Archive - May 18, 2011

S&P 500, Dow Jones, Nasdaq, Russell 2000, Nymex Crude Oil, Comex Gold, EURUSD, GBPUSD, USDJPY

According to Gallup, attempts to distract the US population with trivial side stories is failing spectacularly, as 74% of survey respondents have responded that the economy is the "most important problem" facing America today, which is the highest percentage in two years, and since the market lows in March 2009. So even as the market has doubled, this appears to have done little for the average American who is now more concerned about the true "economy" than ever since the Great Financial Crash, and not merely the one indicated by the Russell 2000. Chalk one more failure to Ben's attempt at forcing the wealth effect upon the great unwashed.

U.K. unemployment claims rose in April at the fastest pace since January 2010, showing the very fragile nature of the recent tentative economic recovery. Government spending cuts, austerity measures and accelerating inflation are clearly beginning to impact embattled consumers. In the U.S., stagflation is also an increasing, if unacknowledged, threat as the classic symptoms of inflation - slow growth, high unemployment and inflation are present. Weak U.S. factory output and home building data yesterday suggests that the world's largest economy is slowing down again. Official inflation figures in the U.S. remain benign but hedonic adjustments and many adjustments to the methodology of calculating inflation in the last 20 years mean that that the Consumer Price Index is no longer an accurate measure of real inflation in the economy. This macroeconomic risk coupled with continuing geopolitical risk is supportive of gold continuing to receive safe haven demand. The launch of the new Hong Kong Commodity Exchange will result in Asia having an even bigger say in prices of commodities and precious metals. The exchange is backed by China’s biggest bank and a Russian tycoon and will challenge established markets and exchanges in Europe and the U.S.

I am now of the opinion that the US will have to go back to fighting deflation soon and that Q/E (probably in a different form) will be needed. Massive inflationary impacts look to be delayed (for now): Whilst I am happy to accept that Bernanke may have delayed or stopped a deep depression for now and that he has made a lot of Wall St. guys very rich, the whole idea of the Q/E programme was supposed to be, if we are to believe him, to create growth and set the economy back on a sustainable growth path, reduce unemployment and cure the housing problem by getting banks to lend and the consumer spending. Mate, you failed! Unemployment is still at 9% (and a lot more if you look at the real stats), the participation rate is falling and the amount on food stamps is over 4mln! Housing is spiralling lower again as prices continue to fall and banks, whilst having their balance sheets ballooned by free money still sit on hidden toxic waste from the sub-prime issue and refuse to lend at competitive rates.

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Where's the fairness in this one?

Overnight, we received some very interesting news on what Asian hedge funds are up to...