Monday, January 31, 2011

Centamin Egypt: A Gold Producer in Egypt at Bargain Prices

This is certainly not for the faint of heart., Centamin Egypt, a gold producer much recommended by analysts, has been dropping since the troubles started in Egypt.

Last quarter (Nov 3rd) the company reported gold production of 30,243 ounces from the company's Sukari Gold Mine. Gold sales totalled 31,228 ounces at an average sale price of US$1,239 per ounce. Cash operating cost averaged US$638 per ounce.

The Company expected 2010 production to be 160,000 - 170,000 ounces -- The Sukari mineral reserve increased to 9.1Moz during the quarter, an increase 28% above the 7.1Moz reserve reported in February 2010.

This quarter should be very interesting if the company reports any troubles.

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Friday, January 28, 2011

Chinese Agency Blasts Fed for "Eroding Ligitimacy of the Global Monetary System": U.S. Vulnerable

The Beijing-based Dagong Global Credit Rating says that the quantitative easing policies by the U.S. Federal Reserve has "eroded the legitimacy of the global monetary system that takes the dollar as the key reserve currency."

In addition, the policies are bringing the U.S. dollar's credit-worthiness to a vulnerable position.

While Japan was cut by S&P yesterday, the Chinese agency downgraded the U.S. sovereign credit rating last November, after the Fed announced it's QE2.

China has been on a campaign to move away fro te U.S. dollar as reserve currency. China's $2.85 trillion foreign exchange reserves are mainly denominated in U.S. dollars, and Chinese Premier Wen Jiabao has publicly expressed concerns of the assets.

President Hu Jintao said at G20 summit at Seoul that China wanted an international reserve currency system with stable value, rule-based issuance and manageable supply.

U.S. Wants Creditor Haircut

Says Reuters: "But Dagong said in the English-language report that the United States is trying to "haircut" its creditors by permitting a weakening currency".

"The behavior that the United States ignores international creditors' legitimate interests indicates a dramatic decline of the country's willingness to repay the debt,"
It added that the capital flows into emerging economics stemmed from cheap dollar is "a destructive factor to the healthy economic development in different countries."

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A Trader Made $5B in Profits in 2010

Reuters reports that a trader personally made over $5B in 2010, slightly more than me, or you it seems, as in fact, he made more than anyone trading on Earth, ever.

His name is not unfamiliar: hedge fund manager John Paulson ,"personally made more than $5 billion in profit in 2010, which may likely be the largest one-year earnings in investment history", says Reuters, citing the Wall Street Journal.

Paulson was famous for his profits shorting the subprime market in 2007 and making a record $4B. That record is now gone.

"Known for making big, contrarian calls, Paulson said early in 2010 that he expected to see strong economic recovery and a rebound in housing prices. He also made a big bet on gold".

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Petrobras Makes Yet New Oil Discovery

Petrobras, PBR on the NYSE, announced yesterday yet a new discovery of oil of very good quality, in the pre-salt reservoirs in Block BM-S-9, in the ultradeep Santos basin.

The breakthrough occurred in the informally known Carioca Northeast area, located in water depth of 2,151 m and 275 km from the coast of São Paulo in the assessment area of the Carioca - 1-BRSA-491-SPS (1-SPS-50) well.
Petrobras is the 3rd largest energy company in the world. The stock is up % since 2009. We track Latin-American ADRS live here.

According to the statement, preliminary analysis confirmed the extent of accumulation with high quality 26 ° API oil in a 200 meters reservoir, better than the results of the initial well. Block BM-S-9 is composed of two assessment areas: well 1-BRSA-594-SPS (1-SPS-55), informally known as Guara, and the area of well 1-BRSA-491-SPS (1 - SPS-50), informally known as Carioca, where is the discovery well.

Petrobras holds 45% interest in this concession, the operator of the consortium being formed by BG Group as well, with 30%, and Repsol, with 25%.

Says PBR: "The consortium will continue the investments planned in the Discovery Assessment Plan, to confirm dimensions and characteristics of the reservoir, seeking the development of the project and activities in the pre-salt Santos Basin,"

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Thursday, January 27, 2011

Brazilian Unemployment: 5.3%, Lowest Ever

Brazilian unemployment numbers for metropolitan aereas were released this morning by the Brazilian Statistics Institute. Unemployment was the lowest ever recorded using this methodology at 5.3%.

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New ETF for Jobless Claims

This is a joke (so far). Jobless claims rose to +454K this week, flollowing a sharp drop last time. These time around the silly figures are being blamed on "snow storms". These numbers are so erratics and volatile that they would make a good candidate for one of those ETFs that gamblers use nowadays, possibly leveraged too. If they could fit in future contracts/bets even better (worse), then investors woudl lose another 10-20% every month too.

So the headline is a joke, but the really, the chances of an employment or jobless ETF is not that low these days.

Did you know there are now 18 ETFs that track the volatility index VIX in one form or another? That includes the dreadful VXX of course.

Bloomberg has a symbol and chart for this stuff:

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S&P Cuts Japan's Rating: Yen Plunges

Balooning deficits do eventually have consequences. Standards & Poors has cut Japans's rating. As a result, the Yen has had  a mini plunge overnight. The Bank of Japan must be very happy however, as this is what they have wanted for  along time, a lower Yen)

S&P downgraded Japan's long-term sovereign debt from AA to AA minus, citing precisely "the country's ballooning deficit", which "will further reduce Tokyo's already restricted fiscal flexibility".

24-hour charts (trades 24h/day), courtesy of INO's marketclub.(click for trial). This is USD versus Yen (i.e, the USD jumps):

The Yen ETF is FXY. This will be very interesting in the next couple of days.

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Monday, January 24, 2011

$1 Trillion To Pour Into Emerging Markets in 2011: Global ETFs To Shine

The IIF, Institute of International Finance, which represents over 430 financial institutions in 70 countries, says private money will pour into emerging markets in 2011, reaching over $1 trillion by 2012.

The IIF warns that curbing the effects of capital flows is becoming increasingly difficult.

These inflows will heat up currencies and global stock markets.

We track all currency ETFs live here, and all global ETFs here. There is quite a selection of them to choose from.

The IIF also said the October capital inflows projection for 2010 was $908 billion, a 50% higher than in 2009.
From Yahoo. "IIF chief economist Philip Suttle told a news conference that although inflows were growing, the ratio of flows to emerging market gross domestic product was still well below levels seen in 2005-2007.

Still, the surge of private capital had complicated policies in emerging markets, which are worried by the potential for inflation, asset bubbles and a loss of export competitiveness.

Some countries, such as Brazil, which has one of the world's most overvalued currencies, Chile and Colombia, have imposed capital controls to slow the flow of hot money.

Suttle said many emerging market countries were choosing to accept a higher rate of inflation when in his view they ought to allow their currencies to appreciate".

Mr. Suttle says this was a worrying trend and that emerging markets as a bloc should coordinate and agree "to appreciate their currencies a little more and take more of the necessary adjustment on the nominal exchange rate side."

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Saturday, January 22, 2011

The Two Europes: Resentment Grows Against Germany Out of Recession; Roubini: It Won't Work

BMW, Daimler and Audi announced measures surprising to many: they will expand their factories to comply with record orders. Two years after the height of the worst economic crisis since the Hitler era, Germany is already showing clear signs that the crisis has been left in the past.

After registering its highest GDP growth since reunification in 1991, yesterday private sector confidecne showed highest increase ever recorded. Exports to emerging countries and the return of domestic consumption are driving the German economy.

However it also reveals a darker side of Europe: the increasingly existence of one bloc operating at two speeds.

Survey of 7000 entrepreneurs made by Munich Ifo Institute found that private sector confidence reached its highest point in two decades. The increase in domestic consumption and exports are mainly the reasons for the resumption.

In 2010, the German economy grew 3.6%, well ahead of all the rest of the EU. For 2011, Berlin has come to revise upward the growth of its economy, with a projection of 2.3%. Neither the high prices of commodities and minerals appear to be a problem. The government now believes it will reach a goal of deficit reduction before the deadline stipulated by the EU in 2013.

According to German economists, the explanation for the good performance is simple. The model is based on exports and since imports from emerging markets is growing, the German economy can withstand the crsiis. Unemployment stood at 7% and allowed domestic consumption to strengthened.

"The German economy began the year with great vigor," said Ifo's president Hans-Werner Sinn. The result made the Frankfurt stock climb to highest level in two and half years. Across Europe, stock markets also reacted positively.

Axel Weber, president of BC German, says the country's economy "is benefiting considerably from the global economic recovery, especially the emerging Asian markets,"demand is once again giving fundamental impulse".

