What A Drag! Consumer Confidence Plunges

from Marketwatch:

LOS ANGELES (MarketWatch) -- Want evidence that the so-called recovery is anemic? Look no further than Friday's consumer confidence numbers.

The Reuters/University of Michigan index posted an unexpected decline in confidence, dropping to 63.2 in early August from 66 in July. Funny, it was supposed to rise to 69, but instead it registered the lowest reading since March, a time when companies were dropping employees like pets shedding fur. See story.

Though not to the same degree, companies are still losing people at a rapid clip. It's the one bugaboo about the economy that is holding everything back, and finally Wall Street got a dose of that reality Friday, with the Dow undergoing a triple-digit drop in the early going from which it never recovered.

It's not enough that prices are holding steady and inflation seems to be in check. In fact, that's a bad thing as it indicates the economy is stagnant. See story.

With inflation locked in a holding pattern not seen since the 1950s, it doesn't offer much hope that things will get markedly better soon.

And a number of doors will have to open before the recovery can get out from under the anemic label -- mostly to companies' personnel departments.

Even Sagging Dollar Couldn't Save Grains Today

Grains had been higher overnight and most of the morning, but gave up the ghost late in the session on weak broader markets. Soybeans had showed significant price gains yesterday and overnight, but dropped back within recent price ranges during the day session. I continue to buy December corn at around $3.25/bushel.

Impact Of Cap and Trade

report from the National Association of Manufacturers:

U.S. jobs decline by 1.8 million under the low cost case and by 2.4 million under the high cost case. The primary cause of job losses is lower industrial output due to higher energy prices, the high cost of complying with required emissions cuts, and greater competition from overseas manufacturers with lower energy costs...
By 2020 gasoline would increase between 8.4% and 11.1%, electricity between 5% and
7.9%. By 2030, gasoline prices increase between 20% and 26.1%, natural gas by 56.3% and 73.5% while electricity prices increase by up to 50%. Table 1 shows the increase in
energy prices faced by a typical household compared over the 2020-2030 period...
the primary impact would fall on the electric sector. W/M would result in the electric industry shutting down most carbon-based generation and/or using expensive, as yet
unproven technology, to capture and store CO2. To meetthe stringent goals of W/M, the electric industry would also have to substitute high cost technologies, such as biomass
and wind, for conventional generation.

Here is the original.

Fed Bringing On a "Zimbabwe Moment"?

from Fortune.com:

WASHINGTON -- When stock markets plumbed new lows in March, the Federal Reserve responded with nearly every tool in its box. It announced it would create new money to buy $1.25 trillion in mortgages and $300 billion in government debt.

That purchase of government debt looked particularly ominous. Creating new money to buy government debt is the sort of strategy that's known to destroy economies--just ask Zimbabwe, which suffered so much hyperinflation that it destroyed its currency. The Zimbabwe central bank printed bills in the denomination of 100 trillion Zimbabwean dollars, then found they had value only as a novelty item on eBay. Eventually, Zimbabwe was forced to abandon its currency altogether.

But the difference between the U.S. Federal Reserve and the Reserve Bank of Zimbabwe (one would hope) is that the Federal Reserve will stop before it wrecks the dollar.

The first major test of the differences between Zimbabwe and the U.S. is rapidly approaching. An indication could come as soon as the Fed releases a policy statement Wednesday afternoon. The Fed is not expected to announce a major change of course (see "All Quiet On The FOMC Front"), but the present course calls for current programs to unwind.

The first program to end is the purchasing of government debt. In its March 18 meeting, the Federal Reserve announced that "to help improve conditions in private credit markets" it would purchase $300 billion of government debt. The Fed wanted markets to believe it was purchasing these Treasuries for the purpose of lowering interest rates. Since much borrowing is ultimately benchmarked against the yield on Treasuries, if the Fed purchases Treasury debt, it should make borrowing easier throughout the economy.

The Fed stated it would make these purchases for six months. As of Aug. 5, according to the Federal Reserve Bank of Atlanta, it has purchased $236 billion of government debt. By the time the Federal Reserve meets again in September, it is likely to have spent all $300 billion, and the six months will be over.

