"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


Thursday, May 15, 2014

CPI numbers

Yesterday we got a surprise PPI number. Today we got a CPI that came in right on expectations. It showed a seasonally adjusted 0.3% rise over April, which was the biggest increase since June of last year.

Much is being made of the rise in food prices which were up 0.4% compared to last month, and which have increased four straight months now. Meat prices in particular have risen sharply putting in their largest increase since 2003.

However, as I have made clear many times here recently, the CPI is a BACKWARD looking indicator. It measures "that which has been" not "that which shall be".

Just today, corn prices fell to a SIX WEEK LOW. Wheat prices have hit a three week low as widespread rains have put a halt to the drought/heat induced deterioration in the crop.

The spread between old crop beans and new crop beans is nearly $2.60 bushel. Just today Informa raised expected soybean acreage to a stunning 82.1 million acres. Looking FORWARD, barring any severe weather issues this growing season, there will be more than enough soybeans around to meet existing demand.

Incidentally, soybean crush was 132.67 million bushels compared to last month's 153.84. High prices continue to eat away at demand.

By the fourth quarter of this year, meat prices will begin to ease lower with supplies increasing in Q1 2015.

What I am saying is that price pressures in the food component of the CPI should ease later this year.

Energy remains a wild card. Gasoline prices rose 2.4%, which was the first gain since December of last year. If you observe the price chart however, gasoline prices spiked higher during the month of April pushing above December's level but have since fallen back somewhat. We will want to monitor this key commodity as it has such a big impact on both the consumer and on business. I am surprised that crude oil prices have been able to stay above the $100/barrel level but the market is proving to be rather resilient. I personally would love to see it move closer to $92 - $93 as it would push the price of gasoline lower and we consumers love that. Right now that appears to be rather unlikely.

Medical costs are worth noting - They rose 0.3% last month and are up 2.4% compared to a year ago.

In other economic news - the Philly Fed May Business Index came in at 15.4 compared to April's 16.6. New orders were at 10.5 versus 14.8.

US April Industrial Production was down -0.6% compared to the market expectation of a -0.1% decline. The March number was revised upward however to a 0.9% increase from the previous 0.7% increase.  Capacity utilization fell  0.7% to 78.6%. The market was looking for 79.0%.

Jobless claims were the big mover today - the number for initial unemployment claims plunged by 24,000 to a SEVEN YEAR low of 297,000. The market had been looking for a slight increase to 320,000. This number is notorious for its volatility so we will want to see next month's numbers but for right now, traders are interpreting the data as further evidence that the employment situation in the country is slowly improving. The Labor Department did issue a report showing that INFLATION ADJUSTED average weekly earnings actually fell 0.3% in April from March. Without the adjustment, wages were flat.

There still appears to be a great deal of slack in the labor market and that is working to hold down inflationary pressures. This phenomenon seems to be widespread in the Western economies at the moment and is one of the reasons that Central Bankers do not appear particularly concerned about the about of widespread inflation pressures at the moment.

Equity markets were pummeled lower today with the S&P 500 down nearly 1.5% as I type these comments. The HUI is down even harder ( near 1.67%).

The key index is perched precariously above a key chart support zone once again. So far it is holding but it does seem that general equity weakness tends to impact the mining shares more severely than the S&P 500 itself.

Bonds of course are going in the opposite direction and having yet another huge rally with the yield on the Ten Year falling below 2.5% at the moment.

I find it absolutely amazing at how skillful these Central Bankers have become at scaling back bond buying programs all the while without impacting the demand for bonds in the slightest. Remember all the talk coming from the perma gold bull community that as soon as the Fed stopped or scaled back their QE programs, that interest rates were going to soar because no one would be left to buy bonds? Well guess what - that is another prediction that has been proven to be completely and utterly wrong. Demand for bonds is still very strong at the moment. It should be borne in mind that the Fed is still buying bonds - albeit at a reduced level - and that its balance sheet is still growing. For whatever the reason, demand for bonds is currently exceeding the available supply and thus the price of the bonds is rising with interest rates moving correspondingly lower.

Along this same line however, the Bank of Canada's Schembri today was quoted saying that these "low interest rates pose a serious challenge for pension funds". Ain't that the truth and do not forget senior citizens and those living on fixed incomes. Those of you who have senior parents alive are all too sadly aware of this. Many hedge fund managers however are thrilled with these low rates as their fears of slowing global growth have most of them singing from the same hymn book.

