Quantitative Inflation

By Stephen McPhie, CA

RSD Solutions Inc.,

www.RSDsolutions.com

info@RSDsolutions.com 

 

The American and British cure for many of our current ills has been printing money. Quantitative easing as those who practice it are concerned.  Germans, especially the head of the Bundesbank are dead set against it.  They view it as a way to let some countries off the hook.  They also believe it will lead sooner or late rot inflation – a logical view. 

 

Perhaps like many, for or against it, you just desperately hope for the best and that it will work somehow and lead to strong growth.  However, if you are a financial executive in the US or UK, do you also countenance the inflation possibility?  A medium term view is important and the consequences of inflation should be considered in risk management.  In spite of a benign rate environment, caused partly by flight to quality), consequences include higher interest rates.

Martian Foreign Exchange Risk

By Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Even though I lived in the USA for several years, I still do not understand U.S. politics and politicians.  I don’t think most Americans do either.  They just seem to be born either Democrat or Republican and harbour a life-long hatred of the other that borders on vindictiveness at times.  Like many non-Americans, I just observe with amazement and never cease to be astonished about what goes on.  However for better or worse, what goes on in America profoundly affects not only Americans, but also the rest of the world.

Now that we know that the U.S. president wasn’t born on Mars (subject to forensic examination of documentation), will U.S. politicians turn their attention to making a serious attack on the deficit?  And what about the debt mountain?

 

Inflation fears are causing pressure for interest rate rises in a number of countries.  It does not appear that the Fed is yet ready to raise rates but things can change rapidly.

 

The U.S. dollar has been weak while commodity prices have been rising.  However some commentators are now opining that such process have overshot and are predicting falling commodity prices. 

 

What will happen to the Euro if the PIG bale outs become PIGS bale outs?  Or even PIGSI bale outs?  (Portugal, Ireland, Greece, Spain and Italy.)

 

And so on and so on …..

 

The bottom line is that we are facing a very uncertain situation of possible currency volatility.  Does your company have a thorough understanding of its foreign currency exposures in terms of identification, quantification and sensitivity to exchange rate fluctuations?  Do you have well-developed strategies and policies for dealing with these?  Are your hedges really effective and are you sure that they do not create additional exposures you are unaware of?

 

And if you answered yes to these questions, are you absolutely certain?  Are you sure that a yes 12 months ago is still a yes today?

Asia’s next export: Inflation. G20 response: Increase interest rates

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Here in the rich western world, consumers are witnessing an interesting disconnect; namely the difference between what we see at the gas pump and grocery store and what we hear when our government’s announce inflation rates.  The disconnect stems from the definition of core verse headline inflation rates. The core rate strips out the so-called "volatile energy and food prices". Luckily, for many in the West the rising cost of food and energy is an annoyance and living with the core rate of inflation – from which the countries’ central banks base their interest rates on, is grudgingly accepted. 

On the other hand however, in the emerging economies where household incomes are lower and food and energy consumes a substantial portion of household income; national governments consider these elements as part of core inflation. Thus you are finding increased pressure for the central banks of emerging economies to raise interest rates to tame inflation and protect their currencies. The local trickle down effect of this will be for consumers to seek higher wages.  Higher wages, when combined with higher (commodity) input cost will translate into higher prices charged on manufactured products.  Once exported Asia’s pivotal role as deflation exporter will change; for their manufactured exports help constitute core inflation in the developed economies. 

As core inflation rises, so to will interest rates. If your firm is highly leveraged and thus sensitive to interest rates what steps are you taking today to reduce this future financial risk?  For the consumer, perhaps locking in longer terms rates is starting to look more attractive. 

 

For more on this follow the link to Pimco’s Mihir P. Worah’s viewpoint:

 http://tinyurl.com/4jcjnqd

 

Low interest rates. Going, going, gone.

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

As a follower of our blogs you know our views on rising energy and commodity prices and how this will impact those firms that depend on them in the creation of their firm’s products.  We also know that this rising tide of wholesales prices will eventually push up consumer prices leading to increases in consumer price indexes (inflation) which in turn will cause interest rates to rise.  You could say that this is (money) supply side induced inflation caused by several of the Western world banks introducing quantitative easing. 

In an excellent article in McKinsey Quarterly (link below) their analysts also look at another catalyst for higher interest rates – namely the lack of savings which will be structural in nature.  It is argued that with the Western world’s aging demographic spending (on health) will increase as will the amount of money put aside for food and energy.  All of this will reduce the amount of money available to be saved and thus force borrowers to increase interest rates to incent what few savings are out there. 

With a strong case that interest rates will be going up, how is your firm’s financial risk management preparing for this and how do they plan to push back the day of reckoning? 

For a link to “The era of cheap capital draws to a close” click:

http://tinyurl.com/6ca78gd

 

If art imitates life; call your risk team. JR is back.

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Last week it was announced that Larry Hagman had agreed to return to Southforks Ranch and reprise his role of JR Ewing. Back in 1979, I was an economic student at the University of Western Ontario, who with my Ivey Business School friends would gather on Friday night before attending any party or social activity to watch the TV soap opera Dallas and cheer for the exploits of JR. During the first 5 years of the show the price of oil reached historic high levels (inflation adjusted) and was 63% higher on average than the previous 5 years, interest rates spiked in Canada up towards 20% and food prices reached historic levels. And now we hear that JR is coming back, ranch and all. 

How interesting that as JR makes his comeback, Brent crude is at triple digits, interest rates are rising (slowly at the moment), inflation is being forecasted and commodity prices are on a tear. JR will surely be having a déjà vu experience, feel right at home and be glad it is not a dream. I wonder if those at Western studying economics and business will be cheering him on this time.  As for your risk team – it might be time to get netflix for their office. 

For more on the Dallas’s rebirth follow the link:

http://tinyurl.com/5wl2x2a