One problem with satellite photos is you don't know what has happened since taken. One may legitimately posit an apartment complex that looks empty in the image may now be filled to capacity and teeming with life. A recent expose by a journalist on the ground demolishes those theories.
What is most impressive about the apartment complex shown is how they built the entire place without adding any roads yet. Hopefully they'll get around to it. Zoom out and look around (both north and east) and you can see the scale of this new city. Like the video above almost all of this new Chenggong appears unused.
The tragic stories coming from Japan keep piling up and the death toll climbs every day as the Japanese try to dig themselves out of the rubble. The humanitarian challenge of caring for a couple hundred thousand homeless is straining even the organized Japanese.
Amongst the despair and rubble there are amazing stories of bravery and determination emerging.
Here is one of them. Hideaki Akaiwa escaped the earthquake and tsunami, but after being unable to find his wife, scrounged up some SCUBA gear and went back into the waters to find his wife! He succeeded and later pulled the same technique to find his mother. A somewhat embellished but great read of the story goes something like this (from Badassoftheweek 03/18/11)
Regardless of how he came across this equipment (borrowing, stealing, buying, beating up a Yakuza SCUBA diving demolitions expert, etc.) Hideaki threw on his underwater survival gear, rushed into the goddamned tsunami, and dove beneath the rushing waves, determined to rescue his wife or die trying. I'm not exactly sure whether or not the dude even knew how to operate SCUBA equipment, but according to one version of his story he met his wife while he was surfing (which is awesome, by the way), so it doesn't seem like that much of a stretch to say that he already had a little experience SCUBA diving under a more controlled situation. Of course, even if this dude didn't know how to work the gear I'm certain that wouldn't have stopped him either – Hideaki wasn't going to let a pair of soul-crushing natural disasters deter him from doing awesome shit and saving his family. He dove down into the water, completely submerged in the freezing cold, pitch black rushing current on all sides, and started swimming through the underwater ruins of his former hometown.
Surrounded by incredible hazards on all sides, ranging from obscene currents capable of dislodging houses from their moorings, sharp twisted metal that could easily have punctured his oxygen line (at best) or impaled him (at worst), and with giant fucking cars careening through the water like toys, he pressed on. Past broken glass, past destroyed houses, past downed power lines arcing with electrical current, through undertow that could have dragged him out to sea never to be heard from again, he searched.
Hideaki maintained his composure and navigated his way through the submerged city, finally tracking down his old house. He quickly swam through to find his totally-freaked-out wife, alone and stranded on the upper level of their house, barely keeping her head above water. He grabbed her tight, and presumably sharing his rebreather with her, dragged her out of the wreckage to safety. She survived.
Google has a service for people looking those lost or missing in Japan. The url is: http://japan.person-finder.appspot.com/?lang=en
They currently have over 250 thousand records. One word of caution however, some cruel people are posting entries stating some people have died and these entries are entirely false so while I don't want to encourage false hope be cautious of such entries.
From metro.uk
One family were crushed when a message posted on the Google people finder by Lucas. A said that Brian Hickebottom had died in the disaster. However, it emerged that the information was wrong, and he had found refuge in the school where he and his wife work, much to his relatives' relief . . . Responding to a post about US marine Justan Browning, which said he had died when a building collapsed, someone going by the name Canadian Friend wrote: 'I have seen several false reports that people are deceased. It is disgusting. Do not give up hope. Call your government to verify the above report.'
Internet trolling pays off again. I think I've found some (semi real time) radiation data sites. My Japanese is limited to the auto translate function in Google Chrome but it appears there are some locations still publishing radiation data. I'm not quite certain of the units due to the translator but you can see peaks and valleys in the data and the peaks are not too much worse than the valleys. It also appears they liken 50,000 to a chest xray, or at least that's how Google Chrome is translating it....
Again the power of social media reveals itself. There is a multi part interview series here http://georneys.blogspot.com/2011/03/third-follow-up-interview-with-my-dad.html
of a retired Navy and civilian nuclear engineer which I highly recommend you listen to. He does an excellent job laying out the facts of what we know and don't know as time has progressed through this emergency.
