Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (53198)	2/9/2006 10:44:23 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 110194

do you happen to know: does that Treasury Direct link to your borker acct work even with IRAs?

To: russwinter who wrote (53198)	2/9/2006 6:32:27 PM
From: regli	Respond to of 110194

I don't have access to his current article yet but will in a day or two. However, I thought you might be interested in his prior column as well. Rising above the laws of supply and demand THE LONG VIEW - PHILIP COGGAN Financial Times February 4, 2006 Saturday It seems like the 1970s all over again. Commodity prices are booming, with copper and zinc reaching record highs and many other metals hitting their highest levels for 25 years. The world is fretting that oil supplies might be disrupted because of a dispute between the US and Iran, and that is keeping upward pressure on the crude price. And it is not just metals or oil. The sugar price reached a 25-year high this week. This is not because we are putting more spoonfuls in our coffee. It is because sugar is a key ingredient of ethanol, which Brazilians are using to fuel their cars. With the oil price so high, drivers want to switch to ethanol or to ethanol/petrol hybrids. The standard explanation for this surge in prices is that booming demand, particularly from Asia, is clashing with stagnant supply. During the 20-year bear market for commodities, there was little investment in new mines. There is certainly something to this argument and it helps explain why there is a long-term bullish argument for raw materials. But John Bergthiel of JP Morgan points out that some metals seem to be rising in price, regardless of their supply-demand mechanics. In copper, for example, inventory levels appear to be equal to just two weeks' demand, so a price squeeze is understandable. But in nickel, inventories are equal to 11 weeks' demand, and it is still being pushed higher. Something else is clearly going on. The answer seems to be that institutional investors are increasingly moving into commodities, having become convinced that they offer returns that are both attractive and, importantly, not correlated with other assets. When such investors do buy commodities, they tend to buy a basket rather than bet on individual metals. So as money flows into the sector, it tends to push all prices higher, regardless of the supply-demand position. Bergthiel points out that commodities such as coal, which are not in such investment baskets, have not been joining in the recent boom. The potential irony here is that if enough investors pile into commodities, the characteristics of the market will change. One attractive feature of many commodities in the past has been "backwardation"; spot prices have been higher than future prices. Investors could buy in the futures market, and on average, expect prices to rise to meet the spot price, a return known as the "roll yield". The roll yield existed because so many producers wanted to hedge their output by selling it in the futures market. This overwhelmed the small number of raw material consumers who wanted to hedge against higher prices. But if enough investors try to exploit this market quirk, the roll yield will disappear. There is no backwardation in gold, the commodity most used as an investment vehicle, or in parts of the oil market. The backwardation in base metals has recently reduced. Whatever its rationale, the surge in commodity prices creates dilemmas for investors. Low real yields on index-linked government bonds makes them look unattractive, particularly in the UK. Buying commodities is an alternative way of hedging against inflation, but there is the danger of being sucked in at the top of a market. Then there is the question of whether higher commodity prices are telling us something about the economy. Rising commodity prices are generally seen as a sign of buoyant global demand. Zinc has risen 23 per cent, and lead 29 per cent since the start of the year, according to Reuters. Does this mean the global economy is suddenly accelerating? For those who remember the 1970s, the fear must also be that higher commodity prices are an early indicator of a more general rise in inflation. Such a rise would require central banks to increase interest rates significantly to bring it under control. But this line of reasoning will turn out to be flawed if commodity prices are being driven by investment flows, rather than simple industrial demand. Andy Xie of Morgan Stanley believes the recent slowdown in property prices may have diverted speculators into those asset classes that have been rising recently: Asian equities and commodities. If investors are really worried about inflation, it seems odd that the bond market has not taken greater fright. The US yield curve is flat (short rates are equal to long rates), normally a sign that investors are worried about an economic slowdown and relaxed about inflation. Some will say that the bond market is distorted by Asian central bank buying but that Asian buying has been around for a while. For those banks to be offsetting the sales of rational, inflation-fearing investors, they must have substantially increased their purchases in recent months. It seems more plausible that high commodity prices are part of a liquidity-driven rally that is pushing up all asset prices. The Big Daddy of all the commodities is oil. While its high price may be a symptom of high global demand, some still fear that it acts as a tax on consumers, and thus a threat to economic growth. The mystery so far is that oil has been above Dollars 50 a barrel for a long time without having any apparent adverse economic effects. But it might be foolish to assume that this would be the case if oil hits Dollars 80 or Dollars 90 a barrel, perhaps if the dispute with Iran escalates into sanctions or military action. If that happened, financial markets would be badly hit. and that would include other commodity prices, ironically done in by one of their own kind.

To: russwinter who wrote (53198)	2/13/2006 6:46:44 PM
From: regli	Respond to of 110194

The Short View: The carry trade has shifted Short view February 9, 2006 Thursday By PHILIP COGGAN The yen rose sharply against the dollar on Tuesday, while gold suffered its biggest one-day decline in 13 years. Analysts could cite fundamental reasons for both moves - expectations that the Bank of Japan will start to tighten monetary policy, and hedging activity by mining companies. But it seems more likely that the two moves are related and have their roots in the "carry trade", the financing of speculative investments with borrowings in a low interest rate, or weakening, currency. For a long time, when US interest rates were 1 per cent, the carry trade was financed in dollars. The dollar's decline, fuelled by fears about the impact of the US current account deficit, only made the trade more attractive. Speculators were borrowing at low rates and having to make repayments in a depreciating currency. But around the start of last year, the carry trade seems to have shifted. Perhaps the trigger was the point when US interest rates became higher than those in the eurozone. At that point, not only did the trade become more expensive but the dollar started to gain ground. So speculators turned their attention to the yen. After rising steadily against the Japanese currency for much of 2001-04, the gold price took off in yen terms last year. A graph of the yen/dollar rate and the gold/yen rates since the start of last year shows a remarkable correlation. The result was that some big short positions developed in the yen while many speculators were betting on continued commodity price rises. When either trade looked like faltering, investors cut their positions on both sides. So Tuesday's yen decline was accompanied by a general sell-off in commodities - and it might have been the commodity price decline that led the yen higher. The temporary disruption of the yen carry trade does not mean it has gone for good. The yen will be the lowest-yielding of the three main global currencies for the foreseeable future. Perhaps the biggest threat to the trade will be if China revalues the renminbi again. This would probably push up Asian currencies and force speculators borrowing the yen to cover their positions.