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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: glenn_a who wrote (8790)	7/6/2004 8:23:08 PM
From: mishedlo	Respond to of 116555

Heinz on gold, oil, deflation, kerry, the markets, and other ideas This post compiled by ILD and thanks to him for this service Date: Tue Jul 06 2004 12:53 trotsky (Pyrite) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved there are a great many very striking similarities between Japan aproximately anno '93/'94 and the US now. there's reason to expect the deflation problem to be less severe in the US, mainly because of the trade deficit ( a falling dollar will continue to lift import costs ) . this could however be balanced by the fact that the US has very little by way of savings - meaning there's more scope for the savings rate to streak higher in coming years, which would add some impetus to the deflationary forces. Date: Tue Jul 06 2004 12:45 trotsky (egoli@lease rates) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved a brief explanation: what is important is not the absolute level of gold lease rates, but the difference between the lease rate and LIBOR ( London Interbank offered rate ) , or a similar short term interest rate like the 1 year note, or the t-bills. this rate differential ( minus bullion bank fees ) is what a gold producer can expect to EARN if he sells gold forward. similarly, a carry trader who borrows gold from a CB to sell it forward and invest the proceeds in higher yielding interest bearing securities would do a similar calculation. from this you can see that the currently extremely low lease rates are a sign that there is very little gold lending going on - a result of US short term rates being very low. the rate differential is too low to make forward selling profitable, plus the borrower has very little cushion against the gold price risk ( the risk in this case is that gold might go higher ) . Date: Tue Jul 06 2004 12:28 trotsky (dan) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved "The rule of thumb is to sell the SM as a whole as soon as interest rates begin to rise and not re-enter until rates have peaked and begin falling. Since we have no reason to believe interest rates will decline from these levels, there is no reason to be long SM positions in general." that 'rule of thumb' is a lot of baloney actually. whether rate hikes are good or bad for the stock market really depends on the economy's position in the K-wave. for instance, if it were true that very low interest rates are always good for stocks, the Japanese Nikkei index would have been a great investment for the past 15 years. as to 'there's no reason to expect interest rates to fall' , there are in fact many reasons to expect them to do just that. A ) the economy is already weakening again ( virtually all recent economic data have come in well below expectations ) , and deflationary economic slack remains extraordinarily large all over the world. B ) recently, speculators have held record net short positions in all government debt futures contracts. when all the specs are positioned short, the market is highly likely to rally, and it has already proceeded to do so - thus interest rates are already falling in spite of nobody 'expecting' it. lastly, if you come around to the idea that rates are likely to fall further, is that a reason to buy stocks, as per your theory? absolutely not. in a deflationary era, stocks and interest rates tend to fall concurrently, defying the 'rule of thumb'. Date: Tue Jul 06 2004 12:16 trotsky (HK@oil) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved note, i'm not saying you're not right looking to short crude for a trade - short to medium term a pullback seems highly likely. i agree on the idea of looking primarily at prices to arrive at a conclusion about a market's fundamentals, but note that one could interpret the recent price action bullishly as well. a bull might say "in spite of OPEC raising output by a huge 2 million bbl./day, prices are almost back at $40". anyway, my earlier comments allude to the market's LONG TERM prospects. short to medium term oil prices could easily revisit the low 30's/high 20's without damaging the longer term bullish case. but even short term it's a market that should be approached with caution imo - mainly because the recent decline from the new all time price high looks like a corrective structure. note that when a market breaks 25 year old resistance, even if it only does so briefly, it could turn out to be a very significant development. that said, per experience it usually takes SEVERAL attempts to break such resistance before the definitive break-out is put in place, and often that process takes a long time. examples: the 1960's highs in virtually all commodities, or the Dow 1,000 level in the period '68 to '82. Date: Tue Jul 06 2004 11:54 trotsky (HK @ oil demand) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved global crude oil demand growth has been underestimated in 20 of the past 20 quarters...that said, it's probably true that demand is going to slow down somewhat on account of the coming US consumer recession. it better slow down. there is exactly ZERO spare production capacity left in the world. so if demand