Low Inflation Over for U.S.?

(Headlines - scroll down for full stories)
1. Low Inflation Over for U.S.?
2. Fed's Inflation Measures Misleading
3. Chad Expels Chevron, Petronas
4. Poll: Investor Optimism Way Down
5. Google, eBay Form Advertising Alliance

1. Low Inflation Over for U.S.?

The United States has been enjoying low inflation and low interest rates thanks to cheap imports from foreign countries like China. But is all that about to end?

The New York Times reports that economists are making the case to the Federal Reserve that these good times won't last forever. Economists say that rising commodities costs, such as oil, copper, and other raw materials, are pushing up prices in foreign countries, which will then export inflation to the U.S.

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"For one thing, they said, China's explosive rise as a low-cost manufacturer does not mean that prices will fall year after year. Indeed, China's voracious appetite for oil and raw materials has aggravated inflation by driving up global prices for oil and many commodities," notes the Times.

"Beyond that, new research presented this weekend suggested that the United States could not count on a continuation of cheap money from poor countries. Those flows could stop as soon as countries find ways to spend their excess savings at home," adds the Times.

Economists argue that once the banking systems of foreign countries become more developed, foreigners will likely keep their money at home rather than invest it in U.S. Treasuries, as they are now.

"Even though capital is flowing uphill to rich countries like the United States right now," Raghuram G. Rajan, the International Monetary Fund's current head of research tells the Times, "it doesn't mean these flows are optimal, safe or permanent."

And that would be very bad news for the more than $700 billion a year trade deficit that the U.S. rings up with its trading partners. Currently, their reciprocal investments in the U.S. somewhat balance out the trade deficit.

Martin S. Feldstein, economics professor at Harvard and president of the National Bureau of Economic Research, asks the Times: "What happens if foreign investors decide they don't want to accumulate American assets any more?"

"Something has to change to make the debt more attractive - an increase in interest rates in the U.S. or a decline in the exchange rate of the dollar,'' he continued. "In the short term, the Fed will face slowing output growth, possibly with higher inflation."

In other words, if this scenario plays out, look for your borrowing costs to rise and your cash to buy less.

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2. Fed's Inflation Measures Misleading

At a globalization symposium sponsored by the Kansas City Federal Reserve this past weekend, the Bank of England's chief economist told an assembly of central bankers that the current method of calculating inflation in the United States is misleading, as it does not account for energy prices.

"It should focus instead on headline inflation, which is much higher, he argued. Including energy and food costs, U.S. consumer price inflation is running at an annual rate of 4.1 percent, against 2.7 percent for core inflation," according to the Financial Times.

In addition, Bean cited record oil prices that could potentially end the flow of cheap imports from Asia, making it very difficult to keep a rein on inflation. He said that while globalization has facilitated greater competition, it has also created a "favorable tailwind to central banks' attempts to hold inflation down," the UK's Independent reports.

Bean warned that this pattern could change at any moment - and he said a reversal might already be taking place, insisting that "there is no never-ending banquet under the sun."

"He pointed to the near-tripling of oil prices over the last couple of years, and the rise in commodity prices more generally, as global demand has rocketed, especially from China's rapidly growing economy. He called the rise in oil prices the ‘flip-side' of globalization," according to the Independent.

Bean said that the rise of energy prices and the fall in the price of manufactured goods were attributable to the same thing: the increased dominance of China and other emerging markets.

"Since both price trends had a common cause, [Bean] said it makes little sense to focus ‘on measures of core inflation that strip out energy prices while not stripping out falling goods prices as well,' " the FT reports.

The U.S. Federal Reserve generally uses the core inflation measure - which excludes food and energy prices - to generate its forecast. The assertion is that food and energy costs are volatile and would skew inflation measurements.

According to the FT, the U.S. Fed has not regarded rising oil prices as a direct contributor to inflationary pressure. Instead, "it focuses on trying to prevent the ‘pass through' of higher energy costs to consumers in the form of higher prices for other goods and services.

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3. Chad Expels Chevron, Petronas

African nation Chad on Saturday reportedly ordered oil companies ChevronTexaco and Petronas to cease operations and leave the country because they have failed to pay taxes. The two companies, though, say that they have not received an official request from the government.

Chevron and Petronas are two of the three members of a consortium to pump oil in Chad. Chevron and Petronas hold 25 percent and 35 percent of the consortium.

ExxonMobil, which owns the other 40 percent, is the only member that wasn't expelled by Chad. The consortium struck oil in 2003, and pumps 160,000 to 170,000 barrels of oil a day.

Reports speculate that Chad - ranked as the most corrupt state last year by a Transparency International survey - is jockeying for a greater piece of the oil pie in Chad, however Chad officials deny this.

Chad's president Idriss Deby has said, though, that the consortium accord is a "fool's agreement" and Chad only gets "crumbs," according to Reuters. This past Wednesday, Deby told his government to renegotiate the contract, which was originally signed in 1988.

Also, a source from Chad's oil minister tells XFN-Asia News that Chad wants its state-run Chad Hydrocarbons Company to join the consortium.

