JD, a long time Big Picture reader (and GP of the Gryphon Fund) writes in:
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When reality is shockingly unpleasant, the market sometimes chooses to ignore it. Eventually, though, reality cannot be denied.
Start with the housing downturn, whose significance many underestimated (including the Fed). Then there was the sub-prime situation, which many people (once again, including the Fed also) erroneously believed was contained. As Jim Grant wryly observed, it was "Contained" — to Planet Earth.
Add to this the hard- and soft-commodity inflation emerged which many — including the Fed — thought was anchored.
I’m starting to notice a pattern here . . .
All this denial led to the biggest credit crisis in 50 years with risk being reassessed as credit spreads widen and remain wide.
Nothing really to worry about, said the pollyannas. As long as people were employed, we would be okay. That notion just went out the window as the Financials took major losses last quarter, are likely to take more losses this quarter, and have been aggressively cutting jobs. So far, we’ve had 3 negative jobs reports since September 2007.
The Fed has complicated the current situation: In both September and January, the FOMC aggressively cut rates, in both instances, much more than expected. A measured response from the Fed would have been appropriate; however, their panicky monetary policy will ultimately backfire. This was a credit problem – not an interest rate problem.
The bigger issue is the Fed signaled to speculators in the commodities and currency markets that the they were throwning in the towel on inflation, and were prepared to print money until we run out of ink. Its no coincidence that Commodities then exploded upwards – the biggest monthly moves since the 1970’s – along with the dollar tanking, and gold rallying 40% since August 2007.
This put even more pressure on struggling consumers as prices lifted on almost everything sold at the supermarket.
Since July 2007, market leadership has gotten increasingly narrow, while internals are horrific. In July 2007, money flowed out of financials and into technology and commodities. Our internal expectations have been for the technology rise to reverse itself and return to Earth as firms cut IT spending, and consumers allocate scarce resources to essentials only. We see this starting to play out now.
NASDAQ has gotten crushed since November, as the hot money has fled. The final leadership group in the market is commodities — either physical commodities or commodity stocks. If this is, indeed, the deep recession and bear market I believe it is, commodities will be hit next for, in the end, they throw the baby out with the bath water AND the piano AND the piano player for good measure. (Editor: My apologies for the mixed metaphors!)
Last week, we heard the people who previously were saying there will be no recession (or only a mild recession) begin to experience what Barry has been calling cognitive dissonance. As their portfolios have suffered, they came to understand that reality will not be denied. Reluctantly, some have begun to remove the rose-colored glasses they have worn for the last several years.
While I believe we’ll probably bounce here for several reasons, I also believe all rallies will fail and the final leg down will come when the only leadership group left — commodities — fails.
Over the next two weeks, we will get quarterly earnings reports from the brokers. That could produce a relief rally — or at least an oversold bounce — simply based on how badly they have been crushed recently. Further, we also have the March 18th FOMC meeting a week away. Let’s see if they make another mistake by again cutting too aggressively, thus making speculators happy for the third time — and prolonging this recession.
International companies probably benefited from the recent dollar swoon, so some reports may mask weakness with currency gains, but as Jim Rogers (a dollar bear AND right) has said recently, the dollar could be in for a sharp rally. As the U.S. falls deeper into recession, other countries economies will feel the pain and they will be forced to start easing to help the dollar. The global economic slowdown is prolonged each day that Europe (and the rest of the world) does not cut rates to tame inflation caused by a reckless U.S. Fed.
–JD
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Thanks, JD — appreciate the overview . . .
Won’t the rest of the world cutting rates just ignite inflation even more and on a global scale?
no because the dollar would rally and since most commodities prices are in dollars we will see some relief due to this inverse realtionship vs the dollar and prices. also
if the global economy weakens as the us goes deeper into recession that will take pressure of inflation and people will start worrying a about and global recession and near term deflationary pressures thus the other centeral banks blink and ease
I read a nice post at European Tribune on the economy Inflation or Deflation? We live in interesting times.
“What we are really seeing is a quite brutal change in the relative values of goods and assets. For years, we had debt-bubble-fuelled increase in asset prices (mostly real estate and financial assets) and stagnation in goods prices, caused by the downwards pressure from China and the wage stagnation engineered by financial capitalism’s requirements.
Now that process is partly going into reverse. Oil and commodity prices are feeding into goods price inflation, while the credit crunch signals the end of the the dizzying valuations of assets. One category is inflating, and another is deflating. And wages and pensions (ie living standards for most people) are caught in the middle. ”
jd,
I agree, but only on the very short term.
