Gold over night retreated to $1478 and has bounced hard near our $1480 target price for a retest of Friday's lows. Silver go pummeled again, as the emotions run high in this market still, and not only slipped below our $35.50 target, but actually made new lows near $32 over night. Both retests of their lows, despite the fear they incite, have been constructive for these Precious Metals markets moving forwards. If we have learned anything over the past two weeks it is that these markets no longer take weeks and months to correct, but only days and hours. This fact is only further proof that the paper markets in both Silver and Gold are a lie that has now been exposed to the entire world, and will soon serve as the launching pad for prices deemed unimaginable just six months ago.
Patience of course is a virtue, and it is patience that must be adhered to, to take advantage of these sale prices that the criminal CRIMEX banking cabal are making available to us all. The US Dollar looks to be reaching the zenith of it's dead cat bounce here. Fundamentally there remains no good reason to buy this snot rag. And every fundamental reason to purchase commodities at these sale prices. The Fed and the CME might run this game, making the rules up as they go along, but in the end, markets can only be manipulated in the direction they naturally seek to move, and down is not natural given the Fed's money printing of the past two years.
Repeat after me:
"The markets are rigged. The markets are rigged. The markets are rigged."
Ahhh... Feels better doesn't it? What we have been witnessing the past several days is "noise in the markets" created by those seeking to hide the TRUTH through deception, and blatant lies. Real corrections, in markets that are "free", would not drop 10-15% in a single day. What we are witnessing, and have been victims of, are the desperate acts of "banks and government" as they attempt to cover up their failed attempt to save the economy by bailing out insolvent banks with money printed out of thin air.
Quantitative Easing, whether 1.0 or 2.0 have been dismal failures. Interest rates have risen, housing prices have continued to fall, and the economy has begun once again to sputter. If you are, or have been, a commodities investor/trader for the past 18 months or been invested in the stock markets, QE1 and 2 have been a huge success as much of the liquidity these programs have spun off [the money they have created] has gone exactly where it was intended, despite what the Fed says it's plans were. The Fed is, and has been desperate, to prop up the stock markets to "boost" the confidence of the public and sustain its "wealth effect" on the economy [rising stock prices and lower interest rates will spur more borrowing and drive the economy higher]. Inflation in "asset prices" has actually been the Fed's unstated goal since QE1 began.
The problem though, in a nut shell, is debt. In a financial system that is crumbling under the weight of too much debt, encouraging more debt is not going to fix anything except in the very short term. You can not spend money you don't have, and hope to get rich.
The biggest drawback to the Fed's silly QE, is that in order for it to work, the banks must lend money. They are not. The money the banks are collecting for their assistance in the Fed's QE program, is being kept in their "excess reserve accounts" at the Fed where they are being paid interest on it "by the Fed". Why should they make low interest loans, if they can earn income on their reserves at the Fed?
The Fed acts puzzled when their QE plan doesn't work. They remain smug about inflation. Why? Because they know that the money the banks have received from QE is, for now and for the most part, locked up at the Fed in the banks excess reserve accounts.
How did the banks get the QE money from the Fed? When the Treasury auctions off debt, it is ILLEGAL for the Fed to buy it "first hand" at the debt auctions. That is what the primary dealers are enlisted to do for the Fed. The Primary dealer is a formal designation of a firm as a market maker of government securities. These primary dealer banks [for a list click here] buy new US Treasury Debt at auction, and then turn around and sell it to the Fed with money the Fed has created out of thin air. The primary dealer banks agree to keep a large portion the money they receive for this Treasury Debt in their excess reserve accounts at the Fed where they are paid the miserly sum of 0.25%. In theory, this interest payment on excess reserves serves as a cap on "inflation expectations" as the banks earn a guaranteed income from their excess reserves as a small reward for NOT lending the money into the financial system.
It is noteworthy that until October 1, 2008, the Fed was not allowed to pay interest on the excess reserves of banks held at the Fed. AND originally, by statue, not allowed to do so until October 1, 2011.
From a Federal Reserve Board press release dated October 6, 2008:
The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.
Clearly, the Fed was looking forward in 2006 when they sought and received permission from Congress to pay banks interest on their excess reserves as a tool to control a money supply that was getting out of control, and threatening monstrous inflationary implications. Only when the Fed's "low interest rate" plans for the economy blew up with the housing market, did they need to hurry along the authority to make interest payments on excess reserves held at the Fed as QE1 went into effect. This, all so they could keep the creation of money from QE1, and now QE2, from seeping into the economy and setting off an inflationary firestorm.
