Hyperinflation or deflation?

Hyperinflation or deflation? It depends on your standard of comparison. We have had huge inflation since 2008 when measured in shares of RIMM (Research in Motion,) for example. Today it costs 10x as many RIMM shares to buy a McDonald's burger than it did four years ago, but has the price of a burger increased that much? In Latin America, we saw in the late eighties prices doubling each month in some countries in local currencies while they were dropping in terms of dollars. Were they experiencing inflation or deflation? As Einstein pointed out, it is relative to your terms of reference. I think we will eventually have hyperinflation measured in US dollars accompanied by deflation in real terms.

Ecuador loses competitiveness in bananas

Despite the government's efforts to maintain its reputation as the world's foremost banana republic through stupid and corrupt policies, Ecuador's competitiveness in the sector is declining, probably due to the effects of the oil boom.

Comment from Davy Stockbrokers in Dublin:

"FACTS: Ecuador banana sales have dropped by half, according to trade publication Fresh Plaza.

"ANALYSIS: Although Ecuador is a major banana exporting nation, accounting for about 25% of global exports in 2010, it has become less competitive with selling prices around $10.50/box versus $8.00/box in Colombia, Costa Rica and Central America. Fyffes, which sells 900,000 banana boxes to Europe weekly, currently uses Ecuador as one of its sources of supply but, according to a representative, it may soon cease purchases from Ecuador as competitiveness has been eroded."

India tries to curtail gold imports: Will other countries follow suit?

Gold accounts for one half of India's current account deficit, so the authorities want to reduce the imports by raising import duties. The question is whether or not this will increase the public's desire to partake of the forbidden fruit. The article from the FT is below. It is interesting that the FT's headline writers chose to describe of Indians' desire to hold their capital in the form of gold as an "unhealthy addiction." It certainly is unhealthy for those who wish to manipulate the value of money.


FT: Tuesday, January 15:

"India seeks ways to beat unhealthy addiction to gold"

News analysis

A rise in import duties is only one of the ideas under consideration, write Victor Mallet and Jack Farchy

It was no surprise that a deliberate threat at the start of this year by Palaniappan Chidambaram, Indian finance minister, to make gold “a little more expensive to import” sent shudders through the international gold market.

India is the world’s largest gold importer and accounts for more than a fifth of global demand. Last year, a drop in imports of about 20-25 per cent – perhaps caused by a previous increase in import duty but also the result of the slowdown of the domestic economy – was one of the main factors in gold’s relatively lacklustre performance.

“The focus on the cost of India’s gold imports at an official level could be seen as a threat to what is the largest physical bullion market alongside China,” says Tom Kendall, precious metals analyst at Credit Suisse in London.

What is not yet clear is whether the measures contemplated by the Indian authorities will actually curb the volume of gold imports, and so affect the price further.

Mr Chidambaram and other officials are concerned about the apparently unstoppable urge among the country’s 1.2bn people to buy gold jewellery and invest in bullion. There are two main reasons for this: the swelling current account deficit and the risks posed to the stability of the banking system.

India’s current account deficit hit a worrying 5.4 per cent of gross domestic product in the three months to September, and in some months gold imports accounted for half the gap. The “impact of huge gold imports on external stability” was described this month as “a major concern” by a Reserve Bank of India working group set up to study the issue of gold.

In its draft report, the RBI also spoke of “systemic concerns” arising from the “huge borrowings” of a growing number of so-called non-banking financial companies that lend money to Indian retail clients, storing their gold and gold jewellery as collateral.

One option for Mr Chidambaram, analysts say, is to increase the import duty from 4 per cent to, say, 6 per cent in an attempt to stifle demand. The revenue raised would have the beneficial side-effect of helping to trim the fiscal deficit. Higher tax, on the other hand, could simply divert more of the gold trade on to the black market.

In any case, says Kishore Narne, associate director for commodities and currencies at Motilal Oswal commodity brokers, only about 10-15 per cent of Indian consumers are price-sensitive when it comes to gold.

“It’s part of our tradition and we keep on buying gold,” he says. “It’s our compulsion. We can’t do anything about it.” The stock of the precious metal in India is estimated at between 12,000 and 25,000 tonnes, and greater prosperity in rural areas is pushing demand ever higher.

Another approach, championed by Raghuram Rajan, the government’s chief economic adviser, is to focus not on the desire for jewellery but on gold’s weaknesses as an investment. That means promoting non-gold financial investments that produce real returns for citizens, although the strategy has been undermined by gold’s strong performance in rupee terms as the rupee has fallen against the dollar.

Last but not least – and this would cut India’s external demand for gold while meeting domestic demand – the central bank and the government want to make better use of India’s vast existing gold stocks.