Medium term, we want commodity prices to stay high for a while, as that’s what attracts spade-in-the-ground investment and structural demand shifts. That is what keeps a lid on prices longer term.
Intrade prices the probability of a US recession at 74%: http://www.intrade.com/#
While this is probably not yet at “baked in the cake” levels, it hardly represents “denial.”
While I agree with most of “JD”‘s post, I take issue with one point: aggressivley cutting rates was not a function of sopping Wall Street so much as preventing a full-blown banking panic.
My inner cynic initially thought the same: that Bernanke was prolonging the pain, but time and perspective have led me to believe that Mr. Bernanke is in the same position as a fire chief who arrives on the scene only after the entire house is on fire; there’s only so much you can do.
As hard as it is for me to say it, and as someone who profits from the market tanking at the moment, I think Bernanke’s only mistake so far is not cutting harder faster (holy shit! I’m agreeing with Cramer! Alert the four horsemen!).
I spend a lot of time around Japanese businessmen talking to them about what happened in Japan over the last few decades, and they politely smile and say (in not so many words) we Americans haven’t seen anything yet.
Head off the deflationary spiral before it’s too late.
The dollar isnt going to rally until interest rates blowout the wrong way. Enough said.
it used to be that when oil stocks rallied it meant recession and the end of bull markets. now i believe it’s commodities genly, as JD suggests. but as to timing of the financials: i think we’ll need another quarter, the June Q, before Mr Market will declare all-clear, if only because it cant sustain a rally longer than say July-Oct for the Nov 4 election. after that the Fed takes it all back and we get the pain out of the way in the first 2 years of next Admin, whether McCain or Obama. if Obama, then pain will come w a vengeance.
Byno
It was “heading off the deflationary spiral” that got us here in the first place. As the can gets kicked further down the road, I fear the ultimate reckoning gets worse too.
What exactly meant by:
..they were throwning in the towel on inflation, and were prepared to print money until we run out of ink.
Does this mean that there going to try to extend credit again @ ZIRP, to any lending institution that can still fog a mirror hoping that in this environment if credit is cheap enough people will be willing to risk what they have left to create more or worse to consume? With the spreads somehow magically lifting the banks out of insolvency.
Exactly how does this printing mechanism work, I don’t really believe the stim-u-less package is an accurate example as this is just a revision to this years code in the lower brackets, being advanced ahead of the 2008 tax return. Less tax money to run the government with increased debt levels but no real debasement, even in large scale bank default with nationalization of the losers, the taxpayer is left holding the bag. The dilution appears to only be facilitated on the credit extension side of the equation. Now given that Debt-Based money is merely an accounting method, possibly it does’t matter and the inflatio/deflation debate goes on, until lenders and borrowers refuse to participate.
Does JD go by J-Daddy sometimes?
JD
So long as the fundamental demand for oil exists and so long as we continue to FISCALLY kill the value of the dollar, soft commodities will remain strong. Correlatory price movements between energy and grain products are casual at this point in time.
Like Estragon notes, the fundamental pricing of softs will remain high in the short run and contribute to long term price deflation. High market prices incentivize investment in infrastructure and yield research.
Unfortunately, while these type of short term price spikes are not supported by fundamental demand, if we are to come close to satisfying the Renewable Fuels Act goals, the lagging demand valuations may actually catch the tail of skyrocketing price.
However, if a price collapse does occur in soft commodities, are the greater populace not better off?
JD
So long as the fundamental demand for oil exists and so long as we continue to FISCALLY kill the value of the dollar, soft commodities will remain strong. Correlatory price movements between energy and grain products are casual at this point in time.
Like Estragon notes, the fundamental pricing of softs will remain high in the short run and contribute to long term price deflation. High market prices incentivize investment in infrastructure and yield research.
Unfortunately, while these type of short term price spikes are not supported by fundamental demand, if we are to come close to satisfying the Renewable Fuels Act goals, the lagging demand valuations may actually catch the tail of skyrocketing price.
However, if a price collapse does occur in soft commodities, are the greater populace not better off?
The gold to high priced escort ratio is down to 5.65oz/bj but I continue to see this trending downwards given continued debasement of the dollar and job cuts on the street.
There still isn’t much inflation, though. Look at the core rate. What’s that year over year, just over 2%? In 1974, the core rate was 6% and in 1979, the core rate was 9%. Just for comparison. Today’s 2.2% is quite below “stagflation” numbers.
A lot of oil’s gains are because of growth in India and China. I’d suggest conservation (drive less) to help out the monthly budget. Most of that money goes to foreign countries, anyways.
