Given that the medium-term structural demand and supply forces driving the commodity bull market are not price-elastic, an underlying tailwind for commodity prices is bullish for long-life assets such as resource equities and long-dated commodity futures. In addition, with no catalyst for a bearish reversal to the current level of resource prices, major mining and energy companies will remain profitable even as wage and equipment costs rise.
We've discussed before the differences between Case-Shiller and OFHEO. Another important point is that the Fed uses the OFHEO series to calculate changes in household real estate worth in the Flow of Funds report. To the extent the OFHEO index missed the runup in prices in recent years, the Fed underestimated the increase in household wealth - and therefore probably underestimated the wealth effect on consumers.
Now that prices are falling, if Case-Shiller is a more accurate reflection of actual prices than OFHEO (as I believe), then the Fed might be underestimating the drag on consumer spending from falling prices.
Japan's Inflation May Be `Hugely Bullish' for Stocks, CLSA SaysBy Patrick Rial
April 28 (Bloomberg) -- Japan's stocks may benefit from the end of deflation as companies raise prices, improving margins, CLSA Ltd.'s chief strategist Christopher Wood said.
Rising inflation ``is potentially hugely bullish for the Japanese stock market,'' Wood wrote today in his `Greed & Fear' strategy note. The ``bull story in Japan is all about a sustained move out of the nearly 20-year period of deflation with all that means for companies' pricing power and, consequently, their profit margins.''
Christopher Wood is a terrific analyst who writes the Fear and Greed newsletter. I used to see the letter regularly and found his opinions to be well worth reading. Unfotunately, I no longer have access to his work so the Bloomberg article is the best link I can provide.
Read it all. It is both frightening and sad to see the country of the Magna Carta slide into oblivion and tyranny by bureaucracy. We must always and everywhere fight the tendency of politicians to grab more power.The distinction between the legal order in Western democracies and the tyrannies of Stalinist Russia or modern China or the Arab gulf states, is often thought to be stark. In Britain in particular, we are complacent that 800 years of the common law will protect us against the overreaching power of state functionaries.
Today comes a case that shows this conceit to be ill-founded. It was already widely known that the Home Secretary would like the power to lock anyone up for seven weeks on her say-so. But it is not in effect yet, and is likely to be opposed in parliament. Who knew that the British state is already punishing 70 people with effective suspension of all their economic rights on mere accusation, by freezing their assets by Treasury order without any legal warrant or process?
The surge in the U.S. dollar cost of oil is draining consumer spending power, adding to an already challenging backdrop as a consequence of job insecurity and the negative wealth effect from housing. Small cap relative valuations are tightly linked with consumption growth, and a further spending slump should ensure that still elevated P/E multiples continue to compress. Stay bearish on small cap relative performance.
The Economics of College.Costs are not just things for government to help people to pay. Costs are telling us something that is dangerous to ignore.
The inadequacy of resources to produce everything that everyone wants is the fundamental fact of life in every economy -- capitalist, socialist or feudal. This means that the real cost of anything consists of all the other things that could have been produced with those same resources.
Building a bridge means using up resources that could have been used building homes or a hospital. Going to college means using up vast amounts of resources that could be used for all sorts of other things.
Prices force people to economize. Subsidizing prices enables people to take more resources away from other uses without having to weigh the real cost.
Without market prices that convey the real costs of resources denied to alternative users, people waste.
Sowell explains why government intervention in markets usually has undesirable unintended consequences and ends up being a far less efficient way of handling the issue being addressed than would letting the market make the adjustments naturally.
Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral, a transaction that has seen an unexpectedly " rapid escalation of losses," and represents an outsized percentage of the insurer's expected credit impairment, Wallis said.
Stick a Fork in It: Moody’s Downgrades 1,923 Subprime RMBS Classes — In Just Two Days
Moody’s Investors Service has decided that it’s finally time to downgrade investment grade subprime RMBS — you know, the Aaa-rated stuff? Between Monday and Tuesday, calculations by Housing Wire show that the rating agency has slashed ratings on 1,923 tranches from 232 separate subprime RMBS deals from 2005-2007 vintages.