Ideas under consideration include various gold-backed financial products not requiring gold from abroad, such as an exchange-traded fund backed by central bank gold and a scheme under which public sector banks could lend on the physical gold they hold as collateral for loans.
Philip Klapwijk, of Thom-son Reuters GFMS, a leading precious metals consultancy, says: “[India is] quite concerned at the impact of gold imports on the balance of payments and that such a high proportion of savings is ‘sterilised’ by being in gold form instead of being put to productive use.”
In the end, however, it may be market forces – and not Mr Chidambaram’s suggested tax increases or any official scheme to recycle hundreds of tonnes of India’s idle gold – that succeed in suppressing demand for gold imports.

With some currency traders forecasting a rise in the rupee this year, and some commodity analysts seeing the end of gold’s international bull run, gold is likely to be a less attractive investment than it was. Indian consumers, however, have a history of ignoring attempts to wean them off their addiction.

“Even a 6 per cent premium over the international price is not going to reduce Indians’ basic desire to hoard the metal,” says Mr Klapwijk, who expects Indian jewellery demand to rise “decently” from last year’s poor showing.

“The Indian affinity with gold runs deep,” agrees Mr Kendall of Credit Suisse, noting that previous efforts to reduce demand, for example in 1962-68 when the government introduced restrictions on gold trading and ownership, merely resulted in an increase in smuggling. “Habits and attitudes towards gold do not change quickly.”

They treat us like dogs

Source: TLS November, 23, 2012

U.S. stock mutual funds gain $7.5 bln, most since 2001 -Lipper

The situation of the stock market compared to fixed income reminds me of a story:  Sam, an irascible fellow who was not much like by his neighbors, died and everyone showed up for the funeral either for the refreshments or to make sure he was dead.  At the appropriate moment in the service, the clergyman asked if anyone would say a few words of remembrance about Sam.  There was a long and awkward silence, so the clergyman said, "surely, there must be someone who has something to say about Sam?"  Finally, a longtime acquaintance stood up and said, "I'll say this for old Sam: his brother Henry was even worse."

Stock inflows were substantial in the week ending January 9th, according to Lipper .  With real interest rates already negative all over the world and high-quality stocks like Intel yielding 4.2%, the case for equities is so compelling as to be almost indisputable.  All that is needed for a big stock market rally is a dose of animal spirits.

From whence will these spirits come?  Perhaps it will come from Japan, where Mr. Abe seems intent on abolishing the last vestiges of central bank independence, consistent with what governments around the world are doing.  Japan lightening the spark of speculation would be highly emblematic to the rest of the world.

It is telling that central bank independence, long considered an important social good, is now being denounced as  unconscionable and even immoral by the likes of the formerly sane Joseph Stiglitz.  In demanding a weak currency and high inflation, Mr. Abe may be unleashing forces he can hardly comprehend, let along control, but they will likely lead to the aggressive deployment of capital that Keynes referred to as "animal spirits."

Here are the numbers for the week ending January 9th:

Migration: Is the American workforce becoming ossified?

The Wall Street Journal published some interesting statistics, the significance of which they did not really analyze, in an article today entitled  "Americans get moving amid torpid recovery"   

There are a couple of points of interest: 1. Americans are continuing to shift to the southeast and the west (ex-California)  2. Despite an uptick due to the current recession, internal migration is declining.

As to point one, people, particularly young people, are moving away from the states with heavy social overheads to the more efficient environments where jobs are being created.

As to point two, we are becoming older and more unwilling to move.  This is normal and understandable.  Of all of Newton's laws of motion, inertia has always been my favorite.  Moreover, I would think that the rapidly-growing reach of the social safety net has combined with lower incentives to work that have resulted from the decline in real compensation for labor has also been a factor.

I remember an article in the Financial Times some years ago that examined the problem posed by the fact that English people were reluctant to move from their homes to towns fifteen miles away to find work.  I observed the same phenomenon when living in France in the 1970's.  Now the USA is joining the club.

Implications of less striving include slower growth, more crime, and increased drug abuse and alcoholism in our Clockwork Orange society.

Greek tax evasion is institutionalized

A recent study¹ at the University of Chicago has concluded that Greece loses at least 1/3 of its deficit through tax evasion. (Other estimates puts this at more than 50%.)  They reached this conclusion by comparing bank lending to reported income, and they found that debt service on loans to many professions and industries exceeds 100% of reported income but that these loans have low default rates. Clearly, banks used actual rather than reported income in their lending standards.

My comment:  Since enforcement of taxes is very unevenly applied, Greeks feel justified in not paying them.

Here is a quote from the study:

“Ranked by euros tax-evaded, the largest offending industries are medicine, engineering,

education, accounting, financial services, and law. This industry distribution of tax evaders in Greece provides support for two incentive stories. First, paper trail matters. Industries with lower intensity of paper trail have more tax evasion. Second, politicians matter. The occupations of parliamentarians line up very well with the tax evading occupations, and these same parliamentarians failed to pass mild reform targeting their own industries.”

1“TAX EVASION ACROSS INDUSTRIES: SOFT CREDIT EVIDENCE FROM GREECE” Chicago Booth Paper 12-25. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2109500