I'm not going to comment/report/speculate on the current news of the moment regarding the nuclear situation in Japan as its changing so often and right now the news flow from Japan is sparse as it is night time over there. In a few hours we'll have another update on what is going on. If you listen to the interviews above you can get a sense of the unfolding situation and how Mr. Mervine predicted the fuel rod storage problem. Hopefully the 3 active plants will be successfully cooled down and the fuel rod storage situation in the 3 (#4,#5,#6) non active plants will be contained.
While trolling around the internet attempting to find hard data on what sort of radiation levels we are seeing in Japan I found this site where someone is graphing radiation levels in real time in Tokyo. http://park18.wakwak.com/~weather/geiger_index.html
The site is in Japanese but you can translate it using google translate or other services available on the web. While the graph shown does show an increase in radiation levels it is only ~4 times the background level which is very minimal. This is good news compared to the other reports coming out of Japan regarding the radiation leaking from the stricken nuclear plants. It is important to get factual data about what sort of radiation levels are being detected and where and unfortunately it has been hard to find so far.
If you can pass along any quantitative data I'd appreciate it.
The site fades in and out and I'm guessing it is due to massive traffic to the site. The photos are stunning. Here's a few samples:
While I have not heard anyone separate the damage between the two events it appears the tsunami did more damage. I was watching CNN a few minutes ago and the official body count is approximately 1,600 but they have just found another 2,000 bodies so I'm certain the toll will rise as the days progress.
Video:
Keeping up to date: There are some English based news sources in Japan
Nuclear power plant situation: This is an ongoing event and so separating the facts from rumor or speculation is a challenge. What we know right now is there have been explosions at Fukushima Daiichi plants #1 & #3. Before you panic it appears this was due to the venting of hydrogen from the inner core which mixed with oxygen and exploded. When the earthquake hit the nuclear power plants immediately shut down by dropping their control rods. The problems started when the backup generators failed due to the tsunami and could no longer run the pumps cooling the reactor cores. (Even after a shutdown there is a massive amount of residual heat which must be shunted away from the core) In an attempt to prevent the central core from breaching they vented gas to bring the pressure down and release heat which then released the hydrogen and it blew off the exterior structure.
So farit appears the main central core which actually holds the fissable material is still intact. Fortunately the prevailing winds are blowing any radioactive gas east offshore and into the ocean. Right now they are flooding #1 reactor with seawater and boric acid to cool the reactor.
I have simplified this description a bit but if you want the technical details I suggest you go to:
which has quite a bit of technical information and a continuing discussion of the ramifications.
I'm not making any predictions as to what happens but the central core appears to be still intact and considering what is has been through is actually pretty impressive. They still need to cool both cores and keep them from breaching. I'll be watching this closely over the next few days.
To follow up on my previous copper post here is some additional articles:
One trader (suspected to be JP Morgan) held nearly 90% of the outstanding copper on the LME in late 2010 WSJ December 21, 2010
As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.
The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.
As is implied in the article, having just one party hold such a huge portion of the outstanding asset is just an invitation for manipulation. For some reason the LME states controls are in place to prevent abuse but I'm a bit skeptical.
I am not the first one to comment on China and their bonded warehouses' providing a convenient 'hiding spot' for excess copper. Ft.com December 21,2010
As Reuters noted, the London/China arbitrage window was after all firmly shut during the period:
The November inflow was a surprise to many market watchers given that the arbitrage window — buying from the London Metal Exchange and selling to Shanghai — was shut for much of last month, Beijing Capital Futures analyst Xiao Jing said.
And, as they also noted:
But trade and warehousing sources in China said the London Metal Exchange and Shanghai arbitrage had stayed closed last month and thatshould have prompted importers to store some arrivals of refined copper in bonded warehouses.
Bonded material can be shipped out to the international market easily or imported into China after the 17 percent value added tax is paid.