That total includes hundreds of formerly Aaa-rated securities, as Moody’s embarked on its largest round of downgrades to investment grade subprime MBS since the credit crisis began.
A little over one month ago, HW covered a Bloomberg special report that suggested that both Standard and Poor’s and Moody’s were holding back on downgrades to the most senior RMBS bonds.
Hat tip to CalculatedRisk.
First I would respond that the commodity price rise has been significantly driven by increased demand and was forecast to do so by analysts like David Fuller and Donald Coxe a number of years ago. Another contributor has been the allocation of money to long only commodity funds by institutional money managers as a diversification tool. These investments while relatively small to the institutions involved amount to enormous incremental demand in the physical commodity markets. Furthermore the success of this strategy is leading to the usual herd behavior on Wall Street and the sums are increasing. A third contributor to the big price rise in commodities has been the tepid response of commodity producers to the increase. Three decades of low pricing power made these producers reluctant to invest in the expansion of productive capacity for fear of a cyclical downswing. Thus the supply response we would normally expect from high prices has not yet occurred. The last contributor and a big one it is now, is rising inflation expectations and the weak dollar. Econbrowser is exactly right that the blame for this can be laid at the Fed's doorstep.I also find it implausible to attribute the commodity price increase to a surge in demand. The economic news over the last three months has been very convincing that output is slowing, not accelerating.
Instead I believe that the price of oil, like the price of all the other storable commodities, and for that matter the dollar cost of a euro, is primarily responding to the Fed's decision to move the real interest rate strongly into negative territory.
But once again the Fed has a golden opportunity to prove me wrong. Fed funds futures prices currently reflect an expectation that the Fed will make one more cut to 2% at the meeting at the end of this month, and then stay there. Here's a prediction for you. If the Fed surprises the markets by holding steady at 2.25%, all those commodities will begin to crash within hours of the news.
Tax-free Internet shopping days could be numbered
Before we start in on questions, I would like to tell you about one thing going on recently. It may have some meaning to you if you're still being taught efficient-market theory, which was standard procedure 25 years ago. But we've had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction; for more, see box on page 74] of about $4 billion. And what we have seen there is really quite phenomenal. Every day we get bid lists. The fascinating thing is that on these bid lists, frequently the same credit will appear more than once.
Here's one from yesterday. We bid on this particular issue - this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to take care of hurricane insurance, and it's backed by premium taxes, and if they have a big hurricane and the fund becomes inadequate, they raise the premium taxes. There's nothing wrong with the credit. So we bid on three different Citizens securities that day. We got one bid at an 11.33% interest rate. One that we didn't buy went for 9.87%, and one went for 6.0%. It's the same bond, the same time, the same dealer. And a big issue. This is not some little anomaly, as they like to say in academic circles every time they find something that disagrees with their theory.
So wild things happen in the markets. And the markets have not gotten more rational over the years. They've become more followed. But when people panic, when fear takes over, or when greed takes over, people react just as irrationally as they have in the past.
I would paste the whole article in if it wasn't a violation of fair use. Go to Fortune and read.
What I find interesting is that the spread between the returns of stocks and bonds really isn’t that much. I think would surprise many investors that boring bonds have held their own. Over the last 40 years, stocks have beaten bonds by a final score 10.5% to 8.4%.He notes that he raised he bond yield by the 2% average difference in return to demonstrate how closely the two track one another over time.
Pacific Investment Management Co.'s Bill Gross lifted holdings of mortgage debt in the world's largest bond fund to the highest since 2000, while putting on the biggest bet against government debt since at least the same year.and
``Treasuries are the most overvalued asset in the world, bar none,'' Gross, Pimco's chief investment officer, said on CNBC on April 4.click on the Bloomberg link to see the article in its entirety.
Short Term Top or Technical Coincidence?
April 10 (Bloomberg) -- The yuan rose past 7 to the dollar for the first time since the fixed exchange rate ended in 2005 as China seeks to slow inflation and reduce its trade surplus.
China has allowed a 4.5 percent gain in the currency this year, more than half the gain for all of 2007, as U.S. Treasury Secretary Henry Paulson last week said China's currency needs to reflect economic fundamentals. A stronger yuan may also help Premier Wen Jiabao to prevent the economy overheating by lowering import costs and raising export prices.
