After assessing that an economy is worth investing in, one needs to decide the industry where one can park one’s money. For, while the economy may be doing outstandingly well, not every industry in the economy would be a good bargain buy. Here is a list of 15 factors that you might like to consider in your search for the right industry
Sales: It is sales that bring in profit to an industry. What is important is not the absolute level of sales but its growth trend. While there is nothing like an “ideal growth” because growth is also a function of the base level of sales (given the mathematics of a low base, the growth levels tend to be high, when sales levels are low) and while it can differ from industry to industry, sales should grow at least at two times the inflation levels. Sales (market share) is the key metric for FMCG industries.
Return on Capital Employed: Look at the ROCE in the industry. ROCE measures how productively money is used. Capital employed is the sum of equity funds and loan funds. Return refers to EBIT. Hence ROCE here is pretax ROCE. Again, while this can vary from industry to industry, it makes little meaning in investing in an industry whose ROCE is less than 15 per cent.
Competition: While competition pushes an organisation to stretch and is, hence, welcome, an overhang of it would lead to unhealthy practices such as price cuts and unrealistic cost reductions. Price cuts merely transfer the profit margin from the industry competitors to the customer. Competition eats into profits and can, over time, erode profitability and convert the industry into a commodity. Price-driven competition can often threaten the very survival of an industry. The airlines industry comes as an example.
Critical cost component: Getting to know the critical cost component is important. You must also know whether the industry has control over that component. For instance, for the tobacco industry, indirect tax is a critical cost component. The industry has no control over it. For some industry, imported raw material may be the key cost component.
Technology: Technology is the new mantra. Technology has done wonders to the way we live and transact business. Mobiles, Internet and e-commerce have all revolutionised our lives. Any industry that does not embrace technology is doomed. If an industry is still old-fashioned and keeps away from technology, you must keep away from that industry.
Governmental promotion: Governmental support can go a long distance in propelling the growth of an industry. The Information Technology industry is the best example of this, with IT having flourished thanks to a series of governmental concessions such as tax sops, cheap land allocation and, most importantly, non-interference in its functioning (!). You would love an industry that has such pampering and backing.
Skilled manpower: Does the industry enjoy technically skilled manpower? It’s important to figure out what is driving success. Skilled manpower helps to maintain product quality and offer customised products, thereby resulting in better customer satisfaction. The mammoth growth of the IT, ITES industry in India is not merely on account of cost arbitrage but efficiency arbitrage as well, with a slew of well trained, English speaking, high-on-IQ manpower being available.
Constant Innovation: Does the industry constantly reinvent itself? This is more critical in the case of industries that experience rapid changing technology/customer expectations and have to spend huge sums of money in constantly upgrading to newer product versions. Industries such as Pharmaceutical and Consumer electronics spend huge sums of money towards R&D to ensure that their products stay “latest”.
Supply-side constraints: Some industries perennially face lack of supplies at reasonable prices, which hamper their ability to exploit favourable market conditions. Take the fact that the demand for crude has opened up a huge market for oil exploration companies. But worldwide shortages of drilling equipment, such as rigs and offshore diving vessels, have slowed down the exploration activity.
Commoditised products: Where the products sold by players in an industry are not unique, then customers make their choices purely based on pricing. For example, agro-based industries such as sugar, cotton, are price takers, since customers try to pull down the prices close to the cost of production.
Regulatory constraints: A highly regulated industry generally has very little scope to enjoy pricing independence and margin improvement. For example, despite strong customer base and established products, the cigarette industry struggles to protect its margins as the government constantly toys with excise duty on cigarettes.
Cyclical demand: If the demand is highly cyclical, the margins come under pressure since the industry has to constantly spend cash to “be on alert” should an opportunity come. For instance, the demand for drilling equipment is cyclical. However, manufacturers of these equipment would have to continue incurring maintenance capex to keep their production facilities in shape, till the next wave of demand comes through.
Growing domestic demand: An industry that enjoys a growing domestic demand is insulated from happenings in the global market place including exchange rates. Currently, FMCG, Retail and real-estate enjoy this advantage.
Expanding export market: This is not to belittle an export-driven industry. Such industries generally enjoy higher margins due to their relatively lower cost base. In addition, export markets of developed countries are huge in size, offering potential for the exporter to grow his sales rapidly. Companies such as TCS and Infosys have been able to maintain high sales growth and decent margins for the last several years because of the export factor.
Macro trends: Rising interest rates, unfavourable currency movements, change in fiscal policies, etc, can impact industries. Rising interest rates have slowed down growth of banking industries as credit intakes slow down. Similarly, recent depreciation of the rupee has had negative impact on industries such as paint that rely on imported raw materials.
Surely, you will, by now, have got a good understanding of what to look for in an industry
Monday, August 04, 2008
Saturday, August 02, 2008
Rising credit card defaults worry Reserve Bank
Rising defaults in the credit card segment is worrying the Reserve Bank of India (RBI) as interest rates are rising and customer profiles are weakening. Pointing to the new trend, RBI deputy governor V Leeladhar on Friday said rising credit card defaults in the country are a matter of concern.
"Defaults are going up. It's a matter of concern," he said on the sidelines of a banking conference when asked about the practice of some banks who issue cards without checking the creditworthiness of their customers.
Credit card outstandings have shot up by a whopping 87 per cent, or Rs 12,375 crore, to Rs 26,596 crore during the year ended May 23, 2008, the RBI said. This has happened at a time when growth rate in all other modes of personal loans, including housing, consumer durables and advances against fixed deposits, moderated during the period. In its quarterly policy review on Tuesday, the RBI stressed on the need to improve the credit quality of banks via stricter credit appraisals.
The RBI had recently asked banks not to charge excessive interest rates on personal loans and small advances, including credit cards, and prescribe a ceiling rate on such loans in a bid to curb the rampant practice among banks to jack up the rates every now and then without valid reasons. Currently, banks charge 40-49 per cent per annum interest rate if the card holders fail to make full payment on the due date or pay the minimum amount due. This rate is nearly four times that of housing loan rates - currently at 10.45-11 per cent.
Unsecured loans, which consist of personal loans and credit card receivables, form an estimated one-fifth of the total outstanding retail loans as on March 31, 2008, up from 6 per cent on March 31, 2004. The ultimate losses on these receivables are often higher than those in the secured asset classes, Crisil said in a study.
In the unsecured loans segment (mainly credit cards), the exposure to low-income customers has been steadily increasing. Loss levels in the low-income customer segment are currently estimated in the 7 to 9 per cent range. A further decline in asset quality seems likely in the segment, on account of seasoning in portfolio, over-leverage by customers, and the entry of players into under-banked geographies; loss levels may be in the 12 to 15 per cent range over the medium term, Crisil said.
"Defaults are going up. It's a matter of concern," he said on the sidelines of a banking conference when asked about the practice of some banks who issue cards without checking the creditworthiness of their customers.
Credit card outstandings have shot up by a whopping 87 per cent, or Rs 12,375 crore, to Rs 26,596 crore during the year ended May 23, 2008, the RBI said. This has happened at a time when growth rate in all other modes of personal loans, including housing, consumer durables and advances against fixed deposits, moderated during the period. In its quarterly policy review on Tuesday, the RBI stressed on the need to improve the credit quality of banks via stricter credit appraisals.
The RBI had recently asked banks not to charge excessive interest rates on personal loans and small advances, including credit cards, and prescribe a ceiling rate on such loans in a bid to curb the rampant practice among banks to jack up the rates every now and then without valid reasons. Currently, banks charge 40-49 per cent per annum interest rate if the card holders fail to make full payment on the due date or pay the minimum amount due. This rate is nearly four times that of housing loan rates - currently at 10.45-11 per cent.
Unsecured loans, which consist of personal loans and credit card receivables, form an estimated one-fifth of the total outstanding retail loans as on March 31, 2008, up from 6 per cent on March 31, 2004. The ultimate losses on these receivables are often higher than those in the secured asset classes, Crisil said in a study.
In the unsecured loans segment (mainly credit cards), the exposure to low-income customers has been steadily increasing. Loss levels in the low-income customer segment are currently estimated in the 7 to 9 per cent range. A further decline in asset quality seems likely in the segment, on account of seasoning in portfolio, over-leverage by customers, and the entry of players into under-banked geographies; loss levels may be in the 12 to 15 per cent range over the medium term, Crisil said.
Friday, August 01, 2008
India :Most Favorable Destination For Foreign Investments
India is the second fastest growing major economy in the world ,when measured in terms of USD exchange rate, is the twelfth largest economy in the world, with a GDP of US $1.25 trillion (2008) and the third largest in Asia behind Japan and China--with total GDP of around $797 billion.Indian GDP rose by around 8% from 2002 to 2006 and 9.4% in 2007. It is the third largest in terms of purchasing power parity. India has been considered as most favorable destination as far as foreign investments are concerned because of more visibility, lower costs and access funds available for investment.
India has been ranked 64th in a global list of best countries to do business as against 51st place last year.A recent survey conducted by the Japan Bank for International Cooperation (JBIC) shows that India has become the most-favored destination for long-term Japanese investment. Survey Indicates nearly 70% of Japanese manufacturers regard India as the most attractive country to do business over the next 10 years
During 2007, Indian firm Anchor Electrical was sold out to Osaka-based Matsushita while Lumax industries were acquired by Japan’s Stanley Electric world leader in illumination products. In 2006, the Poonawala Group sold its stake in Eagle Seals and Systems to Japan’s Eagle Industry. The automobile sector has been the area where the Japanese presence is the most noticeable in addition to the sectors like machine tools, electronics and IT. Finance sector also seems to be one of the attractive sectors being explored by Japanese companies. While Shinsei Bank has set up its investment arm in India, Nomura Holdings, Japan’s largest securities firm, has already expressed its intent to venture into Indian markets. According to India Brand Equity Foundation, Japan ranks fifth in terms of cumulative FDI equity inflow into India. Japan’s FDI in India is projected to be around $5.5 billion over 5 years from 2006 to 2010.
According to a data released by U.S. Commerce Department its Cumulative investment in the Asia-Pacific region increased by $48.5 billion to $453.9 billion in the year 2007.Investments in the rising economic giant surged 48 percent to $13.6 billion in 2007 from a year earlier while its Investments in Asia’s giant china witnessed a surge of 21 percent to $28.2 billion. However, In Thailand US Investments soared 37 percent to $14.9 billion largely because of investments in petroleum refining, banking and mining while investments in Malaysia jumped 25 percent to $15.5 billion.
Indian investment environment is considered better than rest of the countries due to availability of trained investment professionals, establishment of legal and financial system, and internationalization of service industries.This provides a favorable investment eco-system for foreign investors. India established 23 stock exchange markets and formed a multi-layer capital market system.
India has been ranked 64th in a global list of best countries to do business as against 51st place last year.A recent survey conducted by the Japan Bank for International Cooperation (JBIC) shows that India has become the most-favored destination for long-term Japanese investment. Survey Indicates nearly 70% of Japanese manufacturers regard India as the most attractive country to do business over the next 10 years
During 2007, Indian firm Anchor Electrical was sold out to Osaka-based Matsushita while Lumax industries were acquired by Japan’s Stanley Electric world leader in illumination products. In 2006, the Poonawala Group sold its stake in Eagle Seals and Systems to Japan’s Eagle Industry. The automobile sector has been the area where the Japanese presence is the most noticeable in addition to the sectors like machine tools, electronics and IT. Finance sector also seems to be one of the attractive sectors being explored by Japanese companies. While Shinsei Bank has set up its investment arm in India, Nomura Holdings, Japan’s largest securities firm, has already expressed its intent to venture into Indian markets. According to India Brand Equity Foundation, Japan ranks fifth in terms of cumulative FDI equity inflow into India. Japan’s FDI in India is projected to be around $5.5 billion over 5 years from 2006 to 2010.
According to a data released by U.S. Commerce Department its Cumulative investment in the Asia-Pacific region increased by $48.5 billion to $453.9 billion in the year 2007.Investments in the rising economic giant surged 48 percent to $13.6 billion in 2007 from a year earlier while its Investments in Asia’s giant china witnessed a surge of 21 percent to $28.2 billion. However, In Thailand US Investments soared 37 percent to $14.9 billion largely because of investments in petroleum refining, banking and mining while investments in Malaysia jumped 25 percent to $15.5 billion.
Indian investment environment is considered better than rest of the countries due to availability of trained investment professionals, establishment of legal and financial system, and internationalization of service industries.This provides a favorable investment eco-system for foreign investors. India established 23 stock exchange markets and formed a multi-layer capital market system.
India's Inflation Accelerates to Fastest Since 1995
India's inflation accelerated to the fastest pace since 1995, vindicating the central bank's decision to raise borrowing costs for the third time in two months.
Wholesale prices rose 11.98 percent in the week to July 19, after gaining 11.89 percent in the previous week, the commerce ministry said in New Delhi today. Economists had expected a 12.03 percent increase.
Governor Yaga Venugopal Reddy this week raised the central bank's repurchase rate by a half-percentage point to 9 percent, sacrificing growth to tame runaway inflation. The Reserve Bank of India may increase the benchmark rate again in the next three months, according to economists in a Bloomberg News survey.
``The message is clear that inflation will dominate over growth,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ``We expect growth to slow to 7.3 percent this fiscal year due to rising headwinds from sharp rate increases, rising commodity prices and slackening foreign demand.''
Reddy, due to retire in September, this week also raised the cash reserve ratio to 9 percent from 8.75 percent and said the bank had ``headroom'' to further tighten monetary policy.
Higher energy and commodity prices are fuelling inflation across Asia, prompting central banks to raise borrowing costs. Pakistan's central bank on July 29 raised its key rate for the third time this year to tame inflation running at the fastest pace in three decades. Indonesia, Thailand and the Philippines have all increased interest rates in the past month.
Inflation Stable
``Inflation, on a week-on-week basis, has continued to remain stable,'' the finance ministry said in a statement today.
Inflation in the week accelerated because of an increase in the prices of pulses, fruits, spices and sugar. The manufactured price inflation rose 10.82 percent in the week ended July 19, compared with a 10.72 percent gain in the previous week, today's report showed.
India's central bank raised its year-end inflation forecast to 7 percent from 5.5 percent and lowered its growth estimate for the year ending March 2009 to 8 percent from an earlier prediction of 8 percent to 8.5 percent.
Economists expect inflation to remain at elevated levels in the coming months.
``We expect double-digit inflation to continue,'' said Rohini Malkani, an economist at Citigroup Inc. in Mumbai ``We expect the Reserve Bank to maintain its tightening stance using a combination of the repurchase rate and the cash-reserve ratio.''
Interest Rates
Rising interest rates have led to increased monthly loan payments for borrowers, resulting in defaults, and are hurting profits at lenders including State Bank of India Ltd. and ICICI Bank Ltd.
