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Early this morning the Labor Department said U.S. consumer prices rose 0.5% with the consensus expecting a gain of 0.4%. The headline number came in slightly above expectations, but the markets reacted more to the core-rate of inflation excluding food and energy. Expectations called for the core-rate to show an increase of 0.2%, but instead, there was no increase. Stocks and bonds both rallied on the news and the dollar slid lower, but the dollar decline was held in check with the U.S. Dollar Index just dipping the 86 level for a brief period, but for now the dollar index is holding 86. What we are witnessing is an all out effort to support the paper asset items of the U.S. dollar, U.S. stocks (especially the Dow Industrials) and U.S. Treasury bonds. While the paper is being pumped higher, tangible items (commodities such as oil, copper and steel) are being talked down with the Wall Street bulls claiming the bull market for commodities is over. The bull market for commodities is NOT over and the demand for U.S. debt paper (and probably U.S. stocks) is declining globally. The second pleasant surprise for the Wall Street bulls came from the Energy Department when they announced a much bigger than expected build in crude oil inventories. Expectations called for a gain of 500,000 to a million barrels, but the government said crude stocks grew by 4.3 million barrels. The API reported a build of 2.5 million barrels, smaller than the government’s number but clearly building inventory. Crude inventories have moved higher 13 out of the last 14 weeks to 334 million barrels, which is at the higher end of the averages for this time of year. While 334 million barrels sounds like a lot of oil, I believe it represents only about 25 days of supply, therefore we will continue purchasing crude. The market is expected to move toward $45 a barrel, but with solid demand, any supply disruptions will move the price swiftly higher. On the interest rate front, the Mortgage Bankers Association said their applications index fell by 10.5%, with the purchase index down by 10.8% and the refinance index lower by 10.0%. This is the largest decline for the MBA applications index since December. The 30-year fixed rate dropped four basis points to 5.73% and the one-year ARMS index fell nine basis points to 4.11%. New housing starts were WAY up, but mortgage activity is down. I wonder if any of the home builders are concerned about getting hung with unsold inventory. How much longer will the mania phase last in the real estate boom? Higher mortgage rates will probably answer the question in due time. A Blast From the Past In light of the many disconnected movements in the financial markets in recent weeks, especially in the bond markets, the following excerpt really hit home with me. When I read it, I thought it did a good job in shining the light on why so many people felt this uneasy sense of impending doom. Something in the markets just doesn’t feel right…something is wrong. Yesterday Treasuries rallied with higher than expected inflation numbers and today they rallied again with inflation reported lower than expected. Bond prices move higher with an expected economic slowdown and stocks are moving higher in anticipation of the coming “summer rally.” It looks like a manic/depressive market…which is it? All the credit for this excerpt goes to Doug Noland of the Prudent Bear. When I read this, I thought it was an accurate description of what we are seeing today. “One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics.” (page 11) “Nor was our financial system weakness solely in the banks. Throughout the whole business of providing capital for our economic life there ran a pollution – the habit of making money by manipulation and promotion of securities. And that promotion too often disregarded the merits of the goods it sold. In addition, the financial world, instead of providing merely the lubricants of commerce and industry, had often set itself up to milk the system. Worse still, instead of being financial advisers to commerce and industry, the financiers had, in many ways, set themselves up to dictate the management of it.” (page 23) “The credit system in all its phases should be merely a lubricant to the systems of production and distribution. It is not its function to control these systems. That it should be so badly organized, that the volume of currency and credit, whether long or short term, should expand and shrink irrespective of the needs of production and distribution; that it should be the particular creature of emotional fear or optimism; that it should dominate and not be subordinate to production and distribution – all this is intolerable if we are to maintain our civilization.” (page 25/26) “It was difficult for the public to believe that such griefs and tragedies lay hidden in so obscure a process as credit inflation when forced on an already optimistic people.” (page 14) Now here’s the kicker…Mr. Noland described the quote as follows, “I thought I would share a few excerpts I ponder from The Memoirs of Herbert Hoover – 1929 to 1941 that capture the essence of major systemic Credit Bubble dynamics.” Back then, just as today, people were told debt is a good thing…go out and buy something with your credit card! I also noticed the part that described the fraud and manipulations of Wall Street promoters…looks like there really is nothing new