War and Peace

Obama’s surprise Nobel peace prize has caused a reality rift in the US; On the right, Peggy Noonan writes that the Nobel peace prize has always been “an award by liberals for liberals”. She can’t believe Reagan didn’t get one. Yeah, Reagan. The guy who called the Soviet Union “the evil empire” and pushed for the star wars program to militarize space. Bret Stephens wants to give one to Harry Truman. You know, the guy who killed 300,000 civilians by dropping the bomb on Hiroshima and Nagasaki. No serious historian puts forth the claim that this barbarous act was necessary to get Japan to surrender. On the left, Howard Zinn asks, how can you give a Nobel peace prize to a man who’s continued two disastrous wars?

Meanwhile, Australia’s central bank has reversed the course of slashing rates to raise their overnight loan rate by a quarter point. Glenn Stevens, Australia’s chief central banker, warns of the danger of being ‘too timid’ in raising rates. Australia, it seems, wants to avoid the pitfall of being the world’s carry trade sop. Could that award be coming the US? If so, the strategy of borrowing in dollars, then dumping them to buy stocks or bonds in other currencies will weigh on the dollar’s value. The dollar hit a 14-month low recently.

US Fed chief Bernanke and Treasury Secretary Geithner talk of wanting to maintain a ‘strong dollar’ but actions speak louder than words. It seems more plausible that what is wanted is a steadily weakening dollar, which will make the government’s large and escalating debt easier to pay.

The average worker is likely to see continued pain from such a strategy, as wages continue to fall. Colorado has decreased its minimum wage, as their standard is tied to the CPI, and deflation slightly reduced the CPI last year, mostly due to falling oil prices. However, the weaker dollar places pressure on import prices, such as the prices of goods at Wal-mart and other low-cost retailers relied upon by the lowest-paid workers in the US. During a recession, prices and wages tend to fall, but not necessarily by the same amount. However, certain prices are rising again. Oil is now at $75, and gold is over $1060. We could easily see the worst of both worlds, stagnating economy combined with inflation.

The Fed has injected trillions of dollars of money into the economy, in a bid to prevent deflation. But all that money has to go somewhere; so far it seems to have gone into the stock market, and commodities like copper, oil, and gold. It’s hard to believe that the Fed could reverse course anytime soon and start raising rates like Australia. Imagine what a rate increase would do to the still-weak economy. Without one, the dollar will continue to slide.

Maybe the Nobel peace prize should be given to the economy. As the dollar loses value, the US will find it difficult to finance the imperial adventures in Iraq and Afghanistan; at least, that is my hope, though it hasn’t happened yet.

I'll Be Off For the Rest of the Week

Treasuries are up today, pushing the yield back down to 3.55%. Still too high. With the ten year US Treasury note at that yield, a lot of other interest rates are going to be higher. Still a lot of volatility in this market; today's swing was 2.55%. A lot of movement for any market in one day.

How can the Fed possibly re-inflate this impossibly flaccid credit bubble with high rates?

Commodities took a pause; gold is back under $970, oil retrenched to $66, copper's down to $2.22. A bit of backfilling is in order. I wonder when the next big move up will happen. Next week?

Meanwhile, banks are doing their best to resist honesty and transparency. Here's a piece about their off-balance sheet assets. Isn't it a bit absurd that a corporation would have off-balance sheet assets? What possible rationale could there be for keeping an asset off the books besides lying about its true value?

I'll be traveling for the rest of the week. Have a great weekend!

Treasuries Crumple... Again!

Crash... recover... crash.

The price of the bellwether 10-year US Treasury note cratered Thursday, recovered Friday, and now has crumpled again, sending the yield skyrocketing to close at 3.715%.

This is exciting stuff. It's like a pitched battle is being waged over Treasury notes. The yield is like the front line. Meanwhile, the kings of the commodities (oil, copper, gold, silver) are all up sharply. Oil is above $68, gold is above $975, silver is above $15.60 and copper has shot up to $2.30. (Check out NYMEX for a good source on all these commodity prices.)

