Friday, April 29, 2011

5 Reasons Inflation Will Keep Rising

Douglas Porter, deputy chief economist at BMO Capital Markets, wrote a report on why inflation will keep rising. He says that in recent announcements, both the Bank of Canada and the Federal Reserve sounded in absolute zero rush to begin tightening policy, with both viewing the recent rise in headline inflation as transitory, "Yet, there is a clear danger that policy-makers risk suddenly falling behind the inflation curve."

1. "Core inflation is contained"

But we all know how much the prices we pay have rise, in spite of this argument for "core inflation". Mr. Porter says that this argument holds that inflationary pressures are limited to food and energy prices. However, the recent upswing in headline inflation - or real inflation, which include the things we both need and buy, consumer goods, is not limited to the most volatile items. Core inflation strips out energy and food prices (as if we did not need these) is also on the rise.

Second, for more than a decade there has been a growing gap between core and headline numbers, which reduces the usefulness of the core consumer price index as a gauge of underlying inflation.
Annual percentage change as of March 2011
  • Fuel oil +31.3%
  • Gasoline +18.9%
  • Fresh vegetables +18.6%
  • Airfares +12.3%
  • Coffee +9.9%
  • Sugar +8.3%
  • Parking +8.2%
  • Postal services +8.0%
  • Cable and satellite +7.1%
  • Water +6.3%
  • Cigarettes +5.7%
  • Bread +5.0%
  • Meat +5.0%
  • Home insurance +4.9%
  • Auto insurance +4.7%
  • Electricity +4.3%
  • Child care +4.2%
  • Tuition +3.8%
  • Books -4.4%
  • Home entertainment equipment -4.1%
  • Recreational equipment -3.2%
  • Fresh fruit -3.1%
  • Mortgage interest -2.2%
  • Natural gas -2.0%
  • Rice -2.0%
  • Detergent -1.9%
  • Household textiles -1.8%
  • Footwear -0.9%
  • Alcohol at stores -0.8%
  • Appliances -0.6%
  • Seafood -0.2%
  • Clothing +0.1%
  • New vehicles +0.2%
  • Telephone services +0.4%
  • Prescription drugs +0.8%
  • Rent +1.2%
2. A huge output gap will keep prices in check.

The argument is that the high unemployment rate in the U.S. will keep wage gains and prices low.

"Yet this slack could be less effective in controlling inflation, as much of the spare industrial capacity may be obsolete and it will take years to retrain the jobless, suggesting the natural rate of unemployment has at least temporarily risen".

The output-gap argument hardly applies for Canada, where it is already shrinking quickly and the jobless rate is below its long-term average.

3. Coming restraint will keep a lid on growth and thus inflation.

While government restraint (if it indeed happens and the printing presses stop - don't count on it) will certainly contain growth. But that restraint could also simply result in higher user fees, regulated price increases and sales tax hikes as governments work back recession-era deficits.

Mr. Porter quotes Statistics Canada as saying sales tax increases alone have accounted for 0.9 percentage points of the 3.3 per cent rise in consumer prices over the past year.

4. Wages remain restrained and are likely to remain so, as labour is weakened.

Bernanke just said so... Mr. Porter says that this is the central bankers' strongest argument. But he is quick to point out that the Phillips Curve, which shows that the lower the unemployment rate the higher the rate of inflation, is alive and well, and that the recent dip in the jobless rate in Canada and the U.S. suggests the low point for wages has passed.

Further to the notion that the U.S. natural unemployment rate has shifted higher, there is already anecdotal evidence -even in the U.S. -of labour shortages in skilled trades.

5. Intense competition, especially from China, will halt inflation.

This is a good argument, but it is becoming less significant as many Asian countries also grapple with rising inflation and gradually pass these cost increases on to other nations. Moreover, China and other emerging markets are allowing their currencies to rise, driving up the cost of imported goods.

In the U.S., this effect is compounded by the fall in the dollar.

