Who is right on oil and the dollar: HSBC or Standard Chartered?
Posted on 14 May 2008 with no comments from readersYesterday I was privileged to briefings by top analysts from both banks on the economic outlook. StanChart took the morning slot with a breakfast in the Burj Al Arab, while HSBC fitted in an interview before its seminar in the Grosvenor House for Premier clients last evening. But the difference in outlook was stark.
Standard Chartered is predicting continued high oil prices for 2008 with an average of $104 and $120 for 2009 with a $150 spike possible. But its well respected currency strategists see the US dollar recovery failing to prove durable and falling away to $1.75 by the end of 2009.
HSBC saw oil prices falling to $70 and staying around $90 next year. On the other hand, the US dollar will recover to $1.35 by the end of 2008. But both banks could see no end to high inflation in the Gulf thanks to negative real interest rates, and consequently a big ramp up in real estate prices.
On the dollar I side with Standard Chartered. I simply do not see the US economy picking up this year and not really until the housing market bottoms at the very least mid-2009.
Letting the US dollar devalue has served the economy well in keeping the downturn as mild as possible, and I see no sign of a desire to end this policy. Far from it the Fed keeps on ‘printing’ more and more money with its easy bank credit and sundry initiatives in the markets.
HSBC would argue that the euro-zone is due for economic pain which will weaken the euro. Perhaps but then the ECB is maintaining higher interest rates to parry rising inflation, a flat contradiction of Fed policy and does not look very likely to compromise that objective: pushing the dollar down helps to reduce commodity price inflation as commodities are priced in dollars.
Oil prices are a tricky call but again I think Standard Chartered has a more credible case. The fundamentals of demand favor still higher prices while geopolitical tinkering can fuel up prices any time. Also for a bull market like oil to end you would expect to see the tell tale signs of a spike, and they are just not yet there.
However, both banks concur on the outlook for inflation in the Gulf States. It is pretty horrendous as government’s ignore the economists’ advice on revaluation and press on with inflationary spending plans and salary rises. There is also an inevitable distortion of the economy into real estate speculation and financial services related to property like mortgages.
It does look as though an almighty economic bubble is going to be created – but it is not there yet, and if HSBC is right on the oil price and dollar that would go someway to alleviate matters. Otherwise this is a text book example of an overheating economy but who knows when it will boil over, and better this than the nasty credit freeze of the West.
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This debate is crucial for asset allocation, and it was perhaps not so surprising that I also disagree with HSBC on this score. I think further turbulence in financial markets – probably with a stock market crash – is inevitiable as the US recession moves from the financial sector to the wider economy through the mechanism of consumer spending and job losses. The idea that the US economy will rebound in the second half of 2008 is patently ridiculous – it is May 16th so we are almost in the second half and I see only more and more signs of a downturn. In this environment the US dollar will continue to weaken, and if it shows any strength it will be for the wrong reasons – a move from stocks to cash. Stay long on cash and gold in such an environment and out of the US dollar.