Finally, something I suspected but had no 'proof''. Chinese traders may be using copper and other base metals as a cheap funding source as well as a currency play.
From Ft.com March 9,2011
To reiterate: that’s Chinese companies using copper as collateral for financing deals — also known as a somewhat ingenious nationwide inflation hedge (in the event copper prices continue to rise).Let’s just say it’s a bit like living off a loan taken out against your house. The loan won’t be a problem because you believe the price of your house will only go up.
And while that remains your view, there’s no reason not to double up. Buy even morehouses for the sole purpose of transforming cold hard cash — not inflation proof — into an asset which can continue to be monetised via ever depreciating bank loans.
Magic.
That is, of course, until copper prices stop rising.
It's all fun and games until the party stops and the margin calls start. Just think about how much chicanery occurred during the US housing boom. You don't think games like that are being played in China?
Here's a video on the Libyan situation. France also officially recognized the Libyan rebels which could set up a situation where the frozen Libyan assets are released to the rebels. This would allows the rebels to arm themselves and get on with winning the civil war.
France recognized the Libyan opposition movement Thursday as the representative of the Libyan people, a former Libyan envoy said from Paris.Ali al-Issawi, the former Libyan envoy to India, announced in Paris that France recognized "the (Interim Transitional) National Council as the legitimate representative of the Libyan people," reports French news agency France 24.
Copper has had quite a run, but is it legit? Numerous experts are calling for continued strength in the commodity as well as continued supply deficits. I offer a contrary opinion.
There are several fundamental reasons for this alternate opinion and we'll go over them. From a technical standpoint copper as well almost all other commodities has been on a tear upwards ever since the announcement of QE 2. Recent events in the Middle East have slowed the rise in prices and higher oil prices may dent future economic growth worldwide so forces may be aligned to drive copper down in the near future.
Chinese Copper Demand
Copper is traded worldwide on several exchanges and as such provides an opportunity to see where prices (and by implication demand) are higher.
China is commonly cited as a source of continued copper demand. If this is so one would think copper sells at a premium to elsewhere in the world. This is not the case and copper has been selling at a discount to the LME (London Metal Exchange) for several months. As you can see here the last time couple times Chinese copper was cheaper worldwide prices stopped going up. (ht news-to-use.com )
One can see the real time arbitrage price difference on Bloomberg. While the arbitrage values do swing between positive and negative, since mid July the arbitrage price has been negative. Take a look at the long term trends and you'll see periods of negative arbitrage have coincided in the past with lower future prices as well as increasing inventory levels.
Inventories
One of the common bullish themes is how copper has been in a deficit for several years and will continue to be so in the future. A long term inventory chart provides some clarity. Longer term copper inventories have been both lower and higher than today. While right now copper inventories are dropping on a year over year basis the last inventory peak was in early February 2010 and as you can see inventories tend to trend in one direction or another for a period of several months. Right now we are on an upswing. Copper inventories (LME, SHFE, Comex) bottomed mid December and have risen nearly 130,000 thousand tonnes since then and are rising at over one thousand tonnes a day right now.
Furthermore the number of cancelled warrants continues to drop and has remained well below 20,000 for several weeks now. A low cancelled warrant number is an indication of fewer lots of copper coming out of inventory for delivery.
The dog that did not bark
A most interesting news article ran across Bloomberg late last year regarding Shanghai and bonded warehouses.
Why provide this option of delivering copper from 'non official inventory' warehouses if it did not already exist? While getting hard numbers about how much hidden inventory exists is nearly impossible, this rule change leads one to believe there is significant supply available, otherwise why provide the option?
Furthermore the 'movement' of inventories into and out of the official stockpiles occurs rather easily. In January aluminum inventories went up 100,000 tonnes in one day. http://traderightuk.wordpress.com/2011/01/10/now-you-dont-now-you-see-it/ 100 thousand tonnes is a LOT of material. The largest ships in the world move 150 thousand tonnes of cargo to give you a sense of the mass involved.
