Tags: investors | decisions | economy | opec

Long-term Investment Decisions Won't Come Easy for Some Time

Long-term Investment Decisions Won't Come Easy for Some Time

Thursday, 01 December 2016 07:44 AM Current | Bio | Archive

The OPEC cartel has agreed to some oil production cuts alongside some cuts from non-OPEC members, hereby making the first pledge for reduction in oil output since 2008.

Saudi Arabia accepted “a big hit” on its production and dropped its demand for Iran to slash output. Iraq also agreed to curtail its output, while non-OPEC Russia agreed to join OPEC in cutting production for the first time in 15 years although, and that goes in the other direction, Indonesia is to suspend its membership, having declined to comply with the cuts agreed.

Saudi Arabia will take the lion's share of the 1.2 million (Mn) barrels per day (bpd) cuts by reducing its output by almost 0.5 Mn bpd to 10.06 Mn bpd while Russian Energy Minister Alexander Novak announced that “Russia will gradually cut output in the first half of 2017 by up to 300,000 barrels per day."

Now, weather the cuts will be followed through entirely or weather there will be cheating on some of the production pledges is another matter.

Anyway, oil prices rallied on the news by about 9 percent.

These sorts of oil moves are not going to radically change economic outlooks as:

Gulf countries will still face fiscal difficulties requiring them to sell down U.S. assets, and headline inflation rates in developed economies will converge on core inflation rates, which means of course that the headline inflation rates will rise as the impact of lower oil prices fade and that is of course important.

But, it could be good to pay attention to the fact that this is not a moment to be significant enough, yet, for revising inflation forecasts higher. If oil hits $60 per barrel say, and stays there, then things may become more economically significant.

Meanwhile in the United States we got the nomination of Mnuchin as Treasury Secretary who has, as the Financial Times calls it “talent for reinvention” and has business links to victims of mortgage crisis and therefore could be set for a bumpy ride in his nomination hearings.

That said he has brought some unexpected information by delivering his thoughts by the media rather than the more normal practices, as of late, by tweeting policy announcements.

The fiscal easing program does seem to be being pursued aggressively by the incoming administration, which again on the backdrop of inflation pressures rising from already normal levels is a possible challenge.

However, Mnuchin also indicated that tariffs will not be imposed on China on day one of the Trump administration, in spite of the fact that Trump can impose tariffs without reference to Congress. The Treasury will simply review whether China is a currency manipulator. Presumable the U.S. Treasury is doing that on an ongoing basis.

He also indicated that Fed Chair Yellen is doing a good job, that he would not comment on her future and that he liked low interest rates for the foreseeable future.

So much for central bank independence.

The latest Fed’s "Beige Book" gave anecdotal evidence of tight labor market conditions spreading across the United States.

In the near term that’s a good that’s a good thing for the U.S. consumer because of wage pressures, but the loose fiscal and the loose monetary policy suggestions that are coming out of Washington present a challenge in that sort of circumstances.

In context of all the above, Cleveland Fed President Loretta Mester's remarks are interesting: “I view another increase in interest rates as a prudent step to take ... at this point ... I view a small step up in interest rates as appropriate, not because I want to curtail the expansion, but because I believe it will help prolong the expansion.” Alluding to the President-elect's plans for fiscal stimulus, Mester noted that the Fed would have to weigh their likely impact on employment and inflation, stating “When we gauge the effects of any forthcoming fiscal and other economic policy changes on the outlook for growth, employment, and inflation, the devil will be in the details. The devil will be in the details.”

Investors could do well keeping Ms. Mester’s words “the devil will be in the detail” in mind when making long-term investment decisions. No, it won’t be easy.

Of course, here we are not talking about trading.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Investors could do well keeping Ms. Mester’s words “the devil will be in the detail” in mind when making long-term investment decisions. No, it won’t be easy.
investors, decisions, economy, opec
Thursday, 01 December 2016 07:44 AM
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