Friday 6 August 2010

Asset Deflation – Food Inflation?

Baltic Dry Index. 1978 +21
LIR Gold Target by 2019: $3,000.

"Indeed the temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the [New York] Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But is has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently discredited.”

J. K. Galbraith. The Great Crash: 1929.

Today while we wait for the latest US unemployment figures, we have a split focus. Is the USA headed into asset deflation, almost certainly taking much of the other G-7 with it, plus thanks to droughts and floods, are we all heading for a most unwelcome bout of food inflation? The answer to both questions looks highly likely to be yes. Up first, the rising panic over the prospect of US deflation.

"Economics is an entire scientific discipline of not knowing what you're talking about."

P.J. O Rourke.

US economy 'on the road to deflation', warns Pimco boss El-Erian

Mohamed El-Erian, the head the world's largest bond fund, has said the United States faces a one in four chance of suffering deflation and a double-dip recession

Published: 11:55AM BST 05 Aug 2010

I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” Mr El-Erian, chief executive officer at Pacific Investment Management Co. (Pimco), told reporters in Tokyo on Thursday.

"If you wonder how meaningful 25pc is, ask yourself the following question: if I offered you that I would drive you back to work, but there's a one in four chance that I get into a big accident, would you come with me?"

Mr El-Erian, who helps manage more than $1 trillion in assets, warned that action needed be taken quickly to prevent a economic slowdown.

Mr El-Erian said that downward pressure on prices – translating into a rise in real borrowing costs – was already encouraging companies to accumulate cash "in a way that was unthinkable just two years ago", while individuals were being driven to save.

"On the road to deflation, which is what the United States is on today ... policy becomes less effective," he said.

He also warned that US unemployment was likely to stay "unusually high".

http://www.telegraph.co.uk/finance/economics/7928018/US-economy-on-the-road-to-deflation-warns-Pimco-boss-El-Erian.html

Stiglitz Says U.S. Faces ‘Anemic Recovery,’ Needs More Stimulus

Aug. 6 (Bloomberg) -- Nobel Prize-winning economist Joseph E. Stiglitz said the U.S. economy faces an “anemic recovery” and the government will need to enact another round of “better designed” stimulus measures.

The Obama administration took “a big gamble and it doesn’t look like it’s paying off,” Stiglitz told Bloomberg TV in an interview in Sydney yesterday. “The recovery is so weak that it is not strong enough to generate new jobs for the new entrants in the labor force, let alone to find jobs for the 15 million Americans who would like a job and can’t get one.”

-----The U.S. lost 65,000 jobs last month, according to a median forecast of 81 economists in a Bloomberg News survey before the Labor Department report today. The unemployment rate climbed to 9.6 percent from 9.5 percent, the survey showed.

Labor Department data yesterday also showed more Americans than projected filed for unemployment insurance, indicating employers are still cutting staff. Initial jobless claims climbed by 19,000 to 479,000 in the week ended July 31, the most since April, according to the data.

“It’s absolutely clear that you need a second round of stimulus,” Stiglitz said. “It needs to be better designed. It needs to be focused more on returns on investment, education, infrastructure, technology. And if you do those kinds of high- powered investments, the long-term national debt will be actually lower and the growth in the future will be higher.”

http://noir.bloomberg.com/apps/news?pid=20601103&sid=aliQAoFT9LLc

2 Top Economists Differ Sharply on Risk of Deflation

By NELSON D. SCHWARTZ Published: August 5, 2010

When the latest unemployment figures are announced on Friday, all of Wall Street will be watching. But for Richard Berner of Morgan Stanley and Jan Hatzius of Goldman Sachs, the results will be more than just another marker in an avalanche of data.

Instead, the numbers will be a clue as to which of the two economists is right about where the American economy is headed. Their sharp disagreement over that question adds yet another twist to the fierce rivalry between the firms, Wall Street’s version of the New York Yankees and the Boston Red Sox.

