The Commodity Bubble
by ilene - February 16th, 2011 7:29 pm
Courtesy of SurlyTrader
In the future they might coin this the “Bernanke Effect” or maybe the great commodity bubble of 2011. The truth is that commodity prices are rising…dramatically. You might have started to notice this disconnect in your grocery store shopping or in gasoline prices, but if you were to ask our government they would tell you that a basket of goods consumed (CPI) is rising modestly. How modest do these numbers appear to you?
Sugar and Corn? Those are luxury goods.
If the basic ingredients to food are skyrocketing, then prices of food will eventually have to keep pace which will directly hurt consumers.
Of the 853 ETF’s that I looked at, which unleveraged funds do you think had the greatest return over that same time period? It is not a trick question:
Are you noticing a theme?
My conclusion is simple: this time is NOT different. Commodity prices cannot go up forever and China will not continue to support the market regardless of prices. What is this “Bernanke Effect” doing to farmland prices? Well, according to a survey by Farmer’s National Company:
“non-irrigated crop land in central Kansas averaged $3,000 an acre, up 50 percent since June…
Crop prices have seen an extraordinary run since early July. A bushel of wheat priced about $4 a bushel on July 4 is now more than $8.50. Other crops have experienced similar increases.
As the land generates more income, it puts more cash in the pockets of the most likely buyers, nearby farmers. It also provides an attractive return for investors who then rent it out to farmers.
The result: Auctions are drawing twice the number of bidders as before, said area agents.”
As with all hot speculation, the commodity run will surely come to an end and will probably have repercussions for all financial markets. We should have learned by now that large financial dislocations tend to not occur in isolation.
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DiggGRAPES OF WRATH – 2011
by ilene - February 14th, 2011 11:46 am
Excellent article comparing current situation with lead up to the Great Depression. Well worth reading. – Ilene
Courtesy of Jim Quinn at The Burning Platform
“And the great owners, who must lose their land in an upheaval, the great owners with access to history, with eyes to read history and to know the great fact: when property accumulates in too few hands it is taken away. And that companion fact: when a majority of the people are hungry and cold they will take by force what they need. And the little screaming fact that sounds through all history: repression works only to strengthen and knit the repressed.” – John Steinbeck – Grapes of Wrath
John Steinbeck wrote his masterpiece The Grapes of Wrath at the age of 37 in 1939, at the tail end of the Great Depression. Steinbeck won the Nobel Prize and Pulitzer Prize for literature. John Ford then made a classic film adaption in 1941, starring Henry Fonda.
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Ron Paul slams Fed’s bond-buying program; Political Pressure on Fed Mounts
by ilene - February 9th, 2011 3:49 pm
Courtesy of Mish
MarketWatch reports Paul slams Fed’s bond-buying program
Outspoken Federal Reserve critic Rep. Ron Paul, R-Texas, slammed the central bank’s latest $600 billion bond-buying program on Wednesday, saying it and near-zero interest rates haven’t led to job creation in the United States.
“Over $4 trillion in bailout facilities and outright debt monetization, combined with interest rates near zero for over two years, have not and will not contribute to increased employment,” Paul said at a hearing of a House Financial Services subcommittee he heads.
“Debt monetization” is a reference by Paul and other Fed critics to the Fed’s latest bond-buying program — a characterization rejected by Fed Chairman Ben Bernanke.
In essence, Paul is charging that the central bank is enabling profligate spending by the government. The term “debt monetization” is a buzzword for how some poorer countries conducted policies in the post-World War II era.
Political Pressure on Fed Mounts
WSJ’s Sudeep Reddy reports on concerns the Federal Reserve could be facing political pressure from Congress, as Rep. Ron Paul holds the first hearing of a new Fed oversight committee. Separately, Fed Chairman Bernanke updates Congress on the economy.
If the above YouTube does not play here is a link: Rep. Ron Paul Ignites Fed Worry
The Food Bubble
by ilene - February 3rd, 2011 9:45 pm
H/t Barry Ritholtz, Did the Fed Cause Unrest in the Arab World?
Visit msnbc.com for breaking news, world news, and news about the economy
How the US Government Manipulates Inflation Data
by Phil - February 1st, 2011 6:11 am
The PCE bothered me yesterday.
The Government told us that the PCE core price index for December was 0% – no inflation at all. I found that to be incredible – as in not credible at all and then Tuscadog asked me how long the Bernank could keep justifying his rampant money printing with fake government data, to which I responded: "I had many derogatory things to say about that but I was literally so sickened by that BS that I couldn’t bring myself to comment on it so I just left it alone but it’s a very sad joke that our government can tell us that there was no inflation in December while the whole planet is falling apart, isn’t it?"
