Archive - Dec 29, 2010 - Story

• China Cuts Export Quotas for Rare Earths by 35% in First Round of Permits (Bloomberg)
• China Likely to Set Up Rare Earth Trade Body (China Daily)
• Austerity May Not Be Enough to Save the EU's Weakest Links (Independent)
• European Borrowing Costs Eclipse US (FT)
• A Fed-Induced Speculative Blowoff (Hussman)
• To Dow 16,000...Then 6,000? (WSJ)
• As in Sex, WikiLeaks Founder Tests Press Limits (Bloomberg)
• BP Investor Lawsuit to Be Led by New York, Ohio Pension Funds (Bloomberg)
• Dollar Trades Near 6-Week Low on Signs U.S. Recovery Is Uneven (Bloomberg)

The key events out of the US, Europe and Asia, pushing stocks where else but higher.

• Beijing city to raise minimum wage 21%; Second move in 6 months amid inflation concerns.
• Brazil raises duties on China-made baby dolls as Real gains hurt toymakers.
• China cuts rare earths export quota for 2011.
• Chinese CEOs reduces support for a stronger yuan as they criticize U.S. monetary easing
• Euro marks higher after disappointing US economic data, buys at $1.3151.
• Housing Starts seen rising to three-year high with belated US jobs boost.
• Oct. Case-Shiller home price down 0.8%; Non-adjusted house prices down 1.3%.
• Oil trades near 26-month high on Retail sales, supply forecast.
• Taiwan may increase interest rate to damp prices after countering inflows.

The prevalence of crude is undeniable. You might dabble in green-think cultism or you might drive an obnoxious monolith of a Hummer (what I like to call an “overcompensation-mobile”), but neither philosophy of consumption dares to contradict that this world runs on oil. Petroleum is used in the manufacture or shipping of almost every industrial product on the planet, and even many agricultural goods. Therefore, it behooves the public to seriously consider the ramifications of oil price and its underlying effect on the entirety of our economy. Even minor increases holding over an extended period of time cause economic reverberations that can be felt for years afterwards. Financial and social adjustments to commodity inflation can sometimes take decades if the event is historically unprecedented. Petroleum is a foundation ingredient, it is energy itself; the higher its cost, the greater the cost of every other product we use, and the worse off our financial structure is. Period. There is no scenario yet experienced by any nation in which oil inflation actually benefited the masses or the overall economy, even in countries that sell oil! Americans have had a small taste of the tensions involved in an oil crisis, during the 1979-1980 Iranian snafu, and the massive gas spike of 2008, but these events are nothing compared to the steamrolling inflation we are soon to see at the pump in the next couple of years. Let’s examine why…

Following China's Christmas day hike, Roubini Global Economics has put together a brief (and not so brief for clients) summary on the firm's views of what the Chinese post-liquidity stimulus hangover will look like. Here is how Nouriel's firm summarizes its near-term views on China: "Three interest rate increases after the hike on December 25 will leave real deposit rates negative for most of 2011, which will require additional macroprudential measures to prevent a further increase in property prices. A modest slowdown in growth, as we forecast in our recently published 2011 Outlook, is a likely side effect. Some of the interest rate hikes in 2011 probably will be asymmetrical to increase the role of price signals in credit decisions. This will be a gradual process, however, since moving too fast to remove the subsidized net-interest margin of the state-owned banking sector would put it at risk of insolvency." In the meantime, as China does everything to prevent an unpegging of the CNY from the USD which means an increasing tightening across all other verticals (especially with higher rates attracting excess global capital), virtually anything the US does to reliquify stocks will have a diminishing effect on risk asset values, and much more of a price shock on commodity input costs, as the specs move away from China and attack the US, that last bastion of infinite liquidity, full bore. Which is why we believe that WTI of $100+ is just a matter of weeks.

The presented interactive chart from the WSJ tracks the intervention by global central banks in the monetary realm. It should come as no surprise that following the Lehman failure, virtually the entire world went from red (tight liquidity) to green (loose, and ostensibly for most, ZIRP). It is fairly safe to say that when it comes to America, ZIRP will stay forever, as the elimination of a -7% Taylor Rate equivalent offset to rates will annihilate capital markets of all shapes and sizes, which continue to levitate solely on free money promises and micro trading feedback loops. Incidentally, we are willing to immediately cede that there is indeed an economic recovery: all that would take is for Bernanke to stop QE2 immediately, and certify that no incremental forms of quantitative easing will occur. Let's see what happens to stocks, pardon, the economy, and naturally the wealth effect, following such a pronouncement. Another observation on the chart below: note the monetary reaction in the developed-developing world in the last year. This is only driven by the increasing unwillingness of the BRICs and their derivatives to import Bernanke's excess inflation. This is precisely what will be the defining topic of 2011 newsflow (together with Europe's further plunge into insolvency, and as always geopolitical news).