Archive for July, 2012

Emerging bond investors chew over food price threat

First published on Reuters

Foreign investors have made gains of some 10 percent this year on emerging market bond portfolios but now dread future gains being eaten into by an old foe — food price inflation.

Billions have been pumped into emerging market bonds this year by investors looking for alternatives to western markets where yields are minimal or even negative, especially in Europe.

Analysts say one reason investors have bought into emerging market bonds — and still expect further gains — is that sagging global growth is seen bearing down on inflation, giving emerging economies scope for extensive monetary easing.

A sudden rebound in food prices, which often make up a larger share of Consumer Price Inflation baskets in poorer developing countries, has complicated this outlook.

Maize (corn) and wheat export prices jumped some 20 percent in the first three weeks of July over their June level, the United Nations’ Food and Agriculture Organisation said last week. Wheat has risen 25 percent year-on-year.

However, weather-related grain price gains can also be vulnerable to swift falls. The effect of food price rises also varies greatly from one economy to another.

“There have been massive food price rises in the past few weeks — before that happened, emerging market inflation had been coming down quite nicely,” said Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management.

“If food prices continue to rise, emerging markets look less attractive as a whole.”

continue reading on Reuters


Less than zero

Now this blog site wasn’t named after the possibility of negative bond yields on core and semi-core Eurozone countries, but now that they’re here, you should read “QE, negative yields and the paradox of thrift”

Or listen to this:

Food prices may feed monetary angst

Posted on Reuters’ Global Investing blog

Be it too much sun in the American Midwest, or too much water in the Russian Caucasus, food supply lines are being threatened, and food prices are surging again just as the world economy slips into the doldrums.

This week, Chicago corn prices rose for a second straight day, bringing its rise over the month to 45%, and floods on Russia’s Black Sea coast disrupted their grain exports.  Having trended lower for about nine-months to June, the surge in July means corn prices are now up about 14% year-on-year. And all of this after too little rain over the spring and winterkill meant Russia, Ukraine and Kazakhstan’s combined wheat crop would fall 22 percent to 78.9 million tonnes this year from 2011.

But as damaging as these disasters have been for local populations, their effects could be much more widely felt.

The problem is that not only do rising food prices raise the cost of living, squeezing incomes further during a downturn, but by raising inflation they severely restrict the government’s flexibility in setting monetary policy. Just as Mike argued previously on this blog that the falling oil price amounted to a green light for the cutting of interest rates, rising food prices will force many central banks to think again about the pace of monetary easing.  And the problem is most acute in developing countries where the proportion of food in consumer price baskets is far higher than in the richer western economies. For example, according to the US Department of Agriculture, an additional $1 added to income sees 56 cents more spent on food, beverages and tobacco in Burundi, compared to 5 cents more in the United States.

The Russian central bank is a timely case in point when it comes to restrictions on monetary policy. On Friday they announced that they were keeping interest rates the same; as much as growth is struggling and could do with some monetary stimulus, high inflation, fuelled by food prices, is tying the bank’s hands.

Why has this happened? According to the traditional Phillips curve, there is usually a tradeoff to be made between unemployment and inflation; they are inversely related, as prices and wages will rise when unemployment is low, and vice versa.

continue reading on Reuters

Certain danger: Extreme investing in Africa

Posted on Reuters’ Global Investing blog

The Arab Spring, for all its democratic and political virtues,  put a big economic dent in the side of participating North African countries, particularly when it came to attracting foreign investment in 2011.

According to a recent UNCTAD report:

Sub-Saharan Africa drew FDI not only to its natural resources, but also to its emerging consumer markets as the growth outlook remained positive. Political uncertainty in North Africa deterred investment in that region.

So far, so logical. Except that simply can’t be all there is to it.

Why? Because plenty of African countries marred by political uncertainty have succeeded in attracted FDI.

The Democratic Republic of Congo is a good example. According to political risk consultancy Maplecroft, the country ranks as “extreme” in its risk index for governance framework, regulatory and business environment, conflict and security and human rights and society. It scores 0.00 on business integrity and corruption. And yet in 2011 it attacted over a billion dollars in FDI, according to the UNCTAD report.

Sudan tells a similar story. Its risks are high or extreme for every category that Maplecroft lists, and while its business integrity and corruption score comes in at a comparatively virtuous 0.10, it doesn’t scream out to investors as attractive. Yet Sudan too attracted over $1bln in FDI.

The reasons why Sudan and the DRC may be attractive to investors are clear enough; they possess vast mineral, commodity and oil reserves. Yet previously that has not been enough to attract FDI on this sort of scale. Conversely, Libya’s oil revenues only attracted negligible investment in 2011.