State Bank this week reported the slowest profit growth since 2006 and net income at ICICI Bank dropped 6 percent.
Faster inflation and record-high borrowing costs are also affecting vehicle sales. Purchases of two-wheelers, cars and trucks grew 6.6 percent in June, slower than the 8.1 percent increase in May, according to the Society of Indian Automobile Manufacturers.
The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended May 24 to 8.9 percent from 8.24 percent.
Wholesale prices rose 11.98 percent in the week to July 19, after gaining 11.89 percent in the previous week, the commerce ministry said in New Delhi today. Economists had expected a 12.03 percent increase.
Governor Yaga Venugopal Reddy this week raised the central bank's repurchase rate by a half-percentage point to 9 percent, sacrificing growth to tame runaway inflation. The Reserve Bank of India may increase the benchmark rate again in the next three months, according to economists in a Bloomberg News survey.
``The message is clear that inflation will dominate over growth,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ``We expect growth to slow to 7.3 percent this fiscal year due to rising headwinds from sharp rate increases, rising commodity prices and slackening foreign demand.''
Reddy, due to retire in September, this week also raised the cash reserve ratio to 9 percent from 8.75 percent and said the bank had ``headroom'' to further tighten monetary policy.
Higher energy and commodity prices are fuelling inflation across Asia, prompting central banks to raise borrowing costs. Pakistan's central bank on July 29 raised its key rate for the third time this year to tame inflation running at the fastest pace in three decades. Indonesia, Thailand and the Philippines have all increased interest rates in the past month.
Inflation Stable
``Inflation, on a week-on-week basis, has continued to remain stable,'' the finance ministry said in a statement today.
Inflation in the week accelerated because of an increase in the prices of pulses, fruits, spices and sugar. The manufactured price inflation rose 10.82 percent in the week ended July 19, compared with a 10.72 percent gain in the previous week, today's report showed.
India's central bank raised its year-end inflation forecast to 7 percent from 5.5 percent and lowered its growth estimate for the year ending March 2009 to 8 percent from an earlier prediction of 8 percent to 8.5 percent.
Economists expect inflation to remain at elevated levels in the coming months.
``We expect double-digit inflation to continue,'' said Rohini Malkani, an economist at Citigroup Inc. in Mumbai ``We expect the Reserve Bank to maintain its tightening stance using a combination of the repurchase rate and the cash-reserve ratio.''
Interest Rates
Rising interest rates have led to increased monthly loan payments for borrowers, resulting in defaults, and are hurting profits at lenders including State Bank of India Ltd. and ICICI Bank Ltd.
State Bank this week reported the slowest profit growth since 2006 and net income at ICICI Bank dropped 6 percent.
Faster inflation and record-high borrowing costs are also affecting vehicle sales. Purchases of two-wheelers, cars and trucks grew 6.6 percent in June, slower than the 8.1 percent increase in May, according to the Society of Indian Automobile Manufacturers.
The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended May 24 to 8.9 percent from 8.24 percent.
Tuesday, July 29, 2008
The Synergies of Energy
It's been a memorable week for energy markets, starting last Friday when oil hit a new all-time intraday high of $139.12, surging $10.75 in just one day.
Seven days later, oil is trading at the $136 level. That's 31 percent above its inflation-adjusted record high price of US$104.36 (in April dollars), set in April 1980. Oil is up 42.5 percent year-to-date and up 102.1 percent from 52 weeks ago. And Goldman Sachs is predicting that oil will hit the $150 level sometime this summer.
The surging energy prices have caused great anguish for many Asian governments. Consumers in this region have been shielded to a large extent from soaring crude oil prices by government subsidies. But all that's changing. Taiwan, Sri Lanka, Bangladesh and Indonesia have been forced to review their subsidy policies. And both India and Malaysia did the unthinkable and hiked fuel prices.
Speaking at the Asia Oil and Gas Conference (AOGC) in Kuala Lumpur, Malaysia's Prime Minister Abdullah Badawi aptly summed it up saying, "It was a difficult and agonizing decision to make. Many times, we have been tempted to walk away from such a difficult decision. Certainly, we realized that the decision would be met with great anguish not to mention anger from the people."
Market watchers, traders, analysts and policymakers alike, have been trying to figure out why oil prices are, where they are. Theories abound including speculation, rising Asian demand and supply problems, just to name a few.
Speculation Inflating The Bubble?
Fereidun Fesharaki of FACTS Global Energy Group thinks the markets have been more irrational than it has ever been in its history. "It is absolutely unprecedented and simply cannot stand ... since the price hit $105, everything above $105 is speculation. Something like $50 – $100 billion has poured into the market the last two months", Fesharaki says.
CNBC contributor Daryl Guppy of guppytraders.com in his column Charting Asia, adds that, "The disconnect between oil prices and fundamentals is a disturbing bubble ... analysis of the duration of open interest by fund managers 'investing' in the commodity market suggests this is the gas inflating the bubble."
But others don't see the speculative factor as being that extreme in the ramp up of oil prices. Tan Sri Mohd Hassan Marican, the CEO of Malaysia's Petronas told CNBC he thinks there's only about a $15 element in the price of oil that's due to speculation.
Red Hot Asian Demand
And what of Asian demand? Will it play a continuing role in boosting energy prices? The bears think not. Demand looks like it could weaken in the wake of the price hikes, plus the U.S. dollar seems to be on a firmer note after Bernanke's warning on inflation.
"Already, the Asian tigers have become Asian pussy cats. So what this does is it reinforces the same and makes it difficult for demand to go up," FACTS Global Energy's Fesharaki says. "We don't have much growth in Asia. Maybe 600,000 to 700,000 barrels a day, 800,000 at most – compared with the 1.2/1.3 million barrels that we had before," he adds.
Others disagree. Petronas' Hassan points to the middle income group in China and India which is growing. We're talking about millions of people who want to make the transition from a rural to urban lifestyle. This transition is going to require huge amounts of energy.
Tough Supply Lines
All this talk of demand, but what about the supply side factor? It seems to be the consensus that it's not about the availability of the hydrocarbons that's in question, but rather, the ability to extract these hydrocarbons.
According to BP's research, there's nearly 42 years of oil reserves left in the ground and 60 years of natural gas. Group chief executive Tony Hayward told AOGC delegates that while we've already produced around one trillion barrels of conventional oil, there's another one trillion barrels of proven reserves and another trillion of non-proven resources.
Greg Hill, executive vice president (Asia Pacific) of Shell Exploration & Production qualifies this view. "We believe at Shell, that conventional easy oil and gas is probably nearing its peak. So I think the peak is emerging. Having said that, there's still an awful lot of hydrocarbons to play for," Hill said.
But those hydrocarbons he's talking about, are hard-to-get pockets of energy located in countries like Nigeria and Iran where geopolitics comes into play, or are in deeper water, or trapped in difficult rocks like oil shale or oil sands, or under ice -- which brings up the environment/conservation factor.
Energy Vs. Environment
One of the most controversial issues involving energy resource is the question of whether to allow drilling for oil in the Artic National Wildlife Refuge, located east of Prudhoe Bay in Alaska's "North Slope," which is North America's largest oil field. Environmentalists and many within the Democratic Party are vehemently opposed to any sort of exploration in the refuge. They have successfully prevented drilling through legislative filibusters, amendments, and vetoes.
However, James Slutz, acting principal deputy assistant secretary with the Department of Energy thinks the refuge could be effectively developed in an environmentally responsible way. "While it would take some years to do so, peak production would be almost 1 million barrels a year, that’s what's being projected. We think it would make a lot of sense and is the right thing to do," Slutz said.
It's clear from this crude snapshot of oil issues that the synergies of energy are far-reaching, complex and multilayered. There are many more factors that haven't been discussed here such as OPEC's role in price stabilization and the idea of peak oil.
One thing is certain, as oil prices surge upwards and gasoline prices push past $4 a gallon, consumers are being forced to change their habits. People are now looking to purchase fuel-efficient cars like the Toyota Prius with gas-guzzling SUVs falling out of favor. Usage of public transport systems around the world has jumped. Some folks have even taken to cycling to the office.
Seven days later, oil is trading at the $136 level. That's 31 percent above its inflation-adjusted record high price of US$104.36 (in April dollars), set in April 1980. Oil is up 42.5 percent year-to-date and up 102.1 percent from 52 weeks ago. And Goldman Sachs is predicting that oil will hit the $150 level sometime this summer.
The surging energy prices have caused great anguish for many Asian governments. Consumers in this region have been shielded to a large extent from soaring crude oil prices by government subsidies. But all that's changing. Taiwan, Sri Lanka, Bangladesh and Indonesia have been forced to review their subsidy policies. And both India and Malaysia did the unthinkable and hiked fuel prices.
Speaking at the Asia Oil and Gas Conference (AOGC) in Kuala Lumpur, Malaysia's Prime Minister Abdullah Badawi aptly summed it up saying, "It was a difficult and agonizing decision to make. Many times, we have been tempted to walk away from such a difficult decision. Certainly, we realized that the decision would be met with great anguish not to mention anger from the people."
Market watchers, traders, analysts and policymakers alike, have been trying to figure out why oil prices are, where they are. Theories abound including speculation, rising Asian demand and supply problems, just to name a few.
Speculation Inflating The Bubble?
Fereidun Fesharaki of FACTS Global Energy Group thinks the markets have been more irrational than it has ever been in its history. "It is absolutely unprecedented and simply cannot stand ... since the price hit $105, everything above $105 is speculation. Something like $50 – $100 billion has poured into the market the last two months", Fesharaki says.
CNBC contributor Daryl Guppy of guppytraders.com in his column Charting Asia, adds that, "The disconnect between oil prices and fundamentals is a disturbing bubble ... analysis of the duration of open interest by fund managers 'investing' in the commodity market suggests this is the gas inflating the bubble."
But others don't see the speculative factor as being that extreme in the ramp up of oil prices. Tan Sri Mohd Hassan Marican, the CEO of Malaysia's Petronas told CNBC he thinks there's only about a $15 element in the price of oil that's due to speculation.
Red Hot Asian Demand
And what of Asian demand? Will it play a continuing role in boosting energy prices? The bears think not. Demand looks like it could weaken in the wake of the price hikes, plus the U.S. dollar seems to be on a firmer note after Bernanke's warning on inflation.
"Already, the Asian tigers have become Asian pussy cats. So what this does is it reinforces the same and makes it difficult for demand to go up," FACTS Global Energy's Fesharaki says. "We don't have much growth in Asia. Maybe 600,000 to 700,000 barrels a day, 800,000 at most – compared with the 1.2/1.3 million barrels that we had before," he adds.
Others disagree. Petronas' Hassan points to the middle income group in China and India which is growing. We're talking about millions of people who want to make the transition from a rural to urban lifestyle. This transition is going to require huge amounts of energy.
Tough Supply Lines
All this talk of demand, but what about the supply side factor? It seems to be the consensus that it's not about the availability of the hydrocarbons that's in question, but rather, the ability to extract these hydrocarbons.
According to BP's research, there's nearly 42 years of oil reserves left in the ground and 60 years of natural gas. Group chief executive Tony Hayward told AOGC delegates that while we've already produced around one trillion barrels of conventional oil, there's another one trillion barrels of proven reserves and another trillion of non-proven resources.
Greg Hill, executive vice president (Asia Pacific) of Shell Exploration & Production qualifies this view. "We believe at Shell, that conventional easy oil and gas is probably nearing its peak. So I think the peak is emerging. Having said that, there's still an awful lot of hydrocarbons to play for," Hill said.
But those hydrocarbons he's talking about, are hard-to-get pockets of energy located in countries like Nigeria and Iran where geopolitics comes into play, or are in deeper water, or trapped in difficult rocks like oil shale or oil sands, or under ice -- which brings up the environment/conservation factor.
Energy Vs. Environment
One of the most controversial issues involving energy resource is the question of whether to allow drilling for oil in the Artic National Wildlife Refuge, located east of Prudhoe Bay in Alaska's "North Slope," which is North America's largest oil field. Environmentalists and many within the Democratic Party are vehemently opposed to any sort of exploration in the refuge. They have successfully prevented drilling through legislative filibusters, amendments, and vetoes.
However, James Slutz, acting principal deputy assistant secretary with the Department of Energy thinks the refuge could be effectively developed in an environmentally responsible way. "While it would take some years to do so, peak production would be almost 1 million barrels a year, that’s what's being projected. We think it would make a lot of sense and is the right thing to do," Slutz said.
It's clear from this crude snapshot of oil issues that the synergies of energy are far-reaching, complex and multilayered. There are many more factors that haven't been discussed here such as OPEC's role in price stabilization and the idea of peak oil.
One thing is certain, as oil prices surge upwards and gasoline prices push past $4 a gallon, consumers are being forced to change their habits. People are now looking to purchase fuel-efficient cars like the Toyota Prius with gas-guzzling SUVs falling out of favor. Usage of public transport systems around the world has jumped. Some folks have even taken to cycling to the office.
Inflation here to stay for a while: RBI
The Reserve Bank of India, or RBI, said it doesn’t see any respite from rising inflation — already at a 13-year high — as prices of crude oil, a key contributing factor, aren’t likely to drop much from current levels.The crude price, which touched $145.3 a barrel in July, has come down to $124.6 a barrel, but RBI does not expect it coming down further because of the “relatively tight demand-supply balance”.
Quoting the US Energy Information Administration, or EIA, the Indian central bank’s report on economy, released on Monday ahead of a much-anticipated quarterly review of monetary policy on Tuesday, said the crude prices are expected to remain at $127 a barrel until February, and this is a major inflationary risk.
India did hike the prices of its heavily subsidized fuel in June, but that alone hasn’t fully taken care of the rise in international crude prices and, according to RBI, the “pass-through in case of administered petroleum products is still incomplete”.
The report on macroeconomic and monetary developments, a window to the quarterly review, doesn’t drop any explicit hint on the content of the Tuesday’s policy review, but some bankers and bond dealers say they believe RBI will continue to follow a tight money policy to fight inflation even though the trend in the bond and OIS, or overnight index swap, markets suggests otherwise.
The benchmark yield on 10-year bond, which rose to 9.55% early this month, has come down to 9.10%, and movement in OIS market, too, indicates status quo on the policy front.
In a 28 July report titled Asia’s Inflation Troubles, Sydney-based Sherman Chan, an economist with Moody’s Economy.com, responsible for country analysis of China, Hong Kong, Vietnam and India, said “inflation remains uncomfortably strong across Asia-Pacific region” and she expects RBI to raise the cash reserve ratio (CRR), or the cash that commercial banks are required to keep with the central bank, as well as its interest rate, on Tuesday.
Tushar Poddar, an economist with Goldman Sachs, too, predicts RBI will hike both its policy rate as well as CRR by 25 basis points each. One basis point is one-hundredth of a percentage point.
