Fighting inflation with inflation; GE's Mubadala masterstroke

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The best cure for inflation is inflation. If oil's rout proves to be enduring, it will be because the US housing meltdown finally proved more powerful than the emerging-market driven oil boom. The proponents of decoupling are now very quiet, and the drumbeat for Asia and Gulf policymakers to lift interest rates and revalue their currencies has died down.

Instead, the New York consensus is quietly reasserting itself, that is, the philosophy that the world really still does depend - "now, more than ever" to abuse that post 9-11 cliché - on the US economy and specifically the US consumer. This really does drive home the point that in a world of increasing affluence, everyone becomes relatively poorer. The rebalancing of wealth toward the emerging markets is impressive, but the breakdown of the two-stroke, dollar-fueled, exports-for-investment engine that drove the global economy for so long is going to be painful. Economists say Asia is likely to avoid a recession, but it may still feel like one.

The markets now seem to buy this argument, which for strange reasons translates this week into a return to risk. The dollar is staging a fairly dramatic rally (which is probably part of why oil prices are falling) despite growing doubts about the US economy and the prospect of stagflation. The Fed's latest beige book report highlights growing price pressures and slowing growth, with slower consumer spending demonstrating what economists say is the failure of the Bush stimulus payouts to do more than provide a hiccup of relief. The good news is that the US Congress is on the verge of passing legislation to help support the housing market.

This week's rally in emerging markets continues. The only big surprise is that oil has continued downward so fast. I suspect, however, that the longer-term trends driving oil's rise still hold true and that oil prices will soon find their footing.

Analysts are starting to look at GE's deal with Mubadala and like what they see. Mubadala's announcement that plans to start accumulating a significant stake in GE has created a hedge on GE stock, a "Mubadala put" if you will. By saying it would buy a stake in the open market but not saying when, Mubadala has implied it will become an opportunistic buyer of GE shares, buying whenever it thinks the stock is cheap. By setting up a new commercial finance venture with Mubadala in Abu Dhabi, GE creates a way not only to take advantage of Mubadala's ability to cut through UAE red tape, tap UAE petrodollars and muscle in on local deals. Perhaps more significantly, however, it can now expand its business by raising funds using Mubadala's credit rating, which is likely to be quasi-sovereign. That will lower GE's funding costs for new expansion, particularly given the parlous state of its own balance sheet. And, of course, setting up in the UAE means no income taxes for the new venture or its employees (except, of course, those who are American citizens).