Bloomberg: Greenspan Says Current Account Gap May Begin to Fall

Greenspan Says Current Account Gap May Begin to Fall (Update7)

Feb. 4 (Bloomberg) -- Record U.S. trade and budget gaps may soon shrink, Federal Reserve Chairman Alan Greenspan said in London, addressing a major complaint of finance ministers and central bankers from industrialized nations who are meeting there this weekend.

The ministers from the Group of Seven nations have warned that the swelling twin U.S. deficits are a threat to global economic stability. Adjustment has been slow, even with a two-year decline in the dollar, because companies exporting to the U.S. have been willing to put up with smaller profits, Greenspan said. That's now changing.

``We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins,'' Greenspan told the Advancing Enterprise 2005 conference. At the same time, ``U.S. exporters' profit margins appear to be increasing, which bodes well for future U.S. exports and the adjustment process.''

The dollar rose as Greenspan's comments suggested its 16 percent drop since February 2002 against a basket of currencies from its 30 largest trading partners is beginning to have an effect on the U.S. current account, the widest measure of trade in goods, services, and financial transfers.

Market pressures ``appear poised to stabilize and over the longer run possibly to decrease the U.S. current account deficit and its attendant financing requirements,'' Greenspan said. The current account deficit widened by $17.5 billion, to a record $164.7 billion in the third quarter of last year, from $147.16 billion in the first quarter.

Market Reaction

The dollar rose after Greenspan's speech, gaining to $1.2869 per euro at 1:40 p.m. in New York, from as low as $1.3045 earlier.

The speech was important because it ``runs against conventional wisdom regarding the Fed's thinking on several grounds'' about the fiscal and current account deficits, said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. ``He laid out today the case that the foundation for relief on these fronts is already in place. Thus, we should downgrade our fears, or at least our perception of the Fed's fears, about these two issues.''

Greenspan said that from ``early 2002 to early 2004, the dollar's exchange rate against the euro and sterling, on average, declined about 30 percent, yet dollar prices of imported manufactured goods from the European Union rose only 9 percent, slightly more than dollar prices of U.S. manufactured goods during the same two years,'' Greenspan, 78, said.

Exports

That willingness of exporters to the U.S. to accept lower margins to preserve market share, along with strong American consumer spending financed in part by mortgage debt and faster growth in the U.S. than its trading partners ``offset'' the effects of the dollar's decline.

The squeeze on profit margins ``absorbed'' about three- quarters of the dollar's decline relative to the euro and the British pound, he said.

At the same time, Americans financed greater spending on imports in part by refinancing mortgages or selling homes to spend the equity. ``Interestingly, the change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit,'' he said. Consumers in the countries of U.S. trading partners don't have readily available access to mortgage financing ``to finance consumption expenditures,'' he added.

Budget Deficit

Those forces leading the U.S. current account deficit to expand are changing, he suggested. While foreign companies may have hedged their exposure to the falling dollar, many of those contracts likely will expire, he said. And now, although slowly, ``the lower dollar has undoubtedly boosted the competitiveness of U.S. exports and the profitability of U.S. exporters,'' Greenspan said.

In addition, ``some forces in the domestic U.S. economy seem about to head in the same direction,'' he said, as demands to cut the U.S. federal budget deficit mount. That would lower pressure to borrow from abroad, he said. ``The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume.''

Last year, Greenspan also called on reduction in federal spending as a way of slowing demand and growth in the trade deficit. He hasn't called for increases in taxes, which would also lower demand.

Asian Central Banks

Asian governments have been buying dollars ``in support of their currencies,'' Greenspan said. ``Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down.''

At the same conference today, Bank of England Governor Mervyn King suggested the mounting U.S. current account deficit and hoarding of dollar assets by Asian central banks might threaten the stability of the world economy.

King urged members of the Group of Seven industrial nations to agree ``on the nature of the risk'' and collaborate with China and India to rebalance currency reserves. He called on the International Monetary Fund to propose a series of changes. Greenspan is in London for a meeting of G-7 finance ministers and central bankers.

``There is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay,'' King said in his speech. Asia's accumulation of dollar reserves ``contributes to the potential instability of the international monetary system.''

Rubin's Concerns

China, Taiwan, and Korea had the largest stocks of international reserves in the world at the end of 2004. China's foreign reserves rose 51.3 percent to $609 billion, while Japan's reserves rose 26.3 percent for the year to $824 billion. All four countries ranked among the top eight nations in trade of goods with the U.S., according to the most recent government data through November.

Former U.S. Treasury Secretary Robert Rubin also told the conference America's record trade and federal budget deficits might lead to further declines in the dollar.

``The U.S. imbalances can have bond market effects and raise complex questions about our currency,'' Rubin, now chairman of Citigroup Inc.'s executive board, said. ``There is a fairly good chance the dollar could decline.''

Rubin called on President George W. Bush to rein in the budget deficit, which the White House anticipates will reach $427 billion this year. Bush pledges to halve the gap by 2009. ``It ``will not be fixed by tinkering around the edges,'' Rubin said. ``The U.S. is at a critical juncture.''

