Wednesday, May 17, 2006


Inflation Concerns Roil Markets

A check on what is moving the markets this morning. "Stocks plunged Wednesday after a stronger-than-expected rise in consumer prices intensified Wall Street's fear that interest rates will keep climbing. Investors were disappointed by a Labor Department report that its consumer price index swelled 0.6 percent in April, topping forecasts of 0.5 percent. But core CPI, without food and energy, also gained 0.3 percent, ahead of economists' prediction and adding to worries that soaring oil prices have begun to lift prices elsewhere."

"'The CPI data really kicked the market in the teeth today,' said Ken Tower, chief market strategist for Schwab's CyberTrader. 'So the question now really is where can we find some support?'"

"The prospect of higher interest rates hurt bonds, with the yield on the 10-year Treasury note surging to 5.17 percent from 5.1 percent late Tuesday. Last Friday, bond yields reached a four-year high of 5.19 percent."

"The dollar's retreat could propel inflation since more of the U.S. currency will be needed to purchase foreign-made goods. 'The dollar has depreciated quite sharply since the Fed started talking about stopping its rate hikes,' Tower said. 'It's not so much that the dollar is depreciating, it's the speed of the depreciation that is worrying the currency market. The dollar is down 6 percent in one month, which is a lot.'"

"Gold futures eased Wednesday as the US dollar rose on data showing a rising rate of inflation. 'While investors are still keen to enter what remains a firm bull market long term, the short-term risk remains to the downside as heavily leveraged funds appear keen to lock in profits,' James Moore, an analyst at, said."

"Fueling the latest pressure on gold prices, the dollar rose against the yen and euro Wednesday, after a hotter-than-expected consumer-inflation report reignited speculation the Federal Reserve will keep lifting interest rates."

"Gold for June delivery fell to a low of $686.30 an ounce on the New York Mercantile Exchange, before closing out the day down $1.10, or 0.2%, at $691.80. It touched a high of $712.50 earlier in the session."

"Gold wasn't the only metal that retreated from earlier highs. July silver shed 30 cents, or 2.2%, to close at $13.24 an ounce, closing at its weakest level since late April despite an earlier peak of $13.74. June palladium rose $6.10 to close at $383.10 an ounce; July platinum finished up $13.50 at $1,316.40 an ounce."

In a lot of nations around the world, how much the currency has exchanged up or down is fairly common knowledge. How many US citizens know they took a 6% paycut in the last month?
If the Fed were serious about inflation (which I don't believe they are) they'd impose greater than 1/4 point raises. Clearly these hikes are ineffective as the dollar has been losing value during this entire rate-tightening period. Inflation is only beginning -- and IMHO its rate will continue to exceed the Fed's remedial "gestures".
The true or real inflation number is well understated on a regular basis. The shock to the market over this little number up-tick is something to behold. The marketplace can be very entertaining.For us folks in the real world,we have been feeling and understanding the true effects of inflation for many years,and have been doing our best to protect ourselves. I am of the opinion that Burn-Hackey of the FED is way behind with the (Greasepan) baby step plan, but time will flesh out the truth.I may be wrong and the Wizard may save the dollar, I just don't see how.
To impoverish the middle class is never a good idea, for they're the backbone of our economy and society. To make them drunk with illusion and debt isn't a good idea either.

Now the hangover of all that liquidity starts to make us hurt.

The party is over and hard times begin.
How many US citizens know they took a 6% paycut in the last month?

The same number that realize they've lost 50+% since 2000.

Ben, on your blogs you've managed to assemble quite a group. Intelligence, experience, wisdom & (most of all) awareness. I'm thinking you ought to call your group "BENSA". ;-)
I assume we are bullish long term here,but like many of you I didn't jump out last week even after my gut told me we were in for a correction....Inflation numbers are up ,and still metals are suffering a bit...especially my silver stocks. My gut says "chill out as they will snap back. Still, any feedback from you guys? I read,
safehaven, dailyreckoning etc,and most say we are just starting the bull run...Other traditional sites say we are in a bubble?..Where are your blue chips? Waiting and holding tight...

