Thursday, March 31, 2005

This week the top center-left economics blogs have been wrestling with the question of the basic stability of Bretton Woods II, in particular the ability of Asian central banks to support the dollar under a worst-case scenario. Brad Setser and Brad DeLong have weighed in heavily on the "hard landing" side; Kash at AngryBear is undecided but leaning towards a "soft landing" outcome. My contrary nature pushes me towards the "hard landing" group, but I'm convinced that this landing is further off than either of the Brads seem to suggest. Here's why.

I don't put much stock in DeLong's concerns over Asian central bank defections from the current regime. Following earlier arguments by Nouriel Roubini, DeLong argues
The first central bank to decide that the game is up wins and escapes all risk. The rest are left holding the rotting hot potatoes.
As far as the Big Four players in the current dollar regime go, this statement is flat out false. The big four are, in order: Japan, China, Taiwan and Korea. More importantly, they move as a block. Korea's tenuous and ultimately abandoned attempts to defect from the bloc in 2004 and again in early 2005 demonstrate as much. In short, Korea tried to defect and found the won rising precipitously in a matter of days. The reserve devaluation risk is far off and nebulous, dependent upon a conversion of dollars into the local currency (which does not necessarily have to occur). The local currency appreciation, especially vis-a-vis other Asian currencies, is on the other hand rapid and concrete. The latter risk is clearly more important than the former -- Korea is case in point.

Thus these four move together, with China the de facto leader. I cannot see any plausible scenario in which any of the three followers defects first; because of their growing economic dependence on and integration with China, they will move only when/if China moves. If China moves, that signals the end of BWII altogether, quite a different story from the 'defection' scenario drawn out by DeLong.

What about private investors? DeLong in particular thinks they can be the trigger to this house of cards collapsing, but with US interest rates rising in the face of stable interest rates elsewhere in the world, why would private capital flee US assets? The spread between US and German bonds, for example, is at its highest point in years. The real threat of private capital dumping US assets involves Asian capital more than European or North American, since it is unlikely there will be a permanent drop in the dollar's value vis-a-vis the euro, pound or Canadian dollar in the near future whereas there is a high likelihood that there will be a permanent drop vis-a-vis the renminbi or other Asian currencies. But in the past the Japanese government has proven itself very capable of pressing "private" capital into US assets even in the face of real exchange rate losses and can do so again.

In addition, there is the strategic-military argument about Japan, Taiwan and Korea supporting the dollar which I still think has merit.

What the hard landing scenario really has going for it, in my view, is a US debt trap. In 2004:IV US net investment income dropped to a mere $2.1bn, less than one-half the level of 2004:II and III and less than one-fifth of 2004:I. Based on both the incredible volume of US debt being sold off to foreign capital in addition to rising US interest rates relative to the rest of the world, that number finally will be turning negative, probably this year. With investment income on a growing net outflow, the current account deficit will start to swell regardless of what happens to the trade deficit. Perhaps a combination of higher interest rates and a weaker dollar will indeed push monthly trade deficits back under $50bn, but if quarterly net investment income deficit rises to say $15bn, that will cut in half the gains made through lower trade deficits. And unlike trade, investment income is a snowball rolling downhill.

Wednesday, March 30, 2005

China appears to be increasingly committed to what are euphemistically referred to as "administrative measures" to address the growing contradictions of its dollar peg.
China's rising property prices pose a threat to the stability of Asia's second-largest economy and local officials who fail to take measures to rein in growth will be held to account, the country's highest ruling body said. . . .

``Local governments must put on the agenda the important task of stabilizing housing prices,'' said the State Council document, dated March 26. ``People in charge will be held responsible if there are no effective measures to prevent housing prices from rising too fast.''

Prices in Shanghai, China's biggest commercial city, surged 18 percent in the past year, according to the city government's property index. Shanghai's property prices are ``worthy of concern and attention,'' central bank Governor Zhou Xiaochuan said on March 9.

``Social stability is already at stake in some places such as Shanghai,'' said Qiu Zhicheng, analyst at Xiangcai Securities Co. in Shanghai. ``Wage earners cannot afford houses, and hatred toward richer property owners is growing.''