It is a tricky moment for the Fed. If it continues buying government debt, it may help keep interest rates low, but it would raise concerns that the country is inching ever closer to Zimbabwe (and, of course, if enough people believe we're headed down the Zimbabwean road, it would eventually become a self-fulfilling prophecy).

The Treasury purchases are only the first program the Federal Reserve is on course to close. Its plan to purchase $1.25 trillion in mortgage-backed securities is only supposed to last through the end of the year. The Federal Reserve has purchased $702 billion and this program is also on course to run out the clock in four months. Eventually, the Fed will have to indicate a change for its target interest rate which, since December, has been floored between 0% and 0.25%.

Since the announcement in March of its programs to purchase mortgages and Treasuries, the Federal Reserve has been able to sit back at each meeting and simply say the programs would continue apace. In recent meetings the Fed has fiddled with its language about the pace of recovery and their expectations for inflation, but announced no other changes.

Summer is nearing an end, and the economy may already be recovering. The most recent GDP data show an economy headed for growth in the third quarter (see "The Recovery Question.") A report from Macroeconomic Advisers says GDP for the third quarter is on course to grow 3.1%. Even key indexes for manufacturing are poised for a turnaround (see "A Manufacturing Recovery?")

If the Fed is confident about the recovery, it may announce Wednesday the timing of its plans to take the economy off life support. But the Federal Reserve is more concerned with employment--the Fed has a mandate to seek full employment and price stability. Most people certainly care more about having a job than about a measure like the GDP expanding. On the job front, there is still a lot of concern: Last week, "only" 247,000 jobs were lost in the U.S. That's better than a loss of more than 600,000, like we saw earlier in the year, but not even close to the Fed's goal of full employment. (See "Bad News: Unemployment Falls To 9.4%.")

Since March, the strategy has been to wait and see. When summer is over, that will no longer be an option.

"Cash for Clunkers" IS a Clunker for Retail

here's the headline from Marketwatch

Dollar Deficit

from WSJ:

NEW YORK -- The dollar remains down against virtually all of its major rivals Thursday, although trade is volatile in thin summer conditions.

The dollar is weak on two fronts: it's traditional inverse relationship with stocks throughout the financial crisis and on fundamental economic data.

Rising equities are keeping the euro, pound and commodity-linked currencies supported after they earlier advanced to intraday highs.

Higher stocks encourage traders to sell the low-yielding dollar -- particularly after the Federal Open Market Committee on Wednesday pledged to keep interest rates low for a while

Stocks Shrug Off Bad Retail Sales News

Amazing that the market always shrugs off terrible news. More signs of a bubble!

Retail Sales Down Even With "Cash for Clunkers"

The futures were up 100 points on the Dow, but gave up all their gains following this news.

from WSJ:

Stocks struggled to stay in the black on Thursday as a round of downbeat economic data cooled the previous trading session's investor euphoria.

Major indexes have swung between gains and losses since the opening bell. Gains in the financial sector and commodity-related stocks have kept the market on an even keel.

The Dow Jones Industrial Average, which leapt 120 points on Wednesday, was recently up 30 points, or 0.3%, at 9391.46, helped by a 4.7% gain in component Bank of America. Wal-Mart Stores was up 1.7% after saying its earnings last quarter were flat as same-store sales slid. But the discounting giant boosted its earnings outlook.

The Commerce Department said retail sales fell 0.1% in July despite the debut of the government's "cash for clunkers" program meant to jump-start auto sales. Demand for goods aside from cars took a large tumble, with steep declines for housing-related retailers and electronic stores.

In other economic reports out on Thursday, initial jobless claims rose marginally last week and import prices fell in July on lower energy prices.

The reports come at a time when investors have generally been in an upbeat mood thanks to a better-than-expected earnings season. But many participants are also looking for a new catalyst to emerge to keep the market's summer rally going into the fall.

Sugar Shortage Coming

Some of America's biggest food companies say the U.S. could "virtually run out of sugar" if the Obama administration doesn't ease import restrictions amid soaring prices for the key commodity.