Stay the course... the fundamentals haven't changed, and the direction is clear. Oh, and keep reading everything...
How about a secret "plunge enforcement team" (i.e., CB intervention?)
The Working Group, AKA "The Plunge Protection Team" was put into place after the 1987 stock market crash to basically prevent that sort of thing from happening again, a panicked rush to sell stocks. This is acheived through an agreemnet with a few large brokerage houses to purchase large quantities of blue chip stocks. It worked brillantly post 9-11.

That much is fact. And little more is known about the "PPT". I've heard a few of the psuedo-economists over at Ben's other vlog comment that the PPT is propping up Google etc..etc..which is ridiculous. Keep in mind they did not stwp in to stop the Nasdaq crash.

I do believe they are propping up Fannnie Mae, and it also would not surprise me to learn they have various other tricks up thier sleeve.

You do bring up a good point, Gov't intervention. I don't think there is much they or CB can do to control the price of gold. Clearly it's not in thier best interest to have gold shoot up 40% in less than half a year. It's potential a huge PR problem for them, but luckily they have control over the mainstream press so the majority of the people I'm sure have no idea gold is aat a 25 year high.

I think the only way Gov'ts can lower the price of gold is
1) flood the market with the stuff, but they already did that throughout the 90s and thier supply is dangerously low. That is why they are stocking up on it now.
2) Raise interest rates eneough to where inflation isn't a problem, ala the 80s. I think that is what will happen and ultimately end the bull run, but that is years away. I'm indeed very bullish on gold again...the stuff is cheap now...the equivolent of $230 "80s dollars". Sorry about the novel.
Gentle Ben may surprise us. He certainly couldn't be any more reckless than the Maestro with monetary policy. Here's my logic (read "wild-ass guess"):

Wall Street has been complaining incessantly about the Fed over-doing it with tightening. However, they know that actual inflation, if it were to get out of hand, really sucks - it lowers the present-value of projected corporate earnings and dividends and thus drives down stock prices. The bond market hates inflation, too, for obvious reasons.

A few months back, if the Fed had raised 50bp in one fell swoop, Wall St. would have screamed bloody murder: "He's wrecking the economy, going too far, etc, etc." However, now that it's apparent to all that the inflation genie is halfway out of the bottle, Ben's got a lot more latitude to roll up his sleeves and get tough. Wall St. may not like it, but no one's going to accuse him of being too hawkish. And what better way to polish up his new-sheriff-in-town badge? Raising rates stiffly is what everyone expects him to do at this point - that's why the market reacted the way it did. He's got a free pass to follow through; why wouldn't he?
There is absolutley no way Bernake will raise the Fed rate 50bp. It would cause a mass exodus out of the already shaky US equity markets. That's something they can't let happen. 90% of the people have money in there and it would be plastered all over the media.

Also, the Fed has been trying to downplay inflation. a 50bp hike will put inflation front and center and let it be known to all ther is a HUGE problem. Ultimately 50bp is not enough. The fed rate will need to go into the 6s before inflation is tamed.

PS - I think it's a good idea but it'll never happen.
luckily they have control over the mainstream press so the majority of the people I'm sure have no idea gold is aat a 25 year high.

thejdog, you made some cogent points in your post, but I've got to challenge you on this one. It may be true that most people don't know that gold is at a 25-year high, but that's because most people are idiots, not because the government or central banks are suppressing the media:

USA Today: Gold coasts to new 26-year high

Boston Globe: Gold Hits 25-Year High

CBS News: Gold Climbs to Fresh 25-Year High in Asia
VA John -

I should have made myself more clear. It's not that the media isn't STATING the's that they are not REPORTING on the fact...educating people on the reason why gold is so high and some of the challenges for our economy that lie ahead.

I hear every 1/2 hour on the newstalk radio station I listen to..."the price of gold up $30...." and that is it.

Again I'm talking about mainstream media, not CNBC or the USA today biz section.
It's all BS, since it doesn't account for inflation. Same thing with the Dow nearing it's record high. Sadly, most Americans are clueless.

p.s.: John in VA, did you see my long response to your "What do you think?". TAG -- you're it!
Just read it, tj. Well thought-out arguments.