In the German press, the news is quite different from that seen a year ago, when layoffs were being announced in Europe and companies closing their doors. Audi, for example, just announced its biggest expansion in its history two weeks ago. The company plans to hire 1,200 workers and invest 11.6 billion in four years. It does not hide the fact that it wants to sell 1 million cars in China alone by 2014.

The Two Europes
But if the growth of Germany is seen as a relief to many in Europe, the expansion also opened up a reality that the EU is reluctant to speak of: the existence of two Europes. If Germany grows, countries like Ireland, Greece, Portugal, Spain and Italy continue to suffer.

The rate of unemployment in Spain, for example, is three times higher than in Germany.

In the euro area, the projection is that the growth of economies will be only 1.5% in 2011, an average performance thanks to the high German numbers.

The difference is so great that European commentators are alerting the Germans to avoid celebrating the recovery to not make the other partners of the bloc even more angrier. Berlin was even called "arrogant" this week by European politicians.

To governments of countries facing deep crises, this disparity between an export-driven Germany and their economies everyday less competitive is what is threatening Europe. For years, the positive trade balance in Germany was guaranteed by the arrival of Spanish, Greek and Irish, now heavily indebted.

Roubini: It will not work

In an interview with German magazine Der Spiegle, economist Nouriel Roubini also warned that the growth strategy of Berlin "will not work in the medium term." "This model will not work, not for Germany and not for Europe," said the economist, who accuses Berlin of having deepened the crisis of its neighbors

With material from O Estado de Sao Paulo.

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Friday, January 21, 2011

Natural Gas Prices Soar, Contango Now Benefits UNG

Natural gas prices have risen significantly since yesterday. In even more good news for UNG holders, backwardation has increased as well. Contango is UNG's biggest enemy, there is no contango in the first 3 moths futures. As of 8AM, a small contango only appears in may contracts:

UNG rose 2.58% yesterday and is currently up in pre-market. UNG is about to make a higher high:

(please click to enlarge)

This looks very bullish and good for UNG.

Disclosure: I am a holder of UNG 6 Calls for today.

Update 10AM: Calls sold for 0.45 (bought for 0.15). I no longer hold any UNG.

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Wednesday, January 19, 2011

Fed's Plosser: Monetary Policy Cannot Fix Unemployment or Prevent Asset Bubbles, May Cause Instability

The Scope and Responsibilities of Monetary Policy

Speech given by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, in the gorgeous city of Santiago, Chile. Philadelphia fed.


I am delighted to speak before the Global Interdependence Center’s event today, and I especially want to thank Governor José De Gregorio and the Central Bank of Chile for hosting today’s conference. I have been trying to repay a visit that Governor De Gregorio made to the Philadelphia Fed for a GIC conference in 2008. And I am glad that our schedules finally made possible my first visit to this beautiful country.

As the title of the conference today suggests, Governor De Gregorio and I share some unique challenges in conducting monetary policy in a new world, a post-crisis world. Yet I believe some old lessons still apply. I would like to begin with a quote that some of you may recognize.

“...we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and, as a result, in danger of preventing it from making the contribution that it is capable of making.”

Milton Friedman spoke these words in his presidential address before the 80th meeting of the American Economic Association in 1967.1 Although that was over 40 years ago, I believe Friedman’s caution is one well worth remembering, especially in this world where central banks have taken extraordinary actions in response to a financial crisis and severe recession. I believe the time has come for policymakers and the public to step back from our focus on short-term fluctuations in economic conditions and to think more broadly about what monetary policy can and should do.

It may help to put Friedman’s words into context. His remarks were directed at an economics profession that had gravitated toward believing that there was a stable and exploitable trade-off between inflation and unemployment — otherwise known as the Phillips curve. According to this view, policymakers should pick a point on the Phillips curve that balances the nation’s desire for low unemployment and low inflation. Friedman argued that this was a false trade-off and the experience in the U.S. in the decade that followed his remarks, often referred to as the Great Inflation, was a painful demonstration of Friedman’s valuable insight. In particular, that episode illustrated starkly that there was no stable relationship between inflation and unemployment. We learned the dangers inherent in monetary policies that take low inflation for granted in a world of high unemployment or perceived large output gaps. Our experiences clearly showed that efforts to manage or stabilize the real economy in the short term were beyond the scope of monetary policy, and if policymakers made aggressive attempts to do so, it would undermine the one contribution monetary policy could and should make to economic stability — price stability.

Of course, monetary theory has advanced in the past three decades with more sophisticated models and empirical methods to test the validity of these models. However, the proper scope of monetary policy remains an important issue today. In response to the global financial crisis, central banks have been asked to use monetary policy and other central bank functions to deal with an increasing array of economic challenges. These challenges include high unemployment, asset booms and busts, and credit allocations that fall more properly under the purview of fiscal policy. I believe we have come to expect too much from monetary policy. Indeed, broadening its scope can actually diminish its effectiveness. When monetary policy over-reaches and fails to deliver desired, but unattainable, outcomes, its credibility is undermined. That makes it more difficult to deliver on the goal it is actually capable of meeting. Moreover, when the central bank is asked to implement policies more appropriately assigned to fiscal authorities, the independence of monetary policy from the political process is put at risk, which also undercuts the effectiveness of monetary policy.

In my remarks today, I want to discuss the appropriate scope of monetary policy in dealing with real economic fluctuations, asset-price swings, and credit allocation. In doing so, I want to reinforce Friedman’s caution that we should be careful not to expect too much of monetary policy. I believe that if we recognize the limits to what monetary policy can do effectively, we will be better able to understand what monetary policy should do.

Before continuing, I should note that these are my views and not necessarily those of the Federal Reserve Board or my colleagues on the Federal Open Market Committee.

Monetary Policy and Real Economic Fluctuations

The U.S. Congress has established the broad objectives for monetary policy as promoting “effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” This has typically been characterized as the “dual mandate,” since if prices are stable and the economy is operating at full employment, long-term nominal interest rates will generally be moderate.

Most economists now understand that in the long run, monetary policy determines only the level of prices and not the unemployment rate or other real variables.2 In this sense, it is monetary policy that has ultimate responsibility for the purchasing power of a nation's fiat currency. Employment depends on many other more important factors, such as demographics, productivity, tax policy, and labor laws. Nevertheless, monetary policy can sometimes temporarily stimulate real economic activity in the short run, albeit with considerable uncertainty as to the timing and magnitude, what economists call the “long and variable lag.” Any boost to the real economy from stimulative monetary policy will eventually fade away as prices rise and the purchasing power of money erodes in response to the policy. Even the temporary benefit can be mitigated, or completely negated, if inflation expectations rise in reaction to the monetary accommodation.

Nonetheless, the notion persists that activist monetary policy can help stabilize the macroeconomy against a wide array of shocks, such as a sharp rise in the price of oil or a sharp drop in the price of housing. In my view, monetary policy’s ability to neutralize the real economic consequences of such shocks is actually quite limited. Successfully implementing such an economic stabilization policy requires predicting the state of the economy more than a year in advance and anticipating the nature, timing, and likely impact of future shocks. The truth is that economists simply do not possess the knowledge to make such forecasts with the degree of precision that would be needed to offset the economic shocks. Attempts to stabilize the economy will, more likely than not, end up providing stimulus when none is needed, or vice versa. It also risks distorting price signals and thus resource allocations, adding to instability. So asking monetary policy to do what it cannot do with aggressive attempts at stabilization can actually increase economic instability rather than reduce it.

Therefore, in most cases the effects of shocks to the economy simply have to play out over time as markets adjust to a new equilibrium. Monetary policy is likely to have little ability to hasten that adjustment. In fact, policy actions could actually make things worse over time. For example, monetary policy cannot retrain a workforce or help reallocate jobs to lower unemployment. It cannot help keep gasoline prices at low levels when the price of crude oil rises to high levels. And monetary policy cannot reverse the sharp decline in house prices when the economy has significantly over-invested in housing. In all of these cases, monetary policy cannot eliminate the need for households or businesses to make the necessary real adjustments when such shocks occur.

Let me be clear that this does not mean that monetary policy should be unresponsive to changes in broad economic conditions. Monetary policymakers should set their policy instrument — the federal funds rate in the U.S. — consistent with controlling inflation over the intermediate term. So the target federal funds rate will vary with economic conditions. But the goal in changing the funds rate target is to maintain low and stable inflation. This will foster the conditions that enable households and businesses to make the necessary adjustments to return the economy to its sustainable growth path. Monetary policy itself does not determine this path, nor should it attempt to do so.

For example, if an adverse productivity shock results in a substantial reduction in the outlook for economic growth, then real interest rates tend to fall. As long as inflation is at an acceptable level, the appropriate monetary policy is to reduce the federal funds rate to facilitate the adjustment to lower real interest rates. Failure to do so could result in a misallocation of resources, a steadily declining rate of inflation, and perhaps even deflation.

