DABERIAM XXXI

May 2007

The World Wide Web keeps information flowing across all borders at an ever-increasing rate, keeping Executives in Government and industry up to date and avoiding too many anomalies building up. Television around the world seems continually to reduce the amount of information it passes - sit in a foreign land and watch CNN and you have wasted a lot of time. Through all the daily noise, and particularly the agitation in the stock markets at the end of the first quarter, there continues to be an inexorable trend towards higher interest rates, but growth and profits remain steady.

Central Banks, through the global economy, are connected and are also followers of fashion, but underlying the fashion they see commodity prices rising and the inevitability of that continuing as it takes years to bring on new production, while the effects of most commodity price rises have been muted by improved product design and production efficiency. This improvement will continue for some time to come. A recent study by MIT concludes that new technological investment takes five to seven years to produce its biggest gains. In my experience it certainly takes three to four years to start getting the full benefit of new manufacturing technology in a small to medium size company. These technological gains are likely to continue to help keep inflation down in the West, provided of course capital investment is not choked off by high interest rates or Government discouragement by changing the tax rules on depreciation.*

The rise in food prices is more serious and hurting more and more people. As living standards rise in Asia there are several billion people who want more and better food. The rising food prices are also exacerbated by the green illiterates who promote ethanol production from grain in some kind of religious belief that that will save the planet.

While Iraq and Afghanistan are appalling disasters in human and political terms, the life of the majority of the people around the world is improving and there is little day-to-day pain for which Governments cannot popularise themselves by proclaiming solutions. This tends to produce a sort of rudderless Government that creates legislation to solve problems that most people haven’t thought of, the consequence is a rising tide of bureaucracy which, like the underlying inflationary trends, is hurting, but only slowly.

As always it is difficult to draw a conclusion. Will the camel’s back break and if so, which straw will cause it? If retail inflation moves up slowly, food inflation does not accelerate, and interest rates continue to rise slowly, then perhaps we are some time off from any kind of crisis. If global liquidity continues to be plentiful, corporate profits continue to improve, albeit at a slower rate, and employment in industrial and industrialising countries around the world holds up, then the Goldilocks scenario continues.

The US and the UK, where there is vast over borrowing by individuals, could experience a sudden economic crisis if interest rates move faster or the availability of credit dries up but it is unlikely to cause a major economic crisis unless unemployment also rises. One can also say that at some point private equity borrowing will cause a crisis as the investors in private equity companies and partnerships discover there is a problem trying to realise their profits. The pass-the-parcel game is now being played with larger and larger companies.

Having made all the above observations, however, one can only be optimistic as the world remains more benign than “trend” and stock markets, the most fascinating of animals, should continue their steady path.

Damon de Laszlo 
May 2007

* This is of particular concern in the UK where the Government has started to meddle in this area to raise tax revenue and the Conservative Party has floated the idea, for discussion, of withdrawing capital allowances.