Just because you can't see the copper (or aluminum) doesn't mean it is not there. There are other quantitative numbers showing us there is a lack of demand in China such as the the lower relative price as well as a lack of imports.
Both refined and scrap copper imports have leveled off over the last few years and do not show a sustained rise in imports as one would expect if China is truly the voracious eater of copper as people have posited.
Four dollar copper does wonders for encouraging more supply. Heck, there's even supply developing underwater. Nautilus minerals is currently building an underwater 'mine' and if they can pull it off the potential is huge.
Furthermore a little corruption goes a long way. There's a 17% VAT tax on copper in China. Does one honestly believe there is no skirting of the law? A truckload of copper would be an easy thing to 'misplace' at a large import facility.
Betting against the house
Looking at copper futures over the past several years one can see (green line) how commercial traders have never been this short as they have been during this recent run up in price. Remember when you are buying copper right now the person selling probably has more information about copper prices than you do.
Avoiding Imperial Entanglements and Bernankflation
Almost all commodities have been on an tear upwards since Ben Bernanke announced QE 2 in late 2010. The results have come home to roost however as higher food prices may have been the spark that set off the political unrest in the Middle East. Higher oil prices from the riots and regime change in Tunisia, Egypt, and Libya have people wondering who is next and what will that do to oil supplies. Oil prices are now well above $100 a barrel and that price shock has yet to be fully realized throughout the world economy. To hedge my short base metals position I'm also long precious metals and this combination has worked out well recently. Continued tension in the oil producing nations will most likely keep gold rising and depress copper prices as people grow concerned about future economic growth.
Alternative learning annex
For those of you who can't stand looking at data and trying to understand the nuances of localized supply and demand I have created a short video explaining the high points of this post.
NPR recently spoke about how oil is not created equal. There are differing types of oil, with some having higher sulpher content as well as other parameters making it easier or harder to refine into the higher quality fuels.
"It happens that Libyan crude has almost no sulfur and produces a great deal of diesel fuel per barrel of crude, which means it is very valued," he says. "One can think of it as fat-free milk."
Libyan oil is light and sweet — it's the kind that refineries want for making low-sulfur diesel, which is widely desired in Europe, and jet fuel, of which the U.S. makes a lot. Both markets require low-sulfur fuel because it pollutes less.
It's a short (<4 minute) introduction to some of the intricacies of the energy markets and I suggest you listen to it.
A recent Wikileaks article has exposed the Chinese mentioning their large holdings of US Treasuries while in conversation with the US as a not so subtle hint to back off on various international activites by the US, specifically selling arms to Taiwan.
From AFP (2011, Feb 21)
China's clout -- gleaned from its nearly $900 billion stack of US debt -- has been widely commented on in the United States, but sensitive cables show just how much influence Beijing has and how keen Washington is to address its rival's concerns. An October 2008 cable, released by WikiLeaks, showed a senior Chinese official linking questions about much-needed Chinese investment to sensitive military sales to Taiwan.
"In that regard, the recent announcement that the United States intends to sell another arms package to Taiwan increases the difficulty the Chinese government faces in explaining any supporting policies to the Chinese public."
His comments came days after the Pentagon notified Congress it was poised to sell $6.5 billion worth of arms to China's arch rival Taiwan.
China's massive holdings of US debt have not escaped the public's notice either. Even Saturday Night Live spoofed the relationship. (email readers may need to click through to see the video)
My response to China:
Bring It.
I dare you. I double dog dare you.
One must ask how the Chinese have amassed such a huge wad of our currency and thus our debt when considering my dare to the Chinese. In short, the Chinese forcibly keep their currency undervalued by constantly intervening in the exchange markets. They are doing so to keep their exports 'cheap' and their export factories busy. They need invest all those US dollars in something so they end up in our Treasury bonds and bills. Their huge holdings of our debt is a direct result of their mercantilist trade policies.
If the Chinese do not want to keep buying our debt the can very easily do so by not intervening in the currency markets, but I doubt they will do so in a dramatic fashion. Their low skill low wage factories cannot compete without an under priced currency. The Chinese are slowly raising the Yuan but it is a challenge for them to wean themselves off the Faustian bargain they created.