Some of the world's wealthiest investors expect the dollar to continue to fall, which would help narrow the current account deficit. George Soros, chairman of New York-based Soros Fund Management LLC, and Warren Buffett, chairman of Berkshire Hathaway Inc., have said they expect additional declines. And Bill Gates, the world's richest man and chairman of Microsoft Corp., said at the World Economic Forum in Davos, Switzerland Jan. 28 that he's short the dollar, expecting it to fall.

Bloomberg's Matthew Lynn: Are Commodity Prices Headed for Switch to Euros?

Are Commodity Prices Headed for Switch to Euros?
by Matthew Lynn

Feb. 3 (Bloomberg) -- Oil, metals and even aircraft may one day be priced in euros, not dollars. Dream on?

As the dollar stays weak on foreign-exchange markets, with little sign of a sustained recovery, there is speculation that at some point commodity prices will drop the U.S. currency. If that happens, it would herald a wider realignment of the global financial system -- and would indicate that the dollar's reign as the world's reserve currency was coming to a close.

It is too early to conclude the dollar is finished. Yet the challenge is real and growing. The world may well be set for a period during which the dollar and the euro compete for reserve status -- hardly a promising situation for global stability.

The dollar is being shunned for obvious reasons. The trade deficit grew to a record $609 billion last year, and George W. Bush's administration expects the budget shortfall to reach a record $427 billion in the year ending in September. The New York Board of Trade's Dollar Index, which measures the dollar against a basket of six currencies, has dropped 18 percent since the end of 2001.

There are three key responses to the changing status of the dollar in the global financial system. Central banks may shift their reserves out of dollars. The Asian currencies could end their pegs to the U.S. currency. And lastly, we could witness a breakdown in the pricing of commodities in dollars.

Central banks are already slowly raising the proportion of their reserves in euros, and reducing their dependency on dollars. That is likely to continue. Yet it will be a slow process -- not least because no central bank will want to dump dollars into an already fragile market.

Asian Pegs

Asian nations may or may not end their dollar pegs. Politics as much as economics will play the main role in those decisions.

That leaves commodity prices. If the dollar's unique status is indeed coming to an end, that is where we will see it first.

``It is crucial to the dollar's dominant role as a reserve currency that dollar pricing of oil should continue,'' noted Stephen Lewis, economist at Monument Securities Ltd. in London, in a recent analysis of the currency.

Is there a realistic chance of oil or any other major commodity switching its pricing into euros?

Last month, Hamad al-Sayari, the governor of the Saudi Arabian Monetary Agency, caused a ripple in the market with comments that he thought the role of euros in central-bank reserves would increase in the future, according to the Jeddah, Saudi Arabia-based English-language daily Arab News. More pertinently, he said it didn't matter much whether oil was priced in dollars or euros.

A Bookkeeping Matter

It might not matter to him, yet it does to everyone else.

Take a look at the issue from the perspective of an oil producer -- or a producer of any other major commodity.

At one level, which currency you price your products in is largely a matter of bookkeeping. The Saudis can price their oil in dollars, or the South Africans their gold, or the French all those new Airbus SAS aircraft, without it making much difference to their actual income. As soon as the dollars come in, they can sell them for whatever currency they want. If you are uncertain about the future price that your product is likely to command, then you can buy and sell currencies in the futures market.

Just because you price a product in a currency, you aren't compelled to hold that currency.

In the medium term it does matter. The producers of any product are looking for high and stable prices. If your product is priced in a permanently weak currency, then you have to keep raising the prices. That is far from satisfactory. At some point, the temptation to switch to a stronger currency will become irresistible.

Who Will Break Ranks?

Next, commodity pricing matters to the currency markets. The fact that commodities are priced in dollars is one of the key sources of that currency's strength. Everyone buying big-ticket items such as oil, metals or aircraft must buy dollars for their purchases. That is a major source of demand for the currency.

Who will be the first to break ranks? Right now, that is no more than speculation. Russian oil must be one candidate -- most of it is sold in Europe anyway. Airbus aircraft must be another candidate -- the bulk of its costs are in euros, and it has the luxury of now being the dominant producer in its industry.

Nobody should hold their breath. ``Maybe one day,'' says Airbus spokeswoman Barbara Kracht in an e-mailed response to questions. ``The point is that it is the customers who decide, and for the time being they are asking for quotations in dollars.''

Decline or Rout?

True enough. You need to hold a very strong market position to impose a new currency on your industry.

Much depends on the future path of the dollar. It has been weak for about three years now. So far, producers have responded with higher prices. Two more years of dollar weakness, and they may well decide to take more radical action.

It will only take one commodity producer to break ranks, and the move will be widely imitated. At that point, the dollar's decline could well turn into a rout. Commodity pricing is now the weakest line of defense for the dollar.

Fool.com: How to Analyze an Industry by Selena Maranjian

How to Analyze an Industry
By Selena Maranjian (TMF Selena)
February 3, 2005

You're smart to think about and evaluate an industry before thinking about and evaluating a company in it. In his book Competitive Strategy, Harvard Business School professor Michael Porter lays out five competitive forces that affect an industry.

