The weekend news agenda was dominated by news from North Africa with the riots and civil disturbance in Egypt taking centre stage. The civil disturbance issue had started in Tunisia and then spread to Egypt although so far the country in the middle Libya appears unaffected. I feel that firstly one should express sympathy for the dead and injured. If we then look for causes of the unrest then whilst there are issues with corruption and other problems with her autocratic government a large factor at the bottom of this has been rises in food prices. Some 40% of Egypt’s population lives on less than one US dollar per day and they have reached the point where they are struggling to be able to feed themselves and their families. This is a human cost to the rise in commodity prices that I have been chronicling since late summer 2010. This puts a human cost too on the rise in the foodstuffs component of the CRB index from 400 in late November of last year to 479.68 now. A rise of just under 20% in basic food costs affects everyone but is particularly painful for those with little money, some of whom must have been going hungry perhaps very hungry.
The effect of Egyptian and Tunisian unrest on world markets
If we start with Egypt her EGX 30 equity index fell by 6.1% last Wednesday before falling some 10.5% on Thursday and is now closed for the time being. Other Arab stock markets fell in sympathy. The oil price as represented by the West Texas Intermediate measure rose by 4% or US $3.70 per barrel as fears for the security of oil supplies from the Gulf rose. It is now just under US $90 per barrel. Stock markets took a pounding on Friday in Europe and the United States and this morning both the UK FTSE 100 and the German Dax equity indices are down by a further 0.6%.
One area which has benefitted has been the US government bond market where as cash has moved to so-called “safe-havens” has seen a rise in price and a fall in yields providing some relief for a market which was in a poor run. Sometimes improvement comes from the most unexpected source! The US ten-year Treasury Bond yield has fallen back to 3.33%. Some of the other government bond markets in the worlds have also seen prices rally like the German Bund or the UK gilt but by much smaller amounts. As I shall discuss later this improvement has yet to reach the peripheral Euro zone nations.
A Cause of this? Loose US Monetary Policy?
For some time there has been a debate over how and indeed if the extraordinarily loose monetary policy being implemented by the US central bank the Federal Reserve will affect the rest of the world. Initially there was fear over the effect on exchange rates combined with fears as to what this might do to world asset and commodity markets. It would appear that the effect of pumping an extra US $75 billion of cash a month into the hands of those who used to own Treasury Bonds has helped to drive up food prices. For the people who are struggling to feed themselves Mr. Bernanke’s claim that he is “100% sure” that he could deal with any inflationary response to this must ring very hollow in their ears.
Indeed if you look at US inflation it is hard to avoid the conclusion that it is recorded as being so low mostly because of the changes made to the recording of it which started around the time of Jimmy Carter’s Presidency. Indeed an American economist.John Williams, who records all such data faithfully believes that if all such changes were reversed ( the changes that have taken place have all,just by coincidence of course, led to recorded falls in the official consumer price inflation rate) the US inflation rate would be what it was then around 10%. I wrote an article on the under-recording of US inflation back on the 2nd of July 2010.
It’s a long link from the debasement of US inflation indices to the asset purchase policy of the US central bank to the rises in food prices that have led to riots in North Africa but there is also some truth in it.
What is happening with the oil price?
I like to stick with regular benchmarks to provide consistency and for the oil price this has been the West Texas Intermediate or WTI measure I discussed above. From time to time such measures can be questioned by events. Currently there has been a decoupling between WTI and the Brent measure with WTI just under US $90 per barrel and Brent just under US $99 per barrel. So they are not telling the same story! Whilst WTI has the most active futures contract Brent is used to price two-thirds of global oil including North Sea grades such as Forties and Ekofisk and West African exports including Nigeria’s Bonny Light and Angolan Nemba. So in future I will look at both and for now will leave you with the thought that as Brent has risen there has been arise in oil prices on the blind side so to speak! I know some readers specialise in energy markets and will be interested in their thoughts on this decoupling of oil price benchmarks.