under the sun! In July, Blanchard will get their time in court with J.P. Morgan and Barrick Gold for their alleged role in manipulating the price of gold lower. Now let’s take a further look at how seemingly desperate our officials are in keeping the system afloat. Have you ever wondered why the Fed does not think it’s necessary to regulate hedge funds? For quite a long time now I have speculated that the Feds have their own “hedge” accounts set up around the globe. This is the first writer I have seen call it like it is…but it will come as no surprise if you know Mr. Bill Murphy of GATA.org. I was especially humored by the title of his Monday missive, “Caribbean Pirates Holding US Financial Markets Together.” Here are some excerpts from his market recap on Monday as they pertain to foreign capital flows. The manufacturing report was bad on Monday, but the March TICS report of diminishing investment in the U.S. was the worst news of the week so far. Here is how Bill Murphy reported on capital flows: March TICS. Expect:
$70 bil. However, foreign official institutions were net sellers of $14.98 billion worth of Treasuries, or 15 times as much as the last dip in 2003.The last time foreign official institutions were net sellers of Treasuries was almost two years ago, when they sold $963 million of Treasuries. Hail to the Caribbean Pirates who came to the rescue. In other words if it were not for the Caribbean Pirates interest rates would be much higher than where they are today. Who knows where the dollar would be? Who are those guys, the Caribbean Pirates? The Fed, that’s who, at least most of them. The Fed is printing money and buying US Government Securities through these accounts to disguise the FACT that foreigners are pulling way back in the their support of our credit markets. This should be no surprise as late last year they demanded the US gets its fiscal house in order for them to continue their buying of our debt. We have done nothing to correct the problem This report almost leaves one speechless. The biggest holders of our debt, the Chinese and Japanese, went negative for the month!!!! What this tells us (the way I see it) the MIDAS analysis of blatant market manipulation is right on the money. Interest rates have come down to where they are because the Fed is forcing them down in fear of imploding a fragile US economy and the US real estate bubble, which is providing the only real strength in the economy at the moment. This also lends credence to my notion the PPT and G-7 have maneuvered the dollar to the upside because the US credit market situation is close to a disaster (with foreigners lightening up while credit spreads widen due to the hedge fund trades gone bad). With the dollar firmer and the interest rate vehicles going up, they are placating the current foreign holders of our debt and preventing a fiasco. I believe Bill Murphy’s claims are true. The Fed openly stated they would use unconventional means to defend our system from a deflationary meltdown. I firmly believe they are using the unconventional means they described; they just haven’t bothered to tell us what they are really doing behind the scenes. Even Richard Russell recently said he believed the Fed was buying stock futures to prop up the Dow whenever it reached the critical 10,000 level. The internet is littered with evidence of market manipulations by the authorities. This screams of desperation, but they must feel justified in what they are doing for the sake of national security. Protect the U.S. dollar, stocks and Treasuries at all costs…even if you have to do it via subsidiary “shell companies” in the Cayman and Caribbean Islands.
The biggest disconnect in the markets over the last couple weeks has been in the bond market, especially U.S. Treasuries. It seems no matter what news comes out, Treasuries move higher. My take on this is pretty simple based on past Treasury auctions. Problems surfaced with hedge funds at an opportunistic time for the Treasury since they had to auction $51 billion of new debt. The hedge fund problems prompted a “flight to safety” and made Treasuries more desirable along with the evidence of a slowing economy. The bonds got sold with decent demand, but remember that the 22 primary bond dealers that deal directly with the Fed are obligated to purchase Treasuries to make sure all the debt gets sold. I believe the dealers are now putting the bonds in “distribution” to get them out of their inventory and off into public hands. Once the distribution is complete, bond prices will head lower pushing interest rates higher again. The ten-year Treasury note is flirting with the 4% level again…WOW, another half-point lower and we could see re-fi madness hit the mortgage markets again. Be careful before shorting Countrywide Mortgage…new housing starts were up an astounding 11% in the last report! Treasury prices ended higher across the board today, but the stock market bulls are having an even bigger party on Wall Street. Today the Dow Industrials added 132 points to close at 10,464, the NASDAQ Composite gained 26 points to 2,030, and the S&P 500 closed 11 points higher at 1,185. I do not like this manic/depressive stock market. “NOW IS THE TIME” Treasury Secretary John Snow came out Monday and explicitly stated, “Now is the time” for China to revalue the yuan. What he was really trying to say to China is…Now is the time we need to devalue the U.S. dollar! Now is the time we need to