Threat of entry. This can be assessed by evaluating how much capital it takes to enter the industry -- the economies of scale, switching costs, and brand value. It's easier to enter the lawn-service industry than the semiconductor equipment industry -- one requires some relatively inexpensive equipment, while the other requires factories and much specialized knowledge. Switching costs protect some Internet companies, for example. People will think twice about switching from Time Warner's (NYSE: TWX) America Online to another e-mail provider because they'll have to alert too many people of their new address.

Bargaining power of suppliers. If you're running an airline, there are only a few airplane suppliers, such as America's Boeing (NYSE: BA) and Europe's Airbus. It's more difficult in that situation to play one against the other, trying to strike a bargain. If there were many suppliers, they'd likely be competing more for your business, which might result in lower costs for you.

Bargaining power of buyers. This is affected by brand power, switching costs, the relative volume of purchases, standardization of the product, and elasticity of demand (where demand increases as prices fall, and vice versa). In book retailing, buyers have many choices and can easily compare prices online. This gives them bargaining power.

Availability of substitutes. If you're in the restaurant industry, your business will be affected by how easily people can buy takeout meals at supermarkets, how many people prepare meals at home, and the availability of other alternatives.

Competitive rivalry. The more competitive an industry is, the more likely you are to have price wars and reduced profitability. The airline industry is a good example here. Over the years, it has not offered the best returns to investors.

Take these things into consideration and you may be able to zero in on the most attractive company in the industry. Alternatively, you might learn that the entire industry just isn't as attractive as you thought.

Reuters: Steel Sector Fuels Demand for Coking Coal

Steel Sector Fuels Demand for Coking Coal
January 30, 2005 10:05:00 AM ET
By Steve James

NEW YORK (Reuters) - Mining companies, raking in big profits from suddenly sky-high coal prices, are also poised to cash-in on the booming steel industry's need for coke to fire blast furnaces.

Massey Energy Co. (MEE), one of the ``Big Four'' U.S. coal producers, said on Friday it is increasing production of metallurgical, or coking coal, over the next few years as demand from steel manufacturers grows.

``With steel demand and prices as they are, they (steel makers) want maximum coking to run their ovens with our high- quality coke,'' Massey Chairman and Chief Executive Officer Don Blankenship told Wall Street analysts on a conference call. ``It presents more market opportunities.''

Richmond, Virginia-based Massey produced 42 million tons of coal during 2004, three-quarters of it steam coal, which is primarily sold to utilities to fuel power plants.

But 10 million of those 42 million tons were metallurgical coal and Massey expects the amount to rise to 13 million to 14 million tons in 2005.

Peabody Energy Corp. (BTU), whose coal produces more than 10 percent of all U.S. electricity, said it will use a portion of its capital expenditure this year to extend the life of mines that supply the metallurgical markets.

And Consol Energy Inc. (CNX) is considering a substantial investment to expand the Buchanan mine in Virginia, which produces 5 million tons of coking coal per year.

Consol is bullish on the coking coal markets, where demand has allowed it to lock-up all current met coal production under contracts through 2007.

``We will continue to be a player in the metallurgical coal markets,'' CEO Brett Harvey told analysts.

The sudden enthusiasm for humble coke is due to the current boom in steel-making, which was fueled in part by China's economic growth.

``Current conditions suggest that the increase in metallurgical coal demand in China, India and Japan may very well outstrip the ability of suppliers to respond,'' Massey said on Thursday when announcing a fourth-quarter profit after a loss the year before.

Asked about increased production targets for metal coal, Massey's Blankenship said: ``We have some of the strongest metallurgical coal in the world.

``We think the metal market will be steady to up slightly in '05. It favors us in a market where they want to run coke ovens at the highest capacity.''

Only a handful of companies in Central Appalachia, where Massey mines much of its coal, have significant metallurgical coal reserves, he said.

Massey expects metal coal production of around 15 million tons in 2006 and it could go up to 18 million in 2007.

``It could expand, but we don't have market commitment for those tons,'' said Blankenship.

Coal prices have soared in the last two years as higher natural gas and oil prices have seen many utilities switch to coal for their power plants. For example, Eastern (U.S.) rail coal, which was selling on the spot market for around $28 in October 2002, is now going for around $58.

And there is no end in sight for the boom in coal, according to Blankenship.

``The market for coal here and abroad remains very healthy,'' he said. ``High gas prices favor coal as the fuel of choice. Total U.S. coal production was up 3 percent in 2004 and the demand for metallurgical coal has allowed the strong prices to persist.'' But transportation problems -- railroad bottlenecks and barge delays in cold weather -- continue to plague coal shipments.

Asked about the coal stockpiles of utilities, he said that, on average, ``they are 6 to 8 days below where they want to be and some are 20 days below.''

© 2005 Reuters

Resource Investor: Change in Philippines Investment Climate Aids Mindoro

Change in Philippines Investment Climate Aids Mindoro
By Derek Moscato
31 Jan 2005 at 11:49 AM EST

VANCOUVER (ResourceInvestor.com) -- Surging interest in Asia-Pacific mining plays helps Edmonton-based Mindoro Resources be loud and proud when talking up its Philippines gold and gold-copper projects. Yet some skeptics say that the country isn’t ready for prime-time investment just yet.

