Martin Pring On Why The Libyan No Fly Zone Has To Be Extended To Bernanke's Helicopter

Tyler Durden's picture

Another set of relevant obseravtions into commodities from Martin J Pring of Pring Turner Financial Group, courtesy of Advisor Perspectives.

There has been a lot of talk about the
excessive loose monetary policy coming out of the Federal Reserve.
However, most of the  arguments concerning the implications take the
form of generalizations as opposed to quantifiable relationships. Our
objective here is to show, through the historical relationship between
short-term interest rates and the economy, that the Fed has been overly
generous. Moreover, we will see that the data call for much higher
industrial commodity prices before this cycle runs its course. In
retrospect, they will make today’s elevated levels look benign by

Chart 1 Commodity Prices, Short-term Interest Rates and the Economy

The bottom panel in the first chart shows our Growth Indicator, a
composite economic measure that flags whether short-term interest rates
should be rising or falling. Above zero readings tell us the Growth
Indicator is signaling that strength the economy is consistent with
rising rates. These periods have been flagged with the green highlights
on the actual 3-month commercial paper yield plot in the middle panel.

 The pink shading indicates when the Growth Indicator, our proxy
for demand, is signaling that rates should go up but instead they move
sideways or decline. The reason for that is the injection of excess
liquidity on the supply side by the Fed, which has yet to conclude that
inflation is the problem. In effect the central bank is keeping rates
below their natural level. The result, if you look at the CRB Spot Raw
Materials in the top panel, is an above average rise in commodity
prices. Compare that to the 1958 and 1981 periods when the rising black
commercial paper yield indicates the Fed was ahead of the curve. The
result, a benign commodity rally.

 The yellow shading starts when, after one of these overly
generous Fed periods or pink shaded areas, the rate starts to move
above its 12-month MA, i.e. the red dashed line. Yellow shading
continues until the Growth Indicator moves decisively back below
zero i.e. indicating a weak economy. You can see that during these
yellow periods, when the central bank is playing catch-up, commodities
really start to take off on the upside. There are no exceptions. As we
approach May 2011 rates are still below their MA and the Growth
Indicator is not only in a rising trend, but at a pretty overheated
level. Commodities are rising sharply and we have not even made it to
the yellow zone yet! Notwithstanding intermediate corrections along the
way, these conditions tell us that commodities are ultimately headed
significantly higher.

Chart 2 The Corporate yield Curve, the CRB Spot Raw Industrials and the Growth Indicator

Let’s take that idea a bit further by taking a closer look at the 
relationship between the corporate yield curve (3-month commercial
paper/Moody’s AAA Corporate Bond Yield), commodity prices and our
Growth Indicator. The red arrows flag cyclical peaks in the CRB Spot
Raw Industrials since the mid 1960’s. They all have one thing in
common; they were preceded by some form of tightening by the central
bank as reflected by a rally in the yield curve as it moved towards a
state of inversion.  There are no exceptions to this rule, although
some peaks(1966 and 1984)  were preceded by relatively small yield curve
advances. In both periods though, the cyclical low in rates coincided
with a positive zero crossover by the Growth Indicator, as shown in
Chart 1. This indicated  that the Fed was in gear with economic
conditions. The current cycle has experienced a flat yield curve for an
extended period, not much different from the previous cycle. In
addition the  high and rising reading in the Growth Indicator is
another reason for expecting higher commodity prices in the period

Chart 3 The Oil price versus the CRB Spot Raw Industrials

One of the important questions is, what does all this mean for the
oil price? Chart 3 shows it overlaid with the CRB Spot Raw
Industrials. There are some discrepancies, but in the last 10-years
both series have been very closely correlated. If that relationship
continues then oil too is headed substantially higher.

Unfortunately, there is no known technique for consistently
forecasting the magnitude of a price move. However, when a market has
been in a trading range for a while market technicians use measuring


Chart 4 Crude Oil and Long-term Momentum

In this respect Chart 4 shows the recent trading range for the oil
price. The objective is measured by calculating the depth of the
pattern, in this case the arrow on the left, and projecting this
distance in the direction of the breakout, that’s the arrow on the
right. As you can see, this measuring device calls for a rally to the
$220-5 area. Since prices often move in multiples of the objective, and
the global economy is consistent with significantly higher commodity
prices, that may turn out to be a conservative number. Consequently,
$225 is not a forecast, merely an intelligent possibility based on a
combination of technical objectives and economic momentum.