In a letter to Agriculture Secretary Thomas Vilsack, the big brands -- including Kraft Foods Inc., General Mills Inc., Hershey Co. and Mars Inc. -- bluntly raised the prospect of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies, chewing gum and thousands of other products.

The companies threatened to jack up consumer prices and lay off workers if the Agriculture Department doesn't allow them to import...

Interesting Article

Considering that CNN is a big government, pro-Obama propaganda machine, it is amazing to hear them say that this stock market rally is a bubble:

http://money.cnn.com/2009/08/11/news/economy/bubbly.fortune/index.htm?cnn=yes

I keep hearing over and over again that money managers are buying stocks solely because they don't want to be left out. They aren't buying because the economy is good or because stocks are earning solid returns. P/E ratios are at all-time highs -- 160. Historical average is about 18! What will happen when reality finally comes? That will be one very big bursting bubble!

Apparently, we've learned nothing through this crisis. We're just doing the same things that brought it all on. Last week, I saw some TV ads offering mortgages with NO down payment, NO documentation loans. They call them "liar loans" for good reason. Who but the government would do something like that? NO serious investor would loan money under those conditions!

New statistics: 30% of all homes in America have mortgages that are MORE than the value of the homes. Mortgage Bankers Assoc. study predicting that by 2011, 48% of all loans on homes will be MORE than the value of the house they secure!

Our government is very good at blowing bubbles. They devastation they cause when they pop is breath-taking! Probably the biggest bubble of all -- the Mother of all Bubbles -- is U.S. government debt. When that one pops, it will be the POP heard round the world!

Last Thursday, Fannie Mae went back to the taxpayer trough. They went to the Treasury for another bailout. It hardly made the news!

The Founders must be turning over in their graves!

Steve

CNN: Bernanke's Stock Market Bubble

NEW YORK (Fortune) -- The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create. But along the way it may have pumped up another bubble, this time in stocks.
To head off the worst downturn since the Great Depression, the central bank has slashed interest rates while funneling money to banks.
The Fed has mostly won praise for its efforts. The pace of job losses has slowed, and there has been a modest recovery in output.
At the same time, stocks have bounced back with startling speed. Since global markets hit their bottom in March, the S&P 500 has jumped 51% -- even as the outlook for economic recovery remains dim.
"This is the most speculative momentum-driven equity market since the early 1930s," Gluskin Sheff economist David Rosenberg wrote in a note to clients Monday.
Of course, stocks have rallied in part because investors perceive the worst-case scenario -- a 1930s-style Depression -- is off the table. And while the gains have been remarkable, they come after an even bigger decline. The S&P is still down 16% since Lehman Brothers collapsed in September.
But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout.
Recent weeks have brought huge rallies in some of the lowest-quality stocks -- including firms such as AIG (AIG, Fortune 500), Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) that are being propped up by the government and are unlikely to return to health any time soon.
What's more, this year has brought an 80% surge in emerging market stocks, while the dollar has posted a 10% decline since March. A declining dollar and surging emerging markets were the hallmarks of the credit-fueled bull run earlier this decade.
"We have put the band back together on a lot of this," said Howard Simons, a strategist at Bianco Research in Chicago. "That couldn't have happened without liquidity."
Though liquidity is admittedly a nebulous concept, there's no question that central bankers around the globe have poured huge amounts of money into the markets to ease the financial crisis. Given free money, investors' appetite for risk shoots higher and they gobble up stocks.
That's good, except when the outlook for economic growth doesn't seem to support the higher stock values.
"Many observers are wondering whether the strong stock market rebound since mid-March is already a forerunner of the next recovery or simply driven by a reflux of liquidity into riskier asset markets," Deutsche Bank Research analyst Sebastian Becker wrote in a report last month.
Rosenberg, who notes that consumer credit has dropped an unprecedented five straight months, said it's far from clear the recession is over. He says the risk of a market relapse later this year is high.
Simons said another factor that could work against recovery is that short-term interest rates could soon head higher, judging by action in futures markets. That could raise companies' borrowing costs at a time when policymakers have committed to holding rates near zero to restore economic growth.