OIL: This one is really puzzling. Everything I've read about peak oil accounting for the rise in prices makes a lot of intuitive sense. However, Forbes makes a compelling argument that the problem has really been compounded by speculation:

"I see tanks full of product," he says. "The crude carriers aren't waiting to have to unload in the port. There are no lines at Dutch gas stations. Airplanes aren't waiting for fuel."

In other words, the current price run-up isn't like the shocks of the 1970s, when there were real shortages and drivers had to wait for hours to fill up.

"So if inventories are normal, why should the price be so high?" asks van der Veer. At least part of the answer, he concludes, must lie in the financial markets. "I know various pension funds that had money in bonds, in shares. Now they went into commodities," he says. "That's new. And that has to have an impact."

Joe Stanislaw, an independent energy advisor to Deloitte & Touche, calculates that the physical realities of supply and demand point to a price of $50 a barrel for oil, while geopolitical uncertainties in Iran, Venezuela, and Nigeria add another $10. Anything above that, he argues, is due to oil's popularity as an investment.

"Certainly the fundamentals are strong," says Stanislaw. "But the financial players exaggerate the upward movement by driving the trend."

BASE METALS: Completely agree with your argument that it's a short-term bubble and a long-term fundamental supply shortage. Here's the wild card: a lot of the resource demand is coming from China, and I think China's economy is beyond overheated. They're pumping out yuan like crazy trying to keep it cheap, buying junk-bond MBSs by the truckload, and they've got a housing bubble that's worse than our own. They're massively dependent on U.S. consumption, and consumer sentiment just had it's biggest one-month decline ever. Remember Japan, Inc - that Asian tiger juggernaut that bought Rockefeller Center, Pebble Beach, and most of Hawaii? If you had suggested at the time that a severe 15-year recession was just around the corner, you'd have been laughed out the door. If U.S. consumption slows, China is going to find itself with massive overcapacity, multiple popping bubbles, and billions in worthless MBSs. China has a very immature banking and capital markets system that will be hard pressed to deal with a major crisis.

SOFT COMMS: Agree on sugar, but I think it's tied more to ethanol than eating.

Roger's research dispels the notion that economic slowdowns lower resource consumption.

That's a tough sell, tj. Idle factories don't use a lot of metal. A Keynesian would say that during a downturn, government stimulus spending would make up the difference, but I don't think we're going to see any Hoover Dams going up in the next recession.

Okay, we have inevitable price inflation due to oil, metals & food stocks.

That's true, but we also have rising commodity prices due to rising inflation. Remember that inflation is a monetary phenomenon. Right now, there's still too much liquidity in the system, but the Fed is well into a tightening cycle (too slow, but tightening nonetheless). The inflation that we're "seeing" today in the bogus CPI has been there all along, it was just hidden from government statistics because it was largely embedded in "the biggest financial bubble in history" (RE, per the Economist), and RE inflation doesn't directly contribute to the core CPI. However, we're now seeing a massive shift of capital out of RE and into commodities and that does filter through to the CPI numbers that everone seems to care so much about. So the sudden appearance of CPI inflation is just a delayed reaction to a monetary excess that has been around for several years. Now that it is being mopped up through rate increases, there will be fewer dollars to chase those commodites and prices should fall.
What an amazing day!

Metals down
Energy down
Stocks down
Bonds down

The smart ones were holding cash, which is losing its value like a sieve. Yay!
My argument is that inflation can't be concealed any more and will continue to show up in the data, forcing Fed to raise rates. BB's true color will show at the June meeting. I bet my dollar that he is a swing.

Smart money will drive around looking for places to park. And it will change from lot to lot, quickly.

Volatility in all markets will go up. The general trend, though, is continued inflation till something really implodes.

First NASDAQ, then Mortgage lending, then commodities. What's the next one?
This comment has been removed by a blog administrator.
Bottom line is you cannot print money 24/7 without facing the consequences.

So far "helicpoter Ben" and his predecessor have done a pretty godamn commendable job in keeping the US economy strong....even if it is through smoke and mirrors. They do not have mush else to work with.

Keep in mind it's not just the US that's increasing thier money supply rapidly and has a housing bubble in place. It's EVERY 1st world country except Japan. In fact the US was late to the whole RE bubbble party (well, except for CA.)