Fortunately, there was a helpful article in the WSJ by Brett Arends that pointed out that the way the government justifies their low inflation figures is through "substitution and hedonics," a topic expert Government BS detector, Barry Ritholtz had touched on as well. As Barry says:
Hedonics asks the question: "How much of a product’s price increase is a function of "inflation," and how much is quality improvement?" Thus, the entire late 1990′s concept of Hedonics is premised upon a flawed assumption: that quality is static. Hedonics is a variation of the old trick of comparing the present with the past, instead of the present. Measuring quality improvements is a distraction from the real measure of inflation: the purchasing power of a dollar.
Hedonics opens the door to producing magical results: a lower inflation rate with generally rising prices, a higher growth rate although the economy may be weaker, and a higher productivity number, although productivity would have been declining without the hedonic imputations.
What BS, right? Well, when I get mad, I do research and when my research uncovers something – I make an electronic puppet show:
Forward this to your friends and Congresspeople – lets try to get our government to get real!
Bill Fleckenstein: The Race To the Bottom Will Be Won By the Dollar
by ilene - January 20th, 2011 5:12 pm
Courtesy of Chris Martenson
"This printing money is going to lead to huge trouble. It’s going to lead to higher interest rates. It’s going to lead to more inflation, and at some point there is going to be a train wreck in the currency and the bond market."
Market commentator and money manager Bill Fleckenstein sat down for a recent interview with ChrisMartenson.com and excoriated the Fed and the monetary policy it’s pursuing. He and Chris discuss the factors that enabled Bill to be one of the first to accurately identify and warn of the housing and credit bubbles – and how history is now repeating itself via the profligate printing of US dollars. The interview covers a wide range of topics meaningful to the investor trying to make sense of where things are headed from here – including central banking culture, bubble psychology, high-frequency trading, inflation/deflation, and the true relative value of the dollar vs the Euro.
Click the play button below to listen to Chris’ interview with Bill Fleckenstein:
In this podcast, Bill sheds light on why:
- The culture of the Fed reinforces a belief in its infallibility. This blinds it to the fact that its interventions cause market players to adopt irrational behavior leading to misallocations of capital that eventually need to be corrected by the system (e.g., busts).
- Correlation between asset classes is the highest it’s been in 60 years. This is a result of the Fed flooding the market with liquidity. It makes it very hard for investors to be anything besides speculators.
- The SEC has been asleep at the switch for the past 15 years, leaving the system vulnerable to exploitation – of which HFT programs are just the latest example.
- A funding crisis looks inevitable: At some point the bond market or the currency market will revolt, resulting in a weak dollar and increasing bond rates – despite whatever the Fed wants.
- It’s perverse for the US to be rewarded for using a printing press indiscriminately without making any fiscal changes, while Europe is painfully adopting austerity and getting penalized.
In Part 2: Outlook for 2011 (for enrolled ChrisMartenson.com members - click here to enroll), Bill gets specific about what he predicts will happen in the bond and currency markets, as well as his specific outlook for 2011.
12 Economic Collapse Scenarios That We Could Potentially See In 2011
by ilene - January 20th, 2011 12:56 pm
Courtesy of Michael Snyder at Economic Collapse
What could cause an economic collapse in 2011? Well, unfortunately there are quite a few "nightmare scenarios" that could plunge the entire globe into another massive financial crisis. The United States, Japan and most of the nations in Europe are absolutely drowning in debt. The Federal Reserve continues to play reckless games with the U.S. dollar. The price of oil is skyrocketing and the global price of food just hit a new record high. Food riots are already breaking out all over the world. Meanwhile, the rampant fraud and corruption going on in world financial markets is starting to be exposed and the whole house of cards could come crashing down at any time. Most Americans have no idea that a horrific economic collapse could happen at literally any time. There is no way that all of this debt and all of this financial corruption is sustainable. At some point we are going to reach a moment of "total system failure".
So will it be soon? Let’s hope not. Let’s certainly hope that it does not happen in 2011. Many of us need more time to prepare. Most of our families and friends need more time to prepare. Once this thing implodes there isn’t going to be an opportunity to have a "do over". We simply will not be able to put the toothpaste back into the tube again.
So we had all better be getting prepared for hard times. The following are 12 economic collapse scenarios that we could potentially see in 2011….
#1 U.S. debt could become a massive crisis at any moment. China is saying all of the right things at the moment, but many analysts are openly worried about what could happen if China suddenly decides to start dumping all of the U.S. debt that they have accumulated. Right now about the only thing keeping U.S. government finances going is the ability to borrow gigantic amounts of money at extremely low interest rates. If anything upsets that paradigm, it could potentially have enormous consequences for the entire world financial system.