fails to falter, the oil bull has some ways to go still. assuming that over the next year or so India's and China's demand growth slows a bit, while demand growth in the Western countries goes slightly negative, we'd still be left with a tight-as-a-drum market. current supply barely manages to keep pace with even a stagnant demand. however, so far this year, demand has NOT been stagnant at all. the recent RoC of demand growth has hit a multi-decade high in fact. at the same time, supply seems to get disrupted constantly, and on many levels. for instance, the recent output hike by OPEC, which has removed what spare capacity there was, has to contend with the fact that there aren't enough crude carriers around. it doean't help much when Saudi Arabia pumps a million bbl./day more but can't ship them. as an aside, Saudi production capacity is highly suspect, to put it mildly. with Ghawar officially ( as per Saudi Aramco, which is probably fibbing to make things look better than they are ) only 2% away from its Hubbert peak, Saudi production is probably going to fall sharply in coming years. that alone should keep a long term oil bull market intact, regardless of the ceteris that won't stay paribus. Date: Tue Jul 06 2004 11:38 trotsky (the Vet@'reason') ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved don't think so. what's a paltry 0.7% increase in SA gold sales off a 25 year LOW in gold production? imo the catalyst for the slam was Kerry's picking of Edwards...the markets now probably think he has a good chance of winning, and as i've said earlier, Shrubs was clearly good for gold, while Kerry is an unknown in this regard. in fact, Kerry might be viewed as somewhat negative for gold - on account of the fact that he's likely to raise taxes. otoh, he's probably still going to spend more money than he takes in, plus if he hikes taxes, he'll force the FOMC to cut rates again in a misguided attempt to stop he Kerry recession. so it may be a wash in the end, but perceptions are often at odds with reality... Date: Tue Jul 06 2004 11:30 trotsky (pm stocks and gold) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved gold contract: when they ran the stops below 390 earlier, someone covered a BIG short position from the looks of it...volume went wild at that point. pm stocks: money flows look reasonably good...and they're not confirming this PoG slam. considering the above, it looks like this was a typical 'shake-out' move allowing bigger players to get positioned for the REAL move that lies ahead. Date: Tue Jul 06 2004 11:08 trotsky (tweedledee & tweedledumb...) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved as several posters have already stated, it won't make much of a difference which skull & boner gets elected in November - after all, both are likely to 'stay the course' - the welfare/warfare course that is. one of them will probably prove more articulate while 'staying the course', while the other has almost unsurpassed entertainment value as ellix recently noted. given the above, we should however root for the incumbent ( maybe we can pass him off as the 'lesser evil'? no? we'll think of something... ) . the man is an artist...an expressionist with a slight surrealistic bent. no-one can beat him in certain departments - for instance, he has proven extraordinarily adept at producing intractable geopolitical messes combined with collossal deficits. in short, he's GOOD FOR GOLD. it is on that basis that dumb-bell should be favored in November...after all, we have no guarantee that tweedledee will be similarly gifted in the arts of deficit creation and permanent warfare. what if he does a Clinton on us and brings back a balanced budget? ( i admit it's unlikely, but that's what everybody thought on the occasion of Clinton's win as well... ) . the mere possibility of that should be enough reason to support the shrubco enterprise. FOUR MORE YEARS! a public service announcement by trotsky.com

To: glenn_a who wrote (8790)	7/6/2004 9:58:19 PM
From: mishedlo	Respond to of 116555

Fed Is More Likely to Continue Moving Carefully: John M. Berry July 6 (Bloomberg) -- The surprisingly weak labor report for June, in which job growth softened, hours worked fell and hourly pay barely rose, increased the likelihood that Federal Reserve officials will keep moving carefully in raising interest rates. The report, coupled with other recent evidence of somewhat slower economic growth, strongly points to no more than another quarter percentage point increase, to 1.5 percent, in the Fed's target for overnight rates when officials meet Aug. 10. Officials raised the target by a quarter point last week, the first increase in four years. A few analysts said the report, released Friday, made it questionable whether rates would be increased at all next month. Most U.S. labor market data are noisy, with dips and surges that have far more to do with the statistics themselves than the real economy. There is no reason to think the economic expansion is in real trouble. Nevertheless, the data were a reminder that the economy is far from overheated. Even with inflation higher than it was a few months ago, the Fed doesn't need to move aggressively to slow economic growth to keep prices under control. Consumers Negative