Mindoro’s three projects comprise Batangas, a 14,000 hectare land package within a gold-copper belt; Surigao, a 24,000 hectare land package where the company has paired off in a $2 million exploration joint venture with Panoro Minerals; and Pan De Azucar, a smaller land package where drilling has encountered copper, gold, zinc and silver.

On the upside for Mindoro, an improving investment climate in the Philippines is being matched by an improving political climate. In a majority decision this past December, the Supreme Court of the Philippines confirmed the legality of the 1995 Philippone Mining Act, which allows for 100% ownership of large mining projects (those greater than US$50m investment).

According to Tony Climie, president and CEO of Mindoro, “The Philippine's geological potential has never been in dispute. Now, with foreign ownership uncertainties removed, we are very pleased to be at the forefront of the dawn of a major mining industry in the Philippines."

Mindoro VP Penny Gould echoed that sentiment in an interview with Resource Investor, and the positive ramifications it could have for the company. “We've been there since 1996, and we've seen many changes, particularly in the past few years,” she said. “In Australia, they've recognized the opportunity there far earlier than we here in North America have.”

Big in Germany

Shares of Mindoro, which trade on the Toronto Venture Exchange, currently trade hands at roughly C$0.27, with a 52-week range of $0.18 to $.40.

The company is hoping that its new listing on the Frankfurt Exchange will create a stronger investor base and a higher international profile. "Listing on the Frankfurt Stock Exchange will greatly increase the profile of Mindoro with both private and institutional investors across Europe," said Climie in an issued statement

According to Mindoro chairman Gerhard Kirchner, an Austrian national who speaks German and travels to Europe often, the company is garnering strong interest there. “We are the most traded junior company on the Frankfurt Stock Exchange,” he told Resource Investor.

It’s also a less-saturated market in terms of junior miners, says Gould. “In North America, if you look around at this conference, you are one of hundreds.”

And the extra interest in Germany is impacting the company’s business model in Canada. “Demand out of Frankfurt has increased the interest back here on the Venture Exchange,” she says.

It’s also hoped that an advisory board created this past summer will enhance the company’s profile in North America and beyond. The advisory board members are Terry A. Lyons, chairman of Northgate Minerals, and Michael Jones. CEO and director of Platinum Group Metals.

In addition, they’re counting on guidance from company director Oscar Reyes, who might help Mindoro navigate the sometimes tricky bureaucratic and business waters of the Philippines. Reyes previously served as top boss for the Philippines outpost of Shell Oil, and oversaw the offshore Malampaya oil and gas project that was brought into production in that country in 1998.

His presence might also help sway otherwise cautious investor who are still cold on the Philippines, especially after a recently released business survey conducted jointly by Asian Development Bank and World Bank. The report, entitled Moving Toward a Better Investment Climate, cites some major challenges and concerns in the country, including weak macroeconomic fundamentals, corruption, infrastructure issues, and excessive business regulations.

“Buzzword” Key Indicator to the Mining Index Profit Taking

“Buzzword” Key Indicator to the Mining Index Profit Taking

Oh I forgot to include this in my weekly newsletter. Last Friday during a meeting with my principals I said that a correction in the Mining index was imminent given that newspaper headlines or the mainstream media have been overly exuberant over the turnaround industry. Just consider, in last Friday’s headlines the Philippine Daily Inquirer and the Businessworld had this banner on its front page “Mining, new business buzzword in the Philippines”.

When everybody becomes too confident and takes on one side of the trade then it becomes crowded and unsustainable, hence a correction. On the short term mining stocks are due for profit-taking after a blistering run. Over the longer period for as long as the prices of its underlying commodities remain at this levels or move higher and if there are no impediments or disruptions in the mining companies’ operations then these opportunities could be considered as buying windows.

Bloomberg: Microsoft's Gates, World's Richest Man, Bets Against the Dollar

Microsoft's Gates, World's Richest Man, Bets Against the Dollar

Jan. 29 (Bloomberg) -- Bill Gates, the world's richest person with a net worth of $46.6 billion, is betting against the U.S. dollar.

``I'm short the dollar,'' Gates, chairman of Microsoft Corp., told Charlie Rose in an interview in front of an audience of about 200 at the World Economic Forum in Davos, Switzerland. ``The ol' dollar, it's gonna go down.''

Gates's comments reflect the same view as his friend Warren Buffett, the billionaire investor who has bet against the currency since 2002. Buffett said last week that the country's trade gap will probably further weaken the dollar, which fell 21 percent against a basket of six major currencies between January 2002 and the end of last year.

``It is a bit scary,'' Gates said. ``We're in uncharted territory when the world's reserve currency has so much outstanding debt.''

The U.S. is borrowing to finance record budget and trade deficits. Total U.S. government debt stood at $7.62 trillion as of Jan. 27, up 8.7 percent from a year earlier.

Forbes magazine's list of billionaires ranks Gates, 49, No. 1. Buffett, 74, is second, with more than $30 billion. Almost all of it is in Berkshire stock.

