The Influence of Foreign Investors

[stockGURU]

With crude oil prices breaking new highs on Monday, trading as high as $58.28, alarm bells are starting to ring around the world as economists pondered slower economic growth, accelerated inflation, and even global recession.

The higher price for crude was helped along with Goldman Sachs announcement last week that oil could hit $105. This week, CIBC World Markets warned that oil prices could hit $100 or higher. The result of this furor over oil evaporated the liquidity on many non oil resource stocks as investors contemplated what higher oil prices will mean to their portfolios.

The probability of even higher oil prices is a mix a many factors not the least of which include OPEC's limited ability to crank up production, a lack of tanker capacity, and limited refinery capabilities.

Given that the risk in the oil market is already at an unprecedented high, an oil price spike is a real possibility particularly given a major natural disaster, or an act of terrorism centered on an oil producing area.

Last year the International Energy Agency stated that with every $10 increase in the price of oil, world GDP would fall by .5% or $255 billion. Other studies show a strong link between crude oil prices and inflationary trends that can lead to global recession.

So with this scenario, resource investors are at once frozen into an analysis paralysis - neither buying nor selling - but just watching for signs of how the global economy will react to higher oil prices. Many eyes are focused on the world's newest big resource consumer - China.

Investor - A very interesting article, thanks for posting it. I was wondering what you think about companies such as Lihir Gold, that have produced geothermal power facilities... will this give them an edge in a world where the supply of oil is diminishing and prices over the medium term can only increase due to continuing high demand?

 

[Investor]

Investor - .. that have produced geothermal power facilities... will this give them an edge in a world where the supply of oil is diminishing and prices over the medium term can only increase due to continuing high demand?

Yes. A very interesting and promising new technology. I saw the documentary on TV (news).

Exactly what the world needs, because of depleting non-renewable energy sources.

I am hoping it will eventually prove commercially viable in a big way. As with all new technology, it needs to pass the "test of time."

However, I also think the world will have to go "nuclear plants" and hydro electric power, in a very big way, asap because as Margaret Thatcher once said ...... T.I.N.A. (there is no alternative).

 

[Investor]

...a. Can governments worldwide exert some artificial influence to halt such a catastrophy during such an event?

I also remember reading a while ago that the US government had been "borrowing" out of 401k holdings (US equivalent of our supeannuation). Does anyone know if this is correct?
.. - overwhelmingly foreign influence is portrayed as a dark financial shadow cast accross domestic markets when they are also responsible for some of the spectacular rises on local bourse enjoyed over the past two years.

Answer to your first question - at the extreme situation, liquidation of over USD 2 trillion by Asian Central Banks - no way known can there be any solution. The world moves into global depression. It is because of this potential outcome that there is a "Mexican stand off" for so long.

How to resolve it? The G7 nations are trying to come up with an answer. Hitherto, no one knows. Global imbalances of this size has been unprecedented and uncharted waters.

Re: 401K funds - they buy Treasury bills as part of portfolio. As such, they have lent to the US government.

Re: Foreign Investors - all I said was "Do not underestimate their power to move market pricing" - it is a double edge sword that cuts both ways. Upside and downside. Problem is that they usually make profits out of local investors by buying low and selling high. I try to stay one step ahead of them whenever possible.

 

[Investor]

Hedge funds' worst month since 1988
By Richard Irving

THE hedge fund industry in April weathered its worst month since the collapse of Long Term Capital Management in August 1998, according to new performance data published yesterday.

The average return on a universe of more than 950 individual hedge funds was minus 0.5 per cent, the sharpest fall since the Russian default sent emerging markets into a tailspin seven years ago.

The grim performance comes after returns of minus 0.16 per cent in March, marking only the second time that the industry has suffered successive negative returns since records began.

Uncertainties over the long-term creditworthiness of Ford and General Motors ”” which were downgraded to junk this month ”” falling commodity prices and volatile stock markets hit returns across most specialist sectors of the industry.

Only macro funds, which take big-picture punts on the world economy, US bond funds and specialist arbitrage funds, which seek to profit from volatile markets, generated positive returns.

The data, published by Eurohedge, a trade magazine, is one of the few sources of performance information on an industry that is notoriously secretive.

Managed futures funds, which typically make money from exploiting market trends, and convertible bond funds, which play the relationship between bond, equity and stock markets, fared badly, falling 1.57 per cent and 1.18 per cent respectively in April.

Although the poor performance run is likely to spill over into May following the slump in corporate bond markets, the data suggest that losses in the industry are not as widespread as some analysts had feared.

According to Neil Wilson, managing editor of Eurohedge, only seven firms in the database generated negative returns running into double digits in April.

 

[Smurf1976]

However, I also think the world will have to go "nuclear plants" and hydro electric power, in a very big way, asap because as Margaret Thatcher once said ...... T.I.N.A. (there is no alternative).

Somewhat off topic but I wish good luck to anyone who tries to develp hydro these days. Seriously, I wish them good luck but in all honesty I think the Greens and their supporters are so totally opposed to hydro that nuclear is a far easier option. Even burning wood is still vastly preferred by environmentalists to hydro development. ANYTHING would be easier than hydro these days from a politcal perspective.

The world's first Green political party to actually have members elected to parliament was established for the specific purpose of opposing hydro. It was more than a decade before forests were even considered an issue other than in terms of promoting the use of wood as an alternate power source.

Nuclear energy, Iraq war, GE crops, greenhouse, pulp mills and all manner of urban planning issues are absolutely nothing compared to the emotion that hydro development stirs up. Been there, seen that.

Of course, developing hydro in a foreign country is still doable, but forget new large scale hydro in Australia unless there is a MASSIVE change in attitude. Personally I support hydro power as do many, but the politics are something truly amazing to say the least.

 

[Investor]

.... ANYTHING would be easier than hydro these days from a politcal perspective.

... Of course, developing hydro in a foreign country is still doable, but forget new large scale hydro in Australia unless there is a MASSIVE change in attitude. Personally I support hydro power as do many, but the politics are something truly amazing to say the least.

Yes. I am aware of this hurdle. My thinking is when the time comes in many years from now, when it is either that, or water and power shortages of a scale which we have never seen before.

This latest drought that the country is facing, provides a glimpse of potential problems ahead, bearing in mind that the new immigration numbers are now 150,000 p.a. and water requirements can only increase. Without new supply ...... let us hope the drought breaks before the water supply does.

I tend to read about global climate change as part of my reading, for many years. What I am reading recently and seeing on TV have been alarming, but that is my topic for a new thread, soon.

 

[Mofra]

Investor,

Firstly thank you very much for answering my earlier questions

However, I also think the world will have to go "nuclear plants" and hydro electric power, in a very big way, asap because as Margaret Thatcher once said ...... T.I.N.A. (there is no alternative).