Paul Tudor Jones of Tudor investments dedicates 14 pages to a discussion as to how the undervalued Chinese Yuan has created severe imbalances worldwide. I suggest you read the whole letter Mr. Jones' letter (2011 Feb 14)
Failure to address this issue - as one of the primary causes of the intractable unemployment currently plaguing the US -- has led to a series of second-best policy options . . . Indirectly, the peg has exacerbated the United States' large fiscal deficit while enabling our elected officials to delay the difficult spending adjustments that are inevitable.
So China, yes, you can threaten to stop buying our Tbonds. We would pay a little more for our home mortgages but it would also staunch the flow of manufacturing jobs out of America. You however would see a massive number of people thrown into unemployment and most likely a repeat of Tiananmen Square.
Here's a documentary on North Korea's propaganda machine and the people trained to fill it. Remember the kids you see are some of the elite. Unfortunately I doubt the current wave of revolutions will break the bulkheads on this repressive country.
There are small scale operations attempting to tell the citizens of North Korea what really going on but I doubt it will amount to much at this level of intensity.
This weekend has been an eventful one for the world geopolitically and this week will see further events which shape the stage. The riots in Libya and continued unrest throughout the Middle East had a dramatic affect on futures markets today as the regular markets were closed.
The events in Libya are obviously in flux and getting hard news out of the country is difficult so the rumors and actual news will be mixed together and hard to clarify.
The affect on the markets today (Monday) was dramatic:
While the rioting is getting the headlines the trouble in the Eurozone continues its slow burn. Ireland is holding elections this week and the party currently in power is predicted to be handily spanked in the polls. The mood in Ireland is not good and there is some talk of repudiating the guarantee of the government honoring all senior bank.
Tomorrows markets will be very interesting to watch. Oil prices are getting to a point where they are seriously hitting the consumer's pocketbook and another spike in oil (like the one in 2008) could seriously stress the already weak US consumer. I'm not evening mentioning China and their continued raising of interest rates / reserve ratios. That's for another time.
Initial unemployment claims data came out today and weekly unemployment claims decreased to 415,000. The number has bounced around quite a bit recently causing some gyrations in the market and I thought it would be instructive to dig down a little further into the data.
One item to note from this first graph is how volatile the raw data is. Note how around year end the unemployment claims spike up dramatically. Compare the raw data to the 4 week moving average seasonally adjusted data and you can understand why the claims data has bounced around so much recently; we are in the post holiday layoff period.
Next let us examine the year over year change in initial claims. What is actually impressive to me is how close the raw data and 4 week seasonal data track each other. (Note these two graphs do not show today's data) I have drawn in some black lines showing the rise starting in 2008, a peak in early March 2009 and then a bottom and rebound in early 2010. Note this is the change in claims and as you can see we are still dropping on a year over year basis but the rapid fall in initial claims has ended and we are trending back towards zero. You can also see the most recent raw claims data is bouncing around quite a bit, again due to seasonal affects and possibly the weather.
Is the glass half empty or half full?
We can torture the data a bit further and just for fun and see what models predict will happen next. Using March 27, 2010 as the baseline (the peak in the rate of decline in initial claims) I let excel extrapolate the data out another 15 weeks. Bottom line is you can come up with either a positive or negative prediction depending upon how may polynomials you use.
Using a 2 polynomial regression predicts (R2 of .9712) claims are near their deceleration point and will then continue to keep dropping over time.
You want a bearish case? No problem! Using a 5 polynomial (R2 of .9763) regression initial unemployment claims will eventually reverse their fall in 12 weeks or so and start to rise on a year over year basis
Please note I'm not making economic predictions here, I'm just looking at the shape of a graph. Going forward we have several cross currents pulling claims in opposite directions. ISM data has been quite positive which may bode well for fewer layoffs in the future. On the negative side we have higher food and energy prices as well as continues austerity by the states and municipalities. As always stay tuned and I'll keep you informed.