The State Council urged local governments to increase construction of cheaper homes for low-income families, make better use of idle land and slow the pace of housing demolitions to ease supply shortages.

The 16 banks operating in Shanghai yesterday agreed to stop making loans for homes that are being sold within a year of purchase to help cool speculation. The city government earlier this month imposed a 5.6 percent capital gains tax on such sales.
Another hike in Chinese interest rates has already been ruled out, as has a change in the dollar-renminbi exchange rate. As Brad Setser points out, clearly the Chinese want to spring a revaluation on the markets as a surprise rather than put out on open invitation for hot money speculation on their currency. And as a recent Business Week article points out, raising domestic interest rates only makes the task of sterilization more difficult. So administrative measures are looking like the only tool in the toolbox to hammer down runaway asset prices.

So how serious is the inflation bugaboo anyway?

Much of Stephen Roach�s recent worries revolve around the Fed�s need to �catch up� on its monetary retrenchment efforts, with most of the 175 basis points of tightening orchestrated since mid-2004 eaten away by the sudden return of general price inflation. Case in point, Roach from Monday:
Despite nine months of measured tightening, America�s central bank remains well behind the curve, in my view. That is apparent if the �curve� is defined to delineate the setting of the policy rate that would be consistent both with the Fed�s inflation concerns as well as America�s current-account adjustment imperatives. The real, or inflation-adjusted federal funds rate currently stands at just 0.35% if the nominal funds rate (2.75%) is �deflated� by the year-over-year increase in the core CPI (2.4%); it is still slightly in negative territory if the headline CPI (3.0%) is used. An average of the two readings works out to a �zero� real federal funds rate -- underscoring the persistence of extraordinary monetary accommodation.
On the other hand, CBS MarketWatch�s Irwin Kellner is worried about exactly the opposite. To Kellner, a federal funds rate of 2.75% � and more importantly, 30-year FRMs over 6.0% � is about all the US economy can take.
While it's in the process of raising interest rates, the Federal Reserve will have to be careful not to go too far because of the leverage that can magnify the effects of monetary tightness. . . .

Higher mortgage rates will crimp the demand for housing as well as for refinancing existing loans. This means less need to spend on home furnishings, which is just as well, since consumers will have less cash, anyway.

Add to this the fact that consumers have record debt loads -- made manageable only by the existence of low interest rates -- and you can see leverage already beginning to develop. . . .

All this leverage that's out there tells me that the Fed can't get too aggressive, when it comes to raising interest rates. If it does, it may well discover that fighting inflation is the wrong war.
So which is it?

I argued on Monday that consumer inflation is not terribly serious. An article in yesterday�s Christian Science Monitor, ostensibly describing the new inflationary pressures on business, only reinforces my tired old point that the pricing leverage of capital is still very limited thanks to globalization and anemic wage gains by labor. Many cites from the CSM article show as much:
In La Jolla, Calif., Domino's just increased the amount it pays delivery drivers by a nickel a trip: They now get 95 cents to transport a large pepperoni, but it's still not enough to cover the cost, says assistant manager Donald Cunningham. . . .

Thanks to that competition for consumers, combined with the concurrent growth of cheap imports, most people have so far been sheltered from that impact.

"I can still go online and I can order a TV set or a pair of pliers or some other gadget and still get free shipping, if I'm careful," says Mr. Routt. "That, however, can't last forever." . . .

A decade ago, truckers spent roughly 17 cents per mile on fuel; today they pay 35 cents. While there is a surcharge that truckers can pass along to the shipper, Mr. Daniel said that often the charge is pocketed by a broker or not charged at all.

Eventually, he says, truckers are going to have to start passing those increases along. . . .

While some people are looking to economize on gas, some businesses are having to continue to absorb the higher costs, even though they're now cutting deeply into the bottom line. . . .

the airlines themselves, many of which are in bankruptcy or battling to avoid it, have also been reluctant to pass along the higher price of jet fuel, at least on the domestic front. That's where the major legacy carriers face fierce competition from the low-cost carriers, and they're determined not to lose more passengers to them. But the majors are now slapping large fuel surcharges on international travel, where there's less competition. It's one of the few ways they're hoping to increase revenues as they face their fifth straight year of multi-billion dollar losses.

