Tuesday, 10 September 2013

Off Again?

Baltic Dry Index. 1478 +126

LIR Gold Target by 2019: $30,000.  Revised due to QE programs.

Never, never, never believe any war will be smooth and easy, or that anyone who embarks on the strange voyage can measure the tides and hurricanes he will encounter. The statesman who yields to war fever must realize that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events.

Sir Winston Churchill.

This morning war fever in Washington seems to have cooled again. The unfathomable on again, off again, American war on civil war torn Syria seems to be off again, although American flip-flops now seem to be happening daily. Quite what providing an air force for Al Qaeeda is supposed to achieve, other than ensuring their victory, is lost on this side of the Atlantic outside of Paris. And Paris isn’t sharing the great secret with anyone.

In response to the off again news, plus some better economic news from Asia, it became risk-on again in the great disconnect in the US stock market. Stay long physical precious metals. The inmates have taken over the asylum in Washington and on Wall Street, and are now randomly pulling and pushing on all the levers of state.  We are all going to get rich again, by betting on derivatives based on the BRICs driving the global economy. For more on the IC part of the BRIC, scroll down to Crooks Corner. To this old dinosaur trader in the safety of modestly recovering Britain, the BRICs look like an accident just about to happen. But is the now soaring BDI offering a new message of hope, or is it just forecasting war? Time will tell all too soon, I suspect.

There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.

J. K. Galbraith

Sept. 9, 2013, 4:51 p.m. EDT                                     

U.S. stocks jump; Dow has best day in 8 weeks

Art Hogan: Low volume, high volatility until host of issues resolved

NEW YORK (MarketWatch) — U.S. stocks climbed on Monday, with the S&P 500 extending its longest win streak since July, after Chinese exports beat projections and as investors anticipated the unveiling of Apple Inc’s new iPhone models.

The Dow Jones Industrial Average rose nearly 166 points and finished up 140.62 points, or 0.9%, at 15,063.12, its best performance in more than eight weeks. Caterpillar Inc. CAT +0.16%  led gains that included all but one of the blue-chip index’s 30 members after the Chinese government reported exports rose 7.2% in August from the year-earlier period, topping forecasts for a 6% rise.

“China came out with significantly better economic data over the weekend, and that’s important to us because the China demand story continues to be a very important piece of the global economic picture,” said Art Hogan, market strategist at Lazard Capital Markets.

Helping lift equities to afternoon highs were reports related to Syria, with Russian Foreign Minister Sergei Lavrov saying his nation had called on Syria to relinquish its chemical-arms stockpile if the move would help prevent a U.S.-led military strike.

A top aide to President Barack Obama said the White House would take a “hard look” at Russia’s proposal for Syria to put its chemical weapons under international control. The “chatter that a negotiated settlement for Syria’s chemical weapons might be a possibility” bolstered equities, said Michael Sheldon, chief market strategist at RDM Financial.

China August Industrial Output Rises 10.4%

By Bloomberg News - Sep 10, 2013 6:54 AM GMT
China’s industrial output grew at the fastest pace in 17 months in August, adding to signs of a rebound this quarter that include a pickup in export gains.

Factory production rose 10.4 percent from a year earlier, the National Bureau of Statistics said in a statement in Beijing today, compared with a median forecast of 9.9 percent in a Bloomberg News survey. Retail sales advanced 13.4 percent, while fixed-asset investment excluding rural households increased 20.3 percent in the January-August period, both topping estimates.

Today’s data suggest Premier Li Keqiang’s measures from tax cuts to extra spending on railways have helped halt a two-quarter slowdown in the world’s second-biggest economy. Li’s government has signaled that it will defend its 7.5 percent expansion goal while cutting overcapacity and squeezing shadow banking to limit financial risks.

“All the economic data published since July have been quite positive, showing a noticeable short-term recovery,” Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, said before the release of today’s figures. “Demand is picking up on the ground.”

Next, the great Tokyo “gold rush” begins. It’s like taking candy for a baby, for those in the know.

Tokyo Bay’s Properties Are Biggest Olympic Win Beneficiaries

By Kathleen Chu & Katsuyo Kuwako - Sep 10, 2013 7:51 AM GMT
Tokyo Bay area property prices stand to benefit the most in the lead up to the 2020 Olympic Games, adding to the recovery in the city’s real estate values after 20 years of declines.