Some of the food is up because farmers are scrambling to grow corn to fuel the ethanol mania. So that means less wheat, soybeans, etc.
The Fed will cut again next week if not sooner. .75% or maybe 1%.
i am long term bull on energy and agriculture gold and have been long and storng until recently. that being said even in a secular move sharp corrections happen
and that actually make the move stronger as you need to shake the confidence of even the strongest supporter. oil service and fertilizers have been big winners for me but that being said i would not be surprised to see some names i been involved
pull back after moves from 20 130 this pull backs can hurt the perfromance of a hedge fund as those profits are already booked in the past year and a 30 to 40 point drop this year would be booked at a big loss this year i agree with roger softs hold up
the best even in the face of a recession
I’m starting to think we’ve been trained to ignore the obvious.
Why is the price of oil through the roof?
Remember Cheney’s meeting with the Energy (Oil) Barons early on in the Bush Administration?
There’s your answer.
“Some of the food is up because farmers are scrambling to grow corn to fuel the ethanol mania. So that means less wheat, soybeans, etc.”
I’ve been hearing this too. Everybody and their uncle is going corn to sell to the govt, the rise in wheat is mostly due to a large scale shift to corn. Cut out the ethanol BS and corn/wheat should come down quite a bit as well. If you want to put it in your car, you can’t put it in your stomach too.
Although I found much of what JD wrote amusing and well written for a lack of another definition, I don’t get this…….
“The global economic slowdown is prolonged each day that Europe (and the rest of the world) does not cut rates to tame inflation caused by a reckless U.S. Fed.”
Uh……?
I’m not so sure that I agree about the dollar rallying, other than a dead cat bounce, and commodity stocks and commodity prices declining, other than a correction within a secular bull market.
My diligence indicates a sharp and unforeseen decline in US Treasuries with devastating consequences. How shall I put it politely… There is no way to put it politely…
Best regards,
Econolicious
I’m not sure why there is this big rush into corn right now as the ethanol train seems to have switched tracks. The fact is that they are pretty close (they think) to getting cellulose ethanol to work, and the scientists have finally gotten around to the politicians about how awful corn is. Obama for one has completely dropped all mention of corn ethanol subsidies and now focuses completely on cellulose ethanol.
That’s great, thanks for giving us a play by play of what happened in the market over the last . Of course, most of the people here know all of this. Many of us have done well on the short side so far this year.
Maybe you can actually add some value by giving us some suggestions about what to do?
Why don’t you stick your neck out and tell us your best idea right now?
buy a gun and move up into the mountains…take your library of foxfire books along. lol
Posted by: Vermont Trader
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Govt. should give every taxpayer a $300K rebate.
Marcus,
Let’s not forget that the so-called Majors in Oil are looking more midgets than colossus today. Aramco is 20 times (!) the size of Exxon Mobil. The first 8 biggest oil conglomerates on the planet are state-owned.
Cheney can play all his little secretive games he wants, he’s not in position to change anything significant regarding the price of oil on a long-term basis.
If you are out to describe the truth, leave elegance to the tailor.
Albert Einstein
To the powers that be: We the people no longer trust you. Fix the CPI. Stop playing games with figures in order to enrich your pals. Don’t talk about your intelligence, experience or education. It’s merely a license to cheat as far as we’re concerned. The solution is honesty in government and business. We are going to make life miserable for those that are crooks.
i am long suger since the beginning of year
and it you would get our research you would have no this is not play by play of the past but what we been saying since september 2006
Hey jd,
I too am long sugar since last fall. Also cotton and palladium after the recent breakout.
I do my own research but I’d love to compare notes. Your firm have a website?
ross one of my partners in crime and mentors and a guy i respect alot is mark boucher you can get what i consider must read research at as many do midasresourcegroup.com
mark was big on china in 2003 and did some terrfic pieces on gold metals and oil service that really got me in early
now he cautious but loves sugar
Thanks, jd.
Sugar is my absolute favorite for a year or two. Do you use the London ETF’s or some grower refiners?
An aside, I remember my Mom’s cupboard in the early 70’s. She had 40 5 lb bags. I asked her what’s with all the sugar and she said the price was so high the stores were using it as a loss leader. She also baked a lot and was afraid of shortages!!!
Funny what people will hoard. It took my folks about 4 years to work off their inventory.
In the past, lower interest rates fueled domestic investment in the productive economy, creating demand for labour and fueling wage inflation, which caused price inflation.
Today, we no longer have much of a productive economy left, and have excess labour since we exported much of the productive economy and it’s jobs while still allowing immigration (legal and illegal). Since the domestic demand for money in the productive economy is low, and the supply of those with good credit is low, what was left.