Differences between PCE and CPI inflation are showing the same thing more convincingly. CPI inflationfrom January 2004 to January 2005 was running at a notable 3.0% and core CPI at a somewhat milder 2.3%. PCE inflation over the same period, however, was a still tamer 2.2% and core PCE inflation was running at just 1.6%. In that the PCE index picks up consumer substitutions of cheaper products for more expensive ones while the CPI does not, the significant difference between PCE and CPI inflation shows that consumers really are keeping price increases low by shifting their purchases to the lower end of the quality scale.

Where we really see inflation is in asset prices, especially housing. The Fed�s worries about US inflation have to be more about asset inflation than consumer price inflation, much like the concerns of the Bank of England where UK housing prices are into the stratosphere while CPI runs at a mere 1.6%. Yet slaying the asset inflation dragon may also send the US consumer packing. Asset price inflation is about the only thing -- apart from oil prices -- keeping US inflation safely above the 1.0% danger zone. A quick strangling of the US housing market could drive us back to the deflation scare of late 2003. And yet letting the asset bubble continue to swell only make the unavoidable landing harder.

When looking at both the US current account deficit and the US housing market, the clear choice of all policy makers is to delay the pain on the belief that present suffering is always worse than future suffering � which of course makes that final day of reckoning a little further away and yet all the more terrible.

Let me just say that Blogger has been a real pain in the ass lately.

Monday, March 28, 2005

In his column at the end of last week, Stephen Roach once again proclaimed his belief that the tightening has finally begun in earnest. And yet the Fed cowboy on his trusty steed Federal Funds is chasing after a calf Inflation that is doing a good job of outrunning the cowboy himself.
Measured tightening is being largely offset by a measured increase in underlying inflation -- muting the impacts of the Federal Reserve�s efforts to turn the monetary screws. And it�s become a real footrace: The Fed tightened by 25 basis points on March 22, only to find that a day later the annualized core Consumer Price Index accelerated by 10 bp. In fact, the acceleration of the core CPI from its early 2004 low of 1.1% y-o-y to 2.4% in February 2005 has offset fully 74% of the 175 bp increase in the nominal federal funds rate that has occurred during the current nine-month tightening campaign.
But is inflation really that big a cause for concern? For January, PCE inflation is running at a 2.2% annual rate, hardly a run-away train. More recently, over the last three months PCE inflation is a quite tame 1.4% annualized, and that down from the annualized 1.9% rate of the last six months. Thus by this measure, we're looking at actual disinflation of late! High gas prices in March may change this trend, but there is a ways to go before PCE inflation again reaches an annual 2.0% over the short term (3-6 months). And the evidence suggests the Fed cares a lot more about PCE inflation than CPI inflation.

So even though I think Roach's obsession with inflation is overdone, I think he's right about the future direction of the Fed being inclined to end the tightening cycle long before we reach "neutrality" and the problems of the US current account deficit once again being forced through relative currency values than interest rates.
I still don�t think America�s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what�s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. Unfortunately, that takes us to the ultimate trap of global rebalancing -- a realignment of the world that requires both higher US real interest rates and a weaker dollar. Should the Fed fail to deliver on the interest rate front, I believe that the US current-account correction would then be forced increasingly through the dollar. And that would redirect the onus of global rebalancing away from the American consumer onto the backs of Europe, Japan, and China. Call it a �beggar-thy-neighbor� monetary policy defense -- pushing the burden of adjustment onto someone else.
While the Eurpeans are getting a much-needed reprive on the euro, another attempt to surmount the $1.35 level can't be too far ahead. I just hope it happens after I've gone to Paris . . .

Is the end of cheap money nigh?