These dudes are smart and keep in mind they are handcuffed IMHO politically. To what extent in unknown. I defy anybody to step in and try to do a better job. It is far more copmplex than us bloggers comprehend. I know this to be true.

PS - Oh to be a fly on the wall while the Fed and the Executive brance is discusing gold!!

Copper Consumers Seek More Talks With LME Over Rally (Update2)
May 18 (Bloomberg) -- Global copper consumers are pressing for more talks with the London Metal Exchange, the world's biggest metals bourse, over record prices for the commodity and the way it's traded on the exchange.
``They are ready to have constructive discussions,'' said Thierry Centner, chairman of the International Wrought Copper Council, in Shanghai. Consumers want to look at the way the LME functions in terms of hedging, price discovery and the physical market, said Simon Payton, the council's secretary general.
Copper prices have more doubled over the past year in London amid a broad rally in commodity prices. The surge has been driven by concern that rising demand, especially in China, is outstripping supply for the metal used in wires and pipes. Hedge and pension funds have been targeting copper and other commodities, seeking better returns than from stocks and bonds.
``Prices are very bad, very difficult,'' Centner said in an interview yesterday. ``The financing aspect, the working capital issue, is becoming a nightmare. In general the copper business is built on credit.''
About 85 percent of total turnover on the LME may be derived from funds rather than from normal industry business, said Centner, who is also vice-president for copper products at Cumerio, a producer spun off by Belgian company Umicore SA.
Prices of the metal have increased more than four-fold in the past five years and reached an all-time high of $8,800 a ton on May 11 in London. The Standard & Poor's 500 Index is little changed over the same period.
Copper consumers expressed their concern to the LME over the role of speculators in the price rally at a meeting in April.
``We got a weak or soft answer,'' said Centner. ``They showed some sympathy, but they said it's difficult to change the rules because it's a free market and they can't forbid funds access to the market.''
The LME has said that it strives to provide ``an orderly market'' for metals and would take action if it identified any cases of manipulation. An LME spokesman wasn't available to comment for this article.
Centner and Payton were in Shanghai this week for a meeting of the IWCC. Payton said the council agreed to come up with concrete proposals to present to the LME.
``The industry is broadly happy to use the LME as the reference price for copper as long as it has a relevance to the industry,'' Payton said. Much of the world's trading in copper, zinc and aluminum is priced using the LME as a basis.
``The other options for pricing are limited and none of them presents necessarily obvious attractions,'' he said. ``But that's not to say the LME price reference and discovery process can't be improved.''
Substitution Concern
Record prices of copper are increasing the risk that the metal will be replaced by other materials, Centner said.
``In the last two days we have seen that even in China, where there is mass production, they are identifying that in a lot of applications there is a risk of substitution,'' he said. ``Once substitution is done, it'll be very hard to turn back.''
Growth in consumption in China, the world's largest consumer of the metal, will probably slow down this year from last year, and may pick up next year, said Payton. Consumption in Europe, Japan and North America recovered strongly this year from last year.
``Last year we saw virtually no change in copper consumption globally,'' Payton said. ``This year we expect to see about a 5 percent rise.''
Global production of copper is likely to rise this year from last year, Centner said, without giving figures.
John in VA,

Good stuff. Damned if we don't agree on quite a few things!

OIL: Yes, definitely agree there's a significant speculative premium. Given Iraq, Iran & Venezuela, plus the omnipresent fundamentalist threat in Saudi Arabia, I doubt that the risk premium will go away before Peak Oil rears its ugly head. Another factor to consider, too -- Oil is priced in USD, but the USD has declined significantly against the Euro. OPEC (among others) is not at all unhappy with the higher prices offsetting the devalued dollar and is not above managing the supply to preserve their purchasing power.

CHINA: Some say they'll be hard-pressed to avoid a full-scale revolution should the US have a tough recession. Still, they've built up massive foreign reserves and are signing resource contracts for decades out. If TPTB there do survive, don't count'em out... their make-work programs would be HUGE.

[Note: Things that scare me... Troubled governments always pick fights to distract their people. US vs. Iran? China vs. Taiwan?]