In its India Views report on Monday, Goldman Sachs said: “We expect RBI to continue the tightening bias but eschew more significant tightening.”
RBI has raised the policy rate by 75 basis points to 8.5% and CRR by 125 basis points to 8.75% since the beginning of this fiscal year to rein in rising inflation and growth in money supply that is stoking inflation.
The Monday RBI report spoke about some correction in asset prices, both equities and gold, but said the growth in money supply, or M3, bank deposits and non-food credit have all been higher than a projection made in its annual policy in April. These, economists say, strengthen the case for continuing with the tight money policy.
RBI also said India’s budget deficit may come under “pressure” this year as the government boosts spending ahead of elections due by May. Government finances will be hit by “higher oil subsidies and the burden of debt waiver to farmers”, RBI said.
A ballooning budget deficit may force the central bank to raise borrowing costs to prevent higher government spending from stoking prices.
Spending by India’s government registered a “sharp rise” in April-May, the first two months of the current fiscal year, according to RBI.
The government’s budget deficit target for this year is 2.5% of gross domestic product. It has kept an oil subsidy bill of more than $40 billion outside its accounts.
The result of RBI’s tight money policy is showing in the decline of business expectations index as corporations are expecting an increase in raw material prices and production costs.
According to RBI’s industrial outlook survey of manufacturing companies in the private sector for April-June, the business expectations indices, based on an actual assessment for April-June and on expectations for July-September, declined by 5.4% and 0.9%, respectively, over the corresponding previous quarters.
Corporations are less optimistic on the overall business situation, financial situation, production, order books, cost of raw materials, capacity utilization, employment, imports and profit margins than they were in the previous quarter.
According to the RBI survey carried in its report, most of the corporations expect to adjust the rise in raw material prices and the production cost by keeping inventory levels at “below average” and increasing prices.
Incidentally, industry lobby Confederation of Indian Industry’s business confidence index for April-September 2008 declined by 5.3% compared with the past six months, and 2.9% compared with the corresponding period a year ago.
The decline was on account of uncertain global economic outlook and concerns about high interest rates.
The RBI report also said a professional forecasters’ survey, conducted by the Indian central bank in June 2008, suggests moderation in economic activity for next three quarters and fiscal 2008-09 as a whole.
“Between the...survey conducted in March 2008 and...in June 2008, forecast of real GDP growth for 2008-09 was revised downward to 7.9% from 8.1%,” the RBI report said.
The central bank’s projection for growth in fiscal 2009 is 8-8.5%, and there has been no change in this yet.
Quoting the US Energy Information Administration, or EIA, the Indian central bank’s report on economy, released on Monday ahead of a much-anticipated quarterly review of monetary policy on Tuesday, said the crude prices are expected to remain at $127 a barrel until February, and this is a major inflationary risk.
India did hike the prices of its heavily subsidized fuel in June, but that alone hasn’t fully taken care of the rise in international crude prices and, according to RBI, the “pass-through in case of administered petroleum products is still incomplete”.
The report on macroeconomic and monetary developments, a window to the quarterly review, doesn’t drop any explicit hint on the content of the Tuesday’s policy review, but some bankers and bond dealers say they believe RBI will continue to follow a tight money policy to fight inflation even though the trend in the bond and OIS, or overnight index swap, markets suggests otherwise.
The benchmark yield on 10-year bond, which rose to 9.55% early this month, has come down to 9.10%, and movement in OIS market, too, indicates status quo on the policy front.
In a 28 July report titled Asia’s Inflation Troubles, Sydney-based Sherman Chan, an economist with Moody’s Economy.com, responsible for country analysis of China, Hong Kong, Vietnam and India, said “inflation remains uncomfortably strong across Asia-Pacific region” and she expects RBI to raise the cash reserve ratio (CRR), or the cash that commercial banks are required to keep with the central bank, as well as its interest rate, on Tuesday.
Tushar Poddar, an economist with Goldman Sachs, too, predicts RBI will hike both its policy rate as well as CRR by 25 basis points each. One basis point is one-hundredth of a percentage point.
In its India Views report on Monday, Goldman Sachs said: “We expect RBI to continue the tightening bias but eschew more significant tightening.”
RBI has raised the policy rate by 75 basis points to 8.5% and CRR by 125 basis points to 8.75% since the beginning of this fiscal year to rein in rising inflation and growth in money supply that is stoking inflation.
The Monday RBI report spoke about some correction in asset prices, both equities and gold, but said the growth in money supply, or M3, bank deposits and non-food credit have all been higher than a projection made in its annual policy in April. These, economists say, strengthen the case for continuing with the tight money policy.
RBI also said India’s budget deficit may come under “pressure” this year as the government boosts spending ahead of elections due by May. Government finances will be hit by “higher oil subsidies and the burden of debt waiver to farmers”, RBI said.
A ballooning budget deficit may force the central bank to raise borrowing costs to prevent higher government spending from stoking prices.
Spending by India’s government registered a “sharp rise” in April-May, the first two months of the current fiscal year, according to RBI.
The government’s budget deficit target for this year is 2.5% of gross domestic product. It has kept an oil subsidy bill of more than $40 billion outside its accounts.
The result of RBI’s tight money policy is showing in the decline of business expectations index as corporations are expecting an increase in raw material prices and production costs.
According to RBI’s industrial outlook survey of manufacturing companies in the private sector for April-June, the business expectations indices, based on an actual assessment for April-June and on expectations for July-September, declined by 5.4% and 0.9%, respectively, over the corresponding previous quarters.
Corporations are less optimistic on the overall business situation, financial situation, production, order books, cost of raw materials, capacity utilization, employment, imports and profit margins than they were in the previous quarter.
According to the RBI survey carried in its report, most of the corporations expect to adjust the rise in raw material prices and the production cost by keeping inventory levels at “below average” and increasing prices.
Incidentally, industry lobby Confederation of Indian Industry’s business confidence index for April-September 2008 declined by 5.3% compared with the past six months, and 2.9% compared with the corresponding period a year ago.
The decline was on account of uncertain global economic outlook and concerns about high interest rates.
The RBI report also said a professional forecasters’ survey, conducted by the Indian central bank in June 2008, suggests moderation in economic activity for next three quarters and fiscal 2008-09 as a whole.
“Between the...survey conducted in March 2008 and...in June 2008, forecast of real GDP growth for 2008-09 was revised downward to 7.9% from 8.1%,” the RBI report said.
The central bank’s projection for growth in fiscal 2009 is 8-8.5%, and there has been no change in this yet.
Monday, July 28, 2008
Gold rises as oil bounces, shrugs off India bombs
Gold extended gains on Monday, regaining its appeal as a hedge against inflation, as oil prices bounced from a seven-week low and encouraged some investors to put their money back into bullion.
Physical buying from jewellers also lifted prices but overall trading was slow. Gold barely reacted to a series of deadly bombs in India, the world's main consumer, which suggested investors were taking cues from energy and currency markets, dealers said.
Gold rose to $930.20/931.10 an ounce from $927.40/929.40 late in New York on Friday, when it moved in volatile $16 range. Gold was above last week's two-week low of $915.80 an ounce.
"There's a little bit of physical buying around," said Dick Poon, manager of precious metals at Heraeus Ltd in Hong Kong, who expected gold to find resistance at $932 and $935.
New York gold futures firmed on higher oil, while a weaker yen pushed up gold contracts in Tokyo precious metals futures, showing little reaction to the deadly blasts in India.
India's major cities were put on high alert on Sunday, with fears of more attacks after at least 46 people were killed in two days of bombings that hit a communally sensitive western city and a southern hi-tech hub.
In theory, geopolitical tensions boost gold's safe-haven appeal in times of uncertainty.
"Gold will probably continue on a slight bounce and hang around the $925-$930 region for now. We will probably face a bit of resistance around the $935 region," said Adrian Koh, an analyst at Phillip Futures in Singapore.
"We've got to see how the dollar does tonight though," said Koh, adding that the gains were also technically driven after the sharp sell-off to below the $920s level.
Oil added 14 cents to $123.43 a barrel, having fallen to as low as $122.50 on Friday, its lowest since June 5, on worries of slowing demand.
The euro was steady against the dollar at $1.5702.
Spot platinum rose to $1,748.50/1,768.50 an ounce from $1,745.00/1,765.00 late in New York.
Gold futures for August delivery on the COMEX division of the New York Mercantile Exchange added $3.4 to $930.20 an ounce.
The most active Tokyo gold contract for June 2009 delivery on the Tokyo Commodity Exchange rose 27 yen per gram higher to 3,256 yen but was off last week's 25-year high of 3.363 yen.
Spot palladium rose to $384.50/392.50 an ounce from $380.50/388.50 late in New York. Silver edged up to $17.40/17.46 an ounce from $17.35/17.43 late in New York.
Precious metals prices at 0352 GMT
Metal Last Change Pct chg YTD pct chg Turnover
Spot Gold 930.05 1.35 +0.15 11.69
Spot Silver 17.39 0.02 +0.12 17.74
Spot Platinum 1751.00 5.00 +0.29 15.20
Spot Palladium 384.50 3.50 +0.92 4.48
TOCOM Gold 3256.00 27.00 +0.84 6.41 17808
TOCOM Platinum 6045.00 145.00 +2.46 13.22 11269
TOCOM Silver 610.80 1.40 +0.23 12.90 591
TOCOM Palladium 1368.00 -3.00 -0.22 1.26 839
Euro/Dollar 1.5718
Dollar/Yen 107.83
TOCOM prices in yen per gram, except TOCOM silver which is
priced in yen per 10 grams. Spot prices in $ per ounce.
Physical buying from jewellers also lifted prices but overall trading was slow. Gold barely reacted to a series of deadly bombs in India, the world's main consumer, which suggested investors were taking cues from energy and currency markets, dealers said.
Gold rose to $930.20/931.10 an ounce from $927.40/929.40 late in New York on Friday, when it moved in volatile $16 range. Gold was above last week's two-week low of $915.80 an ounce.
"There's a little bit of physical buying around," said Dick Poon, manager of precious metals at Heraeus Ltd in Hong Kong, who expected gold to find resistance at $932 and $935.
New York gold futures firmed on higher oil, while a weaker yen pushed up gold contracts in Tokyo precious metals futures, showing little reaction to the deadly blasts in India.
India's major cities were put on high alert on Sunday, with fears of more attacks after at least 46 people were killed in two days of bombings that hit a communally sensitive western city and a southern hi-tech hub.
In theory, geopolitical tensions boost gold's safe-haven appeal in times of uncertainty.
"Gold will probably continue on a slight bounce and hang around the $925-$930 region for now. We will probably face a bit of resistance around the $935 region," said Adrian Koh, an analyst at Phillip Futures in Singapore.
"We've got to see how the dollar does tonight though," said Koh, adding that the gains were also technically driven after the sharp sell-off to below the $920s level.
Oil added 14 cents to $123.43 a barrel, having fallen to as low as $122.50 on Friday, its lowest since June 5, on worries of slowing demand.
The euro was steady against the dollar at $1.5702.
Spot platinum rose to $1,748.50/1,768.50 an ounce from $1,745.00/1,765.00 late in New York.
Gold futures for August delivery on the COMEX division of the New York Mercantile Exchange added $3.4 to $930.20 an ounce.
The most active Tokyo gold contract for June 2009 delivery on the Tokyo Commodity Exchange rose 27 yen per gram higher to 3,256 yen but was off last week's 25-year high of 3.363 yen.
Spot palladium rose to $384.50/392.50 an ounce from $380.50/388.50 late in New York. Silver edged up to $17.40/17.46 an ounce from $17.35/17.43 late in New York.
Precious metals prices at 0352 GMT
Metal Last Change Pct chg YTD pct chg Turnover
Spot Gold 930.05 1.35 +0.15 11.69
Spot Silver 17.39 0.02 +0.12 17.74
Spot Platinum 1751.00 5.00 +0.29 15.20
Spot Palladium 384.50 3.50 +0.92 4.48
TOCOM Gold 3256.00 27.00 +0.84 6.41 17808
TOCOM Platinum 6045.00 145.00 +2.46 13.22 11269
TOCOM Silver 610.80 1.40 +0.23 12.90 591
TOCOM Palladium 1368.00 -3.00 -0.22 1.26 839
Euro/Dollar 1.5718
Dollar/Yen 107.83
TOCOM prices in yen per gram, except TOCOM silver which is
priced in yen per 10 grams. Spot prices in $ per ounce.
CHRONOLOGY - Major attacks in India since 2003
India's major cities were put on high alert on Sunday, with fears of more attacks after at least 46 people were killed in two days of bombings that hit Ahmedabad and Bangalore.
Following is a chronology of some of the major attacks in India in the past five years:
March 13, 2003 - A bomb attack on a commuter train in Mumbai kills 11 people.
Aug. 25, 2003 - Two almost simultaneous car bombs kill about 60 in Mumbai.
Aug. 15, 2004 - Bomb explodes in Assam, killing 16 people, mostly schoolchildren, and wounding dozens.
Oct. 29, 2005 - Sixty-six people are killed when three blasts rip through markets in New Delhi.
March 7, 2006 - At least 15 people are killed and 60 wounded in three explosions in Varanasi.
July 11, 2006 - More than 180 people are killed in seven bomb explosions at railway stations and on trains in Mumbai, blamed on Islamist militants.
Sept. 8, 2006 - At least 32 people are killed in a series of explosions, including one near a mosque, in Malegaon town, 260 km northeast of Mumbai.
Feb. 19, 2007 - Two bombs explode aboard a train bound from India to Pakistan, burning to death at least 66 passengers, most of them Pakistanis.
May 18, 2007 - A bomb explodes during Friday prayers at a historic mosque in Hyderabad, killing 11 worshippers. Police later shoot dead five people in clashes with hundreds of enraged Muslims who protest against the attack.
Aug. 25, 2007 - Three explosions within minutes at an amusement park and a street-side food stall in Hyderabad kill at least 40 people.
May 13, 2008 - Seven bombs rip through the crowded streets of Jaipur, killing at least 63 people in markets and outside Hindu temples.
July 25, 2008 - Eight small bombs hit the IT city of Bangalore killing at least one woman and wounding at least 15.
July 26 - At least 16 small bombs explode in Ahmedabad in the state of Gujarat, killing at least 45 people and wounding 161. A little known group called the "Indian Mujahideen" claimed responsibility for the Ahmedabad attack. They also claimed responsibility for the May 13 attack in Jaipur.
Following is a chronology of some of the major attacks in India in the past five years:
March 13, 2003 - A bomb attack on a commuter train in Mumbai kills 11 people.
Aug. 25, 2003 - Two almost simultaneous car bombs kill about 60 in Mumbai.
Aug. 15, 2004 - Bomb explodes in Assam, killing 16 people, mostly schoolchildren, and wounding dozens.
Oct. 29, 2005 - Sixty-six people are killed when three blasts rip through markets in New Delhi.
