Posts filed under “Think Tank”

When does asset price inflation lead to consumer price inflation?

With asset price inflation the unofficial policy of our Federal Reserve in driving economic growth over the past 11 years and particularly over the past two years, the question of late has been when does the easy money lead to consumer price inflation. Aug CPI is expected to rise .3% m/o/m but fall 1.7% y/o/y after dropping by the most since 1949 in July. With gold busting out again to a fresh all time record high, it is clear what that asset class is saying about currency and price stability and future inflation. The good US retail sales data yesterday is helping to lift most Asian stocks due to their export focused businesses. ABC confidence fell 1 point to -49, a 7 week low. The MBA said purchases fell 10.3% but follows last week’s 8 month high. The Nov 30th expiration and possible extension of the home buying tax credit looms large. Refi’s fell 7.4%. Aug IP is out today and should rise for a 2nd month after 8 months of declines.

Category: MacroNotes

Commodity Futures Trading Commission (CFTC)

Michael Martin is a proprietary commodity trader. He is a commodity instructor for the CFA Institute and a frequent lecturer on risk management.  Until September 2008 he was an Associate Editor at Trader Monthly magazine.  He blogs at http://martinkronicle.com and at www.huffingtonpost.com/michael-martin.

Victor Sperandeo is professional trader also known as Trader Vic —  is generally considered an expert on commodities (particularly in the Energy and Metals sectors), where he has earned a reputation for profitably trading in declining markets. His market crash prediction during the September 1987 Barron’s interview earned him widespread recognition of his understanding of the financial markets.

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Sitting On One’s Hands

There are several things that the Commodity Futures Trading Commission (CFTC) will be considering as they convene hearings. Hopefully they will hear well-researched, and well-thought out opinions, unlike that of Michael Masters – who’s testimony was slammed equally by the left and the right by the likes of Nobel Laureate Paul Krugman and Commodity trader Jim Rogers. Among the issues that the CFTC is looking at are transparency in the markets and the position reporting limits where they are not currently any Federal guidelines. A third issue is the stratification of the COT — the commitment of traders — which characterizes how the market participants are biased in the marketplace. Ultimately, these make for good talking points, however, regulation in these areas will not stamp out speculation nor insure Americans against high commodity prices.

Position Limits

That commodity futures contracts have position limits is not a new concept. The various exchanges set position limits, except for Agriculture futures which are set (Federally) by the CFTC. Each commodity has its own position limit and they tend to be very specific. NYMEX Crude oil, for example, has the position limit of 10,000 net futures in any one month and 20,000 net futures contracts for all months combined. You are limited to “only” 3,000 contracts in the last 3 days of the spot month, including any concurrent Call or Put Option positions on the same commodity. The question before the CFTC is how to account for the Over the Counter (OTC) market in aggregating position sizes. Also, the Intercontinental Exchange (the ICE), has evolved substantially since trading has become much more electronic. The ICE offers “look-alike” futures which are cash-settled and no physical commodity is ever involved by definition. The position limits for the ICE Crude Oil Futures are exactly the same as those set by the NYMEX on its crude oil contract. These are two different contracts on two different exchanges and their limits should be separate.

If Victor decides to sell 5,000 NYMEX crude oil contracts and Mike is buying 5,000 NYMEX crude oil contracts at the same time, there is no effect on crude oil itself. Neither of us is creating nor producing the physical oil – we are trading against one another. We are not impacting the consumer, unless the consumer happens to be a speculator and is taking part of the position. What we are doing, however, is providing valuable information to the marketplace on the outlook for Crude Oil. We already abide by the reporting levels. Further transparency will not annul volatility in commodity futures trading. Uncertainty causes volatility. Hedgers, real hedgers, are hedged oftentimes to the back of the board and they use several techniques beyond futures contracts.

Commodity investors, also called Indexers, invest in commodities for the long-term to assuage the effect of inflation on their traditional investments and “paper assets,” such as stocks and bonds. Through passive investments such as the US Oil Fund, LP (ticker:USO) discussed below, or through the asset class known as Managed Futures, they seek diversification along their investment frontier to enhance their returns while reducing risk. These indexers, which have billions and billions under management, are the large pensions (and in some cases Endowments) that have Defined Benefit plans that they are legally bound to pay out of to plan beneficiaries – retirees – in the future. It has been alleged that such indexers, due to their sheer size, are driving up the price of commodities. So far, there has been no evidence of fact to this regard. Regulating pensions and endowments out of the market or to the point where their participation would be meaningless, would be a great disservice to them and frankly, discriminatory because of their size. Such regulatory banishment would likely come back to haunt lawmakers and tax payers because if there was a shortfall in corpus that is due to be paid out, it would have to be made up. This would be a drama known as Social Security, Part II.