The two have been friends for years, taking vacations together and playing online bridge. Gates in December joined the board of Berkshire Hathaway Inc., the investment company that Buffett runs.

China `Change Agent'

The country is importing more than it exports, and the government is funding part of its budget deficit by selling bonds to foreign investors, Buffett said in an interview with CNBC Jan. 19.

``Unless we have a major change in trade policies, I don't see how the dollar avoids going down,'' Buffett said.

Gates described China as a potential ``change agent'' for the next two decades. ``It's phenomenal,'' Gates said. ``It's a brand new form of capitalism.''

His $27 billion foundation in September received approval from China's foreign-currency regulator to invest as much as $100 million in the nation's yuan shares and bonds.

Gates, holder of almost 1.1 billion Microsoft shares with a market value of about $29 billion, also owns about 3,580 Class A shares of Berkshire Hathaway. His personal investment vehicle has reported holding $3 billion worth of stock in 14 companies, including cable provider Cox Communications Inc. and the Canadian National Railway Co.

New York Times:Saudis Shift Toward Letting OPEC Aim Higher

Saudis Shift Toward Letting OPEC Aim Higher
By JAD MOUAWAD

Over the last year, Saudi Arabia has quietly endorsed a shift in strategy that was once championed by only a handful of OPEC's more radical members, like Iran or Venezuela, who were pushing for prices higher than those of the last two decades.

Instead of enforcing what has been OPEC's official policy since March 2000 and defending prices of $22 to $28 a barrel, Saudi Arabia, the group's most powerful member, has acted to nudge the group's reference price closer to $40 a barrel. Along the way, OPEC has grown increasingly fond of high prices, with crude oil trading near last year's records.

While the century-old oil industry has been through a number of boom-and-bust cycles before, OPEC's strategy carries risks. For consuming nations, high oil prices could derail economic growth and plunge the world into lasting recession; for producers, it could mean lower demand for their commodity in the long run as consumers shift to alternative fuels or promote energy-conservation policies.

The shift by the Saudis adds to their uneasy relations with the United States. Based for more than half a century on cheap oil in exchange for security, those relations have not recovered from the aftermath of the terrorist attacks on Sept. 11, 2001.

It also underlines a belief that after the oil shocks of the late 1970's and 1980's, modern economies can better withstand higher oil prices than in the past.

"My view is the world is not suffering, as far as economic growth is concerned, from where prices are today," Ali al-Naimi, Saudi Arabia's oil minister, told Reuters at the World Economic Forum in Davos yesterday. "The price today doesn't seem to be affecting economic growth negatively, and we do not want it to."

OPEC's approach will be discussed this weekend when the Organization of the Petroleum Exporting Countries meets in Vienna to consider whether cuts in production are warranted to fend off a slowdown in demand in the second quarter.

Many OPEC oil ministers, like the current president, Sheik Ahmad al-Fahd al-Sabah of Kuwait, indicated recently that they would leave production unchanged. They estimate that keeping the current level of 27 million barrels a day will not cause prices to fall.

OPEC's policy shift has yet to be made public, but it coincides with an emerging consensus among analysts, traders, and oil companies that prices will be substantially higher in the coming decade than the average of $20 a barrel in the 1990's.

At a time when prices already seem high, oil-producing countries need additional revenue to deal with social and economic problems at home; many have young and rapidly growing populations, with high unemployment and rising public debt. That explains why Saudi Arabia is shifting away from its previous view.

Nordine Ait-Laoussine, a former OPEC secretary general and oil minister from Algeria who now heads a consultancy in Geneva, said, "I don't know if Saudi Arabia has become a price hawk, but for sure, it isn't a price dove anymore."

Last year, OPEC's 11 members - Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela - received $338 billion in revenue from oil exports, a 42 percent increase from 2003, according to figures compiled by the federal Energy Information Administration. That agency, part of the United States Department of Energy, forecast a 2 percent increase in OPEC revenue for 2005.

Adjusting for inflation and population growth, OPEC's revenue per capita dropped to $600 in 2004, from a high of $1,800 in 1980. For Saudi Arabia, where the population has more than doubled in the last 25 years, per capita revenue has dropped from $22,000 in 1980 to $4,000 last year. "They have higher revenue needs because they have higher spending, especially on security or social services," said Lowell Feld, the senior world oil market analyst with the Energy Information Administration, who compiled the figures.

Paul Horsnell, director of energy research at Barclays Capital in London, said: "What OPEC is going through is a delicate choreography. Everyone recognizes that $20 a barrel is too low a price. All OPEC is doing now is accompanying where the market sees prices going in the future. But there's nothing terribly explicit about it."

When they met in December in Cairo, OPEC ministers were jolted into action by rapidly falling prices. Within weeks, oil traded in New York had tumbled from its $55 a barrel high in October to around $40 a barrel as the group met. OPEC, which supplies a third of the world's oil production and half of the exports, decided to trim its output by one million barrels a day, or 4 percent, to stem the slide.

The strategy worked as prices rebounded. Crude oil futures in New York are up 15 percent since the beginning of the year. On Thursday, crude oil closed at $48.84 a barrel, up 6 cents, on the New York Mercantile Exchange.

