The Great Debate UK

from The Great Debate:

Buffett uses BNSF to bet on coal

John Kemp(John Kemp is a Reuters columnist. The views expressed are his own)

Warren Buffett's acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe (BNSF) railroad his Berkshire Hathaway does not already own looks like a strategic bet that America's future energy needs will be met, in large part, through a massive expansion in coal-fired power generation coupled with carbon capture and storage (CCS).

Coal is the most important item moved on BNSF's railroads. It accounted for almost half the tonnage moved by BNSF in the first nine months of the 2009 (214 billion revenue ton miles out of a total of 444 billion) and a quarter of the company's revenues ($2.7 billion out of a total of $10.4 billion).

BNSF's track and rights of way are perfectly positioned to benefit from a massive expansion of the country's coal-fired output in the next 20 years, coupled with CCS technology to curb the carbon-dioxide emissions.

BNSF controls the crucial rails linking the massive domestic reserves of the Powder River Basin, the Northern Great Plains, the Western Interior Basin and the Illinois Basin east to the main industrial centres of the Midwest and west to the major electricity demand centres in southern California.

from The Great Debate:

Reflections on Iran

John Kemp-- John Kemp is a Reuters columnist. The opinions expressed are his own --

Perhaps the most frustrating aspect of much western comment on the unfolding crisis in Iran has been its over-simplification and lack of historical awareness. Perspectives are shaped by a single issue (western concerns about whether Iran is pursuing a nuclear weapons program) and the desire to draw a simple Manichean distinction between good guys (liberal-democrats) and bad ones (clerical-authoritarians).

The reality is far more complicated.

Part of the problem is a truncated sense of history. For most western commentators, the history of Iran's troubled relations with the west starts in 1979 with the triumphant return of the glowering Ayatollah Ruhollah Khomeini at the head of the revolution which swept away Shah Reza Pahlavi's western-backed regime and replaced it with a new Islamic Republic.

from The Great Debate:

Inventory-driven U.S. recovery may be delayed

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

Steady improvement in manufacturing surveys, payroll data and freight movements all indicate the U.S. economy is approaching the low point in the business cycle and should hit the bottom within the next one to four months. But that does not necessarily imply a strong and sustained expansion is about to get underway.

It is possible to be optimistic that the worst of the downturn is now over (or nearly so), while remaining cautious about prospects for strong and sustained recovery once the cyclical turning point is passed.

from The Great Debate:

Doing the contango

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

The current contango structure in crude oil futures and most other commodity markets -- with future prices significantly above the spot market -- is providing a strong incentive to buy and store record quantities of raw materials, with most of the cost borne by retail investors in exchange-traded funds and institutional investors in long-only commodity indices.

This "cash-and-carry" strategy rewards market participants with access to storage or finance at the lowest cost. It is providing huge profits for physical commodity merchants, investment banks, and the owners and operators of warehouses and tank farms during the downturn, and helps explain the record profitability from commodity operations reported recently by some of the largest banking and trading groups.

from The Great Debate:

Renewables roll-out needs price guarantees

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

Power generation from renewable sources such as wind turbines, solar cells and biomass plays a small but important part in satisfying total electricity demand around the world, and is growing at an exponential rate thanks to generous public subsidies and government support.

Renewable sources have increased their share of worldwide generation from just 0.4 percent in 1980 and 1.1 percent to 2.3 percent in 2006. In its "World Energy Outlook 2008", The International Energy Agency (IEA) projects their share will double to 4.9 percent by 2015, and then almost double again to 8.7 percent by 2030. Click here for PDF.

