Friday, June 12, 2009

A Slowdown of the Slowdown?

from Reuters:

LONDON (Reuters) - The commodity market rally is being seen as a sign of imminent economic recovery, but that could be an extrapolation too far as higher prices may be more to do with fund allocations and anticipation of revival.

The meltdown in the banking sector and economic recession triggered a sell-off of stocks and industrial commodities such as oil and copper and investors have opted for safer assets such as cash and gold.

Institutional investors normally have benchmark or neutral allocations to equities, bonds, alternatives such as commodities and hedge funds and cash. Most have been overweight cash and are now moving their portfolios back to neutral.

"Some people are definitely putting the cart before the horse. They see higher oil and copper prices and think it must mean recovery," said Adam Robinson, director of commodities at fund manager Armored Wolf.

Many natural resources focused hedge funds with most or all of their assets in cash over the last six months have also added to the billions of dollars heading for commodity markets.

Signs the global economy may be bottoming, after the slump in the last quarter of 2008 and the first quarter of 2009, have also persuaded investors to plough money back into the sector.

"A small reallocation from less risky assets like cash into commodities has led to a large rise in prices," said Eugen Weinberg, commodities analyst at Commerzbank.

"Chances are good that buyers of the recovery story will be disappointed because economic data is pointing to a slowdown of the slowdown, pricing in recovery is premature," Weinberg said.


Interest rates near zero are also an incentive for investors to try and make their money work harder elsewhere.

"You can't earn anything in cash ... The (U.S. Federal Reserve) with zero interest rates is effectively trying to get people to put their money back into markets," Robinson said.

Part of the reason for investors returning to the commodities sector is capacity, which is expected to fall well short of demand over coming years.

The credit freeze meant access to financing for new, sometimes existing, projects was no longer available or affordable and many producers had to abandon spending plans.

Prices of copper used extensively in power and construction have nearly doubled to 8-month highs of $5,300 a tonne since 4-year lows of $2,825 last December.

Crude oil also collapsed to 5-year lows near $30 a barrel last December, before recovering to $72 a barrel on Thursday. Investors say signs of supply shortages as illustrated by the number of oil rigs are already being seen.

The number of drilling rigs globally is estimated by analysts to have fallen by more than 30 percent to near 2,000 in 12 months to April.

The potential for high deficits in commodities such as oil and industrial metals is why many still believe in the commodities supercycle. They do not want to miss profit opportunities in the way they did five years ago.

"Normally commodities tend to be late cycle plays," said Ashok Shah, chief investment officer at London & Capital.

"This time round commodities have become an early cycle play because miners and oil producers during the last cycle did not create as much capacity as was needed."

(For story on commodity bubble concerns click on)

(Additional reporting by Barani Krishnan and Barbara Lewis)

(Editing by Peter Blackburn)

Thursday, June 11, 2009

"There Is No Inflation"

Click your heels together three times, and repeat, "There is no inflation...'

Will you believe the government... or your own eyes?

Crude $73

Treasuries Rise on Good Demand for Highest Yield SInce 2007

from Bloomberg:

By Susanne Walker and Dakin Campbell

June 11 (Bloomberg) -- Treasuries gained as the highest yield on a 30-year U.S. bond auction in almost two years attracted investors concerned that record government spending and debt sales will lead to inflation.

“At 4.7 percent, 30-year Treasuries are compelling,” said Nils Overdahl, a bond-fund manager at New Century in Bethesda, Maryland, which oversees $500 million. “You are really picking up a lot.”

The bonds drew a yield of 4.72 percent at the auction, the highest since August 2007. Benchmark 10-year note yields reached 4 percent earlier for the first time since October on concern the budget deficit and a falling dollar will prompt investors to reduce holdings of U.S. debt.

The yield on the 10-year note fell 11 basis points, or 0.11 percentage point, to 3.84 percent, after climbing as high as 4.0038 percent, at 1:19 p.m. in New York, according to BGCantor Market Data. The yield last touched 4 percent on Oct. 16. The 3.125 percent security maturing in May 2019 rose 27/32, or $8.44 per $1,000 face amount, to 94 3/32.

Eight bond-trading firms surveyed by Bloomberg News had forecast a yield of 4.80 percent. The sale is a reopening of the $14 billion 30-year bond auction on May 7, which drew a yield of 4.288 percent.

Thirty-Year Auction

The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, was 2.68. It was 2.14 last month and has averaged 2.21 at the past 10 scheduled sales.

Indirect bidders, a class of investors that includes foreign central banks, bought 49 percent of the notes, up from 33 percent in May. The average at the past 10 scheduled auctions is 25.2 percent.

Treasuries tumbled 6.5 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion and raising the risk of inflation. Ten-year notes rose as the highest yields in seven months lured investors.

“Clearly the supply issue is having a far-reaching impact,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “Virtually all can be attributed to the supply issue. The economic data has not been that bond bearish.”

Borrowing Costs

The rise in yields is undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing costs and pull the economy out of the worst recession in five decades.

Ten-year yields have risen over 140 basis points since the Fed announced its $300 billion, six-month Treasury purchase program on March 18. The average 30-year mortgage rate jumped to 5.59 percent from 5.29 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The 15-year rate averaged 5.06 percent.

Option ARMs Threaten Recovery Into 2011

from Bloomberg:

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008, according to data from First American and Inside Mortgage Finance of Bethesda, Maryland.

