Given my typical lack of dedication, I have neglected to provide any updates. BAM! Time to binge!
China continues to lose
the fight against inflation:
Chinese inflation has hit its second 10-year high in two months, led again by a further sharp rise in meat prices. China's rate of consumer price inflation hit 6.5% in the year to August, up from 5.6% in July, said the National Bureau of Statistics.
Meat prices have risen 49% over the past year, caused by a shortage of pork after a series of disease outbreaks.
China's central bank has raised interest rates four times already this year to try to control inflation.
Less pigs
China, the world's biggest consumer of pork, has seen its pig population decline by 10% over the past year as a result of major outbreaks of blue-ear disease.
The Chinese government has moved quickly to stamp out the problem, but pork imports have surged as domestic supplies try to recover.
Beijing is said to be acutely aware that while the country's growing urbanised middle class can cope with the higher food prices, it is a major problem for the country's rural poor, who make up most of the population.
Non-food prices rose just 0.9% in the year to August.
"The risk is that if the economy continues to grow very rapidly, this inflation, which looks concentrated in food, starts spreading," said Rob Subbaraman, chief Asia economist for Lehman Brothers in Hong Kong.
Fortunately, the country's enlightened leadership has
a plan:
The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing's mounting concern over inflation. Beijing also stressed the importance of holding down market-driven prices during the forthcoming holiday period, saying it would have a direct impact on the country's "development, reform and stability."
Ensuring stable prices would also create favorable conditions for the opening of the ruling Communist Party's five-yearly congress on Oct. 15, a statement issued by six ministries said.
The government still administers a vast array of prices, including those for land, transport, utilities and fuel.
The ministries said that, in principle, the government would not introduce any new price changes for the rest of the year.
"All current rules on goods and service prices controlled by the government should be strictly implemented. Any unauthorized price rise is strictly forbidden," the statement said.
The ministries ordered local governments not to raise prices without the approval of the National Development and Reform Commission, the main planning agency.
The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August.
The ministries also issued a warning against price gouging and price fixing.
Chinese leaders are nervous that a rapid erosion of living standards could trigger social unrest, as it has before in China, most recently in the run-up to the pro-democracy demonstrations in Tiananmen Square in Beijing in 1989 that were put down by the army.
For its part, the People's Bank of China has also stepped up its drive to cap price increases and hold down inflationary expectations. The central bank raised interest rates last Friday for the fifth time this year.
The main source of inflation has been an increase in the price of pork, China's staple meat, caused by disease, rising feed grain costs and low prices last year, which deterred farmers from rearing more animals.
To keep a lid on pork prices over the holidays, the government would draw if necessary on the country's pork reserves, the ministries said.
They also said the authorities needed to provide ample supplies of grain, edible oil, eggs, aquatic products and mooncakes - the round pastries eaten during the Lunar Mid-Autumn Festival, which falls on Sept. 25 this year.
Separately, China is set to provide more aid to dairy farmers as part of an effort to control rising food prices, which have driven consumer price inflation, industry officials said.
They said the State Council, China's cabinet, was to meet Wednesday to discuss financial support for dairy farmers after increasing feed costs and low milk prices forced many to stop raising cows.
"There has never been a meeting before of State Council leaders to discuss dairy cows," said an official with the China Dairy Association.
Needless to say, we are not impressed. Also, we are very upset with the emphasis central banks and governments are putting on "non-core inflation". While we understand the need to discount sudden and impermanent demand spikes, at some point we need to accept that ENERGY IS A HUGE COMPONENT OF DEMAND AND IS UNLIKELY TO DEFLATE IN THE NEAR FUTURE.
Now that I have gotten that off my chest, we can move onto the next item:
Central to every policy discussion in response to a financial crisis... is the concept of moral hazard. Unfortunately, there is great confusion.... The term “moral hazard”... It refers to the prospect that insurance will distort behaviour, for example when holders of fire insurance take less precaution with respect to avoiding fire.... [I]t is used to caution against creating an expectation that there will be future “bail-outs”....
