Archive - Apr 2011 - Story

Unprecedented strength in corn continues, with futures rising by 4.5% on Thursday, following strong demand for corn to make food and fuel. That demand has whittled down the corn supply, which was already at its lowest level in 15 years in the United States, the world's top exporter of the grain. Per Reuters: " Demand has been strong from the livestock and ethanol sectors, and from importing nations, including China which is believed to have purchased 1.25 million tonnes last week. This week's rally, triggered by the U.S. Agriculture Department's lower-than-anticipated quarterly U.S. corn stocks estimate on Thursday, rekindled worries about food price inflation. The near-term supply concerns have largely overshadowed USDA's forecast that U.S. farmers will plant the second-largest corn acreage since 1944." Yet whether due to fundamental reasons or pure momentum, Goldman has just added more fuel to the fire by raising its corn price forecast, after having lowered it a whopping 10 days ago, from $6.00/bu and $5.80/bu to $7.80/bu and $7.00/bu, for 6 and 12 months respectively. Of course, all those who followed Goldman's recent downgrade made some very inverse profits. So it may well be time to trade against the squid yet again.

The BBC has released a dramatic recollection of events at ground zero when the Japanese earthquake and tsunami hit on March 11. The source is an unnamed maintenance worker who witnessed and experienced events in real time. Below is his story.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 01/04/11

We can only assume this is some evil April Fool's joke: in a speech, titled appropriately: "Central Bank Independence and Sovereign Default" given at Wharton, Minneapolis Fed's Kocherlakota who now it can be put to rest was well aware of what today's NFP number will be, says the following: " I’ve argued that even if the fiscal authority borrows
exclusively in its country’s own currency, the central bank can have a
large amount of control over the price level. But the central bank can
only achieve that control if it is willing to commit to letting the
fiscal authority default. Such a commitment may expose the country to
risks of short-term and medium-term output losses. How this trade-off
should best be resolved awaits future research. But I suspect that it
may be optimal for central banks to guarantee fiscal authority debts in
some situations." In other words, if this is really a prevailing mode of thought within the Fed, very soon we may witness the first ever Leveraged Buyout by a central bank of a sovereign, leading to advent of the concept known as the Full Faith and Credit Of The Chairsatan. It will also certainly cement the perception of the Fed as an "independent" organization. And one wonders why gold is well on its way to recouping today's losses.

The energy complex is certainly enjoying discounting the end of quantitative easing, and is doing so in style: Brent briefly touched a multi year high of $119.44, as it prepares to play chicken with the OPEC threat of pumping more oil once it passes the psychological barrier. And crude, despite the well-known and much discussed issues at Cushing, almost passes $108. No matter what anyone says, this is extremely bullish for the economy and (inverse) wealth creation. At this point we are clearly back to 2008 trendlines to see whether oil can keep up with stock, which are back on their trendline to hit Birinyi's target of 2,700 or something within a year. And $300 oil is very bullish too, especially with the nuclear energy business now, well, out of business. At if all else fails it's ok: the Great Chairsatan can just print some more oil.

Yesterday when we speculated that Kocherlakota may have been leaked the NFP number based on his hawkish tone, we presented an attempt at refutation by Morgan Stanley's David Greenlaw who claimed the following: "I've heard some stories that Kocherlakota has seen tomorrow's employment report and that explains his hawkishness comments.  However, there is no way this is true.  Only the Fed Chairman gets the report ahead of time (late in afternoon on the day prior to release) and he doesn't even share it with the other governors -- never mind the regional bank Presidents." Let's do a little math exercise. Today at 8:30 am the BLS came out with a step change in the unemployment rate which dropped from 8.9% to 8.8%. So far so good. Then at 10:00 am Dudley released his speech from embargo with the following disclosure: "unemployment rate has fallen sharply over the past four months, dropping to 8.8 percent from 9.8 percent in November." Obviously Dudley was aware of the NFP number at the time of writing the speech. So our question is: did Dudley write the speech in the 1:30 hours between the NFP release (presumably while in Puerto Rico)? Or did he simply leave the unemployment data blank until the last moment and just filled it in after the official number was released? Since an embargoed version of the speech was likely released to various news outlets in advance, that cuts the time he had to pencil in the correction. Or, of course, if the embargoed version went out before 8:30 am that confirms that Dudley was well aware of the NFP number ahead of time, and roundly refutes the "fact" that only Bernanke sees the jobs number before its public release. Which then brings the question: who else sees the NFP number in addition to Bernanke? And just how profitable is the industry of distributing forward looking economic data at time of embargo distribution, especially when it pertains to something as critical as the NFP number.

General Motors Co. is offering buyers interest-free financing on some 2011 models after the company increased discounts and incentives to lead all major automakers’ U.S. sales gains last month." As of yesterday desperate car buyers who can't rub two dimes together, can drive to the local unemployment office in the luxury of their brand new Chevy Imapala, or alternatively pick a just as worthless Chevy Malibu, HHR WAgon, Traverse SUV, as well as a Silverado, Colorado and Avalanche pickups, which are now offered at either 72 or 60 months of interest-free loans. "The 60-month deal also applies to the Buick Enclave and GMC Acadia SUVs and Sierra pickups." That pretty much covers the entire line up. And that's not all: "GM raised discounts 12 percent from a year earlier to an estimated $3,732 per vehicle last month, the most among major automakers and 45 percent more than the average, according to researcher Autodata Corp."

