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

To: JMK1 who wrote (20705)	1/7/2005 3:45:43 PM
From: mishedlo	Respond to of 116555

Does that mean that he sees Gold rally when treasuries start dropping? Because your opinion seems to be different. The problem with this idea is that gold tends to be positively correlated to treasuries not negatively Could you clarify that for me? BTW, great board - very educational Thanks BTW I was referring to the YIELD dropping not treasuries dropping. Lower yields ie RISING treasuries correlate positively with rising gold (in isolation). Strong moves in the US$ are also a factor as is sentiment and seasonality. I believe Heinz would agree with all of that. Mish

To: JMK1 who wrote (20705)	1/7/2005 4:14:05 PM
From: mishedlo	Read Replies (2) \| Respond to of 116555

Heinz on the US$, interest rates, money supply and gold complied by and thanks to ILD Date: Fri Jan 07 2005 11:56 trotsky (goose@dollar) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved "cannot see any fundamental reason for the dollar to rise from here" that doesn't mean it won't rise. even if the above were true ( it isn't ) , markets often move contrary to fundamentals for long periods of time. the fundamentals for the dollar have however improved as well. for one thing, the interest rate differential that has favored other currencies has shrunk or even disappeared in some cases ( ECB ST rates are now below the FF rate for instance ) . US money supply growth is turning negative - contrary to money supply growth elsewhere. and lastly, the yield curve has flattened, indicating a tighter monetary policy stance - which also favors the dollar. the above fundamentals are more important for the short to medium term trend than the longer term fundamental issues of the current account and budget deficits. note also that the trade deficit will probably see some short term improvement on account of recently lower oil prices. all that said, i still think that the 80 level on the DXY is not as safe a perch to begin a rally from as everybody believes apparently. if it breaks on the next down move ( it should at least be tested, even if the recent rally's for real ) that break could precipitate a panic - regardless of fundamentals Date: Fri Jan 07 2005 11:37 trotsky (frustrated) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved i've also been wondering about this recent 'let's ignore the jobs data from now on' propaganda campaign. it doesn't sound credible, now does it? after all, the Fed's mandate includes ( foolishly ) a passus that requires them to worry about trends in employment. but i'm not so convinced that there's reason to worry about the demand for the USG's debt paper. as i've mentioned before, people tend to underestimate domestic demand for bonds and notes. it is obviously far stronger than previously thought - consider that Japan has stopped intervening in the currency markets 9 months ago. that has brought us a period of yen strength, but where was the much touted weakness in bonds? didn't everybody say that unless Japan kept buying, bonds would collapse? Date: Fri Jan 07 2005 11:18 trotsky (@pm stocks) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved well, that sure was a quick end to the bounce. i had thought it might actually stick for one day at least, but apparently traders can't get out fast enough. that said, the downturn has improved the money flow picture a bit. one has the feeling that the sector is trying to find a short term bottom, but is sabotaged by the persistent PoG weakness. note that w.r.t. the medium to longer term, the picture isn't as bleak as the recent succession of failing rallies suggests. e.g. the sentiment data ( positioning data ) show that the correction has ravaged bullish sentiment - see the recent Hulbert missive ( gold advisor long exposure is very low ) as well as the fact that the Rydex pm fund has lost over 50% of its assets from the late '03 high - mostly due to outflows. also, it's reasonable to assume that after flattening consistently and sharply since mid '04, the yield curve's next major move will be a steepening. the problem is we don't know when just yet. according to the FOMC's December minutes, they're more committed to the rate hike exercise than i thought they would be. they've mentioned everything in those minutes, except the fact that yields on the long end have been declining ever since the rate hike campaign began. martincapital.com in essence, the market is trying to tell them that every little hike may turn out to be a bridge too far , but they're firmly set on ignoring this piece of evidence in favor of focusing on the speculative frenzy they've managed to unleash ( in concert, it must be said, with the Asian CBs ) . not per se a bad thing, but they're ignoring the lag phenomenon. note that quarterly broad money supply growth in the US is threatening to go negative for the second time over the past year, while year-on-year money supply growth keeps declining toward 10 year lows as well: martincapital.com martincapital.com this shows that contrary to popular misconceptions, the Fed can't be accused to be 'behind the curve' - rather the opposite. and that is a good reason to believe that support for further rate hikes will decrease in coming months, simply because the economic background noise ( i.e., the government's statistics ) are bound to deteriorate more and more in response to the decline in money growth. after all, the 'recovery' rests entirely on the bubbles produced by the reflation campaign - unless these bubbles continue to expand ( first and foremost, real estate ) there won't be much left of the much touted recovery. so the question is, how do you continue to incentivize the consumite baboonery to increase its mortgage debt by more than $600 billion p.a. and drive the 0.2% savings rate down further in the face of declining real incomes and an annual interest rate bill exceeding $500 bn.? the only possible answer from the Fed's PoV is to reverse the rate hike campaign. not that i think it will help, but what else can they do? anyway, it gives us reason to expect a steepening of the long-short yield spread to begin at some point this year. Date: Fri Jan 07 2005 10:35 trotsky (doran) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved "o where’s the imminent crisis? Privatizers say the trust fund doesn’t count because it’s invested in U.S. government bonds, which are “meaningless IOU’s.” Readers who want a long-form debunking of this sophistry can read my recent article in the online journal The Economists’ Voice" on this point, Krugman is simply wrong imo. the government has spent the entire so-called 'surplus' of the SS fund - it has become an integral part of the govt.'s general budget. without it, the currently reported budget deficits would be 50% larger per annum. and the 'lock-box' ( a truly Orwellian name construct ) is indeed full of IOU nothings. it is simply a huge future govt. liability. Krugman is however right that the so-called 'privatization' scheme is to be distrusted. just not for the reasons he imagines ( one needs to remember that Krugman is a Keynesian statist who is always in favor of state control over every aspect of the citizen's lives. he's one of the most vocal critics of tax cuts, but he's not worried by government spending. much of what he has proposed over the years is downright evil from a libertarian PoV ) . more convincing objections regarding the proposed SS scheme have been raised by Mr. Rockwell here: mises.org Date: Fri Jan 07 2005 12:35 trotsky (Aurum@mystery) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved not much of a mystery imo. there are hundreds of hedge funds registered on the Caymans, and every major financial institution has subsidiaries registered in the Carribean tax havens. the big trading volumes emanating from the Carribean iow are a tax avoidance strategy. Nelson Hultberg if i recall correctly simply made up that 'rumor' you speak of out of whole cloth. as usual with these conspiracy theories, there's not one shred of evidence. Date: Fri Jan 07 2005 12:23 trotsky (frustrated@Fed buying bonds) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved it sometimes buys longer dated paper in coupon passes ( permanent additions to the money supply ) . not really a big factor in the bond market overall though - these buys are only operations aimed at influencing the level of liquidity in the domestic banking system. the Fed's balance sheet isn't a secret. you can look for yourself how many bonds they buy. no unusual monetization efforts in evidence thus far - of course that may happen at some point in the future, but it hasn't yet. Date: Fri Jan 07 2005 12:17 trotsky (frustrated@more than meets the eye) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved well, it's true that there's more to the hikes than meets the eye. but i think the major motivation is the gathering of ammunition for the upcoming slump in housing and consequently consumer spending. i don't think they worry so much about foreign inflows. it's well known that those inflows are needed, but there's also widespread conviction that they're not endangered.

