Commodity Futures Trading Commission

A surging yen currency is certainly the worst news for Japan's export-dependent economy. This dire predicament is enough to get the central banks of the G7 to step in and initiate a coordinated yen intervention not seen for over a decade.

The real price of crude oil really topped out at $120/barrel last week. Anyone in the oil industry will tell you that, considering only the true supply and demand for oil, the price should be about $70/barrel. All of the $23, or 27% increase in the price of oil in the last four weeks has been about fear. We are going to see $90/barrel before we see $150. Saudi Arabia is not Tunisia, Algeria, Egypt, or Libya. The Saudi’s had a lot more money to spread around to keep everyone loyal. This is why Al Qaida has made absolutely no inroads there for the past 10 years.

About a year ago, when Zero Hedge was nothing but a monocultured, bearish, conspiracy theory-based blog, we wrote a post titled: "Is The Swiss National Bank Using UBS To Launder Its Euro Purchases?" The reason for this allegation stemmed from some dramatic observations in the reporting of LIBOR to the BBA by member banks. To wit: "The Libor reporting dispersion among BBA member banks has actually
tightened marginally from last week, with one notable outlier: UBS. Of
the 15 banks that report both USD and EUR-based LIBOR, all disclose a
higher offer rate for EUR Libor except for UBS! The Swiss bank is a
blatant outlier, in that its disclosed EUR Libor rate of 0.4850% is in
fact 10% lower than its USD Libor." Out explanation for this anomaly was that the Swiss Bank, most likely in concert with the ECB, were manipulating intercurrency unsecured funding reporting in order to mitigate FX mismatch: "SNB buys EUR in the open market (causing massive destruction in the EURCHF and GBPCHF pairs), then the excess euro holdings are funneled back into the market via a much cheaper EUR lending rate in the 3M funding market (LIBOR) compared to all other banks: the UBS 3M EUR Libor rate is a whopping 30% below the average EUR Libor rate of 0.6344%, nearly double the spread from average of the next lowest EUR Libor offer, that of RBS at 0.56%." Once again our monocultured perspective appears to have served us well - per Dealbook "UBS said Tuesday that United States and Japanese regulators were investigating whether the Swiss bank tried to manipulate a key benchmark used to set interest rates around the world." We can't wait to see what the Mainstream Media does with this one, as usual with its roughly one year delay.

"It does not get any clearer which way Wall Street is trying to take oil," says Stephen Schork. The Schork Report notes that speculators now own nearly six times as many barrels of oil... as can be stored at the WTI trading hub in Cushing, Okla.

After Nomura released a report two weeks back predicting oil could rise to $220 if the MENA situation escalates, this morning SocGen's Michael Wittner has released his own scenario analysis on the possible outcomes of the 2011 revolutions. His three cases see oil within the following escalating thresholds: $110-$125; $125-$150; and $150-$200. We are fairly confident that the worst case, which as expected involves all sorts of bad things happening in Saudi Arabia, is missing an extra zero somewhere. Some key observations from the report (attached below): "The forward curve for Brent, the better indicator of global oil market fundamentals, is currently in backwardation (nearby premium, forward discount) for the next 5 years, reflecting concerns over growing physical tightness in the crude markets. The oil markets are pricing in an extended Libyan shutdown of crude exports (see below). Even on the WTI forward curve, where prices are still under pressure from local mid-continent US market conditions, the contango has eased and now only extends through 2011; from 2012 through 2015, WTI is also in backwardation. As the Libyan crisis has escalated, the latest US CFTC data show that non-commercial net length for NYMEX WTI futures has reached an all time high. This is a key indicator that a new wave of investor flows is now moving strongly into WTI and the oil complex in general. With the widespread unrest in the Middle East and North Africa (MENA) region expected to continue, and the oil markets worried about further supply disruptions, the attractiveness of commodities and oil to investors has been underscored. With oil prices driving heightened concerns over inflation, oil itself is seen as a good hedge against inflation." In summary, SocGen sees about $15/bbl risk premium built into current prices, which could jump to as much as $110.