Conversely, when the outlook for economic growth is revised upward, real market interest rates will tend to rise. Provided that inflation is at an acceptable level, appropriate policy would be to raise the federal funds rate. Failure to do so would result in a misallocation of resources and, in this case, a rising inflation rate.

In both cases, changes in the federal funds target are responding to economic conditions in order to keep inflation low and stable and doing so in a systematic manner. Monetary policy is not trading off more inflation for less unemployment or vice versa. As I have already argued, the empirical and theoretical case for such a trade-off is tenuous at best. And the data to support the view that central banks can favorably exploit such a potential trade-off are even more dubious.

So what should monetary policy do? To strengthen the central bank’s commitment to price stability, I have long advocated that the Federal Reserve adopt and clearly communicate an explicit numerical inflation objective and publicly commit to achieving that objective over some specified time period through a systematic approach to policy. It is one of the messages of economic research over the last 40 years that policy is best conducted in a rule-like manner. This helps the public and the markets understand and better predict how policy will evolve as economic conditions change. This reduces volatility and promotes transparency and more effective communication.

An inflation objective coupled with a rule-like approach to policy decisions would make the central bank’s commitment more credible and policy more effective in achieving its goals. Indeed, the Federal Reserve is one of the few central banks among the major industrialized countries that have not made such a public commitment. I believe it is time we did. Such a commitment will help the public form its expectations about monetary policy, which would enhance macroeconomic stability.

Monetary Policy and Asset Prices

Let me now turn to the role of monetary policy in the evolution of asset prices. Some argue that monetary policy can be a source of distorted asset prices. That can be a problem, but it usually occurs when policy deviates from the sort of systematic policy rules that a price level or inflation target would suggest. Thus, a systematic approach to achieving price stability would help monetary policymakers avoid exacerbating the effects of asset-price swings on the economy. Putting aside monetary-policy-induced asset-price swings, I think it is fair to say that the broad view among many monetary policymakers is that asset prices should not be a direct focus of monetary policy. They generally accept the idea that various forms of prudential regulation or supervision are better suited to address such challenges, should it be called for, than monetary policy. Yet the housing boom, its subsequent collapse, and the financial crisis that followed have caused some to rethink this position concerning the scope of monetary policy.

No one takes issue with the view that asset prices are important in assessing the outlook for the economy and inflation. Movements in asset prices can provide useful information about the current and future state of the economy. Even when a central bank is operating under an inflation target, asset prices are informative. Put another way, judgments about the inflationary stance of monetary policy should be informed by a wide array of market signals, including asset-price movements.3 So while asset prices may be relevant in the normal course of monetary policymaking, the presumption is that such prices are responding efficiently and correctly to the underlying state of the economy, including the stance of monetary or fiscal policy. The bottom line of this view is that monetary policy should not seek to actively burst perceived asset bubbles.

Other people, especially in light of the recent financial crisis, advocate an active role for monetary policy to restrain asset-price booms. They tend to believe that asset prices are not always tied to market fundamentals. They worry that when asset values rise above their fundamental value for extended periods — that is, when a so-called bubble forms — the result will be an over-investment in the over-valued asset. When the market corrects such a misalignment — as it always does — the resulting reallocation of resources may depress economic activity in that sector and possibly the overall economy. Such boom-bust cycles are, by definition, inefficient and disruptive. So, the argument goes, policy should endeavor to prevent or temper such patterns.

This argument for monetary policy to respond directly to a perceived mispricing of specific assets is controversial. It requires that policymakers know when an asset is over-priced relative to market fundamentals, which is no easy task. For example, equity values might appear high relative to current profits, but if market participants expect profit growth to rise in the future, then high equity values may be justified.

Another challenge in addressing asset-price bubbles is that contrary to most of the models used to justify intervention, there are many assets, not just one. And these assets have different characteristics. For example, equities are very different from real estate. Misalignments or bubble-like behavior may appear in one asset class and not others and may vary even among a specific asset class. But monetary policy is a blunt instrument. How would policymakers have gone about pricking a bubble in technology stocks in 1998 and 1999 without wreaking havoc on investments in other asset classes? After all, while the NASDAQ grew at an annual rate of 81 percent in 1999, the NYSE composite index grew just 11 percent. What damage would have been done to other stocks and other asset classes had monetary policy aggressively raised rates to dampen the tech boom. During the housing boom, some parts of the U.S. housing market were experiencing rapid price appreciation while others were not. How do you use monetary policy to burst a bubble in Las Vegas real estate, where house prices were appreciating at a 45 percent annual rate by the end of 2004, without damaging the Detroit market, where prices were increasing at less than a 3 percent annual rate?

Because monetary policy is such a blunt instrument, asking monetary policy to do what it cannot do, such as seeking to deliberately influence the evolution of asset prices, risks creating more instability, not less. Moreover, the moral hazard created by the belief that the central bank would intervene if prices of a certain class of assets became “misaligned” might, in fact, cause more inefficient pricing and more instability, not less.

Monetary Policy and Credit Allocation

Finally, let me address another issue that has loomed large during the crisis and where great caution is required going forward — the role of monetary policy in credit allocation. At various times during the crisis, the Federal Reserve and many other central banks around the world intervened in various markets to facilitate intermediation. In many cases, these efforts were targeted to specific sectors of the economy, to specific types of firms, or in some cases, to specific firms.

Most of these efforts were justified on the grounds that central banks should act as “lender of last resort” in order to preserve financial stability. The specific criteria for undertaking these actions could not help but be somewhat arbitrary as policymakers had little experience with such a crisis, and little theory to guide them beyond Walter Bagehot’s dictum from the 1873 classic Lombard Street to limit systemic risk by “lending freely at a penalty rate against good collateral.”4 In general, these actions, especially in the U.S., involved extensive use of the central bank’s balance sheet and likely went far beyond what Bagehot would have imagined.

Even when it is appropriate for a central bank to function as a lender of last resort, it should follow a rule-like or systematic approach. This suggests announcing in advance the criteria that will be used to lend and who will be eligible to participate. Economic and financial stability would be best served by establishing such guidelines in advance and committing to following them in a crisis. That commitment is hard to deliver on, but institutional constraints can help tie the hands of policymakers in ways that limit their discretion. Most central banks, including the Fed, have not developed such systematic plans and thus behaved in a highly discretionary manner that generated moral hazard and volatility.

My purpose here is not to critique the myriad programs that were put in place or the varying degrees of moral hazard they created but to make a more general point — one that I have made before: that these actions, for the most part, are better thought of as forms of fiscal policy, not monetary policy, because they involved allocating credit and putting taxpayer dollars at risk. Moreover, asking monetary policy to do something that it should not do — engage in fiscal policy — can be detrimental to the economy by undermining monetary policy’s effectiveness at maintaining its ultimate responsibility: price stability.

A body of empirical research indicates that when central banks have a degree of independence in conducting monetary policy, more desirable economic outcomes usually result. But such independence can be threatened when a central bank ventures into conducting fiscal policy, which, in the U.S., rightly belongs with Congress and the Executive branch of government. Having crossed the Rubicon into fiscal policy and engaged in actions to use its balance sheet to support specific markets and firms, the Fed, I believe, is likely to come under pressure in the future to use its powers as a substitute for other fiscal decisions. This is a dangerous precedent, and we should seek means to prevent such future actions.5

I have long argued for a clear bright line to restore the boundaries between monetary and fiscal policy, leaving the latter to Congress and not the central bank. For example, I have advocated the elimination of Section 13(3) of the Federal Reserve Act, which allowed the Fed to lend directly to “corporations, partnerships and individuals” under “unusual and exigent circumstances.” The Dodd-Frank Wall Street Reform and Consumer Protection Act sets limits on the Fed’s use of Section 13(3), allowing the Board, in consultation with the Treasury, to provide liquidity to the financial system, but not to aid a failing financial firm or company.6 But I think more is needed. I have suggested that the System Open Market Account (SOMA) portfolio, which is used to implement monetary policy in the U.S., be restricted to short-term U.S. government securities. Before the financial crisis, U.S. Treasury securities constituted 91 percent of the Fed’s balance-sheet assets. Given that the Fed now holds some $1.1 trillion in agency mortgage-backed securities (MBS) and agency debt securities intended to support the housing sector, that number is 42 percent today. The sheer magnitude of the mortgage-related securities demonstrates the degree to which monetary policy has engaged in supporting a particular sector of the economy through its allocation of credit. It also points to the potential challenges the Fed faces as we remove our direct support of the housing sector.