Uranium was a traders buzz word for a few weeks, as iron-ore was before it and anything from oil, gold, zinc, geo-therm etc could be next (RTM spike anyone?)

Also interesting to read the GM & Ford credit rating slump in terms of the energy crisis - Toyota and Honda seem far more advanced in the hybrid technology stakes, one would have to consider the possibilty of hybrid cars becoming a much greater proportion of the new car market, which doesn't augur well for GM & Ford. At US$100 per barrel, even the Toorak Tractors might be spending a little more time in the garage.

 

[Investor]

May 25 (Bloomberg) -- The European Union set an end-of-month deadline for China to rein in its surging textile exports or face restrictions by the 25-nation bloc.

EU Trade Commissioner Peter Mandelson will request formal consultations with China over exports of T-shirts and flax yarn if informal talks fail to produce a solution by May 31, European Commission spokeswoman Francoise Le Bail said. The EU could then impose a 7.5 percent cap on growth in exports of those products to Europe if China doesn't do so itself.

Informal talks between EU and Chinese trade officials ``are ongoing,'' Claude Veron-Reville, Mandelson's spokeswoman, told journalists in Brussels. ``We will launch the formal consultation process unless a settlement, a satisfactory solution, has been found'' by the deadline.

Mandelson is pushing China to limit exports of T-shirts and flax yarn after the U.S. curbed other Chinese textile imports. The EU and U.S., accounting for almost half of global textile imports, are resorting to the restrictions after Chinese exporters captured market share following the end of a four- decade-old system of global quotas on Jan. 1.

China, the world's biggest clothing producer, agreed to raise export tariffs on 74 products in response, though the government maintains that threats by the U.S. and EU to impose caps aren't justified. While the increases are five times higher than previous taxes for most of the items, U.S. and European businesses said the duties won't curtail the growth in exports.

On May 21, China threatened to drop export taxes on textiles should other governments impose caps through quotas.

Deal `A Possibility'

Discussions will continue this week ``as necessary,'' Veron- Reville said, adding that a deal by the end of the month is ``a possibility we don't exclude.''

Exports of Chinese garments surged 29 percent in the first quarter from a year earlier. The EU imported 187 percent more Chinese T-shirts in the first three months and 56 percent more flax-yarn products.

China shipped about $97.4 billion of textiles and apparel worldwide last year, according to the China National Textile & Apparel Council in Beijing. Prices for Chinese apparel in 2004 were 58 percent below those offered by suppliers in Bangladesh, India and other countries, the U.S. industry estimates.

 

[Investor]

Hong Kong's richest man, Li Ka Shing (net worth USD 11 billion) is a firm believer of the China juggernaut. The Hong Kong people call him "Superman".

His son, Richard Li, was the guy who took Telstra up the garden path for $4 billion, with the PCCW (Reach) JV. At the time, I was wondering why TLS was mixing it with such astute people, who would not be expected to be giving anything away. Apparently, from what I had read, the local business people in HK knew TLS was getting a raw deal, because the Li Senior was already putting competitive telco deals in China, that would make life difficult for "Reach".

Glad I avoided T2.

Li firms sink another $1.5b in China sites
Raymond Wang
May 26, 2005

Cheung Kong (Holdings) and Hutchison Whampoa are preparing to invest nearly HK$1.5 billion in property projects in Beijing and Tianjin, even as the central government steps up its efforts to rein in the mainland's runaway real estate market.

In the past six months, the two key companies controlled by billionaire Li Ka-shing have jointly bought 12 mainland development sites, investing more than 10 billion yuan (HK$9.4 billion).

They said Wednesday their 297,694 square meter site in Bei Xin Village, Changping district, Beijing, will be turned into a residential development at a cost of HK$498.08 million, including land costs of HK$173.38 million. Cheung Kong and Hutchison will be 50-50 owners of the project.

In Tianjin, they will build a commercial and residential complex on a 19,617 sq m site near the Yingkou Dao subway station.

Total investment in the two-phase project is estimated at HK$963 million. The first, commercial phase of the development will cost HK$568 million. The Li companies' partner will be Tianjin Metro General Corp, which operates the city's subway system.

The trio will work through a joint-venture company with registered capital of HK$371 million, of which 80 percent will be contributed by Cheung Kong and Hutchison in cash. Tianjin Metro will fund its part of the investment with land instead of capital.

The subway operator will be entitled to 25 percent of the floor area of the completed buildings, but not to any other share of the profits.

In an effort to curb the overheated real estate sector, Beijing has recently brought in measures designed to curb speculation, such as a 5 percent tax on the value of property transactions and limits on ownership transfers of uncompleted flats. Banks are doing their part too, for example, by insisting that mortages be paid off in full before flats can be sold.

However, Li denied that Cheung Kong and Hutchison were rushing in to the mainland market at a risky time. He said their investments were spread over a number of cities and would generate handsome returns since the land prices involved were not astronomical.

Shares of Cheung Kong fell 1.07 percent Wednesday to end at HK$69.25 per share, while Hutchison shares fell 1.12 percent to HK$66.50.

 

[Investor]

From The New York Times:

Who's to Blame? Hedge Funds
Published: May 27, 2005

EVERY big market decline must have scapegoats to blame for losses. While the timing of the next market collapse is anything but clear, the scapegoat is already in view. It will be those horrid hedge funds.

In recent weeks, the blame for every little market gyration, whether in bonds, commodities or stocks, seems to have been assigned by some commentator or other to a hedge fund strategy gone awry. Memories of Long-Term Capital Management, whose near collapse in 1998 so alarmed Wall Street that the Federal Reserve organized a rescue, are fresh again.

The hedge fund industry is a tempting target, one that has been growing rapidly with minimal public disclosure. Funds will soon have to register with the Securities and Exchange Commission, but there are few rules that apply to them. That will change if and when hedge funds take the blame for whatever financial disaster may await us.

Perhaps they will deserve it. Past scapegoats have rarely been blameless, although finding someone to blame can also be convenient for those who would rather not dwell on their own poor investment decisions. After the 1929 crash, blame was attached to the short sellers and to the use of high leverage to buy stocks. In 1987, it was program traders, who bought and sold baskets of stocks with hedges against stock-index futures. And in 2000, blame was heaped upon analysts who had issued rosy forecasts for overvalued stocks. New rules followed each fall.

There are limited signs that the growth of the hedge fund industry is leveling off. In the first quarter, according to Tremont Capital Management, $24.6 billion went into hedge funds, 36 percent below the level a year earlier. But that was still more than went into such funds in any full year before 2001.

Running a hedge fund can be both lucrative and fun. Management fees are high, and sometimes hedge funds can win arguments, as was shown this year when top executives of the Deutsche Börse were forced out. That power angered German politicians, though, and the fund managers face investigations.