But capping the flow of money created via Quantitative Easing into the economy did not disuade financial market participants from seeing the TRUTH of all this "funny money" the Fed was creating. They used the Fed's "low interest for an extended period" mantra, and low margin rates to pour available funds into commodities AND stocks as a "hedge" against inflation. Inflation the Fed was denying at every opportunity, but that every market participant recognized. Inflation is a rise in the money supply, period.
So as the prices of commodities rose, and the "fears of inflation" rose with them, the Fed's QE plan became and even bigger failure. The economy is floundering, the housing market is seeking new lows, interest rates are rising, and now inflation expectations are coming unanchored. What can the Fed do to save some face, and make their QE the success it was meant to be? Well golly gee Beav, that's simple...crash the commodity markets.
This too will fail, as it only exposes the absolute failure of the Fed's Quantitative Easing Policy. Margin increases on the CRIMEX will ONLY effect the demand for "paper" Silver, Gold, Oil, etc. The global demand for the real thing is, and will continue, going through the roof. Expiration of the Fed's QE2 at the end of June is not the end of global "inflation fears". Much the contrary, inflation is here NOW, and it is not going away anytime soon...no matter what the Fed, OR the financial headlines tell us.
This headline below from yesterday is amusing. Are we to believe then, that stocks have been up for the past 18 months on rising commodity prices that have been deemed inflationary? So what if interest rates rise. Real interest rates are negative when inflation is factored in. Interest rates will have to rise faster than inflation for them to have any "lasting negative effect" on commodity prices. And becasue rising interest rates are a BIG road block to economic growth, it's unlikely they will keep pace with the rise in inflation and the prices of commodities moving forward from this rigged commodity takedown we are witnessing right now.
U.S. Stocks Fall as Commodities Drop Amid Concern Interest Rates Will Rise
U.S. stocks retreated, sending the Standard & Poor’s 500 Index lower for the first time in four days, as commodity producers fell amid concern that accelerating global inflation will lead to higher interest rates.
The Chinese reaction to REAL INFLATION overnight has accelerated our retest of last Friday's lows in Silver and Gold. How many times has a hike in Chinese bank reserve requirements forced a knee jerk sell of in Silver, Gold and Oil? Only to see them all rebound quickly on renewed US Dollar weakness? This begs the question: Why does the US Dollar rise when the Chinese make an effort to fight inflation, when the US Dollar is the cause of Chinese inflation?
China raises bank reserve requirements
BEIJING (Reuters) - China's central bank said on Thursday that it would raise lenders' required reserves by 50 basis points, the fifth time this year and the eighth since October.
The move increases the required reserve ratio for the country's biggest banks to a record 21 percent, another step in the government's campaign to control inflation.
KEY POINTS:
-- The central bank has been raising reserve requirements at a pace of about once a month since October.
-- The central bank relies on the rise bank reserves to soak up excessive liquidity in the economy as it struggles to issue bills.
-- The central bank has said it will use a combination of policy tools, including required reserves and interest rates, to put a lid on inflation, which clocked in at 5.3 percent in April from 5.4 percent in March.
Yesterdays sharp sell-off in commodities, though not unexpected following their sharp bounce Monday from Friday's lows, may have been instigated by news that 17 Senators are demanding immediate action by the CFTC regarding position limits to control the "Speculation" in these markets. Apparently the $10 drop in price and the $6 bounce that followed has opened the eyes of these Senators to just how rigged our financial markets are.
Despite all the calls for position limits by members of congress to halt the rise in Oil prices, it will be amusing if/wen new position limits are actually enacted, to watch the commodities markets move even higher as the "liquidity" that fuels the futures markets evaporates and the banks ability to "cap" prices with their naked shorts disappears.
Senators demand CFTC tackle oil speculation
(Reuters) - In a sign Congress may be losing patience with the U.S. futures regulator and high energy prices, lawmakers demanded on Wednesday the agency immediately crack down on excessive speculation in crude oil markets by hastening planned rules to limit concentration.
