Wednesday, October 27, 2010

September was different. Bulls won. October was a new commodities bubble in the making

Dollar trading value around the globe has reached epidemic proportions.  It is trading at 5x its peak since 1929. At $63TB, it is incomprehensible that every trader is chasing bets against the lowly buck and fueling a rampant speculation boom that will consume markets and institutions over the next five years. Smarter is the person who can pinpoint where the next flash point will be. Is it China 60% portion of GDP related to NON-INFRASTRUCTURE CONSTRUCTION! ( a Healthy economy should be 10-15% MAX)?
Is it rapid food and other commodities reaching all time highs against the US dollar?
Let6's not get ahead of ourselves and work on DATA...


While the currencies gyrations we predicted did materialize in a big way, we can only start by commenting on the extraordinary moves on the S&P which is about to eclipse all previous records with a 10% gain for the month of September! As we analyzed the numbers and trading day patterns, we soon realized FLASH TRADING (supposedly outlawed) accounted for over 65% of the volumes. What is wrong with that? ( phew! I thought you would never ask)
http://www.time.com/time/business/article/0,8599,1914724,00.html

The process is obviously flawed. While US Economic data was awful, yes PLAIN AWFUL, the market traded really up on bad numbers and down on expected numbers. FLASH trading is encouraging rogue behavior and the markets are becoming nothing less than a rigged slot machine. So as September is usually a BAD MONTH if not the worse month of year, Flash trading made sure this was going to be a good month shopping a four month high on the DJIA and 20% of the S&P 500 stock index reached 52 week highs.We expect that  the consequence of manipulated trading while seriously  constrain smaller hedge funds which make real bets and are having their lunch handed to them. Any fund under $100MM in assets is surely to consider folding by year's end. Leaving an even bigger liquidity problem past the mid-term elections. We still contend that the markets will continue to go up Until the end of October.

But what is this really saying? Simply prices are manipulated and we are rapidly approaching hyper inflation. Signs?

On September 21st, Bloomberg reporter Jeff Wilson had this to say:
"The price of Class III milk, used to make cheese, rose in Chicago to the highest level in almost two years as global demand for dairy products increases.  Cheese exports by major milk producers, including the European Union, New Zealand, Australia and the U.S., will rise 10% this year, the U.S. Department of Agriculture said… Wholesale-cheese prices are up 22% since the end of June, butter gained 25% and Class III milk rose 16%... ‘Export demand continues to improve’ for U.S. dairy products, said Roy Huckabay, the executive vice president for the Linn Group… ‘Milk is playing catch-up with the gains in butter and cheese.’”

To prove our point here are a few more:
September 21 – Bloomberg:  “Imports of refined copper by China, the largest consumer, gained for the second consecutive month in August, as traders ordered material to benefit from a profitable arbitrage window.  Inbound shipments totaled 267,153 metric tons last month… That’s 19% higher than… July and 22% more than…a year earlier…”
September 21 – Financial Times (Gregory Meyer):  “The price of jeans and T-shirts could be about to rise. The world’s textile mills, nervous about a global shortage of cotton, have propelled prices of the fiber to their highest in more than a decade.  This week’s jump in cotton prices above the $1 a pound level, for only the second time since the US civil war, has been a long time coming.”
September 21 – Bloomberg (Aya Takada):  “Rubber advanced to the highest level in almost five months amid expectation that the global market is set for the worst shortage in four years next year as weather constrains supply and demand keeps expanding… The price increased for a second day and has gained 10% this year.”
September 21 – Bloomberg (Aya Takada and Supunnabul Suwannakij):  “Bridgestone Corp., the largest tire maker by sales, is raising European prices for the second time this year and Goodyear Tire & Rubber Co. is charging more as rubber gains on prospects for the biggest shortage since 2007.  ‘Drought earlier this year and heavy rains later on hampered tree-tapping across Asian plantations,’ said Pongsak Kerdvongbundit, managing director of… Von Bundit Co., the largest natural-rubber producer and exporter in the world’s biggest supplier. ‘Global production will lag behind soaring demand for at least another two years.’”

So here you have it, what you eat is in hyperinflation, what you wear and let's not forget basic material which were  up at its highest levels in 10 years, Rubber, Copper, Gold!
Do you really feel confident Bernanke and Geithner really have Savers in mind when they push rates down to  1/10th of the real inflation rate?



The FED objective of trying to put a bid under distressed assets rather than avoiding rampant speculation in commodities seem totally illogical to us.  If we WERE FED chairman, we would go out there and corner strategic commodities and start to take out people trying to corner the market. Hoarding is not really a valuable endeavor for Wall Street firms but it is exactly what they are doing with their excess cash. ..  Making a fast buck on others people misery is really low.

That brings us to our probable two outcomes. Hyper inflation being ONE OUTCOME: As I alluded to earlier hyper inflation is a real possibility in commodities if further Dollar devaluation continues unabated. What is your best defense? It is still buying FARM land in a THREE SEASONS growing climate with good access to an adequate aquifer. Five years ago , I was already musing on the rich arable land in Africa which could use modern agricultural methods. Obviously those methods based on profits will not work there because unequal wealth distribution rapidly escalate into turf wars.Unfortunately commodities have gone way higher than they should have thanks to the new Bernanke bubble. Too late now!

SECOND OUTCOME:  Much more unlikely, Fed policy changes and decide that people need access to cheap food (over cheap housing) and institutes a sane price program but preventing Wall Street from speculating in commodities through hedge fund investing. Deflation in over built housing is not a bad thing. Banks should bite the bullet and not repeat Japan's mistakes. 

SOME PEOPLE ARE DOING WELL
Germany economic output has improved. China is moderating growth through interest rates. Brazil and Russia are still there supplying resources!

The leader is Jakarta’s stock market which is up a stunning 44.1% thus far.Manila follows hard by, rising 40.2%. Bangkok is up 35.9%; Santiago’s market is up 34.3%, followed by Istanbul, also at 34.3% [Ed. Note: Istanbul lags Santiago by 0.1% to be precise.] and then comes Copenhagen, where stocks are up 27.1% [Ed. Note: Actually the Shenzhen “B” share index should be in 5th place, but because it is “B” shares we’ve chosen to avoid counting
it amongst the world’s leading equities markets. The Shanghai Composite Index, on the other hand, is down
7.8% year to date and that is after the massive rally ofthe past two weeks!]. Lifted from TGL.

 WHY can't the good old USA figure out that a loose monetary policy only benefits Wall Street and practically nobody else??