pay back our debts with cheaper dollars. Now is the time we need to slow down the American consumer by raising import prices. As we devalue the dollar, a pegged yuan just brings deflation back to the United States in the form of consumer goods. We export jobs and debt to China in exchange for more fun stuff we can buy at Wal-Mart. On Monday the N.Y. Feds Empire index of manufacturing showed industrial production in the U.S. declining by 0.2% in April. This was the lowest reading for the Empire Index since April 2003. Now contrast the U.S. manufacturing decline with Bloomberg’s lead sentence in one of today’s articles. “China’s industrial output rose 16% in April, faster than the highest forecast by economists, as companies including Quanta Computer Inc. and Royal Philips Electronics NV move production to the nation.” The world is changing dramatically right in front of our eyes…no wonder Congress is threatening China with a 27.5% import tariff on all imported goods. Global import quotas were in place for 40 years on textiles from China. The quotas were lifted in January and the U.S. and Europe saw textile imports from China increase by over 30% to European countries and the United States. A week ago the quotas were re-imposed and China is furious! We simply can’t compete with China in low cost manufacturing, so the problem needs to get fixed on the currency side of the equation. Mr. Snow says the U.S. needs to devalue the dollar NOW!!! As for the current dollar rally, I believe the dollar is being ramped higher for two reasons: one, to offer a renewed confidence in U.S. assets; and two, to ramp the dollar higher in anticipation of a revaluation from China. Bill Buckler, who writes the highly respected “Privateer” newsletter out of Australia, has the following take on the recent movement of the dollar: A Rising Tide - Or A Sinking Ship? The biggest "excitement" about the rise in the US Dollar over the period since May 10 has been that the major "victim" of the rise has been the Euro. Many of the biggest hedge fund bets in recent weeks have been based on US corporate debt and corporate pension obligations issued in Europe. It is these which are being liquidated and the resultant capital traded out of Euros and back into US Dollars which has been a MAJOR factor in the sudden Dollar rise of recent days. Gold has almost perfectly reflected the increase in the US Dollar index this week. For public consumption, this surge in the US Dollar is being "credited" to all the US government statistics which have been released in recent weeks - lower trade deficit, higher employment, increased retail sales, etc., etc.. As has been exhaustively reported by us and by many others across the internet, ALL these statistics have been massaged to an extent far surpassing that which has gone before. In FACT, this surge in the Dollar is a frantic attempt to shore up defenses in advance of what EVERYONE expects to be an earthquake in the hedge funds. The state of the hedge funds is a window into the state of the fantastic leverage which has built the derivatives reported by the BIS to its appalling present dimensions. If there has ever been a wakeup call for the ownership of GOLD as the ultimate insurance against financial upheaval, this sudden surge of the US Dollar has provided it. We don't know how far the Dollar can rise and how long the surge can last. We DO know that the rise is NOT based on any kind of "health" in the global financial system and the US financial system in particular. The exact opposite is the case. The tide is not rising. The ship is sinking. Jim Sinclair also had an interesting analysis of the dollar. He basically said to keep an eye on the TICS report for the next few months relative to our trade deficit. If you recall, Wall Street was euphoric to see the last trade deficit come in at only $55 billion, but net foreign investment to the U.S. was lower at $45 billion. We didn’t borrow enough from foreigners to support the trade deficit. Mr. Sinclair suggests another two months with net investment coming in below the trade deficit, and the dollar will be toast! Earlier I commented the dollar was holding the 86 level, but has since weakened to 85.81 for the close. As Bill Buckler puts it, we don’t know how far the dollar can rise or for how long, but it’s not rising because of exceptionally good health. Commodities and the Dollar We are not going to see an end to the bull market in commodities for quite a few more years. Developing nations are just now getting a taste of the good life. With China’s manufacturing growth at 16% there is a tremendous amount of momentum in their economic growth. The same is true for India, Indonesia, some South American countries and many more. The growing demand for commodities is a GLOBAL EVENT. What we have been watching the last few weeks with commodity prices coming down has more to do with the recent dollar rally. As the dollar rallies and foreign currencies decline, commodity prices outside the U.S. don’t come down as fast as they do in U.S. dollar terms. The dollar has strengthened and therefore some commodity prices have declined. We haven’t had a sudden drop in commodity demand and we haven’t heard of any huge commodity discoveries that will increase supply. Fundamentally nothing has changed with commodities…what we are seeing is a battle royal in the currency pits! Commodities have taken a short-term breather in their ascent to higher prices, but