Economist Robert V. DiClemente of Citigroup believes this spring's jump in oil and some other prices has already caused a negative response among consumers. ``Consumers are flatly not on board with the idea of indiscriminate broad-based [business] `pricing power,' as spending has wilted in the face of sharply higher headline inflation,'' DiClemente told clients at week's end. ``With May personal consumption in hand, along with soft June vehicle sales, real [consumer] outlays appear to be growing at barely a 2 percent rate for the spring quarter. That is hardly the fuel needed to validate a sustained inflation or strains on resources,'' he said. The jobs figures and the unexpected drop in auto sales caused some forecasters to reduce their expectations for second quarter economic growth to around a 3.5 percent annual rate. While many of them still anticipate growth of 4 percent or more in the second half of the year, the spate of weak data raises some doubt about that presumed strength. Growth Rate With first quarter growth now pegged at a 3.9 percent rate, a 3.5 percent second quarter would mean an average of 3.7 percent for the first half. That's more or less what many Fed officials regard as the economy's current potential growth rate, an estimate consistent with first half labor data. For five of the last six months, including June, the nation's unemployment rate was 5.6 percent. In other words, growth in the first half of the year was only strong enough to stabilize the rate, not bring it down. Nor was growth strong enough to generate a surge in wages. Average hourly earnings rose only 0.1 percent in June and 2 percent in the past 12 months. Gains in April and May were larger -- 0.3 percent each month -- due largely to big increases in a single industry, airline transportation. That's ``certainly not a steamy pace by historical standards,'' said Ray Stone of Stone & McCarthy Research Associates. Weak Auto Sales Stone, who follows the labor data closely, said that in the second half of the year he expects payroll jobs to increase about 225,000 a month, in line with the average for the past three months. The June gain of 112,000 is not evidence of a new trend, he said. On the other hand, Stone and a number of other analysts have a wary eye on the automobile industry, still a key element of the economy. As sales have softened, the industry has cut back production and employment, he said. ``Auto dealer inventories are simply too high, and misbalanced given the hike in gasoline prices,'' Stone said. What he meant was that dealers have too many gas guzzling SUV's on hand and not enough fuel-efficient vehicles. Again, such details don't mean the economy is suddenly in trouble. They do matter as Fed officials continually try to figure out how monetary policy should respond to changes in inflationary pressures. Moving to `Measured' Back in March, before the spurt in payroll job growth, the Federal Open Market Committee met, left interest rates unchanged and issued a statement that said, ``With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation.'' By the May FOMC meeting, there had been two months of strong job growth and inflation had unexpectedly accelerated. According to minutes of the May meeting, which were released on Thursday, ``All of the members agreed that, with policy tightening likely to begin sooner than previously expected, the reference to patience was no longer warranted. The committee focused instead on a formulation that would emphasize that policy tightening, once it began, probably could proceed at a pace that would be 'measured.''' That didn't sit well with everyone around the table. ``A number of policy makers were concerned that such an assertion could unduly constrain future adjustments to the stance of policy should the evidence emerging in coming months suggest that an appreciable firming would be appropriate,'' the minutes said. June Numbers Some on the committee -- probably those more worried that inflation may have been accelerating in a fundamental rather than a temporary way -- didn't relish the constraint on future action use of the word ``measured'' would imply. A larger group on the committee, ``however, saw substantial benefits to inclusion of the proposed language,'' the May minutes continued. ``These members noted that current economic circumstances made it likely that the process of returning policy to a more neutral setting would be more gradual, once under way, than in past episodes when inflation was well above levels consistent with price stability. ``In addition, some policymakers observed that the timing and magnitude of future policy adjustments would ultimately be determined by the committee's interpretation of the incoming data on the economy and prices rather than by its current expectation of those developments,'' the minutes said. Well, the incoming data have softened, and they could easily continue in that vein for the next month or two. As for the impact of the June labor numbers on the Fed, economist Peter Kretzmer of Banc of America Securities said, ``The report will strengthen the Fed's intention to raise its federal funds rate (target) at a measured pace, and (it) even raises significant doubts about an August tightening.'' quote.bloomberg.com