Noted For Your Wednesday Morning Ruminations – March 4, 2015


  1. The Price of Oil Is About to Blow a Hole in Corporate Accounting – The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.
  2. Six reasons why RBI’s Raghuram Rajan cut repo rate –  According to Rajan, “The need to act outside the policy review cycle is prompted by two factors: First, while the next bi-monthly policy statement will be issued on April 7, 2015 the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance. Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate.”
  3. Greek myths and legends – Any analysis of Greece’s external position that looks only at the current account deficit and ignores the growing capital account surplus is telling only half the story. Hausmann chooses his data to suit his argument that Greece’s problems are all due to its profligate government spending and lack of investment, He ignores the (substantial) role of capital OUTFLOWS from other countries in the Eurozone, notably but not exclusively Germany. And he ignores the fact that the period 2005-7 was characterised by dangerous buildup of credit bubbles throughout the Western world. I’ve written elsewhere about the Eurodollar (“US-in-Europe”) leveraging flow system that burst catastrophically in 2007-8. There was an equivalent Euro leveraging flow system circulating between the core and periphery Eurozone countries. This is what we are looking at in the chart above.
  4. The East India Company: The original corporate raiders – The last hereditary Welsh prince, Owain Gruffydd ap Gwenwynwyn, built Powis castle as a craggy fort in the 13th century; the estate was his reward for abandoning Wales to the rule of the English monarchy. But its most spectacular treasures date from a much later period of English conquest and appropriation: Powis is simply awash with loot from India, room after room of imperial plunder, extracted by the East India Company in the 18th century.
  5. Brazil’s interest rates: no time for wavering – As Brazil’s monetary policy committee sits down in Brasília the consensus view is that it will attempt to regain some credibility in the fight against inflation and raise its policy interest rate by 50 basis points for a third consecutive time. That would bring its target overnight rate, the Selic, to 12.75 per cent a year. Even after discounting inflation of about 7.5 per cent, that is still a very hefty 5.25 per cent a year. So whatever the Copom announces on Wednesday evening after two days of deliberation – it will be either 50bp or 25bp – it will raise protests from labour unions and others worried about the impact of high interest rates on consumption and jobs.
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