Some people say that there is no need to raise interest rates
because commodities will soon fall of their own volition. Chart 2 
debunks that idea because there is no instance in 50-years of history
when a commodity peak has not been preceded by a tightening in the yield
curve. Looked at in another way short-term interest rates remain flat
and no dynamic commodity rally has been halted by such a condition.
It’s like saying the fire will burn itself out when someone is still
throwing gasoline on it.

There are two inescapable conclusions from this data. The first is
that interest rates and commodities are headed much higher. The second
is that the Libyan  no fly zone needs to be extended to include Ben
Bernanke’s helicopter.

h/t Adam

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Traianus Augustus's picture

Ben's helicopter needs to be shot down now!!!

disabledvet's picture

maybe "Ben will jump" and "then it will crash" instead?  THESE ROMANS DEMAND A SACRIFICE!  SEND IN THE BELIEVERS!

the mad hatter's picture

Don't worry, the Chinese will take care of that with their Forex Reserve Cannon.

Bernie won't then crash land his Black Hawk in Zimbabwe 

traderjoe's picture

One more analyst who discusses what the Fed should or shouldn't do as if it is a legitimate institution. 

The Fed was created by the money center banks to: (1) lower interest rates (reduces demand for non-bank credit); (2) create inflation (allows banks and governments to skim and steal money from the people); and (3) support fractional reserve lending - whereby banks create money out of thin air and earn interest in the process (infinite gross margins). Sovereign debt is a fraudulent creation of the banks and mega-elites. Sovereign countries can create their own money, without interest or debt - see Lincoln Greenback and Kennedy silver certificate. 


slaughterer's picture

Would give ZH 100oz silver to post an article: "Exactly what the FOMC will decide tomorrow, what questions BB will be asked, how he will answer them, and how the market will react."  Something for the newbies.

SheepDog-One's picture

This is freakin insane, into the gaping maw we go.

tallen's picture

Bring on QE3 already.

disabledvet's picture

Like I said Tyler:  two questions and two questions only.  "What's your view on the dollar" and "are you saying you still have no comment on the Daisy Duke's rumor?"  When he responds "i am not aware of any Daisy Duke rumor" you say "you will soon Mr. Chairman.  You willllllll be."  And you are the best TD and fellow ZH'ers!--"wake up an find that you are the eyes of the world" said Jerry Garcia. 

duncecap rack's picture

Would the signal of rising rates not collapse the carry trade and hence commodties?

bothsidesnow's picture

Depends on how they do it. If they just raise rates commodities will rise given the amount of money in the monetary base and the fact that the monetary base is not contracted at the same time.

I belive Plosser telegraphed the move when he said the Fed balance sheet needs to contract by 50% which would be equivalent to a 2.5% short-term yield.

If the Fed reduces the monetary base through reverse repos interest rates can rise without inflation. 

It's all spelled out very clearly in this article:

Economist are mathemiticians, they use models to determine increases and decreases in the monetary base and it's a a fairly simple equation borrowed from physics - velocity.

The US is at the extreme of the velocity equation there only two choices increased inflation or contraction of the monetary base.

Bernanke also telegraphed a contraction when he said inflation is "transitory" meaning he will not allow it to rise and the Fed will begin to contract the monetary base.

You don't get to be Chairman of the Federal Reserve by being stupid. Remember the Fed's mandate is to maintain price stability and employment through manipulation of the monetary base.






Auricle of Omaha's picture

So the Fed is going to sell off half of it's balance sheet and to do this it will have to raise interest rates otherwise inflation will spiral out of control... Well that should bode well for the economy and the deficit (payments on debt).

If it's that simple, why did we undertake the latest round of QE2 - only $600 billion?

bothsidesnow's picture

Because if you read the article at the link he has stretched it to the maximum with 600 billion. 

