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One Minute Macro Update

Tyler Durden's picture





 

US:  Markets mostly positive again this AM following yesterday’s bullish performance.  Economic data were supportive of expansion yesterday, though we note that the trend belief seems to be a strong December and a weaker January.  Today’s ISM numbers will reinforce or negate that belief.  Geopolitical risk has overtaken the Euro periphery story as the belief that the EFSF will be expanded has bolstered the Euro versus the USD – not good for global inflation worries.  We believe it is important for investors to remember that USD is not the world’s reserve currency because of the power of the dollar or strength of the US economy. It is the world’s reserve currency because most every commodity in the world is priced in dollars.

Europe:  The periphery continues to trade tighter as S&P affirms Spain at AA, Neg Outlook.  EU summit on Friday is expected to feature discussion around the German proposal for a “Pact of Competitiveness” further bolstering the belief that fiscal unity is on the right track.  We remain unconvinced and believe spreads have tightened too far.  S&P stating that the UK will face an upturn in home repos should the economy slow in the medium term.  The agency notes that 20% of problem mortgage cases are severe in nature.  Eurozone PMI Mfg 57.3 v 56.9E as inflationary pressures continue globally.  Factory Input Price Index 79.2 v 74.1 prior, marking the highest reading since the survey began.  Employment data out of the EC and Germany remain positive.

Asia:  RBA left rates unchanged.  China Jan PMI Mfg. 52.9 v 53.5E, the second consecutive decline.  This contrasts with other data and suggests a murky outlook for region.  PBOC may not adopt the previously reported RRRs that differ between banks as liquidity remains tight.

From Brian Yelvington of Knight Capital

 


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Tue, 02/01/2011 - 09:09 | Link to Comment Oh regional Indian
Oh regional Indian's picture

The juxtaposition of this story's bullish opening note with the million man march in egypt above is too damn ironic.

Everything good. Middle East in turmoil, they control the Oil.

Turm-OIL!!!

ORI

http://aadivaahan.wordpress.com/2011/01/31/then-again-people-choose-yoga-over-gurdjieff/

Tue, 02/01/2011 - 09:38 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture

 

Geopolitical risk has overtaken the Euro periphery story as the belief that the EFSF will be expanded has bolstered the Euro versus the USD – not good for global inflation worries.  We believe it is important for investors to remember that USD is not the world’s reserve currency because of the power of the dollar or strength of the US economy. It is the world’s reserve currency because most every commodity in the world is priced in dollars.

This is such a stupid fallacy, repeated in ZH reporting again and again: why would the strength of the dollar matter to global inflation??

It matters to US inflation, but to global inflation - not so much. [*]

Trivia question: you are India and you buy sugar from Brazil. Will a 1% drop in the dollar index make your purchase of sugar more expensive or less expensive?

Answer: neither - all other things being equal the DXY has no impact on the price of brazilian sugar for India. The numeric price of sugar, measured and traded in USD will of course increase by 1% - but the Rupees India pays for the sugar depends on the Rupee/Real FX rate and on the Sugar/DXY global sugar price, not on the dollar's strength! [**]

That is because the dollar is only an intermediary currency. When India buys from Brasil it first buys dollars for Rupees, then buys the sugar for those dollars and Brazil gets those dollars and those dollars are then exchanged to Real. So the sugar purchase was a Rupee -> Dollar followed by a Dollar -> Real transaction - i.e. a synthetic Rupee -> Real transaction.

Only if the Rupee weakens against the Real, or when sugar gets more expensive than the DXY weakens does India feel inflation in sugar prices. When does that happen? If India's economy weakens, or if there's some sugar production trouble in Brazil (poor harvest due to bad weather for example) - or if someone is physically hoarding large amounts of sugar. I.e. regular supply & demand forces. Not 'dollar inflation' ...

Are there no editors at ZH, are all inflation fallacies just reprinted without any critical thinking applied?

[*] Of course the US is consumer and producer of commodities as well - and so its domestic inflation impacts the global balance of demand & supply indirectly. But the US is only a small piece of global demand as far as most commodities go.

[**] the (very small) FX transaction cost depends on the dollar's exchange rate - but this is a 0.01% range cost or lower.

 

Tue, 02/01/2011 - 09:38 | Link to Comment EscapeKey
EscapeKey's picture

You assume the Dollars are sold back in return for Real, but that's not always the case. In the case of Saudi Arabia - or China for that matter - the Dollars are often plowed back into American investments, be they equity or bonds.

Tue, 02/01/2011 - 09:49 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture

 

If you look at the trade and capital flows of Brazil you will see that the Real is over-bought. That is not something that happens if all the dollars stay abroad ...

So I'd say that a fair amount of the proceeds go back home to Brazil, to pay workers and other costs, to pay out owners and to speculate in the local economy. Some of it might be speculated with abroad - but those are independent secondary, tertiary level decisions from the original sugar transaction - weakening any inflationary link and effect.