0:00 /1:22Greenspan: New rules required

Fed officials have stressed that they will start to unwind their financial support programs at the earliest sign of inflation. Given the cost of cleaning up after the last bubble, Becker writes that "this time, policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble."
But it's clear that bankers are loath to pull back on their support for the financial system before it's clear the economy has staged a stronger recovery. And the Fed has a long and painful history of ignoring asset price inflation.
"The central bankers have this textbook belief that the only inflation is the kind that appears in consumer price indexes," said Simons. "They don't believe what they're doing could cause an asset price bubble."
For now, Fed chief Ben Bernanke and other central bankers can console themselves for now with stable consumer price inflation readings in major economies.
But comparing the bankers with a driver pulled over for speeding for the umpteenth time, Simons said, "At some, point, you have to say maybe your speedometer's broken."

Socked Stocks

Stock analyst downgrades are pressuring stocks today. P/E ratios are the highest in 5 years. Sounds like bubble territory!

Financial System - Is It Bankrupt?

from Market Oracle:
The World needs a breather from the US. And they'll get it sooner than many think

We're making this way too complicated. It's simple really.

The Fed has only one tool at its disposal; to create more money. Typically, the way the Fed adds to the money supply is by lowering interest rates. When the Fed lowers rates below the rate of inflation; they're basically selling dollars for under a buck. That's a good deal, so, naturally, speculators jump on it and trigger a credit expansion. What follows is a frenzy of market activity that ends in a housing, credit, tech or equity bubble. Eventually, the bubble bursts and the economy goes into a tailspin. Then, after a period of digging-out, the process resumes again. Wash, rinse, repeat. It's always the same. The moral is: Cheap money creates bubbles; and bubbles move wealth from workers to rich motherporkers. It's as simple as that. That's why the wealth gap is wider now than anytime since the Gilded Age. The rich own everything.

The Federal Reserve is the policy arm of the big banks and brokerage houses. Period. Ostensibly, its mandate is to maintain "price stability and full employment". Right. Anyone notice how many jobs the Fed has created lately? How about the dollar? Is it really supposed to zig-zag like it has been for the last decade? The central task of the Fed is to shift wealth from one class to another. And it succeeds at that task admirably. The Fed's "mandate" is public relations claptrap. Bernanke hasn't lifted a finger for homeowners, consumers or ordinary working stiffs. "Yer on yer own. Just don't expect a handout. That's socialism!" All the doe is flowing upwards...according to plan. The Fed is a social engineering agency designed to serve as the de facto government behind the smokescreen of democratic institutions. Did you really think a black, two year senator with no background in foreign policy or economics was calling the shots?

Puh-leeese! Obama is a public relations invention who's used to cut ribbons, console the unemployed, and convince Americans they live in a "post racial" society. Right. (Just take a look at the footage from Katrina again) The Fed has complete control over monetary policy and, thus, the country's economic future. Bernanke doesn't even pretend to defer to Congress anymore. Why bother? After Lehman caved in, Bernanke invoked the "unusual and exigent" clause in the Fed's charter and declared himself czar. Now he has absolute power over the nation's purse-strings.

The $13 trillion the Fed has committed to the financial system since the beginning of the crisis --via loans and outright purchases of mortgage-backed garbage and US sovereign debt--was never authorized by Congress. In fact, the Fed stubbornly refuses to even identify which institutions got the "loans", how much the loans were worth, what kind of collateral was accepted for the loans, or when the loans have to be repaid.

