December 1, 2023

Wholesale Prices Fall Again, While Inflation Remains Low

The producer price index, which measures price changes before they reach the consumer, fell a seasonally adjusted 0.7 percent in April from March, the Labor Department said Wednesday. It was the second straight monthly decline and the steepest since February 2010.

Lower inflation means the Federal Reserve has more leeway to continue its aggressive policies to bolster economic growth. If there were signs that inflation was picking up, the Fed might be forced to raise interest rates.

The index declined largely because gas prices dropped 6 percent, and the price of home heating oil fell by the most in almost four years.

Food prices also fell 0.8 percent, the most since May 2011. Half of the decline was because of lower vegetable prices, a highly volatile category. Meat prices dropped 2.3 percent.

Excluding the volatile food and energy categories, core prices ticked up 0.1 percent in April, from March. Pharmaceutical costs also rose 0.1 percent.

Prices for cars and pickup trucks, men’s clothing, tires and computers all declined.

Over all, wholesale prices have increased just 0.6 percent over the last 12 months. That is the smallest yearly gain since July and down from a 1.7 percent pace just two months ago.

Core prices have risen only 1.7 percent in the last 12 months and are just below the Fed’s 2 percent inflation target.

Paul Dales, an economist at Capital Economics, said wholesale prices may fall further as declining prices for many commodities work their way through the supply chain. Slowing manufacturing output could also weigh on prices.

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Special Report: Energy: Despite Lots of Talk, Dollar Still Reigns

Certain countries — including Iran, France and Russia — have periodically floated the idea of transforming the markets by settling crude oil transactions in currencies other than the dollar.

But each time the notion is raised, it has been quickly dismissed on technical and economic grounds. And that remains the case today, more than ever.

“It’s a red herring,” said Leo Drollas, chief economist at the Center for Global Energy Studies in London. “The idea should be put back in its box for a while, especially with all the turmoil surrounding the euro.”

Various reasons have been cited for the calls to shift away from the dollar, which remains the world’s reserve unit.

Proponents of change suggest that there is an economic logic, as many countries have been diversifying their foreign exchange reserves out of the dollar in line with an increase in global trade flows booked in nondollar currencies.

Others argue that the decline in the dollar’s value, an on-off trend since the 1970s, justifies such an action, particularly in the light of calls from China, France and even the United Nations to examine the creation of a global reserve currency.

And Chinese leaders have been making the case increasingly vociferously that in an age of many rising powers, the dollar has an outsize importance. As the second largest economy in the world, behind the United States, and the holder of the greatest amount of currency reserves, China is interested in seeing the global economic hierarchy reordered to match the post-Cold War world more closely.

But most analysts do not see a compelling logic for oil markets — or other commodities for that matter — to ditch the dollar. “It’s just politics,” said Bahattin Buyuksahin, a senior oil market analyst at the International Energy Agency in Paris.

The idea of pricing oil in other currencies first surfaced after President Richard Nixon abandoned the dollar’s direct convertibility to gold in 1971 and devalued the currency.

The subsequent decline in the dollar, exacerbated by the economic strain of the Vietnam War, a balance of payments deficit and high inflation, stirred concern among producers, even before the Arab oil embargo of 1973.

Moving away from the dollar and pricing oil against a basket of currencies was debated at OPEC meetings in Geneva during the early 1970s, according to Mr. Drollas. Ultimately the concept was buried because of technical difficulties — and the fact that the dollar recovered ground.

More recently, the idea has resurfaced.

In 2003, the European Union and Moscow discussed pricing Russian energy exports to Europe in euros, winning tentative support from France and Germany, as well as Vladimir Putin.

For the Europeans, buying oil in euros would have meant reduced currency risks (meaning the cost of energy in Europe would not get higher just because the dollar rose against the euro). It would have also signaled the international arrival of the then-new currency. But the talks did not lead to an agreement.

In 2007, Iran persuaded some Asian customers to settle their oil trades in currencies other than dollars. But for the most part Tehran now sets its export prices using a formula linked to dollar-denominated crude oil benchmarks.