China recently raised the bank reserve ratio requirement again and it looks like this time it's really starting to bite. 7 day repo rates (what banks charge each other for a 7 day loan) spiked up just before year end but they aren't falling back down as I had alluded to in my previous post.
As you can see from the 7 day repo rate chart the spikes have been getting larger at the end of each quarter, hinting at banks scrambling to find enough cash for their books at quarter close. While the rate has dropped in the 7 day, the 3 month has u-turned and is going back up near its pre-12/31 closings. The Chinese stock market has been going down recently and this removal of cash from the system may be the reason. If one continues to observe high bank repo rates it does not bode well for the Chinese stock market or the whole commodity/reflation/Australia trade in general.
The recent news of both China and Japan buying EU debt provides a very interesting window into the various motivations of investors. While most investors are leaving the PIIGS debt markets, China and Japan appear very willing to invest. Why? It appears the Asian nations' motivations are different than return of principal. Both are exporting nations and if more European trading partners are forced into austerity measures of higher taxes and lower government spending their own export industries will suffer.
American policy makers should be mindful of this when negotiating with China. It may appear they have the upper hand when looking at their massive foreign exchange reserves, but China also needs our markets to keep their factories running.
Unfortunately Portugal looks to be the next domino to fall, Asian assistance notwithstanding. FT's blog lays out the timeline I have previously alluded to: It appears once a PIIGS' bond yield pierces the 7% level a bailout eventually follows.
However even with these 'bailouts' and Euro Central Bank assistance the problem has not been solved. As austerity measures and budget cuts drag GDP down the burden of debt grows ever higher in a nasty feedback loop.
From Satyajit Das:
Cuts in government spending and higher taxes have mired the economy in recession. Falls in tax revenue necessitate increasingly deeper cuts in spending to try to stabilise public finances. In 2010, the budget deficit was forecast at 12% of GDP, even after spending cuts and tax rises worth Euro 14.5 billion The problems of the banking sector are increasing due to the poor economic conditions. Hitherto largely confined to commercial property, problems are now spreading to the broader economy. Unemployment and lower incomes mean that householders are unable to meet payment obligations on mortgages and other loans. Weak economic conditions have affected businesses, increasing default levels. In the absence of strong economic growth, inflation and a massive devaluation, the peripheral economies, such as Ireland and Greece, may be unable to shrink themselves to solvency. A simple relationship demonstrates the unsustainable position:
Changes In Government Debt = Budget Deficit + [(Interest Rate – GDP Growth) X Debt]
In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP Growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these. EU/ IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.
Meanwhile the recovery in Iceland provides contrast to the current austerity and higher tax drudgery in the weaker European countries:
The Nordic economy grew at 1.2pc in the third quarter and looks poised to rebound next year. It ends a gruelling slump caused largely by the "New Viking" antics of Landsbanki, Glitnir and Kaupthing, the trio of lenders that brought down Iceland's financial system in September 2008. . .
This has led to vastly different debt dynamics as they enter Year III of the drama. Iceland's budget deficit will be 6.3pc this year, and soon in surplus: Ireland's will be 12pc (32pc with bank bail-outs) and not much better next year . . .
The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland's peaked at 9.7pc and has since fallen to 7.3pc.
Paper-economy tracks (2nd link) the Radar Logic index which appears to lead the more well known Case/Shiller index.
Unfortunately if home prices fall further this may set up a feedback loop as more households with negative equity decided to strategically default. Furthermore the recent rise in long term interest rates will not help affordability either
Housing permits are falling again and coming very close to putting in an all time low for the time series (The all time low was hit just a few months ago) Looking at the graph you will also notice how in previous recoveries housing permits quickly rebounded. Not this time. Considering home values are falling this puts pressure on new home construction. Lumber prices are also going up.
Eventually home prices will fall enough for demand and supply to finally balance but it doesn't look like we are there yet. For now the downward trend appears it will continue.