Those left behind on earth faced real wage deflation adjusted by the real CPI and not the BLS lie that is CPI, forcing them to borrow at usurious interest rates to maintain living standards. Since supply of borrowers with good credit or could afford to pay off loans were low, but consumer demand was high, sub-primes were created and credit issued to those who should not be given credit, and profit by foreclosure became the means to inflate the bubble in the land of Oz.
So much of the money that has been created, as well as our GDP growth in recent years, has been to fuel bubbles and their growth in the Land of Oz, and not the productive economy, except incidentally.
The gas from the deflating housing bubble has left Oz and is returning to Earth due to the looming Basel II, which will force the banks to bring back all of their loans from the Land of OZ and put it back on Mother Earths books.
So what we have is a capital crunch with the banks being hit by Basels 8% capital requirements once these bad loans are back on the books. Our banks do not want to create anymore money for either the productive or the Oz economy as they search for capital, and so they hit back with a credit crunch.
Amend Basel or we will sink the ship they say. Ben counters by increasing its term auction facility (TAF) for troubled banks from $ 60 billion to $100 billion, and offering a further $100 billion in term repos. M3 grew 16.8% in February. The printing presses are running at full speed, and the helicopters are running 24/7, but the money is being held hostage by the bankers, and the consumers are cash starved.
Ben cuts the rates the banks pay for their loans, and accepts sub-prime MBS’s as collateral to appease the banks and begs them to release the hostages, while they counter by increasing long term rates that consumers and corporations borrow at. Not enough they say.
Tensions escalate, and the big guns come out. In a matter of weeks oil spikes 20% to 108, the dollar drops 5%.
Inflation today is due to the devalued dollar which has increased the price of oil, commodities and food which are essentially priced in dollars, and it’s prices are also inflating due to cartel pricing practices and speculation (the Dubai Mercantile Exchange opened in June 2007 and oil has jumped from 65-108 since).
The pressure on other countries will not be to devalue their currency against the dollar, but to appreciate against the dollar to combat domestic inflation that also has nothing to do with interest rates, although higher interest rates may be required to appreciate their currency, and this could backfire. But like in the US, people get upset when food and oil prices are too high, and currency appreciation is the best way to combat this for those who import.
There is a weapon we have that can change the outcome of this battle. The GREENBACK. Lincoln created the Greenbacks when the bankers withheld credit to the government except at usurious interest rates (20-30%). The problem with the greenback was it was not made legal tender for all purposes, so quickly lost value. However, if he had financed the war in a traditional manner, with money borrowed from bankers, we would still have Civil War debt to be paid.
The global financial system has basically declared war on the dollar, and it is clear they seek to replace it. Our tactics should be to take control over our currency, and with a little gunboat diplomacy (attack our dollar and we nuke the Cayman Islands), we can survive and then move on to bring back the productive economy and put an end to the fictitous capital in the Land of Oz.
Down with the the financial terrorists that are the Wizard behind the curtain (imagine Sir Bubbles if you will). The Greenbacks will be like waterboarding to them, so they won’t surrender easily.
We can still keep the Fed and the petrodollar, and the greenbacks would be the weapon to keep them in line. The greenbacks could be issued as a local currency by Congress, debt free, legal tender, and convertible to the petrodollar at equal value. It would not earn interest as deposits and banks would not be able to use it to create money as they may do with the petrodollar, although they could loan it (ie-no fractional reserve banking for the greenback). It also could not be exchanged with other currencies unless first converted to the petrodollar.
Any serious discussion of the Greenback would likely result in massive attack by the international bankers, so it must be done quickly and preparations for it’s launching must be kept as Top Secret, much like the Manhattan Project.
The bankers will scream that the greenbacks will cause inflation. Tell them that the dollar of 1913 when the Fed was created is worth 8 cents today, and in the 100 years before the Fed we never had inflation. That should shut them up, but it won’t. Let them squeal.
you can trade sugar thru etf futures or
fund i also like you cotton pick
JD – Thanks for the pick.
Wildfire
This wildfire is spreading wide, come on Bernanke lets get some firefighters on this fire.
And I don’t mean rate cuts, how about some butt-kicking on the Bank officers and television journalists who promoted this credit wildfire.
“A little fire is quickly trodden out, Which being suffered, rivers cannot quench.”