In the long run, it is unlikely that the returns of most hedge funds will justify the fees. Hedge funds can do well because the managers are geniuses, but there may not be enough of those to go around. Or they can do well by being average performers and using the magic of leverage to multiply the return on equity. But the increase in short-term interest rates has made leverage more costly.

THERE is a problem with a fee schedule that gives the decision maker a big cut of the profits but requires others to bear the losses. As in baseball, those swinging for the fences are more likely to strike out. Around 10 percent of hedge funds go out of business each year, Tremont says.

Add in the sharp rise in recent years in highly risky loans to speculative borrowers, some of them packaged into odd securities bought by hedge funds, and the potential is there for significant market disruption if many hedge funds try to bail out of the same things at the same time.

Hedge funds will not be the only scapegoat candidates if there is a meltdown. If it appears that some derivative security allowed hedge fund managers to gamble with little or no real equity invested, calls for regulation of the over-the-counter derivatives market could multiply.

Whether or not this will matter to ordinary investors is another consideration. In the long run, the systemic impact of Long-Term Capital's collapse was minimal. Any new hedge fund problems could be similar.

But with minimal information available about what hedge funds are doing, it is inevitable that there is fear they are up to something bad.

 

[Investor]

Hedge Funds Are Stumbling but Manager Salaries Aren't
By RIVA D. ATLAS
At hedge funds, the rich just keep getting richer.

Across Wall Street, fees for businesses from trading stocks to investing in mutual funds have been falling. But at hedge funds, those exclusive investment partnerships for the wealthy and institutions like pension funds, fees have stayed dizzyingly high, even as billions of dollars have poured into the industry and performance, on average, has faltered.

Last year, the top-paid hedge fund manager, Edward S. Lampert of ESL Investments, earned $1 billion, according to a survey to be released today by Alpha, a magazine published by Institutional Investor that follows hedge funds. That is the highest sum in the four years the magazine has been tracking these managers' incomes.

The average hedge fund manager on Institutional Investor's list of the top 25 earners made $251 million in 2004, up from nearly $136 million three years earlier.

The secret to the wealth of hedge fund managers is how they get paid. Instead of receiving a fixed percentage of the funds they manage, as mutual fund managers do, hedge fund managers generally make "1 and 20" - 1 percent of assets under management and 20 percent of profits.

That means that a $1 billion hedge fund manager earns $10 million just for opening the doors, and a lot more if his fund performs well. Investors are willing to pay more for these managers' talents because, at a time when stocks are doing poorly and yields on short-term Treasury securities are low, hedge funds hold out the hope of a better return.

This promise has become so seductive that the top hedge fund managers can basically name their price.

"You don't mind paying higher fees if you are getting rewarded properly," said Michael Strauss, chief economist for Commonfund, which invests on behalf of foundations and endowments.

Steven A. Cohen of SAC Capital Advisors, for example, takes as much as 50 percent of all profits his hedge funds earn, netting him $450 million last year, according to Institutional Investor. Even after this big cut, his funds still returned around 23 percent, not bad in a year when the Standard & Poor's 500-stock index rose 8.99 percent.

Another manager on the list, Kenneth C. Griffin, has a novel twist on the fees he charges. His firm, Citadel Investment, which managed some $11 billion at year-end and has close to 1,000 employees - large for a hedge fund - does not charge a fixed fee for expenses. Instead, Mr. Griffin bills investors annually for whatever it cost to run the fund that year, a figure that fluctuates, but has been as high as 6 percent of assets, according to investors.

Last year, Mr. Griffin's largest fund returned 9.87 percent, far below its compound average annual return of 26 percent.

Spokesmen for Mr. Cohen and Mr. Griffin declined to comment.

Still, some longtime investors in hedge funds worry that the steep compensation may make managers like Mr. Griffin less motivated to perform. Already, overall performance of hedge funds is faltering. Through April, hedge funds were down 0.7 percent, according to an index by Hedge Fund Research, a data firm. That is better than the S.&. P. 500, which was down about 4 percent in the period. But hedge fund investors are bracing for further losses for the month of May, after some complex derivatives trades went against a number of fund managers.

"When managers were earning double-digit returns, high expenses did not matter as much," said Antoine Bernheim, publisher of the U.S. Offshore Funds Directory. "But when you are in a low single-digit return environment, investors can end up breaking even or losing money. This is not a sustainable situation."

Somehow, though, hedge fund managers continue to attract huge sums under ever richer terms.

Investors were clamoring to get into Eton Park, the $3 billion hedge fund started last November by Eric Mindich, a former Goldman Sachs executive. Investors in the new fund agreed not to withdraw any of their money for as long as three and a half years. Another recent start-up, by the financier Carl C. Icahn, charges a 2.5 percent fee for expenses and 25 percent of the profits.

Many of the 25 managers on the Institutional Investor list of top earners had outstanding returns. Mr. Lampert's estimated $1 billion profit, for example, came after returning some 69 percent to his investors, who benefited from the spectacular rise in the price of Kmart, the discount retailer that Mr. Lampert has merged with Sears, Roebuck.

The second-best performer on the list, James H. Simons of Renaissance Technologies, made $670 million after posting a 24.9 percent return last year, even after deducting his 5 percent management fee and 44 percent cut of the profits.

A spokesman for Mr. Lampert declined comment; executives at Renaissance did not return calls.

But other celebrated managers had disappointing results, yet continued to earn hundreds of millions.

Last year, George Soros made $305 million, even as his Quantum Endowment Fund rose just 4.6 percent. Mr. Soros's large earnings reflects the fact that much of the money managed by his firm now represents his own capital.

Outside investors pulled money from Soros Fund Management in recent years, after Mr. Soros announced that he would be investing more conservatively. His goal is to earn enough to support his charitable efforts, rather than to make big, risky bets like his famous multibillion-dollar gamble against the British pound in 1992.

Mr. Soros is not the only manager aiming for lower, less volatile results. Much of the vast sums flowing into hedge funds these days comes from pension funds and other institutions, which prize predictable performance over outsize returns.

The average pension fund is looking to make just 8 percent, after deducting fees, on its hedge fund investments, according to a recent study by the Bank of New York and Casey, Quirk & Associates, a consulting firm. That is a far cry from the returns of more than 25 percent generated by celebrated managers like Mr. Soros and Michael Steinhardt at their peaks.

Now that the performance bar has been lowered, there is less incentive for managers to make more aggressive bets, consultants said, especially when they can still charge the same steep fees they did in the past.

Investors in hedge funds say they are resigned to paying dearly for top hedge fund talent. "It's the law of supply and demand," said William Lawrence, chief executive of Meridian Capital Partners, which manages portfolios of hedge funds. "Over time, if the fees are not borne out by performance, the market will react."

 

[Investor]

The latest analysis about the likelihood of rising global trade barriers from Morgan Stanley:

The market and media are spinning a new story on China’s currency: the US is ordering China to revalue by more than 10% or face protectionism. Do not hold your breath. China will not buckle. China does not possess the conditions for a strong currency and will not succumb to foreign pressure and take a decision that may cause economic chaos at home.