$72 Oil

Wednesday, June 10, 2009

Breakout: Treasury Market Bottom Falls Out, Rates Climb Over 4%

Treasuries Tumble Afer Auction

from Bloomberg following today's auction:

By Dakin Campbell and Dan Kruger

June 10 (Bloomberg) -- Treasuries fell, pushing 10-year yields to the highest level since October, as the government sold $19 billion of the securities and Russia said it may switch some of its reserves from U.S. debt.

Thirty-year bond yields reached the most in a year after a Russian central bank official said the nation may buy International Monetary Fund bonds. Today’s auction is the second of three sales this week that will raise $65 billion, part of the U.S.’s record borrowing program.

“It’s the same situation of overwhelming supply versus spotty demand,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., a brokerage for institutional investors. “The trend is still against the market.”

The yield on the 10-year note rose 13 basis points, or 0.13 percentage point, to 3.98 percent at 1:11 p.m. in New York, according to BGCantor Market Data. It hit 3.99 percent, the highest since Oct. 20. The 3.125 percent security maturing in May 2019 declined 1, or $10 per $1,000 face amount, to 93.

The 30-year bond yield touched 4.77 percent, the highest in a year. The government is scheduled to sell $11 billion of the securities tomorrow.

The notes auctioned today drew a yield of 3.99 percent, compared with the 3.975 percent forecast by seven bond-trading firms surveyed by Bloomberg News. The sale is a reopening of the record $22 billion 10-year note sale on May 6, which drew a yield of 3.19 percent.

Indirect Bids

The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold was 2.62. It was 2.47 last month and has averaged 2.40 at the past 10 scheduled sales.

Indirect bidders, the class of investors that includes foreign central banks, bought 34.2 percent of the notes, up from 31.9 percent in May. The average at the past 10 scheduled auctions is 25.8 percent.

Russia’s central bank may switch some of its reserves from Treasuries to International Monetary Fund bonds, the bank’s first deputy chairman, Alexei Ulyukayev, said in Moscow today. His comments were confirmed by a bank official who declined to be named, citing bank policy.

Finance Minister Alexei Kudrin said last month that Russia planned to buy $10 billion of IMF bonds using money from its foreign reserves.

Dollar Assets

Russia holds $138.4 billion of U.S. debt. China is the largest U.S. creditor, with $767.9 billion. The U.S. government must rely on foreign investors to sustain record borrowing.

The dollar fell as Russia’s announcement added to speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, decreased 0.2 percent to 79.649, after sliding 1.3 percent yesterday.

“The market is reacting to this Russia thing,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “The dollar has restarted its dive to lower levels.”

While leaders of the nations of Brazil, Russia, India and China talk about substituting the dollar, the so-called BRIC countries have increased foreign reserves at the fastest pace since September. The nations added more than $60 billion in foreign reserves in May to limit currency gains, data compiled by central banks and strategists show.

Currency Reserves

Many of those reserves are still being plowed into U.S. debt securities, according to Fed data. The central bank’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.

The Treasury said bidding from foreigners was above average at its $35 billion three-year note auction yesterday. The sale drew bids for 2.82 times the amount of debt available, rising from 2.66 in May. Investors bought the notes after yields rose more than 50 basis points in less than a week.

“The market tends to need to build in fairly heavy concessions before every sale,” said Marc Ostwald, a strategist in London at Monument Securities Ltd. “It will be the same for today’s 10-year auction.”

Annual Loss

Longer maturities are leading losses in the Treasury market in 2009, indicating investors are demanding more yield because of the threat inflation will quicken in coming years.

Thirty-year bonds handed investors a 28 percent loss this year, versus 11 percent for 10-year notes and 0.4 percent for two-year securities, according to indexes compiled by Merrill Lynch & Co. Treasuries of all maturities have fallen 6.2 percent this year, according to Merrill indexes. The securities haven’t posted an annual decline since 1998, according to the index.

The Fed’s $3.5 billion purchase today of Treasuries maturing between August 2019 and February 2026 brings to $156.528 billion the amount purchased since the $300 billion, six-month program was announced on March 18.

Ten-year yields have risen nearly 137 basis points since then, complicating the Fed’s mission to lower consumer borrowing costs. Thirty-year fixed-rate mortgages jumped to 5.56 percent from as low as 4.85 percent in April, according to in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.

Record Borrowing

President Barack Obama may borrow $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to primary dealer Goldman Sachs Group Inc. The budget deficit is projected to increase to $1.85 trillion in the year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

All told, the government and the central bank have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 2.04 percentage points, a nine- month high.

Vigilante's Revenge

from Lauren Steffy at the Houston Chronicle:
A New Breed of Vigilante

They are the dark knights of finance, the shadowy champions of responsible spending. Lurking on the dim edges of the bond market, they keep watch over the deficit. They are ... the bond vigilantes.

The term was coined in 1983 to describe global investors who, unhappy with rising U.S. spending, drive up bond yields, forcing government austerity. Unseen for 15 years, the bond vigilantes may be at work again as the nation faces a staggering $1.9 trillion deficit to fund a stimulus aimed at breaking the worst recession in decades.

Runaway spending fuels inflation, which is the enemy of bond investors, driving them away from government debt and the dollar. As a result, the government has to pay higher yields to woo them.

“The bond vigilantes are saying, ‘You better watch your spending, because we’re going to push rates higher,’ ” said Rick Kaplan, a portfolio manager with Houston-based Legacy Asset Management. “We’ve never printed this much money before. Our budget’s never been this out of whack. That’s bringing the vigilantes out in full force.”