Remember, this may be a harbinger of higher interest rates, signaling a loss of confidence in the dollar, which would mean the Fed would have a very hard time using monetary policy to stimulate the economy.

What will happen is that interest rates will rise as investors edge away from the dollar and US treasury debt. That will deepen the recession. (Why do I say recession instead of depression? Habit, I guess. There is no technical distinction in economics. There is a joke (sort of): a recession is when your neighbor loses his job. A depression is when you lose yours.) The best strategy for dollar depreciation is investing in hard assets with no debt or leverage whatsoever.

The Rise of Oil and Gold Is An Early Sign of Inflation

(This filthy-looking pool of oil is from the Exxon Valdez oil spill)

The Federal Reserve must be happy now; they're doing their job: fighting deflation by creating money out of thin air.

The oil price is over $65 now, and gold is over $978. This is an early sign of inflation. We're in an odd situation economically; certain items are in deflationary mode. Deals are

everywhere on housing, furniture, cars, appliances, clothing, travel. These are items that consumers are cutting back on.

Since oil and gold are investment commodities, they are seeing appreciation now because of fears of inflation and the desire to protect assets. A good way to get exposure to the oil price easily is through the oil ETF USO. (This is good for long-term exposure; USO doesn't always track short-term movements in oil prices accurately, because it is the target of arbitrage)

What about the ethics of investing in oil? My dad won't touch it; he says it's a dirty business. Similar concerns have been raised about gold, which is produced by crushing tons of rock into a fine powder, then using acid to dissolve the metal, a process that uses copious amounts of energy.

Each person's ethics come from within. For me, I don't rule out profits from oil or gold, because it doesn't seem helpful to me to say I won't invest in something but I will use other products. I own a car, I own electronics, I have gold in my teeth. If I touch it as a consumer, I'll touch it as an investor, where at least there is an opportunity to make a profit. These things have to be decided on a case-by-case basis. Every corporation is guilty of something, as is every individual.

Oil and Stocks

After skyrocketing to a high of $147, then crashing to $30, crude oil has rebounded to nearly $60 a barrel. (Some good analysis of the oil market can be found at wtrg.com)

Will this cause the economic "green shoots" to wither?

Nah. Unfortunately, there are no green shoots. And the oil rebound is a technical matter, caused by the rising stock market. This market rally is causing "mini-rallies" in other assets; this is because at the end of the great market boom of 1980 to 2007, every asset in the world had become severely overvalued, from stocks, to real estate, to commodities, to art; you name it, it was overvalued. An ocean of fiat money was pushing up prices in everything that could possibly be an investment good. The bear market in stocks has also been a bear market in all of these alternate investment assets, including the king of bear market commodities: gold. (Let me hasten to say that the fall in gold prices is a temporary phenomenon, a secular bear market within a bull market that began in 2002.)

Oil presents us with a paradox. Are prices rising because demand is stronger than we thought? That would be a good thing. Or will the rising demand quash consumer spending? I'd say neither. Look for oil prices to continue upward as the stock market rally continues, but I expect oil to correct down sharply as the rally ends. Of course, the long term trend of oil is up, both because of inflation and because of the geological reality of peak oil.

Did the Oil Boom Cause the Recession?

There are several recent papers which make the argument that without the oil price boom of 2007-08, there wouldn't have been a recession. James Hamilton says "I don't quite believe the conclusion myself."

These papers make some interesting points, and there certainly is a connection between rising expenditures on gas and falling consumer spending. That said, I don't find it persuasive that rising oil prices "caused" the recession. The primary cause of the recession is the bursting of the artificially induced credit bubble. What caused that bubble was the rapid expansion of the money supply, which is always the ultimate cause of bubbles. There is only one way that stocks can outpace overall productivity growth over a long period, there's only one way that any asset can become outrageously overvalued without coming under pressure from short sellers and that is money creation.