Decisions to grant subsidies to specific industries or firms must rest with Congress, not the central bank. That is why I have advocated that the Fed and Treasury reach an agreement whereby the Treasury exchanges Treasury securities with the non-Treasury assets on the Fed’s balance sheet. This would transfer funding for the credit programs to the Treasury, thereby ensuring that policies that place taxpayer funds at risk are under the oversight of the fiscal authority, where they belong. And it would help ensure that monetary policy remains independent from fiscal policy and political pressure.


Although it has been over 40 years since Milton Friedman cautioned against asking too much of monetary policy, his insights remain particularly relevant today. I too am concerned that we are in the process of assigning to monetary policy goals that it cannot hope to achieve. Monetary policy is not going to be able to speed up the adjustments in labor markets or prevent asset bubbles, and attempts to do so may create more instability, not less. Nor should monetary policy be asked to perform credit allocation in support of particular sectors or firms. Expecting too much of monetary policy will undermine its ability to achieve the one thing that it is well-designed to do: ensuring long-term price stability. It is by achieving this goal that monetary policy is best able to support full employment and sustainable growth over the longer term, which benefits all in society.

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Looking For The Best ETFs? Brazil Boom To Continue For Many Years; 7 ETFs To Choose From

Readers here know about my reports on the huge boom going on in Brazil. While some call it  a bubble, I say this boom still has years left to go.

Today comes the latest Brazilian jobs report. While the U.S. unemployment stubbornly stays at very high levels, in Brazil 2010 was a record year for hiring, which ended with a balance of  +2.5 million formal jobs. Employment is expected to remain steady in 2011, especially in industry.
Just in the Manaus Free Zone, which includes most manufacturers of consumer electronics and motorcycles, as well as chemical products, will make permanent about 7,000 temporary workers. They were recruited from October supposedly to increase production till year end.

There are 7 ETFs that track Brazil stocks, plus BZF which tracks its soaring currency. We track them all live here.

Note: BZF's perfomance is actually in excess of +10% as there was a very large dividend on December 22 and chart has not yet been adjusted by Google.

Most temporary workers who are now hired are in the electronics sector and the increased employment reflects a "quite heated" demand early this year, especially for televisions. "As the Christmas sales beat expectations, the stocks of finished goods fell in retail and are now being replenished."

For the second consecutive year, the Korean company Samsung will hire all the temporary workers, says the vice president of Business Development Company, Benjamin Sicsú. Close to 800 employees are to be hired.
"The early years are strong and we can repeat the sale of 11 million TVs," says Lourival Kiçula, president of Eletros, bringing together the sector's industries.

An FGV manufacturing survey of about 1,000 companies in various industries indicates that 31% of industries plan to hire in the period December-February and 5.7% plan to layoff. In November, the indicators were 28.6% and 7.8% respectively.

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Commodities: Wheat Near Record Prices Again; Food Price Riots To Cause Price Hikes

We track all commodity ETFs live here.

The local newspaper reports that there is trouble in the wheat area. World wheat supplies are extremely tight and grain demand is so strong that any small problem in a major producing area would cause soaring prices to skyrocket to new record highs. The huge drop of the U.S. dollar does not help.

World leaders worry that further increase could trigger deadly riot as high food prices are already triggering violent protests in North African countries, including the chaos that toppled Tunisia's president. This also caused neighbouring countries to speed up wheat purchases to secure supplies, compounding the problem.

In addition, prices in 2011 will be fueled further by increasingly chaotic weather patterns that have seen major floods in Australia and Brazil. If the weather in the summer in the northenr hemisphere is the same, significant disruptions to food supplies could happen.
Prices doubled in the 12 months ending in  Jan. 18 in Europe, which is the world's second-biggest wheat exporter, after Russia banned exports after a severe drought. U.S. wheat prices also surged over the past year.
Citizen: "There is little sign of relief on the horizon for prices of quality wheat. Analysts do not expect Russia to open its gates to exports until at least July.

Devastating floods in Australia and dry weather in Latin America and parts of top exporter the United States are feeding a bullish mood in global grain markets, with prices in Europe hitting nearly three-year highs every week since mid-December.
European milling wheat futures are only 15 per cent away from their all-time high of 300 euros per tonne in 2007/08. Analysts say it would not take much to fill the gap.
At $9 U.S., Chicago Board of Trade wheat futures would still be 32 per cent below the 2008 high of $13.30 a bushel.

Analysts said U.S. wheat futures were unlikely to revisit their 2008 peaks as expectations of higher global wheat crops in 2011 would keep a lid on prices, even in case of weather damage, with the most ambitious estimate at around $9.

Key in the coming months will also be the amount of quality wheat available to meet strong uncovered demand, analysts say.

High-protein wheat is in short supply globally because of weather setbacks in Canada and Germany and now in another major exporter, Australia, where waterlogged fields reduced most of the current crop to low-grade feed wheat".

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Tuesday, January 18, 2011

China Steps Up Bad Mouthing of U.S. Dollar; Target: The Yuan as World Reserve Curency

The poor U.S. dollar gets no respect. China is now stepping up its campaign against the dollar being the world's reserve system. With trillions or worthless dollars being printed in the last couple of years, they have their allies.

China's President Hu Jintao said that "the current international currency system is the product of the past,", in written answers to questions posed by The Wall Street Journal and the Washington Post.

We track all currency ETFs live. the Yuan is tracked by the very attractive CYB ETF.

"The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level," Hu said.

Interestingly, Mr. Hu's comments come just ahead of his state visit to Washington on Wednesday
"Highlighting the dollar's importance to global trade, Hu implicitly criticized the Federal Reserve's recent decision to pump 600 billion dollars into the US economy, a move criticized as weakening the dollar at the expense of other countries' exports".

Asked about the exchange rate of the Yuan, and Chinese inflation, he answered:

"Changes in exchange rate are a result of multiple factors, including the balance of international payment and market supply and demand,"

"In this sense, inflation can hardly be the main factor in determining the exchange rate policy,"

Making the Yuan the World's Reserve Currency:

"China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development,"

"But making the RMB an international currency will be a fairly long process."

"They fit in well with market demand as evidenced by the rapidly expanding scale of these transactions,"

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Why Overall U.S. Consumer Spending Has Not Collapsed: Only The Rich Are Buying; Unemployed Can't Buy

If you were wondering how it was possible that unemployment in the U.S. remains so high and yet consumer spending does not fall off a cliff, here is the answer. Consumer spending is being driven by rich shoppers masking "reluctance among less affluent Americans to join in".

The difference between the have and the have nots is striking. So says the Bloomberg today. Sales of expensive items are doing well, "Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy".

However, the poor or not so well to do shop at places like Walmart. "At the other end of the economic spectrum, Wal-Mart Stores Inc., the world’s largest discount retailer, reports “everyday Americans” are living paycheck to paycheck as they await an improvement in job prospects".

“The heavy lifting is being done by the upper-income households,” said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase & Co. in New York. “They’re the ones benefiting the most from the stock market rally, and they’re spending.”

"The uneven progress in household expenditures, which account for about 70 percent of the economy, helps explain why Fed policy makers likely will keep interest rates near zero and complete a second round of Treasury purchases. Unemployment averaged 9.6 percent last year, the highest rate since 1983, even as the expansion gathered speed".

"Consumer purchases reflect bigger gains among high-income households and “financial pressures on those of more-modest means,” according to minutes of the Fed’s Dec. 14 meeting. Feroli estimates the top 20 percent of wage earners account for about 40 percent of spending, while Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, puts their contribution at closer to 50 percent."

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Sunday, January 16, 2011

Meredith Whitney: Beware Muni Bonds, Wave of Defaults About To Start

Meredith Whitney was again on CNBC and repeated her call that muni bonds are the worst place to be at the moment. She says the municipalities face a wave of defaults.

"When you have the first group of defaults you will see indiscriminate selling that would be a buying opportunity for some," "Because there has been such complacency in the market and muni investors have been talked down to for so long—'There's nothing to worry about, there's nothing to worry about'—they'll just fly."

We track all bond ETFs live here.

However, she said that investors can still make money in munis, but need to be very careful in how they proceed. "You have to know what you own. You have to really do your homework in terms of knowing what supports your bonds," Whitney said. "There are great municipal investments out there, but on a blanket basis you have to be really careful about knowing what cash flows are supporting your investments."

Watch interview:

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Friday, January 14, 2011

Fitch Downgrades Greece to Junk Status

Fitch has downgraded Greece to BB+ from BBB-.

"The downgrade acknowledges that while Greek economic and fiscal performance under the EU-IMF programme has in may respects exceeded expectations, its heavy public debt burden renders fiscal solvency highly vulnerable to adverse shocks. Moreover, despite the significant progress made in reducing the budget deficit in 2010 – by 6% of GDP despite a severe recession – the fiscal consolidation effort will still have to be sustained over several years to firmly anchor confidence in Greek sovereign creditworthiness.