"OPEC's actions speak louder than their words," said Lawrence J. Goldstein, president of the PIRA Energy Group, an oil consultancy in New York. "It was not so long ago that Saudi Arabia mentioned $25 as a fair price. But they seem to have dramatically shifted their price to $35 a barrel. They won't admit it because that would have enormous political consequences."

Because transactions on the oil market are priced in dollars, the currency depreciation in the last two years has been one of OPEC's main concerns and a central argument in favor of higher oil prices.

In its last monthly report before Sunday's meeting, OPEC highlighted that issue again. The report said that the benchmark was worth $23.50 if adjusted for inflation and currency fluctuations. That would put it at the low end of OPEC's current price range.

"Their reference price is the OPEC basket and what that represents in terms of purchasing power for them," said Vera de Ladoucette, an analyst with Cambridge Energy Research Associates, an oil consultancy in Paris. "Their alarm bell is $35 for the basket."

To be sure, OPEC alone is not responsible for high prices. Since the beginning of 2002, when the current rally started, a series of unconnected events conspired to push prices up - the war in Iraq, production disruptions in Nigeria, strikes by oil workers in Venezuela and Norway, hardball politics in Russia and a hurricane in the Gulf of Mexico named Ivan.

Still, Saudi officials repeat that their government's policy is to keep oil markets well supplied, not rationed. Crown Prince Abdullah, who has been governing Saudi Arabia since King Fahd suffered a stroke in 1995, said in August that he favored oil prices of $25 to $30 a barrel.

The kingdom took steps last year to nudge prices down, stepping up production to some 10 million barrels a day and accelerating its program to add production capacity.

"Saudi Arabia has concluded that for the first time since the 1970's, an overall expansion in production capacity is justified," Brad Bourland, the chief economist for the Samba Financial Group in Riyadh, wrote in a recent report. He said that Saudi Arabia had increased its capacity to 11 million barrels a day, with the addition of two new fields, Abu Sa'fah and Qatif, and is starting 2005 with excess capacity of about two million barrels a day.

But Saudi officials remain evasive on a timetable for raising capacity. That issue is reflected in the debate over Saudi Arabia's pivotal role in the oil market, according to the Center for Global Energy Studies, a market analysis group.

"Boosting capacity risks undermining oil prices and with them, the kingdom's oil export revenue," the group, founded by Sheikh Ahmed Zaki Yamani, the Saudi oil minister for much of the 1970's and 1980's, said this week. "Better, then, to save the money and seek higher prices, especially as these higher prices show little sign in the short term of undermining global oil demand."

Prudent Investor says...

Bye bye cheap oil!

International Herald Tribune:UN urges global action on U.S. debt

UN urges global action on U.S. debt
By Elizabeth Becker The New York Times
Thursday, January 27, 2005

WASHINGTON The United Nations has urged all major industrial countries, especially Europe and Japan, to help the United States reduce its twin deficits by spurring their own economies to grow faster.

In its report, World Economic Situation and Prospects 2005, the world body said on Tuesday that the twin budget and trade deficits of the United States were throwing the global economy off balance.

It echoed warnings already issued by the International Monetary Fund and other financial institutions in saying that the United States cannot continue to maintain such huge debts.

"What we really need is a major advancement in cooperation among the advanced economies to help the U.S. get out of this problem," said José Antonio Ocampo, the UN under secretary general for economic and social affairs.

The U.S. deficit is a global problem in part because it is the fastest-growing economy among the leading industrial nations and, together with China, is largely responsible for helping pull the world economy out of doldrums.

But whereas China has become an economic engine through its huge growth in manufacturing and exports, the United States has pushed growth by consuming far more goods than it exports, raising concerns about sustainability.

The report said that the world economy grew at a healthy 4 percent rate in 2004 but that the cyclical recovery was now past its peak. Gross world product will grow by 3.25 percent this year, it predicted.

Over all, developing economies including those of China and India are doing better than the industrialized nations, the report said.

That, Ocampo said, is the case despite a "peculiar mix" of high commodity prices, high oil prices and a lack of major disturbances in financial markets.

The U.S. trade deficit is expected to come in at a record $600 billion for 2004. The Bush administration has promised to reduce spending in its new budget and has called on Beijing to revalue the yuan against the dollar to make Chinese exports more expensive, which in turn would help shave the U.S. trade deficit.

But the UN report said the problem was more complicated. Letting the dollar fall could spur U.S. growth and lead to more consumer spending there on foreign goods; but a greater drop in the dollar's value could hurt the economies of Europe and Japan that need to grow in order to buy U.S. exports and help right the trade imbalance.

The U.S. Treasury secretary, John Snow, already plans to ask for immediate help from the wealthiest U.S. trading partners at a meeting next week in London of the finance ministers and central bank governors of the Group of 7 leading industrialized democracies. Snow has said he will tell these countries that if they are concerned about the U.S. deficit, they should purchase more American goods and services.

For their part, the Europeans will argue, instead, that the countries should make a coordinated effort to stop the drop in the dollar, a move that would help spur their own growth but one the administration opposes.