RTTNews notes that Chad's ouster of Chevron and Petronas "comes on the heels of Chad's shift of diplomatic relations from Taiwan to China, a major oil investor in neighboring Sudan. Chadian officials have said they would welcome Chinese investment in the oil sector."

The dispute stems from a 2000 accord that gave Chevron and Petronas tax benefits. Chevron and Petronas argue that they're entitled to annual tax deductions based on an estimated depreciation of oil assets, says Reuters. But Chad disagrees with their "erroneous interpretation of the aforementioned agreement."

As a result, Chad is ordering the companies to pay back taxes in the amount of 250 billion CFA francs or $486.2 million.

Chad's minister for state ethics and control told Reuters, "The solution is to pay their tax. We want them to pay the tax. There's no other solution.

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4. Poll: Investor Optimism Way Down

The slumping real estate market has investor sentiment down to a new low for the year, according to the UBS/Gallup Index of Investor Optimism released today.

The index fell to 53 in August, a drop from 55 in July. But more ominously, the index is down a whopping 40 points since the start of this year, according to Reuters.

"The number of new home sales fell in July and is now down 22% from the same time a year ago, according to the most recent Commerce Department report," says Gallup News Service.

Meanwhile, the supply of unsold homes soared to its highest level since November 1995, while the median home price dropped significantly and July sales of previously owned homes sank to their lowest level in almost three years, according to Gallup.

The UBS/Gallup index surveys close to 800 households around the U.S. - but only those with investments of $10,000 or more. Nearly 40% of American households maintain at least this amount in savings and investments, says Reuters.

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5. Google, eBay Form Advertising Alliance

In a deal between two of the Internet's most prominent properties, Google Inc. will begin selling advertising on Web auction leader eBay and help buyers quickly ring an online merchant to do business.

The arrangement announced Monday promises to introduce "click-to-call" Web site technology to a broader audience and potentially speed its adoption as a means to more quickly connect online consumers with advertisers. It allows potential buyers to call up sellers by clicking a link in a Web page.

"We have a chance to create a whole new way for buyers and sellers to connect online and to create what we hope will be a significant revenue stream for both eBay and Google," eBay Chief Executive Meg Whitman said in an interview Sunday night.

Last year, eBay Inc. bought the Internet phone service Skype. Google has its own messaging and voice telephone service, Google Talk. Both services will be used in the partnership, though details were not disclosed.

Google CEO Eric Schmidt said the agreement with eBay is "likely to go on for many years," but he would not disclose the terms of the deal or what it might mean for the Mountain View-based search engine's bottom line. Whitman said eBay does not expect the partnership to affect its financial performance either this year or next.

Under the partnership, Google would become the exclusive provider of text advertising on eBay outside the United States. In May, eBay announced a deal with the No. 2 Internet search engine, Yahoo Inc., to serve all its domestic advertising.

The second component of the alliance calls for the two Silicon Valley companies to work together on developing a service that lets Web surfers place telephone calls through their computers or handheld devices when they click on a link in an Internet ad.

Schmidt and Whitman said they would begin testing some of their joint services early next year.

Whitman said eBay decided to give Google's advertisers access to its international auction sites after choosing Yahoo for its domestic advertising because of the competing Internet search engines' respective strengths and how they mesh with eBay's assets.

San Jose-based Ebay also owns PayPal, the online payment service, and when the company joined advertising forces with Yahoo, PayPal became the preferred payment provider for purchases made on Yahoo.

Similarly, eBay plans to rely on Google's international presence to build a worldwide market for Skype, the Luxemborg-based Internet phone provider the company acquired last year.

The companies said they would use Skype and Google Talk, the search engine's instant messaging and voice-over-Internet telephone service, to build a search function that lets Web surfers launch Internet phone calls to eBay merchants or Google advertisers by clicking on ads.

Promoting "click-to-call" advertising was also part of the deal eBay announced with Yahoo in May.

Although eBay already was one of Google's biggest advertisers, the search engine launched a rival online payment service to Paypal in June. Schmidt said the overlapping services and partnerships are all part of Silicon Valley's effort to respond to tech-savvy shoppers who want service in a hurry.

"This is all about speed," he said. "The moment somebody wants to buy something, we want that advertiser to be able to sell it, hawk it or do whatever they want with it."

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Editor's Notes:

Don't get stuck holding the bag when traders realize these economists are right. Find out how you can protect yourself and profit before it's too late. Go here now.
Find out why the Fed loves inflation and how you can profit. Go here now.
Hedge Fund Investing's energy recommendations have pocketed gains of up to 198%. Discover how you can rake in profits like this without investing in a single stock! Go here now.
Housing prices nationwide could fall by as much as 40% over the next few years. Here are the five easy ways to protect yourself and profit from the coming real estate crisis. Go here now.
We're on a winning streak! The first three trades recommended by Intelligent Options are up between 21% and 80%. How's that for a kick-off?! Go here now.
Is your body a filter for toxins? According to one environmental study group, U.S. Drinking water contains more than 2,100 toxic chemicals that can cause cancer, yet the EPA has established enforceable safety standards for only 87. Protect your health now.