He said up to 600 billion with T-Bill rates at 3 bps there is nor more room for increases in the monetary base.

Interest rates in Europe are 1.25% is it the end of the world? No it's not.

There is only one way to go from zero - up. So we have have 6-9% unemployment or whatever the unofficial number is. That my friends is the new normal - welcome to the rest of the world. We don't need as many people in manufacturing because of the increased efficiency due to automation.

Bernanke is not going to pile inflation on top of a poor employment situation it would only make it worse.

He stretched the rubber band and in the case of speculative assets with an emphasis on speculative assets to the max and know the bubble in spec is going to pop.

Can't be that bad IBM is increasing dividend and buying back shares. AAPL may split.



sabra1's picture

c'mon, the bernank hasn't finished trasfering all debt to the public yet! the endgame is to improvish everyone, enslave all!

TruthInSunshine's picture

bothsides - you talked about the significance of velocity in economics, and then you just fell down on the job, with no follow up.

You rightfully raised the velocity issue, because once a trend is firmly established, and it has a fuel supply, it becomes a very slippery slope and is off to the races.

This is why most economists agree that from the time of a rate hike, the effects of monetary tightening aren't felt for at least 6 months out, and much longer in some instances (you can look at the early 80s in the U.S. to see how high Volcker had to go and how long it took to reign in some very nasty inflation during a stagflationary period).

So, Ben is already waaay too late to the party if he had desire to ensure prices didn't get out of control, because he can now only try to reign in what is sure to be a runaway freight train by hiking frequently and aggressively, and such action won't have any impact for quite some time.

Regulatory alteration in commodity markets would actually stand a better chance of taming some of the inflation that Ben has already baked into the cake. I know that we laughed at Obama's fingering off speculators as his go to boogy men for high oil prices, given that there is a hypermanic printer who sits in the Chair Seat at the Fed, but in truth, speculation by actors who have no interest in underlying commodities is a big cause for the run up in the prices of many commodities (even if they're trying to rationally capitalize on The Bernank's follies). It's one thing for Delta Airlines to hedge the price of fuel by buying oil future contracts, but it's somewhat different when 1000x the actors of the Deltas and Federal Express's of the world pile in on the long side, not having any offset interest in rising fuel prices nor never planning on taking physical delivery of the commodity they are bidding up - ever.

tarsubil's picture

What is it with you people and AAPL?

Rikki-Tikki-Tavi's picture

I also found Hussman's article interesting as it suggest there might be a non catastrophic outcome of FED's experiment, albeit an outcome with a low-ish probability. As highlighted in the article the biggest problem is the first rate hike where apparently a 25bps hike require the monetary base to shrink with $600bln in order to avoid inflation (an "average" price which in FED's view likely is very different from commodity prices - so I think their view could be consistent with the typical ZH view that commodities will continue up). I find it very doubtful that it should be possible to place that much paper in a market which will expect further rate hikes, but obvious the transfer might not happen at market prices (according to the article FED has made accounting changes such that the US tax payer will end up covering the difference) and Bill Gross cash position might suggest that a deal has been/will be made?

Auricle of Omaha's picture

The point is, why plan on unwinding the Fed's balance sheet in a few months but in the mean time full speed ahead with QE2?

If eveything is so rosy, why not taper or end QE2 and start raising rates immediately. We don't even have to jump to 1.25% or 2.5%. Let's just give it a go at .25% and see how well it turns out.

And I very much think Ben would pile on inflation as opposed to seeing a massive deflationary depression. He didn't get the name "helicopter ben" for nothing.

By the way, are shares of AAPL just as tasty as iPads?

winks's picture

Conclusion 3: Stocks headed much lower.

SheepDog-One's picture

Just when all the media is crowing about the new highs since 2008 and all, time for double top blowoff?
Well if thats the case, then all the '2 day before it happens we know' crowd is all set up for it.
I'll take PM's down just to see the stock cultists get beat up good.

Wakanda's picture

Why shouldn't Libya be showered with FRN's from Ben's chopper?  They may be next to worthless, but at least you can burn them for fuel or use as toilet paper.  Libyans need to wipe their asses too.

