Simple Question with interesting answers?

Since I never posted anything interesting, I had this discussion in one of the classroom sessions during MBA.

How world would be if we have one global currency?

Subprime Market and impact on Oil Prices

So, with recent turmoil in the subprime markets, most of the fixed income markets such as commodities market for Oil, Gold, Natural Gas Futures have all seen lot of volatility and trading. With Oil & Gold rising to historic high levels. Today, in a discussion with a trader from Citi, we were discussing/speculating if Oil would continue to go higher due to impact from Sub-Prime?? I argued against it, and speculated that Oil Prices are no longer that closely coupled with US markets, due to huge demands driven by China and India, and also the impact of sub-prime, is slowly getting un-covered and financial losses of companies such as Citi are much lower than what markets predicted, therefore US economy will not head into recession, and thus impact on Oil Prices would be low bringing them back to normal 65-70$ levels. Some experts will also argue in the other direction, and say that because sub-prime markets will continue to be a problem, and thus short term investors will hedge their investments by investing in Oil(same as Gold). What do you guys think? Oil a Buy or a Sell in the futures market?? Only time will tell the answer, but for now I am voting for lower oil prices in near future (1-2 months).

The Great Moderation

Very Interesting article from Financial Times. Notice the debate over what has cause “The Great Moderation” in output fluctuations and inflation rates! What has caused the last two decades of mild business cycles and mild inflation. Is it:

1 Better monetary policy (Feds controlling supply of money)

2 Increased productivity (Technology)

3 Globalization

4 Or a combination of all three.

So the interesting questions is: will these positive drivers continue? Greenspan says no, Taylor says yes, Rogoff says no, Blinder says yes. What do you all think?

BTW, Great Moderation is the period between 1980s and 2002 or so, during which US economy grew rapidly with little or no inflation.

Fed treads a fine line between perils

By Krishna Guha in Washington

Published: September 18 2007 03:00 | Last updated: September 18 2007 03:00

If Alan Greenspan is right, Ben Bernanke and his colleagues at the Federal Reserve - who meet today to set interest rates - have an even tougher decision to make than most people think.

Not only do they have to worry a lot about easing policy too little - and allowing the economy to slide into possible recession - but they also have to worry seriously about easing too much, and letting inflation out of the bag.

This is because MrGreenspan believes that the fundamental forces that have subdued inflationary pressure for more than a decade - high productivity growth and an increasing pace of globalisation - are set to abate.

If this is correct, it would be a very bad moment to make a policy mistake on inflation.

However, not all economists agree with Mr Greenspan's analysis, which emphasises the link between price changes and the rate of change of global economic integration. John Taylor, a professor at Stanford and former under-secretary for international affairs at the US Treasury, says: "The change in the behaviour of inflation over the last few decades cannot be explained at least in any great degree by changes in globalisation.

"By far the main thing is how central banks have behaved in terms of providing money growth and setting interest rates," he says.

Mr Taylor argues that there was a dramatic improvement in the conduct of monetary policy in the US and elsewhere from the early 1980s onwards. The increased credibility of central banks in turn reduced the expected rate of inflation.

He accepts that the trade-off between growth and inflation may have deteriorated due to lower productivity gains. But he sees little danger of today's low inflation rates being jeopardised by changing global economic trends.

"There is still this idea of monetary policy being conducted in a good way," he says.

However, Ken Rogoff, a professor at Harvard and former chief economist at the International Monetary Fund, says the improvements in inflation worldwide since the early 1980s cannot be simply attributed to better central banking.

Like Mr Greenspan, he believes the economic context was unusually favourable for a while, and may now be turning for the worse, though his specification of the processes differs.

Mr Rogoff says the rise of China has been changing relative prices - not the overall level of prices.

But he says that increased global competition may have made it more difficult for classic wage-price spirals to take off, and thus buttressed the credibility of central banks.

Mr Rogoff also says that many productivity gains were linked to opportunities created by global integration.

"Central banks have had the wind at their backs," he says.

"It has made it easier for them to deliver strong growth and low inflation at the same time. Now the parameters are changing."

He says that it will be much harder for the Fed to stay focused on inflation in an era of lower US growth.

"There will be pressureon it to inflate a little -and I bet it does," he says.

By contrast, Alan Blinder, a professor at Princeton and a former vice-chairman of the Fed, agrees with Mr Greenspan that globalisation has held down price pressures - but disagrees that the rate of change of this process is peaking.

Mr Blinder says the integration of China and India added much more to global supply than demand.

Technically, he says, this changes the world price level, not the inflation rate. But because this effect is spread out over many years, it looks like a lower inflation rate.

Mr Blinder says: "We are only beginning to exploit the opportunities for global economic integration inservices."

If he is right, the favourable tailwinds that benefited Mr Greenspan may also aid his successors for years to come.

Viva Las Vegas??? Investing in Casino Companies

We all know about Las Vegas, the Sin City, the entertainment and gambling destination of the world, but did you know about Macau, its a small peninsula of the coast of China near Hong Kong, its the only place in China that offers legalized gambling. Moreover, its the only destination within a 2500 mile radius to offer gambling, half of the worlds population lives in that area, aproximately 3 Billion people compare that to Las Vegas which in-turn encompasses not more than 500 million people within the same area. As of yet most countries in that region do not offer gambling due to cultural and religous reasons.

In the second quarter of this year Macau passed Las Vegas to become the largest gaming destination in the world. There are only six companies that posses license to operate in China. The conventional wisdom is that a casino company usually makes 20% profit of whatever it takes in.

Its your provogative to invest in other companies, but Casinos are hot right now especially in Macau.... ouch!!! tooooo HOT!!! :)))... Anyways, this was just something to think about... your thoughts are always appreciated.

Viva Las Macau!!!!!!

CAUTION: The share prices of most companies that have operations in Macau are at their 52 Week Highs, but there are still some good opportunities out there.

Food for thought

On Wednesday the CPI (Consumer Price Index), came out for the month of August. The headline stated that the “U.S. Consumer Prices Unexpectedly Fall 0.1% in August”. The CPI basically meassures the rate of inflation. Are the prices of goods really going down? It depends on what you use to calculate the rate of inflation. While calculating the core rate of inflations the government omits the changes in prices of food and energy, the reason for that is stated below, but still having lived here for a long time and seen the prices of goods and services go up dramatically, I still wonder sometimes as to why do they not put food and energy back into the mix, isn't everything else related to food and energy? Can we survive without food and energy? If anything else those two should be the only things used to calculate the core rate of inflation. Anyways, it was just something to think about.


“Consistently volatile components of the PCEPI obscure economists' ability to evaluate monetary policy and the true inflation trend. To get a better idea of the underlying inflation trend, economists look at core inflation, which is traditionally measured by the PCEPI excluding food and energy. Removing food and energy from the PCEPI results in a less volatile series and a better gauge of the underlying inflation trend.”

Credit Crunch effect?

I was just wondering...that the current credit crunch started with the housing market. And its effects can be seen on the financial industry and economy in general. But how has it affected other industries? Since we all are from different industries (Vinay- Finance, Rahul- IT, Sumit- Wireless technology, me- oil and energy), maybe we can discuss how it has had effects on our industries. There maybe some general effects which will be applicable to all (it'll be good to talk about those too) and there maybe industry-specific effects. I still need to research on mine and find this out. But if any of you can write about your opinions, it would be good.

Buying Gold

Whats the best way to invest in commodities in our current scenario? Buying real gold in US or buying something like ETFs? Does it make a difference if we buy gold here or in india?