March 7, 2006 - At least 15 people are killed and 60 wounded in three explosions in Varanasi.
July 11, 2006 - More than 180 people are killed in seven bomb explosions at railway stations and on trains in Mumbai, blamed on Islamist militants.
Sept. 8, 2006 - At least 32 people are killed in a series of explosions, including one near a mosque, in Malegaon town, 260 km northeast of Mumbai.
Feb. 19, 2007 - Two bombs explode aboard a train bound from India to Pakistan, burning to death at least 66 passengers, most of them Pakistanis.
May 18, 2007 - A bomb explodes during Friday prayers at a historic mosque in Hyderabad, killing 11 worshippers. Police later shoot dead five people in clashes with hundreds of enraged Muslims who protest against the attack.
Aug. 25, 2007 - Three explosions within minutes at an amusement park and a street-side food stall in Hyderabad kill at least 40 people.
May 13, 2008 - Seven bombs rip through the crowded streets of Jaipur, killing at least 63 people in markets and outside Hindu temples.
July 25, 2008 - Eight small bombs hit the IT city of Bangalore killing at least one woman and wounding at least 15.
July 26 - At least 16 small bombs explode in Ahmedabad in the state of Gujarat, killing at least 45 people and wounding 161. A little known group called the "Indian Mujahideen" claimed responsibility for the Ahmedabad attack. They also claimed responsibility for the May 13 attack in Jaipur.
'Dark Knight' overshadows box office rivals again
Batman buried his rivals at the North American box office for a second weekend on Sunday, racing past $300 million in a record 10 days.
The Caped Crusader's blockbuster outing, "The Dark Knight," sold an estimated $75.6 million worth of tickets during the three days beginning Friday, taking its total to $314.2 million, distributor Warner Bros. Pictures said.
A week after it scored a record-breaking $158 million opening, "The Dark Knight" added a new title to its impressive list of superlatives: the best second weekend, surpassing the holiday-boosted $72 million haul of 2004's "Shrek 2."
The $180 million movie, which stars Christian Bale as Batman and late actor Heath Ledger as the anarchic Joker, has reportedly been drawing strong repeat business, and also has piqued the interest of people who avoid superhero flicks or rarely go to the movies at all.
"The Dark Knight" now ranks as the second-biggest movie of the year, just behind the $315 million haul of "Iron Man," and the 23rd-biggest of all time.
The previous speed record for a $300 million film was 16 days set by "Pirates of the Caribbean: Dead Man's Chest" in 2006. The next target is $400 million, which took "Shrek 2" 43 days to reach. Warner Bros. distribution president Dan Fellman predicted "The Dark Knight" would take just 18 days to reach that milestone.
"Where we go from there, it's uncharted waters," Fellman said.
The last movie to break $400 million was the 2006 "Pirates of the Caribbean" movie, which ranks No. 6 on the all-time list with $423 million. The 1997 epic "Titanic" leads the field with $601 million.
"STEP BROTHERS" STRONG
Elsewhere, the Columbia Pictures comedy "Step Brothers," starring Will Ferrell and John C. Reilly as perpetual adolescents, opened surprisingly strongly at No. 2 with $30 million. The 20th Century Fox sci-fi sequel "The X-Files: I Want to Believe" came in at No. 4 with $10.2 million, a figure at the lower end of expectations.
In between, Universal Pictures' ABBA-inspired musical romance "Mamma Mia!" slipped one place to No. 3 with $17.8 million while its 10-day total rose to $62.7 million.
"Step Brothers" represents a strong rebound for Ferrell and Reilly, following their recent respective bombs "Semi-Pro" and "Walk Hard." The actors, along with director Adam McKay, previously worked together in the hit 2006 comedy "Talladega Nights: The Ballad of Ricky Bobby."
Industry pundits had forecast a $25 million opening for the $65 million film, which received mixed reviews from critics. Ferrell and Reilly's emotionally stunted characters are forced to live together when their single parents marry. Two-thirds of the male-skewing audience was aged under 25, Columbia said.
"The X-Files: I Want to Believe" also marks a reunion, this time between former FBI agents Mulder (David Duchovny) and Scully (Gillian Anderson). But it failed to spark much enthusiasm among fans or critics. Fox said it had targeted an opening in the $10 million to $15 million range.
"We made it for the fans and they have come out," said Chris Aronson, senior VP of distribution at the News Corp-owned studio.
The sci-fi mystery comes to screens six years after the underlying TV series "The X-Files" ended its run, and a decade after the first big-screen spinoff. That film, also called "The X-Files" opened to $30 million on its way to $84 million domestically.
The $30 million sequel marks the third consecutive disappointment in as many weeks for Fox, following the Eddie Murphy comedy "Meet Dave" and then the animated "Space Chimps." The studio, noted for keeping costs down and sharing the risk with outside partners, has had a quiet year highlighted by the early-spring release "Dr. Seuss' Horton Hears a Who," which grossed $154 million domestically. Next up is the Aug. 15 horror film "Mirrors" starring Kiefer Sutherland.
Warner Bros. is a unit of Time Warner Inc. Columbia Pictures is a unit of Sony Corp while Universal Pictures is a unit of General Electric Co.
The Caped Crusader's blockbuster outing, "The Dark Knight," sold an estimated $75.6 million worth of tickets during the three days beginning Friday, taking its total to $314.2 million, distributor Warner Bros. Pictures said.
A week after it scored a record-breaking $158 million opening, "The Dark Knight" added a new title to its impressive list of superlatives: the best second weekend, surpassing the holiday-boosted $72 million haul of 2004's "Shrek 2."
The $180 million movie, which stars Christian Bale as Batman and late actor Heath Ledger as the anarchic Joker, has reportedly been drawing strong repeat business, and also has piqued the interest of people who avoid superhero flicks or rarely go to the movies at all.
"The Dark Knight" now ranks as the second-biggest movie of the year, just behind the $315 million haul of "Iron Man," and the 23rd-biggest of all time.
The previous speed record for a $300 million film was 16 days set by "Pirates of the Caribbean: Dead Man's Chest" in 2006. The next target is $400 million, which took "Shrek 2" 43 days to reach. Warner Bros. distribution president Dan Fellman predicted "The Dark Knight" would take just 18 days to reach that milestone.
"Where we go from there, it's uncharted waters," Fellman said.
The last movie to break $400 million was the 2006 "Pirates of the Caribbean" movie, which ranks No. 6 on the all-time list with $423 million. The 1997 epic "Titanic" leads the field with $601 million.
"STEP BROTHERS" STRONG
Elsewhere, the Columbia Pictures comedy "Step Brothers," starring Will Ferrell and John C. Reilly as perpetual adolescents, opened surprisingly strongly at No. 2 with $30 million. The 20th Century Fox sci-fi sequel "The X-Files: I Want to Believe" came in at No. 4 with $10.2 million, a figure at the lower end of expectations.
In between, Universal Pictures' ABBA-inspired musical romance "Mamma Mia!" slipped one place to No. 3 with $17.8 million while its 10-day total rose to $62.7 million.
"Step Brothers" represents a strong rebound for Ferrell and Reilly, following their recent respective bombs "Semi-Pro" and "Walk Hard." The actors, along with director Adam McKay, previously worked together in the hit 2006 comedy "Talladega Nights: The Ballad of Ricky Bobby."
Industry pundits had forecast a $25 million opening for the $65 million film, which received mixed reviews from critics. Ferrell and Reilly's emotionally stunted characters are forced to live together when their single parents marry. Two-thirds of the male-skewing audience was aged under 25, Columbia said.
"The X-Files: I Want to Believe" also marks a reunion, this time between former FBI agents Mulder (David Duchovny) and Scully (Gillian Anderson). But it failed to spark much enthusiasm among fans or critics. Fox said it had targeted an opening in the $10 million to $15 million range.
"We made it for the fans and they have come out," said Chris Aronson, senior VP of distribution at the News Corp-owned studio.
The sci-fi mystery comes to screens six years after the underlying TV series "The X-Files" ended its run, and a decade after the first big-screen spinoff. That film, also called "The X-Files" opened to $30 million on its way to $84 million domestically.
The $30 million sequel marks the third consecutive disappointment in as many weeks for Fox, following the Eddie Murphy comedy "Meet Dave" and then the animated "Space Chimps." The studio, noted for keeping costs down and sharing the risk with outside partners, has had a quiet year highlighted by the early-spring release "Dr. Seuss' Horton Hears a Who," which grossed $154 million domestically. Next up is the Aug. 15 horror film "Mirrors" starring Kiefer Sutherland.
Warner Bros. is a unit of Time Warner Inc. Columbia Pictures is a unit of Sony Corp while Universal Pictures is a unit of General Electric Co.
Wednesday, July 23, 2008
Prices of Food and Gas Take a Toll in Asia
While prices have been rising in the United States and Europe, the biggest increases are being felt in Asia, and countries like India and Vietnam are already having to deal with double-digit inflation.
Skip to next paragraph Sharp rises in global food and oil prices are now spilling over into wages and broader measures of inflation across Asia, as the Asian Development Bank noted in a report released Tuesday.
Workers are demanding higher wages to cover their rising living costs, and companies are imposing higher prices for a wide range of goods to cover accelerating production costs.
“The epicenter of the inflationary storm is really in Asia,” said Cyd Tuano-Amador, the managing director of monetary policy at the Philippines Central Bank.
Higher inflation in Asia is also starting to contribute to higher prices in the United States. According to the Labor Department, prices for imports from Pacific Rim countries — mostly Asian goods — rose 2.7 percent in the 12 months through June, after falling 1.4 percent in the preceding 12 months.
Asia’s central bankers, who are preparing for their annual gathering July 28 in Shanghai, have been unable to develop a united response to deal with the worst inflation threat in at least a decade.
In an interview Tuesday, Boediono, the governor of the Bank of Indonesia, called for a coordinated international move toward tighter monetary policy, including higher interest rates by the United States, so as to slow inflation.
In an era of global capital flows, so much excess money is now flowing through world markets that no single country can fight the international problem of inflation effectively by tightening its own monetary policy, Boediono said. (Like many Indonesians, he uses only one name.)
“I don’t think any one country, even as big as China or even the United States, would be able to stomach the adjustment” of raising interest rates far enough to slow global inflation, he said.
World oil prices could fall by 30 percent if countries took coordinated action to reduce liquidity, he said. He attributed much of the recent rise in global commodity prices to excess money in circulation.
But Boediono said he was not recommending that Asian central banks sell any of their dollar reserves to put pressure on the United States to raise interest rates. Asian purchases of dollar-denominated securities, led by China’s $1.8 trillion in foreign reserves, have played a central role in financing the American trade and government budget deficits and in holding down interest rates on mortgages during the recent American housing market decline.
Most central banks in Asia have been reluctant to give up any of their economic independence or challenge the United States by coordinating their monetary and currency policies, even as they fret about rising prices.
“There is a legitimate concern about the recent developments on the inflation front,” said Y. Venugopal Reddy, the governor of the Reserve Bank of India, in a speech late last month. “Oil price increase is now a global problem, making inflation a problem for all countries, both developed and developing. Hence, our solutions to the problem will also be similar, but tailored to suit our conditions.”
Zhou Xiaochuan, the governor of the People’s Bank of China, said this month during a visit to Switzerland that an interest rate increase might be needed in China to combat inflation. While the rise in consumer prices slowed slightly in China last month, to 7.1 percent from 7.7 percent in May, inflation accelerated at the producer level, to 8.8 percent in June from 8.2 percent in May.
Ms. Tuano-Amador said the meeting in Shanghai was unlikely to produce any consensus on monetary policy coordination. “I don’t think that it’s on the table right now,” she said.”
As the Asian Development Bank said in its report issued Tuesday in Singapore, inflation has risen across the region. “The external economic outlook for emerging East Asia has dimmed amid prospects for slower growth, tighter credit conditions and higher inflation,” the bank said.
The report also mentioned that “heightened inflationary pressures will require more decisive tightening of monetary policies across much of emerging East Asia.”
The initial reaction of many governments and private sector economists across Asia over the winter was to see price increases as largely confined to food and energy — and therefore not requiring monetary policy responses like interest rate increases. But broader inflation trends are now starting to become apparent.
Skip to next paragraph The core inflation rate, excluding food and energy, accelerated in Indonesia to 8.7 percent in May from 6.3 percent in December. During the same period, the core rates rose in May in the Philippines and Singapore to 6.2 percent and 6.8 percent, respectively, from 2.6 percent and 3.5 percent.
Strong demand for Indonesia’s many commodities, from coal to palm oil, have insulated it somewhat from slowing growth elsewhere. But rising prices are starting to take a toll, particularly on the poor.
Halimah, a teacher, echoed the unhappiness of many Indonesians as she bought milk on Sunday at a street market in Karawang, a town in west-central Java. “It has been very difficult for us, especially on kerosene, cooking oil and eggs — they have been rising in price dramatically,” she said.
Central banks in the region have been struggling for months to respond to the Federal Reserve’s low interest rates. Low American interest rates are making it harder for the region’s central banks to raise their rates; doing so would make them more attractive for international investors and could produce rapid appreciation in their currencies.
Stronger currencies would lower the cost in local currency terms of importing oil and other goods. But stronger currencies would also reduce the competitiveness of exports at a time when demand for Asian goods is weakening in the United States.
Boediono said he saw some room for the Indonesian rupiah to rise against the dollar, but that the timing could not be forced on his country. “Some orderly appreciation,” he said, “would be helpful for us.”
Boediono said that the Federal Reserve should raise short-term interest rates, and that his experience during the Asian financial crisis made him believe that the Fed could act without causing excessive damage to the American banking system.
“I don’t think a move of 25 or 50 basis points,” or 0.25 or 0.5 percentage points, “would collapse it,” he said.
Ben S. Bernanke, the chairman of the Federal Reserve, told the Senate Banking Committee in testimony on July 15 that the United States economy faces risks of a further slowdown and higher inflation. Analysts interpreted his comments as meaning it was unlikely that the Fed would either raise or lower interest rates soon. The target for the overnight borrowing rate among banks, or federal funds rate, stands at 2 percent.
Boediono spoke in an interview in his elegant, wood-paneled offices, where the international décor and even the styling of the paneling bear a striking resemblance to the governors’ suites at the Federal Reserve’s headquarters in Washington.
Skip to next paragraph Sharp rises in global food and oil prices are now spilling over into wages and broader measures of inflation across Asia, as the Asian Development Bank noted in a report released Tuesday.
Workers are demanding higher wages to cover their rising living costs, and companies are imposing higher prices for a wide range of goods to cover accelerating production costs.
“The epicenter of the inflationary storm is really in Asia,” said Cyd Tuano-Amador, the managing director of monetary policy at the Philippines Central Bank.