A group of 17 senators, in a letter to the chairman and commissioners at the Commodity Futures Trading Commission, said they wanted the agency to unveil a plan by May 23 to impose position limits in all energy futures markets, beginning with crude oil. The agency has already proposed such limits as part of the financial reform, but has not finalized them.
The senators said the recent drop in crude oil prices, which fell nearly $10 a barrel in one day last week, defy supply and demand conditions. Oil prices bounced back almost $6 a barrel on Monday, but then fell more than $5 on Wednesday. Gasoline prices slumped by more than 8 percent.
"The wild fluctuation could only be the result of rampant oil speculation, plain and simple," said Senator Ron Wyden, one of the lawmakers who wrote to the CFTC demanding action, in some of the strongest language attacking speculators since oil prices surged to a record $147 a barrel in 2008.
Some Thoughts On The Recent Commodity Correction
by Brad Schaeffer, via Zero Hedge
To understand why the Bernake’s and Geithner’s of the world view CPI through rose-tinted glasses we must remember who they are. They are wonks who have spent their entire careers lecturing and/or fidgeting with economies without actively participating in them. They are awash in data and are hardwired to extrapolate patterns from the past to predict the future. But we have only had a non-gold fiat monetary system in place since 1971 which is hardly enough time to get a handle on repeating macro-economic cycles in such an ever changing and dynamic landscape. And I want to offer something else. From the late 1940s to the mid-1980s the United States was the dominant manufacturer in the world. The reason? Of our three main foreign competitors today, China , Japan and Germany, one was mired for much of the third quarter of the 20th Century in a disastrous experiment with Maoist communism while the latter two’s urban centers had been reduced to utter wasteland as their reward for launching the most devastating war in human history. Indeed, all of Europe was digging out of the wreckage of their mass-fratricide, including a bankrupted Great Britain …once the supreme power of the world.
Into that void poured American made cars, radios, appliances, garments, food, you name it. By the mid-1950s the US was producing almost half of the world’s manufacturing output. Now we produce less than 20%. So when Bernake considers whether or not rising prices will result from printing trillions of dollars he looks back to, say 1987 when the dollar index halved yet CPI was only up 4.4% in that same year. Ergo: a falling dollar does not cause inflation. Hence QE I and II should move forward without fear.
But he is wrong on two levels. First of all, a weak dollar is usually a catalyst to prompt more exports as US goods become cheaper. And indeed that has happened as the manufacturing sector has been recovering nicely. But, those US manufacturers that once dominated the landscape are few and far between as we have surrendered our assembly lines to the forces of cheap labor overseas in favor of a service oriented economy. So now when imported goods are more expensive due to their relative strength (or less weakness) against the dollar, unlike in the past when we could shift our purchases to cheaper US-made goods, we instead are compelled to accept higher prices as we have no choice but to buy foreign-made goods. Ask Wall-Mart. (One’s house would be an almost vacant four walls if we invaded it and took away any items that don’t say “Made In USA” on them!) China, for example in 1987 produced less than 5% of the world’s goods. Now it almost a 20%. A four-fold increase.
Secondly, the definition of inflation that most people use, including the Fed, seems to be a measure of the CPI as if the two are interchangeable. Hence, people believe, if the CPI remains steady, so too does inflation. But, what is inflation exactly? Is it really price increases per se? Or are rising prices just one symptom of a larger event? “Inflation” is what the word implies: an inflation in the supply of a currency and thus a decrease in its value and eventually its purchasing power. Consumer prices are not always the best measure for a variety of reasons. Just to give one example, they tend to be ‘sticky’ in that vendors are hard-pressed to jack them up to account for lost dollar values. So they may try other approaches to mitigate the inflated currency’s impact on the bottom line such as keeping prices the same but reducing the package size. Care for some potato chips with your bag of air? How about a 1.5 pint of ice cream that for the same price (hence no measurable impact on CPI) that used to be 1.75 pints? There are many ways short of raising prices to compensate for the effects of an ever expanding supply of dollars. But real costs rise just the same.
The fact is that inflation in its traditional definition is rampant across the globe and it can in large part be attributed to the policy of almost zero interest rates in the form of a greatly expanding balance sheet of the Federal Reserve. Take China for example. They are the largest exporter to the United States and as such have a vested interest in preventing their products from becoming too expensive (although they have less to fear from competitively cheap US goods as they once did). They do this by artificially pegging the Yuan to the dollar at a fixed rate. When the Fed prints more dollars, in order to prevent their currency from appreciating as it can now buy more dollars for the same price, the Chinese must expand their own balance sheet to print the money used to buy up the excess dollars in the system and maintain their target exchange rate to keep their exports flowing.