The negative outlook reflects that public debt sustainability is still very fragile and renewed access to market financing uncertain. Failure of the economy to rebalance and emerge from recession would place further downward pressure on Greek ratings".

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Weeping in a BMW: China Pushes Consumption; Move Over U..S.

Chna seems to be sending a message: Move over U.S., we will be the new kings of consumption; increase internal consumption or else.

Now imagine 1.4B people doing that. (By the way, there won't be enough food for their new tastes - got food commodities?)

Germany's Der Spiegel reports that China and Hong Kong together already have more than 100 billionaires, that is four times as many as Japan.

Please note that we track all Chinese ETFs live here.

"Attending an annual trade fair in Shanghai, whose high-end luxury goods cater to China's nouveau riche, is more important to them than going to see traditional military parades. Indeed, the party hopes that ostentatious displays of wealth will boost domestic consumption".

China is becoming a promising market for Western corporations, particularly in light of the warm welcome they often receive from government economic planners. Consumption has become an acceptable form of patriotism. International experience, Vice Premier Li says, teaches us that "any major power's development process must be led by domestic demand."

To strengthen purchasing power -- and following a series of suicides among workers at Foxconn, a supplier to the American technology giant Apple -- Chinese leaders have even allowed workers in many plants to strike for higher wages. In its next five-year plan, Beijing plans for the first time to assign its highest priority to consumption as an engine of growth.

Whether the strategy works will depend in part on how well the government gets inflation under control. But either way, affluent urban residents like Zhang and his wife Xu are hardly deterred by higher prices. Indeed, Beijing, it would seem, would like their next major purchase to be a car. Since the global financial crisis began, the government has stimulated car-buying by reducing taxes. The Volkswagen Group alone sold more than 1.9 million cars in China last year, a 37 percent increase over the previous year. Although Beijing's city government has put a cap on the number of new vehicle registrations it allows, it represents but a minor hurdle in the large-scale plan to boost consumption.


"For many Chinese, owning a car is the second most important status symbol after buying an apartment. "I would rather weep in a BMW than smile on a bicycle," a candidate on a popular TV dating show said recently when describing her ideal husband. The episode gave rise to a new term on the Internet, "BMW woman," a reference to this particular type of materialistic Chinese woman".

Meanwhile, the roughly 700 million residents of China's rural areas face completely different problems. Traditionally, they have saved much of their income for times of illness and old age. But now the party has launched campaigns to turn frugal farmers into consumers by encouraging them to buy television sets, refrigerators and computers.

Officials throughout the country are promoting the construction of giant, amusement park-like shopping centers to serve as temples of the new consumer religion. Wuhan, a city of 9 million, also aspires to win global fame from its malls. The most upscale of these complexes is the Wuhan International Plaza, and -- like a promise of things to come -- it rises up out of the smog that envelopes this iron-and-steel-producing city almost year-round"

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Inflation Jumps in The U.K., Calling for Raise in Interest Rates

Rising prices for those commodities priced in the dropping U.S. dollar, namely oil and food, helped overall input prices surge 3.4% in just a month, "more than double the 1.5% rise expected".

From the Telegraph: "The rise helped pushed the yearly rate of increase to 12.5%...".

"As margins come under increasing pressure, manufacturers are passing price rises on to their clients, although competitive pressures are shielding customers somewhat.

“Firms will feel pressure to pass further cost increases on in coming months, especially as there seems to have been no let up in the rising price of many commodities in recent weeks,” said Chris Williamson, chief economist at researcher Markit.

Calls to Increase Interest rates

"These data will therefore add to calls on the Bank of England to raise interest rates to cool inflationary pressures."

The official rate of inflation, as measured on the consumer price index (CPI), was 3.3pc in November and economists expect the rate to have moved even further away from the 2pc target in December.

Philip Shaw at Investec thinks the updated figures out next week will show that annual inflation rose to 3.5pc last month, driven by the rising cost of energy.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: “These figures … reinforce our expectations that during the next few months annual consumer price inflation will rise towards 4pc per cent and possibly higher.

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Forget Peak Gold Theories: Global Gold Production Hits New Record High

Precious metals consultancy firm GFMS reports that global gold production reached a record high in 2010, "defying the gold fanatics who claim that output is in terminal and irreversible decline".

GFMS executive chairman Philip Klapwijk: "It seems we've broken away from the flat-to-down trend of the last decade,", in a presentation in Toronto.

We track all gold ETFs live here.

Mine production rose 2.7% to reach an estimated 2,652 tonnes, as a result of new mines coming on stream or ramped up production. What is inetresting is that this follows a 6% increase in 2009.

GFMS says production will increase another 6% in the first half of 2011.

From the Financial Post: "From 2002 to 2008, gold production declined even as prices soared from less than $300 U.S. an ounce to more than $1,000 U.S. The poor supply-side response to rising prices led some experts to declare that "peak gold" -- the point at production reaches its historical zenith and begins to decline -- was already upon us.

Now that output has jumped two years in a row and exceeded the previous peak level in 2001, that case is getting harder to make, at least in the short term.

In the longer-term, the industry is mining lower grades and making fewer new discoveries.

Jon Nadler, senior metals analyst at Kitco Metals Inc., said that the rise in output reflects the massive amounts of exploration spending over the last several years.

"You don't spend $40-or $45-billion on finding new gold and expect no fruit to be borne.

"It's not necessarily low-hanging fruit, but it certainly is fruit," he said.

It has taken years for all of that exploration to lead to higher production, which reflects how long it takes to get a new mine permitted and built. By the same token, experts say the declining production of the last decade reflects the meagre spending on exploration in the 1990s and early 2000s, when prices were poor.

At current prices above $1,300 U.S. an ounce, gold miners are also looking at ways to maximize output from their existing assets, which supports higher overall output. For instance, Barrick Gold Corp. is studying a plan to expand production at its Turquoise Ridge mine from less than 200,000 ounces a year to 800,000 by chasing lower-grade ore.

"At these margins, how could these companies not be pumping out as much as possible? It would behoove them to do the most they can," Nadler said.

GFMS also pointed to rising production from emerging regions like China and West Africa, which more than offset declines in places like South Africa and Peru. South Africa used to be the world's dominant producer, but now lags behind China, Australia and the United States.

GFMS remains very bullish on the overall gold market, calling for an average price of just over $1,400 U.S. an ounce in the first half of 2011, with $1,500 U.S. breached in the summer. Klapwijk said the biggest drivers remain potential growth in investment demand, loose monetary policy, and inflation fears. He also said that the bargain hunters come out when the price dips."

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Thursday, January 13, 2011

Brazil, India, and China Account for 50% of World's Growth; Food Price Pressures

Emerging countries, including Brazil, China and India will account for almost half of world economic growth in 2011, according to estimates by World Bank released on Wednesday.

We track all global ETFs live here.

It is anticipated that these nations represent 46% of growth in Gross Domestic Product (GDP) worldwide this year.

The bank's estimate represents a reduction in the pace of global growth in 2011 after expanding by 3.9% in 2010. The bank predicts growth of 3.3% in 2011 and 3.6% in 2012.

For Brazil, the report forecasts a real GDP growth of 4.5% in 2011 and 4.1% in 2012.

The average economic growth between rich countries should be at 2.4% in 2011. Among developing countries, the expected average is 6%.

"It's an encouraging sign, not only the health of these economies, but also the growing role they are playing in the global economy," said Andrew Burns, manager of the Global Macroeconomics Group Perspective of Development Economics World Bank.

Burns warns, however, that the positive scenario could change if there is a worsening fiscal situation in some European countries.

"This can not only reduce the growth potential of the European economy, but also could result in negative consequences in emerging countries," he says.

The study argues that in general the world economy is experiencing "a stage of post-crisis growth to a slower but still solid growth this year and next."

Marked improvement

The study points to a considerable improvement in the economic environment in Latin America and the Caribbean. The report said the region could leave the global crisis in a positive way, both in comparison with the previous year's performance as with the recovery of other parts of the world.

For 2010, the World Bank predicts that regional GDP has grown 5.7%, "similar to the average recorded in the growth spurt of the 2004-2009 period."

The report said the slight slowdown in regional growth in 2011 (to around 4%) will be due to weaknesses in the economic situation in other parts of the world.

The Bank also draws attention to regional countries that are vulnerable to capital flows that can destabilize the economy. Economic activity in the region began to recover in the second goal of 2009, with industrial production growing by 10% during the fourth quarter.

With the exception of Chile, the region's aggregate industrial growth remained high in 2010 and grew 9% in the first quarter. The earthquake in Chile in February triggered a fall of 30% of the country's growth in the period.