Back to gold for a moment - the price chart continues to show the metal range bound but that series of lower highs is also continuing. Rallies are being sold. The giant gold ETF, GLD, now has reported gold holdings at 780.46 tons, that is down from the ending level last week of 782.85 tons. Thus far the ETF has shed 2.4 tons of gold this week. It will be interesting to see what the number comes in at by the end of trading this Friday, especially if gold fails to recapture the psychological "13" handle.

One last comment for now, the Treasury's International Capital Flows data ( TIC ) showed that Russia's US Treasury holdings fell $25.8 billion in March to $100.4 billion. Their holdings as of February had been $126.2 billion.
This can be explained as investors, fearing the impact of Western-backed sanctions, yanked money out of Russia. The exodus of capital caused the ruble to fall and this induced the Russian Central Bank to intervene in the forex markets. To do so, they would have needed to sell US Treasuries to raise the Dollars needed to sell those to keep the ruble from dropping even more sharply than it did.

In looking at the report, China's holdings are essentially unchanged from this same time last year ( 1272.1 billion to 1270.3 billion). Japan's holdings are up from 1114.3 billion to 1200.2 billion, an increase of $85.9 billion.

The chatter going around is that Belgium is taking up the slack in Treasury buying brought about by the Fed's tapering program. Belgium holdings are at $381.4 billion compared to last year's 188.4 billion, an increase of $193 billion. That is a big increase over the last year.

However, in going through the data, I have decided to start with the month of June 2013 and do some examination. Why? Because that is the month during what all adjustments are made in the TIC data. You see, many foreign buyers of US Treasuries, will do their buying through banks IN OTHER COUNTRIES other than their own. That shows up in the country in which the banks are located. However, that data does not show the originating buyer of the Treasuries but only the country in which the transaction was conducted. In June of each year, the Treasury Department will then properly credit the actual ownership of the Treasuries to the host country. Generally at that time, we will then see a big adjustment in the reported holdings of the various countries. That is the data I am interested in seeing. In the past, we have seen big buying out of the United Kingdom which then, during June, has been moved out of the UK and credited to China. In other words, a great deal of Chinese Treasury buying had been done through London banks which when properly credited, ends up in China.

I suspect we might have some of the same thing occurring with this Belgium deal but of course we will have to wait until the report showing the June updates is released. That will be three months from now unfortunately.

But let's go back to June of 2013. It reported Belgium holdings were at $176.2 billion. As of March 2014, those holdings are at $381.4 billion. That is a $205.2 billion increase. That certainly is a big increase.

China lowered their holdings by around $3.7 billion.

Japan's reported Treasury holdings as of June 2013, were at $1083.3 billion. They are currently sitting at $1200.2 billion. That is a 116.9 billion increase, a fairly sizeable jump.

The Caribbean Banking Centers were at $286.3 billion and increased by $26.2 billion to $312.5 billion. Those are often used by hedge funds.

Brazil registered a slight decrease in holdings from June ( about $8 billion). Taiwan dropped about $10 billion and Switzerland lowered their holdings by about $5 billion. Opec dropped by around $19 billion.

Those were mostly offset by increases in the UK of about $13 billion and Hong Kong by some by some $21 billion.

So what does all this mean? Right now, not much because we do not know where the final destination of those holdings are going to end up in June this year when Treasury does its annual adjustments.

But the fact that it is Belgium, the headquarters of the European Union doing the buying is interesting. That is because the various European nations, Germany, France, Italy, etc. that make up the EU are listed separately. We can speculate what is going on with that but one thing that I am wondering is whether or not the ECB might be buying US Treasuries as a way to undermine some of the stubborn strength that has been seen in the Euro.

Back in March of this year, the Euro was quite strong, trading near the 1.39 level for some time that month. I am only guessing as I have no proof whatsoever, but it is no secret that many European based political and monetary leaders do not want a strong Euro. Perhaps, that Treasury buying has been to derail some of the Euro's strength in relation to the US Dollar. I simply do not know but the fact that ECB President Mario Draghi felt compelled to talk down the Euro last week is rather revealing if you ask me.

One last thing - while this TIC data is interesting, the majority of US Treasuries are still owned internally here in the US. By that I mean private investors, pension funds, mutual funds, etc. Those investors, looking to take some of the gains that they have made in equities and put that aside into something more conservative while they try to get a sense of what the next direction in the broader equity markets might be, should not be underestimated.