The net margins for China’s exports based on the information from the companies listed in Hong Kong and Taiwan are around 5%. With 50% costs local, 10% currency appreciation could wipe out the profits in the export sector. The exporters may be able to raise prices, but maybe not. A big appreciation will trigger some economic instability. China does not need that.

Some protectionism in the global economy may be coming. Capital can adjust much quicker than labor in today’s global economy. The WTO framework can tolerate such protectionist measures. But this won’t stop, let alone reverse globalization. Most of the trade today is unambiguously good for both capital and labor among trading nations. The trade disputes today involve a tiny amount compared to the overall trade volume.

I do not believe that globalization as a whole is under serious threat. Modern communication and transportation technologies have shrunk the world so much that isolationism is not practical. Despite the ominous noises in Washington, life goes on.

An Anxious America

I think the United States may be experiencing an anxiety attack. The high household debt, big fiscal and trade deficits make many Americans, especially the Washington elite, anxious about America’s future. At the same time, the international media has become obsessed with China, creating catchy titles like ‘China’s century’, ‘the next superpower’, ‘the next biggest economy’, etc. Many Americans also notice that China has replaced Japan as the country that the US has the biggest trade deficit with. It is not surprising that many politicians and policy thinkers in Washington link the two and equate China’s fortunes with the US’s misfortunes, and ‘China bashing’ has become popular.

There is also a political element to the issue. The swing states in the Midwest have heavy exposure to manufacturing. Sounding tough on China may help win some congressional seats there.

The emotional buildup over China has climaxed with the determination to ‘do something about China’. The rumor is that the US government is demanding a 10% Rmb appreciation as a down payment or face a protectionist measure, such as a 27.5% tariff on all Chinese goods. The anti-surge quotas on Chinese textiles have been touted as indicators for what to come. It looks like a standoff.

I would not worry too much about this. The United States went through worse with Japan in the 1980s. It led to Super 301 and voluntary quotas in steel and auto. The situation is much more benign this time, in my view. Most Chinese goods do not compete against US domestic industries, and these goods are usually under American brands. The US may account for three-quarters of the value chain in the China trade. This is why the social opinion surveys in the US show low negative rating on the China trade. A majority of the American people in the mid-1980s thought negatively of the Japan trade.

The US economy has boomed for 20 years without a significant downturn. It may be headed for one soon. This is why Washington is so anxious, I believe. Many Americans tell me that they would not want a downturn to deal with the economic excesses. Nobody does. But it is ultimately unproductive to fight the force of business cycles at any cost. When the US economy does go through a downturn to address its imbalances, cheap Chinese goods should become more desirable. It will decrease the reduction of living standard during the downturn. Washington will come around to this view, I think.

Blaming China for the US’s problems is unhelpful and groundless. China’s exports to the US are one-third of the US trade deficit. If the US were to stop importing from China, it would not solve the trade deficit. It is even more unrealistic to imagine that moving China’s currency will make a significant dent in the trade deficit. The US needs to go through a recession to solve its imbalances, I believe. Asia went through a similar adjustment in 1998. Eventually, I believe the US will come around to this view.

The United States has an excellent system that can correct itself. It is fighting the correction now. But it will go through the adjustment soon enough and boom again.

Limited Impact of Protectionism So Far

There are some areas of competition between the US and China in trade. Under the MFA quota system, the US textile industry survived, despite high costs. As the quota system was eliminated this year, the pressure from Chinese imports has inflicted adjustment pain in this sector. The imposition of the anti-surge quotas would give the industry more time to adjust. I think that these measures will prove to be temporary, like the steel tariffs a few years ago.

Since the textile quotas limit growth, their impact on the China trade is quite small. The US’s total imports from China were US$197 billion in 2004, of which US$4.3 billion were textile products. In the first quarter of 2005, US imports from China rose by 30.2% from last year and the textile portion by 34.9%. If the textile category was kept at US$2.3 billion by quota as opposed to 35% growth, US imports from China would rise by US$2.3 billion less. This is a significant amount but is only 1% of the total.

Further, trade is no longer bilateral. While the US may restrict the imports of pants and shirts from China, some developing countries could still enjoy quota-free access to the US market. These developing countries are likely to import fabrics from China. The US will eventually see that such bilateral barriers are not effective.

I seriously doubt that US protectionist measures would spread. American companies import and distribute goods imported from China. Most of China’s exports to the US are on an f.o.b. basis. US companies would have to pay the tariffs that the US government may put on Chinese products. For example, 27.5% tariffs on China may force American businesses to pay about US$50 billion. Their impact on corporate earnings would be so severe that the US stock market could fall sharply. I do not believe that the US government would act to allow something like this.

There is a market view that Washington is not rational at this point and is determined to punish China regardless of the consequences for itself. First, I doubt it. The US is a pluralist society. While a few people in Washington can ratchet up the noise level, the interests of different groups would work into the decision process. The outcome would result from the trade-offs of different interest groups. Considering how important China’s production base is to corporate profits in the US, the probability that the US would act in such a way to inflict severe self-damage is low.

Second, if the purpose of US pressure on China is just to damage China, it is pointless for China to compromise. China is better off to wait for a protectionist bill, such as a 27.5% tariff, which may affect only the one-fifth of China’s exports to the US that belong Chinese companies, or 5-6% of China’s total exports. The US and other foreign companies own four-fifths of China’s exports to the US and must pay the tariffs. This would be better than a big revaluation that would affect all of China’s exports and may destabilize the economy.

No Turning Back on Globalization

The noises of protectionism can be deafening these days. The bottom line for protectionism is that the labor in high-cost economies cannot adjust as quickly as capital to seek out lower-cost production locations. This asymmetry may justify temporary and selective trade protection to address the mobility difference between capital and labor. As global companies extend their reach and increase the speed of capital mobility, the cases of targeted protection would increase. However, this would only affect the growth rate of global trade. Such protectionist measures do not imply that the trend of globalization is reversing.

Some argue that the labor backlash in the rich economies may stop or even reverse the trend of globalization. This sort of virulent protectionism did happen in the 1930s. I strongly disagree that the world could head down this path again. Today’s world is dramatically different from that in the 1930s when globalization suffered a severe setback. Modern communications and transportation technologies have dramatically shrunk the world. The interactions in the world community are rising rapidly. Politicians will not be able to stop the trend.

 

[Investor]

May 28, 2005

China has established a new top level task force headed by Premier Wen Jiabao to handle its urgent energy needs, as the country prepares for a new wave of severe power shortages.

The panel, made up of "heavyweights from the country's economic and military sectors,'' will regulate and oversee the unruly and fragmented energy industry, the China Daily newspaper reported.

