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Tuesday, March 8, 2011

Rosenberg Daily - Oil, Food, Emerging Markets

While there is an estimated $15 per barrel geopolitical risk premium in the oil price, it still pays to take note that before the crisis erupted in the Middle East and North Africa, Brent crude was trading around $100/bbl. This reflects the reality of burgeoning demand from the fast-growing emerging market world (as well as relative energy inefficiencies in this region) coupled with a relatively inelastic supply curve. The same holds true for the food complex, where prices globally have just hit a new record. In the absence of a slowing in demand, the end-result is going to be ongoing increases in headline inflation rates. And if central banks in the emerging market world, who have allowed their economies to overheat as it is, continue to drag their feet in terms of policy tightening, the need for more draconian measures down the road will be even more intense and could well lead to a bad outcome for growth in this part of the world. Inflation in the emerging market world is typically problematic, especially since food comprises such a larger part of the consumer spending basket, but if the supply is inelastic over the intermediate term, then tactics that delay an adjustment to curb demand for other goods and services will likely prove to be the greater of two evils. The tough choices these governments face are generally unappreciated by the investment community. [today]

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