As such, China ’s M2 is up 15.3% in April alone in part due to this phenomenon. This is an inflationary policy. There are more Yuan than there used to be. So they too are worth less, although not as less as the even more in supply US dollar. And as you would expect, since they have real inflation, prices in China are on the rise. Their CPI, in fact, shows a 5.3% inflation rate. How come their CPI shows a much higher level than ours when our dollar is depreciating faster than theirs yaun? It all depends on how you measure it. The answer is that their CPI reflects real changes in commodities prices and ours discounts their impact in favor of finished goods. So to put it simply, where their CPI places a larger import on the price of raw materials and food ours places more emphasis products like the price of a cell phone. Considering the first Motorola cell phone retailed for $3,995 in 1983, the price has clearly gone down.
Regardless of CPI though, why would raw materials be impacted by the Fed’s relentless easing? Well, commodities are traded in US dollars which is the world’s reserve currency so a refiner in, say Japan, who has to purchase crude oil for distillation must first take its Yen and buy dollars with it before going into the market to buy crude oil. The seller of crude knows that the Yen bought its counterparty more dollars and thus will it charge more dollars for its oil, lest the next time he visits Tokyo and converts his less valuable dollars back into fewer Yen he may be forced to stay in a Holiday Inn as opposed to a Ritz this visit.
To be sure, demand spurned by economic growth in the developing world is still the prime driver of raw materials price action. Complex systems like global markets are an expression of many factors. But if the supply/demand dynamic is what got dealers into the commodities market from the long-side, the Fed’s policies injected steroids into the rally and has now printed its way into a corner. It cannot initiate more easing as inflation is here. (As companies add more to their payrolls too, though good for the country as a whole, this will put ever more upward pressure on prices.) But should it start tightening by raising interest rates as I think is inevitable, making it more expensive for businesses to borrow, it could threaten the anemic recovery that is already showing signs of slowing if the Q1 numbers are any indication.
Good luck with this trade:
Treasuries Rally as Commodities Decline Eases Inflation Concern
May 11 (Bloomberg) -- Treasuries rallied, pushing yields on 10-year notes to almost the lowest level this year, as a slump in the prices of commodities and U.S. stocks eases concern that inflation will accelerate.
Patience of course is a virtue, and it is patience that must be adhered to, to take advantage of these sale prices that the criminal CRIMEX banking cabal are making available to us all. The US Dollar looks to be reaching the zenith of it's dead cat bounce here. Fundamentally there remains no good reason to buy this snot rag. And every fundamental reason to purchase commodities at these sale prices. The Fed and the CME might run this game, making the rules up as they go along, but in the end, markets can only be manipulated in the direction they naturally seek to move, and down is not natural given the Fed's money printing of the past two years.
Repeat after me:
"The markets are rigged. The markets are rigged. The markets are rigged."
Ahhh... Feels better doesn't it? What we have been witnessing the past several days is "noise in the markets" created by those seeking to hide the TRUTH through deception, and blatant lies. Real corrections, in markets that are "free", would not drop 10-15% in a single day. What we are witnessing, and have been victims of, are the desperate acts of "banks and government" as they attempt to cover up their failed attempt to save the economy by bailing out insolvent banks with money printed out of thin air.
Quantitative Easing, whether 1.0 or 2.0 have been dismal failures. Interest rates have risen, housing prices have continued to fall, and the economy has begun once again to sputter. If you are, or have been, a commodities investor/trader for the past 18 months or been invested in the stock markets, QE1 and 2 have been a huge success as much of the liquidity these programs have spun off [the money they have created] has gone exactly where it was intended, despite what the Fed says it's plans were. The Fed is, and has been desperate, to prop up the stock markets to "boost" the confidence of the public and sustain its "wealth effect" on the economy [rising stock prices and lower interest rates will spur more borrowing and drive the economy higher]. Inflation in "asset prices" has actually been the Fed's unstated goal since QE1 began.
The problem though, in a nut shell, is debt. In a financial system that is crumbling under the weight of too much debt, encouraging more debt is not going to fix anything except in the very short term. You can not spend money you don't have, and hope to get rich.