In truth, the loans are not loans at all, but gifts to the industry to keep asset prices artificially high so that the entire financial system does not come crashing down. Check this out:

"In an analysis written by economist Gary Gorton for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference titled, "Slapped in the Face by the Invisible Hand; Banking and the Panic of 2007", the author shows that mortgage-related securities ballooned from $492.6 billion in 1996 to $3,071.1 in 2003, while asset backed securities (ABS) jumped from $168.4 billion in 1996 to $1,253.1 in 2006. All told, more than $20 trillion in securitized debt was sold between 1997 to 2007. "

$20 trillion! How much of that feces paper--which is worth just pennies on the dollar-- is sitting on the balance sheets of banks and other financial institutions just waiting to blow up as soon as the Fed asks for its money back? And the Fed will never get its money back because the prices of complex securities and derivatives will never regain their pre-crisis values. Why? Because these derivatives are linked to underlying collateral (mortgages) which have already declined 33% from their peak and are headed lower still. Also, these toxic assets were sold as risk-free (many of them were rated triple A) and have now been exposed as extremely risky or fraudulent. Because these assets were heaped together in bundles to strip out their interest rates, they cannot be easily separated which means that they are worth considerably less than the 33% that has been lost on the underlying collateral (mortgages) The securitization markets are not expected to rebound for a decade or more, which means that the Fed will have to find other more-creative way to goose the credit system to avoid a downward spiral.

But how?

Zero percent interest rates haven't worked because qualified borrowers are cutting spending and saving their disposable income, while people who need to borrow, no longer meet the banks' tougher lending standards. Bank credit is shrinking even though excess bank reserves are nearly $900 billion. When banks stop lending, the economy contracts, business activity slows, unemployment soars and growth sputters. Presently, the economy is still contracting, but at a slower pace than before. "Less bad" is the new "good". All the recession indicators are still blinking red--income, employment, sales, and production--all down big! But it doesn't matter because it's a "Green Shoots" rally; plenty of cheap liquidity for the markets and a freeway off-ramp (for sleeping) for the unemployed.

The Fed's lending facilities are designed to pump liquidity into the system and inflate another bubble by generating more debt. Unfortunately, most people accept Bernanke's feeble defense of these corporate-welfare programs and fail to see their real purpose. An example may help to explain how they really work:

Say you bought a house at the peak of the bubble in 2005 and paid $500,000. Then prices dropped 40% (as they have in Calif) and your house is now worth $300,000. If you only put 5% down, ($25,000) then you are underwater by $175,000. Which means that you own more on the mortgage than your house is currently worth. (This is essentially what has happened to the entire financial system. The equity has vaporized, so institutions are using dodgy accounting tricks instead of reporting their real losses.) So Bernanke comes along and gives you $175,000 no interest, rotating loan to you so that no one knows that you are really busted and you can continue spending just as you had before. Not bad, eh? This is what the lending facilities are all about. It is a charade to conceal the fact that a large portion of the nation's financial institutions are insolvent and propped up by state largess.

But there's more, too.

Now that Bernanke has given you $175,000 no interest, rotating loan; you expect that eventually he will ask for his money back. Right? So your only hope of saving your home, in the long run, is to engage in risky behavior, like dabbling the stock market. It's like playing roulette, except you have nothing to lose since you are underwater anyway.

This is exactly what the financial institutions are doing with the Fed's loans. They're betting on equities and hoping they can avoid the Grim Reaper.

Here's how former hedge fund manager Andy Kessler summed it up last week in the Wall Street Journal: "By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market." (Andy Kessler, "The Bernanke Market" Wall Street Journal)

Only a small portion of the money that has gone into the stock market in the last 6 months (since the March lows) has come from money markets. The fed's loans are being laundered into stocks via financial institutions that are rolling the dice for their own survival. The uptick in the markets has helped insolvent banks raise equity in the capital markets so they don't have to grovel to Congress for another TARP bailout. Everybody's elated with Bernanke's latest bubble except working people who have seen their wages slashed by 4.5%, their credit lines cut, the home values plunge, and their living standards sink to third world levels. And the Fed's spending-spree is not over yet; not by a long shot. The next wave of home foreclosures (already 1.9 million in the first half of 2009) is just around the corner--the Alt-As, option arms, prime loans. The $3.5 trillion commercial real estate market is capsizing. The under-capitalized banking system will need assistance. And there will have to be another round of fiscal stimulus for ailing consumers. Otherwise, foreign holders of US Treasurys will see that the US can no longer provide 25% of global demand and head for the exits.