US Economic Growth
The Bureau of Economic Analysis released these numbers on Friday.
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate.
There are two initial thoughts. The first is that it is a preliminary estimate which is likely to be revised, maybe heavily, an example of this came in the same report where growth in the second quarter was revised from 2.5% to 1.7% and growth in the third was revised up from 2 % to 2.6%. The second is that these numbers are annualised so divide by four for an international comparison. Ok for someone from the UK like me there was also a third thought that these were on the face of it much better than our figures!
Analysing the figures
If we look to the breakdown of the figures we see that this time inventory growth was negative at -3.7% reversing a recent trend which is good as they cannot rise for ever.
This was offset by a positive contribution from Net exports of goods and services of 3.44 %, again a good influence.
Domestic consumption rose with real personal consumption expenditures increasing by 4.4 % in the fourth quarter up from an increase of 2.4 % in the third quarter.
These figures looked strong and in comparison with the ones published in the UK have led many commentators to declare victory in the stimulus (US) austerity (UK) debate. Those who have done so appear to have ignored the rather inconvenient truth that austerity has barely started in the UK and mostly kicks in from the new financial year in April.
Also there was a curious development in the US inflation figures in this report. The price implied deflator was at 0.3% much lower than expected. The probable cause of this was the fact that oil prices had risen! Bear with me in this I now it looks wrong! But higher petrol prices are recorded as part of imports and import prices are subtracted from the GDP deflator. Apart from the obvious issue in higher prices leading to lower inflation it leads to higher recorded economic growth as there is less inflation to subtract from an increase in output to get the “real” improvement. If you choose to allow for this you might conclude that the US growth rate would have been halved if this had not taken place. Quite a difference? Welcome to the murky world of official statistics.
Paul Krugman’s View
I do not remember referring to the American economist before so let me put that right as he did have an interesting way of illustrating these figures.
Today’s GDP report puts real GDP basically back where it was in the 4th quarter of 2007 (1/10th of a percent higher, but who’s counting?) Based on the trend between the previous two business cycle peaks, the economy should have grown — had the capacity to grow — around 2.3 or 2.4 percent per year over that period, so we’re actually around 7 percent below where we should be.
More attempts to conceal the truth in the Euro zone
There was some talk at Davos about a way of solving the problems of the peripheral Euro zone. As it came from European Central Bank Governing Council members then it may have some credibility. This idea is to change the length of the time Greece and Ireland have to repay the loans given to them to thirty years from the 7 to 11 of the Irish deal and the 3 of the Greek one (they plan to make the Greek deal like the Irish one but have not done so). This is a form of soft default and it is really giving the can an enormous boot into the future. In rugby terms I guess it is like kicking the ball up in the thinner air of the veldt in South Africa!
Whilst this may seem a good idea as it solves the problem that no-one in their heart of hearts can really expect the money to be repaid under current plans it has a flaw. If you are a private-investor in these markets you are bound to ask the question if they cannot repay official borrowing what about me? We get some sort of answer from Irish ten-year government bond yields which at 9.13% are above 9% again and the Portuguese equivalent which at 7.06% are back above 7%. Both levels leave them insolvent looking forwards and Greece,of course, at 11.4% has looked insolvent for months.
The UK loan to Ireland
When we provided assistance to Ireland I argued that it was a mistake as we were unlikely to get the money back. By default, if you think about it, then it would appear that members of the Governing Council of the European Central Bank now agree with me by the way they are floating the idea of a loan extension. In addition to my letter to the London Evening Standard I emailed the Chancellor of the Exchequer back on the 22nd of November expressing my views. As I had not received the courtesy of a reply I sent it to the UK Treasury again last week.
That leaves me 0 for 3 on the subject of receiving the courtesy of a reply from our political representatives as when I emailed my Member of Parliament Jane Ellison with my suggestions for reform of the Monetary Policy Committee she failed to manage the courtesy of a reply too. Is this usual these days?