Tonight:
4°c
The publication of the Barclays Capital Equity Gilt Study is a highlight of the year, and never more so than now with the 2008 version. Happily, it barely mentions either equities or gilts, both of which can be a bit dull, but instead plunges into an analysis of the supply and demand for commodities and the implications for the world in which we live.
Its analysis is not for the faint-hearted. We all know that commodities prices have soared in line with economic growth, and in particular the additional demand from China and India. BarCap's first point is that this surge in demand coincides with a progressive tightening of supply, because the easily exploitable ore deposits are running out and the new ones deliver nothing like the same yield.
In the past, demand for commodities, and their price, fell away as world economic growth cooled. Not any more. BarCap says global growth would have to fall to zero to take the heat out of the current commodity boom.
Next it underlines the sheer scale of what is happening, and this is frightening. China has been responsible for 50% of the growth in total energy demand every year since 2001, but in this and all other commodities it is only warming up (as indeed is the whole world - but that's another story).
China's consumption per head is massively below the averages for the developed Asian nations such as Korea and Taiwan, let alone those of the West. It can be expected rapidly to increase to the levels of the more developed economies. The global system is already struggling to accommodate demand, but quite clearly we ain't seen nothing yet.
Assume, for example, that Chinese and Indian consumption of oil rises over the next 25 years to current US levels, while the rest of the world takes no more oil at all. China and India alone would then consume 160 million barrels a day, against a total current global demand of 85 million barrels.
Global demand at that point, including the rest of the world, would be three times today's level, at 240 million barrels a day. If that amount could actually be produced - a big if - it would exhaust all current proven oil reserves in 15 years, and all the other weird stuff like Canadian tar sands in 26 years.
If production cannot be stepped up to meet demand, by implication the price goes through the roof. Asians save, so they are much more likely than we are to be able to pay these high prices. For those of you worried about global warming, CO2 emissions would triple, global temperatures would rise by five degrees and you would be hard-pressed to get flood insurance unless you lived on top of Ben Nevis.
BarCap focuses on the short-term implications of this fundamental shift. It notes that the commodities boom has fed through to inflation generally, and this puts a constraint on central banks. For the past 15 years, they have been able to respond to the threat of economic downturn by cutting interest rates to get things moving, because they did not have to worry about the inflationary implications.
That option no longer exists. They have much more limited room for manoeuvre. Their ability to control the economy is much reduced, which means it is all going to get much more volatile and cyclical. Welcome back to the world of boom and bust.
BarCap's analysis confines itself to the economics, but it is worth pausing to consider the geopolitical implications of all this. There is a view that the current economic turmoil is in fact only a symptom of a much more fundamental trend - which is the decline of America as the world's premier economic power and the transfer of that mantle to Asia.
According to this argument, the US has been living on credit for 10 years, has paid itself too much and seems unable politically to endure the pain, and drop in living standards, needed to regain its global competitiveness. If that is true now, the shift in commodity prices can only make it very much worse, because it depends on the rest of the world for most of its supplies.
The shock will come when it discovers that scarce resources go to the highest bidder, and that the raw efficiency and high savings ratios of the Asian nations mean they will be that highest bidder. We in Europe, and the US, could be priced out of the market.
The "interesting" thing is how the Americans will react to this. The lessons of history are not encouraging, because military power lasts longer than economic power.
This allows countries to go into denial about their loss of economic power, and to use their military might to shore up their position - basically by throwing their weight about. America accounts for well over half of all the world's military spending, so it has the weight.
After all that doom and gloom, at least BarCap has put the debate on non-doms into perspective. THERE is a lot of talk about the need for fund management groups to use their votes to hold to account the managements of businesses in which they invest. Only rarely does one see the sheer scale of the effort required to do the job properly.
Foreign & Colonial is one that does try. With just over £100 billion under management, it is one of Europe's leading investment groups, with shareholdings in most of the world's major markets. Since 2000, it has had a policy of voting on all its holdings. This means that last year it dealt with 34,889 proposals at 3279 companies in 52 countries.
An optimist reading its just-published 48-page report, which distils the key trends from all these resolutions, might see signs of progress across the world, though it is agonisingly slow, with socalled developed markets such as the US among the worst offenders.
Indeed, there is an irony in the vociferous American complaints about the potential power of sovereign wealth fund investors because, as F&C points out, US managements still routinely ignore their shareholders on everything from pay to the appointment of directors. Why they might behave any differently if the shareholder is a sovereign wealth fund is a mystery.