Mr. Hatzius is arguably Wall Street’s most prominent pessimist. He warns that the American economy is poised for a sharp slowdown in the second half of the year. That would send unemployment higher again and raise the risk of deflation. A rare occurrence, deflation can have a devastating effect on a struggling economy as prices and wages fall. He says he may be compelled to downgrade his already anemic growth predictions for the economy.

For months, Mr. Berner has been sticking to a more optimistic forecast, despite growing evidence in favor of Mr. Hatzius’s view. Last week, Mr. Berner was caught by surprise when the federal government reported that the economy grew at a 2..4 percent pace in the second quarter, well below the 3.8 percent he had forecast a month before. Mr. Hatzius came closer to hitting the mark, having projected a 2 percent growth rate.

More.

http://www.nytimes.com/2010/08/06/business/economy/06deflation.html?hpw

Below, our unstable fiat currency world runs into a problem fiat currency can’t fix. When nature impacts global food production, too much fiat money chases the restricted supply. Below, a subject readers of the LIR have been following for quite some time. This year the weather over much of Eur-Asia has been a continuous tale of too much rain in some places and searing drought from Germany to Kazakhstan. Now Russia has banned wheat and other grain exports through the rest of the year, and there are well grounded fears that the next winter wheat crop due to be planted next month in Russia and Kazakhstan, will be impacted by drought too. Below the latest news potentially triggering food inflation.

Agflation fears as Russia halts all grain exports

Russian premier Vladimir Putin has ordered a halt to all exports of wheat and other grains from August 15, raising the stakes dramatically in the crisis over wheat supplies

By Ambrose Evans-Pritchard Published: 10:47PM BST 05 Aug 2010

"This is very serious," said Abdolreza Abbassanian, chief grain economist at the UN Food and Agriculture Organization. "It's a desperate situation because it has caught everybody off guard. We're not facing the situation of two years ago but there is a risk of destabilising panic."

The shortage may trigger a bout of "agflation", posing a quandary for central banks. Professor Charles Goodhart from the London School of Economics fears that rising food prices will add 0.5pc to Britain's sticky inflation, already testing market tolerance.

Wheat prices surged by their maximum daily limit of 60 cents to $7.86 a bushel on Chicago's exchange, with knock-on effects across the nexus of tradable grains.

Mr Putin said it was a temporary ban on wheat, corn, barley, rye, and grain products until the end of the year due to "abnormally high temperatures", adding that Russia needs to cap domestic food prices and build its own reserves.

Wheat has surged 69pc since June, but is still far below it $13 peak in 2008. The spike guarantees a sharp rise in bread prices this Autumn. Premier Foods said a loaf of bread may go up to 10p.

Mr Putin pressured Kazhakstan and Belarus to impose similar curbs as the worst drought in a century threatens to drag into late August. "It is unprecedented to ask neighbouring countries to do the same," said Mr Abbassanian.

Ukraine insists that exports are safe, but analysts fear it may follow suit. The Black Sea belt and Eurasia's Steppes produce a quarter of global wheat exports. The saving grace is that stocks are 187m tonnes, against 124m in 2008.

-----Mr Putin acted after meteorological experts issued further drought warnings, raising fears that the ground would be too hard to seed the winter crop next month. The loss of both crops would force Russia to withdraw from export markets for two years. Rabobank expects Russia's wheat output this year to fall from 58m to 45m tonnes.

Kirill Podolsky, head of Russia's grain group Valars, told Bloomberg that the ban had created havoc. "We have ships lined up for grain and no idea what to do. This will be a catastrophe for farmers and exporters alike," he said.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7929133/Agflation-fears-as-Russia-halts-all-grain-exports.html

Wheat Extends Rally, May Advance to $10 If Export Bans Spread

Aug. 6 (Bloomberg) -- Wheat extended a rally to the highest price in almost two years on concern that other nations may follow Russia’s export ban, and the grain may reach $10 a bushel, a price not seen since the global food crisis in 2008.

Russian Prime Minister Vladimir Putin said that Kazakhstan and Belarus should also suspend shipments as Russia’s ban was announced yesterday from Aug. 15 to the yearend. “It’s got $10 written all over it,” said Peter McGuire, managing director at CWA Global Markets Pty, who correctly forecast Aug. 3 the surge to $8.50. Wheat last traded at $10 in March 2008, and a gain to that price would be a 23 percent advance from yesterday’s close.