Higher inflation in Asia is also starting to contribute to higher prices in the United States. According to the Labor Department, prices for imports from Pacific Rim countries — mostly Asian goods — rose 2.7 percent in the 12 months through June, after falling 1.4 percent in the preceding 12 months.
Asia’s central bankers, who are preparing for their annual gathering July 28 in Shanghai, have been unable to develop a united response to deal with the worst inflation threat in at least a decade.
In an interview Tuesday, Boediono, the governor of the Bank of Indonesia, called for a coordinated international move toward tighter monetary policy, including higher interest rates by the United States, so as to slow inflation.
In an era of global capital flows, so much excess money is now flowing through world markets that no single country can fight the international problem of inflation effectively by tightening its own monetary policy, Boediono said. (Like many Indonesians, he uses only one name.)
“I don’t think any one country, even as big as China or even the United States, would be able to stomach the adjustment” of raising interest rates far enough to slow global inflation, he said.
World oil prices could fall by 30 percent if countries took coordinated action to reduce liquidity, he said. He attributed much of the recent rise in global commodity prices to excess money in circulation.
But Boediono said he was not recommending that Asian central banks sell any of their dollar reserves to put pressure on the United States to raise interest rates. Asian purchases of dollar-denominated securities, led by China’s $1.8 trillion in foreign reserves, have played a central role in financing the American trade and government budget deficits and in holding down interest rates on mortgages during the recent American housing market decline.
Most central banks in Asia have been reluctant to give up any of their economic independence or challenge the United States by coordinating their monetary and currency policies, even as they fret about rising prices.
“There is a legitimate concern about the recent developments on the inflation front,” said Y. Venugopal Reddy, the governor of the Reserve Bank of India, in a speech late last month. “Oil price increase is now a global problem, making inflation a problem for all countries, both developed and developing. Hence, our solutions to the problem will also be similar, but tailored to suit our conditions.”
Zhou Xiaochuan, the governor of the People’s Bank of China, said this month during a visit to Switzerland that an interest rate increase might be needed in China to combat inflation. While the rise in consumer prices slowed slightly in China last month, to 7.1 percent from 7.7 percent in May, inflation accelerated at the producer level, to 8.8 percent in June from 8.2 percent in May.
Ms. Tuano-Amador said the meeting in Shanghai was unlikely to produce any consensus on monetary policy coordination. “I don’t think that it’s on the table right now,” she said.”
As the Asian Development Bank said in its report issued Tuesday in Singapore, inflation has risen across the region. “The external economic outlook for emerging East Asia has dimmed amid prospects for slower growth, tighter credit conditions and higher inflation,” the bank said.
The report also mentioned that “heightened inflationary pressures will require more decisive tightening of monetary policies across much of emerging East Asia.”
The initial reaction of many governments and private sector economists across Asia over the winter was to see price increases as largely confined to food and energy — and therefore not requiring monetary policy responses like interest rate increases. But broader inflation trends are now starting to become apparent.
Skip to next paragraph The core inflation rate, excluding food and energy, accelerated in Indonesia to 8.7 percent in May from 6.3 percent in December. During the same period, the core rates rose in May in the Philippines and Singapore to 6.2 percent and 6.8 percent, respectively, from 2.6 percent and 3.5 percent.
Strong demand for Indonesia’s many commodities, from coal to palm oil, have insulated it somewhat from slowing growth elsewhere. But rising prices are starting to take a toll, particularly on the poor.
Halimah, a teacher, echoed the unhappiness of many Indonesians as she bought milk on Sunday at a street market in Karawang, a town in west-central Java. “It has been very difficult for us, especially on kerosene, cooking oil and eggs — they have been rising in price dramatically,” she said.
Central banks in the region have been struggling for months to respond to the Federal Reserve’s low interest rates. Low American interest rates are making it harder for the region’s central banks to raise their rates; doing so would make them more attractive for international investors and could produce rapid appreciation in their currencies.
Stronger currencies would lower the cost in local currency terms of importing oil and other goods. But stronger currencies would also reduce the competitiveness of exports at a time when demand for Asian goods is weakening in the United States.
Boediono said he saw some room for the Indonesian rupiah to rise against the dollar, but that the timing could not be forced on his country. “Some orderly appreciation,” he said, “would be helpful for us.”
Boediono said that the Federal Reserve should raise short-term interest rates, and that his experience during the Asian financial crisis made him believe that the Fed could act without causing excessive damage to the American banking system.
“I don’t think a move of 25 or 50 basis points,” or 0.25 or 0.5 percentage points, “would collapse it,” he said.
Ben S. Bernanke, the chairman of the Federal Reserve, told the Senate Banking Committee in testimony on July 15 that the United States economy faces risks of a further slowdown and higher inflation. Analysts interpreted his comments as meaning it was unlikely that the Fed would either raise or lower interest rates soon. The target for the overnight borrowing rate among banks, or federal funds rate, stands at 2 percent.
Boediono spoke in an interview in his elegant, wood-paneled offices, where the international décor and even the styling of the paneling bear a striking resemblance to the governors’ suites at the Federal Reserve’s headquarters in Washington.
Monday, July 21, 2008
Rice wants "serious answer" from Iran
U.S. Secretary of State Condoleezza Rice warned Iran on Monday that it faced more sanctions if it defied a two-week deadline to agree to curb its nuclear program.
Rice said Iran was stalling and must give a "serious answer" within the deadline set by six world powers which offered trade and technical incentives if Tehran halts its uranium enrichment. The West fears Iran wants to build a nuclear bomb.
"We are in the strongest possible position to demonstrate that if Iran does not act then it is time to go back to that (sanctions) track," Rice said,
It was her first comment on the subject since Washington broke from usual policy and joined nuclear talks with Iran in Geneva on Saturday.
Rice, speaking to reporters on her way to Abu Dhabi en route to Asia, said the United States would impose more bilateral sanctions on Iran and the Europeans would look at what they could do if Iran failed to meet the world powers' demand.
"The main thing is we will have to start considering what we do in New York," she said, referring to the Security Council which has imposed three rounds of sanctions on Iran.
Envoys from the United States, Russia, China, France, Germany and Britain -- the so-called sextet of world powers -- attended the Geneva meeting.
Iran's top nuclear negotiator, Saeed Jalili, said at the next meeting Iran would not discuss the demand to freeze its sensitive atomic work which the West fears is aimed at making bombs. Iran says its aims are peaceful.
But Iranian President Mahmoud Ahmadinejad gave an upbeat assessment on Sunday. "Any negotiation that takes place is a step forward," he told reporters, according to IRNA news agency.
A senior Iranian official said Iran was ready to respond to any positive U.S. overture but it was unclear whether Washington had decided between diplomacy and force.
The U.S. government was "indecisive about whether to lean on diplomacy or the military option", said Deputy Foreign Minister Alireza Sheikh-Attar, according to the student news agency ISNA on Monday.
Turkish Foreign Minister Ali Babacan, briefed by Jalili in Istanbul on Sunday, said: "There is no reason to be hopeless. The process continues but it would not be right to raise expectations too high."
NO MORE "SMALL TALK"
Rice said Iran's envoy to Saturday's talks, attended by senior U.S. diplomat William Burns, engaged in small talk rather than address the central issue of the sextet offer.
"I understand that it was at times meandering," Rice said.
She said EU foreign policy chief Javier Solana "clarified" Iran's choices at the talks.
"It was also a very strong message to the Iranians that they can't go and stall and make small talk and talk about culture and that they have to make a decision," said Rice.
U.S. attendance at the Geneva talks was an about-face and comes as Washington is considering whether to open an interest section in Tehran, which would allow for diplomatic contact while falling short of diplomatic ties.
The United States broke ties with Iran nearly 30 years ago.
"We are always looking for ways to relate to the Iranian people and to make it easier for them to relate to us," said Rice. She said such a move should not be seen as a thawing of relations.
Rice said there were no plans to join further nuclear talks unless Iran met conditions to give up the enrichment work. She said the decision to join the Geneva talks was to show U.S. commitment to the incentives offer to Iran.
"I think we have done enough to demonstrate that the United States is serious and to assure our partners that we are serious and to show the Iranians that we are serious. I think we have done enough," Rice said.
Rice said Iran was stalling and must give a "serious answer" within the deadline set by six world powers which offered trade and technical incentives if Tehran halts its uranium enrichment. The West fears Iran wants to build a nuclear bomb.
"We are in the strongest possible position to demonstrate that if Iran does not act then it is time to go back to that (sanctions) track," Rice said,
It was her first comment on the subject since Washington broke from usual policy and joined nuclear talks with Iran in Geneva on Saturday.
Rice, speaking to reporters on her way to Abu Dhabi en route to Asia, said the United States would impose more bilateral sanctions on Iran and the Europeans would look at what they could do if Iran failed to meet the world powers' demand.
"The main thing is we will have to start considering what we do in New York," she said, referring to the Security Council which has imposed three rounds of sanctions on Iran.
Envoys from the United States, Russia, China, France, Germany and Britain -- the so-called sextet of world powers -- attended the Geneva meeting.
Iran's top nuclear negotiator, Saeed Jalili, said at the next meeting Iran would not discuss the demand to freeze its sensitive atomic work which the West fears is aimed at making bombs. Iran says its aims are peaceful.
But Iranian President Mahmoud Ahmadinejad gave an upbeat assessment on Sunday. "Any negotiation that takes place is a step forward," he told reporters, according to IRNA news agency.
A senior Iranian official said Iran was ready to respond to any positive U.S. overture but it was unclear whether Washington had decided between diplomacy and force.
The U.S. government was "indecisive about whether to lean on diplomacy or the military option", said Deputy Foreign Minister Alireza Sheikh-Attar, according to the student news agency ISNA on Monday.
Turkish Foreign Minister Ali Babacan, briefed by Jalili in Istanbul on Sunday, said: "There is no reason to be hopeless. The process continues but it would not be right to raise expectations too high."
NO MORE "SMALL TALK"
Rice said Iran's envoy to Saturday's talks, attended by senior U.S. diplomat William Burns, engaged in small talk rather than address the central issue of the sextet offer.
"I understand that it was at times meandering," Rice said.
She said EU foreign policy chief Javier Solana "clarified" Iran's choices at the talks.
"It was also a very strong message to the Iranians that they can't go and stall and make small talk and talk about culture and that they have to make a decision," said Rice.
U.S. attendance at the Geneva talks was an about-face and comes as Washington is considering whether to open an interest section in Tehran, which would allow for diplomatic contact while falling short of diplomatic ties.
The United States broke ties with Iran nearly 30 years ago.
"We are always looking for ways to relate to the Iranian people and to make it easier for them to relate to us," said Rice. She said such a move should not be seen as a thawing of relations.
Rice said there were no plans to join further nuclear talks unless Iran met conditions to give up the enrichment work. She said the decision to join the Geneva talks was to show U.S. commitment to the incentives offer to Iran.
"I think we have done enough to demonstrate that the United States is serious and to assure our partners that we are serious and to show the Iranians that we are serious. I think we have done enough," Rice said.
Ranbaxy probe highlights medical issues
When US regulators raised concerns during their visit to a factory operated by Ranbaxy, the Indian generic drugs group, no one involved imagined that their inquiry would last so long, become so public or raise the stakes so high.
Since an inspection by the Food & Drug Administration (FDA) at the Paonta Sahib plant in February 2006, there has been a drawn-out battle for extra information, triggering raids and subpoenas last year from the Department of Justice.
But it was only in the past few days, after the US attorney's office for Maryland filed a court motion to force disclosure of more internal documents from Ranbaxy, that unusually detailed claims have emerged.
The filing alleges "a pattern of systemic fraudulent conduct, including submissions by Ranbaxy to the FDA that contain false and fabricated information . . . failure to timely report the distribution of drugs that were out of specification and attempts to conceal violations of good manufacturing practices".
The accusations could have great impact. In the US alone, Ranbaxy last year reported sales of generic drugs of $390m. It has been an important supplier of antiretroviral medicines to treat HIV patients in the developing world via Pepfar, the US government's Aids programme. It has ambitious plans elsewhere.
Ranbaxy, which stresses it is fully co-operating with the authorities, calls the claims "baseless". It adds that samples of its products have been independently tested and found to be compliant. No charges have been filed against the company.
The spat comes at a time of heightened public concern over drug quality following the discovery in the US at the start of this year of life-threatening substandard Heparin, a blood thinner, in which contamination in raw materials supplied from China was found.
The saga highlighted the difficulties for US regulators to accelerate their capacity to conduct foreign inspections to keep pace with the jump in the purchase of raw materials and manufactured drugs coming from Asia.
For Ranbaxy, the timing is sensitive; last month,Daiichi-Sankyo of Japan announced its intention to buy control of Ranbaxy for up to $4.6bn as part of a process diversifying from its traditional innovative medicines base into the generic drug sector.
News of the US probe has depressed both companies' share price on fears the deal could be called off - a suggestion firmly denied by both groups.
The allegations are not the first concerns involving the company. In 2004, it and Cipla, another Indian generics producer, withdrew antiretroviral medicines for HIV after inspections by the World Health Organisation identified "serious discrepancies" in clinical tests conducted by a common third-party contractor.
But the storm may prove overblown. Inspections constantly raise concerns in western innovative companies as well as generic companies, but details are rarely made public.
Stripped of the aggressive language in the Department of Justice's motion, the FDA's inspection report highlighted sloppy procedures at Ranbaxy and inadequate records to audit its processes, but did not prove that substandard drugs liable to harm patients were being produced.
Whatever the outcome, the case highlights two broader issues concerning quality of medicines. The first is that even good manufacturing practice" inspections such as the FDA's only examine procedures in place at the time of a spot check. There is a case for more frequent follow-ups, and regular testing of batches of medicines delivered to ensure they meet quality standards.
Second, in countries such as India, with a large and vibrant generic drugs sector, there are often different standards for drugs manufactured for domestic use, and those destined for export which are subject to far tougher regulatory scrutiny. Convergence of the two will be an area of increasing attention.
Since an inspection by the Food & Drug Administration (FDA) at the Paonta Sahib plant in February 2006, there has been a drawn-out battle for extra information, triggering raids and subpoenas last year from the Department of Justice.
But it was only in the past few days, after the US attorney's office for Maryland filed a court motion to force disclosure of more internal documents from Ranbaxy, that unusually detailed claims have emerged.
The filing alleges "a pattern of systemic fraudulent conduct, including submissions by Ranbaxy to the FDA that contain false and fabricated information . . . failure to timely report the distribution of drugs that were out of specification and attempts to conceal violations of good manufacturing practices".
The accusations could have great impact. In the US alone, Ranbaxy last year reported sales of generic drugs of $390m. It has been an important supplier of antiretroviral medicines to treat HIV patients in the developing world via Pepfar, the US government's Aids programme. It has ambitious plans elsewhere.
Ranbaxy, which stresses it is fully co-operating with the authorities, calls the claims "baseless". It adds that samples of its products have been independently tested and found to be compliant. No charges have been filed against the company.