The biggest drawback to the Fed's silly QE, is that in order for it to work, the banks must lend money. They are not. The money the banks are collecting for their assistance in the Fed's QE program, is being kept in their "excess reserve accounts" at the Fed where they are being paid interest on it "by the Fed". Why should they make low interest loans, if they can earn income on their reserves at the Fed?
The Fed acts puzzled when their QE plan doesn't work. They remain smug about inflation. Why? Because they know that the money the banks have received from QE is, for now and for the most part, locked up at the Fed in the banks excess reserve accounts.
How did the banks get the QE money from the Fed? When the Treasury auctions off debt, it is ILLEGAL for the Fed to buy it "first hand" at the debt auctions. That is what the primary dealers are enlisted to do for the Fed. The Primary dealer is a formal designation of a firm as a market maker of government securities. These primary dealer banks [for a list click here] buy new US Treasury Debt at auction, and then turn around and sell it to the Fed with money the Fed has created out of thin air. The primary dealer banks agree to keep a large portion the money they receive for this Treasury Debt in their excess reserve accounts at the Fed where they are paid the miserly sum of 0.25%. In theory, this interest payment on excess reserves serves as a cap on "inflation expectations" as the banks earn a guaranteed income from their excess reserves as a small reward for NOT lending the money into the financial system.
It is noteworthy that until October 1, 2008, the Fed was not allowed to pay interest on the excess reserves of banks held at the Fed. AND originally, by statue, not allowed to do so until October 1, 2011.
From a Federal Reserve Board press release dated October 6, 2008:
The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.
Clearly, the Fed was looking forward in 2006 when they sought and received permission from Congress to pay banks interest on their excess reserves as a tool to control a money supply that was getting out of control, and threatening monstrous inflationary implications. Only when the Fed's "low interest rate" plans for the economy blew up with the housing market, did they need to hurry along the authority to make interest payments on excess reserves held at the Fed as QE1 went into effect. This, all so they could keep the creation of money from QE1, and now QE2, from seeping into the economy and setting off an inflationary firestorm.
But capping the flow of money created via Quantitative Easing into the economy did not disuade financial market participants from seeing the TRUTH of all this "funny money" the Fed was creating. They used the Fed's "low interest for an extended period" mantra, and low margin rates to pour available funds into commodities AND stocks as a "hedge" against inflation. Inflation the Fed was denying at every opportunity, but that every market participant recognized. Inflation is a rise in the money supply, period.
So as the prices of commodities rose, and the "fears of inflation" rose with them, the Fed's QE plan became and even bigger failure. The economy is floundering, the housing market is seeking new lows, interest rates are rising, and now inflation expectations are coming unanchored. What can the Fed do to save some face, and make their QE the success it was meant to be? Well golly gee Beav, that's simple...crash the commodity markets.
This too will fail, as it only exposes the absolute failure of the Fed's Quantitative Easing Policy. Margin increases on the CRIMEX will ONLY effect the demand for "paper" Silver, Gold, Oil, etc. The global demand for the real thing is, and will continue, going through the roof. Expiration of the Fed's QE2 at the end of June is not the end of global "inflation fears". Much the contrary, inflation is here NOW, and it is not going away anytime soon...no matter what the Fed, OR the financial headlines tell us.
This headline below from yesterday is amusing. Are we to believe then, that stocks have been up for the past 18 months on rising commodity prices that have been deemed inflationary? So what if interest rates rise. Real interest rates are negative when inflation is factored in. Interest rates will have to rise faster than inflation for them to have any "lasting negative effect" on commodity prices. And becasue rising interest rates are a BIG road block to economic growth, it's unlikely they will keep pace with the rise in inflation and the prices of commodities moving forward from this rigged commodity takedown we are witnessing right now.
U.S. Stocks Fall as Commodities Drop Amid Concern Interest Rates Will Rise
U.S. stocks retreated, sending the Standard & Poor’s 500 Index lower for the first time in four days, as commodity producers fell amid concern that accelerating global inflation will lead to higher interest rates.
The Chinese reaction to REAL INFLATION overnight has accelerated our retest of last Friday's lows in Silver and Gold. How many times has a hike in Chinese bank reserve requirements forced a knee jerk sell of in Silver, Gold and Oil? Only to see them all rebound quickly on renewed US Dollar weakness? This begs the question: Why does the US Dollar rise when the Chinese make an effort to fight inflation, when the US Dollar is the cause of Chinese inflation?