Yossarian's picture

No Fed tightening but ECB is tightening, China has been tightening, Brazil is tightening, etc.  Is it still sufficient to look at markets in a US-centric vacuum?  I guess we are looking at $ priced commodities so such a discrepency between US and ex-US central banks can lead to further $ debasement without commodities neccessarily rising in foreign currency terms. 

Also, in past commodity bull moves was it not more led by real demand as opposed to this bull which is primarily led by cheap-money-financed carry trades?  When commodities are led by consumers spending money on things neccessities because there is a wage price spiral, the lag affect of rising rates on the real economy is far longer than with a carry trade where the trade begins to close almost instantaneously.

bothsidesnow's picture

+1 and pop goes the carry trade bubble. Commodities have been driven to a point where future returns are likely to be zero.

Note to self's picture

Oil $200+ would mean, I think, a gallon of gas exceeding the hourly minimum wage (before taxes!)  I gotta see this!

(Not that I don't think it can happen - just think there will be more oil up/down cycles first.)

lolmao500's picture

Bring QE3... screw deflation.

Atomizer's picture

Does anyone know the story behind Hawaii purchase? If not, study it. Regarding Libya, mega gold to fleece.

The real treasure is all the unpaid Lybia oil receipts that various countries owe. It's a debt collectors paradise. I'll say no more!

They (above the law criminals) continue to cross the line. You're watching their final lap to victory. The spoiler, their engine cuts out before passing the checkered flag.

This isn't a joke! Watch it unfold in real time & Enjoy.

Bartanist's picture

I don't know about the logic. First, it seems to assume that there is some free market action taking place when evidence indicates the opposite.

Also, by selecting data, we can probably find historical trends that exactly refute the historical trends shown.

Third, by choosing how the scale on the axes are display we can make the data look anyway we want... just as the author has done. Is that a log scale? Well not exactly...

How about adjustments for REAL inflation, industrial output which no longer exists in the US and currency translations with industrial commodity producing countries. The US no longer exists in a vacuum and it is foolhardy to pretend it does.

My guess is the author is a paid shill who was hired to find some statistics that coincidentally correspond to a predetermined outcome and make it look plausible to the average idiot ... and that predetermined outcome is $200 oil already decided behind closed doors by TPTB ... no B/S justgification required.

TruthInSunshine's picture

$200 oil puts the global economy into a full blown depression.

You don't need an economic model to figure that one out. Just common sense.

If gasoline is $8 in Europe and $4 in the U.S. now, with oil at 112, you can more than double those prices if oil gets to 200, because of the feedback inflationary inputs that will accelerate the cost of everything from shipping to processing and beyond between here and there.

I will give but one example of surging prices in an area of the economy I know well: Roofing shingles have gone up to $112 to $120 per square (10' by 10' area). These were $70 per square in early 2009. With oil at 200/barrel, they'll be $225 per square, easily. You think new home starts are slow now?

What about asphalt? Good luck on all those shovel ready road projects when they can't even source asphalt because demand has dropped so much that batch mills have closed down left and right.

That's depression territory.

glenlloyd's picture

Exactly what I expected, bought shingles back around $70 per square because I expected this to happen, the initial decline brought about price cutting to move merchandise but once that inventory was cleared the replacement items wouldn't be at the same price level.

Have a friend needing to reroof this year and he's not happy about the prices he's seeing.

TruthInSunshine's picture

Half the lumber yards in my area closed up in the last 24 months, including the largest one, which had about 8 locations in the metro area.

Yep, you are correct. They cleared out a ton of inventory in 09 at low prices, only to not be able to source low priced replacement product, even though demand was anemic.

Now, Georgia Pacific and Weyerhaeuser have closed about 7 plants in the U.S. and Canada that produce OSB (oriented strand board), and Masco announced today that they are QUITTING the production of cabinets (they are the largest producer, making KraftMaid, Masco Retail Cabinet Group, Merillat, Quality Cabinets, The Moores Group and Tvilum).

This is what The Bernank has sown: Total distortion of the price/demand/supply curve.