The spat comes at a time of heightened public concern over drug quality following the discovery in the US at the start of this year of life-threatening substandard Heparin, a blood thinner, in which contamination in raw materials supplied from China was found.
The saga highlighted the difficulties for US regulators to accelerate their capacity to conduct foreign inspections to keep pace with the jump in the purchase of raw materials and manufactured drugs coming from Asia.
For Ranbaxy, the timing is sensitive; last month,Daiichi-Sankyo of Japan announced its intention to buy control of Ranbaxy for up to $4.6bn as part of a process diversifying from its traditional innovative medicines base into the generic drug sector.
News of the US probe has depressed both companies' share price on fears the deal could be called off - a suggestion firmly denied by both groups.
The allegations are not the first concerns involving the company. In 2004, it and Cipla, another Indian generics producer, withdrew antiretroviral medicines for HIV after inspections by the World Health Organisation identified "serious discrepancies" in clinical tests conducted by a common third-party contractor.
But the storm may prove overblown. Inspections constantly raise concerns in western innovative companies as well as generic companies, but details are rarely made public.
Stripped of the aggressive language in the Department of Justice's motion, the FDA's inspection report highlighted sloppy procedures at Ranbaxy and inadequate records to audit its processes, but did not prove that substandard drugs liable to harm patients were being produced.
Whatever the outcome, the case highlights two broader issues concerning quality of medicines. The first is that even good manufacturing practice" inspections such as the FDA's only examine procedures in place at the time of a spot check. There is a case for more frequent follow-ups, and regular testing of batches of medicines delivered to ensure they meet quality standards.
Second, in countries such as India, with a large and vibrant generic drugs sector, there are often different standards for drugs manufactured for domestic use, and those destined for export which are subject to far tougher regulatory scrutiny. Convergence of the two will be an area of increasing attention.
Top U.S. admiral says strike on Iran means turmoil
White House military adviser Adm. Mike Mullen said on Sunday he was concerned that any U.S. or Israeli strike on Iran carried a notable risk of more turmoil in the Middle East.
"I think it would be significant. I worry about it a lot," Mullen, chairman of the Joint Chiefs of Staff, told the "Fox News Sunday" television program.
U.S. officials have played down fears of a military strike against Iran over its nuclear program, which Tehran says is for peaceful purposes. But Israel fears Iran is seeking to build atomic weapons, and speculation it would bomb Iranian nuclear installations has grown since a big Israeli air drill last month.
"I worry about the instability in that part of the world and ... the possible unintended consequences of a strike like that," Mullen said.
He said it would be difficult to predict the impact throughout the region or what actions the United States would have to take to contain it.
"Right now I'm fighting two wars, and I don't need a third one," Mullen said, speaking of U.S. military engagements in Iraq and Afghanistan. But he quickly added the U.S. military would be capable of handling another front.
Alternately, he added, the risk of doing nothing is also big.
"It's a very, very tough problem," Mullen said. "But that's where I think this international community -- and the pressure has got to continue to be brought specifically on Iran to not proceed in this regard."
Iran faces tougher sanctions after talks on reining in its nuclear program ended in a stalemate on Saturday despite unprecedented U.S. participation.
Mullen said he believed the Iranians are intent on building nuclear weapons. "We need to figure out a way to ensure that that doesn't happen," he said.
"I think it would be significant. I worry about it a lot," Mullen, chairman of the Joint Chiefs of Staff, told the "Fox News Sunday" television program.
U.S. officials have played down fears of a military strike against Iran over its nuclear program, which Tehran says is for peaceful purposes. But Israel fears Iran is seeking to build atomic weapons, and speculation it would bomb Iranian nuclear installations has grown since a big Israeli air drill last month.
"I worry about the instability in that part of the world and ... the possible unintended consequences of a strike like that," Mullen said.
He said it would be difficult to predict the impact throughout the region or what actions the United States would have to take to contain it.
"Right now I'm fighting two wars, and I don't need a third one," Mullen said, speaking of U.S. military engagements in Iraq and Afghanistan. But he quickly added the U.S. military would be capable of handling another front.
Alternately, he added, the risk of doing nothing is also big.
"It's a very, very tough problem," Mullen said. "But that's where I think this international community -- and the pressure has got to continue to be brought specifically on Iran to not proceed in this regard."
Iran faces tougher sanctions after talks on reining in its nuclear program ended in a stalemate on Saturday despite unprecedented U.S. participation.
Mullen said he believed the Iranians are intent on building nuclear weapons. "We need to figure out a way to ensure that that doesn't happen," he said.
Friday, July 18, 2008
Fitch's downgrade not a cause of worry, says FM
Finance Minister P Chidambaram on Friday downplayed the lowering of India's credit outlook by global rating agency Fitch, saying it is not a cause of worry as economic fundamentals are strong.
"One rating agency has revised the outlook from stable to negative. I do not think that should cause us too much worry. We must look at fundamentals which I believe are still strong, but facing difficulties. I do not think we should worry about outlook," Finance Minister P Chidambaram said.
Fitch has earlier this week revised the local currency outlook of India to negative from stable because of fiscal pressures.
"One rating agency has revised the outlook from stable to negative. I do not think that should cause us too much worry. We must look at fundamentals which I believe are still strong, but facing difficulties. I do not think we should worry about outlook," Finance Minister P Chidambaram said.
Fitch has earlier this week revised the local currency outlook of India to negative from stable because of fiscal pressures.
MARKET PREDICTION
GLOBAL MARKETS ARE IN POSITIVE NOTE ..
OIL BREACH TO $129(APRX).GOLD ALSO CORRECTED SIGNIFICANTLY,
NIFTY WILL OPEN IN POSITIVE NOTE RANGE BETWEEN 3950-4040-4100.
IF MARKET HOLDS 3950 BUY WITH SL OF 3920 AND IF IT DOESNOT HOLD 4040 WITH SL OF 4060 GO SHORT.
TOTAL MARKET OI IS 68 K CR AND JULY OI IS 56 K CR AND AUGUST IS 10 K CR.
INFLATION INCHED UP A BIT TO 1.91%VS 1.89% LAST WEEK.
HAVE A NICE WEEKEND.
-MR SAM
OIL BREACH TO $129(APRX).GOLD ALSO CORRECTED SIGNIFICANTLY,
NIFTY WILL OPEN IN POSITIVE NOTE RANGE BETWEEN 3950-4040-4100.
IF MARKET HOLDS 3950 BUY WITH SL OF 3920 AND IF IT DOESNOT HOLD 4040 WITH SL OF 4060 GO SHORT.
TOTAL MARKET OI IS 68 K CR AND JULY OI IS 56 K CR AND AUGUST IS 10 K CR.
INFLATION INCHED UP A BIT TO 1.91%VS 1.89% LAST WEEK.
HAVE A NICE WEEKEND.
-MR SAM
Thursday, July 17, 2008
J.P. Morgan's Net Falls 53%
J.P. Morgan Chase & Co. posted a 53% decline in second-quarter net income as credit-loss provisions more than doubled and its investment bank cut the value of leveraged-loan and mortgage-related securities by a further $1.1 billion.
The nation's biggest bank by market value, which has been battered less than others by the credit crisis, reported net income of $2 billion, or 54 cents a share, compared with $4.23 billion, or $1.24 a share, a year earlier. Net revenue fell 3% to $18.4 billion. Analysts polled by Thomson Reuters had expected earnings of 44 cents a share on revenue of $16.55 billion. Shares rose 4.1% in premarket trading.
Chief Executive Jamie Dimon said he expects "the economic environment to continue to be weak -- and to likely get weaker -- and for the capital markets to remain under stress." He added that "since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer."
What to expect from other major companies -- including analyst forecasts for profit and revenue -- as they report quarterly earnings
The latest results included a $540 million loss related to the company's purchase of Bear Stearns Cos. In mid-May, Mr. Dimon said J.P. Morgan's $1.08 billion purchase of Bear would reduce J.P. Morgan's quarterly earnings by $500 million, plus or minus several hundred million dollars, due to its share of Bear's losses and merger costs.
Mr. Dimon noted Thursday that "through the truly remarkable partnership and efforts of our people in extremely difficult times, we made great progress towards full integration, while also significantly reducing our combined risk positions. We now have an expanded platform to better serve our institutional clients -- one which we fully expect will make our franchise stronger over time."
The bank's return on equity -- an important measure of profitability at financial firms -- fell to 6% from 14%, and credit-loss provisions more than doubled to $3.45 billion but fell 22% from the first quarter. Home-equity charge-offs surged to 2.16% from 0.44%, while subprime-mortgage charge-offs quadrupled. Charge-offs for prime mortgages surged to 0.91% from 0.05%.
The company's investment bank saw profit plunge 67% amid the markdowns as revenue fell 5.7%. Its retail-bank operations saw earnings fall 23% on the surging credit-loss provisions, as revenue increased 15%.
The provisions also hurt the credit-card business, where earnings slumped 67% amid a 2% revenue drop. The charge-off rate surged to 4.98% from 3.62% a year earlier and 4.37% in the first quarter. At an investor conference in May, Mr. Dimon said the firm expected the quarter's losses to be about 5%, exceed that level in the second half of the year and possibly average 6% in 2009.
The nation's biggest bank by market value, which has been battered less than others by the credit crisis, reported net income of $2 billion, or 54 cents a share, compared with $4.23 billion, or $1.24 a share, a year earlier. Net revenue fell 3% to $18.4 billion. Analysts polled by Thomson Reuters had expected earnings of 44 cents a share on revenue of $16.55 billion. Shares rose 4.1% in premarket trading.
Chief Executive Jamie Dimon said he expects "the economic environment to continue to be weak -- and to likely get weaker -- and for the capital markets to remain under stress." He added that "since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer."
What to expect from other major companies -- including analyst forecasts for profit and revenue -- as they report quarterly earnings
The latest results included a $540 million loss related to the company's purchase of Bear Stearns Cos. In mid-May, Mr. Dimon said J.P. Morgan's $1.08 billion purchase of Bear would reduce J.P. Morgan's quarterly earnings by $500 million, plus or minus several hundred million dollars, due to its share of Bear's losses and merger costs.
Mr. Dimon noted Thursday that "through the truly remarkable partnership and efforts of our people in extremely difficult times, we made great progress towards full integration, while also significantly reducing our combined risk positions. We now have an expanded platform to better serve our institutional clients -- one which we fully expect will make our franchise stronger over time."
The bank's return on equity -- an important measure of profitability at financial firms -- fell to 6% from 14%, and credit-loss provisions more than doubled to $3.45 billion but fell 22% from the first quarter. Home-equity charge-offs surged to 2.16% from 0.44%, while subprime-mortgage charge-offs quadrupled. Charge-offs for prime mortgages surged to 0.91% from 0.05%.
The company's investment bank saw profit plunge 67% amid the markdowns as revenue fell 5.7%. Its retail-bank operations saw earnings fall 23% on the surging credit-loss provisions, as revenue increased 15%.
The provisions also hurt the credit-card business, where earnings slumped 67% amid a 2% revenue drop. The charge-off rate surged to 4.98% from 3.62% a year earlier and 4.37% in the first quarter. At an investor conference in May, Mr. Dimon said the firm expected the quarter's losses to be about 5%, exceed that level in the second half of the year and possibly average 6% in 2009.
India sees good harvest
India expects a good harvest of rice, corn and soybean this year, and may release 6 million tonnes of wheat into the local market to further ease prices, farm minister Sharad Pawar said, raising hopes export curbs may be relaxed.
Pawar told reporters that India had seen adequate and well-distributed monsoon rains, adding government incentives encouraging farmers to use fertilisers would boost farm output.
India had to import wheat in each of the past two years, and this year it clamped down on rice and corn exports and cut import duties on edible oils as part of efforts to tame inflation that hit a 13-year high of 11.89 percent in end-June.
"We are hopeful of a rich harvest, especially of rice, maize and soybean," Pawar told a conference.
The weather office said in a statement monsoon rains were 6 percent above normal so far but the distritution was uneven. Rainfall was 77 percent above normal in the northwest but 34 percent below the long-term average in southern India.
Pawar said the government would take a decision on selling wheat in the domestic market by Thursday.
"We are planning open-market sales of six million tonnes of wheat," Pawar told reporters. He said prices of the grain were rising in some parts of the country.
Traders said pricing of the grain would determine the impact.
"They will have to sell below their economic cost ... The government has procured at higher levels and incurred the cost of holding and transporting grains," a New Dehi-based trader said.
A trader in Singapore said the move to sell wheat in the open market signalled a good harvest.
"Some quantities might make it to the international market. There is surplus production for both wheat and corn, I hope India resumes exports," he said. India's government bought a record 22.5 million tonnes of wheat from farmers this year, filling its granaries and easing concerns of scarcity.
Pawar said India was likely to buy 27.5 million tonnes of rice from farmers by the end of the crop year to September.
The country has banned exports of non-basmati rice and the government has said in the past that it would review the ban only by November, after assessing the new harvest.
Pawar said India was also sending half a million tonnes of rice to Africa as promised by Prime Minister Manmohan Singh at the recent G-8 summit.
The country has also shipped 186,305 tonnes of rice to neighbouring Bangladesh, part of the 500,000 tonnes it had offered Dhaka after the country was ravaged by a cyclone last November.
Pawar told reporters that India had seen adequate and well-distributed monsoon rains, adding government incentives encouraging farmers to use fertilisers would boost farm output.
India had to import wheat in each of the past two years, and this year it clamped down on rice and corn exports and cut import duties on edible oils as part of efforts to tame inflation that hit a 13-year high of 11.89 percent in end-June.
"We are hopeful of a rich harvest, especially of rice, maize and soybean," Pawar told a conference.
The weather office said in a statement monsoon rains were 6 percent above normal so far but the distritution was uneven. Rainfall was 77 percent above normal in the northwest but 34 percent below the long-term average in southern India.
Pawar said the government would take a decision on selling wheat in the domestic market by Thursday.
"We are planning open-market sales of six million tonnes of wheat," Pawar told reporters. He said prices of the grain were rising in some parts of the country.
Traders said pricing of the grain would determine the impact.
"They will have to sell below their economic cost ... The government has procured at higher levels and incurred the cost of holding and transporting grains," a New Dehi-based trader said.
A trader in Singapore said the move to sell wheat in the open market signalled a good harvest.
"Some quantities might make it to the international market. There is surplus production for both wheat and corn, I hope India resumes exports," he said. India's government bought a record 22.5 million tonnes of wheat from farmers this year, filling its granaries and easing concerns of scarcity.
Pawar said India was likely to buy 27.5 million tonnes of rice from farmers by the end of the crop year to September.
The country has banned exports of non-basmati rice and the government has said in the past that it would review the ban only by November, after assessing the new harvest.