With news from Ottawa Citizen

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Thursday, April 28, 2011

China, The Giant is Ageing Fast; Growth to Stop Helping World's Economy

Today's Chinese data suggests China is the ageing giant. Will it follow Japan where its ageing population that has caused so much economic malaise? China may not have a choice however, in fact, the world may not have a choice. Current population growth is simply not sustainable for the planet.
Census results released today has China's population at 1.34 billion with 73.9 million more people since 2000.

As a comparison, India, which added 181 million in the last decade and now has 1.21 billion, will surpass the Chinese population size by 2025, at the current rates.

Chief statistician Ma Jiantang says: “China’s ageing population is increasing quickly while the birth rate remains low,”.

The population growth dropped to 0.57% during the last decade (down from 1.07% 10 years earlier).

Also, almost half the people in China has moved into cities.
The average household size dropped from 3.4 persons to 3.1. China, however, will continue limiting urban families to one child and rural families to two.
Chinese over 60 years old now make up 13.26% of the population. Chinese below 14 years make up 16.6% of the population.

We track Chinese ETFs live here.

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Wednesday, April 27, 2011

Fed Says QE Continues, Gold and Silver Spike Higher, AGQ Silver ETF +1,032%

AGQ: +1,032%, 11% today alone, thanks to today's fed announcement on QE (from

And gold at $1,529!

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Radiation in Japan Rises To Highest Ever: Tracking Nuclear Companies and ETFs

Radiation readings inJapan’s Fukushima Dai-Ichi nuclear station rose to the highest sicne the earthquake.

Two robots were sent into the reactor (No. 1) building. They measured radiation of 1,120 millisierverts of per hour, or more than four times the annual dose allowed. This story is far from over, unfortunately.

The long term effects on nuclear and uranium companies will linger for  along time.

Nuclear ETFs and companies  are tracked here


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Greek, Irish, and Portuguese Bonds Record: Greece Will Have A Lost Decade

Please note that we track all global ETFs live here.
Mohamed El-Erian, chief executive officer at Pacific Investment Management, said that Greece faces the risk of a "Latin America-style lost decade" due to its debt crisis.
“Latin America suffered from a ‘lost decade’ for growth, employment and investment,” “Greece today faces the same danger,” the country is “far away” from financial stability and hasn’t come any closer to gaining access to international financial markets".

So today, Greek, Irish and Portuguese bonds are being dumped and the cost to insure them against default rose to all-time highs.

"Greek two-year yields rose above 25 percent for the first time, while 10-year bond yields advanced to euro-era highs for the ninth consecutive day. Portuguese two- and 10-year, and Irish 10-year yields also reached records. German two-year notes fell as reports showed inflation accelerated in five German states in April and the nation sold 10-year bonds".  Bloomberg

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Monday, April 25, 2011

More Signs of Inflation: Kimberly Clark to Raise Prices 8.9%

More signs of rising inflation, at least for normal people that is:
Kimberly-Clark says it plans to raise prices on most products it sells in North America.

Q1 fearnings fell 8.9% due to rising costs for key materials like wood pulp.

Kimberly-Clark's says the company expects costs for the year to be twice as high as it expected last quarter.

So you will pay more for Kleenex tissues and diapers.

According to the Wall Street Journal, the actions "may not be enough to prevent weaker earnings". The company reduced the low-end of its full-year earnings outlook by a dime to a range of $4.80 to $5.05 a share, "even as it raised its sales forecast projection to an increase of 4% to 6% from 3% to 4% amid anticipated price increases and a weaker dollar".

While the weak dollar causes oil to jump, it is now expected to increase sales by about 2% for the year, up from a prior estimate of 1%.

"Kimberly-Clark's plans for another round of price increases come after the company last month said it was rising prices on bathroom tissue, diapers and other products to combat higher costs".

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A New Day, a New Record High for Gold and Silver; Silver Soars

A new day, a new record high for gold and silver.

Silver in fact is up an amazing 5%:

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China's Inflation is Soaring; CPI +5.4%, 32 Month High; Chinese Want Income Tax Cuts To Deal With Costs

China Daily newspaper reports today an interesting notion that residents in large Chinese cities have with regards to the rising inflation. They hope to see cuts in personal income tax to cope with rising prices.
More interestingly, the "Standing Committee of the National People's Congress" (NPC), which is China's top legislature, has actually reviewed a draft amendment to theirs Personal Income Tax Law " in a move to narrow the income gap and offset the effect of rising living costs".