To: JMK1 who wrote (20705)	1/7/2005 4:57:54 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Tom 2005-01-06: As for a big move up in gold, Heinz does not see it until the yield curve stops flattening. When is your best guess on when that might be? Mish 2005-01-06: There are several things that could steepen the yield curve 1) expectations of inflation and 10 yr treasuries sink. The problem with this idea is that gold tends to be positively correlated to treasuries not negatively. It is also not in line with my views of a weakening economy or Heinz's either. Some sort of US$ panic could cause it also. That probably would be positive for gold but I am not sure how permanently. Neither of us thinks a dollar panic is likely any time soon, but it could happen. 2) The FED pauses and the short end rallies while the long end stays more or less the same. Perhaps it starts to happen as soon as the market perceives the FED will pause. Note that strong jobs tomorrow will probably not be good for gold even though it would be good for "inflation alarmists". As I have said, rising treasury yields has tended to be quite bad for gold. 3) The FED actually starts cutting. I believe Heinz thinks this may happen this year(not sure when) and it is consistent with his and my view of deflation and what the FED will do to fight it. I have no timeframe for this and we did not discuss this either. IMO it would probably not happen till late this year unless things get really ugly in which we could see it by midsummer. Ignoring the yield curve for a moment, I think what gold really needs to see is some sort of US$ bottom vs the Euro, Pound and Yen. That might happen if the UK and Europe go on a cutting cycle. When the world sees there is currency to hide in, that's when gold really takes off. I have no idea how to time that. I will pass this post on to Heinz for comments. Heinz 2005-01-07: the timing is rather difficult, but i would say that if one considers the normal lag time between a sharp slowdown in money growth and the corresponding slowdown in economic activity, evidence of the infamous 'soft patch' turning into an even softer patch should continue to pile up in coming months. given that, the current idea (as expressed in the Dec. FOMC meeting) of further rate hikes being an unavoidable certainty will be dispelled sooner rather than later imo. i hasten to add that that's just a gut feeling, or rather, an educated guess. the slowdown has already begun, but it needs to become more pronounced before the bureaucrats realize that they've overestimated the recovery's staying power. so what i'm not really sure of is if i can gauge where the realization threshold of the bureaucracy is. recall that they kept hiking right into the initial Nasda collapse in 2000 - they didn't even realize at the time that the tech stock bubble had burst and what that meant. this disconnect may be even more pronounced in the case of the beginning demise of the housing bubble, since there'll be less timely information on its evolution.