Perhaps my friend Eric de Groot might be able to shed a bit of light on this as he is very good at studying money flows.


  1. Dan,
    What do you make of the big spike in yields in Italy, Portugal, Greece, and Spain. Could this be the start of another European crisis?

  2. Dan, I find it far more likely that the Feb is buying bonds by using Belgium as a proxy. If the ECB were behind it in order to weaken the Euro then why has the Euro been rising until very recently?

    Does it make sense to you that the Feb scales down its bond buying program and yields decrease? What happened to the laws of demand and supply? Far more likely that the taper didn't actually happen and the bond buying continues despite the Fed's official balance sheet increasing by a reduced rate.

    I think there may have been an element of the taper being priced in to treasuries but I still find it amazing that yields continue to fall in unison with the "taper". It doesn't stack up.

    I enjoy your blog as it offers a different perspective but i do sense an increasing "anti gold perma bulls theme" recently. Is this why you no longer do the KWN weekly metals wrap? It's difficult becausue i don't think most people would deny that the Fed intervenes in the markets but no one knows how much. GATA present a heck of a lot of evidence, even a German regulator agrees with these manipulation theories to some extent (http://www.zerohedge.com/news/2014-01-16/precious-metals-manipulation-worse-libor-german-regulator-says) and, as Franklin Sanders says:

    "a matter of notorious fact and law and government policy the US Treasury intervenes in markets through the President's Working Group on Financial Markets (Plunge Protection Team, primarily for stock markets) and in the silver and gold markets (Exchange Stabilization Fund, Gold Reserve Act of 1934, etc.). Thus it is not conjecture but hard fact that your yankee government intervenes in markets. "

    Trying to fathom out these markets when there is intervention is almost impossible. Just how rigged is the game? Are the gold bugs just regurgitating conspiracy theories or will they be proved right in time.

    All I know is that governments are very good at keeping things going and none of us will know the answers to many of these questions until the chips fall one way or another. I agree with what you say about gold and silver not having their day in the sun until western investment demand returns. IMO the Fed having been very clever at funneling western investment demand out of the PMs though intervention on the margins on a backdrop of falling commodity prices. I can't see the price of gold and silver remaining at these levels much longer, forgetting conspiracy theories, we have been at break even or worse levels for many mining companies now for over a year.

    Keep up the good work!

    1. Basically traders have no choice but to play by the rules, and react to every whim and fancy of perception created by the news makers and market makers. They are slaves to the unreality of the perception bias. The focus is on time scales of short duration; in this respect traders are like small fish that follow the scent of the larger ocean going creatures, it's inevitable.

      The larger trend is much more holistic but takes decades to play out, requires less consumption of meaningless government fabrication and will probably enrich you much more depending on the size of your current wealth. We live in the age of immediate gratification however, so 'what have you done for me lately' is the catchphrase and thus requires a traders mentality to elaborate short term gains. Basically to live and die a trader is to become a slave to the information flow every minute of every day, despite its long term meaninglessness. The Fed talks what every week now it seems? If it's not the Bernanke, it's the Yellen, then it's the Draghi, or the Lagarde, or the Tepper or whoever else chimes in and moves the markets. It is ALL fabricated perception. If you like being a worker drone buzzing around computer screens and consuming the constant flow of meandering numbers coaxed and massaged by government control rooms than you will make a good trader.

      I posted a partial tongue and cheek comment maybe a week or two ago about the U.S economy improving and gas prices going down - based on information gleaned from this site - but don't buy it for a second. The U.S. is contracting, gas prices will not move to the downside and hence all talk of deflation (as in lower costs) are meaningless. If oil is expensive then THINGS are expensive, it's a neat and simple equation. We're supposed to believe that deflation is the fear, yet I beg anyone here reading this to tally their cost of living in 2004, or even 2010 and compare it to today, 2014. No inflation? Really? And Santa has a reindeer named Rudolf...

      Deflation only exists as a function of debt deterioration in the west, peoples ability to borrow in the developed world is maxed out, but that slack is made up for by growing masses in the developing nations, regardless of what analysts say. Look at global oil and energy consumption, it's increasing without fail, where is the growth? The developed world is flat-lining, the 'emerging' economies are thrusting upwards. Established economists are so full of hubris that they think deflation in debt growth in the developed world means global contraction, it doesn't. It means a transfer of wealth, from the once wealthy to the new wealthy.