Assisting Wen will be vice premiers Huang Ju and Zeng Peiyan, both members of China's all-powerful nine-member politburo standing committee, as well as leaders from the commerce and foreign affairs ministries.

The ``leading group'' will be responsible for research into the nation's ramped-up energy needs, including exploitation and conservation, security and emergency systems as well as international co-operation within the sector, the newspaper said.

The fact that the new non-ministerial body is stacked with China's heaviest ruling-Communist Party hitters signals a renewed urgency on the part of Beijing to tackle the sprawling and mismanaged industry blamed for the today's woeful energy shortages.

As China's economy has accelerated over recent years the country has been hit by worsening power blackouts, forcing rationing in all major cities and especially along the industry-heavy eastern provinces.

Adding to difficulties have been redundancies in the building of power plants and bitter fighting between the nation's coal suppliers and electricity providers.

The energy bureau of the National Development and Reform Commission, the current energy regulator, would continue to supervise industrial projects and energy-affiliated activities, the newspaper said.

China has long held off on the establishment of a regular ministry to replace the current energy bureau under the control of Kai Ma, chief of the commission that has a staff of only 20.

Critics insist the bureau has failed to reduce the shortages, especially a lack of electricity nationwide since mid-2003.

 

[Investor]

India digs deep for trade and commerce
By Sudha Ramachandran

BANGALORE - A century and a half after the idea was first conceived, the decks have finally been cleared for the execution of the Sethusamudram shipping canal project. This envisages increasing the navigability of the waters between India and Sri Lanka, and will involve dredging a channel in the seabed between the two countries. The canal will run through Indian territorial waters.

India's cabinet committee on Economic Affairs has given the green light for the US$550 million project, and work is scheduled to begin next month. The canal is expected to be ready by 2008 for medium-sized vessels to navigate.

Currently, the movement of vessels through the Palk Strait is impeded by its shallow waters. Between Pamban island near Rameshwaram in the southern Indian state of Tamil Nadu and Talaimannar in Sri Lanka's Mannar district lies a reef called Adams Bridge, where the depth of the sea is a mere two to three meters. Consequently, ships from the Arabian Sea heading to the eastern ports of India (or vice versa) have to take a circuitous route around Sri Lanka at present.

The Sethusamudram project will change that. It involves dredging a 167 kilometer, 300 meter wide, 14.5 meter deep canal, which will stretch from Tuticorin port on India's southern coast to Adam's Bridge in the Gulf of Mannar, and extend northward to the Bay of Bengal.

Once the canal is ready, ships will be able to avoid sailing the circuitous route around Sri Lanka, reducing travel distance by about 400 nautical miles and travel time by at least 36 hours. The reduction in travel time and distance, fuel costs and docking fees at Colombo will cut maritime transportation costs significantly. This cut in costs will obviously make Indian goods more competitive globally, and domestic consumers, too, would benefit. India would also gain from toll collections from vessels using the channel.

The project is to be funded by government-guaranteed debt and equity from the public that that will be listed on stock exchanges.

Winners and losers
Tuticorin harbor is the biggest beneficiary of the project. The Sethusamudram canal is expected to transform Tuticorin into a transshipment hub that will act as a catalyst for the development of other ports - in Nagapattinam and Rameshwaram for instance - as well as economic activity in the hinterland.

However, while the project might hold out the promise of profits and seem like a South Asian version of the Suez Canal, to some it spells economic ruin and environmental disaster.

Notably, there are worrying economic implications for Sri Lanka. Colombo port currently relies on India for about 60% of its transshipment business. This could fall drastically once the canal is operational.

However, Indian officials are saying that Tuticorin cannot displace Colombo in importance as a port, as bigger Indian vessels would still need to sail around Sri Lanka and dock at Colombo port. Besides, international shipping would continue to take the route around Sri Lanka.

Environmentalists in India have pointed out that the project threatens the rich marine ecology of the area and that the dredging and marine traffic could destroy the Gulf of Mannar Marine Reserve - one of India's most biologically diverse coastal regions. Environmentalists in Sri Lanka have warned that heavy dredging could disturb the water system of the Jaffna peninsula. It is also feared that the dredging and increased maritime traffic would disrupt sea currents, step up sea erosion and threaten the fragile coastline of the Gulf of Mannar.

The livelihood of about 500,000 fisherfolk spread across 138 fishing villages along five coastal districts of Tamil Nadu will be severely hit, as there will be restrictions on the waters they can enter and the number of hours they can fish. Entire fishing villages could be displaced to make way for repair yards and other onshore services.

But not just the environment lobby is opposed to the project. "Comparing the Sethusamudram canal with the Suez or Panama canals is absurd," admits an Indian official in the Ministry of Shipping. "The Suez Canal transports 14% of world trade and reduces navigation time by 24 days. The Sethusamudram Canal cuts navigation time by 36 hours only. The investment might not justify the boost in trade that is expected to accrue," he points out.

So why is the Indian government steaming ahead with the project? "Reports in the media seem to have exaggerated India's expectations from the project," says the Shipping Ministry official. India does not expect the Sethusamudram project to emerge as an important waterway for international shipping. "We see it as a means to boost coast-to-coast shipping within the country," he says.

All political parties in Tamil Nadu have been demanding the implementation of the project. It appears that pressure from the Tamil parties in the ruling United Progressive Alliance coalition has speeded up the cabinet committee's green light for the project.

But there are also defense and security compulsions behind the project. India's Minister of Finance P Chidambaram has drawn attention to the "tremendous externalities" in defense, security and anti-smuggling that the project has. Security analysts have pointed out that the canal would enable the Indian navy and coast guard to deploy larger vessels than they do at present and allow them to deploy faster as well.

The significance of the project to India's security stems from its proximity to Sri Lanka's Northern province, the bastion of the Liberation Tigers of Tamil Eelam (LTTE). The increasing reach and effectiveness of India's navy and coast guard in the Palk Strait and the Gulf of Mannar as a result of the project is expected to improve India's capacity to check smuggling and movement of LTTE cadres across these waters.

Analysts such as Professor V Suryanarayan, former director of the Center for South and Southeast Asian Studies at the University of Madras, have been warning that the emergence of the LTTE's naval wing - the Sea Tigers - "as a credible fighting force in India's immediate neighborhood has serious implications for India's security".

"New Delhi should take up the Sethusamudram project on a top priority basis, so that the navy and the coast guards can freely move around the Palk Bay and the Gulf of Mannar and keep constant vigil on India's maritime borders," he wrote in 2003 in an opinion piece in The Hindu.

The LTTE has been strangely silent on the project. Sri Lankan sources tell Asia Times Online that this could be because Tamil political parties in India are in favor of the project. And the Tamil LTTE might not want to be seen to be opposing their "dream project". It is possible that the LTTE is content to stand back for now while the environmental lobby and other opponents of the project press their protests. Pro-Tiger websites have been carrying analyses by environmentalists critical of the project and articles that portray India's maritime and geostrategic ambitions.