To: JMK1 who wrote (20705)	1/7/2005 4:58:13 PM
From: mishedlo	Respond to of 116555

grain report WEEKLY: JANUARY 7, 2005 CORN: Hi, this is Tim Hannagan and this is my weekly review. The week began Monday just as we called for and that being those who bought back shorts ahead of year end would re-enter short and continue to sell the soft demand scenario and bulging inventories. With March closing 3 lower, our inspection report showed 24.4 m.b. were inspected for near term export off from 35.9 the week prior. Tuesday's selling was much lighter as the USDA announced a sale of 112 thousands tons to a unknown destination spooking shorts a little. Wednesday saw light short covering on talk the winter storm crossing the plains and the midwest had the country movement of corn at a standstill firming elevators cash prices lightly. Thursday's weekly export sales report showed 430 t.t. of corn was sold last week off 38% from the week prior and 42% under our four-week average. Most of the bearish demand numbers come as we come off a holiday week with fewer export days. Corn posted 7-cent gains in the last half hour of trade after funds began buying back wheat shorts push 7 to 9 higher, March corn hit 2.05 up 3.5 cents and triggered buy stops from short positions pushing us quickly to a 2.094 high. It was all technical inspired. Friday saw a day more for consolidation with a range of 2.6 lower to 1 higher. With funds buying back over 20 thousand of their short positions Thursday it is a red flag their done selling for at least the near term leading up to next Wednesday's USDA crop report. If we do not turn back down after Wednesday's report then lows are in. It does not mean a bull market begins with buyers rushing in, it just means the big players are done with their short position play and we go to the charts and begin buying support. Consider this for Monday. Buy the February 2.10 call for 3-cents and a 2.05 put for 3-cents. You have $300 dollars tight up. If they return as sellers 1.96 could be seen easily with worst case scenario 1.80. Upside potential if they return as buyers or short covering is 2.19 to 2.30. March support is 2.00 with resistance at 2.10 then 2.19. WHEAT: We called for lower wheat prices after the first and got it. Monday saw March fall to 3.022 on the close after a 3.08 high before the holiday break. Our inspection report came in at 14.7 m.b. inspected for near term export off from 16.2 the week prior and a continuing reminder of our slow demand. Tuesday saw funds pile on short with 10-cent declines after the open as winter wheat weather remains non-threatening and private state by state winter wheat ratings showed a healthy dormant crop. Wednesday was profit taking day as shorts bought back some very profitable short positions posting 5-cent gains at mid-session. Thursday's weekly export sales report showed 91.8 t.t. of wheat was sold last week, a new low for our marketing year beginning June 1st and 75% under our four-week average. It is more than a shortened holiday week, we need lower prices to draw business with world record inventory sitting out there. After a modest open wheat shot up 8 to 9 cents higher on short covering as traders eye our only bullish news and that being thoughts next Wednesday crop report will show a smaller winter wheat planting this year. Pre-report trade guesses put our winter wheat crop at 43.220 million acres versus 43.350 a year ago. Estimates range from 42.3 to 44.6. After the report we should expect sellers to return and trade our weak demand pattern. Support on March lies at 3.00 then 2.95 with resistance at 3.16. BEANS: Monday came in as expected with large trading funds taking year end short covering profits and pile back on short pushing us to down 11 on the close, on anticipation of lower cash price as growers lightly sell grain for cash to cover holiday debt. Tuesday was follow through pushing 10 lower by mid-session, again large trading funds controlling the selling. Cash prices being paid farmers had dropped from 80-cents over the January futures to only 58-cents over before the opening. Wednesday saw our 22-cent two day drop lead to funds taking some profits to the bank off winter storm warnings slowing cash grain sales and word ahead of the opening. China had purchased 116 t.t. of beans. Thursday's weekly export sales report showed 649 t.t. of beans were sold last week down from 926 the week prior and 22% under our four-week average. Holiday shortened week was our culprit but good news was China was in for 370 t.t. we traded both sides of unchanged in a very tight range with funds and commercials selling off the highs early but buying back their shorts late when wheat and corn rallied. Friday saw light follow through buying as traders take more short profits to the bank ahead of the weekend and next week's crop report. Support on March beans lie at5.30 with resistance at 5.42 then 5.60. Monday and Tuesday look to choppy two-sided trade each day ahead of Wednesday's crop report. Like corn beans too look for direction after Wednesday's report. Will they test our near-term 5.24 low or our funds done selling and will buy back the rest of their shorts until South American production becomes clearer. The only problem todate is in for southern Brazil where it has been too dry but January is like our June here. It is February and March that make or break yields. We got our early January break. I called for and I still look for a late January rally into February.