China raises bank reserve requirements
BEIJING (Reuters) - China's central bank said on Thursday that it would raise lenders' required reserves by 50 basis points, the fifth time this year and the eighth since October.
The move increases the required reserve ratio for the country's biggest banks to a record 21 percent, another step in the government's campaign to control inflation.
KEY POINTS:
-- The central bank has been raising reserve requirements at a pace of about once a month since October.
-- The central bank relies on the rise bank reserves to soak up excessive liquidity in the economy as it struggles to issue bills.
-- The central bank has said it will use a combination of policy tools, including required reserves and interest rates, to put a lid on inflation, which clocked in at 5.3 percent in April from 5.4 percent in March.
Yesterdays sharp sell-off in commodities, though not unexpected following their sharp bounce Monday from Friday's lows, may have been instigated by news that 17 Senators are demanding immediate action by the CFTC regarding position limits to control the "Speculation" in these markets. Apparently the $10 drop in price and the $6 bounce that followed has opened the eyes of these Senators to just how rigged our financial markets are.
Despite all the calls for position limits by members of congress to halt the rise in Oil prices, it will be amusing if/wen new position limits are actually enacted, to watch the commodities markets move even higher as the "liquidity" that fuels the futures markets evaporates and the banks ability to "cap" prices with their naked shorts disappears.
Senators demand CFTC tackle oil speculation
(Reuters) - In a sign Congress may be losing patience with the U.S. futures regulator and high energy prices, lawmakers demanded on Wednesday the agency immediately crack down on excessive speculation in crude oil markets by hastening planned rules to limit concentration.
A group of 17 senators, in a letter to the chairman and commissioners at the Commodity Futures Trading Commission, said they wanted the agency to unveil a plan by May 23 to impose position limits in all energy futures markets, beginning with crude oil. The agency has already proposed such limits as part of the financial reform, but has not finalized them.
The senators said the recent drop in crude oil prices, which fell nearly $10 a barrel in one day last week, defy supply and demand conditions. Oil prices bounced back almost $6 a barrel on Monday, but then fell more than $5 on Wednesday. Gasoline prices slumped by more than 8 percent.
"The wild fluctuation could only be the result of rampant oil speculation, plain and simple," said Senator Ron Wyden, one of the lawmakers who wrote to the CFTC demanding action, in some of the strongest language attacking speculators since oil prices surged to a record $147 a barrel in 2008.
Some Thoughts On The Recent Commodity Correction
by Brad Schaeffer, via Zero Hedge
To understand why the Bernake’s and Geithner’s of the world view CPI through rose-tinted glasses we must remember who they are. They are wonks who have spent their entire careers lecturing and/or fidgeting with economies without actively participating in them. They are awash in data and are hardwired to extrapolate patterns from the past to predict the future. But we have only had a non-gold fiat monetary system in place since 1971 which is hardly enough time to get a handle on repeating macro-economic cycles in such an ever changing and dynamic landscape. And I want to offer something else. From the late 1940s to the mid-1980s the United States was the dominant manufacturer in the world. The reason? Of our three main foreign competitors today, China , Japan and Germany, one was mired for much of the third quarter of the 20th Century in a disastrous experiment with Maoist communism while the latter two’s urban centers had been reduced to utter wasteland as their reward for launching the most devastating war in human history. Indeed, all of Europe was digging out of the wreckage of their mass-fratricide, including a bankrupted Great Britain …once the supreme power of the world.
Into that void poured American made cars, radios, appliances, garments, food, you name it. By the mid-1950s the US was producing almost half of the world’s manufacturing output. Now we produce less than 20%. So when Bernake considers whether or not rising prices will result from printing trillions of dollars he looks back to, say 1987 when the dollar index halved yet CPI was only up 4.4% in that same year. Ergo: a falling dollar does not cause inflation. Hence QE I and II should move forward without fear.
