Monthly Archives: April 2009

Deflation hits the US

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Consumer prices in the US are now lower than they were a year ago.

down blue
Creative Commons License photo credit: TheTruthAbout…

This is the first time this has happened since 1955. On the one hand, this reiterates that this recession is much worse than those in recent times. On the other hand, it shows how how asset prices had become in the final years of the credit-bubble. A large cause of the declining prices was the effect of oil and energy costs. The high base from high oil prices makes it easier for prices to move backwards.

This isn’t yet enough to introduce stubborn deflation. The oil price effect is a particular feature of the data and not all components of the consumer price index are declining. Real interest rates are still positive, and with declining prices (if these were to persist) there is not way through interest rate policy to change this.

The much-feared, poorly understood “quantitative easing” may be required to boost the money supply and encourage some inflation.

While serious deflation is probably not a major risk, the risk of massive inflation arising out of overdone quantitative easy, government spending and low interest rates should still be a concern for the dollar in the medium term.

Art ain’t all alternative and alpha

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Fin24 has a story outlining how the South African art market has been struggling. Seems that art, like many other alternative investments, has rather more Beta or systematic risk buried inside the arty exterior and isn’t as good a diversifier as claimed.

update 7 April 2009

The FT is also running a story showing art prices plunging in the first quarter.

The Mei Moses index, set for release on Tuesday, shows art prices fell 35 per cent in the first quarter, having held up during earlier months of the financial crisis.

The worst year on record for art investors was 1991, when prices dropped 41 per cent, said Mr Moses, who has collected data going back to the 1800s.

The index providers added that the art market tended to track the state of the economy but with a time lag.

None of this says that art can’t be a good investment, but the systematic risk involved is still high.

Good economic news for Lebanon

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I blogged before about some medium-term concerns I have around Lebanon’s currency stability. A story I saw today shows an opposite view, so I’m linking it here.  Moody’s have upgraded Lebanon’s bond ratings due to improved external liquidity.

My original post was to temper the irrational optimism around the currency peg, rather than to say there is bad news around the corner. However, I still feel Moody’s may be slightly optimistic, upgrading a small country’s bonds when the extent of the global recession is not clear.