Why Does Inflation Matter?

De Lorean: Back to the Failure

My colleague Graham Brownlow has recently been doing some research on the De Lorean Motor Company (DMC) - press release here. His working papers on the DMC are available here and here. 

Graham's main insight is that the political violence which erupted in Northern Ireland in the 1970s created an institutional environment where industrial policy was used to quell civil unrest. This resulted in soft budget constraints and a lack of due diligence on support for inward investment projects. Into this environment stepped the entrepreneurial, yet psychologically flawed, John De Lorean with his now-iconic winged sports car, which was made famous in the Back to the Future movies.

Low Oil Price Providing a $1.3 Trillion Fiscal Stimulus

You cannot just be focused on one side of the equation. Yes, lower oil prices may affect the revenues of oil exporting nations. It may even be a reflection of the oversupplu, maybe brought on by rogue nations milking oil for funds for war and terrorism. It could also be a strategy by OPEC to decapitate shale oil production ventures which needs oil to be safely way above $80 to make it feasible.

Whatever it is, lower oil prices will also mean savings for almost all nations, and in actual fact may go a long way to boosting demand and improve savings for reallocation of resources t

o other areas of the global economy. The report below from Bloomberg pegged stimulus at $1.1 trillion, now it should be $1.3 trillion. Thats a whole lot of QE in a different form and manner. Not all news is bad, the pendulum may swing but there is always a counter balance.
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The lowest oil price in four years will provide stimulus of as much as $1.1 trillion to global economies by lowering the cost of fuels and other commodities, according to Citigroup Inc.

Brent, the world’s most active crude contract, closed at $83.78 a barrel inLondon yesterday. That’s more than 20 percent below its average for the past three years, amounting to savings of about $1.8 billion a day based on current output, Citigroup estimates. Savings will climb to $1.1 trillion annually as the slide cuts costs of other commodities, leaving consumers and companies with extra cash to spend and bolstering growth, according to Ed Morse, the bank’s head of global commodities research in New York.

Crude prices are plunging amid signs that OPEC, supplier of 40 percent of the world’s oil, won’t act to eliminate a surplus as global growth slows. Combined supplies from the U.S. and Canadarose last year to the highest since at least 1965 as producers tapped stores locked in shale-rock formations and oil sands. The global economy will rebound next year, with growth quickening to 2.98 percent, the fastest since 2010, according to analyst forecasts compiled by Bloomberg.

“A reduction in oil prices also results in a reduction in prices across commodities, starting with natural gas, but also including copper, steel, and agriculture,” Morse said yesterday in an e-mailed response to questions. “All commodities are energy intensive to one degree or another.”

Commodity Prices

Regular gasoline averaged nationwide in the U.S. dropped to $3.163 a gallon, the lowest in more than three-and-a-half years, Heathrow, Florida-based motoring group AAA said on its website yesterday. The Bloomberg Commodity Index slumped to a five-year low, about 50 percent below its peak in July 2008. Copper, natural gas, coal and iron ore are all far below their peaks.

“Cheaper oil is an advantage for both consumers as well as industrial and manufacturing operations, especially as winter approaches,” Myrto Sokou, an analyst at Sucden Financial Ltd. in London, said by e-mail yesterday.

As lower energy prices help reduce commodity costs, they can push down the inflation rate. While freeing up more money for consumers, outsized declines could become a concern in places likeEurope, where policy makers are trying to stave off deflation, which can exacerbate an economic slump.

The euro area will have inflation of 0.5 percent this year, according to estimates compiled by Bloomberg. Consumer prices globally will increase by 2.47 percent in 2014, about the same as last year, the forecasts show.

Oil Analysts

Brent rebounded from the lowest level in almost four years today, rising 47 cents to $84.25 a barrel at 1:13 p.m. in New York on the ICE Futures Europe exchange.

“Lower prices, for most economies, reduce the cost of doing business and support economic growth,” the International Energy Agency said in a report Oct. 14. “Lower prices offer a cushion of sorts against an otherwise vulnerable macroeconomic backdrop.”

The Paris-based adviser to governments said in the same report that oil demand will expand by about 650,000 barrels a day this year, half the pace it anticipated in July.

Nations in the Organization of Petroleum Exporting Countries may resist cutting output in response to the slowing demand growth to try and test the prices at which some North American supply is profitable, Antoine Halff, head of the IEA’s oil industry and markets division, said.

A decline to $80 would cost OPEC $200 billion of its recent earnings of $1 trillion, Morse said in an analysis on the topic that was published yesterday in the Financial Times.

Big Chunk

Oil prices rose to a record in 2008, boosting revenues for nations including Russia as well as Middle East states such as Saudi Arabia, Kuwait and the United Arab Emirates. It also increased prices for consumers in industrialized nations.

“It is a big chunk of stimulus,” Seth Kleinman, Citigroup’s head of European energy research, said by phone from London. “The macro economic analysis of higher oil prices was always that it is essentially a wealth transfer from leveraged spending U.S. consumers to saving Middle East sovereigns, so ultimately it reduces the global velocity of money significantly and it’s a net drag. Now a price fall reverses that.”

Bank Negara Ending Its Tightening Cycle? - Potentially Good News

Markets - What Was That?

Most investors were surprised by the way the local bourse performed today. Most of the popularly traded stocks went down for no reason. A look across other regional bourses saw Nikkei on holiday following its already massive gains late last week. Europe and the US both had strong closing on Friday. Only HK went down together with Malaysia today. The US dollar's strength was the only common factor. For HK its pretty bad because their currency is tied to the USD and a 7 year high for USD would curtail many areas of their economy in terms of competitiveness. 

But the case couldn't be more different for Malaysia, we thrive on a weaker dollar. I guess some people just took it as an excuse to take some profit after quite a sustained run for second liners over the last week or so. I expect things to return to normal quickly.

Stocks To Watch

NiHsin - Announced that Pelaburan Mara was the 5% buyer of NiHsin at 52 sen. If you just follow what happened to PDZ and Sanichi, well the short term trend looks pretty awesone trading wise.

IFCA - Apparently corporate results is due soon and would surprise on the upside in a big way. Expect this to continue its rerating process upwards.

SMRT - A nice research report boosted interest before clipped in the heels yesterday by a strange market, This should resume its uptrend as well.

Mental Health and the Economy

In the video below, Richard Layard claims that although the cost of treating mental health is very high, it makes economic sense for a country to take mental-health conditions just as seriously as it does physical-health conditions.  

Punography

Is punning fun, funny or despicable-showing-off ... maybe all three. Puns are funny and some say is the highest order of comedy because its literal and literally funny. You have to be somewhat well versed sufficiently in the language to find puns funny.