      Wage stagnation in the developed world is real, cost of necessities are rising, commodities are more scarce due to depletion, aquifers are being depleted and fresh water resources are being polluted or destroyed at a remarkable rate. Soil depletion as a result of chemical fertilization, GMO strains failure to compete with super weeds, and hyper extreme weather will result in yield failures the proportions of which have never been seen. Food is already so nutrient deficient that all good doctors and nutritionists must of necessity recommend vitamin supplementation to make up for the deficit. Cancer rates at 50% (life time rate) in western industrialized nations.....

      Good luck to you all, and may your view of the world be elongated beyond the myopia of a short term chart.

    2. Angelo;
      Spoken like a true disciple of Thomas Malthus.
      If you really believe all this nonsense that you just wrote, then why bother going on living. End it all now and escape before things become catastrophic.

      You evidently do not have the slightest clue about the ability of modern agriculture to continually produce larger and larger crop yields with nearly the passing of each decade, sometimes even sooner than that.

      "Yield failures the proportions of which have never been seen". That statement is astounding for its sheer ignorance.

      Compare expected life spans to a century ago and tell me that things are getting worse and worse and worse. Technology is the great game changer and advancements in medicine, genetics, agriculture, computers, etc. have made living in our modern age immensely preferable to living even a century ago.

      We traders enjoy being "fish following the scent of larger ocean going creatures". It means we are studying money flows and profiting. If that means being a "slave to the unreality of the perception bias", so be it. Those of us who have been at this profession for any length of time also call that "understanding market sentiment".

      Your comments reek with animus towards those who attempt to be good students of the markets and who work diligently to learn and understand them better.

      I will say it again - when the charts change, the sentiment changes, and when sentiment changes, good traders change with it. Those who are married to their view and attempt to impose that on the market, are like fools who never learn nor understand their own arrogance. In their own minds, they are wiser that the collective markets combined.

      good riddance.

    3. Disciple of Malthus! That's rich. It's called the larger trend, you seem stuck in a range of what a month or two, maybe a year, max? You think the green revolution has freed humanity from the constraints of nature...technology as the great liberator. Don't get me wrong, I believe in technology, in fact I invest in those that produce it, but believing in its advancement without recognizing humanities social deficiencies is childish. Our ability to harness technology is outstripping our ability to actually adjust to it's all- pervasiveness. Do me a favor and google 'touch screen children' and read about what is happening to children's brains as a result of over stimulation by technology.

      I'm sorry but your comment about understanding markets is very perplexing to me, and I'm not being facetious. Your utter belief in the markets as they currently exist is to me like someone learning a language that has an expiry date, you believe in indicators that have NO relation to reality. You actually believe the CPI numbers? Wow. I mean wow.

      In regards to lifespans, you have fallen for the fraud which is the life span hoax, do you know how they developed the life expectancy index? The main component is death at birth, and war, if you implement better birthing methods the life span is almost identical even going back 2-500 hundred years, based on the figures you allude to the continent of Africa still lives in the middle ages then right? Remove death at birth and the rates have barely changed. Basically. The technology solution, if we can call it that, was better pregnancy care and access to clean water and food. We have utterly failed to offer these solutions to half the planet by now, how selfish of us, we're too busy deciphering whether the Taper is on or off....

      Ask someone who works in soil biology, I have a family member in the field, whether the soil on mono-crop, high yield, high chemical input farms can sustain a crop without inputs. I mean to say, if you for some reason don't have access to chemical N-P-K, NOTHING will grow to any degree worth harvesting. You call that advancement? The destruction of soil biota that took thousands of years to develop, turning naturally rich soil into basically an inert non nutritive substrate, is revolutionary?

      You are delusional if you think this is sustainable as a healthy diet for a thriving humanity. Cancer rates are off the chart, yet you bury your head in the sand, that's great! Do you know what the cancer rates were 100 years ago? I could drink daily from my local lake 100 years ago, if I did so today I'd need medical attention, that's quality of life?

      We do have machines that do much of the labor we used to do, and building advancements make our life more comfortable, I agree, but these selective appropriations of technology are only a partial picture. I don't think mono-cropping is a long term solution, neither do I think that relying on ever more expensive agricultural inputs helps poor farmers feed their communities.

      good riddance.