Ahead of schedule bond yields in the PIIGS of Europe have reached new highs. 'Risk Free' interest rates have risen as well since November so the relative spread may not be at a new maximum yet but the trend is going the wrong way.
The Chinese sense of humor was evident as they raised short term interest rates on Christmas Day by 25 basis points. (Bloomberg) What is interesting about this Saturday surprise is what happened a few days before with their failed treasury bill auction.
The ministry sold 16.76 billion yuan ($2.53 billion) of 91- day securities, falling short of the planned 20 billion yuan target, according to traders at the lead underwriters of government debt, who asked not to be identified. The average winning yield was 3.6769 percent, according to the traders. That compared with 3.22 percent on the debt of similar maturity in the secondary market yesterday.
Since the Chinese central bank was not able to drain enough cash out of the markets via Tbill sales, they raised interest rates instead. One possible reason why the Tbill auction was not well received is there appears to be other demands on short term money in the Chinese banking system. Short term bank repo rates are spiking higher as the year comes to a close. Why buy 3 month Tbills at 3.7% when you can lend out at 5.60% in the 3 month repo market?
As you can see there were spikes in the repo rates just before the end of previous quarter ends and I wonder how much of this current rise is due to squaring the books before year end. We'll know soon. . .
The year is wrapping up and the US stock market continues to grind higher in a Christmas rally. While the US is in a much calmer state as compared to a year ago, not all is well across the pond in Europe.
The fiscal crisis in the PIIGS of Europe (Portugal, Ireland, Italy, Greece, Spain) has not been 'fixed' in my opinion and will most likely move up to the headlines in America very shortly.
Here you can see a chart of the PIIGS bond yields (Bloomberg) and they are not going in the right direction. The spike and fall in May 2010 was due to Greek financial difficulties and the spike in November was from Ireland. Note how much faster the fall in yields after the Ireland event has been retraced as compared to the Greek event.
As this chart shows the absolute yields and not the relative 'risk' of the PIIGS regions looking at the combined CDS for the PIIGS (Bloomberg) provides a clearer view of perceived risk. It too is almost at new highs and could very well exceed previous peaks before the new year. I suggest you keep an eye on both of these indicators and if you see them shooting higher you will most likely see weakness in the equity markets as well.
Mr. Hugh Hendry's December commentary has been floating around the internet for a few days and I thought I'd share it with my loyal readers. As always his letters are an interesting read, seamlessly combining the literary and financial.
His main thrust is the monetary stimulus by central bankers is not enough to outweigh the massive consumer deleveraging going on right now. It is an epic tug of war and Hugh Hendry is on the side of further deleveraging and deflation (for now) Please read.
With the recent rise in interest rates I thought revisiting inflation rates would be helpful.
3 data series on this graph [click to enlarge]:
Blue for total Consumer Price Index (CPI) aka 'inflation'
Red for inflation minus (food and energy)
Green for housing subset
Notice how overall inflation tends to peak at the onset of a recession.
Headline inflation is still very low overall at near 1%
Housing inflation is still negative.
Inflation less food and energy is at a low for this timeline and is trending down. Yes, we all need to eat and consume energy but both of those items are extremely volatile and stripping them out of the data series can provide additional useful information.
China comes to mind when people speak about energy and food inflation and like almost every other basic commodity the Middle Kingdom overshadows other negative factors such as Europe's continuing austerity drive and our own tepid domestic growth. To me it appears whichever way China goes the energy, food, metals, etc. complex will follow.
Consumer credit data was recently released and the deleveraging continues. This time I've shown the change in consumer credit over the entire data series so one can see how infrequently consumer credit declines.
The rate of decline is turning around, or so it seems.
Remove lending by Sallie Mae and the Federal government and the rate of decline has not been arrested. Furthermore you can see this is a new phenomenon.
My previous post on the muni market needed some more information. (Ready, Fire, Aim) Bond Girl over at self-evident.org highlights some recent events which most likely were the catalyst for the most recent downdraft in the muni market.