Ultra-loose monetary policy has been the fuel that has propelled the global economy�s recovery from the 2000-01 recession, particularly cheap money flooding the mortgage market. But signs of impending change are everywhere. The Fed just completed its seventh 25-basis-point hike in the federal funds rate, putting the Fed�s level at its highest since September 2001. Last week, nationally averaged rates on 30-year FRMs topped 6.0% for the first time since July 2004, and likewise, rates on one-year ARMs hit 4.24% last week, the third week in a row they have been above 4.19%, the ceiling of the zone in which they�ve traveled (with a few brief one-week exceptions) since November 2002. Stories of ultra-frothy US housing markets have been everywhere, the most recent in today�s Financial Times (sub. only) which traces out the serious consequences of the end of cheap money in a highly levered and dependent system.
Americans have come to see their homes much like cash machines, withdrawing Dollars 223bn (Pounds 119bn, Euros 171bn) last year from the equity in them. According to a recent speech by Alan Greenspan, chairman of the US Federal Reserve, approximately half of this money shows up in increased spending by consumers. If so, about 40 per cent of the 2004 increase in consumption rested on withdrawals from the housing market.

The worry is not simply that consumers will stop taking money out of their houses if appreciation stops or prices fall. They may also feel the need to bolster their savings accounts - again to the detriment of consumption.

. . . Ian Morris, US economist at HSBC . . . [notes that] declines in real house prices have tended to set in before interest rates or unemployment really start to rise. "Assets tend to be leading indicators while unemployment tends to lag behind other economic trends," he says. "We don't necessarily need a sharp rise in interest rates to undermine the housing market and economic growth."

The precedent of the Netherlands is particularly worrying for the US. There, after years of steep increases, house-price inflation tumbled back to zero in 2003 when interest rates and unemployment were coming down. This slowdown contributed to a consumer slump, with spending declining through most of 2003. The discomforting message from the Netherlands is that even the flattening of house-price inflation may have a more dramatic effect on consumers than expected.
We all know that Americans refuse to save out of income these days. In 2004 the personal savings rate was a pathetic 1.2%, the lowest level since 1934, and that thanks only to a special Microsoft dividend pay-out in December. Without Microsoft�s extraordinary intervention, the personal savings rate would have been around 0.9%, the lowest since 1932 and 1933 when, thanks to the Great Depression, personal saving was actually negative.

If the house-as-ATM path is blocked, HSBC estimates that
the US would need to create an additional 2m jobs to make up for an end to mortgage equity withdrawal. This is not a blow that the economy could easily take on the chin.
No kidding. That�s the total number of private sector jobs created in 2004. How another 2 million will materialize in the midst of a housing slump � and the sloughing off of hundreds of thousands of property related jobs from mortgage brokers to construction workers � is anybody�s guess.

Tuesday, March 15, 2005

"Mirror, mirror, on the wall, who's the fairest capital importer of all?"

"It is thou, O Red Ink, who is the fairest of all. Why, which economy could compare to your rising interest rates on short-term Treasuries, your 4.0% GDP growth, and your tireless consumers who laugh at recession and throw all caution to the wind?"

And Red Ink went away happy with the answer from her mirror, pleasantly weighed down by an extra $91.5bn in pocket.
Investors purchased a net $91.5 billion in Treasury notes, corporate bonds, stocks and other financial assets in January, up from $60.7 billion in December, the Treasury Department said today. The total was the second highest behind the $103.9 billion in May and shows that record current-account and budget deficits haven't soured foreigners on the world's biggest economy.

``It shows people are still finding value in the U.S. and that the U.S. is a good place to put their money,'' said George Goncalves, a fixed-income strategist in New York at Banc of America Securities LLC.
In October 2004 we all had a little scare when net foreign purchases of long-term US securities was a mere $49.5bn, nowhere near enough to balance monthly trade deficits pushing $60bn. However, since that scare the US has attracted net $89.5bn, $60.7bn and now a big $91.5bn, making October just a bad memory.

Rising short-term interest rates have made US Treasuries a tasty dish once again. 1-year bills rose from 2.58% at the start of December to 2.96% by the end of January; 3-years from 3.12% to 3.45%; and 10-years from 4.09% to 4.33% before their popularity dropped them back down to 4.14%. In turn, in January net foreign treasuries purchases leapt to $30.7bn after December's disappointing $8.4bn.

