Posts Tagged ‘commodoties’
Money and Markets
Wednesday, June 22, 2011 at 7:30 am
For a very long time in America we’ve enjoyed a seemingly endless, cheap, and abundant variety of foods from all over the globe.
Although for many of us, our understanding of food supply and what it takes to get it all on the grocery store shelves is very limited. Somehow, it just magically appears!
The problem: Like so many of our other natural resources, we have simply taken for granted the costs associated with producing, harvesting, packaging, and shipping the items we have come to expect at the market each day.
But with fuel prices and other costs surging, we are seeing …
The End of Cheap Food
Today, in emerging markets such as India and China, there is exponential growth and a new middle class that is demanding things they’ve never had before. Millions of cars, better housing, electronics, and above all … better foods.
Demand has surged for things like meats, better quality grains, soft commodities including coffee, cocoa, and sugar. This huge increase in demand is rapidly outstripping supplies of many key resources, and putting a strain on an already overloaded agriculture system.
On top of the global surge in demand we are seeing a decline in quality agricultural acreage and arable land in many regions, mainly due to an increase in poor farming methods. In China for example, poor hillside farming techniques are quite common. And antiquated farming equipment is often still the norm.
In addition, much of the once abundant younger rural population has fled the farms for the chance of a better life and increased pay in the larger cities and factories. This migration has left behind an elderly and dying rural population that simply will not be able to sustain the growing food demand.
Meanwhile, China has been racing to secure arable farmland anywhere it can, gobbling up land in South America, Europe, and especially Africa. China has made huge investments in parts of Africa and has secured vast amounts of arable land, mining resources, and even a new built-in workforce. China’s influence is so widespread that many people are now referring to parts of the Dark Continent as Chafrica.
The Chinese leadership realizes the dire situation they face if they don’t secure long-term supply lines for food and other raw materials for their people. The widespread unrest this year in the Middle East in places like Egypt, Tunisia, and Libya, in large part was ignited because of surging food and fuel costs. This is very worrisome to the Chinese leadership, as civil unrest in China could be uncontrollable once ignited.
More Hungry Mouths to Feed
According to the U.S. Census Bureau, the current world population of close to 7 billion is projected to exceed 9 billion by the middle of this century. To put those numbers in perspective, in 1950 there were only 2.5 billion people.
As global population explodes demand for food, fuel and land will increase at a frantic pace as nations work to secure long-term supplies from all corners of the Earth.
High Costs Going Much Higher
Of course higher prices for agricultural products help farmers, but at the end of the day their input costs have soared as well. Costs for things like fertilizer, equipment, irrigation, seed, and most of all, fuel.
Farming is a very energy intensive business, and as diesel and other fuel costs soar those increased prices roll downhill to the consumer in the grocery aisle. And energy costs don’t just impact the growing process … it also significantly increases the cost of packaging and certainly transport.
As food prices climb, along with everything else, those costs are hitting Americans in the wallet — hard. In fact many people are being forced to make extremely difficult choices. Things have gotten so bad right now that we have over 44 million Americans on food stamps, a grim new record high, according to the latest data from the U.S. Department of Agriculture (USDA).
While surging food and gas prices are hitting Americans with a one two punch, those same prices are even more devastating for poor and developing nations, and often can often become a matter of life and death.
This is only expected to get worse …
According to a June 17, Organization for Economic Cooperation and Development Report, “Cereal costs may average 20 percent more and meat 30 percent more over the next decade than in the last one.”
2011 has been a rough year so far, as widespread natural disasters have caused major crop delays and damage around the globe. Flooding in much of the U.S. has virtually wiped out many farmers’ chances of getting any crops in the ground this season. And those who have gotten crops in the ground, risk a very hot, dry summer which may kill corn and other crops that were planted late.
In addition, many farmers are now worried that because they got the crops in late they may risk an early freeze before they can harvest.
Simply put: 2011 is setting up to be a very expensive year for agriculture and potentially a very profitable one for those who are invested in it.
Do I Think Commodities Are in a Bubble? No Way!