Bank of England faces dilemma on QE extension

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johnkemp– John Kemp is a Reuters columnist. The views expressed are his own –

LONDON, April 9 (Reuters) – The Bank of England’s terse press statement announcing it will maintain overnight rates at 0.5 percent and continue the existing 75 billion pound quantitative easing (QE) programme gives no clue about whether the Bank intends to extend the programme when the first tranche of asset purchases are completed in June.
But officials will have to make a decision soon: unless they signal a commitment to extend QE, gilt yields will rise even further in anticipation that the major buyer in the market will withdraw.
The QE programme is dogged by ambiguity about its objectives (which a cynical observer might conclude is deliberate).
Officially, the aim is to prevent inflation falling below target by accelerating money supply growth, not manipulate the yield curve for government and corporate debt.
In this, the Bank’s avowed strategy is more conventional than the Fed’s ambitious efforts to determine the cost of credit for borrowers throughout the economy. It is a straightforward quantitative easing patterned on the Bank of Japan, rather than a credit easing patterned on the Fed.
If true, the measure of success is how much the money supply has been boosted at the end of the three month period; the Bank should be indifferent about whether ending QE causes yields and borrowing costs to rise.
So long as money supply has risen consistent with the inflation target, and the Bank can discern some green shoots of stabilisation if not recovery, officials can declare victory, end the programme, and keep the other 75 billion pounds of asset purchases authorised by the chancellor in reserve. Yields can be left to find their natural level.
But many suspect the Bank’s real objective is yield control — in which case it will have to announce another round of buy backs of gilts and corporate bonds in good time, well before the current programme is completed, to shape market expectations.
The results of the existing round have been unimpressive.
After falling initially, gilt yields are almost back up to the level they were at before the Bank’s foray into unconventional monetary policy.
The snag is that if the Bank stops buying, other investors will struggle to absorb all the new government paper on offer without a major increase in yield — pushing up borrowing costs for everyone, precisely what the Bank has sought to avoid.
The Bank’s dilemma is whether to push on (heightening fears about inflation) or call a halt (risking a spike in yields all the same).
Either way, the Bank needs to give the market, as well as the Treasury and the Debt Management Office, plenty of warning about its intentions.
(Editing by Richard Hubbard)

from The Great Debate:

Fed sets out exit strategy

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

Intense criticism of the Fed's role in the financial rescue program and the decision to triple its balance sheet, including monetizing a portion of the Treasury's debt, has forced the central bank to issue an unusual defense of its actions (http://www.federalreserve.gov/newsevents/press/monetary/20090323b.htm).

It attempts to placate critics by acknowledging the real risk of inflation, and marks the Fed's first attempt to set out an "exit strategy" for ending quantitative easing and other credit programs once the crisis is safely passed.

from The Great Debate:

U.S. government borrowing runs into resistance

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

Investors have started to balk at absorbing large quantities of U.S. government debt, taking on substantial inflation and devaluation risk in return for little reward. While the government has no trouble placing short-term debt with a maturity of up to 2 years, longer-dated securities are proving much harder to sell.

Increasing resistance from the market explains why the Federal Reserve felt it had no choice but to announce it would start buying back longer-term U.S. Treasury securities last week, in a $300 billion program of direct quantitative easing and monetization.

from The Great Debate:

Time to rethink inflation targeting

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

It is time to add another victim to the ever-growing list of institutions (Bear Stearns, Lehman Brothers) and theories (value at risk, fair value accounting and originate to distribute) which have been tested by the financial crisis and found wanting. The central bank practice of inflation targeting -- the jewel in the crown of modern monetary economics -- has palpably failed.

Over the last two decades, inflation targeting has emerged as the most popular strategy for monetary policy among the world's major central banks, and become something of a state-of-the-art choice among theorists and central bankers.

from The Great Debate:

The equity illusion

John Kemp Great Debate-- John Kemp is a Reuters columnist. The views expressed are his own --

Even after its recent decline, the U.S. equity market does not look especially "cheap" or "undervalued" when viewed over time; the bear market has simply brought valuations back into line with long-term trends.

At a fundamental level, equity is a claim on a corporation's residual cash flow after wages, interest, taxes and other costs have been paid.

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