The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, January 25, 2011

Gavyn Davies (former Goldman Chief Economist) on emerging market inflation

I told a buddy of mine at an investment bank that he should write a note on this subject. Gavyn Davies has done it for me. Gavyn, who used to be global chief economist at Goldman Sachs, has an excellent global macro blog over at the FT. In this article, he argues that inflation is the new black for investors:

"1. Inflation concerns continue to spook investors. This week, the global inflation scare was given an extra twist by a rise in CPI headline inflation in the UK to 3.7 per cent (see this blog), and generally strong activity data in China (see this one). This led investors to conclude that the authorities in both countries are “behind the curve”. Bond yields therefore continued their recent climb. Ten year yields have now risen as follows since the beginning of the year: US +14 basis points; eurozone +21 bp; UK +30bp. More interestingly, yield curves have steepened further, as long dated yields have risen particularly fast. The US spread between 2 year and 30 year yields hit a new record again this week at 400bp. However, none of this really qualifies yet as a major inflation scare, at least in the developed world. Core inflation in the US has barely budged. If this were a major scare, global equities would be falling and expectations of Fed/ECB tightening would be changing fast. They are not – yet.

2. Inflation is a more urgent problem in the emerging economies. Food and energy accounts for almost half of the CPI in emerging economies like China and India, and only around 15 per cent in the US. The emerging world is therefore facing a much more urgent need to tighten monetary policy, despite its widespread reluctance to do anything which increases upward pressure on its currencies. Last week, Brazil increased policy rates by 50 bp, and Poland joined the tightening bloc with an initial 25 bp hike. Next week, India, Russia, Hungary and Israel are expected to do the same. However, real policy rates in many emerging economies remain below zero, so policy is still extremely accommodative. There are serious questions about whether policy makers will turn a partial blind eye to rising inflation, in which case property and equity markets in some economies might enter bubble territory. And commodity prices could continue to rise, doing a lot of damage to growth and inflation in the developed world as well. This is fast becoming the most important risk facing the global economy this year."