Seems these days that everywhere I go, investors and fund managers are concerned about the rising costs of commodities. They’re always asking me if this is a commodities bubble and when it will burst, and when will prices return to the cheap levels we are used to.
My answers are always the same: This is not a bubble, and the chances of prices falling by any significant amount are slim to none.
Even now, we still have the die-hard dollar bulls coming out and claiming that we really don’t have inflation and the commodities markets are simply speculator driven and the worst for the dollar is over. I strongly disagree.
I believe a small move up in the dollar will continue a bit longer as the euro seemingly crumbles because of Greece.
However, longer term I think the same problems that drove the dollar into the ground will persist, and even worsen. The Fed has dug a hole that is too deep to climb out of, no matter how much funny money they decide to print.
Sure, speculation is a part of this picture. But to lay the blame on the farmer’s doorstep or to say it’s all speculators and hedge funds causing the run-up is a sad mistake.
Real physical demand and the weak U.S. dollar policy are two of the biggest reasons. And I don’t see demand for commodities going anywhere but higher longer term.
One thing you can count on is that everything from milk to yogurt and steak to eggs is going up in price — and not just a little, a lot!
That’s why as consumers and investors, we must look for ways to hedge ourselves against those costs we all are facing in the grocery aisle.
By Aaron Task | Daily Ticker
Thu, Jun 9, 2011 8:02 AM EDT
There’s nothing new about pundits and authors warning about the thread posed by China’s rapid rise. In his upcoming book, Red Alert, Stephen Leeb tackles this hot-button issue from a slightly different viewpoint.
“Everything about China we have to pay attention to…but what really concerns me is their accumulation of all these commodities,” Leeb tells me in the accompanying video.
When you think of “commodities” you probably think about oil, gas, gold, corn, soybeans, and maybe copper or zinc. China has been on a global buying spree to gain access to many commodities, but Leeb’s focus is on so-called heavy rare earth materials, which China already owns in abundance.
“OPEC’s control of oil [is] dwarfed by China’s control of rare earths, which are probably just as vital as oil,” Leeb says. “It’s something we have to wake up to and wake up to very quickly.”
Back in 2005, the importance of rare earths became evident when Congress blocked China’s attempt to buy Molycorp’s Mountain Pass mine from Unocal, its owner at the time. China’s control of rare earth minerals made headlines again last September when the Communist nation imposed an unofficial ban on related exports to Japan.
But for the most part, rare earths are a backburner issue (at best) for most Americans, policymakers included. This is a big mistake, according to Leeb, who notes rare earth materials are used in high-tech weaponry and are “vital” to renewable energy production, notably wind turbines and hybrid cars.
“If you want to create a society reliant on renewable energy, you need a major transition that’s going to rely on critical commodities [like] heavy rare earths,” he says. “Silver too is totally vital.”
Yes, while most of us think of silver as an alternative currency, Leeb notes it has major industrial uses, both conventional and in the development of solar panels. As a result, he is extremely bullish on silver, for the long term. (See: Why Higher Oil Prices Are Good for Silver)
“I think silver is heading for $100 [and possibly] much, much higher numbers,” he says. “It could become so valuable that like gold in the Depression,” the government will confiscate individuals’ silver holdings.
For the moment, however, Leeb is far more concerned about what our government is failing to do to respond to China’s challenge.
“There’s no point in demonizing China for pursuing its own economic interests,” he writes in the preface to Red Alert. “But as a disciplined, fast-growing economic juggernaut, China poses a massive challenge to the United States and represents a major threat to our economic well-being. And we have only a limited window of time in which to respond to this challenge in any meaningful way.”
Failure to respond will result in “severe dislocations and an irreparable drop in our national income [and] our children will experience a decidedly lower standard of living,” he warns.
Read the entire article HERE.
By Chris Puplava
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
While most investors are familiar with the Dollar Index, it is actually a poor tool in gauging the strength of the USD given its weightings and only being a six currency basket. To truly see how the greenback is performing on a global scale one needs to look at more than six currencies and include precious metals. When one does this it is truly amazing how much the purchasing power of the USD has declined since 2009 after two rounds of quantitative easing (QE), and it is this loss of purchasing power that has the potential to at least cause another growth scare like 2010 or even a bear market.