Health care burden

The final straw may be health care reform. If President Barack Obama pursues his health care agenda, it may add as much as $500 billion in spending.

The last time the bond vigilantes swung into action, it was to gut Bill Clinton’s health care spending plan in the 1990s, forcing him to focus on deficit reduction. Now, however, the economy is much more precarious. The Federal Reserve wants to keep interest rates low to shore up the housing market and cut borrowing costs for businesses.

That’s why Fed Chairman Ben Bernanke recently told Congress that we had to address the deficit. He’s trying to talk down the bond market, Kaplan said.

Low mortgage rates have been a key focus of the Fed’s recovery plan, but the market has been moving the wrong way. Rates on a 30-year fixed-rate mortgage jumped as high as 5.45  percent last week from as low as 4.85 percent in April. At the same time, yields on the benchmark 10-year Treasury note rose as high as 3.9  percent, up from about 2.2 percent in January.

“That’s what’s got everybody freaked out,” Kaplan said.

False sense of recovery?

At least, those who are paying attention. Many investors are too busy looking at the stock market, where the roughly 40 percent rise in the Standard & Poor’s 500 Index since February may be creating a false sense of economic recovery.

“That’s the barometer, and I think that’s misleading,” Kaplan said.

Gold prices, for example, have risen 18 percent since January, a sign the market sees inflation on the horizon. That doesn’t bode well for Bernanke’s plans because if mortgage rates climb, housing prices will fall, prolonging the recession.

“He wants the economy to stay just where it is,” Kaplan said. “He has no interest in raising rates.”

On a tightrope

It’s a difficult tightrope for the Fed to walk. On the one hand, it’s injecting trillions into the economy to combat the recession while on the other trying to keep rates low and shrug off inflation.

Outside of the Fed’s machinations, the economy seems to have few catalysts for recovery. For the past two decades, the market has been driven by financial engineering, deregulation, lower taxes and technological improvements, none of which is going to save us now. Corporate earnings are weak, casting suspicion on the equities rally.

Against a backdrop of mounting debt and increased spending, frustrated investors have had enough.

So this may be a job for the bond vigilantes. The problem for consumers is the bond vigilantes aren’t so much heroes as mercenaries. They may succeed in putting the brakes on spending, but they won’t save us from higher borrowing costs or a lingering recession.

Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at His blog is at

Bernanke's Monster

from John Crudele at the New York Post:

BEN Bernanke now has to deal with his Frankenstein monster.

The head of the Federal Reserve just plain blew it when he and then-Treasury Secretary Henry Paulson decided late in the Bush administration to start pumping money that the US didn't have into the economy.

Paulson's motives last year were obvious -- he was part of the administration whose party was trying to retain the White House.

I have no doubt that Bernanke, a relative newcomer to Washington's inner circle, genuinely believed he was doing the right thing when he agreed to play along.

But, in fact, the former Ivy League professor was really only giving in to the aggressive demands (and commands) coming from Wall Street and politicians.

So, the Fed cut interest rates and blessed spending increases -- and it made those moves so aggressively that there was no ammunition left when the economy kept sinking in the last quarter of 2008 and again in the first months of 2009.

Then Bernanke came up with a novel -- and untried -- approach that he had been tinkering with when he was in academia.

He'd print money and flood the system until the economy got some traction. So what if this had never worked before? So what if this tactic had destroyed other countries' economies?

Just because Dr. Frankenstein screwed up didn't mean Dr. Bernanke's monster couldn't be taught to behave.

Was there really a crisis last year that threatened to undermine the entire financial system -- a "systemic risk" in the catch phrase of the time?

Or did politicians (looking for footing in the presidential election) and Wall Street (looking for an escape from its massive blunders) talk us to the edge of the cliff?

Historians will debate that issue long after I've stopped writing this column.

But this much is indisputable -- now we really do have a problem with the system.

But it is not just the banking system. We've managed to put the whole monetary system at risk. The US economy now isn't just in a recession. It is broken.

Take last Friday as an example. The Labor Department reported one more in a series of lousy employment reports.

Another 345,000 jobs gone from the economy in May, said the Labor Department, and the unemployment rate jumped to 9.4 percent.

Worse, a better government measure of the unemployment rate -- which goes by the nifty name U-6 -- rose to 16.4 percent from 15.8 percent. U-6 was just 9.4 percent this same time last year.

Stock prices rose a bit, but that's not really important.

As I've been saying in this column since last year, keep one eye on the prices of fixed-income securities -- bonds, notes etc. -- and your other eye on interest rates.

Borrowing costs have been rising steadily all spring.

And last Friday we got a sense of just how quickly they might jump even if there is only a smidgen of good news on the economy, like the latest still lousy but not horrible employment report.

Interest rates are not supposed to react this passionately to slight signs of economic improvement.

The system is so taut because of massive spending that borrowing costs shoot higher at the slightest economic twitch.

Banks have been able to report better earnings only because they are benefiting from interest-rate trends (at the expense of customers) and can again hide the deteriorated value of their assets.

Where is the good news? Why are interest rates skyrocketing?

Why are the Chinese of all people pestering the US about budget deficits?

And why is President Barack Obama, incongruously, warning about cutting US budget deficits even as he is spending tax money two hands over two fists?

Because they are all concerned that the US financial system is broken. They are worried that our economy can't respond to normal monetary and fiscal stimulus.

I felt that Washington's decision to open the spigot full blast always carried the risk that the cure would be worse than the disease.

