Mumbai: The rally in commodity prices has dominated discussions in the blogosphere the past few days. We take a look at some of the posts.
Gulzar Natarajan cites an HSBC report to point out that financial assets have been swinging in unison and distorting relative valuations between assets.
He writes: Even as the emerging and developed economummies appear to be de-coupling from each other, there is growing evidence that their financial markets are getting more closely synchronized. Have the global financial markets become too interconnected to fail? Are financial markets no longer useful in risk diversification?
Read more at http://tinyurl.com/6crgdrt
Yoni Jacobs of Chart Prophet Capital says a lot of the rise in commodity and energy prices in the past two years has to do with unrealistic expectations of growth in emerging markets.
Jacobs writes: The problem—and it’s a major one—with this emerging markets theme that has dominated for the past two years is that all the expectations and projections investors have had may be way too optimistic... Add to that the possibility that all the growth is already factored into the commodity and stock prices, and any stumble or slower growth could send prices plummeting as they attempt to adjust to more realistic growth.
Read more at http://tinyurl.com/3wheuld
Bruce Krasting lays the blame at Ben Bernanke’s door for the sharp rally in commodities. He uses interesting charts to argue that loose monetary policy in the US has fuelled inflation and asset-price increases without impacting real indicators like housing.
Krasting writes: For the vast majority of Americans, QE (quantitative easing) has been a dismal failure. Stock gains for the average guy were offset by losses in real estate. There was no wealth effect there. For those with few stocks and a house it was another two-year loss in most cases.
Krasting critiques Bernanke’s policies at http://tinyurl.com/4hoyeu2
Krugman, however, says the usual chain of monetary transmission through home loan rates is not relevant in the current recovery as there is a huge overhang of excess capacity.
Instead, monetary easing has fuelled a stock market rally that might be fuelling consumption at the higher end and has weakened the dollar, helping exporters.
Krugman writes: If QE really is working through stocks and the dollar, are there further implications? I’m not sure—in a highly indebted society, you might hesitate at policies that would increase private debt further, but if stocks are driving the story, the consumers now spending more aren’t the same people who are in debt trouble—so that’s actually ok.
Krugman says most economic indicators in the US have improved but asks if such a recovery can be self-sustaining at http://tinyurl.com/4xhdyeh
Jean-Louis Arcand, economist at Geneva Institute, Enrico Berkes of the International Monetary Fund, and Ugo Panizza of the United Nations Conference on Trade and Development, ask if too much finance is good for the economy, in this post: http://tinyurl.com/3wf3dww
In a recent research paper, the trio provide evidence that shows that beyond a point, growth of the financial sector may actually harm the economy by distorting incentives and contributing to volatility and instability.
They conclude: We believe that our results have potentially important implications for financial regulation. The financial industry has argued that the Basel III capital requirements will have a negative effect on bank profits and lead to a contraction of lending with large negative consequences on future GDP growth.
While it is far from certain that higher capital ratios will reduce profitability, our analysis suggests that there are several countries for which tighter credit standards would actually be desirable.