When Prime Minister Manmohan Singh lays the foundation for the Sethusamudram canal project next month, India will be taking its first concrete step toward making a 150-year dream a reality. This reality, though, might not turn out to be as rosy as hoped.

Sudha Ramachandran is an independent journalist/researcher based in Bangalore.

 

[Investor]

The next reserve currency
By Toni Straka

Oil prices seem to have reversed their recent correction, capital inflows into the United States are falling, and there has been no significant moderation of producer and consumer prices. Under these circumstances, questions are being raised about America's preeminent economic status. Taking into account the slowing in US industrial production, worsening demographics in all Western industrialized nations and the general expectation that the global economy will slow in the second half of 2005, here's some historical perspective about reserve currencies - a status that many say the dollar is perilously close to losing.

Time-traveling from the Greek to the Roman empire, the British empire, and the young history of the US, one notes that the most widely accepted (reserve) currency always had its home in the political powerhouse of its times. Political power rests on three determining factors: the productive capacity of that nation; its international trade relations; and its capability to defend itself.

While there were several denominations of silver coins in circulation in the Greek empire that had their origins in the provinces of Byzantine, Macedonia and Peloponnesia, to name just a few, the Roman empire first introduced the silver drachmae in order to facilitate trade with the Greeks. The drachmae was followed by the golden aureus, the silver denarius and the bronze sestertius. One aureus was equivalent to 25 denarii or 250 sestertii.

Inflation, the beginning of the end
The aureus had a respectable lifespan of more than 400 years before inflation diminished its reputation. Nothing has changed since: whenever a currency loses its value, so does its popularity. First the Roman emperors started chipping away at the edges - the need to prevent this resulted in the edge grooves still seen on many coins now in circulation - and then the purity of the coins was tampered with until they became pieces of lead covered with a thin coat of gold.

As the Roman empire declined, so did the Roman money as a means of tangible form of payment for goods and services. In medieval times, all forms of money, and their respective strength, were mainly tied to the content of precious metals - a system that continued till World War I. One Swiss gold franc had the same value as one Austrian gold crown or a Dutch gold coin of the same weight. There was no need for a Bretton Woods agreement in these times.

The reserve currency of the 18th and 19th century was undoubtedly the British pound sterling. As the name says, a one pound note could at any time be redeemed against one pound of sterling (pure) silver at the Bank of England or before that at the treasury of the king. The sixpence stemmed from the custom of cutting a silver penny in six equal pieces for small purchases.

With the demise of the British empire, which went hand in hand with the outsourcing of its productive capacity to the colonies, where labor was cheap, the pound was replaced by the US dollar in the early 20th century, when the US ascended to the throne of the biggest economy in the world, a place it has held ever since.

Menzie Chinn of the University of Wisconsin and Jeffrey Frankel of Harvard look at the next 20-30 years and conclude, in their study entitled "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?" that "under any plausible scenario, the dollar will remain far ahead of the euro and other potential challengers for many years".

I wonder whether this Western approach will still be valid in 30 years. Under the assumption that the European Union with its strong productive base and its highly developed financial markets - especially once Britain joins the Euro - will come back to the path of stronger growth again, the euro could climb to the number one spot in the line-up of international currencies. But this might be for a transitory period only. Most forecasts see China becoming the biggest economy on the globe by 2020, give or take some setbacks along the way that are inherent with the growth rates that the country has been enjoying recently.

China is still some distance away from liberalizing its currency controls, not least for the reason that its financial sector is still in its infancy. But China will develop this sector and gain knowledge along the way. With a consumer base of probably more than 1.5 billion people by then, it will have a huge backyard on which it can rely for further growth to fuel its growing international importance. As the country has been on the path to a more liberalized economy for the last 15 years, taking one step at a time, its careful planning for the future will lead to a more prominent role in the capital sector. Those who produce can save, too, and therefore become a supplier of capital needed elsewhere.

Of course it is premature to speculate about the yuan becoming the reserve currency of the world. But it is not premature to speculate when the resource-rich countries will begin to favor the euro as the preferred means of payment for the riches in their soil. Until now, commodities have been predominantly priced in dollars on the world markets, stemming from the fact that the US is the single-biggest buyer and consumer of energy and has been the biggest buyer of most other commodities. In an age of global redistribution, this might change as the US gives up its number one purchaser position.

Staying with dollar-based prices - which could mean using the currency of a third country that is primarily known for its huge amount of debt and no plausible recipe for a turnaround - could become too costly a way for others to conduct their bilateral trade. After outsourcing American production, an outsourcing of control of international trade could well be on the way. The race for financial dominance is on. And it will be decided in favor of the country or region that manages to maintain a lead in production, which will inevitably be located in proximity to the world's largest base of consumers.

Toni Straka is a Vienna, Austria-based independent financial analyst and portfolio manager, who worked as a financial journalist for over 15 years and now evaluates global market trends.

 

[Investor]

Hedge funds 'to blame'
David Nason, The Australian
30May05

LONG Term Capital Management wasn't the first hedge fund to get itself into serious strife but it's the one that is always recalled whenever the market turns choppy.

A choppy market is one that doesn't seem to make sense and is hungry for direction. The uncertainty it produces invariably causes traders, investors, analysts and everyone else in the money game to start worrying about a downturn. When that happens, people want a bad guy to blame for the doom that might be ahead. Nowadays, when there's no obvious candidate, suspicion tends to fall on hedge funds.

Run by outrageously paid managers, these vast pools of exclusive private capital are used for highly leveraged investments and are a major component of today's market.

But because hedge funds are largely unregulated and not subject to disclosure rules that apply in other sectors of the market, much of what they do remains a mystery. In unsettled times this makes people nervous.

Hence the current round of reflection on LTCM, the once state-of-the-art hedge fund founded in 1994 by legendary Salomon Brothers bond trader John Meriwether.

Meriwether put together a team that included a couple of Nobel Prize-winning finance academics, an ex-deputy of the US Federal Reserve and some of the smartest traders on the street. Eighty wealthy investors, including some of the big investment banks, kicked in a total of $US1.3 billion at inception.

For a while LTCM seemed invincible, producing returns way above the market average and attracting more and more investment. At the beginning of 1998, LTCM had $US4 billion under management, leveraged to create bond, currency and equity positions worth more than $US100 billion. But when, in August that year, Russia devalued the rouble and declared a moratorium on $US13.5 billion of government debt, it triggered an international upheaval of a kind that Meriwether's geeks, for all their computer models and Harvard degrees, had failed to anticipate.

LTCM went into a nosedive and in the end the Fed was forced to organise a $US3.5 billion bail-out to prevent its demise from causing a crisis of confidence across the entire market.

People have been revisiting this history because of the market contradictions currently at play. It wasn't so long ago that increasing interest rates, high oil prices and a struggling General Motors would have had everyone preparing for a recession.