Pawar said India was also sending half a million tonnes of rice to Africa as promised by Prime Minister Manmohan Singh at the recent G-8 summit.
The country has also shipped 186,305 tonnes of rice to neighbouring Bangladesh, part of the 500,000 tonnes it had offered Dhaka after the country was ravaged by a cyclone last November.
Chidambaram says pressure on prices remains
India's finance minister, Palaniappan Chidambaram, said on Thursday pressure on prices remained but there were signs that central bank moves to tighten policy and lower inflation were working.
"There are signs that monetary steps are taking effect," Chidambaram told reporters. He added the government could take more measures and that the central bank's assessment on inflation was "fair and correct".
India's annual wholesale price inflation rate surged to nearly 12 percent in June, its highest in at least 13 years.
"There are signs that monetary steps are taking effect," Chidambaram told reporters. He added the government could take more measures and that the central bank's assessment on inflation was "fair and correct".
India's annual wholesale price inflation rate surged to nearly 12 percent in June, its highest in at least 13 years.
Tuesday, July 15, 2008
Stagflation is back. Here's how to beat it
The world is running short on energy, food, and water. The answer: a massive dose of technology.
Three decades ago, in a bleak stretch of the 1970s, an economic phenomenon emerged that was as ugly as its name: stagflation. It was the sound of the world hitting a wall, a combination of no growth and inflation. It created an existential crisis for the global economy, leading many to argue that the world had reached its limits of growth and prosperity. That day of reckoning was postponed, but now, after a 30-year hiatus, at least a mild bout of stagflation has returned, and matters could get much worse. We are back to the future, with the question we asked 30 years ago: How can we combine robust economic growth with tight global supplies of such critical commodities as energy, food, and water? It's worth comparing the earlier episode of stagflation with our current travails to help us find our way. In fact, this time the resource constraints will prove even harder to overcome than in the last round, since the world economy is much larger and the constraints are much tighter than before.
The similarities with the first half of the 1970s are eerie. Then as now, the world economy was growing rapidly, around 5% per year, in the lead-up to surging commodities prices. Then as now, the United States was engaged in a costly, unpopular, and unsuccessful war (Vietnam), financed by large budget deficits and foreign borrowing. The Middle East, as now, was racked by turmoil and war, notably the 1973 Arab-Israeli war. The dollar was in free fall, pushed off its strong-currency pedestal by overly expansionary U.S. monetary policy. And then as now, the surge in commodity prices was dramatic. Oil markets turned extremely tight in the early 1970s, not mainly because of the Arab oil boycott following the 1973 war, but because mounting global demand hit a limited supply. Oil prices quadrupled. Food prices also soared, fueled by strong world demand, surging fertilizer prices, and massive climate shocks, especially a powerful El Niño in 1972.
Here we go again. Oil prices have roughly quintupled since 2002, once again the result of strong global demand running into limited global supply. World grain prices have doubled in the past year. Just as in 1972, the recent run-up in food prices is aggravated by climate shocks. Australia's drought and Europe's heat waves put a lid on grain production in 2005-06. Even the politics are strangely similar. In both 1974 and 2008, an unpopular Republican President, battling historically low approval ratings, was distracted from serious macroeconomic policymaking. The country was adrift.
Then as now, Dick Cheney was close to the helm. What's more, the erroneous lessons he took away from the 1970s contribute to the problems that haunt us today. Cheney was Gerald Ford's chief of staff in 1976, when soaring oil prices helped doom Ford's reelection campaign. Cheney became obsessed with the fight to control the flow of Middle Eastern oil. That obsession, which by many accounts contributed to Cheney's urge to launch the Iraq war, has made the United States much more vulnerable in terms of energy, not only by tying the United States down in a disastrous military effort but also by diverting attention from a more coherent energy strategy.
The first stagflation was overcome at very high cost, including 15 years of slower global growth. While the world economy expanded by about 5.1% during the period 1960-73, it grew by a much slower 3.2% during the period 1973-89. A lot of the slowdown had to do with the worldwide profit squeeze and restraint on investments, jobs, and growth caused by tight energy supplies. A side effect of rising oil prices was to heighten financial turmoil, since central banks around the world, including the Federal Reserve, initially tried to use monetary expansion to overcome the supply-side constraints. The result was inflation rather than a restoration of economic growth. That is a key lesson for today, at a time when the Fed seems intent on lowering interest rates despite fast-rising commodity prices. There are limits to what a central bank can do in the face of a severe resource squeeze.
The first episode of stagflation opened a great debate about the global adequacy of primary commodities, especially energy and food. In 1972 the Club of Rome published its manifesto, "Limits to Growth," which predicted that the global economy would "overshoot" the earth's natural-resource limits and subsequently collapse. Yet once the world economy surmounted the extreme stagflation and returned to lower inflation and stronger growth from the mid-1980s onward, it became fashionable to dismiss the earlier fears of resource pessimism. Critics mocked "neo-Malthusians," who, inspired by the warnings of the late-18th-century thinker Thomas Malthus, predicted that society would outstrip the earth's carrying capacity. Didn't the Malthusians know that scarcity would generate new resource discoveries, new substitutes for scarce commodities, and new technologies?
Now the debate has returned with a vengeance, and a careful look back to the first stagflation is a sobering one. Yes, the world economy surmounted the stagflation, but not easily and not robustly. To an important extent, the workarounds on resource constraints were themselves limited and are showing decided strains today. We are not exactly running out of resources, but we are once again running up against serious resource and ecological limits that can hold back global economic progress. We will need to put a much greater priority on easing those constraints.
Conventional oil supplies will remain tight in the years ahead. New discoveries will not suffice. World crude-oil production nearly tripled in 1960-73 (from 21 million barrels a day to 56 million), but has grown a mere 30% since then, to around 73 million barrels per day in 2006. In fact, Persian Gulf crude-oil production stopped growing entirely after 1974, peaking at around 21 million barrels per day. Discoveries and production increases outside the Middle East rose only modestly and now in many cases are in decline in such fields as Britain's North Sea and Alaska's North Slope.
The simultaneous food scarcity of the 1970s proved to be shorter-lived than the energy scarcity, since the 1970s ushered in a nearly worldwide "green revolution" of higher grain yields, based on the adoption of improved seed varieties, intensive inputs of fertilizer, and vast increases of irrigation. The achievement was stunning but also not without its limits. Many areas of increased food production, such as in India and China, have relied on massive pumping of ground water for irrigation, and that ground water is being depleted. Heavy use of fertilizer, often inappropriately applied, has also proved to be an environmental threat in some parts of the world, as runoff creates dead zones in places like the Gulf of Mexico.
To make matters worse, human-made climate change is now adding enormous risks to global food production. Today's dry land regions, as varied as the U.S. Southwest, the Sahel of Africa, the Mediterranean, and Australia, are facing the increased frequency and severity of droughts, with hugely adverse consequences for global food security. A host of other global environmental problems also threaten the global food supply: disappearing glaciers (which feed rivers and irrigation), temperature stress, soil erosion, destruction of fragile habitats, and the loss of biodiversity, including the dramatic decline of birds and insects that pollinate food crops.
The climate-change challenge is incomparably greater than in the 1970s. In 1973 the world emitted roughly 17 billion tons of carbon dioxide from fossil-fuel use. Today the world emits roughly 30 billion tons from those sources. The atmospheric CO2 concentration, which stood at 325 parts per million (ppm) and was rising at roughly one ppm each year in 1973, has risen dangerously, to 385 ppm and now increases by 2.4 ppm each year.
Global resource constraints
The implications are clear and sobering. Our global resource binds are much tighter now than in the 1970s, because the world economy is that much larger, the resource constraints are tighter, and quick fixes are harder to find. In 1974 the world population was four billion, and total world income was around $23 trillion (in today's dollars adjusted for purchasing power). Now the world population is 6.7 billion, and the economy is around $65 trillion. The same annual growth rate of the world economy, say 4% per annum, requires vastly more natural resources - energy, water, and arable land - than in the 1970s and poses much larger risks for the world's climate and ecosystems.
We are therefore facing a prolonged period in which global economic growth will be constrained not by broad macroeconomic policies or market institutions, nor by limits of global trade, nor by the general ability of today's emerging markets to invest in new industries. The more pressing limits will be in resources and a safe climate. It took 15 tumultuous years to overcome the limits on energy and food after 1973. Unless we act more cleverly today, we could face an even more harrowing and prolonged adjustment ahead.
Fortunately, there is a better way forward than we took after 1974. We need to adopt coherent national and global technology policies to address critical needs in energy, food, water, and climate change. Just as we invest $30 billion of public funds each year in the National Institutes of Health, we should invest at least as much each year in a new National Institutes of Sustainable Technologies. Just as private biomedical firms live in a kind of symbiosis with NIH, the energy and food sectors should be backstopped by a major public effort to promote sustainable technologies.
There is certainly no shortage of promising ideas, merely a lack of federal commitment to support their timely development, demonstration, and diffusion. Solar power, for example, has the potential to meet the world's energy needs many times over, and engineers are closer than ever to cutting costs and solving the problems of intermittency (cloudy days), nighttime storage, and long-distance transmission from sunny deserts to population centers. High-mileage automobiles (like plug-in hybrids with advanced batteries), green buildings, carbon capture, cellulose-based ethanol, safe nuclear power, and countless other technologies on the horizon can reconcile a world of growing energy demands with increasingly scarce fossil fuels and rising threats of human-made climate change. As for food supplies, new drought-resistant crop varieties have the potential to bolster global food security in the face of an already changing climate. New irrigation technologies can help impoverished farmers move from one subsistence crop to several high-value crops year round.
Yet as promising as these alternatives are, we have not been investing enough to bring them to fruition. While we squander hundreds of billions of dollars in Iraq, the U.S. government spends a mere $3 billion or so per year on all its energy research - around 36 hours of Pentagon spending! Yet it will be the new technologies, deployed quickly and on a global scale, that offer the real keys to energy and food security, and the chances for sustained economic development globally. In the years ahead, technological development, with both public and private funding, must become a core part of our national economic and security arsenal.
Three decades ago, in a bleak stretch of the 1970s, an economic phenomenon emerged that was as ugly as its name: stagflation. It was the sound of the world hitting a wall, a combination of no growth and inflation. It created an existential crisis for the global economy, leading many to argue that the world had reached its limits of growth and prosperity. That day of reckoning was postponed, but now, after a 30-year hiatus, at least a mild bout of stagflation has returned, and matters could get much worse. We are back to the future, with the question we asked 30 years ago: How can we combine robust economic growth with tight global supplies of such critical commodities as energy, food, and water? It's worth comparing the earlier episode of stagflation with our current travails to help us find our way. In fact, this time the resource constraints will prove even harder to overcome than in the last round, since the world economy is much larger and the constraints are much tighter than before.
The similarities with the first half of the 1970s are eerie. Then as now, the world economy was growing rapidly, around 5% per year, in the lead-up to surging commodities prices. Then as now, the United States was engaged in a costly, unpopular, and unsuccessful war (Vietnam), financed by large budget deficits and foreign borrowing. The Middle East, as now, was racked by turmoil and war, notably the 1973 Arab-Israeli war. The dollar was in free fall, pushed off its strong-currency pedestal by overly expansionary U.S. monetary policy. And then as now, the surge in commodity prices was dramatic. Oil markets turned extremely tight in the early 1970s, not mainly because of the Arab oil boycott following the 1973 war, but because mounting global demand hit a limited supply. Oil prices quadrupled. Food prices also soared, fueled by strong world demand, surging fertilizer prices, and massive climate shocks, especially a powerful El Niño in 1972.
Here we go again. Oil prices have roughly quintupled since 2002, once again the result of strong global demand running into limited global supply. World grain prices have doubled in the past year. Just as in 1972, the recent run-up in food prices is aggravated by climate shocks. Australia's drought and Europe's heat waves put a lid on grain production in 2005-06. Even the politics are strangely similar. In both 1974 and 2008, an unpopular Republican President, battling historically low approval ratings, was distracted from serious macroeconomic policymaking. The country was adrift.
Then as now, Dick Cheney was close to the helm. What's more, the erroneous lessons he took away from the 1970s contribute to the problems that haunt us today. Cheney was Gerald Ford's chief of staff in 1976, when soaring oil prices helped doom Ford's reelection campaign. Cheney became obsessed with the fight to control the flow of Middle Eastern oil. That obsession, which by many accounts contributed to Cheney's urge to launch the Iraq war, has made the United States much more vulnerable in terms of energy, not only by tying the United States down in a disastrous military effort but also by diverting attention from a more coherent energy strategy.
The first stagflation was overcome at very high cost, including 15 years of slower global growth. While the world economy expanded by about 5.1% during the period 1960-73, it grew by a much slower 3.2% during the period 1973-89. A lot of the slowdown had to do with the worldwide profit squeeze and restraint on investments, jobs, and growth caused by tight energy supplies. A side effect of rising oil prices was to heighten financial turmoil, since central banks around the world, including the Federal Reserve, initially tried to use monetary expansion to overcome the supply-side constraints. The result was inflation rather than a restoration of economic growth. That is a key lesson for today, at a time when the Fed seems intent on lowering interest rates despite fast-rising commodity prices. There are limits to what a central bank can do in the face of a severe resource squeeze.
The first episode of stagflation opened a great debate about the global adequacy of primary commodities, especially energy and food. In 1972 the Club of Rome published its manifesto, "Limits to Growth," which predicted that the global economy would "overshoot" the earth's natural-resource limits and subsequently collapse. Yet once the world economy surmounted the extreme stagflation and returned to lower inflation and stronger growth from the mid-1980s onward, it became fashionable to dismiss the earlier fears of resource pessimism. Critics mocked "neo-Malthusians," who, inspired by the warnings of the late-18th-century thinker Thomas Malthus, predicted that society would outstrip the earth's carrying capacity. Didn't the Malthusians know that scarcity would generate new resource discoveries, new substitutes for scarce commodities, and new technologies?
Now the debate has returned with a vengeance, and a careful look back to the first stagflation is a sobering one. Yes, the world economy surmounted the stagflation, but not easily and not robustly. To an important extent, the workarounds on resource constraints were themselves limited and are showing decided strains today. We are not exactly running out of resources, but we are once again running up against serious resource and ecological limits that can hold back global economic progress. We will need to put a much greater priority on easing those constraints.
Conventional oil supplies will remain tight in the years ahead. New discoveries will not suffice. World crude-oil production nearly tripled in 1960-73 (from 21 million barrels a day to 56 million), but has grown a mere 30% since then, to around 73 million barrels per day in 2006. In fact, Persian Gulf crude-oil production stopped growing entirely after 1974, peaking at around 21 million barrels per day. Discoveries and production increases outside the Middle East rose only modestly and now in many cases are in decline in such fields as Britain's North Sea and Alaska's North Slope.