The report points to the inflationary pressures faced by the BRIC nations, especially China and India. The exception in the block would be Russia, where the strengthening of the ruble has contributed to the decline in inflation.

The situation of commodities has also won a separate chapter in the report, which states that the price recovery began in 2009 remained in 2010.

Current prices of foods - considered relatively high, according to the bank - are having different impacts in each region.

In some economies, "the devaluation of the dollar, improving local economic conditions and rising prices of goods and services means that the real price of food has not increased in proportion to the dollar for basic food products are marketed internationally.

Burden of poverty

Burns, however, followed by a warning: "double-digit increases in prices of basic foodstuffs in recent months are exerting pressure on some countries, especially in parts of the population already suffering a heavy burden of poverty and malnutrition. "

"And if the global food prices rise further, along with the price of other essentials, one can not exclude a repetition of the conditions prevailing in 2008."

The World Bank concludes his report saying that the strong recovery that has marked the latest monthly analysis should be losing steam in coming months. However, the expectation is that growth rates will follow strengthening, especially in developing countries.

The study also concludes that the intense participation of these countries is a trend that should continue in the coming years and decades, but warns of the "significant challenges ahead that continue to exist as an obstacle to a peaceful recovery."

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Brazil Created Over 2.5M Jobs in 2010, Will Create 3M in 2011

This is for anyone that had any doubts about the boom in Brazil, and all those sayng that there is a bubble there. Make no mistake: this still has years to go.

Labor Minister Carlos Lupi said on Thursday that the creation of formal employment in Brazil in 2010 surpassed 2.550 million, which should confirm a historic result. The official numbers will be published next week, according to the minister. 2,544,457 jobs were created up to November.

Lupi said that despite the prospect of a slowing economy this year, employment generation should surpass the 3 million mark. "The virtuous cycle will continue this year with increased investment in infrastructure works and works for the World Cup and Olympics," said the minister.

Lupi also commented that there is no disagreement within the government regarding the minimum wage.
During the week, the minister had said that the value of the minimum wage would be decided by Congress. Today, however, Lupi said she defends the value established by Provisional Measure 516, signed by former President Luiz Inacio Lula da Silva and published in the Official Gazette in the last days of his government on December 31. The MP has set the wage at R $ 540.00. The minister emphasized that Congress is entitled to discuss the issue

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Citi Says European Bailout Fund Needs to Be Increased by 1 Trillion Euros For Spain and Italy

Citigroup says European bailout fund (Europe’s Financial Stability Facility") needs to be increased by about E1T to accomodate Spain and Italy. From page 1 of the 28-page report:

"Our economists believe the EFSF will need to be upsized to at least €1tn given that the 2011-13 gross funding needs for the peripheral countries amount to €1.76tn"

And U.S. banks report a phantom $1T in interest income. What's a trillion these days..

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U.S. Banks Are Reporting Phantom $1.4T on Interest From Foreclosed Properties: Massive Losses Coming

Robert Lenzner of Forbes writes that US banks have been reporting phantom $1.4T in interest on bad morgages, Basically mortgages that are going for foreclosure (but have been delayed, or they are just going through a long slow process) can still accure interest, even though that interest will never be paid. In other words, the losses at the banks are much larger and you cannot trust their financials.

In fact it can get worse because house prices continue to fall.

This is  a massive amount of money, even by today's bailout standards.

Says Lenzer: banks are being... "bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators.

They are allowed to accrue interest on non-performing mortgages until the actual foreclosure takes place, which on average takes about 16 months.

All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.
The potential writeoffs could be even larger should home prices continue to weaken, placing more homes in the nonperforming category on bank balance sheets.

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Wednesday, January 12, 2011

Fed Buying $112B in Treasuries By February 9th

The NY Fed has released its schedule for $112B in open market purchases for the next few weeks. That is  a veyr sizable amount of money.

January 13, 2011 January 14, 2011 Outright Treasury Coupon Purchase 07/31/2016 12/31/2017 $7 $9 billion
January 14, 2011 January 18, 2011 Outright Treasury Coupon Purchase 01/31/2015 06/30/2016 $6 $8 billion
January 18, 2011 January 19, 2011 Outright TIPS Purchase 04/15/2013 02/15/2040 $1 $2 billion
January 19, 2011 January 20, 2011 Outright Treasury Coupon Purchase 07/31/2013 12/31/2014 $6 $8 billion
January 20, 2011 January 21, 2011 Outright Treasury Coupon Purchase 08/15/2028 11/15/2040 $1.5 $2.5 billion
January 21, 2011 January 24, 2011 Outright Treasury Coupon Purchase 02/15/2018 11/15/2020 $7 $9 billion
January 24, 2011 January 25, 2011 Outright Treasury Coupon Purchase 07/31/2016 12/31/2017 $7 $9 billion
January 25, 2011 January 26, 2011 Outright Treasury Coupon Purchase 01/31/2015 06/30/2016 $6 $8 billion
January 27, 2011 January 28, 2011 Outright Treasury Coupon Purchase 07/31/2012 07/15/2013 $4 $6 billion
January 28, 2011 January 31, 2011 Outright Treasury Coupon Purchase 02/15/2018 11/15/2020 $7 $9 billion
January 31, 2011 February 1, 2011 Outright Treasury Coupon Purchase 08/15/2013 12/31/2014 $6 $8 billion
February 1, 2011 February 2, 2011 Outright TIPS Purchase 04/15/2013 02/15/2040 $1 $2 billion
February 2, 2011 February 3, 2011 Outright Treasury Coupon Purchase 02/15/2021 11/15/2027 $1.5 $2.5 billion
February 3, 2011 February 4, 2011 Outright Treasury Coupon Purchase 08/15/2016 01/31/2018 $7 $9 billion
February 4, 2011 February 7, 2011 Outright Treasury Coupon Purchase 08/15/2013 01/31/2015 $6 $8 billion
February 7, 2011 February 8, 2011 Outright Treasury Coupon Purchase 02/15/2018 11/15/2020 $7 $9 billion
February 8, 2011 February 9, 2011 Outright Treasury Coupon Purchase 08/15/2028 11/15/2040 $1.5 $2.5 billion
February 9, 2011 February 10, 2011 Outright Treasury Coupon Purchase 02/15/2015 07/31/2016 $6 $8 billion

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Home Prices Drop More Than During Great Depression, Drops Are Accelerating

Shocking news indeed. While gasoline, oil, food and commodity prices have risen since the financial crisis, home prices have dropped 26% since their peak in 2006. Why is this so significant? This drop has exceeded the 25.9% drop registered in the five years between 1928 and 1933, a period also know as the Great Depression.

The data is from Zillow, the housing data company (Reuters)
"Many economists expect further price drops, even if there are some anecdotal signs of growing demand, such as in pending home sales data".

Stan Humphries, Zillow's chief economist:

"For the next six to nine months, the larger factors affecting the housing market that will produce more home price declines will be the excess inventory of homes, high negative equity and foreclosure rates, and weakened demand due to elevated employment"
Zillow also added that declines are actually accelerating, and "it will take a while before falling unemployment and other signs of economic improvement support the market,"

This inspite of all the funny monye put into the system, TARPs, QEI and QE2, etc. Without them, likely all asset prices woud have dropped, making the crisis worse than the Great Depression.

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So You Thought The Troubles Were Over: Why Markets Shoots Higher Today

Pretty much every single analysts and media outlet had been reporting how the crisis has been contained and how the markets will be fine this year and going higher by 15% or so. Goldman Sachs just said the same yesterday (forecasts 18% gain for the SPX).

Although the market had  a rough first days in 2011, today you'd think all of them them were right. Europe is rocketing higher. Why? The devil is in the details.

Bloomberg reports that European governments are considering help for Portugal, including buying back debt and lowering interest rates on rescue loans and guarantees. They are part of a package to "quell the financial crisis, according to two people with direct knowledge of the talks".

Basically, the markets go higher because the can is being kicked down the road again. Who will pay for it is our children and their children, but the party continues. If you though the crisis was over, please understand why these neasures are being taken.
According to the report, the plan may include a loan to Portugal of about $78B, more purchases of outstanding Greek debt (who thought Greece was fine?).

Costs Rise to Record High
The report also says that the cost of insuring European debt climbed to a record as the crisis that last year led to 178 billion euros in EU and International Monetary Fund aid for Greece and Ireland threatened to claim Portugal as its next victim.

Interestingly, Portugal just yesteray said that it did not need any aid! "Portugal has brushed aside suggestions that it will have to fall back on EU help. Noting that last year’s deficit was less than forecast, Prime Minister Jose Socrates said yesterday that “Portugal will not request financial aid for the simple reason that it’s not necessary.”'