This draft increases the minimum threshold for personal income tax from 2,000 yuan (about $307) per month to 3,000 yuan, and cuts the number of income tax brackets from nine to seven.
A survey of 282,000 Internet users showed 98.1% supported lifting the threshold. Since these are taxes, we wonder who would not support such measure.
China's consumer price index (CPI), a main gauge of inflation, rose 5.4% in March from one year ago, a 32-month high.

Food prices surged 11%.

China currently uses a nine-bracket progressive rating system, and the draft will eliminate the 15 and 40 percent tax rates.

"According to the draft, the minimum tax rate of 5 percent will be applied to those whose monthly salaries range from 3,000 to 4,500 yuan, compared to the current 2,000 to 2,500 yuan. Also, the peak rate of 45 percent will apply to those who make more than 80,000 yuan per month, instead of the current 102,000 yuan".

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Thursday, April 21, 2011

S&P U.S. Ratings Drop: White House Being Repossessed

From the Ottawa Citizen today.

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Tuesday, April 19, 2011

Perceived Investment Risk In Brazil Is Lowest Ever; Country Has U.S. $320B in Reserves

Investors perceived risk on Brazil overall has never been so low compared to the U.S. Last week, the difference between the risk levels of the two countries reached their lowest level in history: 0.60 percentage points. Monday afternoon, it was at 0.62 percentage points.

These figures were extracted from the negotiations of widely a financial derivative traded in the market, the infamous CDS (Credit Default Swaps). This paper is a type of insurance sold to investors who want to protect themselves from a possible default.

If someone wants to buy Brazilian government bonds at the same time they can protect themselves using the CDS. Yesterday, it paid 1.1% per year in U.S. dollars for this purpose. To protect against potential problems in the U.S., the rate was 0.48% per annum. The CDS market moves trillions of dollars around the world and Brazil is one of the most traded.

What happens today is the result of three movements. "On one hand, it reflects the improvement in the perception of Brazil's solvency. It is also the result of the massive global liquidity," says Dany Rappaport,  economist and partner at Investport Consulting and Resource Management. "...specifically in relation to Brazil, there is a cyclical and a structural reason that catalyzes the structural reason".

From the point of view of Brazil, structurally, the public accounts showed a significant improvement in recent years. The relationship between the public sector net debt and gross domestic product (GDP) went from 60% in December 2002 to the current 39.9%. This means that the probability that the Brazilian government does not honor the repayment of bonds it issues is very low.

In addition, external debt was reduced dramatically in recent years due mainly to the accumulation of international reserves. Currently, the country has a safety mattress of over $ 320B. Analysts say such an amount ensures the investor an exit door when - or if - they decide to leave Brazil.

The improvement in internal and external solvency was recognized again two weeks ago, when the ratings of credit risk, Fitch raised its rating of Brazil. The country is now at an even higher step on the scale that measures the solvency of a debt issuer.

With news from O Estado de Sao Paulo.

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Monday, April 18, 2011

Brazil Surpasses China as Top Destination For Private Equity Investment

Brazil has surpassed China as the largest destination for private equity investments in emerging markets over the next year, according to a survey by the Emerging Markets Private Equity Association (EMPEA), along with Coller Capital Emerging Markets Private Equity.

The same survey showed that emerging markets will capture a bigger slice of the investments from private equity investors, as some partners aggressively seek exposure to high growth markets such as India, China and Brazil.

"Brazil is perceived as having little or no political risk," said Sarah Alexander, chief executive and president of EMPEA. "And it has a strong economic growth that is leading to a significant increase in the middle class,".

Only 3% of private equity investors have cited political risk as a factor that could deter investment in Brazil, compared to 24% from 11% to China and India.