The simultaneous food scarcity of the 1970s proved to be shorter-lived than the energy scarcity, since the 1970s ushered in a nearly worldwide "green revolution" of higher grain yields, based on the adoption of improved seed varieties, intensive inputs of fertilizer, and vast increases of irrigation. The achievement was stunning but also not without its limits. Many areas of increased food production, such as in India and China, have relied on massive pumping of ground water for irrigation, and that ground water is being depleted. Heavy use of fertilizer, often inappropriately applied, has also proved to be an environmental threat in some parts of the world, as runoff creates dead zones in places like the Gulf of Mexico.
To make matters worse, human-made climate change is now adding enormous risks to global food production. Today's dry land regions, as varied as the U.S. Southwest, the Sahel of Africa, the Mediterranean, and Australia, are facing the increased frequency and severity of droughts, with hugely adverse consequences for global food security. A host of other global environmental problems also threaten the global food supply: disappearing glaciers (which feed rivers and irrigation), temperature stress, soil erosion, destruction of fragile habitats, and the loss of biodiversity, including the dramatic decline of birds and insects that pollinate food crops.
The climate-change challenge is incomparably greater than in the 1970s. In 1973 the world emitted roughly 17 billion tons of carbon dioxide from fossil-fuel use. Today the world emits roughly 30 billion tons from those sources. The atmospheric CO2 concentration, which stood at 325 parts per million (ppm) and was rising at roughly one ppm each year in 1973, has risen dangerously, to 385 ppm and now increases by 2.4 ppm each year.
Global resource constraints
The implications are clear and sobering. Our global resource binds are much tighter now than in the 1970s, because the world economy is that much larger, the resource constraints are tighter, and quick fixes are harder to find. In 1974 the world population was four billion, and total world income was around $23 trillion (in today's dollars adjusted for purchasing power). Now the world population is 6.7 billion, and the economy is around $65 trillion. The same annual growth rate of the world economy, say 4% per annum, requires vastly more natural resources - energy, water, and arable land - than in the 1970s and poses much larger risks for the world's climate and ecosystems.
We are therefore facing a prolonged period in which global economic growth will be constrained not by broad macroeconomic policies or market institutions, nor by limits of global trade, nor by the general ability of today's emerging markets to invest in new industries. The more pressing limits will be in resources and a safe climate. It took 15 tumultuous years to overcome the limits on energy and food after 1973. Unless we act more cleverly today, we could face an even more harrowing and prolonged adjustment ahead.
Fortunately, there is a better way forward than we took after 1974. We need to adopt coherent national and global technology policies to address critical needs in energy, food, water, and climate change. Just as we invest $30 billion of public funds each year in the National Institutes of Health, we should invest at least as much each year in a new National Institutes of Sustainable Technologies. Just as private biomedical firms live in a kind of symbiosis with NIH, the energy and food sectors should be backstopped by a major public effort to promote sustainable technologies.
There is certainly no shortage of promising ideas, merely a lack of federal commitment to support their timely development, demonstration, and diffusion. Solar power, for example, has the potential to meet the world's energy needs many times over, and engineers are closer than ever to cutting costs and solving the problems of intermittency (cloudy days), nighttime storage, and long-distance transmission from sunny deserts to population centers. High-mileage automobiles (like plug-in hybrids with advanced batteries), green buildings, carbon capture, cellulose-based ethanol, safe nuclear power, and countless other technologies on the horizon can reconcile a world of growing energy demands with increasingly scarce fossil fuels and rising threats of human-made climate change. As for food supplies, new drought-resistant crop varieties have the potential to bolster global food security in the face of an already changing climate. New irrigation technologies can help impoverished farmers move from one subsistence crop to several high-value crops year round.
Yet as promising as these alternatives are, we have not been investing enough to bring them to fruition. While we squander hundreds of billions of dollars in Iraq, the U.S. government spends a mere $3 billion or so per year on all its energy research - around 36 hours of Pentagon spending! Yet it will be the new technologies, deployed quickly and on a global scale, that offer the real keys to energy and food security, and the chances for sustained economic development globally. In the years ahead, technological development, with both public and private funding, must become a core part of our national economic and security arsenal.
That ’70s Look: Stagflation
Lately, many people are hearing an echo — faintly perhaps but distinctly audible — of the stagflation of the 1970s.
Even as economic growth sags, oil and gasoline prices are surging to new heights. Gold is on the rise, along with the prices of such basic commodities as wheat and steel. And on Wednesday, with the latest government report on consumer prices, there are signs that overall inflation, after years of only modest increases, may be breaking out of its box.
For the Federal Reserve and its chairman, Ben S. Bernanke, all this could not come at a worse time. With the credit markets in disarray from the collapse of the housing bubble, Mr. Bernanke is cutting rates in a headlong rush to blunt the risks of recession.
But in putting its emphasis above all on reviving growth, America’s central bank, according to some economists and even a few Fed officials, may face a bigger inflation problem down the road.
“They are cutting rates with a bill to be paid later," said John Ryding, chief United States economist at Bear Stearns. “The question is not, will we get inflation, but how much will it cost to stuff the genie back in the bottle. This has the feel of 1970s stagflation.”
Over the last 12 months, consumer prices are up 4.3 percent on average, according to the Labor Department. The core index of consumer price inflation, which excludes food and oil, was 2.5 percent higher in January than a year earlier, significantly above the Fed’s unofficial comfort zone of a 1 to 2 percent underlying inflation rate. That’s a far cry from the double-digit inflation rates that battered the economy at times in the 1970s, but still worrisome.
Analysts like Mr. Ryding say that by tolerating such price rises and maybe even allowing them to escalate, the Federal Reserve is risking its hard-won credibility as an inflation fighter, which will ultimately require it to push up interest rates higher than otherwise to contain the damage.
Most economists still expect the Fed’s policy-making committee to cut interest rates again when it meets on March 18, engineering its sixth reduction since September. But the fears of a revival of inflation underline the difficult decisions it now faces.
Like the Fed, economists generally remain more concerned about the immediate threat of recession than the more distant fear of higher inflation. Recent data suggests an economy that may be in a downturn or close to it. The consensus view is that the expected slowdown is likely to create enough spare capacity to suck inflationary pressures out of the economy.
Moreover, even if some additional inflation is a side effect of the Fed’s prescription, many economists say, it sure beats the alternative. Once the interest rate cuts have nursed the economy through the next few difficult quarters, they say, the Fed can easily raise rates again to respond to any pickup in inflation.
“They are going to fix the wound now,” said David Darst, chief investment strategist of the Global Wealth Management Group of Morgan Stanley. “They are going to take care of the growth situation and then fight inflation when the economy gets stronger.”
Reinforcing this view, there are few signs that inflation is seeping into the labor market and pushing up wages in anticipation of higher prices to come.
That may be comforting to the Fed, but keeping inflation contained still may not be easy. In recent days some officials at the central bank have gone out of their way to warn that they are not prepared to let down their guard — even if it means that the Fed has to be less aggressive about cutting interest rates.
In a speech this month, Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said “the Fed has to be very careful now to add just the right amount of stimulus to the punch bowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.”
Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, echoed that view, saying in a speech that “we cannot be confident that a slow-growing economy in early 2008 will by itself reduce inflation.”
“As we learned from the experience of the 1970s,” Mr. Plosser added, “once the public loses confidence in the Fed’s commitment to price stability, it is very costly to the economy for the Fed to regain that confidence.”
In a telephone interview, Mr. Plosser explained that the Fed seemed to be making progress against inflation in the first half of 2007 but he started to become more worried during the second half.
“Since the summer almost all of the measures of inflation that we look at have begun to accelerate again, and in some cases pretty sharply,” Mr. Plosser said. “Perhaps the inflationary pressures are more broad-based than just energy.”
While Mr. Plosser said he hoped that inflation was about to moderate on its own, “we do have a dual mandate after all — one is price stability and the other is growth.”
“We can’t just throw one out of the window when it is convenient.”
To Bernard Baumohl, managing director of the Economic Outlook Group, such talk is seen on Wall Street as a clever tactic intended to help jawbone inflationary expectations downward while the Fed continues to cut rates for at least a while longer.
“We expect Fed officials will ramp up their rhetoric in speeches and in testimony that they will work diligently to keep inflation expectations under control,” Mr. Baumohl wrote to clients after the latest consumer price figures were released Wednesday. “Mere words, to be sure. But it would be a mistake to construe them as hollow.”
Zach Pandl, an economist at Lehman Brothers, said that the statements so far have been by less important Fed officials and that the Fed’s real views should be measured by its actions, which are to cut rates aggressively with less concern about inflation.
Those actions have led a number of economists to warn that the Fed’s aggressive easing moves, combined with the strong demand for industrial and agricultural commodities from emerging global economic powers like China and India, may be laying the groundwork for a new era of rising inflation.
“The period of falling inflation that we have been in for all the ‘80s and ‘90s and early 2000s has come to an end,” said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “That is over.”
Mr. Darda points to the surge in commodity prices, including food and oil. Long-term rates are rising in the bond market, reflecting the view that both growth and inflation may pick up later this year and into 2009, as well as fears about bad debt.
And, according to Mr. Pandl, a measure of investors’ inflation expectations provided by the difference between the yield on normal Treasury securities and Treasury inflation-protected securities “spiked quite a bit higher” after the Fed cut rates in January even though it “has been trading lower since then.”
Then there is gold, which has historically been a refuge for investors seeking protection from eroding currencies.
Gold “has risen a lot since the Fed began lowering rates,” Mr. Darda said. “That’s an ominous sign. Once we are in 2009 and 2010, we are going to figure out that inflation is far less benign.”
Even as economic growth sags, oil and gasoline prices are surging to new heights. Gold is on the rise, along with the prices of such basic commodities as wheat and steel. And on Wednesday, with the latest government report on consumer prices, there are signs that overall inflation, after years of only modest increases, may be breaking out of its box.
For the Federal Reserve and its chairman, Ben S. Bernanke, all this could not come at a worse time. With the credit markets in disarray from the collapse of the housing bubble, Mr. Bernanke is cutting rates in a headlong rush to blunt the risks of recession.
But in putting its emphasis above all on reviving growth, America’s central bank, according to some economists and even a few Fed officials, may face a bigger inflation problem down the road.
“They are cutting rates with a bill to be paid later," said John Ryding, chief United States economist at Bear Stearns. “The question is not, will we get inflation, but how much will it cost to stuff the genie back in the bottle. This has the feel of 1970s stagflation.”
Over the last 12 months, consumer prices are up 4.3 percent on average, according to the Labor Department. The core index of consumer price inflation, which excludes food and oil, was 2.5 percent higher in January than a year earlier, significantly above the Fed’s unofficial comfort zone of a 1 to 2 percent underlying inflation rate. That’s a far cry from the double-digit inflation rates that battered the economy at times in the 1970s, but still worrisome.
Analysts like Mr. Ryding say that by tolerating such price rises and maybe even allowing them to escalate, the Federal Reserve is risking its hard-won credibility as an inflation fighter, which will ultimately require it to push up interest rates higher than otherwise to contain the damage.
Most economists still expect the Fed’s policy-making committee to cut interest rates again when it meets on March 18, engineering its sixth reduction since September. But the fears of a revival of inflation underline the difficult decisions it now faces.
Like the Fed, economists generally remain more concerned about the immediate threat of recession than the more distant fear of higher inflation. Recent data suggests an economy that may be in a downturn or close to it. The consensus view is that the expected slowdown is likely to create enough spare capacity to suck inflationary pressures out of the economy.
Moreover, even if some additional inflation is a side effect of the Fed’s prescription, many economists say, it sure beats the alternative. Once the interest rate cuts have nursed the economy through the next few difficult quarters, they say, the Fed can easily raise rates again to respond to any pickup in inflation.
“They are going to fix the wound now,” said David Darst, chief investment strategist of the Global Wealth Management Group of Morgan Stanley. “They are going to take care of the growth situation and then fight inflation when the economy gets stronger.”
Reinforcing this view, there are few signs that inflation is seeping into the labor market and pushing up wages in anticipation of higher prices to come.
That may be comforting to the Fed, but keeping inflation contained still may not be easy. In recent days some officials at the central bank have gone out of their way to warn that they are not prepared to let down their guard — even if it means that the Fed has to be less aggressive about cutting interest rates.
In a speech this month, Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said “the Fed has to be very careful now to add just the right amount of stimulus to the punch bowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.”
Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, echoed that view, saying in a speech that “we cannot be confident that a slow-growing economy in early 2008 will by itself reduce inflation.”
“As we learned from the experience of the 1970s,” Mr. Plosser added, “once the public loses confidence in the Fed’s commitment to price stability, it is very costly to the economy for the Fed to regain that confidence.”
In a telephone interview, Mr. Plosser explained that the Fed seemed to be making progress against inflation in the first half of 2007 but he started to become more worried during the second half.
“Since the summer almost all of the measures of inflation that we look at have begun to accelerate again, and in some cases pretty sharply,” Mr. Plosser said. “Perhaps the inflationary pressures are more broad-based than just energy.”
While Mr. Plosser said he hoped that inflation was about to moderate on its own, “we do have a dual mandate after all — one is price stability and the other is growth.”
“We can’t just throw one out of the window when it is convenient.”
To Bernard Baumohl, managing director of the Economic Outlook Group, such talk is seen on Wall Street as a clever tactic intended to help jawbone inflationary expectations downward while the Fed continues to cut rates for at least a while longer.
“We expect Fed officials will ramp up their rhetoric in speeches and in testimony that they will work diligently to keep inflation expectations under control,” Mr. Baumohl wrote to clients after the latest consumer price figures were released Wednesday. “Mere words, to be sure. But it would be a mistake to construe them as hollow.”
Zach Pandl, an economist at Lehman Brothers, said that the statements so far have been by less important Fed officials and that the Fed’s real views should be measured by its actions, which are to cut rates aggressively with less concern about inflation.
Those actions have led a number of economists to warn that the Fed’s aggressive easing moves, combined with the strong demand for industrial and agricultural commodities from emerging global economic powers like China and India, may be laying the groundwork for a new era of rising inflation.
“The period of falling inflation that we have been in for all the ‘80s and ‘90s and early 2000s has come to an end,” said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “That is over.”
Mr. Darda points to the surge in commodity prices, including food and oil. Long-term rates are rising in the bond market, reflecting the view that both growth and inflation may pick up later this year and into 2009, as well as fears about bad debt.
And, according to Mr. Pandl, a measure of investors’ inflation expectations provided by the difference between the yield on normal Treasury securities and Treasury inflation-protected securities “spiked quite a bit higher” after the Fed cut rates in January even though it “has been trading lower since then.”
Then there is gold, which has historically been a refuge for investors seeking protection from eroding currencies.
Gold “has risen a lot since the Fed began lowering rates,” Mr. Darda said. “That’s an ominous sign. Once we are in 2009 and 2010, we are going to figure out that inflation is far less benign.”
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