The Biggest Loser
As I pointed out in a recent article, the USD Index has broken a three year trend line, which largely resembles a similar setup in the 1970s. When that break occurred stocks suffered in real terms and commodities went screaming higher with gold advancing more than 350% in two years. Whenever the USD Index has approached this 3-year trend line support I take a look at how it is performing versus world currencies over different time periods to see if it is beginning to strengthen and indicate a change in trend.
What you see below is the USD versus 30 world currencies and 4 precious metals over 6 different time periods. If the USD was in the process of staging an intermediate bottom you would begin to see more and more currencies and precious metals declining relative to the USD on a short term basis (1 day, 5 day, 1 month) but we simply aren’t seeing that. Shown below, only 8 currencies/metals are declining relative to the USD yesterday and over the 5 day , 1 month, and 3 month horizons, the USD is still declining against 2/3 of the currencies below.
Stepping back just a bit further in time we can see that the USD has lost a great deal of its purchasing power from a global perspective, particularly versus precious metals. Since 2009 and after two rounds of quantitative easing the USD has declined more than 75% versus palladium, 69% versus silver, and 39% versus gold. The USD has also lost a great deal of purchasing power versus commodity currencies like the Australian Dollar, Brazilian Real, and Canadian Dollar. Clearly, when looking at the USD from a global perspective, cash has been trash thanks to Helicopter Ben Bernanke and a Congress and President that have extended U.S. debt to the stratosphere.
What a Weak USD Means to You
Given the U.S. economy is now primarily a service economy by exporting its manufacturing base overseas, it is important to keep in mind that we are far more susceptible to import inflation. Thus, one of the major trend components in import inflation is the USD as commodities are priced in dollars. Shown below is the inflation rate for import prices (blue line) along side the annual rate of change in the USD Trade-Weighted Index (orange line—shown inverted for directional similarity and advanced several months). The close relationship between the USD and import price inflation could not be more clear with the recent weakness in the USD hinting at even higher import prices in the months ahead. This is certainly not going to be good news to consumers already struggling with high food and energy prices.
What a Weak USD Means to Corporations
One of the things I argued for as to why there was still pain ahead in the middle of 2008 was the extremely high level of corporate profits relative to their normalized levels (“The Worst Is Yet to Come”). Essentially, corporate profit margins tend to reverse and move back towards the long run average, and we were still well above historical norms back in the summer of 2008—a strong reason for why I was not ready to turn bullish on the markets.
Yet again, the extreme in corporate profits is causing me to turn more cautious on the economy and stock market as the drivers that helped corporations boost their margins (shedding payrolls while sales recovered) is largely behind us as payrolls are now being added again. Additionally, while inflation was quite tame in 2009 and for most of 2010 it is picking up momentum and a weak USD ahead will only exacerbate the problem. Shown below are current corporate profits relative to normalized levels (historical average times Gross Domestic Product), which imply significant downside risk for the earnings seasons ahead. As of the end of last year, corporate profit margins were more than two standard deviations above normalized levels (see red line in second chart below), with 2007 representing the last time this occurred.
What a Weak USD Means to the Economy & Stock Market
The current rising inflationary pressures we are seeing are coming from the 15% decline seen in the USD Index since last summer, and further USD weakness ahead will only compound the problem. Higher inflation cuts into corporate profit margins as well as reduces consumer’s discretionary spending levels as they are forced to pay more for less. Inflation levels are leading economic indicators as it takes time for consumers to respond from ticker shock and change their spending habits, and current inflationary trends portend a decelerating shift for the economy ahead.
Seen below are three different Federal Reserve regional surveys with both the headline index and the price index for the surveys shown together, with the price index shown inverted for directional similarity and advanced owing to their leading tendencies. As you can see all three price indexes (red lines) haved moved sharply higher (lower in chart since inverted) and indicate we are likely to see lower national ISM and regional ISM numbers ahead.