Then in late 2009, The Independent newspaper reported that secret meetings were taking place among some Arab states, China , Russia, Japan and France to end dollar dealings for oil and move to a basket of currencies. Nothing was confirmed and much was denied. Since then, the idea has not resurfaced.

Countries that have most actively sought to loosen the dollar’s grip on oil markets have had differing reasons. France has periodically sought to weaken U.S. global economic and political hegemony; Russia is increasingly aware of its powerful role as an energy exporter; and Iran has openly sought to undermine Washington for geopolitical reasons, angry about U.S.-led sanctions against its regime.

Ultimately, though, economic logic has always won the day.

Technical factors suggest there would be significant upheaval after any shift from the dollar. The main benchmark oil contracts — light sweet crude traded on the New York Mercantile Exchange and the Brent contract traded at ICE Futures Europe in London — are quoted in dollars, as are the other important commodities contracts globally like gold, copper and wheat. When the Dubai Mercantile Exchange introduced its DME Oman Crude Oil Futures Contract in 2007, the price was — naturally — in dollars per barrel.

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Green Blog: Tracking the Global Food Situation

A worker loading rice onto a ship in Jakarta, Indonesia, where food prices have soared recently.ReutersA worker loading rice this week onto a ship in Jakarta, Indonesia, where food prices have soared recently. Globally, prices of staple grains rose 2.2 percent in August.Green: Politics

The latest numbers suggest that the situation with the global food supply continues to be deeply worrisome.

In its monthly report on food prices, the Food and Agriculture Organization of the United Nations reported that August prices were virtually flat, down just a fraction of a percent from July. The index is now down 7 percent from its record high in February —but still 26 percent above the level of August 2010.

That overall number obscures changes within the components of the index. For instance, while commodities like oils and dairy products are falling, prices rose 2.2 percent in August for staple grains, which supply the bulk of human calories and on which many of the world’s poor depend. Those prices are now 36 percent above the levels of a year ago.

The report showed that producers are responding to high prices by trying to raise output but are having a hard time catching up with rising demand. As readers of our article from earlier this year will not be surprised to learn, one of the reasons is erratic weather in many countries, including this summer’s floods and heat waves in the United States.

The F.A.O. warned last month that this year’s cereal production might not “be sufficient to result in any recovery in the level of global cereal stocks,” which are at low levels.

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DealBook: Barclays Reports Profit Plunge

Barclays, one of the largest banks in Britain, said Tuesday that profit fell 38 percent in the first half because of costs for compensating customers for mistakes in selling some insurance and as earnings at its investment bank declined.

Net income fell to £1.5 billion, or $2.45 billion, in the first six months of this year from £2.4 billion in the same period last year, the company said. That was better than the £1.3 billion median profit estimate by analysts polled by Bloomberg News.

“It’s been a very difficult operating environment,” said the chief executive, Robert E. Diamond Jr. “I am pleased with the progress made across Barclays.”

Like many of its rivals, Barclays is reviewing its business to reduce costs. It was in the process of cutting about 3,000 jobs this year, Mr. Diamond said. Barclays cut 1,400 positions in the first half and Mr. Diamond said he “would expect the trend of the first half to continue and likely increase somewhat.”

Barclays said it set aside £1.8 billion for bad loans and other credit risks in the first half, a drop of 41 percent from a year earlier. Return on equity, a measure of profitability, improved to 9.1 percent from 6.9 percent. Barclays had set itself a target to reach a return on equity of 13 percent by 2013.

Barclays Capital, the securities unit, reported 9.3 percent lower pretax profit in the first half of £2.4 billion, after demand for its credit, currency and commodities services and products declined.

Pretax profit at its retail banking operation fell to £446 million in the first half from £1.2 billion after its operations on the European continent, especially in Spain, widened its pretax loss amid a deteriorating economic environment. It also set aside £1 billion to compensate customers it mistakenly sold some payment insurance to, it said.

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Bucks: Gold Is Not an Investment

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site,

Gold is not an investment. It’s a speculation.