The lack of animal spirits in the gold and silver bullion markets is also seen in the decline of the gold ETF holdings (see chart above) and the Commitment of Traders open interest (see below). Neither show any signs of speculative fever whatsoever. This would suggest that the recent record prices are due to short covering on the COMEX (possibly by Wall Street banks with concentrated short positions as alleged by the Gold Anti-Trust Action Committee or GATA and being investigated by the CFTC) and buying of bullion in the Middle East and Asia, particularly in China. While all the focus is on the geopolitical risk in the Mediterranean, the not insignificant risks posed by the European sovereign crisis, the possibility of a US municipal and sovereign debt crisis and continuing currency debasement internationally are the prime drivers of gold today. Quantitative easing, debt monetisation and competitive currency devaluations have not gone away and are leading to deepening inflation which will likely result in much higher prices in 2011 and 2012.

When two months ago, in the first week of January, we observed that the U.N. Food and Agriculture Organisation's Food Price Index had hit a record we said: "The last time food prices hit ridiculous levels, the immediate outcome
was global food riots in places such as Haiti and Bangladesh. Which is
why distributors of riot equipment in the world's poorest countries may
be in for a bumper crop as the Food and Agriculture Organization has
just announced that world food prices have just surpassed the previous
record last seen in 2007-2008." Little did we know just how prophetic this statement would turn out to be. Well, the FAO has just released its latest food price update and as expected, it is a new all time high. The U.N. Food and Agriculture Organisation's Food Price Index hit its second straight record last month, further passing peaks seen in 2008 when prices sparked riots in several countries, driven by rising grain costs and tighter supply." And with oil now joining food, which means that the inflationary vicious spiral is now on, it is only a matter of time before ever more hungry countries join the wave of revolutions, now that Tunisia and Egypt have shown it can be done. On the other hand, our expectation is that the IMF will promptly seek to put out any fires before they become infernos, with the US taxpayer reeling from the double whammy of Bernanke's inflationary policy consequences: once at home, and once by subsidizing foreigners.

Even Bernie Madoff agrees ...

The paper-driven sell off in the gold market seen in January has been trumped by continuing robust physical demand in January and February. This has resulted in gold rising nearly 6% in February and silver’s strong industrial and investment demand leading to a 19% rise to new nominal 30-year highs. Political, and more importantly socioeconomic, revolutions in the Middle East and North Africa are leading to a degree of geopolitical instability and risk not seen in many years. This is leading to concerns about oil supplies from the region and hence the 14% jump in US crude oil just last week and deepening inflation concerns. With all eyes on the Middle East and North Africa, there has been less focus on the continuing European sovereign debt crisis. However, the crisis continues and recent days and weeks have seen government bonds in Greece and Ireland again come under pressure. The majority of Irish people are seeking that the massive debts of the Irish and European banking systems, incurred against them, be restructured or defaulted. Therefore, the new government will be under pressure to negotiate a fairer, more equitable settlement with the European Commission and the ECB with possible ramifications for the many European banks who lent irresponsibly to Irish banks...Mooted proposals by the Vietnamese Central Bank to ban “gold bullion trading” (see news below) are somewhat bizarre. If true this would be a very important development as the Vietnamese are some of the largest buyers of gold bullion in the world.

How does D.C. address the infinitesimally small nano-level of change included in FinReg? Defund it, of course ...

On several occasions over the past couple of years, thousands of you have taken the time to write to The Commodity Futures Trading Commission (CFTC) concerning the issue of position limits in COMEX silver. Now the CFTC has solicited your opinion again for what will be the last time. The current open comment period, through March 28, is the culmination of all the public hearings and commentary over the past two years. Your comments on silver position limits make a difference. Private legal counsel and even sources within the Commission have assured me that there can be serious consequences for the CFTC should they ignore the will of the public, when that public opinion is reasonable.