But he is wrong on two levels. First of all, a weak dollar is usually a catalyst to prompt more exports as US goods become cheaper. And indeed that has happened as the manufacturing sector has been recovering nicely. But, those US manufacturers that once dominated the landscape are few and far between as we have surrendered our assembly lines to the forces of cheap labor overseas in favor of a service oriented economy. So now when imported goods are more expensive due to their relative strength (or less weakness) against the dollar, unlike in the past when we could shift our purchases to cheaper US-made goods, we instead are compelled to accept higher prices as we have no choice but to buy foreign-made goods. Ask Wall-Mart. (One’s house would be an almost vacant four walls if we invaded it and took away any items that don’t say “Made In USA” on them!) China, for example in 1987 produced less than 5% of the world’s goods. Now it almost a 20%. A four-fold increase.
Secondly, the definition of inflation that most people use, including the Fed, seems to be a measure of the CPI as if the two are interchangeable. Hence, people believe, if the CPI remains steady, so too does inflation. But, what is inflation exactly? Is it really price increases per se? Or are rising prices just one symptom of a larger event? “Inflation” is what the word implies: an inflation in the supply of a currency and thus a decrease in its value and eventually its purchasing power. Consumer prices are not always the best measure for a variety of reasons. Just to give one example, they tend to be ‘sticky’ in that vendors are hard-pressed to jack them up to account for lost dollar values. So they may try other approaches to mitigate the inflated currency’s impact on the bottom line such as keeping prices the same but reducing the package size. Care for some potato chips with your bag of air? How about a 1.5 pint of ice cream that for the same price (hence no measurable impact on CPI) that used to be 1.75 pints? There are many ways short of raising prices to compensate for the effects of an ever expanding supply of dollars. But real costs rise just the same.
The fact is that inflation in its traditional definition is rampant across the globe and it can in large part be attributed to the policy of almost zero interest rates in the form of a greatly expanding balance sheet of the Federal Reserve. Take China for example. They are the largest exporter to the United States and as such have a vested interest in preventing their products from becoming too expensive (although they have less to fear from competitively cheap US goods as they once did). They do this by artificially pegging the Yuan to the dollar at a fixed rate. When the Fed prints more dollars, in order to prevent their currency from appreciating as it can now buy more dollars for the same price, the Chinese must expand their own balance sheet to print the money used to buy up the excess dollars in the system and maintain their target exchange rate to keep their exports flowing.
As such, China ’s M2 is up 15.3% in April alone in part due to this phenomenon. This is an inflationary policy. There are more Yuan than there used to be. So they too are worth less, although not as less as the even more in supply US dollar. And as you would expect, since they have real inflation, prices in China are on the rise. Their CPI, in fact, shows a 5.3% inflation rate. How come their CPI shows a much higher level than ours when our dollar is depreciating faster than theirs yaun? It all depends on how you measure it. The answer is that their CPI reflects real changes in commodities prices and ours discounts their impact in favor of finished goods. So to put it simply, where their CPI places a larger import on the price of raw materials and food ours places more emphasis products like the price of a cell phone. Considering the first Motorola cell phone retailed for $3,995 in 1983, the price has clearly gone down.
Regardless of CPI though, why would raw materials be impacted by the Fed’s relentless easing? Well, commodities are traded in US dollars which is the world’s reserve currency so a refiner in, say Japan, who has to purchase crude oil for distillation must first take its Yen and buy dollars with it before going into the market to buy crude oil. The seller of crude knows that the Yen bought its counterparty more dollars and thus will it charge more dollars for its oil, lest the next time he visits Tokyo and converts his less valuable dollars back into fewer Yen he may be forced to stay in a Holiday Inn as opposed to a Ritz this visit.
To be sure, demand spurned by economic growth in the developing world is still the prime driver of raw materials price action. Complex systems like global markets are an expression of many factors. But if the supply/demand dynamic is what got dealers into the commodities market from the long-side, the Fed’s policies injected steroids into the rally and has now printed its way into a corner. It cannot initiate more easing as inflation is here. (As companies add more to their payrolls too, though good for the country as a whole, this will put ever more upward pressure on prices.) But should it start tightening by raising interest rates as I think is inevitable, making it more expensive for businesses to borrow, it could threaten the anemic recovery that is already showing signs of slowing if the Q1 numbers are any indication.
Good luck with this trade:
Treasuries Rally as Commodities Decline Eases Inflation Concern
May 11 (Bloomberg) -- Treasuries rallied, pushing yields on 10-year notes to almost the lowest level this year, as a slump in the prices of commodities and U.S. stocks eases concern that inflation will accelerate.
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