Soaring food prices driven by the rise in soft commodities has seriously dented the purchasing power of the world’s poor. The resulting explosion of discontent spread by internet around the Mediterranean basin has now reached Bahrain, Saudi Arabia, Yemen and, in particular, the dictatorship of Libya. The Web-informed populations of these countries cannot comprehend why, with billions in foreign exchange reserves, their governments should let them go hungry. Libya accounts for just 2% of global oil production and there is more than enough surplus capacity. But even so speculation has pushed the price of crude to $115 a barrel, creating sufficient drag to slow the global economy. All of a sudden the recovery is starting to look uncertain again. Coffee, cocoa, soybeans and other agricultural produce are similarly rocketing. Last summer, taking advantage of already high prices a hedge fund manager nicknamed «Chocolate Finger» cornered the market in cocoa and squeezed short-sellers. Just like in the good old days. Nothing has changed.
There are encouraging signs in the US that consumer credit and job creation are turning up. This and the rally in equities are fostering a bit of a «feel good» effect and thus providing scope for steady economic growth in 2011, despite the continuing slump in construction. The Federal Reserve, having nearly completed its collection of long-term Treasury securities, will have to start raising short-term rates gradually to encourage savings and deter speculation. We saw the damage on Alan Greenspan’s watch that zero interest rates can do. It is high time the Fed slammed the lid on speculative borrowing. With companies awash in cash, traditional loans are rarely used these days. The bonds of all levels of government—federal, state and municipal—are dangerous. Only good-quality corporate issues look reassuring.
Pimco’s well-known fund manager Bill Gross recently announced he had sold his position in US Treasuries. When can we expect the credit ratings of many governments to be downgraded to AA or A? Moody’s, Standard and Poor’s and Fitch clearly rely on well-polished rear-view mirrors. With a new US presidential election approaching, the Obama administration will focus less on reforms and more on recovery. But where will it find the money? The changes to banking recommended by the Volcker Commission will be minimal, paving the way for the same kind of gambling that caused the collapse of Lehmann Brothers in 2008. That story is now ending with the government and the SEC afraid of losing their case against Richard Fuld, Lehmann’s former CEO, accused of balance sheet manipulation. Fuld, protected by a phalanx of lawyers, may be able to contemplate a peaceful retirement. [...]
Extract from Patrick Ségal's analyse, Banque Privée Edmond de Rothschild S.A.