August 11th, 2004, 8:54 pm
Hi Samudra-Yes, in my view it's a status quo scenario for the DOHA round with some measurable deterioration, with risk of a catastrophic failure. Things would improve slightly with the return of Robert Rubin (if Kerry is elected). Bush's approach of having Zoellick negotiate a large amount of bilateral trade agreements undermines the whole basis for the WTO in general and the Doha process in particular. Kerry would clearly take the multilateral route here.I wish I knew more about what was decided on textiles. India is slated to reenter the market here after a substantial absence, am I correct? I understood that the Indian textile industry had suffered quite a bit under the preferential status granted to some of the countries on its periphery such as Bangladesh. But I am unsure of this.There are some pretty major changes coming for textiles and South Asia, am I correct?In terms of the long term inflation outlook, it looks like we are heading for some turbulence and very strong cross currents. By no means do they cancel out.In terms of a deflationary bias in world pricing, we have Moore's law which mandates collapsing semiconductor prices which amplify through the economy. Additionally, productivity gains from computer networks are really helping to keep a very tight lid on business costs.And the cost of labor, a huge portion of the cost of doing business, continues to plunge. Global labor is plentiful and plunging in price. Chinese labor at 15 cents an hour brings a huge downward pull to prices.So on the deflationary front, you have an extraordinary amount of items in surplus, from labor, to semiconductors, to plunging crop prices, etc.However, the cost of oil is a real wild card. 75 dollar a barrel oil could easily be reached by March of next year. One dirty bomb, very easy to assemble, exploded at the world's largest oil refinery complex in Dharan would push us to 100 dollars a barrel and more very quickly. The Chinese are continuing to consume oil at a rapidly growing rate as well. And of course escalating costs for oil amplify through many sectors of the economy.But inflationary psychology, measured by real interest rates (the spread between the inflation rate and the nominal yields on government bonds) continues to be relatively stable. And that is critical.Another factor in the long term inflation/deflation outlook is whether the Chinese landing will be a soft one or a hard one. Economic slowdowns are notoriously difficult to engineer (recall Volcker's 1979 tightening after his return from the Belgrade IMF meeting as a prime example) and a hard landing would have troublesome implications indeed for the Treasury market. So I generally keep my predictions to the intermediate term, i.e. 9 months from now. The short term is too volatile to base policy decisions upon and the long-term is too difficult to predict. This intermediate term approach is consistent with what the Fed does in conducting its open market operations.Therefore, 9 months from now, US economic growth should be limping along at 2.8 - 3.1%, the CPI should be around 3.5% and the price of gold should be between 370 and 390. I think March 2005 light crude will be going for $48.50 per barrel. I think the Fed will raise its target for Fed funds by 25 bp in January, but that is all. The Dow and FTSI should both be trending lower, but only by about 4%, nothing catastrophic.That's my snapshot of where we will be 9 months from now. I must admit I don't follow this data as closely as I used to.That's my view.Matthew