The pending expiration of the Build America Bond (BAB) program has pulled supply forward, and this is going to seesaw over the next several weeks. Since the BAB program was initiated, most issuers have structured their new issues with the sense that they will go to either the tax-exempt or taxable market, whichever is more advantageous at the time. . .
What is going on now is that muni issuers are scrambling to get deals done to take advantage of the program before it expires, and this is pulling the number of new issues that would ordinarily be coming to market forward. So the looming expiration of the BAB program is creating the very conditions it was created to alleviate.
I suggest reading the entire article for some additional info on the current situation. As I mentioned in my previous post it is unusual for muni bonds to trade at a higher yield to treasuries as the muni's have a tax benefit. The current situation is unusual and bears further attention.
There's been some recent news regarding how municipal bond prices are dropping and California is having some problems selling new muni debt. Looking back one can see the relative drop in municipal bond prices is not new and its been going on since May.
Observing the ratio of the etf's MUB (nationwide muni bond fund) to IEF (7-10 year US Treasury bond fund) can be instructive as it shows the relative value of two bond funds with almost the same duration (7.58 vs 7.26)
The relative decline in MUB is more dramatic when observed in this fashion versus an absolute basis. Furthermore looking at each etf's yield is interesting:
MUB 12 month yield: 3.71%
IEF 12 month yield: 3.00%
In other words a tax free bond fund is yielding 71 basis points more than a treasury fund with the same interest rate risk. This 'shouldn't be' as muni bonds are tax free and a safe investment, right? The markets are telling you something here; the perceived credit risk of muni bonds is increasing.
The Federal Reserve recently announced they will purchase another 600 Billion in US Treasury bonds (commonly called Quantitative Easing 2 or QE2) I am working on a longer email regarding how our current financial situation is very different from previous recessions and recoveries but the Federal Reserve's QE 2 announcement deserved some commentary.
The markets did not really respond until after reading Fed Chairman Ben Bernanke's article in the Washington Post on November 4:
For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
In short Fed Chairman Ben Bernanke wants higher stock prices so you'll feel better about yourself and go buy more stuff. Will it work?
I have my serious doubts (as I'll expand upon in later emails). The banks already have so much unused money they deposit the excess at the Federal Reserve. (973 billion as of October 10) How is another 600 billion going to change the situation?
So why is the Fed printing? Because they can and they feel like they can't do anything else. It looks like an easy painless solution but in the long term it will not fix the problem of too much debt in America.
The problem with QE2 is the money being created is not going where Mr. Bernanke would like it to, the real US economy. If you look at the market's reaction before and after the announcement one sees the money shifting into commodities and emerging economies while simultaneously weakening the US dollar. The Fed is taking the easy way out by attempting to prop up and paper over our structural problems.
Lest you think this is merely the ranting of a crazed financial advisor former Federal Reserve Chairman Paul Volcker stated the QE2 plan won't help much as well: (Yahoo, November 5, 2010)
Volcker told a business audience in Seoul that the Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."
The Fed is essentially lending enough money to the government to fund its operations for several months, something called "monetizing the debt."
In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.
Financial markets Thursday responded warmly to the Fed move, but outspoken critics of the policy issued full-throated critiques.
"It is doubtful the Fed decision will produce any results," Brazilian Finance Minister Guido Mantega told reporters following a cabinet meeting with Brazilian President Luiz Inacio Lula da Silva. Officials in Brazil, which averaged 850% annual inflation in the 1990s, have been critical of the Fed's easy-money policies because they are spurring price pressures abroad and could encourage new asset bubbles outside the U.S.
If all else fails, keep doing what you did before seems to be the rule at the Federal Reserve. By his actions Ben Bernanke is attempting to artificially raise asset prices and reduce the value of the dollar. We shall see if he is sucessful, but what happens when the crutch of QE money is removed?
What is most impressive about the apartment complex shown is how they built the entire place without adding any roads yet. Hopefully they'll get around to it. Zoom out and look around (both north and east) and you can see the scale of this new city. Like the video above almost all of this new Chenggong appears unused.