The report urges the major industrial countries to work out a solution that will help the United States reduce its deficits by spurring their own economies to grow faster, especially Japan and the countries of Europe.

Most of the wealthiest European countries have trade surpluses, though not as large as those of China and Japan. The exceptions are Britain, which has a current-account deficit equivalent to 2 percent of its gross domestic product, and Italy, with a deficit of 1.1 percent of GDP.

"The message of our report is that the industrialized countries all have their own problems that will hurt growth," Ocampo said.

"The U.S. has its deficits, while Europe and Japan are slow in recovering. But the most challenging is the U.S. twin deficits."

Forbes.com: "Economist: China Loses Faith in Dollar"

Economist: China Loses Faith in Dollar
Forbes
01.26.2005, 03:25 PM

China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum.

At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."

But he stressed that the Chinese government is under no pressure to revalue its currency.

China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to US$1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency.

"The U.S. dollar is no longer - in our opinion is no longer - (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English.

"So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars - those kind of more diversified systems," he said.

"If you do this, in the beginning you have some kind of initial shock," Fan said. "You have to deal with some devaluation pressures."

The dollar hit a new low in December against the euro and has been falling against other major currencies on concerns about the ever-growing U.S. trade and budget deficits.

Fan said last year China lost a good opportunity to do revalue its currency, in July and October.

"High pressure, we don't do it. When the pressure's gone, we forgot," Fan said, to laughter from the audience. "But this time, I think Chinese authorities will not forget it. Now people understand the U.S. dollar will not stop devaluating."

Asked how speculation about revaluation could be curbed, he noted that China imposed a 3 percent tariff on Chinese exports.

Some Chinese experts say that perhaps inflation can be reduced this year, "but I'm not that optimistic," Fan said, noting that fuel prices keep rising.

"So maybe China (will) have 4-5 percent inflation in 2005," he said.

Fan, whose nonprofit institute specializes in analyzing the Chinese economy, stressed that the country's development is a long-term process that will take decades, maybe a century.

Since China's economic modernization began over a decade ago, 120 million rural laborers have moved into cities, but another 200 or 300 million people need to move into the cities from the countryside to spur development, he said.

"The income disparity is huge, and income disparity will stay with us for a long time, as long as those 200 to 300 million rural laborers stay in the countryside," Fan said.

Nonetheless, William Parrett, chief executive of Deloitte Touche Tohmatsu, told the panel that Chinese companies are making significant progress in becoming global giants, led by state-owned companies.

"It's probably at least 10 years before the objective of the government of 50 of the largest 500 companies in the world being Chinese" is achieved, he said.

Prudent Investor Says…

Oh no…Don’t you think that the Chinese are getting a little bit more audacious?

Businessworld: Southeast Asia currencies may be next big bet

Southeast Asia currencies may be next big bet

SINGAPORE -- Thailand, Indonesia and the Philippines could see their currencies outperform those of richer Asian neighbors in the coming months as foreign investors fuel a stock market boom on signs of a sustained economic upswing.

The three economies fell off the radar screens of global investors after the 1997 Asian financial crisis. The rise of China and India since the turn of the millennium pushed Southeast Asia further into the shadows.

Not any longer. Leading stock market indices in all three countries have almost doubled in the past two years, even as their currencies weakened or underperformed those of their powerful neighbors South Korea, Taiwan, Singapore and Japan.

Analysts now say it's time for the Southeast Asian currencies to play catch up with, or even outrun, their northern rivals to reflect an improvement in their economies and the confidence investors have shown in the region's companies.

"Our indicators are pointing to an outperformance of the Southeast Asian currencies in the coming months and a stalling of the (north Asian) currencies," said Philip Wee, strategist at Singapore's DBS Bank, Southeast Asia's largest lender.

"Although the dollar looks weak, it's difficult to squeeze out more from north Asian currencies. So the path of least resistance is Southeast Asia. Do the policy makers mind? No!"

The central banks have largely stayed out of the currency markets in the past few months even as their counterparts in South Korea, Taiwan, Singapore and India accumulated tens of billions of dollars -- brought in by foreign investors and local exporters -- to curtail strong gains in their exchange rates.

Some analysts say this intervention could well continue as demand for North Asia's electronics exports slows. That would make currencies of economies boasting resurgent domestic demand -- such as Thailand or Indonesia -- relatively more attractive.

Thailand expects its economy to grow between 5.5% and 6.5% this year. Indonesia is hoping for growth of more than 6%. The Philippine economy, which expanded at its fastest pace in 15 years in 2004, may grow 6.3% this year.

With that kind of growth, Claudio Piron, a currency strategist at JP Morgan Chase, expects the baht to outperform all other Asian currencies, except the Taiwan dollar, in 2005.

"The expected resilience of the baht is explained by two key drivers: an upturn in the domestic investment cycle and continued global growth."

He predicts the baht, already at a 4-1/2-year high, will firm almost 5% to 36.8 per dollar by the end of the year despite losses suffered by Thailand's tourism industry from the Dec. 26 tsunami.