US equities became wildly popular among foreign jet-setters in January. They bought net $16.5bn of them, the highest monthly tally since May 2001. At the same time, American jet-setters stopped buying foreign securities in January, cutting the net foreign securities purchased total to a mere -$1.1bn mostly on the back of Americans' new-found love for domestic assets. They dumped low-yielding foreign bonds to the tune of $5.5bn in net sales to foreigners, the first time that figure was positive (indicating net sales of foreign bonds by Americans rather than net purchases) since May 2004.

In turn, agency and corporate bond purchases slacked off some from their blistering end-of-2004 pace. That doesn't mean that interest rates on these securities have budged an inch, however.

As the chart above shows, corporate borrowing rates are still falling, and the 1-year ARM remains stuck around 4.1%. Until these rates begin to climb, don't look for any change in the pattern we're in now. Monthly trade deficits will climb well into the -$60bns, financing will continue to flood in, and Nouriel Roubini's and Brad Setser's day of reckoning will continue to be delayed at least through the first half of 2005 if not all year.

Monday, March 14, 2005

The Bush administration has apparently given up painting Hugo Ch�vez as a domestic dictator needing to be overthrown and taken up painting Hugo Ch�vez as a regional ruffian needing to be overthrown instead.
Senior US administration officials are working on a policy to �contain� Hugo Ch�vez, the Venezuelan president, and what they allege is his drive to �subvert� Latin America's least stable states.

A strategy aimed at fencing in the government of the world's fifth-largest oil exporter is being prepared at the request of President George W. Bush and Condoleezza Rice, secretary of state, senior US officials say. The move signals a renewed interest by the administration in a region that has been relatively neglected in recent years. . . .

�Ch�vez is a problem because he is clearly using his oil money and influence to introduce his conflictive style into the politics of other countries,� Mr Pardo-Maurer said in an interview with the Financial Times.

�He's picking on the countries whose social fabric is the weakest,� he added. �In some cases it's downright subversion.�
We've already seen that the Bush administration has no fear for the global oil market when it comes to making foreign policy, so don't count on >$50/barrel oil and US dependence on Veneuzuelan supplies to insert any note of caution.

Should we be expecting a 'Venezuela Liberation Act' from the Republican Congress sometime soon? If at first you don't succeed . . .

All those astute regular readers of the business press and of General Glut's Globblog already know that the January US trade figures turned in the country's second largest monthly deficit of all time and set the current account deficit for the first quarter of 2005 on a clear path to exceeding 6% yet again. Contrary to everything that liberal economists have been waiting, hoping , and predicting would be accomplished by a USD (broad dollar index) fallen 16.2% in nominal terms since February 2002 -- that is, more balanced trade -- continues to elude the world. A trade balance with China and it's unswerving renminbi, which has gone from -$83.1bn in 2001 to -$162.0bn in 2004, is of course a big part of the story.

The other part, however, is the persistently high rates of US consumption thanks to persistently low interest rates. We'll see whether higher interest rates will finally cut into US consumption and thus into the US trade deficit figures. For example, the 10-year is up to 4.5% from 4.0% just a month ago, and the 3-year is up to 3.9% steadily from 2.8% six months ago.

However, these government rates are not the really important ones. Pride of place for the American consumer has to be the 30-year FRM, which is still under 6.0% thanks to the East Asians abandoning Treasuries for agency bonds last year. If the 30-year FRM stays low, I think we won't see any real drop in the deficit.

The current account deficit was -6.2% of GDP in the fourth quarter of 2004. At the rate we're on now, we could see -7% before 2005 is in the books. And only a catastrophic drop in US consumption (read: major recession) will be able to start setting things right.

Friday, March 11, 2005

She can move you and improve you
With her love and her devotion
And she'll thrill you and she'll chill you
But you're headed for commotion

And you'll need her so you'll feed her
With your endless dedication
And the quicker you get sicker
She'll remove your medication

Get the firehouse
'Cause she sets my soul afire
Get the firehouse
And the flames keep gettin' higher

Now, you may think I'm quoting these lyrics from the immortal Kiss song "Firehouse" (yes, I was in junior high in the 1970s) simply for pleasure, but I think they describe the US relationship with its erstwhile trading partners quite well -- particularly in light of the just-released US monthly trade figures for January.
The U.S. trade deficit climbed to $58.3 billion in January, the second-highest level in history, as Americans' appetite for foreign consumer products and automobiles hit record highs. The deficit with China was pushed higher by a surge in textile shipments, reflecting the end of global quotas.