Why is this important to you as an investor? Well, there is a strong correlation between the ISM numbers and the year-over-year rate of change in the S&P 500 as seen below. Given the price indices for regional ISM’s are forecasting lower headline ISM numbers in the months ahead, we can also expect the stock market to be at risk with flat to negative returns. That said, with QE 2 still in force the price weakness forecasted by the regional ISM price indexes may have to wait until QE 2 comes to a close in June.
Source: ISM, Standard & Poor’s
What Does it All Mean?
The last time we were in a similar scenario was late 2007 to early 2008. While I am not forecasting another crash like the one seen in late 2008, I do believe we can see the same trends. What were the characteristics of that time period? A weak USD, rising inflationary pressures, lower retail sales, lower corporate profit margins, and outperformance by commodities in general and precious metals in particular. If the USD accelerates its current decline then commodity based investments would be the most likely beneficiaries. Additionally, defensive sectors like consumer staples, health care, utilities, and telecommunications will likely outperform the more cyclical sectors such as technology, consumer discretionary, and financials.
Read the entire article HERE.
By Chris Martenson PhD
Prepare for Fed-induced turbulence in the markets
There’s a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%. The trigger will be the cessation of QE II and a multi-month pause before QE III.
This is a reversal in my thinking from the outright inflationary ‘buy with both hands’ bent that I have held for the past two years. Even though it’s quite a speculative analysis at this early stage, it is a possibility that we must consider.
Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals. The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view.
But over the next 3-6 months, I have a few specific concerns.
It’s time to build on the idea I planted in the Insider article entitled Blame the Victim (February 28, 2011) where I speculated on the idea that the Fed might be forced to end its quantitative easing programs, almost certainly because of behind-the-scenes pressure.
Here’s what I said:
How I read [the Fed's recent propaganda tour] is that the Fed is taking some heat for its inflationary policies, mainly behind closed doors, and it is trying to do what it can — with words — to soothe the situation. Perhaps China is making noises, or perhaps Brazil’s finance minister is making the phone lines feeding the Eccles building smoke ominously, or perhaps it is internal pressure coming from politicians with restless voters. Or all three.
The big risk here is that the Fed will be forced by this rising pressure to discontinue the QE program in June at the normal ending of the QE II efforts. Couple that with a possible federal showdown over the debt ceiling right at the same time, and you have the makings for a massive fireworks display, possibly involving derivative mortars bursting in air.
At the time, I speculated that all of the Fed’s pronouncements about inflation being almost nonexistent were actually signs that the Fed was taking some behind-the-scenes heat for the inflation its policies was creating. And I worried about what would happen if the Fed were to end the QE program in June.
Let’s just say it won’t be pretty.
Everything would tank. Stocks, bonds, and commodities. All of the risk assets that have been unnaturally supported by a flood of liquidity, too-low interest rates, and thin-air base money would give up those ill-gotten gains. Gold might behave a bit differently, because along with these market declines will come an enormous amount of uncertainty about the financial system itself, usually a condition for higher gold prices. So I expect gold to correct somewhat, but not nearly as much as everything else, and it could even gain.
The story is, admittedly, getting more confusing by the week, with some calling for hyperinflation and some calling for massive, outright deflation. I am trying to surf the probabilities and stay one step ahead of whatever curve balls are coming our way.
The basic idea is this: The Fed has been dumping roughly $4 billion of thin-air money into the US markets each trading day since November 2010. The markets, all of them, are higher than they would be without this money. $4 billion per trading day is an enormous amount of money. It’s gigantic by historical standards. As soon as the QE program ends, the markets will have to subsist on a lot less money and liquidity, and the result is almost perfectly predictable.
The markets are quite substantially elevated due to the efforts of the Fed. T, and then some, is quite likely to be rapidly eliminated as soon as the QE program has ended.
It’s really that simple.
To make the story even more difficult to follow, the Fed has been sending out teams of PR agents in an effort to guide the markets with their words.
