Marketplace Middle East - Blog
8/21/08
Half way through the fight


In the spirit of the Beijing Olympics and the boxing finals, it is worth exploring whether the credit crisis afflicting primarily the G-8 countries is half way through the bout, or whether we are getting to the final round.

As sports buffs know, Olympic boxing is controlled with thick headgear and the bout is limited to four rounds of action. The damage to the athletes is limited and the action intense in a rush to score points.

I wonder if we can say the same right now for the global economy. Is further damage limited and how much more intense will it get before this fight is over?

One of the leading economists this week put a cold towel on expectations of a quick recovery and in fact, signalled that times will get worse before they get better. This was further complicated by a recovery in oil prices from their recent low of $111 a barrel.

First, let’s review the comments from Kenneth Rogoff, the former chief economist of the International Monetary Fund. At a conference while on a tour in Singapore, Rogoff said: “I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.” That would put us at round two of the four round fight.

Having made his comments in Asia, the trading world had a full day to digest those comments and read between the lines on the seriousness of his thoughts.

Rogoff did not stop there. He said it wouldn’t be a minor banking player that would collapse, but a major institution, “a whopper” the economist noted.

I have heard Rogoff speak at past conferences, primarily in his official role at the IMF. Not personally, in the heat of the credit crisis contest and far from home, he spoke more freely and spoke his mind. Sometimes comments like these are brushed off to use a boxing analogy, but in a jittery market unsure of the path going forward, these landed a near knock out blow.

Rogoff rounded off his thoughts questioning the wisdom of providing too much liquidity by lowering interest rates to avert recession. The result? We are witnessing the highest inflation since 1991. This is another reason he feels the worst is yet to come.

The forecast for higher inflation was not helped by energy prices. After tumbling to a recent low of $111 a barrel (still up 68 percent this past year) leading analysts are predicting that we will move higher after this summer lull, where we saw a 20 percent correction.

I spoke to Francisco Blanch the head of Commodities Research at Merrill Lynch, who thinks we can peak out near term at $124 a barrel. The important thing in his view is the demand we are still seeing from emerging markets – including the wide belt of growth from the Middle East. Blanch said, “On the supply side we still have serious constraints particularly for oil, while on the demand side we have of course, we still have strong emerging market growth and that is all that matters in the commodity markets, what happens to emerging markets.” His research shows that regional oil consumption represents 20-30 percent of the new demand.

As it turns out, Blanch is being conservative versus his counterparts at Goldman Sachs. They were the first to call for $100 oil and are now forecasting prices of $149 a barrel near term. That is despite what Rogoff has to say about where the U.S. economy is at this juncture and how much that is influencing a slowdown in Europe and Japan, for example.

Oil and other commodity prices were under the influence of a stronger dollar, with traders lulled into the belief that the fight against the credit crisis was nearly over. They were looking at a pretty sluggish forecast for Britain, Germany and France and saying they too will struggle.

That may be true, but the U.S. economy is still the largest (albeit for another decade or so) and this is where an old boxing adage comes in useful: The bigger they are, the harder they fall.
ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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