From: vince farrell
Sent: Monday, January 28, 2008 12:34 AM
I expect the Fed to cut rates at their meeting this week. The European Central Bank seems reluctant to follow. It is important to remember there is a big difference in the respective charters of the two institutions. The Fed has the dual role of "price and employment." They worry about economic growth and the rate of inflation. The ECB has the sole responsibility of price stability. They are not supposed to concern themselves with the pace of economic growth. That's why much of what you hear from the ECB is talk about inflation. So the fact that Spanish unemployment is up sharply to 8.6%, and that Italian retail sales fell in November doesn't carry as much weight as German consumer sentiment being a touch better than expectations. France and Germany are about half of Eurozone activity and the historical memory of hyperinflation, especially for Germany, is very real.
Sent: Monday, January 28, 2008 12:34 AM
I expect the Fed to cut rates at their meeting this week. The European Central Bank seems reluctant to follow. It is important to remember there is a big difference in the respective charters of the two institutions. The Fed has the dual role of "price and employment." They worry about economic growth and the rate of inflation. The ECB has the sole responsibility of price stability. They are not supposed to concern themselves with the pace of economic growth. That's why much of what you hear from the ECB is talk about inflation. So the fact that Spanish unemployment is up sharply to 8.6%, and that Italian retail sales fell in November doesn't carry as much weight as German consumer sentiment being a touch better than expectations. France and Germany are about half of Eurozone activity and the historical memory of hyperinflation, especially for Germany, is very real.
UBS was mentioned in the weekend press believing that for the recent upward move in the stock market to be sustained oil has to be below $80, and the government has to guarantee the viability of the bond insurers. I don't think oil will average less than $80 (it averaged $72 in 2007), and no way, in my opinion, should the government, in any way shape or form, guarantee the insurers. The original structure of the industry was to provide a guarantee to the issuers of municipal bonds for the timely payment of interest and principal. Timely payment. If a 30 year bond was guaranteed and somehow defaulted, the principal would be paid on schedule, in 30 years. The present value of that obligation makes the face value of the guaranteed debt more manageable. That management of these firms went off the reservation and speculated in CDO's and other financial wizardry is the private markets problem. The basic business is attractive (Warren Buffet just entered it) and at some price guys like Wilbur Ross or firms like Warburg will figure out how to price the assets. Pain will be inflicted, but that's what the market requires. Government guarantees will only encourage future idiocy. My opinion only.
3 comments:
If I understand the logic correctly, we need a recession in order to bring oil down to $80 or less, but that will invoke prosperity which will raise oil up over $80, which is recessionary.
The fallacy here is that UBS has no clue what the "right" price of oil is or should be, at least when it comes to gauging the growth of U.S. GDP. Or more likely, they are looking for a reason to justify their public position that a recession is inevitable for the next few quarters and the high price of oil makes for a good scapegoat. I would think that their economists know that crude-based energy has a much smaller impact on our economy than in previous years, especially since the last oil shock in the '70's.
For what its worth, if you were to inflate 1970's crude prices to present and factor in the relative GDP impact, we would be looking at about $150 per barrel.
curvey-l: I didn't understand that the post contained the logical argument that you set forth. I've seen it argued (Howard Simmons among a few) that high oil prices are not inflationary. I do not pretend to understand that logic!
I concur that UBS nor anyone else has a clue as to 'right' price of oil. Ultimately it is the folks that trade the stuff--and for that reason there can be quite a few premiums (or discounts as the case may be): geopolitical, fundamental and speculative.
Thanks for the 1970 roll forward.
Louise Yamada had an interesting take on oil on Bloomberg. She thinks that it will reach a higher shelf plateu than last year's average. She sees $125 based on her technical work.
Leisa,
I was basing my logic on the that oil prices change with demand. If oil demand drops, GDP would consequently flatten or fall, and vice versa. The UBS position is therefore convoluted given the present geopolitical situation. With worldwide demand pushing the present production capabilities to the limits, stocks should fall if oil prices fall, which is indicative of a slowing worldwide economy.
I doubt that $80-$100 oil will cause a recession. Perhaps the tipping point is $125 as you mentioned. But if oil does rise to that level, it would probably mean that worldwide GDP is rising too, and that would be good for stocks.
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