Instead, growth in the US remains steady, high-yield bond default rates are at record lows and the vast majority of S&P 500 companies have produced first-quarter earnings at or above expectations.

There's a feeling that something has to give and much of the nervousness has focused on hedge fund plays in the car industry, particularly at GM, traditionally one of the market's biggest issuers of bonds.

The speculation is that many hedge funds went long on GM bonds (a losing bet now that the bonds have been downgraded to junk status) and covered their positions by going short on GM equities.

What they didn't expect was billionaire investor Kirk Kerkorian stepping in and buying great chunks of the company, an action which sent the share price north again and left the hedge funds with losses on both sides of the ledger.

The big questions now are: which hedge funds have lost how much, are there more losses on the horizon and what will be the overall impact on the market?

But amid all this, the outlook for hedge fund managers remains upbeat with a report last week showing that the top 10 managers all made in excess of $US200 million in 2004.

Top of the list was Ed Lampert of ESL Investments. His 69 per cent return on investment in 2004 gave him a staggering take-home pay of $US1.02 billion, the highest hedge fund compensation ever recorded.

This was up from $US420 million in 2003.

Think of Eddie next time you're trying to find that mortgage payment.

 

[Investor]

The Death of the Federalist Project?
By Anatole Kaletsky
Thursday, May 26th 2005

Why are the people of Europe so angry? The standard answer, as the Germans, French and Dutch all turn against their governments, is that the European project has gone too far and that political elites have over-reached, losing touch with the ordinary people. Their resentment about the loss of national political control to unaccountable Eurocrats of Brussels has finally boiled over. The French may be voting Non to defend their country against a European Union which they now see as a Trojan horse for ultra-liberal Anglo-Saxon values, while the Dutch (and the Danish and British) rejectionists may be driven by exactly the opposite motive, believing that the EU Constitution is trying to ensnare them in a centralised, over-regulated, Gallic state. But far from discrediting the anti-EU movement, this diversity of opposition actually accounts for the power of the revolt.

What people are voting against is not just one or other particular clause of the constitution, nor even its general tenor, whether this is too liberal or insufficiently so. The real bugbear is the idea of any unified Constitution which attempts to impose a single system of government on the whole of Europe and purports to harmonise away the political philosophies, economic preferences and social traditions developed in different nations over hundreds of years.

But before we assume that the federalists will simply give up in desperation, it is worth considering another possible explanation for the popular revolt against European elites. In Sunday's German election, which effectively destroyed Gerhardt Schroeder's government, his recent ratification of the EU constitution was not even an issue and Europe was far from the voters' minds. Two months earlier, the Berlusconi government suffered a similar fate in Italy, a country where Euro-enthusiasm remains undimmed. Why did this happen? In our view the answer is simple: It's the economy, stupid! As regular readers may be aware, we have always argued against economic determinism in British or US politics. But that is because the British and American economies have on the whole been performing well since 1992. Europe meanwhile has become an economic disaster.

The people of France, Germany, Italy and Holland may be angry about globalization or ultra-liberalism or immigration, but this anger reflects a deeper malaise. Their living standards are falling, their pensions are in danger; their children are jobless and their national pride is turning into embarrassment and even shame. In sum, they feel that their countries, which numbered among the richest and most powerful nations on earth as recently as the middle of the last decade, have gone to the dogs under the leadership of the present generation of politicians. And, at least in the economic sense, they are absolutely right.

The relative economic decline of "old" Europe since the early 1990s - especially of Germany and Italy, but also of France - has been a disaster almost unparalleled in modern History. While Britain and Japan certainly suffered some massive economic dislocations, in the early 1980s and the mid-1990s respectively, they never experienced the same sort of permanent transformation from thriving full-employment economies to stagnant societies where mass unemployment and falling living standards are accepted as permanent facts of life. In Britain, for example, unemployment more than doubled from 1980 to 1984, but conditions then quickly improved. By the late 1980s, Britain was enjoying a boom, the economy was growing by 4% and unemployment had halved. In continental Europe, by contrast, unemployment has been stuck between 8% and 11% since 1991 and growth has reached 3% only once in those 14 years.

This dreadful economic performance is more than enough to explain the political angst among Europeans. But what does it mean for the future of Europe? If Europe's economy remains paralysed, then the federalist project is clearly dead, as are all hopes of further significant EU enlargement. But if the economy recovered, the disillusionment with EU politics might quickly vanish.

What could bring about this miraculous transformation? The answer is surprisingly simple. European policymakers could kick-start growth and break the spiral of economic and political pessimism by doing exactly what America did in similar circumstances in 2001. They could drastically reduce interest rates and devalue their currency. As in Japan, interest rates could be reduced all the way to zero and the euro could be pushed down through intervention in currency markets. Such an aggressive policy of monetary stimulation could be guaranteed to revive economic growth, whether or not voters could be persuaded to endorse the labour market and pension reforms which Europe certainly needs in the long- run, but which can actually aggravate economic stagnation in the short term, as Chancellor Schroeder has learned to his cost.

There is only one obstacle to this monetary solution of Europe's problems. That is, of course, the European Central Bank. It is no coincidence that Europe's economic underperformance started with the centralisation of monetary policy under the German Bundesbank from 1991 onwards and deteriorated further with the formation of the ECB in 1999. In fact, the behaviour of the ECB has transformed the euro from a giant step towards European integration into the biggest single obstacle to the further development of the EU.

This is not the place to discuss in detail the ECB incompetence (Charles took a whole book, called Des Lions Menès Par Des Anes, to do that) which largely accounts for the economic and political malaise in Europe today. Suffice it to say that all of the major shocks to the world economy since the ECB was created have originated outside Europe - the internet boom and bust, the terrorist attacks of 9/11, the Iraq oil shock, the US corporate scandals, the rise of China... Yet in every case, the euro-zone has suffered more economic and social disruption than America, Britain or Japan.

If Europe's leaders want to revive any hope of EU integration - or even if they just want to save their own political skins - they have one obvious recourse. The first order of business in any revision of the European Constitution must be to change the objectives of the ECB and bring central bankers under the explicit political control which is taken for granted in Britain, America and Japan. Imposing some political discipline on the ECB would not guarantee popular support for EU integration, but it would at least acknowledge to voters that Europe has now suffered from a decade of economic incompetence bordering on sabotage.

 

[Investor]

The New York Times:
May 29, 2005
An Indicator That's Almost as Good as a Time Machine
By ROBERT D. HERSHEY Jr.

AN investor's fantasy might be to glimpse stock or bond market prices for a trading session yet to come, perhaps next month or in 2010.

Sorry. That kind of prescience can't be arranged. But there's another forward-looking resource, albeit less certain, to aid in financial decision-making, one that has the virtue of being not only readily obtainable but free as well.