Moral hazard fundamentalists misunderstand the insurance analogy... the prospect that people may smoke in bed is not usually taken as an argument against the existence of fire departments. Moreover, if there is “contagion” as fires can spread from one building to the next, the argument for not leaving things to the free market is greatly strengthened. In the presence of contagion there is every reason to expect that individual institutions will under-insure because they will not feel obliged to take account of the benefits their insurance will have for others.
Second... solvent institutions can also fail because of illiquidity simply because creditors rush to withdraw their funds and assets cannot be liquidated fast enough. In this latter case the availability of external support averts needless panic and contagion. More subtly, but no less important, the knowledge that efforts will be made to stand behind solvent institutions facing runs reduces the capital institutions have to hold, encourages investment in productive but illiquid projects and reduces the risk of contagion.
Third... much of what financial authorities do in response to crises does not impose any costs on taxpayers... LTCM... no taxpayer money... was spent. A competent lender of last resort... turns a profit....
[P]rudent central banks will make judgments during financial crises not on the basis of “avoiding moral hazard” but rather by asking themselves three questions. First, are there substantial contagion effects? Second, is the problem a liquidity problem where a contribution to stability can be provided with high probability...? Third, is it reasonable to expect that the action in question will not impose costs on taxpayers? If the answers to all three questions are affirmative, there is a strong case for public action.
Larry Summers is a smart guy, and I am glad he is willing to make a case against the moral hazard argument. At the same time, however, the economic repercussions of this most recent Fed decision will only be felt in a year's time. The debate on moral hazard, I fear, will be settled at our next financial crisis.
On that note, a brief respite to deliver the SOB view of global markets. Before we proceed, please be aware that this is an unscientific projection delivered by a 22-year old boy who could not argue his way into an i-banking job. While I do work in asset management and have plenty of time to read, this is clearly no substitute for experience and intelligence.
In the short term, I see a stock bubble developing. The two main drivers will be a) the Fed decision and b) a fanatical belief that BRIC consumers can somehow cope with the implosion of the US economy. Unfortunately, massive flows like these do not reverse themselves quickly or painlessly. When you combine this fact with the likely instauration of more stringent lending standards and the collapse of low grade corporate debt, you have all the necessary ingredients for a cataclysm.
Of course, feel free to laugh at me in 12 months. In the meantime, do what Cramer and Kudlow so thoughtfully tell you to do and buy everything in sight. It will be a fun ride for three quarters before the inevitable switch to more defensive asset classes.
Eric Hobsbawm proves the importance of changing your mind, least you look like
an extremely learned imbecile:
IGNATIEFF: What that comes down to is saying that had the radiant tomorrow actually been created, the loss of fifteen, twenty million people might have been justified?
HOBSBAWM: Yes.
Personally, I never had the desire to finish his book, which reflects poorly on my scholarly endeavors. On the other hand, his obduracy reflects poorly on everything about him.
And now, for some pot shots:
- Carlyle Capital's CEO proves himself a master of criminal understatement (or understated criminality?) by declaring his firm to be in "capital-preservation mode." As Alphaville notes, he is about three months too late.
- Northern Rock has decided to delay its shareholder dividend. Again, Alphaville is up in arms, viewing this as a misappropriation of government resources.
- Even fans seem to doubt Apple's intentions.
- BP, ever the trendsetter, raises the bar on management transparency.
- Thoughts on Facebook: Whoever invented the Rolodex is clearly rolling in his grave. On a slightly more serious note, social networking provides insight into why none of us really care about the PATRIOT Act: we'd all volunteer the information if we thought it could help us score.
And that concludes one very large update. Expect smaller, more regular chunks once we return to our doctor-prescribed diet.
Listening to: The New Pornographers - Mutiny, I Promise You
