Another Asian Contagion May Be Only a Bad Currency Trade Away: Ten years after the collapse of Asian governments’ overvalued currencies in 1997, the remedies they embraced to prevent a recurrence may have only traded one set of risks for another. Their “never again” determination has led them to new extremes: artificially low currencies, a record $3.4 trillion in reserves and export-dependent economies. (Bloomberg)
Must read Big Picture post how about how the government is lying to us about inflation:
Delving Deeper into the Inflation Issue: Consider what happens when the BLS looks at rent/OER: “They supposedly net out utility payments. So if your rent payment stays constant but utility bills go up, that yields a lower net implied rent. In other words, utility prices going up caused rental prices and CPI to go down.”
But that’s just the tip of the iceberg. Consider the even more bizarre concept of OER as representative of the entire home-dwelling US public. More than three times as many people OWN THEIR OWN HOMES then rent their abodes. So why do we use Rental Measures for measuring shelter inflation? (The Big Picture)
The strong Euro is causing lots of angst in Europe. There is a growing social and political movement against the Euro in a few countries in Europe, Italy and France in particular:
France’s Sarkozy Lashes Out Anew at Strong Euro: French President Nicolas Sarkozy criticised euro strength anew on Wednesday, saying there was no reason why the euro zone should be the only region in the world to be handicapped by an overly strong currency.
In an interesting and somewhat unusual view of a strong currency, Sarkozy argues that a strong Euro decreases the purchasing power of France:
“An overly low purchasing power is the fault of competition from countries with low salaries; of social, environmental, monetary dumping; of the Chinese currency which is too low; of the euro which is too strong; of charges which are too high; of interest rates which are higher than inflation; of house prices which have risen a lot.” (Reuters)
As Mercury Rises, Motorists Get Burned: (Will’s Blog)
Rate Rise Pushes Housing, Economy to “Blood Bath”: The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.
“It’s a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.” (Bloomberg)
Commodities Boom Driving Inflation in Latin America: High international commodities prices are becoming a double-edged sword for Latin American countries. After boosting economic growth for years, the high prices are making food more expensive and stoking fears that inflation could accelerate. (Reuters)
Agricultural Commodities – Biofuelled: Every morning millions of Americans confront the latest trend in commodities markets at their kitchen table. According to the United States Department of Agriculture, rising prices for crops–dubbed “agflation“–has begun to drive up the cost of breakfast. The price of orange juice has risen by a quarter over the past year, eggs by a fifth and milk by roughly 5%. Breakfast-cereal makers, such as Kellogg’s and General Mills, have also raised their prices. Underpinning these rises is a sharp increase in the prices of grains such as corn (maize) and wheat, both of which recently hit ten-year highs. Analysts are beginning to ask, as they have of oil and metals, whether higher prices are here to stay.
When demand was growing more slowly, farmers could meet it through gradual improvements in their yields. But to cope with today’s boom, yields will have to rise much faster, or farmers will have to bring more land into production.
Both are possible. Greater adoption of genetically modified strains of corn and wheat, for example, could improve yields. But they are expensive and politically controversial. There is also quite a bit of fallow land to be sowed, especially in developing agricultural powers such as Brazil and Ukraine. But those countries are far from the biggest markets and their idle land tends to be found in areas with poor transport links. A strong price signal will be needed to overcome such obstacles and induce extra supplies.
Neither seems very likely in the near future. This week America’s Congress is debating whether to double its targets for biofuel production.
At the same time, the oil price rose to its highest level in ten months, thanks to a strike and other disruptions in Nigeria. The chaos in the Niger delta, it turns out, has a surprising amount to do with the price of eggs. (Economist)
China Blocks Flickr Photo Sharing Service: Flickr’s blockage in China, which seems to affect only the actual photo files, rather than the entire Web site, ironically arrived almost exactly as Wikipedia was suddenly freed from a long stretch in the big house. Several weeks ago, users posted photos of public protests of a new chemical plant in Xiamen, which led to flickr’s current blockage. (MarketWatch)
Investing & Trading:
Steer Clear of the Rotting Bond Market: You don’t have to believe in collusion between debt underwriters and the ratings agencies, however, to worry that the system isn’t working. The criticism here is coming from bond professionals who have produced a series of studies showing that pools of debt called CDOs (for collateralized debt obligations) aren’t showing the patterns of return and default that their credit ratings predict. For example, one study shows that tranches of CDOs with the same BBB credit rating, which should trade at roughly similar prices, are instead trading at yields that differ by anywhere from 1.4 to 10 percentage points. At the A and BB levels, the gap is something like 4 percentage points. The U.S. Federal Reserve recently weighed in with a paper that said the ratings for CDOs are riddled with “anomalies.” (Jubak’s Journal – MSN Money)
Four CDOs With Subprime Loans May Have Ratings Cut: Four collateralized debt obligations containing subprime mortgages from 2006 and valued at $3.1 billion may have their credit ratings cut by Fitch Ratings. (Bloomberg)
A good acquisition for a stock I own:
Luxottica buys Oakley: Chances are that many of the celebrities’ favourite brands are owned by Luxottica, the Italian eyewear group. It is now adding another name, Oakley, the California-based sunglasses maker, to a portfolio that already includes Prada and Chanel. And it is paying a rather fashionable price to do so.
The $2bn, or $29.30 a share, deal does make sense, though. The luxury goods market is booming and, despite a substantial capital expenditure programme, Luxottica has spare cash to invest. It already distributes Oakley sunglasses through its retail outlets and wants to expand in North America, where it made two-thirds of its €4.7bn sales last year. Luxury sunglasses are becoming increasingly popular in the region. According to Luxottica’s chief executive, only 15 per cent of sunglasses sold in North America cost $30 or more, but the proportion is growing. (Financial Times)
Housewives Outmaneuver UBS, Deutsche Bank Trading Yen: Yukiko Ikebe, a 59-year-old housewife in Tokyo, in April was indicted for evading about 139 million yen in income taxes while earning 407 million yen trading foreign-exchange, according to the Tokyo District Public Prosecutors Office.
“She must have earned more money than us,” joked Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. “I said to my colleagues, `let’s find her and hire her!”’ (Bloomberg)