Private equity firms have increased investments in Brazil in recent years, such as Apax Partners, which bought a 54% stake in Brazilian company Tivit technology for $ 1 billion. And last week the London-based firm 3i Group hired Marcelo Di Lorenzo to head the new office and team in Brazil, where it already has investments but it does not have a base.

We track all Brazilian ADR stocks live here.

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Markets Nosedive As U.S. Outlook Downgraded to AAA Negative; If AA, Pension Funds Must Sell

The markets went on a nosedive in pre-markets, and so did bonds. To top off Greenspan's very negative comments yesteray, Standard & Poor's downgraded the outlook for the United States to negative.

S&P believes there is a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures. The outlook is now AAA negative.

This is big news because if the ratings are changed to AA, the understanding is that many or most pension funds may  longer hold those bonds. Now that is scary indeed.

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EVs: Nissan Recalls Leaf Due to Software Bug

Well, that was fast. Nissan is recalling its electric vehicle, the Leaf. This is the EV that I wanted! It is a pure electrical car, with significantly fewer moving parts that can break.

Nissan Motor offers to fix over 5,000 of its electric Leaf, which may not restart once turned off; automaker says issue is software-related and not safety.

Oh well... Hopefully, the software engineers will do a betetr job this time.

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Greenspan: U.S. Crisis is Imminent

Alan Greenspan, the former head of the Federal Reserve, who supported the tax cuts made by President George W. Bush in 2001, said on Sunday, that he is now in favor of ending the tax cuts, because the risk of a debt crisis in the United States is very large.

"This crisis is so imminent and so hard that I think we need to let all called 'Bush's tax cuts" expire. It is a very large number, " Greenspan said on NBC's Meet the Press, NBC, referring to how much the U.S. government would save if the tax return as they were under President Bill Clinton, who ruled in the 1990s.

Despite the warnings, Greenspan said he was "much more optimistic" now that the U.S. will solve its fiscal problems, in comparison a few months ago. It cited recent agreements signed between Republicans and Democrats to cut spending and reduce the U.S. government. But he warned of the risk of government to be "complacent".

"We'll make it realistically - and I hope that sooner rather than later,"

(Reported by O Estado de Sao Paulo)

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Thursday, April 14, 2011

Currency Wars Still On; Brazil Accuses of Speculation Not Protection

So says Brazil's Minister of Finance of Brazil, Guido Mantega, again criticizing the loose monetary policies in advanced countries.

He is going to ask the G-20 nations to adopt restrictions on derivatives and hedge funds in rich countries as a means to reduce global inflationary pressures .
The world is still struggling with the consequences of global economic and financial crisis, which is most apparent in the divergence in growth rates among advanced economies and emerging markets, Mantega said.
"The main culprit is the delayed recovery of the advanced countries and that leads them to practice monetary policies that are too expansive,"  "While advanced countries have not fully recovered from the crisis, we have a competition for markets, particularly for manufactured goods,"  "So I would say that this war is still going on exchange,"

He said as well that speculation in derivatives markets for commodities like oil and food have pushed up prices, adding to global inflation. Companies must be able to protect its foreign exchange exposure, but the volumes of derivatives are well above the levels of transaction, ", which is speculation, not protection", adding that the levels of leverage should be limited and money to ensure separate contracts should be increased, while the contracts should be registered with a clearinghouse to provide transparency.

Mantega recognized that in a 12-month basis, inflation in Brazil could surpass the ceiling of 6.5% of the government's target range. The inflation target is 4.5%, with a tolerance of two percentage points up or down. "Looking back on a historical basis, it is possible for us to get out of band" at the end of this year, said Mantega. "But what is important is to look forward to the future,"

And with regard to that, unlike many countries, inflation in Brazil will slow this year, the minister said. Mantega expected inflation of 5.7% this year, down from 5.9% in 2010.

Brazil's government is facing a difficult task to control high inflation, high interest rates and a stronger currency. Dealing with inflation by raising interest rates attract more money to Brazil, which strengthens the real and affect the local industry.

Mantega blamed the massive monetary expansion in the advanced countries in large part by creating the problem and said that China and other Asian countries "manipulate" their currencies. "For us it would be better if China and other countries adopted a floating exchange rate,"  "We would have a flow of global capital more balanced."