INFLATION: Yes, there's true inflation at work in addition to price inflation. IMHO, I see rates increasing regardless of what Bernanke does, but I also see rampant money printing. Total fed credit keeps expanding, no? Global competitive devaluation is still at work, too.

Will rate increases take the wind out of speculative sails? To some extent yes, but I'd expect equities and debt instruments (especially Treasuries) to take the big hits. Stocks won't be attractive in a depression, and bonds won't be attractive in a rising rate environment with persistent underlying inflation. Investment dollars won't go away, they'll just be more selective and demanding and employ less leverage. Lots of leverage is necessary when borrowing Yen to buy Treasuries, for example.


So far, our discussion appears to be centered around the effects of inflation vs. speculation. IOW, will inflation drive PMs higher or reduced speculation take them down?

IMHO, PMs are very unique commodities in that they thrive when all else suffers. I believe inflation, instability, economic depression and the inevitable downfall of the USD all bode very well for the PMs. In fact, I expect the smart money is anxiously anticipating this eventuality and has been positioning itself appropriately. Even governments are re-evaluating their gold reserve policies. Yes, speculation tends to spice things up a bit, but the trend is still up, because global conditions are still headed down.

Actually, I'm counting on speculation in the PM endgame. Once the world's problems become obvious, the rush will be on, and everyone will want in on the act (both out of greed and fear). By that time, I'll have gladly traded my coins for their stocks, real estate and other hard assets... and be set for life.

Of course, to buy into all this you have to believe (as I do) that we're headed for a depression and a USD collapse. What's your take on the future?

Read an article a while back that stated China's copper reserves rivalled that available in world markets, and that they could make or break the price on a whim. Anyone have opinions on why they haven't done so, if only to lower future acquisition costs?
A snippet from Jim Willie's Hat Trick letter:

It is hard to say how far this correction in commodity stocks might go. Surely, the mainstream press enjoys what they proclaim as the end of the bull. However, they forget that only a global recession will interrupt this commodity bull market. They forget that energy stocks were the biggest single engine in the S&P500 index last calendar year. A case in point is the strong and growing global demand for gold bullion as the USTBond erodes in confidence. A case in point is the relentless twin deficits indicative of extreme hemorrhage and foreign capital dependence. A case in point is the 20% decline in official copper inventory at the exchange warehouses, the challenge to Indonesia copper supply, the socialist (and water) threat to Andean copper supply in Peru. Sorry, but these three factors remain very much alive, either without evidence in any way, or not even addressed.

Three requirements are necessary before the commodity bull is interrupted:

1) emerging developing economies must stall in growth altogether, like China, India, Southeast Asia, including the construction boom in the Middle East
2) the multi-year USDollar decline must come to an end, in a real sense from remedy to its crippled fundamentals in astronomical trade deficits and burgeoning federal budgets
3) the imbalances whereby global commodity demand overwhelms commodity supply must find equilibrium in the midst of historically low inventories and supplies at risk.

Sorry, but none of these requirements has been met, as all are still in force.

This hegemonistic policy will ultimately backfire, with blocked supply routes and supply chains, along with a mushroom of global alliances in opposition. Its policy will fail from an insurrection in the USDollar and rejection of the USTBond (its paper observe side). My forecast from early 2005 was for the world to separate into four trade zones: Europe, Asia, Middle East, and Americas. There is far more cohesion in the three non-American zones than in our zone. Iran is the rogue within the Middle East. Venezuela, Ecuador, Bolivia, and Cuba are the rogues within the Americas. Russia is the rogue within Europe. The four zones in time will produce their own single currency, as well as their own dominant commodity supply. As the months pass, shipment of commodities across zone boundaries will become increasingly problematic.

By that time, I'll have gladly traded my coins for their stocks, real estate and other hard assets... and be set for life.

You share this plan with a lot of other folks. I hope your timing is good! :-)

Of course, to buy into all this you have to believe (as I do) that we're headed for a depression and a USD collapse. What's your take on the future?

Painful recession and big extraction of liquidity as banks and regulators tighten the screws on lending. I don't think we're in for a depression, but it's not unthinkable. If the U.S. can get a handle on the twin deficits, the USD will probably not collapse, but may decline further.
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