The Commerce Department reported Friday that the January trade gap was 4.5 percent higher than December's $55.7 billion deficit and was just below the all-time high monthly deficit of $59.4 billion, recorded in November. . . .

As usual, the largest deficit with a single country was recorded with China, an imbalance of $15.3 billion, the third biggest imbalance on record and up 7 percent from December. The January deficit with China was driven by a 33.6 percent surge in shipments of textiles, which rose to $1.05 billion, reflecting the elimination of global quotas.
Over the last three months the US trade deficit is $173.4bn -- that makes for roughly an annualized $690bn.

Most disconcerting should be the rocketing non-petroleum goods balance, which leapt from -$42.8bn in December to -$46.0bn in January. Y-o-y non-petroleum goods imports are now up a whopping 18.2% while total US exports are up just 13.6%. January 2005 and November 2004 hold pride of place as the two largest non-petroleum trade deficit months, and with oil prices shooting through the roof again, we should expect monthly deficits well over $60bn as the spring progresses.

The East Asians sure have their work cut out for them, don't they?

BTW, I should say formally that I'm sorry for leaving you all in the lurch much of the last week without so much as a by-your-leave from me. I'll let you know next time when I plan to be away.

After looking at the comments from yesterday, I just had to promote this one from hellacia -- it stirred both my love of a fine turn of phrase and of slighty crude sarcasm:
The credit card teat is stuck firmly in the American consumer's mouth still. The passage of the bankruptcy bill should warn the sheep that they are about to be brutally weaned, but we're kind of slow and damn it, we deserve granite countertops and 60" plasma TVs and we don't care how much debt we have to go into to get it.
2005 may indeed be the year John and Jane Public find out in full what exactly they are expected to do for that inflated standard of consumption.

I've become a bit of a currency crash nay-sayer over the last few months and am moved less and less by rumors sweeping the currency markets that the East Asians have had their fill of the dollar and are pushing away from the table. As Brad Setser has told us many times, simply buying less consttitutes a pull-back, so the latest news out of Japan is getting everyone's knickers in a bunch.
The dollar fell and Treasury yields rose yesterday after the Japanese prime minister made remarks that suggested the country's central bank could be shifting some of its huge reserves out of dollars and Treasury securities.

Japan's Ministry of Finance quickly denied there was any change, a statement that limited the fall of the dollar and bolstered Treasury prices. But the volatile reactions in the markets underscore that the dollar, already under pressure from the drag of the United States' record current-account deficit, has another issue that could weigh on it in the future.
It is surely true that Japan is interested in diversifying its position, and with the yen stuck around �103-105 to the dollar of late, a little strengthening of the Japanese currency can be easily afforded now. Note that simply because of US inflation (2.4%) and Japanese deflation (-0.3%) between 2003:IV and 2004:IV, the magic �100 line is now up to �97 and surely higher still for 2005:I. So until the yen rises to around that level, I'm not going to lose too much sleep over the currency musings of Japanese politicians.

As oil prices fall sharply yesterday and today, it's in my contrary nature to focus on this second major price spike of the past several months.

For despite the recent pullback, oil is indeed making yet another attempt at hitting the global economy with a sharp body blow. Back in October and early November 2004, closing crude futures prices on the NYMEX topped $50 per barrel for twenty straight days and twenty-two of twenty-four before receding rapidly to the $40 mark in mid-December. Now in March 2005 we have an encore performance. Through yesterday, NYMEX oil futures prices have topped $50 per barrel for thirteen days in a row -- just one week short of last year's sustained record levels.

The Europeans are suffering as well. Through yesterday, Brent crude spot prices have been over $50 per barrel for ten straight days. Thanks to the tanking dollar, however, the pain is less now than back in October when Brent closing prices topped out at $52.28. Wednesday's $54.30 was just �40.57 compared to October's �41.36.