If interest rates continue to climb at the current speed, the cost of borrowing money will cause economic activity to contract even before it has expanded.

Mortgage rates are already up more than a percentage point in the past month and will be going higher this week.

Corporations will also be paying more when they decide to borrow, which will probably make them think twice about doing so.

And Washington will automatically have to pay more to borrow hundreds of billions of dollars in the weeks and months ahead.

Interest rates on 10-year government bonds have already risen 90 percent year to date; 30-year bond yields are 80 percent higher.

Only the insignificant short-term interest rates that the Fed directly controls have behaved.

And there is now widespread talk on Wall Street that the Fed will be forced to raise those interest rates within the next few months. That's a description of broken in any economics textbook.

And here's the real knee slapper in this whole situation -- the labor report that is the latest problem really wasn't as improved as the market believed last Friday.

In last Friday's num ber, for instance, the department added a very questionable 220,000 jobs that it believes were created by newly formed companies.

That included 43,000 jobs that it hopes appeared in the depressed construction industry.

And when the government takes another look at its numbers in the coming months it will probably that more jobs were lost in May than it originally thought.

But the damage will still be done. Interest rates will still be higher. And the system for getting the economy going -- no, we're not there yet -- will still be broken.

Bond Auction Appears to Have Spooked Stock Traders, Too

This sell-off occurred precisely at the same time as the bond auction!

New Record High Interest Rates for 2009

The treasury auction must have gone somewhat poorly, because interest rates have surged slightly higher as a result of the auction held just 4 minutes ago! We are just a few ticks away from higher rates for 2009! Will interest rates hold, or go higher?

Interest Rates Continue to March Higher

Falling treasuries continue to push interest rates higher, endangering a recovery in housing. At the time of this writing, interest rates are very close to the highs of 2009. However, a new treasury auction is just minutes away, so it will be interesting to see what happens in this auction, and how it's results will impact interest rates.

Crude Oil Continues Higher

Crude oil reached $71.79 this morning.

Grains Liquidate on Dollar Surge

Soybeans have given up opening gains, but bullish fundamentals are supportive. USDA reports overnight have confirmed very tight soybean supplies. However, corn and wheat have sold off on a surging Dollar.


Dollar Surges

Stocks Go Red

After spending the overnight hours in positive territory, and the Dow futures surging 100 points, stocks have now given up all its gains and have gone negative.

CBO Says Cap and Trade Won't Generate Revenue

from the CBO's report on the Cap and Trade tax:

CBO and the Joint Committee on Taxation (JCT) estimate that over the 2010-2019 period enacting this legislation would:
• Increase federal revenues by about $846 billion; and
• Increase direct spending by about $821 billion.
In total, those changes would reduce budget deficits (or increase future surpluses) by about $24 billion over the 2010-2019 period.
In addition, assuming appropriation of the necessary amounts, CBO estimates that implementing H.R. 2454 would increase discretionary spending by about $50 billion over the 2010-2019 period.
Let me get this right: Cap and Trade will result in a net increase in spending of $26 billion. So if the carbon emissions bill won't reduce carbon emission, won't increase revenue to the government, and will increase spending, why pass it? One thing is for certain: it will cost Americans a lot more money out of pocket! It's about power and control, not revenue or improving the environment!

Russia Announces It Will Buy Fewer U.S. Treasuries

from Bloomberg:
Russia may switch some of its reserves from U.S. Treasuries to International Monetary Fund bonds, the central bank said today, driving Treasuries and the dollar lower.

Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said some reserves may be moved from Treasuries into IMF debt, reiterating comments made last month by Finance Minister Alexei Kudrin.

“We plan to reduce the share of U.S. Treasuries, because a window of opportunity for working with other instruments is opening,” Ulyukayev said. As well as the IMF bonds, Russia could place more of its currency reserves on deposits with foreign banks, he said. His remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy.

Treasuries fell, pushing 10-year yields to the highest level since November, on the Bank Rossii statement and as the U.S. government prepared to sell $19 billion of the securities. The dollar declined versus most of its major counterparts as speculation the global recession is easing reduced demand for safety and after Ulyukayev’s remarks.

Monday, June 8, 2009

Another Commodity Bubble?

from Reuters:

NEW YORK (Reuters) - A rush of investors betting signs of an economic rebound will spark demand for oil and other raw materials has driven prices to levels that may belie fundamentals and created the specter of another commodities bubble.

Oil prices have jumped nearly 30 percent over the past month to seven-month highs near $70 a barrel and tin prices are up 40 percent since March. Corn, soybean and wheat futures hit eight-month highs over the past weeks amid heavy fund buying.

The gains come despite forecasts that fuel demand will fall by the steepest rate since 1981 this year, and despite strong supplies in some agricultural markets.

That sets the stage for creation of a bubble similar to the one seen last year, analysts say, and raises questions about the sustainability of the recent price rise.

"Right now the price of crude oil is really not supported by fundamentals," said Rob Kurzatkowski, futures analyst with optionsXpress in Chicago.

"The market is looking so far forward it is reacting to inflation news and expectations that supply and demand fundamentals will support prices some time in the future."

Commodity prices are rebounding after the global economic crisis clipped demand as consumers reined in spending and halted a six-year rally that peaked last summer when oil tipped $147 a barrel.

Many analysts say last year's record run was in part fueled by an influx of speculators using oil and other commodities as a hedge against inflation.

Hedge-fund manager Michael Masters last week appeared before the U.S. Senate Agriculture Committee arguing another bubble may be growing and that prices again were being determined by trading desks of large Wall Street firms -- and not by supply and demand.