Bernanke's back is against the wall. The only thing he can do is print more money, shove it though the back door of the stock exchange and keep his fingers crossed. The rest is up to CNBC and the small army of media cheerleaders.

There is some truth to the theory that Bernanke saved the financial system from a Chernobyl-type meltdown. But that doesn't change the facts. Accounts must be balanced; debts must be paid. The Fed chief has committed $13 trillion to maintain the appearance of solvency. But the system is bankrupt. The commercial paper market, money markets, trillions of dollars of toxic debt instruments, and myriad shyster investment banks and insurance companies are now backed by the "full faith and credit" of the US Treasury. The financial system is now a ward of the state. The "free market" has deteriorated into state capitalism; a centralized system where all the levers of power are controlled by the Central Bank. If Bernanke's Politburo withdraws its loans--or even if he raises interest rates too soon-- the whole system will collapse.

The economy is now balanced on the rickety scaffolding of the dollar. As the Obama stimulus wears off, the rot in the economy will become more apparent. Household red ink is at record highs, so personal consumption will not rebound. That means US assets and US sovereign debt will become less attractive. Foreign capital will flee. The dollar will fall.

The world needs a breather from the US. And they'll get it sooner than many think.

By Mike Whitney

Speculators in the Hot Seat

from Lind-Waldock:

By Kristina Zurla Landgraf ISSUE 808 | August 2009

This time last year, crude oil prices were soaring to new record highs above $147 a barrel, and anxious consumers and regulators were pointing fingers at what--or who--was to blame for the price escalation. Speculators and index funds active in the futures markets took the heat. Even though crude oil futures are down about 50 percent from that peak, this summer the spotlight again has turned to speculators as a new administration looks for ways to appease the public still shell-shocked over the 2008 financial crisis and leery of possible market manipulation.

The Commodity Futures Trading Commission (CFTC) again has reopened the discussion, conducting three days of hearings in late July on the topic of speculation in the futures markets, and the impact on market pricing. New restrictions on trading may result as regulators look for ways to reduce price volatility.

While no action has yet been taken, participants in the futures markets should take heed of the developments. Some say it could trigger a plunge in the price of oil or other markets in the short run if index fund participants face limits and have to exit positions. In the long run, some say it could hamper efficient price discovery as well as drive business overseas.

It had seemed this issue had been put to rest last year when after a series of hearings and discussions in the early summer of 2008, the CFTC’s Interagency Task Force on Commodity Markets issued its “Interim Report on Crude Oil,” which concluded that fundamental supply and demand factors provided the best explanation for the rise in crude oil prices to their record highs. “There is no statistically significant evidence that position changes of any category or subcategory of traders systematically affect prices,” the CFTC said.

In a further statement in September 2008, the CFTC found that while crude oil futures prices were rising from December 2007 to June 30, 2008, in fact, the activity of commodity index traders in crude oil at that time reflected a net decline of futures equivalent contracts. Speculators and index funds were off the hook, or so it seemed.

This year, crude oil has seen its price more than double from its January low of just over $32, and worries about rising prices reignited. CFTC Chairman Gary Gensler said the agency “must seriously consider setting strict position limits” in the energy markets. He also stated that the hearings were “an opportunity to determine how speculative position limits could be used to address excessive speculation, not how we can eliminate speculation.” By law, the CFTC can set limits on the number of positions a trader can take in the futures markets, even without any evidence of excessive speculation.

CME Group CEO Craig Donohue testified to the CFTC that “efforts to control price or volatility by position limits is a failed strategy” and that there was no proof that putting position limits on these market participants will have any positive impact. However, he said the CME recognizes the concerns respecting the role of index funds and swap dealers in the futures market, and in particular, the impact that their participation in the markets might have on energy prices.

“We are prepared to respond to those concerns by adopting a hard limit regime for those products, including single-month and all-months combined limits in addition to the current limits that apply during the last three trading days of the expiration month,” he said.