With all the rhetoric about the "self sustaining" recovery, some may forget that back in early 2010 we went through exactly the same song and dance. As we pointed out recently, comparing speeches by James Bullard showed absolutely no difference from the end of March 2011 and 2010. And keep in mind that in early 2010 we had precisely the same "jump" in economic data as we are supposedly experiencing now. Well, we all know what happened in 2010. But to confirm just how short institutional and investor memories are we present the Fed Funds futures for December 2010 (Z0) and December 2011 (Z1) as of today and as of a year ago. Basically, investors were pricing in a nearly 50% higher Fed Funds rate back in 2010: according to the FFZ0 the expected Fed Funds rate a year ago looking out to December 2010 was about 60 bps (and the December 2011 expectation was at about 2%). Compare that to the expectation of roughly 40 bps in the FF rate for December 2011 as of now. So basically when the market expected a much stronger response by the Fed a year ago, what we got instead was... QE2 5 short months later. So is it fair to say that despite all the Fed jawboning back then, absolutely the opposite happened. But that's ok - this time is really different. Dudley promises...

The phrase “Black Swan” is really making the rounds these last few months. Uttering the term a year ago would have earned you a collection of confused looks and a general attitude of disinterest. Now, people behave as if they had learned about economic shockwave events and the global domino effect when they were in kindergarten. The problem is that when this kind of terminology hits the mainstream, in most cases it comes prepackaged with dumbed down and diluted definitions which promote an inadequate, cartoonish understanding of the circumstances. To be sure, most Americans are well aware that the world’s political and economic foundations are about as stable as fresh pudding under a heat lamp. The problem is that they are now being conditioned by the mainstream media to view the idea of collapse as “cinematic”; a kind of live action fantasy in which we all get to play the part of the audience, watching safely from the dark in our cushy theater seats with a bag of overpriced popcorn, Dolby surround sound, and a hot date to keep us company during the boring parts. Three years ago, even mentioning the idea of a breakdown in society or a financial catastrophe beyond a minor recession earned you the label of “doom monger”; a rather inept and naïve attempt on the part of the MSM to silence any economic analysis that stepped outside the establishment Keynesian framework. Today, I turn around to look at a magazine stand at the airport and right in front of me is Newsweek openly declaring “Apocalypse Now”!

Punchline from Dudley's Puerto Rick speech just hitting the wires: "We must not be overly optimistic about the growth outlook. The coast is not completely clear—the healing process in the aftermath of the crisis takes time and there are still several areas of vulnerability and weakness. In particular, housing activity remains unusually weak and home prices have begun to soften again in many parts of the country. State and local government finances remain under stress, and this is likely to lead to further spending cuts, tax increases, or job losses in this sector that will offset at least a part of the federal fiscal stimulus. To sum up, economic conditions have improved in the past year. Yet, the recovery is still tenuous. And, we are still far from the mark with regard to the Fed's dual mandate. In particular, the unemployment rate is much too high." Word count of iPad: zero.

As usual the story remains the Prices Paid index, which increased again from 82.0 previously to 85, surging above expectations of 82.9. New Orders declined to 63.3 from Prev. 64.4, Employment rose again to 63.0 vs. 55.6 prior.Elsewhere, Construction Spending plunged to -1.4% on expectations of -0.2%, but it's an "improvement": last month's print of -0.7% was revised to -1.8%.

And some more bullish news for inverse consumption from JPM's Lawrence Engles Daily Note On Oil: 'As long as key economies remain on track, and given the tensions still manifest on the supply side, we remain positive on near-term price outlook and expect 2Q2011 Brent crude to average $118/bbl, prices possibly spiking towards $130/bbl, if OPEC fails act in time and raise production." Basically we are no recreating the "goldilocks" economy from late 2007/early 2008 when everyone thought crude at $150 was sustainable. And back then there wasn't quite as much "speculative actions driven by too much liquidity" as noted earlier by Charles Plosser.

Looking at today's NFP report which beat consensus by 26K jobs, it is easy to lose perspective of the big picture. Whch is as follows: in order to regain the millions of jobs lost since the start of the Depression in December 2007, and return to the same unemployment rate when factoring in the natural growth rate of the labor force of 90,000 per month (not our estimate: CBO's), the economy will need to create 245,500 jobs each and every month by the end of Obama's tentative second term in November 2016.

Goldman's Take: "Overall a healthy payroll report, but not a very large surprise relative to consensus expectations. In our view, the latest job readings will not have an immediate affect on the monetary policy outlook."

March update: civilian noninstitutional population: 239.0 million; Civillian labor force: 153,406, Employed 139,864, Unemployet 13,542. Americans not in Labor Force: 85,594. Which means that the Labor Force Participation rate continues to be at a 25 year low of 64.2%. And Birth Death adds another 117,000.