Analysts said investors were instead eyeing broader economic data, indicating the crisis may be easing to make a bullish case for commodities, and piling into exchange traded funds and long-only indexes to get exposure to commodities.

"This bull market is being manufactured by a bunch of guys trying to get their marks, not on the fundamentals," said Stephen Schork, editor of The Schork Report energy newsletter.

"Momentum and high prices have become the justification for buying, not the real fundamentals of this market."

Delays in corn and soybean planting have accounted for some of the bullish attitudes about agriculture futures during the past few weeks. But the crops were generally in better shape in most areas than they were a year ago.

In 2008, Midwest farmers managed to produce bumper crops of both corn and soybeans despite severe flooding that left millions of acres of key production areas underwater.

"Eventually there has to be some pressure on prices but it has not happened yet," said Darrell Jobman, senior analyst for

"I think that there is a lot of money ... speculative money that is anticipating inflation. There might be some more inclination to go into agricultural commodities."

Gains in industrial metals such as copper and aluminum over the past few months are more tied to fundamentals, according to some analysts.

"The rally in aluminum, for instance, is a longer term bet on economic recovery while copper has been rising and falling in tandem with Chinese demand and inventory levels," said Catherine Virga, senior analyst at New York's CPM Group.

Despite weak oil demand and strong inventory levels, Goldman Sachs (GS.N) this week raised its end-2009 oil price forecast to $85 a barrel, predicting tighter fundamentals in the second half due to economic recovery and lower supply due to cutbacks by producer group OPEC.

Analysts said the rise in fuel prices following the gains in oil could eventually threaten the very recovery fueling the uptick in prices.

"The market is still more than amply supplied, if anything this is going to be a barrier to growth," Kurzatkowski said.

Corporate Debt More Safe Than U.S. Government Debt

from Reuters:

NEW YORK (Reuters) - Is Campbell's Soup a better bet than U.S. government debt?

No, we're not talking about stocking a bunker for survival. This is talk about safe investments.

U.S. Treasuries, traditionally considered the safest of all investments because the debt is backed by full faith and credit of the U.S. government, is losing favor among derivatives traders to Campbell Soup Co, Microsoft Corp and Intel Corp as concerns over the government's massive deficits and costly bailouts mount.

Investors are apparently concerned that sovereign debt of the United States, the world's biggest economy, is more vulnerable to a huge sell-off than bonds of these three companies amid the most protracted economic downturn in decades, strategists said.

Those concerns are reflected in the pricing of credit default swaps, which are used both to insure bonds against default and to place bets on the likelihood of default, of Treasuries and of the three companies.

The cost to insure debt of the United States with credit default swaps for five years was 43.7 basis points on Monday, versus just 27.4 basis points for Campbell Soup and 29.8 basis points for Intel Corp , according to data from CMA DataVision. Higher prices for credit default swaps, or CDS, reflect a greater perception of a risk of default.

Rising Treasury Rates May Be a Double Whammy

from Marketwatch:
Escalating Treasury yields risk hitting the U.S. stock market with a one-two punch, as higher yields increase the allure of bonds as an investment alternative to equities as well as posing a potential drag on the economy.

"There are two legs to that story, both of them bad. As yields on the 10-year go higher, the more attractive that investment would be to equity investors, so there is an asset allocation argument to be made," said Art Hogan, chief market strategist at Jefferies & Co.

"And, the Fed would like to keep yields lower, or at a favorable rate to help the recovery," said Hogan.

Worries inflation could return as the recession shows signs of easing may keep investors on their toes next week. The Fed's Beige Book is due and Apple afficionados will gather in San Francisco for a developers conference. (June 5)

"Rising interest rates will probably begin putting modest valuation pressure on the equity market as the yield on the 10-year Treasury note moves above 4%," wrote Fred Dickson, chief market strategist, Davidson Companies, in a research note.

Pollyanna Creep: Why Government Statistics Lie

from Smart Money:

How’s the economy treating you? Chances are, your answer is colored largely by three things: whether you’re working (if you want to), how much you’re making and how quickly your expenses are rising. Economists rely heavily on the same factors to judge the nation’s health. At last count, 9.4% of the workforce is jobless. Compared with a year ago, the goods and services we produce are worth 5.7% less while the ones we buy are 0.7% cheaper.

Two bright people might see sharply different things in those numbers. To one, the shrinking economy is a healthy unwinding of past excess, for example, while to another it’s a dangerous downturn that calls for bold government action. But what if the numbers themselves are something we should be debating? In the alarming view of a vocal few, America’s economic measures are misstated -- rigged, really.

The accusation goes like this: Surveyors collect the nation’s data and statisticians compile and report it. Politicians naturally want the numbers to show improvement. Not being able to change the facts, they focus on the handling of facts, pressuring statisticians to change their measurements. It’s not quite one grand conspiracy but decades of minor ones compiled. Today’s reports are so perverted, the theory holds, that the numbers have detached from common experience.

Pollyanna Creep

If the theory has a chief architect, it is John Williams, a semi-retired grandfather of five living in Oakland, Calif. The son of a chainsaw importer, Williams sold the family business in the 1970s and began consulting for corporations, recalculating government economic data to arrive at what he says were more reliable measures, and with them, truer forecasts. Today Williams runs Shadow Government Statistics ( from his home. For $175 a year subscribers get economic data and analysis adjusted to back out the accumulated effects of what Williams has dubbed the Pollyanna Creep -- Pollyanna being the orphan protagonist of the 1913 children’s book who learns to play the “glad game” to find cheery perspectives on life’s sorrows. In other words, he provides figures he feels are properly miserable, to offset government ones he says are too prettied-up.