    4. I should qualify something I said earlier, regarding believing the CPI numbers, my more pointed question is do you actually believe the CPI numbers? Or do you know they are false but use them because they are simply informing you of what the 'market' will do?

      My so called animus towards traders plying their trade is not so much in the ply, but in the attitude necessary, and inherent denial I see within it's community, where short term gain is seen as a universal reciprocation of correctness. Traders believe they are 'right' and are validated by the return of money, money = correctness. This is a corrupted value system.

      As an aside - Traders tend to short stocks when they see the opportunity, so what are they in fact doing? What are they selling? Perhaps I own stock ABC, the short trader will 'borrow' my share and sell it! Nobody asked me if I was willing to lend my share! Alas I find out, the brokerage holds the share for me and they have the facility to lend out those shares such that more than one person can hold it. I'm like, wow! That's bizarre, I mean who dreamt this up? Can I borrow your car and sell it, and then buy it back and return it? I'm going to take your blanket when you're 'not using it', soil it and bring it back for bedtime.....The short seller will take my stock sell it and devalue my stock! Wow, who dreamt this up?

      Shouldn't the only person to sell an item be the owner of the item? What bizarre logic allows us to sell what is not ours? I'm not talking about betting on future prices outside of affecting the share prices, but actually pushing the price down through means of force, using shares that are not yours to sell!

      The wonders never end - money from nothing charged at interest, taxation of gross labour, selling what is not yours, what's next, charging you interest on your savings? Oh wait.....

    5. Angelo;

      US farmers feed the world and are the best anywhere. You are entitled to believe otherwise. Crop science continues to improve and yields continue to increase. Livestock productivity continues also to move ahead as advancements in animal science means more meat for a hungry planet. Denying that is simply your own bias showing through once again.

      Of course, you can always eat seaweed, dandelions or pine needles if doing so makes you feel like more of a purist.

      As far as traders having " a corrupt value system" - would you like to offer me, your host, any further complements?

      Why not just go away if you believe we are corrupt. Hoard your shiny metal object and wait for the world to end. Those of us who have a more realistic view of things will continue to attempt to further enhance our corrupt value system and profit.

      Investing or trading, whether you like it or not, is all about being "right" and profiting. Anyone who buys stock in a company is expecting the price to rise. If it does, they are "right" and obviously corrupt in your world-view. See, they made a "short-term" gain - how horrible; how utterly corrupt!

      I marvel that some people seem to go through life angry at everyone and everything.

      The financial system is what it is; if you don't like - then don't invest in it or trade in it. No one is forcing you to do anything.

      Have a pleasant day in your angry world. We are obviously too corrupt to understand your purity.

  3. Full Blown Market Crash has already happened.

    In the gold and silver mining sector.

    TRX is barely surviving above the $2 mark.

    Meanwhile, even after a brutal selloff in the shares of Whole Foods, that stock is still at $38, over a 400% increase since the lows of $10 in 2009.

    And don't even get me started on XRT, still trading at $82, after a low of $25 in 2009, thanks to "cult" retail stocks like Buffalo Wild Wings, Coach, Under Armor, Nike, Lululemon, etc. which have stunning gains the last 5 years despite this year's selloff.

    Whatever inflation is attempting to creep into the system, it will be instantly quashed with some "Pie Holing" from the Fed.

    Just like 2011, when some "Fedspeak" triggered a bear market in the CRB Index lasting over 2 2/12 years, which is a longer time period than the 2008 - 2009 stock market crash.

    Just imagine what they could do if they actually did something, other than flap their gums, LOL...

  4. Jobless claims numbers....lmao...in a country with 50,000,000 on food stamps...keep drinking the Koolaid boys.

  5. as long as traders continue to take these fake government numbers at face, they will remain relevant. i think Dan has said as much recently. but credibility is fickle, and belief in the government spin has been stretched to the limit. when confidence is lost, things collapse very fast. and that is why the government has no choice but to keep on spinning the numbers.

    "you don't need a weatherman to know which way the wind blows" Bob Dylan

  6. "You see, many foreign buyers of US Treasuries, will do their buying through banks IN OTHER COUNTRIES other than their own. That shows up in the country in which the banks are located. However, that data does not show the originating buyer of the Treasuries but only the country in which the transaction was conducted."
    Dan, I found your observation very interesting and it made me think that wouldn't this be a covert way for the Fed to support our Treasury market? How would anyone know what is what. Does the Fed answer to any kind of accounting audits?

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