Wednesday September 7, 2005 - 11:07:25 GMT
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Black Swan Capital - www.blackswantrading.com
The pound's crude argument
“The perfect Tao is without difficulty,
Save that it avoids picking and choosing.
Open lines to the Zen poem: Hsin-hsin Ming (Treatise on Faith in the Mind)
The pound looks pricey. It is “at odds with the reality on the ground,” a bank analyst told the Financial Times. We agree!
• Retail sales falling
• Jobless claims rising
• Housing prices cooling
• Consumer debt rising
The OECD cut its UK growth forecast for 2005 to 1.9 percent from 2.4 percent, according to Bloomberg—in a recent article from Mathew Lynn on the topic: UK Interest Rates are Heading for a Decline . ``Interest rates will fall again before the end of the year, and return to their 2003 low of 3.5 percent in 2006,'' according to Capital Economics.
If Mr. Lynn and Capital Economics are correct, and we think they are, you have to wonder what’s driving the pound.
Well, according to Stephen Jen of Morgan Stanley it’s oil. Once again, we just can’t seem to break away from crude arguments.
Writes Mr. Jen: “How each economy is affected by an oil shock reflects the elasticity of growth with respect to oil price changes. Most Asian countries’ oil intensity (as measured in terms of thousands of barrels of oil consumed per day, per billion dollars of GDP) ranks very low, relative to the rest of the world. China, Malaysia, the Philippines, Indonesia, Thailand, and Singapore, for example, consume more than twice as much oil as the US does. Compared to the US, Japan’s consumption is 35% lower, but 14% higher than Germany, and France. UK ranks highly on this measure.”
And in addition, the UK should benefit from a balance of payments perspective when it comes to oil prices and trade. Okay! The key question: How long does the crude argument trump the other negative fundamentals facing the pound?
Charts: pound weekly and pound vs. crude
If crude goes to $100 per barrel, as many believe, there is only one choice, buy the pound. But there are other views on crude, believe it or not!
“The oil price call has been a fool’s game for the macro forecaster in recent years. I have no idea where energy prices are headed over the intermediate and longer term. The bookshelves are filled with very compelling tomes on the demise of Saudi oil (my favorite is Matthew Simons, Twilight in Desert, John Wiley, 2005). In that respect, this oil shock is no different from those of the past -- all of which ended with doomsday forecasts of permanently higher oil prices. Yet there can be no getting around the mean-reverting history of oil prices over the past 30 years. To the extent the near-term growth hit sows the seeds for a subsequent cyclical decline in oil prices, even an unbalanced world will survive this energy shock. In the meantime, this first-cut revision to our baseline global forecast underscores the downside risks that still loom in the weeks and months ahead,” writes Stephen Roach of Morgan Stanley. [Our emphasis]
Picking and choosing! It’s not easy.
Black Swan Capital
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