If Williams is right, unemployment is over 20%, gross domestic product is shrinking by 8% and consumer prices are jumping by nearly 7%. His forecasts border on apocalyptic. The government is creating so much new money, he says, that the all but inevitable result is hyperinflation, where “your highest denomination, the $100 bill, becomes worth more as toilet paper than money.” Buy physical gold, he advises.

Whether we believe the forecasts or not, the possibility of a Pollyanna Creep has serious implications. Social Security payments are just one benefit adjusted each year for increases in the cost of living. If the figures hadn’t been corrupted, says Williams, checks might be close to double what they are.

Williams has managed to attract plenty of press. A year ago, Harper’s magazine featured a cover drawing of a grinning Uncle Sam fondling numeral-shaped party balloons, with the headline, “Numbers Racket: Why the Economy is Worse Than We Know.” The story centered on Williams’ data. The San Francisco Chronicle followed with “Government Economic Data Misleading, He Says.” Last fall in the London Times: “Forget Short-Sellers and Manipulators, Pollyanna Creep Could Be the Culprit.”

Government statisticians are frustrated. “Economic Data Seems Accurate” doesn’t make for a catchy headline, so the press, they say, are too quick to give credence to conspiracy theories. “We go out of our way to be transparent,” says Thomas Nardone, who during 32 years at the Bureau of Labor Statistics helped implement many of the changes in calculating the unemployment rate. “We’d be remiss if we didn’t make changes,” he says. “I’ve never seen measurement changes that were politically motivated.”

Katherine Abraham served as commissioner of BLS during the Clinton administration. Commissioners, unlike the statisticians who work for them, are political appointees. Now a professor at University of Maryland, Abraham says she did see political pressure, but rarely, and never with results. Once, she says, a prominent lawmaker told her the BLS might get more funding if it would agree to propose changes that reduce the appearance of inflation. Abraham says she rebuffed the offer.

Decide for yourself. Here’s a roundup of measurement changes at the heart of Williams’ claims, along with responses from people who work closely with the measurements. I’ll focus on unemployment and inflation, but not GDP, since the chief flaw with it, according to Williams, is how problems with the inflation measure overstate real, or after-inflation, growth. (There’s a different case to be made -- that GDP measures some fairly undesirable things, like the cost of war and divorce lawyers, and so isn’t a great proxy for economic well-being -- but I’ll save that subject for another day.)

Disappearing Jobless?

About 13 million people were unemployed during the Great Depression, or around 25% of the work force, but those are fairly recent estimates. At the time, the government simply didn’t track data like it does today, which made it difficult to judge whether things were getting better or worse. Two main developments in the 1930s made tracking unemployment feasible. The first was an improvement in the way statistics are used to turn a relatively small sample into a faithful representation of the larger population. That allowed for the use of surveys. The second was the notion of basing one’s status as part of the unemployed work force on actions. Whether someone wants to work, after all, is a subjective thing. Whether they’re looking for work is not.

Today the BLS reports six measures of unemployment, called U-1 through U-6, for which the definition of unemployment gradually broadens. For example, 4.5% of the work force has been unemployed for 15 weeks or longer and is actively looking for work (U-1), while 15.8% is unemployed if we count those who say they want work but aren’t looking, and those who work part-time for lack of full-time options (U-6).

Williams takes issue with a 1994 change that coincided with a shift to computerized data collection from pencil and paper. Until then, a discouraged worker was someone who wanted to work but had given up looking because there were no jobs. The BLS tightened the restrictions with additional questions, which reduced the ranks of discouraged workers by half. As Williams puts it, “The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers.” Add those in, he says, and unemployment approaches Great Depression levels.

Nardone, the longtime BLS economist who today serves as assistant commissioner for current employment analysis, says the 25% unemployment rate often cited for the Great Depression is based on research that corresponds with today’s U-3, the unemployment rate most commonly reported by the media. It stands at 9.4%, recall -- not close to Depression-era levels. The 1994 changes did reduce the ranks of discouraged workers, but also introduced a new category: the marginally attached, who want jobs but aren’t looking for reasons like transportation problems and child-care requirements. The most commonly watched measure (now U-3, before the change U-5) is mostly unaffected, since it doesn’t include discouraged workers. The benefit of the changes, explains Steven Haugen, a BLS economist, is a less subjective measure of discouragement, and some additional ways to judge whether the nation is not only working, but working up to its ability. Williams says the change reduced the broadest measure of unemployment in a way that “doesn’t match with public perception, and for good reason.”

For a BLS paper describing changes to its unemployment measure, see here.

Rent, Geometry and Hedonism

The same agency that reports unemployment, the BLS, also reports the consumer price index. It tracks changes in the prices of more than 8,000 goods and services, from apples in New York to gasoline in San Francisco. There are several variants of the CPI index. For example, CPI-W weights things like fuel more heavily to better reflect the commutes of workers, and is the basis for Social Security adjustments. CPI-U, the measure most often reported in the media, includes items a typical urban consumer might buy, and determines adjustments to inflation-indexed Treasury bonds. Note that “core” inflation, which excludes food and fuel, isn’t used as the basis for any federal spending program (and isn’t called “core” by the BLS, which reports but doesn’t seem to especially prize the measure).

