Here’s the most nonsensical headline of the day: ‘Banks face rates dilemma as oil price soars’. “Pressure is growing on the Bank of England for another cut in interest rates next week. Consumers face soaring petrol bills while their spending is being squeezed by higher mortgage payments and rising energy bills,” writes Nick Goodway in the Evening Standard.
Lower interest rates are not going to bring oil prices down, we’re pretty sure of that. But the writer notices the problem faced by consumers in the Western world. Energy prices are rising. Interest rates want to rise, increasing the cost of carrying a lot of debt (nearly as popular as oil in the West.)
The trouble is that the rising oil price is already a result of interest rates that were too low for long. Oil now has a fundamental economic momentum of its own. People everywhere want it. But it’s harder to find. And so the price rises. Central bankers can’t do much about that, and cutting rates won’t make a lick of difference.
So 2008 begins much as 2007 ended. Investors are whistling past the proverbial grave yard, hoping that 10 years of credit-driven speculation in financial markets will go bust quietly, without any real economic consequences. Oil and gold prices tell us that there are already consequences.
The oil price came off US$100 late last week. Byron King, our colleague in the U.S., says the geology is leading off-shore oil explorers straight to Namibia. It could be “the next be thing.”
And what about financial markets in general? CLSA’s Chris Wood, who writes a client newsletter called Greed and Fear, puts it this way: Greed & Fear’s long-term view remains what it has always been since Nasdaq peaked in 2000. This is that Asia is in a structural bull market and America is in a structural bear market; though the extent of the downside in US equities will be determined in the longer term by the relative strength of the US dollar. As for Asia currencies, the story is much clearer. They remain in long-term bull markets, just like the region’s stock markets.