And to top it all off, the Financial Times reports today that
The International Energy Agency on Friday raised its forecast for China�s oil demand in 2005 from 100,000 barrels per day to 500,000 barrels.

The increase was based on forecasts that US economic momentum would last longer than previously expected, which would help China sustain manufacturing exports. . . .

The IEA also said China was clamping down on construction of unapproved power plants which are chiefly coal-fired. Persistent power shortages boosted demand for gas oil and residual fuel oil, but the IEA felt this situation would probably not get much worse.

Overall, the pace of growth in Chinese demand for oil has been slowing, as Beijing seeks to cool economic growth to 8 per cent in 2005 from 9.5 per cent last year.

The increased estimate for oil demand of 500,000 barrels per day represents a 7.9 per cent acceleration, but that is only about half the 2004 growth rate of 15.9 per cent, while in January and February, China imported 13 per cent less oil.
The IEA is being a bit coy here. China's relative oil consumption growth rate in 2005 is forecast to be lower than 2004, but what of the absolute oil tally? It's hard to tell what the IEA's latest thinking is since it won't release it's full March report to the great unwashed masses for another month, but from February's report we can see that China's total oil demand for 2004 was 6.38 mbd for a grand total of 2328.7 million barrels consumed. If 2005 demand is supposed to be 0.5 mbd higher, then the Chinese total for 2005 should come in around 2511 million barrels, or over 180 million barrels more this year.

Now put that together with the insatiable US appetite for oil which dwarfs China's levels and you see this US-China global imbalance tandem continuing to fuel the fire well through the new year.

Wednesday, March 09, 2005

Well, I go away for a week and the whole world goes topsy-turvy. Greenspan is outed by Harry Reid for the political hack he has become. Lebanese protests force their pro-Syrian PM out of office, and then even bigger protests look to be bringing him back in. Oil hovers well over $50/barrel. Long-term US interest rates seem finally to be rising.

I'm especially interested in the sudden turn-around in US inflation sentiments. It was only a month ago that the market took the comments of Atlanta Fed President Jack Guynn to mean that the Fed was almost done with rate hikes. Now the talk is all about the end, all right, but of the "measured" rhetoric.
Fed policy makers this month may drop their commitment to lift the federal funds rate at a ``measured'' pace in favor of more ``flexible'' and ``hawkish'' language, which may push debt yields higher, John Herrmann, director of economic commentary at Cantor Viewpoint, said in a research note yesterday.
From January 2004 to January 2005, US personal consumption expenditures have risen at a quick 5.7% annual clip. Strangely, annual PCE inflation is still just 2.2%, though, and even lower over the last six months (1.9% annualized) and three months (1.4% annualized). For all the inflation talk, the durable goods sector in particular is still struggling to gain any pricing traction according to the PCE data.

Stephen Roach highlighted for us on Monday the doldrums in which US wages still wallow. Without rising real wages and with the threat of rising real interest rates, one might just finally begin to see that slowdown in overall US consumption begin to creep up on us.

Tuesday, March 01, 2005

Is this the twilight of the neocons?
Paul Wolfowitz, US deputy secretary of defence, has emerged as a leading candidate to replace James Wolfensohn as the president of the World Bank.

Mr Wolfowitz is one of a small number of people being considered for the US nomination, administration insiders said.

The nomination of Mr Wolfowitz, one of the chief architects of the Iraq war and a former US ambassador to Indonesia, would likely be highly controversial, and could raise new questions about the process by which the World Bank chief is selected. One administration official said his nomination �would have enormous repercussions within the development community�.
It may seem odd to interpret an elevation to President of the World Bank as a sign of waning neocon influence, but consider it as one of a string of recent setbacks to the neocon cause. In August 2004 the FBI made public its long-running investigation of AIPAC. In January, Doug Feith announced his resignation. In February Bush began making noises regarding Iran that are none too sweet to neocon ears, and now in March it appears that Paul Wolfowitz may be heading out the door.

That being said, promoting incompetency always has repercussions on those who get stuck with the guy nobody can seem to fire. If Wolfowitz does for development what he did for Iraq, we should see those Millennium Goals being fulfilled sometime around, oh, 2100?