Most CPI criticism is based on three changes that affect all indexes. In 1983 the BLS replaced house prices with something called owners’ equivalent rent to measure the cost of shelter. Williams and other critics say it understates the cost, since house prices, until recently, had outpaced rents. John Greenlees, a BLS economist, says the new method is the most widely used among developed nations and is meant to fix a flaw in the old one. The CPI is supposed to measure things people buy to use, not things they invest in. For many people, houses are a little of both. The new measure attempts to isolate the portion of housing expenditures that best reflects the cost of living. Williams says the purchase price of housing is an important factor in determining a constant standard of living, and he doubts the ability of “the government to accurately calculate how much a person would pay to rent his own house.”

Another change: In 1999 the BLS adopted a geometric mean formula to replace its arithmetic mean one. The new method weights goods less as their prices rise, and is supposed to reflect patterns of consumer substitution. Critics say that treats consumers as if they’re no worse off when they switch to hamburger from steak. Greenlees says the analogy is flawed; the methodology allows substitution only between similar goods in the same region -- from steak in Chicago to a different type of steak in Chicago, and not to hamburger. The old measure was really an overstatement of price increases, one that assumed consumers don’t react at all to higher prices, he says. Also, the impact is relatively small. The BLS has continued to calculate prices under both methodologies and says over five years ended 2004 the new measure reduced CPI growth by 0.28 percentage points a year. Williams says geometric weighting has moved the CPI away from measuring a constant standard of living. He says that when the effects are combined with those of other changes, like increased price surveying among discount stores (which he contends offer poorer service and thus a lower standard of living than the shops they replaced) the overall impact is larger than the BLS states.

Finally, in 1999 the BLS began using what it calls hedonic adjustments. Williams explains the approach with a dash of sarcasm: “That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial.” He calls the impact on CPI “substantial.” Greenlees says the name “hedonic” was an unfortunate choice, since the technique has little to do with making judgments about pleasure. It’s designed to measure the quality difference between goods when one is discontinued and must be replaced in the index with another that’s not quite the same. Adjustments can push the index in either direction, but Greenlees says the overall impact since the change has been a tiny increase in the CPI -- about 0.005% a year. Williams says some hedonic adjustments are indeed necessary, like when the size of a box of crackers changes from 12 ounces to 10 ounces. But more theoretical adjustments, he says, “overstate the quality of what the public is buying."

The BLS has published a 17-page paper countering what it calls misconceptions about the CPI. Find it here.

Williams suspects his charges motivated the paper, and has issued a response — a rebuttal to the rebuttal, if you like — here.

Unemployment Worse Than Numbers Suggest

from CNN Money:

To get a more comprehensive snapshot of the labor picture you need to focus on the less well-known U-6 data set known as “alternative measures of labor utilization.” The U-6 includes folks counted in U-3 plus “ all marginally attached workers” as well as people who aren’t working full-time but wish they were (i.e., the underemployed.) Marginally employed covers “persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.”

And when you add up U-3 and all the underutilized workers the official U-6 rate for May 2009 is 16.4%. That’s an official BLS-generated stat that no one really wants to talk about: One out of every six members of the civilian labor force is either out of work or not fully employed. (And that doesn’t even account for the rising ranks of workers coping with furloughs.)

Okay, so exactly how bad is that from a historical perspective? Pretty bad. The BLS began reporting U-6 in 1994; in January 1994 the U-6 rate was 11.8% and then steadily declined before reaching an all-time low in October 2000 of 6.8%. During the ensuing recession/bear market U-6 peaked at 10.4% (Sept 2003) until the credit crisis took hold in 2008. The U-6 rate hit 10.9% in August 2009 August 2008 and has been on a rapid climb ever since; over the past year it has shot from 9.8% to today’s 16.4%. It sure makes it hard to buy into the green shoots theory just yet.

–Carla Fried

Fed's Hoenig: Inflation Is the Most "Regressive", "Corrosive" Tax

from Thomas Hoenig, President, Federal Reserve Bank of Kansas City:

"...I often emphasize that inflation is the least fair, most regressive and most corrosive tax we can impose upon ourselves. It is particularly harsh for low- to moderate-income citizens." (delivered Jun3, 2009, Sheriday, Wyoming)

Bond Vigilantes Take Their Pound of Flesh

I thought this insight from bond veteran John Jansen was symbolic and typical of the current sentiment in the bond market:

"I would expect the market to erode further as investors and traders demand a concession from the taxpayers for the profligate level of debt issuance."
The American people can't continue their profligate ways without consequences. The pound of flesh is only beginning to hurt! It will hurt much more as time presses on! One consequence for everyone is that borrowing costs are rising, and not just for the U.S. government! Mortgage rates are rising, and I suspect that other credit costs will rise also as time passes. Isn't that what John just said?

Gold Loses Its Gleam

Soft Wheat, Solid Soybeans

Wheat -- softening, overbought
Soybeans -- continues solid despite weaker peripheral markets

More Dollar Dumping -- Go Yuan!

from the Daily Telegraph (UK):

Top Chinese banker Guo Shuqing calls for wider use of yuan

The head of China's second-largest bank has said the United States government should start issuing bonds in yuan, rather than dollars, in the latest indication of the increasing importance of the Chinese currency.

Guo Shuqing, the chairman of state-controlled China Construction Bank (CCB), also said he is exploring the possibility of issuing loans to trading companies in yuan, allowing Chinese and foreign companies to settle their bills in yuan rather than in dollars.