It is the market's up-to-the-minute forecasts on the future monetary policy of the Federal Reserve.

Even beginning investors know the Fed's importance, because the interest rates it influences affect the financial markets, the economy - from housing to incomes to tourism - and even national elections. Knowledge of the Fed's likely moves may help you to decide whether to use an adjustable-rate mortgage or a conventional one, whether to shift money into stocks or bonds, and even which kinds of stocks or bonds to buy.

The course of Fed policy is foreshadowed by various market indicators, the most revealing being the price of futures contracts on federal funds - overnight loans among financial institutions whose rate the Fed itself closely controls.

The futures contracts send clues about what is usually the most important single issue facing the markets: What will the Fed do next? And the specific question on everyone's mind these days is this: Is the Fed, which has been raising rates for nearly a year and has five more policy meetings scheduled for 2005, about finished?

The answer, judging from the consensus reflected in the futures contract for December, is: We're getting close.

"The funds market is telling us they're going to pause at at least two of these meetings," said John Augustine, chief investment strategist at Fifth Third Asset Management in Cincinnati.

Mr. Augustine points to the current federal funds rate of 3 percent and notes that a quarter-point increase at each meeting - the pattern that has lifted the rate in eight steps from 1 percent in mid-2004 - would put it at 4.25 percent by year-end. The December contract, however, is now trading at 3.72 percent. He said he believes that the Fed is likely to stop its credit-tightening in meetings toward the end of the year.

These contracts, settled on the basis of the average rate for federal funds during the month, are traded on the Chicago Board of Trade. The August contract ended one recent session at 96.60, meaning that the market believed the funds rate for that month would be near the difference between that figure and 100, or 3.40 percent.

You can follow the action online at www.cbot.com by clicking on "30-day fed funds."

Sometimes, analysts portray their readings of funds futures prices as odds or probabilities. For example, if you assume that the Fed will raise rates by a quarter point at both the June and August meetings, bringing the level to 3.50, then a reading of 3.72 would imply there was about an 80 percent chance of an increase at the next meeting, in September - 3.72 being about 80 percent of the distance from 3.50 to 3.75.

Not surprisingly, the shorter the time period, the more accurate these forecasts have turned out to be.

"So far as predicting the funds rate over the next several months, the federal funds futures dominate other instruments," said Brian P. Sack, senior economist for Macroeconomic Advisers in Washington.

Investors can use such readings of market expectations as a benchmark for evaluating the general investment climate as well as predicting movements in the relationship between short- and long-term interest rates.

If, for example, you think the consensus is correct for modestly higher interest rates this autumn, and you have not already made an adjustment, you may want to cut back on your fixed-income investments. If you're in real estate, a conventional mortgage may seem a better bet than an adjustable one. If you are convinced that the Fed will stop raising interest rates by early fall, you may be more comfortable buying longer-term bonds.

The stock market implications are tricky. Rising rates are generally not good for stocks, but if investors become confident that the Fed has inflation under control, they could start pouring money into stocks, setting off a rally. An optimist may want to buy metals or other industrial stocks, while a pessimist may want to consider food or tobacco or other so-called defensive stocks.

Of course, the futures contracts merely reflect current market sentiment, and if you're a contrarian who thinks that the Fed may have already made its last move, you may want to lock in today's rates and load up on bonds or certificates of deposit.

In any event, knowing the consensus is a good starting point.

"The federal funds rate serves as an anchor for the financial system and other interest rates key off its current level and expected changes in it," said a 2001 study by Raymond E. Owens and Roy H. Webb of the Federal Reserve Bank of Richmond. "Accurate predictions of changes in the federal funds rate are, therefore, of great value to persons engaged in a wide variety of business activities."

Although Alan Greenspan, the Federal Reserve chairman, and other Fed officials tend to speak opaquely about monetary policy, the central bank since 1994 has increasingly managed to guide the markets along an intended path without surprises.

Thus its formal statements after each of its eight meetings a year are scrutinized for the smallest nuance of intentions, currently whether the Fed sees itself continuing to nudge rates higher at a "measured" pace. The next meeting is June 29-30.

THE funds market can also move sharply on unexpected news about the economy. For example, after the government announced on May 6 a surprisingly big increase in payroll jobs for April, the October funds futures contract jumped to 3.59 percent from 3.49 percent in just a half-hour.

"There had been hopes that the Fed might be able to take a breather" in its persistent credit-tightening since mid-2004, said Ward McCarthy, managing director of Stone & McCarthy Research Associates in Princeton, N.J. "The April employment data, I think, dashed a lot of such hopes."

But while the funds rate is the best predictor in the short run, Mr. Sack and other researchers have found that for periods longer than six months, other market instruments, including Treasury bills, display comparable predictive power.

For this, Macroeconomic Advisers favors eurodollar futures, which trade very actively on the Chicago Mercantile Exchange and pay out at quarterly maturities based on the three-month London interbank offered rate, or Libor.

Movements in Treasury bills can be misleading because yields can be depressed by a panic-driven flight to quality, analysts said.

For the past year, there have usually been just two realistic choices for the policy makers - raising the funds rate by either one-quarter of a point or one-half a point.

Sometimes there is a third choice, and when the situation seems complex, analysts at times seek supplementary information from other markets, such as options on funds futures, a relatively new and underdeveloped contract with rich potential as a provider of information. These options are also traded on the Chicago Board of Trade.

The main complication in deriving the expected policy path from the funds futures rates is adjusting for the premiums that investors require for bearing the risks of going long or short the contract.

The size of this premium, which needs to be subtracted from the futures rate, can be big enough to lure speculators with no firm view on the direction of Fed policy.

(A study by the National Bureau of Economic Research last year found that the Fed itself makes only a minimal adjustment of just six-hundredths of a point for the premium on a six-month futures contract. That compares with an adjustment of 25 hundredths of a point that the bureau's researchers consider more accurate.)

Even without refinements, knowing the likely course of policy is useful, with movements in funds futures especially revealing in reacting to fresh developments.

"Investors' exposure is not so much to what the Fed does," Mr. Sack said, "but to unexpected things the Fed does - to changes in the market's expectations."

 

[markrmau]

We might have just had a lot of O/S hedge fund selling on close. China has reversed the textile export duties they recently planned to impose, because of US and European noises towards trade-war. Gold being sold off, USD up, and base metals down - all because yuan revaluation is less likely when china feels threatened.

ASX might be a bit rocky tomorrow.

 

[Investor]

We might have just had a lot of O/S hedge fund selling on close. China has reversed the textile export duties they recently planned to impose, because of US and European noises towards trade-war. Gold being sold off, USD up, and base metals down - all because yuan revaluation is less likely when china feels threatened.

ASX might be a bit rocky tomorrow.

Not just tomorrow. Probably a few weeks at least; a few months more likely.

Time will tell. Enjoy the ride.