Investments are made by evaluating underlying value. Speculative bets are made by looking at the price of something and simply hoping the price goes up. Investing is about value; gambling is about price.

Gold has no real underlying value. I know there is a market for it. I know it is real, just like real estate was real in 2007.

But what is the value of a bar of gold?

It has no value except the one assigned by a herd of speculators. This is true for most commodities. They don’t actually produce anything. They are raw material. No value. No dividend. No cash flow.

Investing in gold is a very dangerous game right now. Whenever the price of something rises as much, and as quickly, as gold has, we need to stop and consider the end game. While in Florida last week, I was surprised to see guys standing on the street waving “We Buy Gold” signs. They looked exactly like the guys I used to see all over Las Vegas with the signs announcing open houses and touting real estate as a sure bet.

Remember when your brother-in-law told you that you had to invest in real estate because they weren’t making any more of it? Or the common justification people used — that at least with real estate you could see, touch and feel it? It was real! And how did that work out?

Now I hear people using the same argument for gold. It’s real. Tangible. And you can enjoy it because it’s pretty. But what does that have to do with investing?

Keep in mind that there are huge institutional players in the gold market right now. When they decide that the run is over, there won’t be time for you to run to your safe in the basement, pack up all your coins and gold bars, run to the local pawn shop and get rid of the stuff.

I have no idea where the price of gold is going, but for me it doesn’t matter. But if George Soros is selling while your grandmother is buying, you have to wonder who’s more likely to get hurt. The point here is that it (literally) pays to consider that the time to bet on gold was 2007. At this point if you are counting on the gold under your bed to fund your retirement, things could get very ugly.

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Fundamentally: That Offshore View Is Looking Foggier

IN January, conventional wisdom said that three long-term trends were likely to persist in 2011: the dollar would continue to fall, commodities would keep roaring and foreign stocks would outpace domestic ones.

Two of these predictions have gone awry since early May, as the dollar has surged 5 percent against the euro while commodity prices have sunk by more than 19 percent. These developments may also lessen the appeal of foreign stocks, some market strategists say, worsening the odds for the third prediction, too.

So far this year, shares of companies in developed markets overseas have risen 3 percent, less than half the gain of the Standard Poor’s 500 index.

Emerging markets, meanwhile, have had a worse start to the year. Shares of companies in fast-growing economies like India and Brazil have lost value while returns for Chinese stocks have been relatively flat.

Chalk it up to a couple of factors, strategists say. First, China has been stepping on the fiscal brakes, aiming to prevent asset bubbles in its red-hot economy. And central banks throughout the emerging markets — including India and Brazil — have begun to raise interest rates in an effort to slow inflation.

These moves help to account for the recent pullback in commodity prices. Crude oil, for example, is down 13 percent from its peak three weeks ago.

But while lower commodity prices may reduce some inflationary pressure in an economy, they often lead to selling in commodity-related sectors of the market, said Alec Young, international equity strategist at S. P.

International stocks generally have higher correlations with commodities markets than do domestic equities. While energy and materials companies make up less than 16 percent of the S. P. 500 index of domestic stocks, those two categories account for 27 percent of emerging-market stocks.

“For a long time, that was a good thing for the emerging markets,” Mr. Young added. “But right now commodities seem increasingly volatile,” and that could create a headwind for those markets’ shares.

Mark D. Luschini, chief investment strategist at Janney Montgomery Scott, said companies in commodity-producing countries like Russia and Brazil could struggle, not just because of uncertainty in raw material prices, but also because so much of their growth is tied to serving China’s needs. “If China has a hiccup” stemming from its efforts to slow the economy, he said, “it’s going to cause a blowback to all those emerging-market countries.”

Not everyone thinks these stocks are at such risk. James W. Paulsen, chief investment strategist at Wells Capital Management, says the emerging markets have underperformed domestic shares since last fall, when central banks in developing nations began to tighten monetary policies by lifting interest rates.

“But I think they’re just about done doing that,” he said. And many other risks in emerging markets, he added, have already been priced into the market.

On the other hand, Mr. Paulsen said he expected the dollar to at least stabilize as investors realized that the United States economy was likely to accelerate while economies of other large industrialized nations would probably keep slowing.