The president of Brazil, Roussef, is currently in China negotiating trade issues. Mantega said that China is sending "signals" that will reduce the restrictions on Brazilian beef, while Brazil also wants to increase sales of manufactured goods to China.

"We want to export our manufactured goods (for China) and less in terms of export commodities,"  Although defend currencies freely floating, Mantega acknowledged that Brazil had to intervene to prevent the real rise sharply. "The Brazilian economy today is very balanced,"

The government sought to discourage capital flows of short-term capital controls limited, the minister said they are working and will continue as needed. But the government has been careful not to block any action for longer-term investments, he said.

"We will not take actions that are worse than what we're trying to remedy.'s Not worth it. We will continue taking actions very hard to continue this movement interrupting the flow,"

The government's measures have kept the real stable in the first quarter of this year, near the level of $ 1.65 per dollar, while capital inflows from record highs of around U.S. $ 35 billion. Without controls, the dollar could have fallen to $ 1.40 or $ 1.45, according to the minister.
The minister stressed again that the government set a target for money and warned investors that the currency may fluctuate in both directions. "These investors should be careful not to invest in only one direction, because they may be surprised," As the currency is floating, it can turn the other way," he added.

We track all currency ETFs live here.

With news from O Estado de Sao Paulo.

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Wednesday, April 13, 2011

Rare Earths Prices Soar in 2 Weeks, REMX ETF

Chinese newspaper China Daily reports that rare-earth prices will continue to climb because of the stricter environmental standards that producers will have to meet by Aug 1.
China has seen environmental damage from mining and processing, and depletion of the resource, including polluted water discharged by rare-earth mining in rural Baotou (Inner Mongolia region).

And so, whether that is the reson or not, prices will rise.

"Miners and processing companies that don't submit applications or fail to pass the review will be denied environmental assessment approval for new projects, output expansion and IPOs", said the Ministry of Environmental Protection..

"Industry insiders said this will affect production costs and may raise the prices of Chinese rare earths".

The enwspapers mentions reports that at least 60% of producers could not currently meet the standards and they will have to spend more on environmental protection to pass the review. This is confirmed by an April 11 JP Morgan repor, that says "the prices of domestic rare earths continue to rise as China cuts back on illegal mining".

Since March 28, Chinese prices for cesium have risen an astonishing 49% to $19.76 a kilogram, lanthanum has risen 75% to $14.32, and neodymium  23% to $99.75.

The ETF is REMX:

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China Now Has 1 Million Millionaries; 20% Property Speculators, 15% Stock Gurus

More signs of the times. China daily reports that there are nearly millionaries in China, more precisely, 960,000 in the mainland.

That is 960,000 with personal wealth of 10 million yuan ($1.5 million) or more. That is up 9.7 percent year-on-year.

However, the reasons are mainly rising property prices and the growing GDP.
  • 55 % of Chinese millionaires derived their wealth from private businesses
  • 20% are property speculators who have ridden the fast hike in home prices.
  • 15% are stock gurus
  • 10% are high-earning salaried executives.

That's a lot of volatile, perhaps temporary, earnings in there.

The picture conveys the message. 

"violinist plays at the Haitian Shengyan (Sea and Sky Grand Banquet) Luxury Exhibition for yachts, private planes and other luxurious goods at Sanya, South China's Hainan province, on April 1.

60,000 of the 960,000 millionaires are China's super rich, with 100 million yuan or more in wealth.

Beijing is number one with 10,000 residents with 100 million yuan or more, followed by Guangdong province with 9,000, and Shanghai with 7,800.


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Yen Resumes Falling

After all the slliness of recent days, the Yen is back on the weakening track today:

The chart above is for the inverse, USD/JPY.