#2 Speaking of threats to the global financial system, it turns out that "quantitative easing 2" has had the exact opposite effect that Ben Bernanke planned for it to have. Bernanke insisted that the main goal of QE2 was to lower interest rates, but instead all it has done is…
Stock World Weekly
by ilene - January 2nd, 2011 8:18 am
Here’s the latest Stock World Weekly Newsletter, New Year’s Edition.
Feedback welcome — please leave comments, we value your input. - Ilene
Picture credit: William Banzai7
For Stock World Weekly archives, click here.
AAII: BULLISH SENTIMENT HITS 6 YEAR HIGH
by ilene - December 24th, 2010 2:18 am
Courtesy of The Pragmatic Capitalist
This morning’s AAII sentiment survey is consistent with just about every other sentiment reading of late – investors are wildly confident that stocks will be higher in the coming 6 months. The optimism is almost near universal. The following chart tells the story of this bi-polar market. On August 26th, just days before the market bottom, the bullish sentiment hit just 20.7% – no one thought stocks were set to rise. Now, after a 20% rise in equities the consensus is uniformly positive.
Charles Rotblut of AAII elaborated on this morning’s results:
“Bullish sentiment, expectations that stock prices will rise over the next six months, rose 13.1 percentage points to 63.3% in the latest AAII Sentiment Survey. This is the highest level of optimism since November 18, 2004. This is also the 16th consecutive week that bullish sentiment has been above its historical average of 31%, the longest such streak since 2004.
Neutral sentiment, expectations that stock prices will remain essentially flat, declined 2.3 percentage points to 20.3%. This is a six-week low for neutral sentiment and the 20th consecutive week that neutral sentiment has been below its historical average of 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 10.7 percentage points to 16.4%. This is the lowest level of pessimism since July 14, 2005. It is also the 11th time in the past 12 weeks that bearish sentiment has been below its historical average 30%.
The spread between bullish and bearish sentiment is currently at +46.9 points. This is the most positive bull-bear spread since April 15, 2004, when it reached +50.0 points. A wider differential was recorded on March 5, 2009, when the bull-bear spread fell to -51.4 points.
Bullish sentiment is more than two standard deviations from its historical mean, making it a statistical outlier. In simpler terms, bullish sentiment is running red hot. In fact, the current reading is the 18th highest since the survey started in 1987. Higher readings were recorded in 1987, 2000, 2001, 2003 and 2004. Such high levels of optimism have been correlated with a decline in the S&P 500 over the proceeding 24 weeks, though the magnitude of the declines have varied. A spreadsheet showing all of the survey’s historical data is attached.”
Source: AAII
FED EXTENDS USD SWAPS THROUGH SUMMER 2011
by ilene - December 21st, 2010 2:51 pm
Courtesy of The Pragmatic Capitalist
The Fed announced this morning that they will be extending U.S. dollar liquidity swaps through summer of 2011. This is basically their way of saying that they’re worried about the risk of a dollar funding crisis still. That’s not unreasonable given the elevated risks in Europe (it’s nice to see a more proactive Fed), however, it does expose the USA to a risk that it should never have – foreign denominated debt risk. They issued this useful primer on swaps along with the announcement:
Why has the Federal Reserve re-established temporary U.S. dollar liquidity swap facilities with foreign central banks?
The swap facilities announced in May 2010 respond to the re-emergence of strains in short term funding markets in Europe. They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions.
With which central banks has the Federal Reserve entered into swap facilities?
The Federal
Reserve has established swap arrangements with the Bank of Canada (BOC), the Bank of England (BOE), the European Central Bank (ECB), the Swiss National Bank (SNB), and the Bank of Japan (BOJ).How will the swap facilities function?
The swap lines with the ECB, BOE, SNB and BOJ will provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed local rates for full allotment, similar to arrangements that had been in place previously. The swap line with the Bank of Canada allows for drawings of up to $30 billion. The terms, structure, and operational mechanics of these swap agreements closely parallel the arrangements that expired on February 1, 2010. For reference please see the attached link.
http://www.federalreserve.gov/monetarypolicy/bst_swapfaqs.htm
For how long are the swap facilities expected to be operational?
These swap arrangements have been authorized through August 1, 2011. Central banks may request drawings on their swap lines up to the date of expiration.
Is the Federal Reserve exposed to foreign exchange or private bank risk in extending these lines?
No. Dollars provided through the reciprocal currency swaps are provided by the Federal Reserve to foreign central banks, not to the institutions obtaining the funding in these operations. The foreign central bank receiving dollars determines the terms on which it will lend dollars onward to
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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