The tsunami wreaked most devastation on Indonesia. In its aftermath, Indonesia attracted billions of dollars in foreign aid and was granted more time to repay government-to-government debt.

The inflows, coupled with the new government's stepped-up efforts to lure back foreign direct investors, are helping to show the rupiah in a new light.

"I particularly like Indonesia; their banks have started lending again," said Wee at DBS Bank.

Doubtless, Southeast Asian nations are far from solving their deep-rooted problems -- widespread poverty, lack of pricing power overseas because of their reliance on low-value-added exports, endemic corruption and bottlenecks to investment.

"I'm long on the baht but I'm not a structural bull for rupiah or the peso," said Bhanu Baweja, a strategist at UBS.

While Baweja agrees that the rupiah and the peso are both undervalued, he does not expect them to outperform because foreign investments are not strong enough. The currencies could get hurt once the United States raises interest rates, he said.

In the case of the Philippines, the government's inability to speed up fiscal reforms led Standard & Poor's this month to cut the country's long-term debt rating by one notch. Yet the government beat its budget deficit target for 2004 and expects to cut the shortfall further this year.

The peso, the best-performing Asian currency so far in 2005, may benefit further from pledges by Chinese firms to invest $1.6 billion in the country's mining industries and from a $1 billion bond that the government plans to price on Wednesday, said Irene Cheung, head of Asian currency strategy at ABN AMRO Bank.

She said stock investors had noted the new optimism about Southeast Asia and it was time currencies reflected that change.

Indonesia's key stock index powered ahead this month to record highs, the Philippine index raced to a five-year high and the Thai stock market benchmark rose to a nine-month high.

"The baht and the peso, two of our favorite currencies, continue to benefit from equity inflows," said Cheung. -- Reuters

The Prudent Investor Says…

I have been writing about this ‘regional currency impetus’ since the last semester of last year. Today, the unfolding developments in favor of the domestic currency are being carried by the mainstream media, which should provide for a psychological boost and reaffirm the emerging trend. And as I have written before, expect capital flows to the domestic economy to accelerate as the trend becomes entrenched.

Financial Times Editorial: Dollar dilemma

Dollar dilemma
Financial Times
Published: January 25 2005 02:00 | Last updated: January 25 2005 02:00

The fate of the dollar rests in the hands of a handful of central bankers in Asia. We have known this for some time. Since the foreign private sector shows insufficient appetite for US assets, the US relies on central bank purchases to fund its current account deficit and the acquisition of foreign assets by US residents. By absorbing the excess supply of dollars these central banks stop their own currencies appreciating against it. This Faustian bargain underpins today's currency prices and trade patterns and sustains global imbalances. Any suggestion that foreign central banks may be losing their hunger for dollars is highly significant.

A new survey suggests that central bankers are beginning to ponder whether it is in their interest to carry on buying dollars. This does not signal a rush for the exits. Much of the rise in the share of reserves held in euros is a valuation effect. Two-thirds say they want to keep the proportion in dollars unchanged this year. Neither Japan nor China - which together hold 40 per cent of the world's reserves - took part in the survey. Yet one-third of those polled did indicate a desire to increase the share of reserves held in euros. Eurozone capital markets are seen as liquid. Not a single respondent wants to hold a greater share in dollars.

It would be surprising if central bankers were not thinking very carefully about what they should be doing. The fall in the dollar has already resulted in big capital losses for those holding large dollar reserves. They risk far bigger losses if the so-far steady decline turns into a rout. The importance of capital loss increases as reserves rise relative to gross domestic product. For example, Malaysia's reserves are now equal to 54 per cent of GDP, up from 34 per cent two years ago.

Could a country with a de facto dollar peg diversify its reserves without appreciating against the dollar? Many assume not. In fact the answer, as so often in international economics, depends on whether the country in question is "small" or "large" in this context. A "small country" with medium-sized reserves, such as Thailand, Malaysia or even India, could continue to absorb surplus dollars on the bilateral currency market, but sell its stock of dollars for euros. The effect would mainly be to push the euro up against the dollar. The central bank's own currency could remain pegged.

A "large country" - Japan or China - could also embark on the same strategy. But the scale of the dollar sales would probably cause a generalised dollar collapse, with private buying disappearing altogether, demanding still greater central bank purchases. The central bank would lose control over domestic money supply, resulting in soaring inflation that would in turn push up the real exchange rate. In practical terms, Japan and China probably cannot diversify to a meaningful extent without letting their currencies rise. So keep an eye on the other Asians. Who will break ranks first?

The Prudent Investor says

This “Armageddon” scenario precisely is what I am afraid of. For the Editorial of the Financial Times, which is a mainstream business outfit, to raise this concern simply reflects the gravity of the imbalances. In other words, in the spectrum of risks, this is not an improbable event. This also implies that in such a case where the Central Bank does ‘lose control over money supply’ means that there could be that risk of a ‘crash’ in the US Dollar based currency system. And as to what money system, in its aftermath, the world will adopt remains virtually uncertain. Yet history has shown that under these circumstances, tangible assets will most likely preside as the transition. Hence precious metals today serve as two purposes, one as commodities and most importantly, as an insurance. Profit from folly and not be a part of it!