"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, January 30, 2013

Euro Yen Cross Continues Streaking Higher

Remember our old friend, the Euro-Yen cross from its hey day back prior to the credit crisis of 2008? We used this cross as a gauge of risk sentiment particularly during the massive Yen carry trade of that time frame. The cross came under tremendous pressure when that carry trade was unwound and the investing world was rushing into safe havens and out of speculative positions.

When the Euro was the subject of "the Euro is finished" talk during the height of the European sovereign debt crisis, this cross was hit particularly hard. However, once the ECB got into the act and the Europeans put together their bond buying program, the Euro began a steady recovery against the Yen. Thus far we are not hearing any significant chorus of monetary officials/political leaders out of the Euro Zone making noises about the strength of the Euro. That is why money keeps flowing into the Euro.

I think it is no insignificant matter than the recent rally in the US equity markets  which has seen the S&P move to a FIVE YEAR HIGH just so happens to parallel the rise in this cross. That cross has been and still remains one of the more accurate measures of risk sentiment that we have, along with the bond market of course.

Take a look at the recent action of the cross as it confirmed a bottom in November last year and the subsequent action in the S&P 500 which also rallied off a short term swing low that same month. With the exception of the selling pressure in the last few days of 2012 (based no doubt on tax related selling), the two have been moving in lockstep.

Clearly, speculative fever has been revived in regards to stocks based on this cross. The question now becomes, will the commodity sector be next? That is why as long as this cross continues higher, I am going to be very closely watching the price action of the Continuous Commodity Index or CCI. So far that index has not been following the cross higher as it actually went in the OPPOSITE direction of the cross during the month of November. However, it is beginning to show signs of paralleling the cross. If this connection, which was in exact lockstep leading up to the peak in commodities back in 2008 becomes re-established, watch for the precious metals, in particular, silver, to start more of a sustained trend higher. Let's pay close attention to this as well...

Gasoline Prices on the Rise

A mere two months ago, consumers were enjoying some of the lowest gasoline prices seen since early last summer. Call me a conspiracy nut but I no longer believe in coincidences seeing that these lower gasoline prices just so happened to strangely correspond to the lead up into the past election day.

Now that this is behind us, gasoline has been on a tear higher, along with crude oil I might add. You no doubt have noticed the increase at the pump already. Rising energy prices are something that cannot be long overlooked by those scanning the horizon for signs of inflationary pressures. I mentioned yesterday that heretofore, gold has ignored the strength in crude and the rise in distillates. That may be getting harder for it to do if this strength continues.

Remember, at some point, because of the pervasive impact of higher fuel/energy costs on nearly all segments of our economy, the price of transported goods must rise to reflect the higher costs for producers/manufacturers/distributors. When it does, the impact on the CPI should be seen. What is lagging right now is FOOD costs. You will recall that we have seen episodes in the recent past where both FOOD and ENERGY prices were rising in tandem. That occurence cannot be ignored.

For now, energy is taking the lead. We'll keep a close eye on this to see if unleaded gasoline can run as high as the $3.20 level or not.

Perhaps the stubborn refusal of energy prices to break lower is one of the factors contributing to the continued weakness in the bond markets...

The Punch Bowl Runneth Over

Fear not ye despairing lads and lassies. Surely thou wert fearful that said supply of spirits to enliven yonder punch bowl wert in peril of being dried up. Hark - the sum of all economic activity in the realm didst verily sink a fortnight plus ago. This turn of events must surely bring forth the purveyors of joy and bliss to aid thee.

Okay - I got a bit carried away - the big news, and I do mean "BIG" news this morning that has gotten the commodity sector excited and is in the process of pushing the US Dollar lower, is the fact that 4th quarter 2012 GDP actually managed to SHRINK! Yes, you got that right - it shrank! As a matter of fact, the reading was the worst since Q2 2009! Remember that we were back in an official recession during that time frame.

Ironically, and this to me is a big deal, government spending decreased and that is perhaps one of the biggest reasons for the reduction in growth. I have mentioned previously on this site that government spending was a large factor behind recent improvements in the rate of growth in this nation and that were it subtraced from the numbers, we would be showing very little in the way of actual growth. Lo and behold, I did not expect the growth rate to actually shrink were it removed from the equation.

Here is the ironic part - the US MUST REDUCE SPENDING as it is headed down a road that will certainly lead to economic ruin. When government debt is 100% of GDP it is unsustainable. Any who doubt need merely look across the Atlantic Ocean to Greece, Spain, Italy, Portugal, etc. Heck, even one of the French officials made the slip of the tongue in admitting the obvious, namely that France was bankrupt! While the US DEbt/GDP ratio is not yet at levels seen in the PIGS, it is most surely headed in that direction.

So guess what, if the US government attemps to rein in spending, economic growth will contract because this deficit spending by government is contributing to a large portion of the "growth" in this economy. But keep in mind, that government does not actually create wealth - it merely takes it from one sector of the economy with one hand and redistributes it to another sector with the other hand. To the extent that it adds "growth" to an economy, it is BORROWING FUTURE GROWTH INTO THE PRESENT when it deficit spends. Borrowed money must eventually be paid back and when it is in a debt-based economy. growth shrinks.

That brings us squarely back to the Fed - before this morning's GDP number was released, the world of investors were waiting with bated breath for the oracles to come forth from Delphi and issue their prophetic insight into the state of the US economy. Another duller way of saying this is that the conclusion of the FOMC meeting is today and the market was waiting for what statements would come out of that. Prior to today's GDP report, there were genuine fears of a curtailment in the QE4 program coming sooner rather than later. Today's GDP number should put those fears to rest.

This is what has gotten both gold and silver in such a tizzy this AM. Hedge fund shorts in silver in particular, that were put on below $31 are now being forced out. Same goes for gold shorts by hedge funds that were put on below $1660, those too are being covered. The reason? Traders are now revising their views of any premature end to QE4; based on today's contraction, it ain't gonna happen anytime soon.

I am going to wait until later in the day to see how the pit session closes and in particular, how the S&P 500 REACTS  before doing any charrting as I want to see those before making any conclusions as to near term technicals.

One thing I do want to point out however is that in spite of the pitiful GDP numbers, the bond market is FALLING. This is to me, perhaps, the most important price action of today's session. One would have expected slowing growth to rev up bond buying; it is not. The opposite is what is happening. The yield on the Ten Year note is now OVER 2.0% as I type these comments. We will have to monitor this extremely closely. Something big might just be afoot!