But most importantly, it does not even matter much: such speculative FX transactions also do not directly impact the price an Indian food company pays for sugar - which is what determines 'sugar inflation' for India ...

 

Tue, 02/01/2011 - 09:54 | Link to Comment EscapeKey
EscapeKey's picture

You used Brazil specifically as an example, I did not.

But in the event Brazil (or any other nation) does not sell the US Dollars for her own currency, the transaction which would have been a net gain for the local currency (as it's being bought), and a loss for the US Dollar (as it's being sold), does not take place, and hence the local currency is effectively devalued relative to the Dollar.

/Just realized someone junked you, wasn't me. I don't understand why you can't have a discussion without people junking these days... ah well.

Tue, 02/01/2011 - 10:02 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture

 

How does this impact inflation in India, the country which buys the commodity, and which is exposed to any 'global inflation'?

But yes, countries producing massive amounts of commodities are facing various FX effects, if they decide to keep the proceeds in dollars ... or if they did a direct transaction and decide to keep the Rupees and invest in an Indian company using the proceeds ... or if they are keeping it in Euros.

The dollar's strength or weakness has no direct effect on the commodity transaction or on the purchasing country's price level (inflation).

So I maintain my position, that the simplistic "the dollar got 1% weaker, Bernanke is exporting 1% global inflation again, because commodities are priced in USD!" ZH stance is simply false, both on a statistical and on a causal level. Do you agree with that?

 

Tue, 02/01/2011 - 10:07 | Link to Comment EscapeKey
EscapeKey's picture

Where does the original article differentiate between producer and consumer? It simply states the US Dollar is the reserve currency. And as the US is a large scale importer, this automatically makes the remaining world a net exporter (or producer) to the US, and hence the argument I made stands.

Tue, 02/01/2011 - 11:32 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture

Not really. But instead of arguing about the mechanism, lets look at the hard data instead - lets see whether we can agree on that as a first step :-)

Lets look at sugar trade as an example - one of the commonly cited source of food price increases.

Here's the raw data, a table of global sugar consumption, import/export:

http://www.spectrumcommodities.com/education/commodity/statistics/sugart...

India and the EU alone consmes 5 times more sugar than the US.

While the US is a major consumer, it's only a small (<10%) part of global supply and demand.

So any demand based inflation in the US gets exported to the global market only with a 0.1 multiplier, worst case. So 10% of inflation in the US would show up as 1% inflation globally (this is simplified, estimated, etc.).

And the multiplier in fact can easily get negative: in the US we were seeing a reduction in  demand due to the recession - most increases in demand for sugar come from India ...

You will see a similar story with most other commodities as well: supply and demand forces control, and the current value of the dollar index is mostly an invariant. As far as the US as a consumer is involved it reduces global demand (i.e. disinflates!), it does not inflate - because it's in a recession.

Furthermore, look at the last 20 years of history of the dollar index:

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=lin...

How value did the dollar lose in value since QE? About 5%. Any theory that this is behind recent food price increases (which are +30% or more) would have to explain why the 30% weakening of the dollar during Bush presidency did not result in +180% food price inflation.

Do you dispute this data, or do you disagree with my interpretation of it?

 

Tue, 02/01/2011 - 11:43 | Link to Comment EscapeKey
EscapeKey's picture

I'm not sure there's a point to this conversation. You made an original sweeping statement, and have now changed it into becoming one under a specific set of conditions, which you choose.

I disagreed with your initial statement, and stated my reasons why. I can't be bothered getting into your custom scenario, which will no doubt because increasingly specialized until you can "claim victory".

Tue, 02/01/2011 - 12:31 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture

 

You made an original sweeping statement, and have now changed it into becoming one under a specific set of conditions, which you choose.

I have not changed my statement at all. Here is my original 'sweeping' statement, verbatim:

why would the strength of the dollar matter to global inflation

and that statement did not change at all. Look at this graph of the strength of the dollar:

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=lin...

That data strongly supports my claim. Did you really see global food prices increase drastically during the Bush presidency when the dollar weakened by 30%, compared to the current cycle of (much smaller) dollar weakening? The USD was a global reserve currency and a global commodity unit of accounting in that time as well so your arguments would apply just as much.

Furthermore, during the discussion I did not narrow my argument at all - I simply countered assertions made by you, such as this statement:

And as the US is a large scale importer, this automatically makes the remaining world a net exporter (or producer) to the US, and hence the argument I made stands.

And I have shown it via data that contrary to your statement, compared to the size of global trade, the US is a small part of the picture only. I.e. I have shown that your statement is largely wrong.

 

Tue, 02/01/2011 - 09:09 | Link to Comment topcallingtroll
topcallingtroll's picture

ISM blowout today?

Tue, 02/01/2011 - 09:14 | Link to Comment EscapeKey
EscapeKey's picture

Just in case there are some Keynesian macroidiots still insisting inflation "doesn't exist", and that we live in a "deflationary environment", UK input prices hit an all time high, and output prices rose as well.

http://www.guardian.co.uk/business/2011/feb/01/maufacturing-surges-to-re...