First, on March 2, 2011 Bernanke said this:
March 2, 2011
Federal Reserve Chairman Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.
A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy. A “sustained period of stronger job creation” is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an “extended period,” he said.
The “no rush to tighten credit” statement is a signal that the Fed will neither raise rates at the end of the QE program nor perform reverse POMOs where it reels cash back in and pushes MBS and/or Treasury paper back out.
Upon the cessation of the QE efforts, and the cessation of $4 billion a day in Treasury buying pressure, it’s a safe bet that market interest rates will rise. Bernanke is at least on record as saying that if this happens, it won’t be because the Fed has taken the lead.
Bernanke was being a little bit sloppy in his statements, because stopping QE will serve to tighten credit simply because there will be a lot less liquidity sloshing around the system. It’s a situation where the absence of excess is the same as the presence of tightness, if that makes any sense.
Then on March 5th, a much stronger and clearer signal was given, confirming my worries:
March 4, 2011
Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.
“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.
Whoa. This is important news. Not only a cessation of QE, but the possibility of a sudden stop is being telegraphed. This will change everything.
The old saying ‘sell in May and go away’ might never be truer than this year, although with this sort of a warning, the cautious investor may want to get a head start on things and sell in March or April.
For some time there have been rumors that the Fed has been splitting into factions, with some of the inner team becoming increasingly uncomfortable with the QE program and its effects. But so far they’ve either spoken in code to reveal their displeasure or quietly resigned. So we’re pretty sure there’s an admirable level of support within the Fed for ending QE, and it has now bubbled to the surface and reached the public arena.
Of course, there’s some form of gobbledy-gook reasoning being floated to justify the plan for a sudden stop rather than a gentle wind-down, and it involves the distinction between ‘stocks and flows’ (from the same article as above):
Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.
“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”
Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”
The idea that Brian Sack, a 40-year-old economist with a PhD from MIT, is winning the day in the argument of “stocks over flows” is somewhat troubling to me. MIT is a quantitative shop, home to some very brilliant people, but how markets will actually respond is another specialty altogether, one that requires a bit of on-the-street experience. Markets have a bad habit of not being logical, not fitting neatly into tidy formulas, and ignoring things like ‘stocks and flows.’
I’ll go even further. I’ll take the other side of that bet and opine that the flows are much more important than the stocks, because it is the flows that support the continued budget deficits of the US government — which, it should be noted, will still be with us each and every month long after June 2011. Those deficits are baked into the cake and will require in excess of $125 billion in new Treasury sales each and every month.
Who will buy all the Treasury bonds after the Fed steps aside? That is unclear. If there are not enough buyers at these artificially inflated prices, then the price will have to fall until sufficient buyers can be found. Falling bond prices are at the other side of the financial see-saw from rising bond yields; one goes down while the other goes up, and the Fed has been pressing firmly down on yields for a while via the QE II program. When that’s over, pressure will be reduced and yields will rise.
Continue reading part II HERE. I subscription to Mr. Martensen’s newsletter is required
By Rudy Ruitenberg
Mar 3, 2011 5:22 AM PT
Global food prices rose to a record in February and grain costs may continue to rise in the next several months, with only rice keeping the world from a repeat of the crisis three years ago, the United Nations said.
An index of 55 food commodities rose 2.2 percent to 236 points from 230.7 in January, the eighth consecutive gain, the UN’s Food and Agriculture Organization said today. Wheat rose as much as 58 percent on the Chicago Board of Trade in the past 12 months, corn gained 87 percent and rice added 6.5 percent.
“I’ve never loved rice more than now,” Abdolreza Abbassian, a senior economist at the FAO in Rome, said by phone. The grain is the staple food of more than half of the world population, according to the International Rice Research Institute. “Probably rice is the commodity which is separating us from a food crisis,” Abbassian said.
Rising food costs contributed to riots across North Africa and the Middle East in the last several months that toppled leaders in Egypt and Tunisia. Prices surged as bad weather ruined crops from Canada to Australia and Russia banned grain exports after its worst drought in a half-century.
