Dear rss free blog,
Reader
Tom McC objected to Frida Ghitis’s Jewish New Year article on
Israel’s currency. He wrote: “High prices for ‘stuff’ is a sign of a
low value for the currency. A highly valued currency would bring low
prices for things.”
Frida
claimed she just meant that her fistful of US dollars and credit
cards was not going very far in the Holy Land. But I think both of
them are missing the contradictory forces at work when the Israeli
Central Bank decided to raise rates.
With
the open global Israeli economy one of the few looking good these
days, the CB has to keep buying dollars to prevent the shekel from
appreciating. The higher shekel results from the CB’s earlier move pushing interest rates to fight inflation.
Israel
needs to keep down the shekel to export and lure in tourists like
Frida, because a lot of the economy depends on tourist and pilgrim
receipts.
Moreover,
Israel is a tiny country which imports everything from oil to palm
oil to suntan oil. It is not the land of milk and honey any more.
They still raise honey but import milk, along with tea and coffee to
pour it into plus meat, leather, paper. All this stuff costs more
when the shekel is kept down. Hence the rate increase perversely
triggers more inflation because of the dollars coming in for yield.
Some
of this comes from a speculative carry trade into shekels with
borrowed money. You can borrow US$ at 0.25% for placement in Israel.
The CB has to sterilize these inflows to stop the shekel
appreciating.
The
Bank of Israel is caught between two needs, to raise interest rates
to keep inflation within the target range, and to stop speculators
pushing up the shekel. Apparently another country in the same boat is
Czech Republic, which I am planning to visit in Nov. I am going to
Prague.
You
can also run into the reverse contradiction in CB policy. Here is an
article from Bloomberg
today based on an interview with a South Africa monetary specialist:
“The
rand may do the ‘bizarre’ and gain if South Africa unexpectedly
reduces its benchmark interest rate tomorrow as lower borrowing costs
boost the economy, according to Brait
SA,
the nation’s largest buyout company,.
“The
rand may extend its 25% advance this year, climbing toward a fair
value level of 7.16 per dollar should the central bank reduce its 7
percent main rate, said Colen Garrow, Brait’s Johannesburg-based
economist. ‘It’s quite bizarre but the rand could actually
strengthen if they cut rates,’ Garrow said in an interview. “’Investors are hungry for growth and a rate cut would hasten
South Africa’s recovery from recession.’”
I
am still trying to catch up for having taken the weekend off for the
Jewish New Year. Several readers have gently inquired why we are
being so Jewish this year. There are a couple of reasons.
Firstly,
about a year after the world as we know it came to an end with the
collapse of Lehman Brothers and the TARP, the Jewish New Year is as
good a time to look for a new direction as any. Moreover, I did
predict that the market would do well in Sept. which is a
traditionally down month. I pooh-poohed advise to sell at Rosh
Hashanah and buy on Yom Kippur weeks ago. So it seemed only right to
follow up.
Another
reason is that when I started Global Investing over 20 years ago, my
then-partner, Bill Bonner of Agora Publishing, an Episcopalian, told
me that of course he wanted me to cover Israeli stocks. He also urged
me to tell my readers about my religious affiliation so that it could
not be “revealed” to discredit my advise.
We
currently recommend three Israeli stocks, large, medium, and
miniscule. The Israeli economy is an out-performer but its companies
are not a slam dunk given the currency and inflation risks. That is
why you need not just our macro-economic service, which is free, but
also our stock advise which you have to subscribe for.
Today’s
blog is late because of the buildup of business over the holiday
weekend and because I have a nasty cold. In the diaspora, where I
live, you celebrate the Jewish New Year for two days because of
(historic) uncertainty about exactly when the New Moon appeared over
the Land of Israel. It is of a piece with the battles over the date
of Easter; and different days for Ramadan which sometimes arise
between Sunni and Shia Moslems.
In
responses to a Canada reader, I looked into the origin of the name of
Ramada Inns. It has nothing to do with Islam. In Arizona, where the
first Inn was set up, a “ramada” is Spanish for a temporary
shelter during the harvest. In Hebrew, a sukkah; in French an abri;
in Aloxe-Corton (where I have helped harvest Corton Charlemagne) an isba.