Input prices surged to the highest level in the index's history, while output prices also grew as manufacturers passed on recent large increases in commodity costs.

Tue, 02/01/2011 - 09:17 | Link to Comment Bearster
Bearster's picture

I can't speak for the keynesians, but this Austrian thinks we are in deflation because inflation is not "rising prices" but expanding credit.  Public credit has been forced to expand, but private credit is a whole 'nother story.

Question, Tyler.  You don't think the USD is the world's reserve currency for any of these reasons:

1) far more than any other currency, it is held by every central bank

2) there are far more dollars out there in use than any other currency

3) perhaps most importantly, more debt worldwide is denominated in dollars

?

Tue, 02/01/2011 - 09:26 | Link to Comment blindfaith
blindfaith's picture

suggestion...turn off the tv and go shopping.  Of course that won't do any good if you don't have a price list vs size/content list to compare it to.  Getting more computer power for the same price as two years ago is NOT deflation, house prices dropping because there is no demand is NOT deflation,  seeing a dollar get less and less is NOT deflation.

How on earth can anyone think we are in a deflation period...you might get paid to say it, but your can't believe it.

Tue, 02/01/2011 - 09:30 | Link to Comment EscapeKey
EscapeKey's picture

M2 has been expanding for quite some time, and the SGS-M3 is about to cross to positive territory.

Of course, what the most accurate money supply is, is a discussion in itself. Rothbard has a chapter on this in "The Mystery of Banking".

Tue, 02/01/2011 - 10:02 | Link to Comment taraxias
taraxias's picture

The answer to your questions 1), 2) and 3) is YES......because most all commodities are priced in USDs. 

You have cause and affect backwards.

And one more thing, in a fiat monetary system DEFLATION is a myth.

Tue, 02/01/2011 - 10:34 | Link to Comment IBelieveInMagic
IBelieveInMagic's picture

Yes, USD is reserve currency because commodities are denominated and traded in dollars -- ideally an international currency (and not a national currency playing the role of international currency) would be the fairest trading arrangement but the current arrangement is to our advantage and that is why the financial industry is bent upon defending this privilege even at the expense of sacrificing the well being of workers in many other industries (the cost of providing ongoing welfare payments is apparently well worth retaining this privilege)...

I believe the US will be ready to forgo the reserve currency status when commodity rich countries run low on exportable commodities... until then outsourcing will be tolerated.

Tue, 02/01/2011 - 09:15 | Link to Comment papaswamp
papaswamp's picture

Maybe Cheeky knows the answer to this or some other far smarter than I persona....what the heck happened to the HARPEX? It stopped in December and Harper Petersen hasn't released a report since then. Did they go under? Used to be a great little index for shipping volume...now silence.

http://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=6&...

Tue, 02/01/2011 - 09:18 | Link to Comment blindfaith
blindfaith's picture

some groups somewhere want a war.  Is not that plainly obvious and has been for sometime?

Tue, 02/01/2011 - 09:25 | Link to Comment FunkyMonkeyBoy
FunkyMonkeyBoy's picture

Someone needs to put a trampoline under that Baltic Dry Index and quick!

Come on Bernanke, get control, spin those plates my son.

Tue, 02/01/2011 - 09:26 | Link to Comment Tense INDIAN
Tense INDIAN's picture

i love this fall in the Baltic dry index.....tomorrow we will be welcoming 3 digit Baltic Dry numbers

Tue, 02/01/2011 - 10:00 | Link to Comment jus_lite_reading
jus_lite_reading's picture

That's another GREEN SHOOT and a signal the "recession ended in June 2009."

After all, if the recession really ended in 2009, why the hell did we need QEI, lite and 2 and discussing whethere or not we still are in a recession. It should be obvious.

 

Tue, 02/01/2011 - 09:31 | Link to Comment topcallingtroll
topcallingtroll's picture

2nd biggest outflow in gld etf ever recorded in january.

Tue, 02/01/2011 - 09:37 | Link to Comment sudzee
sudzee's picture

With hell breaking out all over the world the only bright spot I see is the massive buildup of PM shorts. Get ready for the ride of a lifetime if you are physical and the nightmare if your are in paper. I'm buying more shiny trinkets today.

Tue, 02/01/2011 - 09:49 | Link to Comment satansanus
satansanus's picture

selling tbt

Tue, 02/01/2011 - 10:27 | Link to Comment MiningJunkie
MiningJunkie's picture

Never heed the economic headlines - watch the policy behind the headlines. If you want a market crash, pray for more GOOD NEWS. GOOD NEWS = POLICY SHIFT. Egyptian food riots portend POLICY SHIFT.

POLICY SHIFT = Exit printing presses = market crash = lower food prices.

Appease the masses and screw the bankers = regimes stay in place.

Look at the LME inventories for copper - http://www.kitcometals.com/charts/copper_historical.html

Sell 'em...

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