More aid to bring the markets higher, until the next crisis in a few days or weeks.

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Tuesday, January 11, 2011

Roubini Versus Goldman Sachs, Who is Right?

Nouriel Roubini says Brazil's comments, and also Goldman Sachs comments, that the country should cut spending and reduce its budget deficit as a measure to contain the appreciation fothe Real may well backfire.

So Goldan Sachs says one thing, Roubini says quite another.

According to Bloomberg, Roubini calls Mantega’s proposal (to stem currency gains by cutting spending) is flawed.

Brazil mentioned a strong fiscal move to reduce demand and slow inflation down. With lower inflation, as opposed to the high current rate, the country will be able to lower interest rates, thus making it less attractive to foreigners.

Roubini says that may actually have the oppostite effect.because spending cuts will reduce the budget deficit and increase the country’s creditworthiness.
Roubini: “I am not convinced by the argument,” “If you are fiscally sound, then you are even more appealing as a country and more money can come.”

Per the sasme Bloomberg report, Goldman Sachs’s chief Latin America economist (Paulo Leme) says that Brazil "may struggle to slow real gains if international prices for its commodity exports keep rising. Still, he said, reining in government spending and credit growth would help the country “find a more neutral interest rate which is less attractive” to overseas investors".

Roubini said he has doubts about the proposal.

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ECB's Issing: Euro's Existence Threatened; Crisis Reveals Basic Design Flaws; Moment of Trust Postponed

Otmar Issing, former chief economist of the European Central Bank, warned today that the Euro's existence could be threatened unless member countries find a way to impose tougher spending curbs on one another.

Mr. Issing wrote: “With the failure to make sovereign states’ fiscal policies consistent with the conditions for the single currency area,”  “policy makers not only have weakened the functioning of monetary union, but have also called into question its very survival.”

The New York Times reports that he also wrote in an email: “I have indeed become very concerned that politics fail to take the crisis as an opportunity to forcefully improve the framework” for monetary union'

Mr. Issing is former member of the board of the Bundesbank and was a key figure in the introduction of the euro.

He opposed bailing out Greece and other troubled European countries saying that that rescue of countries that have pursued bad policies “adds up to an open invitation to states to live beyond their means at the expense of others.”

"Predictions by euro skeptics have proved true", [...]  “The crisis brought further evidence of a basic design flaw of monetary union, namely that we could not rely for its sound working on member countries to carry out appropriate economic policies,”

Mr. Issing also warned leaders “A political union worthy of the name cannot be set up by stealth,”, i.e, do not push policies down European throats in disguise.

Positive side

“Europe has faced repeated crises in the past and each time has emerged on the whole in stronger shape,”

He concluded: “the more these tensions will endanger the existence of E.M.U.”

“My conclusion at the start of 2011 is a somber one,”  “We have not yet reached the moment of truth for E.M.U. It has merely been postponed.”

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Monday, January 10, 2011

Brazil Says Currency Wars Are Now Turning Into Trade Wars

We reported last week that Brazil introduced new measures to stop the appreciation of the real currency versus the declining US dollar and they hay have set a floor of 1.60 to 1.65 on the rate.

Brazil now says it will raise the issue of currency manipulation at the World Trade Organisation and other global bodies, stating that the US and China were among the "worst offenders".

Turning into trade wars

Guido Mantega, finance minister:“This is a currency war that is turning into a trade war,”
He added that currency manipulation would be on the G20 agenda this year. Brazil may also lobby to have the WTO define exchange-rate manipulation as a form of veiled export subsidy, which it is.

Brazil’s trade with the US have dropped from an annual surplus of about $15B to a deficit of $6B since the US began is stimulus and QE programs.

Mr. Mantega also said that China’s undervalued currency is distorting world trade:

“We have excellent trade relations with China ... But there are some problems ... Of course we would like to see a revaluation of the renminbi.”

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Saturday, January 8, 2011

Invest Wisely Where The Growth Is: World's Current Powers To Drop Hard Falling Behind Emerging Nations in GDP

PriceWaterhouse Coopers has released a study of GDP projections. It's "move over" for the world's current powerhouses. Brazil will surpass France this year, will move ahead of the U.K.,. by 2013, and will be 4th largest economy by 2050, leaving even Germany and Japan behind.

Reflecting where the current growth is in the world, the U.S. will also fall, to 3rd place, behind China and India. Canada will drop to 16th place. After Brazil, Indonesia is the next big jumper, moving to 8th place.

Germany is expected to drop to10th place.

Brazil's GDP is expected to rise from $2T to $9.7T by 2050, at current prices.

Invest wisely. We track all country ETFs live here.

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ADP's Huge Miss Employment Numbers Versus Government Numbers, Can You Trust Either?

There was a big hoopla this week when the ADP numbers were released showing massive employment gains. Those gains ended up being nonexistent in the figures released by the government two days later. Who do you trust? Can you trust either? Normally, I'd tend to trust more a private organization that reports real numbers, but it turrns out that is not the case at all. Both entities estimate numbers and both make seasonal adjustments, and neither can be perfect.

Bloomberg has an article on this today. It reports economists from JPMorgan Chase & Co.’s and Goldman Sachs Group warning to beware of December

“I don’t think ADP has been particularly useful in forecasting” the government’s employment figures, Feroli (JPM) said in a telephone interview from his New York office. “ADP has historically had problems in December because of a variety of technical reasons.”

They talk about the "purge effect", when employees sometimes remain on company records until December,  regardless of when they are dismissed or quit, when businesses update, or purge, their figures with ADP. "The Roseland, New Jersey-based paycheck processor estimates this change when adjusting its data for seasonal changes and the company’s projection may have been too large this year because there were fewer firings than in previous years, economists said".

The Labor Department said that 113,000 workers were added to payroll last month. This was 184,000 fewer than ADP predicted - just two days earlier. According to Bloomberg, this is the largest ever gap ADP has had on an initial private payroll forecast for December and it was a ‘Big Miss’.

Why it matters so much? "ADP’s December estimate of 297,000 prompted 22 economists, including forecasters at Morgan Stanley and Deutsche Bank Securities Inc. in New York, to raise their forecasts".

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Friday, January 7, 2011

Brazilian Inflation Is The Highest in 6 Years

Brazilian inflation numbers were released this morning. The huge boom in the country is reflected in the country's IPCA index, which shows that inflation was the highest of the last 6 years, adding to the government pressure to raise interest rates.

The IPCA measures inflation for those earning up up 40 minimum wages (about $13k/mo) in metropolitan areas.

However, the IGP-M, computed by the prestigious Getulio Vargas foundation, and which includes wholesale and consumer prices, shows a much higher number overall, but slightly off the peak in November.:

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Thursday, January 6, 2011

Threats: Geithner Warns That U.S. Could Hit Legal Debt Limit in March and U.S. Could Default

Treasury Secretary Timothy Geithner said today that the United States could hit the legal limit on its ability to borrow as soon as March 31 and "faces serious consequences unless Congress acts by then to raise it".

The statement is a sign of the new times, run out of money? Just increase your dredit limit! Imagine if consumers did that. Well, some do, and we know the consequences.

According to Reuters, Geithner said: "Even a short-term or limited default would have catastrophic economic consequences that would last for decades,"

He added that it was hard to know exactly when the current $14.3 trillion ceiling on the debt limit would be pierced and that the Treasury could engage in extraordinary measures, such as suspending sales of state and local government securities, but preferred not to because it is disruptive.

"The Treasury department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely between that date and May 16, 2011,".

He warned that if the U.S. does not raise the debt limit, it would put the United States into default on its obligations for the first time in its history, would have consequences "potentially much more harmful than the effects of the financial crisis of 2008 and 2009."

Wasn't there a previous secretary making similar comments not long ago, warning, or threats about the time TARP was launched?

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Currency Wars: Brazil Fires New Salvo To Stop Drop of US Dollar: Requires 60% Withholding

In spite of all the "good news" lately, the US Dollar continues to sink versus the Brazilian real, and Brazilian authorities have stated that theory will not allow it any further, establishing  a floor at 1.60/1.65 (currently 1.67). Today, Brazil's Central Bank reported that it is taking action to resize the exchange positions of financial institutions.

The banks will have to collect and remit to the CB a compulsory deposit worth 60% of the value of the sold foreign exchange position that exceeds the lesser of: $ 3 billion or the banks reference asset value. This compulsory deposit will be collected in kind and will not earn interest.

In the jargon of the financial market, "being sold" signals doing business that require future delivery of dollars or payment of the exchange rate variation. In practice, this represents a bet that the Real will appreciate. Being "bought", therefore, indicates the opposite: expected depreciation of the Brazilian currency.