Past 7 on it way to 4.
The changing behavior of commodity investors and speculators increases our conviction that the asset class is on an eventual path toward a mania-like overshoot.Large institutions adding commodities as a long only asset class because they don't correllate to bonds and equities and thus smooth returns has led to huge amounts of money coming in to these markets. Twenty years of relatively depressed prices in many physical commodities is being made up in a short period of time. Unfortunately this coincides with explosive demand growth from populous emerging economies and ill conceived programs like ethanol from corn.
In Congressional testimony, Fed Chairman Bernanke spent most of his speech explaining what has happened in credit markets and why the Fed bailed out Bear Stearns. However, he also suggested that the worst for the economy is almost over.
Actually, though, the unemployment rate in November 1996, when Clinton rode a soaring economy to victory, was 5.4%. That's right--three tenths of a percent higher than the "grim picture" of a "pink slip nation" painted by this month's unemployment report.and GatewayPundit: back in January had this post on how the media spins the news:
Bush Unemployment at 5.0%- Bad... Clinton Unemployment at 5.4%- Good
Crossing the Rubicon
We believe that one of these unintended consequences will likely lead to the Federal Reserve becoming even more politicized. With the taxpayer’s purse being placed at greater risk by these governmental entities’ increased financial risk, the process by which the Federal Reserve conducts monetary policy may be placed in jeopardy. Will the Fed be as willing to raise interest rates to fight economic excesses or inflation if it means it could cause losses for these governmental entities or place the American mortgage borrower at increased financial risk? Given the extreme measures that are currently being contemplated, we believe this is a serious risk consideration. If we are willing to “rescue” borrowers and financial institutions that have been reckless or unwise in their financial decision making leading up to this crisis, how can we expect a different outcome in the future? Why should individuals and financial institutions conduct themselves in a financially prudent manner, knowing that the government will likely ride to their rescue? Why shouldn’t they take increased risk with the expectation of short-term gain, while laying off long-term risk to the government? The Federal Reserve’s recent policy changes, federal agency enhanced risk taking and possibly new consumer mortgage “rescue” plans, all have the potential of increasing future unsound business and consumer decision making.
The banking industry got every provision it lobbied for. Most likely, the sentences lobbyists wrote made grammatical sense. It now looks like no one bothered to read the rest of the bill. If so, it should not be too surprising. This does go to show that we could save money by directly electing lobbyists instead of congressmen. The legislative process is so flawed lobbyists write our legislation anyway. Why not cut out the middle man?I agree. We should not let any of the current congressmen/women write any more law. do not reelect any current office holder. Instead "Throw the Bums Out".
British Muslims 'planned to kill thousands by bombing SEVEN transatlantic airliners in one go'
Last updated at 00:55am on 4th April 2008 A gang of British Muslims planned to blow up seven planes within hours in the biggest terrorist atrocity since 9/11, a court heard yesterday.
Two thousand passengers would have died in the plot by eight fanatics working "in the name of Islam", the jury was told.
In a recently published Special Report we conclude that concerns about an upward spiral in consumer price inflation within the euro area are premature.
One of the few who didn't: Bob Rodriguez, veteran manager of the mutual fund FPA Capital. His returns through March 30: only minus-1.4%, according to preliminary data from Lipper Inc.
That's way ahead of the market averages, which fell about 10%.
It's not a blip, either. Mr. Rodriguez has a great track record going back decades. Over the past 10 years, his fund has generated three times the returns of the market averages, turning $10,000 into about $25,000.
The first thing that leaps out about Mr. Rodriguez's portfolio is how much he's been holding on the sidelines. "We're about 39% or 40% cash," he says. "One of the rarest commodities at the moment is cash. Liquidity. You never know the value of liquidity until you need it and don't have it."I have heard of Bob Rodriquez for many years and those of you looking for a fund manager who isn't just a closet indexer should check out Mr. Rodriquez fund.
In an environment of declining profitability, it becomes increasingly important to overweight sectors that can protect margins.