Mr Guo said the issuing of yuan bonds in Hong Kong and Shanghai would help to develop the debt markets in China and promote the yuan as a major international currency.

It was the first time the head of a major Chinese bank has called for the wider use of the yuan, although a chorus of senior government officials have already voiced their concerns about the stability of the dollar and have said the yuan should be used more widely.

Sunday, June 7, 2009

White House Concedes Unemployment Worse Than Predicted

from VOA News:
The White House says America's employment picture is worse than the Obama administration had anticipated just a few months ago. The somber admission follows the latest jobless report showing the highest unemployment rate the United States has seen in more than 25 years.

U.S. unemployment jumped a half percent in May, to 9.4 percent prompting this comment by Austan Goolsbee, a member of President Barack Obama's Council of Economic Advisors:

"The economy clearly has gotten substantially worse from the initial predictions that were being made, not just by the White House, but by all of the private sector," said Austan Goolsbee.

Economists point out that the current jobless rate is already higher than the hypothetical rate that was used to calculate the health of banks and other financial institutions in so-called "stress tests" earlier this year. And, the upward unemployment trajectory is expected to continue in coming months, even if the overall economy begins to recover.

Small Businesses to be Hit Again to Provide Compulsory Healthcare

Kennedy Bill Would Make Employers Provide Care


WASHINGTON (AP) - Employers would be required to offer health care to employees or pay a penalty - and all Americans would be guaranteed health insurance - under a draft bill circulated Friday by Sen. Edward M. Kennedy's health committee.

The bill would provide subsidies to help poor people pay for care, guarantee patients the right to select any doctor they want and require everyone to purchase insurance, with exceptions for those who can't afford to.

Insurers would be supposed to offer a basic level of care and would be required to cover all comers, without turning people away because of pre-existing conditions or other reasons. Insurance companies' profits would be limited, and private companies would have to compete with a new public "affordable access" plan that would for the first time offer government-sponsored health care to Americans not eligible for Medicare, Medicaid or other programs.

Still More Taxes and Compulsory Insurance

from Bloomberg:
President Barack Obama wants Congress to consider taxing the wealthy instead of workers to pay for a health-care overhaul, as House Democrats discuss a plan to require health insurance for most Americans.

The Obama administration stepped up efforts to influence health-care legislation today as advisers David Axelrod and Austan Goolsbee appeared on television talk shows to discuss the issue.

The president is trying to avoid broad-based levies such as a Senate proposal to tax some employer-provided health benefits Axelrod said. Instead he is urging lawmakers to reconsider limiting all tax deductions for Americans in the highest tax brackets.

“He made a very strong case for the proposal that he put on the table, which was to cap deductions for high-income Americans, and he urged them to go back and look at that,” Axelrod said on the CNN’s “State of the Union.” Goolsbee, appearing on “Fox News Sunday,” said Obama is “mindful” about how “ordinary Americans are able to foot the bills” and never proposed taxing employee benefits.

House Democrats are weighing a new proposal in response to Obama’s call for legislation to be enacted by August. An outline of the plan obtained by Bloomberg News would require Americans to have insurance with some exceptions.

Backfired: Fed Policies Having Opposite of Intended Effect

from AP:

NEW YORK (AP) - The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.

But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.

That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford.

To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.

Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.

"If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices."

Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time.

So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?

One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation.

The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year - more than four times last year's all-time high.

"The bond market is calling the Federal Reserve out," said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. "Investors are saying that the Fed can't just print money out of thin air to finance a massive deficit."

Fed Chairman Ben Bernanke acknowledged Wednesday in congressional testimony that large budget deficits could threaten financial stability by eventually eroding investor confidence and endangering the economy's prospects for long-term health.

"Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House Budget Committee.

That kind of talk is meant to calm bond investors' nerves. It also shows the quandary faced by Bernanke and other federal officials. They need to hold down interest rates through massive government spending at the same time they have to deal with worries over how that spending could damage the economy over the long term.

After Fed policymakers this spring said they would buy billions of dollars of government debt and more than $1 trillion of mortgage securities, 30-year fixed mortgage rates fell to 4.78 percent in April, the lowest since Freddie Mac started surveying rates in 1971.

Sales of new and existing homes began to trend higher. Mortgage refinancings also jumped, allowing borrowers to lock in lower rates. Fee income from this activity helped lift profits at many battered banks and gave consumers more disposable income to spend, which helped lift their confidence about the economy's prospects. All that was good for the nation's businesses.

But now, surging mortgage rates are threatening to undermine all that. Seventy percent of refinancing activity could be knocked out as rates close in on 5.5 percent, according to Mark Hanson, a managing director at the independent research firm Field Check Group of Menlo Park, Calif.

That's because homeowners wouldn't get much of a benefit if a refinancing only reduces monthly payments a tiny bit while they are stuck paying closing costs that typically run about 2 percent of the loan amount.

Also, many homeowners who wanted to refinance didn't lock in the super-low rates in April when the refi boom took off. "Half the deals in the pipeline are dead," Hanson said. "People were applying to refinance to improve their situation, but now they are seeing it won't be much improved."

All this means that even though mortgage rates are still low by historical standards, many of the trends that seem to be pointing to economic recovery in recent months could be undone fast.

Protectionism Coming in Retaliation to Obama's "Buy American" Stimulus

from AP:
Canadian mayors have passed a resolution that would potentially shut out U.S. bidders from local city contracts.The resolution is in retaliation to "Buy American" provisions in President Barack Obama's stimulus bill.