Economist hilites

Several worthwhile reads in the Economist:

The world suddenly looks bleaker

“Unfortunately, there is no one of Mr Rubin’s calibre close to Mr Bush; no one, indeed, in whom financial markets place much trust at all. Mr Bush has surrounded himself with businessmen such as Mr Snow and the likes of Karl Rove, his chief political advisor and a politician to his bones. Mr Bush wants to get re-elected, whatever the cost. One of the biggest threats to this is the “jobless recovery”, which is being linked politically (regardless of any economic arguments to the contrary) with the trade deficit. Politically it plays well to bash foreigners (particularly the Chinese, the new whipping-boys) for “rigging” their currencies. . .”

Though such rhetoric plays well with voters it has played very badly indeed with financial markets for the simple reason that such measures would undermine growth, not just in Asia and Europe but in America too. China is very unlikely to unpeg the yuan from the dollar. But other Asian countries have currencies that float more or less freely, and the yen has been floating upwards. Fears are rising that a strong yen (or other Asian currencies for that matter) will stifle growth everywhere, and stockmarkets have taken a bashing since the G7 announcement. Japan’s stockmarket, by way of example, has fallen some 6.5%.”

A copper-bottomed boom?

“For all the optimism, however, there is reason to be wary of claims that this is the beginning of a long bull run in commodities. In commodities, every bull market contains the seeds of its own destruction. Vietnamese coffee producers planted seedlings in the early 1990s, when prices were robust. As their harvests began to grow later in the decade, prices slumped. Much the same is true in metals industries, where rising prices lead to the opening of previously shuttered mines. Even as the gold market rises, it is watching for sales by central banks. Much of the recent increase in base-metal prices reflects producers’ slow response to signs that the global economy is picking up. When they do respond, a flood of new output is to be expected, followed by falling prices. Oil has so far been the only commodity whose producers have been able to prop up prices by maintaining a cartel.

One extra factor pushing prices upwards is speculative buying. Hedge funds, in particular, have been keen. Many such investors, as well as more staid pension funds, whose staple fare is equities and bonds, have noted commodities’ new allure and have piled in. Their bets are made easier by recently constructed indices in steel and gold. Some also suspect that hedge funds have increased the volatility of some markets; But mostly, their impact should be the opposite. The greater liquidity provided by such investors should reduce volatility, smoothing out any demand shocks.”

Peril on the sea

“South-East Asia is the home of piracy. There was an alarming 37% increase in incidents during the first half of this year. Raiders board ships, steal cash and kidnap crew members, then hold them for ransom. Some criminals even steal a ship and sell its cargo—then repaint it, equip it with false documents and put it to work. The region, with its lax security and poor maritime supervision, is famous for such “ghost ships”.

But according to a new study* by Aegis Defence Services, a London defence and security consultancy, these attacks represent something altogether more sinister. The temporary hijacking of the Dewi Madrim was by terrorists learning to drive a ship, and the kidnapping (without any attempt to ransom the officers) was aimed at acquiring expertise to help the terrorists mount a maritime attack. In other words, attacks like that on the Dewi Madrim are the equivalent of the al-Qaeda hijackers who perpetrated the September 11th attacks going to flying school in Florida.”

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