. What is true is that we do see certain examples of double standards. When the Western economies hit trouble, born of debt, then they responded with a good old Keynesian push. When the economies of Asia and Russia hit those kinds of problems, the IMF enforced polices that were almost the precise opposite. And this, by the way, influenced China’s policy. After that, China looked at what the IMF did when her neighbours hit problems and vowed never to be put in that position herself, which explained her deliberate policy of encouraging savings while she grew. China is unique in history in seeing such meteoric growth while maintaining a massive balance of payments surplus. This in turn helped create global imbalances. The truth is that Western attitudes promoted by the IMF in the 1990s were a contributing factor behind the crisis of 2008 and 2009. And now, economies of the Southern Hemisphere are looking towards forming their own answer to the IMF, in a Bank of the South. The IMF is paying the price of its high-handedness of a decade ago.

US housing recovery stalls

Sales of new US homes rose in August, but only because the data from July was revised. It seems July was worse than originally thought, meaning all that talk of US housing recovery last month may have been overdone. August did in fact see a 0.7 per cent rise in new homes sales on July. Furthermore, it seems the modest rise in sales was almost entirely down to a tax credit in California, a credit which has now come to an end. Analysts are now fearing falls in the months ahead. Article author: Michael Baxter from Defaqto,to see more articles by the author go to: http://defaqtoblog.com/iabn/ For financial advice call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400



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