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Monday, April 11, 2011

I.M.F Lowers Growth Forecast for U.S and Japan, Says Debt Reduction Lacks Credibility

The IMF says medium-term deficit reduction strategies in the U.S. and Japan lack credibility. The commnets are in its World Economic Outlook, to be releaed today.
The International Monetary Fund has also owered its forecasts for economic growth in the U.S. and Japan.
Bloomberg: "While the likelihood of a double-dip economic slump in the world economy has decreased, risks to economic growth outweigh chances and commodity price shocks, especially oil, have emerged as a new risk to the global economy’s expansion, the German official cited the IMF as saying. The IMF left its forecast for global growth unchanged, he said, without giving time-frames.

The IMF estimates damage from an earthquake and a tsunami that struck Japan a month ago to amount to between 3 percent and 5 percent of the nation’s gross domestic product, the German official said.

The IMF raised its growth forecasts for Germany for this year and next, noting improved economic growth dynamism and progress in cutting the deficit as well as lowering unemployment, the German official said".

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Brazilian Police Uses Hi-Tech Glasses to Find Criminals In Real-Time

It is with this little equipment that police will effectively "shoot" the audience and detect whether there are criminals, missing persons, wanted people, in the crowd.

The "biometrics facial" system consists of a special camera that is installed on glasses, captures an image of people and then forwards them to a police real-time database. Then the system knows if the person that appears in the picture has some sort of trouble with the law. If this occurs, a small red square appears on the camera lens and the police can take the necessary steps.

Major Leandro Pavani Agostini says: "It's quiet because you do not questions the person does not ask for documents. The computer does it,"

The equipment is offered by a representative of a company in Israel. There, now works as a controller boundaries.

"It will be very useful and will help the city as a whole, from city bus and airport terminals to a shows and events,"

Twins. The system claims that will not be errors even if for twins. To the naked eye twins are two identical people, but not for 46,000 points of similarity that the system uses. Normally, the ability to view camera is up to 50 meters away. Depending on the case, however, the system can be adapted to work 20 kilometers away.

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Stiglitz: New Global System to Replace Dollar Needed; Reserves Are IOUs

Joseph Stiglitz, Nobel prize winner and professor at Columbia University in New York, says that the world needs a new global reserve currency, adding to the chorus that the current one is obsolete. This is to help prevent trade imbalances, which are in turn reflected in the national debt of the U.S.

He says that a global system is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality.
Incidentally, we have  a created  a new U.S. dollar index that includes the Chinese Yuan, the Brazilian real, and the Aussie dollar, and track it live on this site. The old USDX index is tracked here.

“By taking off the burden of any single country, we don’t have to have trade deficits,” “Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”

“Reserves are IOU’s,” “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”

“there’s a very good risk of an extended period of low growth, inflationary bias, instability,”  It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”

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Friday, April 8, 2011

Marc Faber, Fed's Negative Rates, Money Printing: Only at The Fed There is No Inflation Today

Marc Faber was on CNBC today. as usual, very astute comments.

The "master of the markets" explains the cycles of gloom, boom and doom.

Where are we now? He comments on the Fed's statements this week that they should set interest rates as negative, if they could.

On Rising rates, he says that absolute level of interest rates does not indicate whether there is tightening or not. Commodity prices going up, insurance prices going up, food prices going up, only at the fed there is no inflation.

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After New Earthquake and Spike Up, Yen Resumes Trend Down

This was so expected. After the new earthquake scare yesterday, the Yen spiked, only to resume its downward trajectory today:

And this is the ETF, FXY. Note the sell signal:

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Thursday, April 7, 2011

It Has Started: Spain Says It' Follow Portugal Steps, No Bailout(!)

The govenrment of Spain says it would not follow Portugal in seeking a European bailout". As we noted, Portugal was saying the same thing, repeatedly, and repeatedly.
Reuters: "The fall of another euro zone domino after Greece and Ireland focused attention on Madrid and the efforts that its government, and European authorities, have poured into erecting a firewall to buttress its public finances.

"(The risk of contagion) is absolutely ruled out ... it has been some time since the markets have known that our economy is much more competitive," Spanish Economy Minister Elena Salgado told national radio station SER.


While European Union officials voiced relief, non-euro zone Sweden criticized Lisbon for waiting too long.

