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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (26965)	4/6/2005 8:34:57 AM
From: Crimson Ghost	Read Replies (1) \| Respond to of 116555

Market Nugget – Opinion Rising energy prices present the same drag on the economy as rising interest rates. .Although you can make a good argument that rising oil prices are inflationary, interest rates may not respond as expected - why? The most obvious reason is the recycling of petro-dollars. The higher the price of oil, the more dollars there are sloshing around in the oil exporting countries looking for a place to call home; this is especially true the longer oil prices stay high. Initially those petro dollars are put to work at home but eventually there are so many surplus dollars that they find their way back to the USA. Those petro-dollars are now joining China’s and other countries US trade deficit dollars in being recycled back into the market via demand for US Treasury securities. This added demand for US Treasury securities is helping to offset the massive supply of treasuries and is keeping pressure on interest rates to the downside. Connecting the dots, in roundabout way high oil prices may be helping to support the overpriced housing market via their impact on interest rates. Of course, this is not sustainable – the higher oil prices will constrain economic growth which will impact housing….eventually. A slower economy should create some slack in the demand for oil , which should negatively impact oil prices. The double whammy on oil will come when a slower economy teams up with increased oil supply capacity, capacity that is built and brought on stream in direct response to the current high price of oil. All commodity price booms sow the seeds of their own demise in the medium term. Oil is unique in that it is becoming finite in supply and hence in the long run oil there are genuine supply concerns, we are not there yet. In response to high prices in any commodity (oil, iron ore, steel, grains), money is invested to increase capacity in a desire to cash in on the higher prices. The commodity cycle has always been characterized by very high highs and unbelievably low lows. This is because typically the bulk of the new capacity will come on stream just as economic growth is slowing partially as a result of the high commodity prices. Economic booms start when commodity prices are low and end just as, or just before, commodity prices peak. Looking at the US economic environment today it is ironic that a declining price of oil may also be the cause of rising interest rates – when the petro-dollars no longer find their way back to the US Treasury market. It is an economic cycle unlike others; the forces of deflation are in abeyance as long as commodity prices are rising. Also, as interest rates rise, I suspect other asset prices (stocks and real estate) will have difficulty remaining at levels fueled by ultra low interest rates and previously higher rates of economic growth. Take away asset price inflation and the worldwide glut of productive capacity may once again allow the deflation genie to escape from its bottle.

To: mishedlo who wrote (26965)	4/6/2005 1:36:57 PM
From: RealMuLan	Read Replies (3) \| Respond to of 116555

Mish, Gas tax in China will not be likely in the near future. The main purpose for Chinese gov. wants to charge tax is to encourage people to save and consume less of gas. This issue has been on the agenda for 10 years now. Plenty of issues still haven’t been resolved yet. Gas tax, according to the plan, will replace the road maintenance fee and other 14 dif. types of fees. Road maintenance fee counts for 80% of all fees. The central gov. want 100% of the gas tax for imported oil, and 40% of domestic-produced oil. Currently, 50% of gas depends on imports. So that means the local gov. can only get 30% of the new gas tax and their funding for the road maintenance will be dramatically reduced. Besides, some highways are funded/built by local gov. it will be impossible to ask those highways to be free like all the state-funded highways. Another issue is the conflict bet. transportation dept. and the revenue dept. Right now, there are 270,000 people all over the country employed in fee-charging sector. One major issue for not starting the national gas tax in 2000 was not able to relocate those employees. The current gas tax plan (of 50% or so) has been designed according to the oil price of $15 a barrel, but now oil has become $50 a barrel. So for an average car owner who run 20,000 kilometer a year, the cost of gas tax would be an additional of 4000 Yuan, and road maintenance fee he saved would only be 3000 Yuan or so. And this is against the principle set by the gov. that the implementation of gas tax would not increase the cost of driving for consumers. So how much for the gas tax now become a difficult issue. How to charge the gas tax is also a problem. It would encourage smuggling if taking out the tax from refinery. If charged from gas stations, there are >100,000 gas stations all over the country, the logistic will be a problem. The administration of the tax would be very expensive and possible widespread corruption and tax fraud. Who should pay the gas tax is also an issue. 20% of gas and 80% of diesel are not used for transportation. So the potential liability would be too high for these non-transportaion industries and consumers, including a lot of farmers. That means for these sectors, the gov. needs to give some subsidies or tax refund. Another way is to use 2 tax rates, which would encourage illegal transaction. The gas tax would also increase the cost for those long distance transportation. Gas tax will be implemented sooner or later. And there is plenty of conflict of interest bet. dif. sectors, and there are a lot of decision-making here. It will take a strong decision-maker to finally put it into effect.