The director of Central Bank's monetary policy, Aldo Mendez, says that the measure increase the demand for dollar in the financial market and therefore induces dollar purchases by financial institutions, causing a trend of dollar appreciation.

Financial institutions will have 90 days to comply to the new rule. A note of CB published this morning, reports that the CB's board decided to adopt this as a preventive measure. According to the monetary authority, the measure improves the existing regulatory tools and helps maintain the stability of the financial system.

The banks aims to improve the functioning of the spot foreign exchange and reduce the short positions of the system, which in December 2010 reached a value of $ 16.8 billion.

According to Mr. Mendes it is not good for the economy when the system moves to one extreme or the other (purchased or sold in U.S. dollars). That's because, he said, the futures market there is always a risk and uncertainty about the exchange rate. Therefore, it is not good, he insisted, when there is a concentration at one end.

He noted that when a market is in a short position and there is appreciation, there is a run to buy the currency to cover that position.

Mendes also said that ideally the financial system should work with a position closer to the equilibrium exchange rate, instead of focusing on a particular "pole". He noted, however, that the short position does not necessarily mean bet on a certain tendency for the exchange rate, because sometimes it reflects normal operations of financial institutions, such as foreign trade.

In addition, the government is preparing other new measures: a big increase on the IOF (financial tax) or even a "quarentine" of inbound money. It is clear that Brazil has set a floor for the U.S. Dollar. However, there are still very good ways to play this through an ETF. We just need to wait for the measure to be announced and the one-time hit.

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It's Sleek, It's Fast, Powerful, and Super Thin: Not The iPad, It's The RIM Playbook!

RIM gave a demonstration of the new Playbook at the International Consumer Electronics Show, and it was impressive. Analysts and reporters report that the Playbook is a device that will gain a foothold in the expanding market for touch screen tablet computers.
"It's sleek, it's fast and has the same polished feel and attention to detail that helped RIM become the favourite device of corporate users and helped propel the Waterloo, Ont.-based company's Black-Berrys to the forefront of the smartphone world". (FP)

It's going on sale in Q1 2011, and the company says pricing will be "competitive" with rival tablets.

It has the BlackBerry logo emblazoned under its seven-inch screen, weighs barely 400 grams and its thickness: just10 mm. It also has a scratch-resistant soft-touch finish backside.
RIM demoed the powerful QnX OS that power the Playbook (this is an incredible OS that I used when developing security applications for Citibank in the 80s). The device was shown playing a YouTube video while spreadsheets and other apps run on the foreground. RIM also showed showed the front-and rear-facing cameras.

RIM's target price is $80.

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Wednesday, January 5, 2011

World's Food Prices Surge To New Record Highs - Again

The FAO has released its updated food and commodity price indeces, and the numbers show that they have climbed to new record highs:

Sugar is one of the main culprits. The FAO also lsits meat. Interestingly, as I justb returned from brazil, I can attest that meat prices there, whcu have historically been much lower than elsewhere, have indeed soared. A kilogram of filet mignon was selling for USD$35, the same price it sells in Canada. A kilogram of picanha was selling for $55, it sells for $11 in Canada.


We track all commodity ETFs live here.

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Tuesday, January 4, 2011

Shell and Brazil's Cosan to Sell Ethanol Worldwide

The European Commission approved today a joint venture between Shell Brazil Holding BV, a unit in Royal Dutch Shell, and Brazil's Cosan SA

Together, the companies will produce, sell and commercialize sugar and ethanol in Brazil and abroad. They should also develop and license certain technologies for ethanol as well as provide, distribute and sell transportation fuels in Brazil.

"After examining the operation, the Commission concluded that the transaction will not significantly hinder effective competition in the Eurozone  or any substantial part of it, " the EU said in a statement.

Cosan trades in New York as symbol  anmd is one of the several spectacular Brazilian companies which have returned over 200% since 2009. We track them all live here.

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Natural Gas Shoots Higher: HNU to Jump Today; Contango Alleviated Today

Natural gas climbed higher yesterday and UNG rose over 5%. Because the TSX was closed, HNU was not traded.

This morning, natural gas February contracts continue to move higher to $4.68. If this continues, at the open, HNU should jump over 10%, possibly 12-14% since its last price of $6.67.

Note however, that contango's ugly face is showing up again, which is very bad news for UNG, although the situation today is slightly alleviated until June/July contracts. Contango is terrible news for UNG.

Disclosure: long HNU.

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Currency Wars Continue: Chile Strikes Back and Buys $12B US Dollars

Chile’s CB will start buying dollars massively  in the foreign-exchange market today in "an unprecedented bid to weaken the peso, Latin America’s best- performing currency in the past year". (Bloomberg)

Chile's main export is copper, and becuase copper is so expensive (due in part to a  weak US dollar), the country's economy has not been terribly affected, but it's other exporters have.

We track all foreign currency ETFs live here.

"Chile joins other emerging nations in a battle that even De Gregorio has signaled risks being more expensive than it is helpful as the Federal Reserve pumps $600 billion into the U.S. economy while keeping its benchmark interest rate near zero. Chile’s peso has gained 17 percent against the U.S. dollar since the end of June, second only to the Australian dollar among currencies tracked by Bloomberg, as surging copper prices boost trade prospects of the world’s biggest producer of the metal".

“This is the biggest exchange rate intervention that has been announced in our country,” Finance Minister Felipe Larrain told reporters in Santiago. “It seems to us to be a measure that is on the right track and that will have an impact on the exchange rate.”

The CB expects to buy the $12 billion by the end of the 2011 and also intends to sell bonds.

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Brazil's Automobile Industry Hits New Record: 3.3M Cars Sold in 2010

Sales of cars and light commercial vehicles in Brazil in December hit a record high totaling 361,300 units, bringing the total for 2010 to 3.33 million units, an increase of 10.6% over the 3.01 million 2009. The annual volume confirms the expectation of industry on the fourth consecutive record sales in the sector.

This is a very high number considering that in the U.S. sells about 10M total vehicles are sold every year.

In comparison with November, December sales were 16% larger; compared to the same month of 2009 were up 30%.

The previous monthly record in March 2010, was 337,400 cars and light commercial vehicles and had been driven by consumers anticipating the withdrawal of the sales incentives granted by the federal government when the financial crisis hit the country in late 2008 .

In recent years, the month of December comes with peaks of registrations of vehicles in a move that automakers and dealers rush to close their balance sheets.

For 2011, the renewal of Anfavea expects record sales in 2010 to 3.63 million vehicles - including trucks and buses also.

Although Fiat has ended 2010 in the lead industry, General Motors and Ford had the highest sales growth among the four leading carmakers in the country.

The Italian automaker ended 2010 with sales of 760,495 cars and light commercial vehicles, up 3.2% on the volume sold in 2009. Volkswagen sold 700,354 vehicles, up 2.3 percent. General Motors recorded 657,700 registrations, an expansion of 10.4%. Ford ended the year with 336,281 units sold, up 10.6%.

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Monday, January 3, 2011

Bank of America is Worried: Buys Embarassing Web Sites

Bank of America executives seem to be very worried. According to the New York Times, the bank bought web addresses that "could prove embarrassing to the company or its top executives in the event of a large-scale public assault, but a spokesman for the bank said the move was unrelated to any possible leak".

Of course the move will be futile as the number of address and names is virtually infinite.

Today they also announced that they are settling with Freddie and Fannie for just over $2B, a move that is seen as a preventive measure. BAC stock has had a disastrous performance in the last year.

On Dec. 18, BAC said it would join MasterCard and PayPal in stopping the processing of payments intended for WikiLeaks.

"The bank’s investigative team is trying to reconstruct the handover of materials to public agencies for a variety of inquiries, in pursuit of previously undisclosed documents that could embarrass the company, bank officials said.

In addition to the Merrill documents, the team is reviewing material on Bank of America’s disastrous acquisition in 2008 of Countrywide Financial, the subprime mortgage specialist, the officials said. The criticism of Bank of America’s foreclosure procedures centers mostly on loans it acquired in the Countrywide deal, and one possibility is that the documents could show unscrupulous or fraudulent lending practices by Countrywide.

If that is the case, it would not only reignite political pressure on Bank of America and other top mortgage servicers, but it could also strengthen the case of investors pressuring the big banks to buy back tens of billions in soured mortgages.

“If something happens, we want to be ready,” one bank official said. “You want to know what your options are before it comes out, rather than have to decide on the spot.” Bank of America’s efforts are complicated by the fact that it has made several huge acquisitions in recent years, and those once-independent companies had different computer systems and security procedures".

What is interesting is Mr. Assange has never said that the embarassing data is about Bank of America, yet they are so worried.

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