About 90 percent of the competition venues will be located within 8 kilometers (5 miles) of the Olympic Village in Harumi, an area of reclaimed land about 2 miles southeast of downtown Tokyo, according to the Tokyo 2020 Bid Committee. Apartment prices in the area may increase as much as 20 percent, said Sanyu Appraisal Corp., a property appraisal company.

Tokyo’s victory coincides with a recovery in the nation’s property market where residential prices have been declining since 1992, amid expectations that Prime Minister Shinzo Abe’s policies will end 15 years of deflation. Just as the summer Olympics in 1964 helped turn vast, empty tracts of land in Komazawa into a residential neighborhood in central Tokyo today, the 2020 Games will help Tokyo Bay real estate, said Deutsche Securities Inc.

“With the improvement in infrastructure, such as parks, stadiums and transportation, the property values in the bay area may increase dramatically,” Yoji Otani, a Tokyo-based analyst at Deutsche Securities, said without giving an estimate. “There are just idle land sites in the Harumi area. It will be like turning something that’s not worth anything into gold.”

To taper, or not to taper, that is the question, and America’s Fedster’s get to put up or shut up in roughly ten days. The IMF has been having fits, ever since the Fedster’s at Jackson Hole, told the rest of the world, BRICs and Club Med included, to “Drop Dead.” It’s their ball and they’ll play the game any way they like. With QE kicking in to the US economy the heroin of over a trillion dollars a year of new money, straight from monetary heaven with no cost, even tapering a little will force some of the QE junkies straight into the unpadded cell of cold turkey. For the BRICs and Club Med, it’s the pin that bursts the great BRIC bubble, and the delusion that Austerity is working in Club Med. I don’t think the “Bernank” wants his legacy to be that of the man who deliberately detonated multiple Lehman’s. Watch what they do, not what they say. Though the IMF thinks that they are all about to get burned, I don’t think that the Fedster’s have the Volker nerve to start raising global interest rates. I think that they’ll go with the Great Inflation of 2014 onwards.

In central banking as in diplomacy, style, conservative tailoring, and an easy association with the affluent count greatly and results far much less.

J. K. Galbraith

The IMF knows that the Fed is playing with fire in emerging markets

By Ambrose Evans-Pritchard  Last updated: September 9th, 2013
Listen to the IMF's Christine Lagarde very carefully. While the US Federal Reserve has as a parochial "closed economy" view – and made a series of grave blunders over the last six years as a result – her job is to look at the entire world, and she does not like what she sees.

She warned over the weekend that Fed tapering could ricochet back into the US economy if handled carelessly.

"Very negative spillover effects on the emerging market economies could very much backfire on other economies. So to assume that the domestic economy is totally isolated, that a country is an island, would not be the right approach," she told CNBC at the Ambrosetti Forum on Lake Como, which I have been attending.

"Without necessarily changing the mandate, without reviewing the terms of references, and maybe without even acknowledging it, I cannot believe that central bankers do not take into account what's happening elsewhere in the world," she said.

Unfortunately, that is exactly what the Fed seems poised to do. It is an open question whether the US economy itself has really reached escape velocity, or is strong enough to withstand much tapering, and the European economy is not even close to that point.

One suspects that the Fed is acting for "bad motives" rather than "good motives", by which I mean that it is starting to tighten because of growing (and understandable) alarm about speculative excess, or because the Fed is worried as an institution that it cannot easily extract itself from QE if it waits until 2014 (the Mishkin thesis), not because the US economy is genuinely healthy.

But the Brics are in no fit state to cope with the withdrawal of global dollar liquidity. And remember, emerging markets now make up half the world economy, so we are in uncharted waters here.

We end today’s shortened update with one probable part of the BDI puzzle. This part’s more boom than war, unless war fears are driving wheat sales.  Lower prices this year has stimulated extra demand. But some of that demand could equally just be a flight into tangible assets from forever devaluing fiat money in our new G-20 currency wars. Tomorrow, will not be like today, which was like yesterday. The Great Nixonian Error of fiat money is heading toards its end.

Fastest Wheat Sales in Six Years Diminish Inventory: Commodities

By Whitney McFerron - Sep 10, 2013 7:31 AM GMT
The U.S. and European Union are selling wheat at the fastest pace in at least six years, diminishing stockpiles even as farmers reap a record crop.

Sales from the U.S. in the past three months surged 38 percent from last year and export licenses issued by the 28-nation EU more than doubled, government data show. World inventories will drop to a five-year low by June 30 as farmers harvest 705.4 million metric tons, the U.S. Department of Agriculture estimates.
Futures will rise 15 percent to $7.40 a bushel by the start of the next season on July 1, according to the median of 10 analyst estimates compiled by Bloomberg.