Concerning the influence of index funds, Donohue said “index investing is an efficient means for thousands of small traders to gain the benefit of asset diversification or to hedge risk,” and that “contrary to the picture painted by a few witnesses at recent Congressional hearings, index funds are not monoliths where a single speculator, who controls a large block of capital, stays long against all odds and logic.” Read the full text of Donohue’s CFTC testimony.

ICE Chairman and CEO Jeffrey Sprecher cautioned in his CFTC testimony that “during times that unpopular price signals are being sent by markets, it is often tempting for policy makers to take pro-active steps to address what they perceive to be structural problems in the market. While well intentioned, these measures often fail to achieve their desired objectives or, worse yet, lead to unintended consequences such as increased price volatility and distortion of important price signals that would otherwise be discovered in properly operating markets.” Read his full testimony.

If the CFTC puts new price limits in place, some say investors in popular commodity-based exchange-traded funds (ETFs) may be rushing for the exits, triggering possible short-term declines in commodity markets such as crude oil.

The day the CFTC hearings began on July 29, crude oil futures plunged to a three-month low. Some analysts that day said the decline (driven mainly by a supply report) was exaggerated by fears of CFTC action.

However, some say the CFTC won’t want to create chaos, and any measures enacted may not have sweeping market impact on all participants. An announcement from the CFTC is expected later this month.

CFTC Regulatory Changes

from WSJ:

The Commodity Futures Trading Commission now tallies data on oil trading in two continents, but the expanded reports still reveal little about the role of speculators in setting prices.

The agency recently began including oil-trading data from ICE Futures Europe's West Texas Intermediate contract in addition to the New York Mercantile Exchange in its weekly reports outlining the activities of large traders in commodity markets. The reports break out the open bets that commodities such as oil and wheat will rise or fall by speculators as well as companies trading to reduce business risk.

CFTC Chairman Gary Gensler in late July said the inclusion of ICE data is a move to "begin fulfilling our commitment to greater transparency."

Critics said the regulator is providing more of the same flawed data, dividing traders into frustratingly vague "commercial" and "noncommercial" columns.

"I always viewed it as a match in a cave," said Craig Pirrong, director of the Global Energy Management Institute at the University of Houston. "It sheds a little light, but not a whole lot."

The CFTC also plans to break swap dealers out of the commercial category and into their own group, while doing the same for hedge funds in the noncommercial section. Supporters said these moves will increase market transparency. Right now, the CFTC divides "commercial" traders, who use the market to reduce the risk that price swings pose to their regular business, from "noncommercials," which are financial investors like hedge funds.

New Bull Market in Commodities?

from iStockAnalyst:
Reuters is quoting Abby Joseph Cohen, chairwoman of the investment policy committee at Goldman Sachs as saying the new bull market has begun.

At the same time, FT Alphaville pointed out that Goldman Sach's commodity research team sees a commodity supply shortage developing in 2010 that could become so bad that governments end up having to conduct coordinated policy responses. As the following graph by FT Alphaville shows, Goldman has been spot on about movements in WTI crude oil prices.


This implies new historical highs in crude oil, copper and agricultural commodities--think $147/bbl oil and what that would do to global demand.


The bull market call says we should load up on stocks, while the commodity call is more omnimous. Yes, if the commodity call is correct, investors stand to make big returns on commodities like crude and copper, but a "severe" supply shortage means prices will begin choking off demand, i.e., harming economic growth and stock prices in the process, as well as fostering ballooning inflation that central banks ostensibly would have to respond to.

The question is, at what point does the portended surge in commodity prices kill instead of cheer stock prices? Ostensibly, when there is evidence that soaring commodity prices are feeding into accelerating inflation and severely hampering consumption. That's not likely to happen until crude oil for example exceeds previous highs (over $147/bbl).

My thoughts:
The only part of this that I disagree with, and this is minor, is the price level at which commodity prices would stifle economic growth. Since the economy is so weak, I suspect that level would come at a much lower price than before. The break in commodity prices occurred around the 4th of July in 2008, months before the economic crisis fully hit with all the bailouts and TARP. This was also long before the vast majority of job losses.