Russia’s ban may benefit rival producers, including the U.S., the largest exporter, Australia and Argentina, according to Rabobank Group. Wheat prices have doubled in less than two months as drought slashed the harvest in Russia, the third- largest grower, and rains cut Canadian production.

“We believe that the rally in wheat prices is overdone, but would not short wheat,” Morgan Stanley analysts including Hussein Allidina said in a note to investors, referring to making bets that prices may drop. Other wheat-producing countries may opt to limit exports, potentially boosting prices, even though global wheat stockpiles are ample, they wrote.

-----Halting Russia’s wheat shipments would be “appropriate” to contain domestic prices that jumped 19 percent last week, Putin said. The country shipped an estimated 17.5 million metric tons of wheat in the year to June 30, accounting for 14 percent of global trade, according to the U.S. Department of Agriculture.

Kazakhstan, Russia’s partner in a customs union, exported 7.5 million tons in the year ended June 30, while Belarus, another partner, shipped 400,000 tons, according to the USDA. Ukraine accounted for 9.2 million tons in the same year, it said.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=av7VAROgLSEo&pos=4

India Splits in Inflation Fight, Bets on Monsoon Rain

Aug. 6 (Bloomberg) -- India’s officials are splitting over how to quell the inflation hammering the 828 million people who live on less than $2 a day, with the government counting on monsoon rains to end a debate that risks policymaking paralysis.

Finance Minister Pranab Mukherjee Aug. 4 warned growth will suffer if interest rates rise too fast, after the Reserve Bank of India last week accelerated its pace of increases. A central bank official was stripped of some powers this week after saying the RBI hasn’t gone fast enough, The Economic Times said, and opposition parties have stalled parliamentary proceedings over the government’s failure to stem inflation.

-----In the past decade and a half, Indians have ousted at least two national governments after inflation eroded the spending power of the nation’s poor. Price increases of more than 6 percent between 1994 and 1996 helped eject Prime Minister P.V. Narasimha Rao. His Congress party-led government lost to the Bharatiya Janata Party, which was voted out in May 2004 after prices rose in eight of the 12 months that preceded the poll.

-----India’s food inflation slowed to 9.53 percent in July, a 13-month low and down from 21 percent in November, as the country last month got more monsoon rains than forecast by the weather office, aiding sowing of lentils and rice. The June- September monsoon is the main source of irrigation in the country. It was 16 percent above average last week, the India Meteorological Department said yesterday.

http://noir.bloomberg.com/apps/news?pid=20601091&sid=amPO8Og8JcYY

'More than four million' hit by flooding in Pakistan

By Waseem Sattar in Sukkur Friday, 6 August 2010

Pakistan's worst floods in 80 years have killed at least 1,600 people and affected the lives of more than four million, the UN said yesterday.

-----The raging waters have spread from the north-west to the Punjab, the country's agricultural heartland, and further south to the province of Sindh.

-----Officials in Sindh, home to Pakistan's biggest city and commercial hub, Karachi, are scrambling to prevent heavy loss of life as the waters near.

The Pakistani meteorologist Hazrat Mir said the floods were moving swiftly across north Sindh and would enter the town of Sukkur by Saturday.

"What we [are witnessing] is a sea of people in need," said Manuel Bessler, head of the Pakistan bureau of the UN Office for the Co-ordination of Humanitarian Affairs. "It is an evolving emergency. We are afraid it will get worse before it gets better."

-----At least 1.3 million acres of crops have been destroyed in the Punjab, meaning that more government money will have to be spent on importing cotton for the textile industry, while staple crops such as rice have been badly affected.

http://www.independent.co.uk/news/world/asia/more-than-four-million-hit-by-flooding-in-pakistan-2044911.html

At the Comex silver depositories Thursday, final figures were: Registered 50.89 Moz, Eligible 58.83 Moz, Total 109.72 Moz.

"... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."

Harvard Economic Society, November 10, 1929

+++++

Crooks and Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

No crooks today, just the tax and work shy scoundrels of Greece, where unsurprisingly striking and paralyzing the economy has driven thr tourists away, many of them into next door local rival Turkey. At some point ahead the Greeks will figure it out for themselves. They’re better off out of the Germanic euro, and better off restructuring their debt.

What would be a road hazard anywhere else, in the Third World is probably the road.

P.J. O Rourke.

AUGUST 6, 2010

Tourists Shun Greece, Try Turkey

In the big-money world of mass tourism, Greece's woes are proving a boon for Turkey as vacationers vote with their flip-flops to avoid a country in financial crisis.

Greek hotels and tour operators have been slashing prices and scaling back staff in a bid to recoup, after TV images of street riots coupled with a strong euro earlier this year persuaded vacationers to book elsewhere.

That is bad news for Greece, which is already facing declining growth and budget deficits. Tourism makes up about 15% of the country's gross domestic product, and many economists say this summer's tourist season will be critical for a weakened economy that is forecast to shrink around 4% this year.

So far, tourism revenues are down almost 9% this year compared with the period in 2009—itself a bad year—according to the latest Bank of Greece data. In May, Athens hoteliers saw some 30,000 cancellations after protests rocked the capital, leaving three bank workers dead.

Meanwhile, just across the Aegean Sea in Greece's longstanding rival Turkey, 2010 is shaping up as a record year for tourism. Popular beach resorts such as Antalya are straining to cope with overflowing hotels and bars. Revenues in the second quarter for the industry as a whole were up 7.4%, compared with last year, while passenger arrivals in the first half were up by a quarter, according to Turkey's airport authority.

But tourist arrivals don't tell the whole story. Hotel prices at Greek resorts are down from 20% to 30%. Prices at other tourist-oriented businesses—from rental-car shops to souvenir stands—are also lower. Greeks themselves, hit by government austerity measures, are cutting back.

"If you take into account the roughly 12% revenue decline we saw last year, Greek tourism in these two years has seen a 20% reduction in income. That's a very big number," said Andreas Andreadis, president of the Panhellenic Hoteliers Federation.

Greece, with its ancient monuments and sunny Mediterranean climate, is one of the world's top 20 tourist destinations, attracting some 14.9 million tourists last year.

But vacationers can find the same blue waters, ancient Greek ruins and similar food just a few miles away from many of the Greek islands, in Turkey, which is riding a wave of benign economic news. In 2009, Turkey attracted 27 million tourists, a roughly 3% increase, according to official statistics. This year, Turkey's economy is forecast to grow 5% to 6%, and its resorts see opportunity in the crisis experienced by such tourism hot spots as Spain and Portugal.

"We have everything the other European resorts have here: sunshine, history and tourism infrastructure, only cheaper," says Erdem Yilmaz, a restaurant owner in this ancient city's old town. Antalya was settled by Greeks, Romans and before them Hittites, a civilization that occupied much of modern Turkey.

Tourist associations say Istanbul and smaller cities near the border with Syria also are profiting from a doubling of the number of free-spending tourists from the Arab world, a consequence of Ankara's warmer relations and newly visa-free regimes with its Middle Eastern neighbors, analysts say.

http://online.wsj.com/article/SB10001424052748704741904575409162866603270.html?mod=WSJEUROPE_hps_MIDDLEFifthNews

Greece is not technically part of the Third World, but no one has told the Greeks.

P. J. O Rourke, with apologies to Italy.

More on the blog at the weekend. Have a great weekend everyone.

The monthly Coppock Indicators finished July:

DJIA: +264 Down. NASDAQ: +427 Down. SP500: +275 Down.

The bull market (or bear market rally) that commenced on Nasdaq on 30/4/09 at 1717 has ended. (30/5/09 SP 500 at 919, 30/5/09 DJIA 8500.) While the indicators can flip flop at market turns, this action is rare on the slow monthly indicators. July seems to have confirmed June’s reversal and end of the bull market.

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