While over the past week we finally got confirmation that while the Swiss franc reserved its place at the top of the foreign exchange pantheon as the last flight to safety currency (with dollar concerns expressing themselves in the form of accelerating DXY selloffs predicated by fears of QE3 should oil continue rising higher or the world economy deteriorating), the one surprising discovery has been the stunning resilience of the Euro in light of relentless bad news. We have already noted our concern that March is rapidly coming, and brings with it a vicious calendar of European political upheaval and debt maturities, which should only be ignored at the peril of other people's money. Confirming our Euro-skepticism is Citi's Steven Englander who has released an extended note earlier titled "EURUSD - why so strong" which seeks to explain why the EURUSD is not trading a few hundred pips lower. Englander's conclusion: "we still find it hard to sweep away sovereign issues, especially if private sector positions continue to creep up. Under a benign global outcome, we continue to see better currencies to buy than the EUR, and under a not-so-benign outcome, we expect that the run-up in risk aversion will be a significant EUR negative. At these prices we are not buyers." Yet someone is...

• Irish Voters Set to Take Revenge on Ruling Party (FT, Bloomberg)
• Saudi youth call for protest in solidarity with Libyan uprising (Monsters and Critics)
• Wisconsin Assembly approves plan to curb unions (Reuters)
• Special report on Glencore: The biggest company you never heard of (Reuters)... actually that would be the DTCC
• US Warns Extreme Food Prices Will Stay (FT)
• Gotta love Bloomberg headlines: Fannie Mae, Freddie Mac Seek $3.1 Billion Amid Improved Earnings (Bloomberg)
• More completely expected criminal fraud out of Citigroup: What Vikram Pandit Knew, and When He Knew It (Bloomberg)
• CFTC, SEC halt criminal investigations, blame lack of money (WSJ)
• Sentance Says BOE Must Tighten Now to Prevent Tough Moves Later (Bloomberg)
• House Republicans Move to End U.S. Foreclosure Aid Criticized as Harmful (Bloomberg)

When we reported on last week's net spec contract position per the CFTC, we noted that speculators are expecting a roughly 50% hike in the price of rice based on comparable historical patterns. Updating for this week's data confirms that the upside price bets, which increased from 6,652 to 7,114 have just surged above the previous top hit in late 2009, of 6,773. Yet they are still just shy of the all time highs from February 2008 when they stood at 7,883. As the spec activity in rice predates major price moves rather efficiently, the continued bets on a price surge mean something is bound to snap. And with rice prices continuing to be rather sticky, considering the move in all other grains, we may be in for a very major break out in the coming week. Or not: as we have now learned the hard way, the banking cartel has way to keep commodity prices low, until explosive break outs confirm that one can only manipulate a price down for so long. With recent disclosures by Wikileaks that China had been imposing pressure on the Treasury and the US banking system to get what it wants, is it too surprising to assume that just as JPM has long been manipulating the price of silver, so Chinese interests in the US (remember - quid pro quo in a M.A.D. world) have been instructed to keep the price of Rough Rice as low for as long as possible.

The report is out. Click here to read the 14 page report. The Joint CFTC/SEC committee makes 14 recommendations which they intend to focus on to ensure the integrity of our connected market place. We would like to highlight the 3 recommendations that we think are “news” today, and that we have particularly expressed concern about over recent years: Recommendations 10, 11, and 12, which deal with order cancellation fees, internalization, and trade-at rules. Missing in the report, however, is any discussion of proprietary exchange data feeds, the proliferation of exchanges, or minimum order life. Also, this report is a stark contrast to the September 30th report, which focused more extensively on an algorithm trading eMini futures from a large money manager. The HFT community, at that time, focused on that aspect of the report extensively. This report is an improvement, as it does begin to examine structural inefficiencies and risks in our current market structure.