Europe, with its debt-related problems, is growing at roughly half the pace of the United States while Japan’s economy has been disrupted by the recent earthquake and tsunami. If the dollar strengthens, Mr. Paulsen said, American investors will lose an advantage they have enjoyed in foreign stocks: price appreciation based on a weakening dollar.

ALL of this could make investing in Europe and Japan less appealing. And more uncertainty could also refocus investor attention on valuation, another fundamental factor.

While there is a growing sense that stocks in general are becoming expensive, strategists agree that one market area is still relatively cheap: large, blue-chip companies with little debt and with stable, though unspectacular, earnings growth. This group of so-called high-quality companies would include names like Microsoft and Coca-Cola.

What’s more, the bigger these high-quality stocks are, the cheaper they seem to be, said Ben Inker, head of asset allocation at the asset manager GMO.

Yet for reasons Mr. Inker said he didn’t quite understand, “the domestic market has far more than its share of these types of stocks than foreign markets do.”

That’s just one more reason that foreign investing could be a whole lot harder this year.

Paul J. Lim is a senior editor at Money magazine. E-mail:

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DealBook: Barrick Gold to Buy Equinox Minerals for $7.8 Billion

As prices for commodities keep climbing, the Barrick Gold Corporation said on Monday that it had agreed to acquire Equinox Minerals for 7.3 billion Canadian dollars, or $7.8 billion.

The all-cash offer values Equinox Minerals, which is listed in Toronto and Sydney, at 8.15 Canadian dollars a share, 30 percent above the price it shares were trading at on Feb. 25, the last trading day before the company announced an unsolicited bid for the Lundin Mining Corporation. The Equinox board has unanimously approved the Barrick Gold deal and withdrawn its offer for Lundin.

“The acquisition of Equinox would add a high-quality, long-life asset to our portfolio, and is consistent with our strategy of increasing gold and copper reserves through exploration and acquisitions,” Aaron Regent, chief executive of Barrick Gold, said in a statement.

The Barrick bid is also at a 16 percent premium to a $6.2 billion proposal by the Chinese miner Minmetals earlier this month, which Equinox said was a “lowball price.” Though Minmetals announced its plans for an unsolicited offer — rare for Chinese companies — no formal bid was made, and it is unknown whether it will engage in a bidding war. A spokesperson for Minmetals was not immediately available for comment.

Craig Williams, head of Equinox, said in a statement that the Barrick offer was “superior to the public proposal made by Minmetals in terms of certainty and value.”

The deal comes amid a boom in commodities. Gold recently reached a new high of $1,518 an ounce, with other metals appreciating, too.

The environment has encouraged dealmakers. The materials sector, which includes mining, saw $133 billion worth of mergers and acquisitions worldwide so far this year, more than double the amount of $57.5 billion for the same period in 2010, according to Thomson Reuters data.

With the acquisition of Equinox, Barrick will build out its presence in copper, adding to its interests in Chile. Equinox is one of the top 20 copper miners in the world. At full capacity, its Lumwana project near the Zambian copperbelt is expected to account for 20 percent of the country’s production of the metal.

Barrick Gold, which is set to report first-quarter results on Wednesday, saw earnings rise 57 percent in the fourth quarter, compared with the period a year earlier. In the last year, its share price has jumped 33 percent.

The company will finance the acquisition with a bridge loan and credit facility worth $5 billion from Royal Bank of Canada and Morgan Stanley. The financing will supplement the company’s existing $1.5 billion loan facility and its $4 billion in cash reserves.

The tender offer, which will start Tuesday and run for at least 35 days, and is conditional on Barrick obtaining two-thirds of all outstanding Equinox shares, including the 2 percent Barrick already owns.

Morgan Stanley and Royal Bank of Canada advised Barrick, while Ogilvy Renault, Sullivan Cromwell and Clayton Utz served as legal advisers. Equinox Minerals employed CIBC World Markets, Goldman Sachs and TD Securities as advisers and Hoskin Harcourt as legal counsel.

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