Turmoil in oil-producing countries including Libya has pushed crude above $100 a barrel, which may drive corn and wheat prices even higher, Abbassian said. Higher crude prices make biofuels produced from crops more competitive while raising the cost of tractor fuel and fertilizer for farmers.
“As long as oil prices remain high, it would start putting heavy pressure on the market, first through corn and then spilling over to other markets,” Abbassian said. “There’s no sign of rationing for cereals. I don’t see a correction.”
Global food prices probably will rise in the first half of this century because of an expanding population and higher incomes, slower crop-yield growth and the effect of climate change, Ross Garnaut, the Australian government’s climate-change adviser, said yesterday.
“The hike in food prices is deeply worrying,” Thierry Kesteloot, a food-policy adviser at Oxford, England-based hunger-relief charity Oxfam, said in an e-mailed statement. “Millions more people are sliding into poverty as they struggle to afford basic food supplies, and more and more are at risk of going hungry.”
Forced Into Poverty
Even without a crisis, the number of undernourished people in the world will rise this year from 925 million in 2010 as food costs gain, Abbassian said. He gave no estimate. The World Bank said last month 44 million people have been forced into extreme poverty since June by food inflation.
Food output will have to climb by 70 percent between 2010 and 2050 as the world population swells to 9 billion and rising incomes boost meat and dairy consumption, the FAO forecasts. Producing 1 kilogram (2.2 pounds) of pig meat can take 3.5 kilograms of feed, U.S. Department of Agriculture data shows.
“You now need a very good 2011 crop, and if we don’t get that, I’m not very optimistic about 2011-12,” Abbassian said. “There hasn’t been a food crisis per se, anything comparable to 2008. With stocks being drawn down, for 2011-12 we’ll have to be far more cautious.”
The UN’s food-price index rose 34 percent from 175.9 points a year earlier, with all five food groups advancing.
The dairy index climbed to 230 points in February from 221.3 in January. Milk futures traded in Chicago jumped 15 percent last month following a 26 percent surge in January, the biggest gain since March 2004.
The FAO’s sugar-price index slipped to 418.2 points from a record 420.2 in the previous month. Raw-sugar prices climbed 37 percent in New York in the past year.
The gauge for meat rose to 169.5 points from 166.2. Meat is a “significant” part of the diet in developed countries, which may see more food inflation than in 2007-08, according to Ken Ash, trade and agriculture director at the OECD.
A gauge of cooking oils and fats gained to 279.3 points from 277.7, the FAO said. Its cereal-price index climbed to 253.8 points from 244.8 in January, the highest level since July 2008, the report showed.
World grain production in 2010-11 is forecast to drop 1.1 percent to 2.24 billion metric tons, the UN agency said, compared with December’s outlook for a 2.23 billion-ton crop. It estimated cereal usage at 2.28 billion tons, exceeding production.
The FAO cut its projection for ending stockpiles to 479 million tons from December’s 525 million tons following an adjustment of historical Chinese corn inventories.
The global wheat harvest will come to 654 million tons, compared with a previous outlook of 653 million tons, the FAO said. Production of coarse grains including corn and barley will be 1.12 billion tons, and milled-rice output will be 466 million tons, it said.
Read the entire article HERE.
Submitted by Tyler Durden on 02/21/2011 12:04 -0500
The first very shy tick above $34 in the last 31 years is in the history books. Will soon be followed by many more. And only $16 more to go to all time nominal highs… and ~$160 to real ones. What is truly hilarious vis-a-vis claims that the dollar is a reserve currency is that in the period in which gold has risen by 2.9%, and silver, 12.3%, the DXY has dropped by 1.45%. It would be quite amusing if Schumer’s push to unpeg the CNY came true, only for the US to realize that its currency is now completely irrelevant.