China, set to overtake Egypt as the biggest wheat buyer, may import three times more this season. Brazil already bought 41 times more from the U.S. since June 1, USDA data show. Demand increased as futures tumbled 32 percent from a four-year high in July 2012, as drought eased in the U.S., the biggest shipper. The EU is the second-largest exporter.

“Demand is so great with wheat that it’ll be ready for a pretty decent bounce,” said Jon Marcus, the president of the Lakefront Futures & Options LLC brokerage in Chicago who has followed grain markets for about two decades. “Prices have come down pretty significantly this year so I’m anticipating seeing some overseas demand, and it’s going to be significant.”

"If you don't trust gold, do you trust the logic of taking a beautiful pine tree, worth about $4,000 - $5,000, cutting it up, turning it into pulp and then paper, putting some ink on it and then calling it one billion dollars?"

Kenneth J. Gerbino   

At the Comex silver depositories Monday final figures were: Registered 42.40 Moz, Eligible 119.48 Moz, Total 161.88 Moz.  

Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally doubled over.

As everyone and his dog, now bets on the Great BRIC Bubble Recovery to lead us from Main Street to Easy Street, what could possibly go wrong? Plenty, says leading Asia watcher Andy Xie. The “one way bet”, might just not be the one way we all expect.

“It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity. If there must be madness something may be said for having it on a heroic scale."

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

A Tale of Two Giants

The elephant and the dragon are entering a new chapter, and the main question they both face is whether they will reform before a crisis or after
By Andy Xie 09.05.2013 13:28
India and China are suffering growth challenges. While the immediate reasons for the challenge – overdependence on hot money for India and overreach of the export/investment model for China – are different, both missed two golden opportunities to address their problems. The first was when the global economy was booming before 2008; the second came when global liquidity was rising from 2008 to 2012.

Developed economies, apart from commodity exporters like Australia and Canada, have stabilized. However, their growth rate of 1 percent to 2 percent won't fuel another global boom. Only when China and India grow fast again can the boom return.

China and India must undertake radical reforms to revive growth. Playing with macro policies like interest rates and fiscal balancing will merely prolong stagnation. Of course, reform is much harder in a slow economy, as vested interest groups fight for a stagnant pie. Nevertheless, there is no alternative. The status quo will likely lead to a crisis because the credit boom will bust in a slow economy.

China needs to decrease investment from half to 30 percent of GDP in five years. This requires the central
government to cap investment by local governments and state-owned enterprises at the current level.
Because they have a negative cash flow model, they need growing capex to sustain liquidity. Hence, capping investment could lead to some bankruptcies. That is the price that the country must pay to move forward.

India has a tougher challenge. It must mobilize its cheap and plentiful labor to produce investment goods. Its capital formation is too dependent on imports. This is not sustainable for a country of India's size. To achieve this goal, India must liberalize the labor market, cut down entry barriers to product markets and massively increase infrastructure investment.

Fallen Stars

Global financial markets have turned extremely bearish on China and India. Chinese offshore-listed stocks are trading at extremely low valuation relative to the past or comparable stocks from other countries. India's currency is collapsing. In the first decade of the 21st century the two were stars for financial investors. From 2001 to 2011, India's real GDP doubled and nominal GDP tripled, China's real GDP nearly tripled and nominal GDP more than quadrupled, validating market optimism in terms of growth. How could they, after rising so high, fall so low?

For a decade, India enjoyed the limelight in the BRIC club and received a massive inflow of financial capital. The inflow went into its banking system and was lent out as consumer credit. India enjoyed a consumer-led economic boom. Despite much higher inflation than the global average, India's currency also stayed strong. 
That, of course, was a typical emerging market bubble during a global liquidity boom byproduct of a Fed easing cycle. Even though the Fed is merely signaling the gradual unwinding of its QE program and rate hikes are still far away, India is already crashing. This shows how big the bubble is.

"The international monetary order is more precarious by far today than it was in 1929. Then, gold was international money, incorruptible, unmanageable, and unchangeable. Today, the U.S. dollar serves as the international medium of exchange, managed by Washington politicians and Federal Reserve officials, manipulated from day to day, and serving political goals and ambitions. This difference alone sounds the alarm to all perceptive observers."

Hans F. Sennholz

The monthly Coppock Indicators finished August:
DJIA: +162 Down. NASDAQ: +189 Up. SP500: +194 Down. Two red flags. Only the “stock market for the next hundred years,” remains optimistic.

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