this is just a pause for refreshment. The next round of commodity boom prices will come as soon as the dollar rolls over to reflect the dollar devaluation that Secretary Snow says we need RIGHT NOW! In the meantime, the commodity bull market is preparing to climb the proverbial “Wall of Worry” as the dollar moves lower if we can get the needed cooperation from China. I’ll leave it to Doug Casey, an expert speculator and 25 years an investor and analyst in commodities and resource stocks. Here is a brief excerpt from his piece, “Profiting From the Wall of Worry.” “Periodically in 2004, and intensively so far in 2005, prices of most resource companies have been driven down, casting a dark cloud over the psychology of most investors and market observers.” “People are worried for a number of reasons. Technicians fret about the huge run-up and subsequent loss of momentum; they wonder if the mining stocks aren’t about to go right back where they came from. Fundamentalists are concerned that (inevitably) higher interest rates will cause people to buy fewer new houses, cars, and other consumer goods; as demand falls, so would commodity prices. They worry that the boom in China will soon come off the rails. They worry that all the money that’s been raised will result in gigantic new supplies of metal, depressing prices. They worry that environmentalists will make it impossible to develop new properties at any price. They worry that feckless and bankrupt governments might nationalize good-looking discoveries, or tax them into unprofitability. They worry that new technologies will radically reduce the use of some metals, collapsing their prices. They worry that anything that can go wrong will go wrong. And they’re right—but their timing is wrong.” After Mr. Casey details the Wall of Worry, he goes on to describe some of the reasons the bull market in commodities is not over. Here is what he says: “There are lots of reasons. Enough that even a cursory discussion of them will take another article. But in brief, to refute some of the current Worries: We’re coming off the longest and deepest secular commodity bear market since the depression of the ‘30s. Commodity prices are still far closer to historic lows than historic highs, at least in “constant” dollars, which is what counts. The world economy is evolving away from the debt-burdened U.S. and towards China, India, and numerous smaller countries; their growth will be volatile, but it’s for real, and they’ll consume unbelievable amounts of raw materials in the coming years. There’s been very little mineral exploration for a full generation, the industry has come nowhere near replacing reserves, and a historic supply crunch in many commodities is in the making. Governments will always act stupidly, but the long-term trend is inevitably towards freer markets, higher standards of living—and higher resource consumption.” Through the paper Mr. Casey details the three phases of a secular bull market: the Stealth Phase, the Wall of Worry, and finally the Mania Phase. The easy money was already made in the Stealth Phase and we are now in the Wall of Worry. Just listen to the popular media talk down the commodity markets…today will be easy with the decline of $1.77 a barrel for crude today with the close at $47.20. Two things have happened to get oil down in price: first they ramp the “petro-dollar” higher and voila…lower crude price. Second, oil inventories have been growing for 13 out of the last 14 weeks. If they thought crude would be moving so much lower in price (some say going to $35), why have they been building so much inventory with the price was above $50 a barrel? I have heard some analysts suggest they have to top off the tanks if we are going to war with Iran in a month or two…or possibly Syria. They have been pumping oil and importing at breakneck speed to get these inventories higher. High energy prices are taxing the global economy. They needed to get oil lower to avoid choking off more discretionary spending. As we get closer to the driving season we’ll see how much of a choke point there is on global refining capacity. I like to close with positive comments on my favorite investment. Silver had a good day today by adding 16 cents to close at the high of $7.21. I’ve held firm with my silver calls on the COMEX at $7.50. It appears the commercials now hold the “long” cards and are prepared to take the silver price higher. There is also a lot of talk that there could be a delivery problem brewing for the May contract with over 2,000 longs still outstanding that can either roll-over to June or demand delivery. For the details of this bullish scenario that has shaped up for silver, please read Ted Butler as he is far more qualified to comment on the composition of the Commitment of Traders Report. The COT’s are now turning favorable for gold, so very soon gold will not be acting to keep silver down. Keep an eye on the dollar, because short-term politics usually has repercussions in precious metals, especially gold with so much going on in the foreign exchange arena. Two weeks ago before the Treasury auctions I said we would have to get beyond the auctions before gold and silver would be free to move higher. We are there now. I’m prepared to see the precious metals climb right over the top of this false dollar strength. We shall see!!! In the meantime… Have a Great Evening! Mike Hartman
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