Feb. 16, 2011, 8:30 a.m. EST
By Jeffry Bartash
WASHINGTON (MarketWatch) – U.S. wholesale prices jumped 0.8% in January as gasoline costs rose again, the government reported Wednesday. And core producer prices, which exclude the volatile food and energy categories, rose 0.5%, marking the largest increase since October 2008. Economists surveyed by MarketWatch had predicted a 0.9% gain in overall producer prices and a 0.3% increase in the core rate. Producer prices have risen 3.6% over the past 12 months on an unadjusted basis. The core rate has climbed a slower 1.6% over that span.
Read the entire article HERE.
By Jason Kelly
January 11, 2011
I’m concerned that inflation is taking hold in China and will accelerate into hyperinflation that sends China’s economy over the edge. The following appeared in the Want China Times last week: “China continued to be the largest money-supplying country in 2010 as its M2, a broad measure of money supply, was up 19.46 percent at the end of November from a year earlier. This compares with 3.3 percent and 2.5 percent of annual M2 growth in the US and Japan respectively over the same period.”
The article noted that China’s broad money supply is now “larger than that of the US and Japan” and that the past ten years have seen China’s M2 expand at 19 percent a year as its GDP averaged annual growth of only 11 percent and it “needs only 14.1 percent of growth in money supply to sustain its economic development.”
The article quotes Wu Xiaoling, vice chairman of the Financial and Economic Affairs Committee of China’s National People’s Congress saying that for the past three decades China has “used excessive money supply to rapidly advance our economy.”
One reason for the explosive growth in China’s money supply is its legal requirement to release a $1 equivalent amount of yuan for every $1 increase in foreign exchange reserves. The annual growth rate of China’s foreign exchange reserves hit 28 percent after it joined the World Trade Organization in 2001. That’s why by the end of last September, its foreign exchange reserves reached a level more than 18 times bigger than they were in 1998.
This ramp-up in foreign exchange reserves coupled with the matching yuan injections have created a money supply “phenomenon unprecedented in the history of the world economy.” The article concludes:
The excess money flows into the property market and any assets available for making investments, causing land, housing, and commodity prices to surge.
Since 2003, land prices in Beijing and its surrounding areas have increased nine times. Furthermore, the prices of approximately 70 percent of agricultural produce in 36 cities in China have risen since July last year.
That’s the data that most investment analysts are examining and is the reason you’re seeing red flags fly up in global finance journals. I, however, am in possession of even more convincing evidence that something unpleasant is rising from China’s out-of-control money supply growth.
I stay in touch with a network of business associates throughout Asia and have found that the best way to keep tabs on Asian economies is by talking with small to midsize Japanese manufacturers who outsource operations to the Asian mainland, primarily China. Because Japan is an island economy with almost no natural resources, its business leaders have become experts at watching global commodity price trends to carefully manage inventories. Nobody knows commodity patterns better than people who’ve made careers out of managing resource scarcity.
Last month, my accounting contact sent me a report from a Japanese client whose company outsources the manufacturing of clothing to factories in China. For the first time ever, the client said the company may need to exit China entirely due to runaway inflation. His prices are rising 35 percent per month and many of his larger competitors have already fled to factory contracts in Bangladesh, Malaysia, and Vietnam. Because his firm is smaller, it’s harder for him to relocate his overseas operations. He’s worried that he won’t be able to get out of China before “something enormous happens” in 2011.
Yes, he said, and explained that he hasn’t seen anything like the current environment since the oil shock of the 1970s. Ahead of the shock “everybody used extra money to hoard supplies they didn’t need. They adapted to make something from the supplies they’d bought, but then all the raw materials were gone in the shock.” He remembers a shortage of toilet paper because the raw materials for it disappeared into the voracious maw of a runaway money supply.
The same thing is happening now. The raw material of cloth is harder to find in China and some of the outsourcing factories are sitting idle for lack of it. The ones still operating are guarding their supply so closely that the Japanese client must pay for materials first in cash, then the factories will make the clothing to order. He calls it a dangerous situation that violates the tradition of partial payment which protects both signers of a contract from undue loss. It’s easy to see how that could unravel in a hurry if a factory is tempted to accept more cash upfront than it has cloth in storage.
I’m watching this closely and will share more as I receive it.
Read the entire blog post HERE.