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Category: Commodities, Regulation, Think Tank

Everyone Has a Stock Market Forecast

Good Evening: This may sound like a recording, but stocks overcame another early dip to again finish higher on Tuesday. At least the averages had some economic data behind this rally, with retail sales and the Empire Manufacturing survey both coming in well ahead of expectations. Then again, PPI rose at a stagflationary pace, and…Read More

Category: Markets, Think Tank

Penury, self-imposed or inflicted, the new normal?

One of my favorite sources of information is The Liscio Report by Philippa Dunne & Doug Henwood. Among other things, each month they survey all the states about tax revenues, expenses and then give us the results in a very pithy fashion. No one pays taxes unless they have to, and thus taxes tell us…Read More

Category: Think Tank

We Can’t Break Up the Giant Banks, Can We? Yes We Can!

Washington’s Blog strives to provide real-time, well-researched and actionable information. George – the head writer at Washington’s Blog – is a busy professional and a former adjunct professor. ~~~ Top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion. Even the Bank…Read More

Category: Think Tank

Economic data

Aug Retail Sales were much better than expected. Including clunkers, sales were up 2.7% vs expectations of a gain of 1.9%. Ex clunkers, sales were up 1.1%, .7% more than expected and ex clunkers and gasoline stations, sales were up .6% vs the estimates of flat. Sales for auto/parts were up 10.6% and gasoline station…Read More

Category: MacroNotes

Lehman’s Legacy Still Being Written

Good Evening: After small stutter steps on Friday and this morning, U.S. stocks marched ahead today for the sixth time in the last seven trading sessions. The early dip in prices could probably be attributed to some nascent nervousness over a brewing trade dispute between the U.S. and China. But market participants took little time…Read More

Category: Markets, Think Tank

Capital markets/bank lending

To the question of whether banks are lending to businesses and the flip side of what’s the demand for loans, from Friday’s Federal Reserve data for the week ended Sept 2nd, Commercial and Industrial loans outstanding fell for a 9th straight week and is at the lowest level since Jan ’08. Fortunately though for many…Read More

Category: MacroNotes

An economics lesson from ‘Ferris Bueller’s Day Off’

“In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone?…Read More

Category: MacroNotes

Elements of Deflation, Part 2

Just as water is formed by the basic elements hydrogen and oxygen, deflation has its own fundamental components. Last week we started exploring those elements, and this week we continue. I feel that the most fundamental of decisions we face in building investment portfolios is correctly deciding whether we are faced with inflation or deflation in our future. (And I tell you later on when to worry about inflation.) Most investments behave quite differently depending on whether we are in a deflationary or inflationary environment. Get this answer wrong and it could rise up to bite you.

The problem is that there is not an easy answer. In fact, the answer is that it could be both. Today I got another letter from Peter Schiff, who seems to be ubiquitous. He says the rise in gold is because of rising inflation expectations among investors. Gold is predicting inflation. Maybe, but the correlation between gold and inflation for the last 25-plus years has been zero. I rather think that gold is rising in terms of value against most major fiat (paper) currencies because it is seen as a neutral currency. The Fed and the Obama administration seem to be pursuing policies that are dollar-negative, and they give no hint of letting up. The rise in gold above $1,000 does not really tell us anything about the future of inflation.

In fact, it is my belief that if the Fed were to withdraw from the scene of economic battle, the forces of deflation would be felt in short order. The answer to the question “Will we have inflation in our future?” is “You better hope so!”

I wrote in 2003, when Greenspan was holding down rates too long in order to spur
the economy, that the best outcome or endgame over the course of the full cycle would be stagflation. I still think that is the most likely scenario. The Fed will fight deflation and knows how to do that. They also know what to do when inflation becomes too high. But there is a cost.

It is not a matter of pain or no pain; it is a matter of choosing which pain we will face and for how long, and perhaps in what order. As I wrote a few weeks ago, like teenagers, we as an economic polity have made some very bad choices. We are now in a scenario where there are no good choices, just less-bad ones.

In a normal world, the amount of monetary and fiscal stimulus we are witnessing would
produce inflation in very short order. That is what has the gold bugs of the world excited. It is their moment. They keep repeating that Milton Friedman taught us that inflation was always and everywhere a matter of too much money being printed. The answer to that is that the statement is mostly true, but not always and not everywhere (think Japan). The reality is somewhat more nuanced. Let’s review something I wrote last year about the velocity of money, and this time we are going to go into the concept a little more deeply. This is critical to your understanding of what is facing us.

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Category: Think Tank