In short, there seems to have been quite a role reversal between North and sub-Saharan Africa in light of the Arab Spring.

continue reading on Reuters

Investors hungover after wine binge

During this depression, it would appear that investors are no longer finding solace in turning to the bottle.

Fine wines are being hit hard by the global downturn, with the Liv-ex Fine Wine 100 index down 7.4 percent on the year, according to July’s Cellar Watch Market Report.

The Liv-ex Bordeaux 500 was down by 3.4 percent month-on-month – an especially disappointing showing given that the market is usually energised in June by new Bordeaux releases.

The close correlation of prices in wine and gold since 2004  had suggested that wine was proving very resilient to economic recession; concerns about its “luxury” status were perhaps outweighed by its alcoholic content.

However, since early 2011, the prices have been steadily declining, reflecting a sharp decline in the market for top end Bordeauxs in particular.

Only a fifth of the wines in the Bordeaux 500 are seeing year to-date increases, with buyers turning away from First Growths, which are traditionally seen as blue-chip investment wines, towards smaller producers. Latour is the best performing First Growth wine, posting a decrease of only 4% on the year.

continue reading on Reuters

SCOTUS and the ACA Ruling, Context and Analysis: Part 3 – Conclusion: a Pyrrhic Victory?

The coverage of the PPACA ruling has tended to run as follows: “Dramatically, Chief Justice Roberts upheld Obamacare, giving a big victory to liberals. The one qualification on their victory was that moot opinion on Medicaid, which may in practice protect states’ rights, but on the individual mandate, their needs were met. Even though the commerce clause was not found as a constitutional basis for the individual mandate, a constitutional basis was found, and cited, by Roberts, who delivered victory to Obama and the Democrats.” Hence in this excellent analysis of why Roberts voted as he did (which I haven’t really touched on), Reuters label the commerce clause ruling as a “pyrrhic victory” for conservatives, inconsequential when the costs of upholding the law are counted.

This way of looking at the ruling is myopic. It is appropriate when considering the policy alone; it is true that Obama’s biggest victories in the upholding of the PPACA followed from the protection of the individual mandate and his biggest defeat was the qualification of the use of Medicaid provision to coerce states to comply. However, as follows from my previous posts, constitutionally, the invalidity of the justification of regulation under the commerce clause is a much bigger event than the retention of the principles in federal transfers to states that have been practiced since 1923. Far from a pyrrhic victory, Roberts’ reasoning used a justification for the individual mandate – that it was a tax – that had been publicly disowned by the Obama administration during the arguments, and further restricted the clause in the constitution that, when expansively read, had justified the New Deal.

And so while today Obama may well toast the Chief Justice for a policy triumph, it is possible that in a year’s time, Romney will be in office, Obamacare will be repealed through legislative action and a restrictive reading of the commerce clause will be more firmly established as judicial precedent. At that point, liberals may wonder for whom this victory was pyrrhic.

SCOTUS and the ACA Ruling, Context and Analysis: Part 2 – the Medicaid expansion

The second key argument concerned whether or not the expansion of Medicaid provision, and its denial to states who don’t comply, puts an onerous burden on states, impinging on their sovereignty. The debate about “fiscal federalism” and the use of federal grants is an old one, and has traditionally been seen as one of the biggest threats to states’ autonomy.

That three of the majority (Kagan, Roberts and Breyer) held that withdrawal of existing Medicaid funds would be an unacceptable infringement of states’ rights seemed to be the most consequential reservation placed on Obama’s bill. However, in constitutional terms it is not much of a revolution. Ever since Massachusetts vs Mellon (1923), it has been ruled that federal grants have not been seen as an impingement of states rights, for so long as they are “inducement” and “not foisted upon States, no violation of sovereignty occurred. States had to choose between accepting Federal conditions and having no Federal support at all” (Bowles 1993). The Garcia vs SAMTA case referred to in the last post seemed to uphold Federal government’s ability to interfere in state’s affairs like any other employer when it comes to invasive mandates, but, as the arguments had hinted at, the Rehnquist court’s later rulings may have overtaken this, providing “enforceable limits on Congress’ ability to interfere with state sovereignty.”

As it happened, the PPACA ruling was very consistent with the ruling of Massachusetts. New Medicaid funds extended to the states may only be given if the states’ accept their conditions, which aren’t onerous so long as they’re voluntary, in line with the precedent in fiscal transfers. However, pre-existing funds may not be removed, as such moving of goalposts after initial conditions have been accepted would be an infringement of state sovereignty. This too is entirely consistent with precedent.