William Shakespeare
no problem i wish i could recommend
more things but most of the things i
like i think will pull back and you
can get better enter points
to AGG,
I’m pretty sure honesty in government (and business for that matter) is a paradox.
anyway, to me it’s pretty obvious the dollar will continue to go down forever because that’s the trend now and current trends never end… until they do.
according to Bloomberg, BNP Paribas, which also happens to be its most accurate currency forecaster has joined the dollar rallies in ’08 camp (137 is the prediction).
I think Bush should call Trichet and explain to him that just because you stick to your guns that doesn’t mean your not wrong.
I appreciate that..
I have been nibbling at the “alternative” financials like Blackstone/BX, Apolo Investment/AINV, and Fortress/FIG trying to get comfortable with a long position for a swing trade.
They are all sporting monster dividend yields right now (BX yields 8%, FIG 8%, AINV, 14%) and their ex-dates are all coming up in the next couple weeks. So I think the dividends will be supportive and put a floor under the shares and if we get a bounce that would be great as well.
Everyone feel free to poke holes in my ideas, I can take it.
J.D.s comment:
“While I believe we’ll probably bounce here for several reasons, I also believe all rallies will fail and the final leg down will come when the only leadership group left — commodities – fails”.
It’s hard to see how we are going to get a bear market in commodities going without some tightening from the Fed. And that’s not going to happen before the election.
I AGREE WE ARE IN A SECULAR BULL IN COMMODITIES BUT THAT DOES NOT MEAN
A DEEPER RECESSION AND BEAR MARKET
WONT TAKE COMMODITIES DOWN IN NEAR
TERM YOU CAN HAVE A NASTY PULLBACK
AND STILL BE IN A SECULAR UPTREND.
THE ONLY WAY COMMODITY SECULAR BULL
ENDS IS IF GO DOWN INTO MAJOR GLOBAL
SLOW DOWN AND THE US GOES INTO A
DEFLATIONARY SPIRAL AS JAPAN DID
WHICH IS HIGHLY UNLIKELY
CENTERAL BANKS AROUND THE WORLD WILL
DO ALL IN THEIR POWER TO PREVENT THAT
THEY RATHER DEAL WITH COMMODITY INFLATION
IN THE FUTURE THEN A GLOBAL RECESSION AND
DEFLATION
I didn’t know that BH was predicting a final commodity recession–that was my thoughts. This will end when no onw wants to beuy Oil at any price.
I agree with the earlier praise for Mark Boucher. His book “The Hedge Fund Edge” is brilliant and his research is second to none. I know of no one else who can help you get your portfolio well-positioned better than Boucher.
In the 90’s, when the dollar was strong, that meant less consumption in other countries as those people had less money in BRICland and more in the US.
Now 8 years later, the dollar has been devalued signifigently and BRICland has more money, thus higher commodities. While the US slowly gets eaten up by the falling purchasing power.
Much like in 2001 when Americans asked Greenspam to flood the country with debt. Americans will ask BOB to raise rates to revive their purchasing power. He will listen and obey.
We are in control. That is the joke nobody gets.
thanks jason
i am actually sending barry a signed copy of mark’s book the hedge fund edge
as he collects alot of books on the market
JD’s comments convey a huge assumption that I’m not prepared to go along with. He assumes that the world can’t hum along or at least avoid recession while the US goes into recession. While I would have been prepared to accept that assumption as fact maybe even a decade and definitely two decades ago I would not be willing to bet money on the case that it is still a fact. I would not also bet money against it. Therefore, for me, the jury is still out and it remains to be seen if the US still really is the centre of the economic universe or that it is just some strange psychological desperate hoping(because I have heard it from many US citizens now) that it is so.
Why Americans are desperate to hold on to a paradigm that if it hasn’t passed yet will probably pass soon is beyond me. It really means nothing to the individual and the fact that your nation is ‘winning’ or ‘losing’ economically will not save you from the creditor that is personally knocking on your door. It is definitely an interesting study in mass psychology and an attempt to preserve the paradigm may affect American economics going forward. How you would attempt to preserve something like that is beyond me but psychology makes for strange economics and strange economic strategies
I hope this doesn’t insult anybody, that is not the intent. I’m just calling it as I am perceiving it
It’s the end of the world as we know it.
i wonder if the original article is trying to say that the money that the fed has effectively printed to give to the banks has gone into low risk commodity markets ; e.g. the only money to be made is in gold, oil and possibly commodity currencies such as brazil’s. this is as opposed to going into the US economy to stabilise things. in other words the fed’s actions have stoked inflation which have put it into a complete mess. now it can’t even cut interest rates cos we’ve now got inflation as a prospect. so it’s kinda a mix between the post-crash japan and 1970s stagflation. uh-oh!