"They should have requested aid much earlier," Swedish Finance Minister Anders Borg told journalists. "They have placed themselves and Europe in a very difficult situation."

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Portugal Now Says Needs Bailout, After Denying It Needed One for Months; Who is Next to Lie?

The news today is that Portugal is seeking a bailout. You may remember all the government declarations in previous months, they all denied they needed a bailout, and that would not happen. How can anyone believe what these people say? One wonders if next we will see headlines httys Spain does not need a bailout.

Portugal will seek a bailout from the European Union after the nation’s political crisis pushed borrowing costs to record levels and forced it to become the third euro-region country needing a rescue.
Jose Socrates, Portugals's Prime Minister: “I tried everything but we came to a moment that not taking this decision would bring risks we can’t afford,”  said in a televised statement in Lisbon yesterday. He tried everything indeed.

Now I read in Brazilian newspapers yesterday that people in Brazil are wonderign if they will ever see their money back.

Portugal is looking for a package of about 75 billion euros..

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Wednesday, April 6, 2011

Rogoff: New Entity To Control Governments Debts, and Stop Global Ponzi Schemes

Should more countries create independent fiscal advisory councils to infuse greater objectivity into national budget debates? Jailed swindler Bernie Madoff, although hardly reputable, summed declared that “the whole government is a Ponzi scheme, an opinion that many would agree with.

Ken Rogoff, in an article with Project Syndicate, says: "Perhaps this was just wishful thinking from a man who will die in prison after his own record-breaking $50 billion pyramid scheme collapsed in 2008. Personally, I suspect Madoff’s unenviable place in the record books will be secure for quite a while. Still, with many of the world’s largest governments facing a lethal combination of unsustainable conventional debt, unprecedented old-age pension obligations, and a downshift in growth, one has to wonder what the fiscal plan is".

Mr. Rogoff has just writne an article, "A Decadde of Debt", which is summarized in the above PS paper.

The authors advocate the creation of new entity to keep tabs on government's debts. They state that general government debt in the United States (including federal, state, and local debt), has surpassed the record 120% of GDP of the end of World War II!

In Japan, that figure is 200%, and that is before the earthquake.

Rogoff says It is high time to consider novel approaches. An independent and respected advisory council could, "in principle", force governments to acknowledge the hidden costs of government guarantees and off-balance sheet debts.

He cautions, however, that fiscal councils by themselves are not enough, no matter how well designed they are. "It will remain very tempting for each generation to say, 'My grandchildren will be two or three times richer than I, so who cares if they have to pay some debt?'

That sounds like Ponzi indeed, and yet, it is an attitude that is still prevalent in certain countries.

"To be sure, Bernie Madoff may yet be proved right, and his will not turn out to be the biggest Ponzi scheme ever"

Ken Rogoff is the author of "This Time is Different":

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VALE: +143% in 2 Years, To Sell 130M Tons Iron Ore To China

VALE has announced that it will sell betrween 120M and 130M tons of iron ore to China in 2011.

Its total production for the year will be 320M tons. The volume to China is stable.

VAL, under a huge controversy in Brazil due to government interference, has risen 143% in 2 years:

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Japan Rises To The Challenge: Mitsubishi's New Jet Begins Production

Mitsubishi has begun manufacturing its new MRJ aircraft. The plane will come in two configurations, for 70 and 90 passengers, in direct competition to Embraer's planes.

After the earthquake, Japan shows that it can still rise, and Mitsubishis' planes will soar in the sky.

New slim seats:

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OECD: Canada to Lead G7 Growth in 2011; Risks of Global Inflation

The Organization for Economic Co-operation and Development says Canada will lead all Group of Seven countries in economic growth in the first half of 2011..

The OECD says that the global recovery is getting traction, with data exceeding its previous expectations from just a few months ago, with business investment and exports are driving the recovery.
Pier Carlo Padoan, OECD chief economist:  "The outlook for growth today looks significantly better than it looked a few months back,"
Canada expects annualized first-quarter GDP growth of 5.2%  and 3.8 % in the April-to-June period..

Last November, the OECD expected Canada to record annualized growth of 2.4% in the first quarter and 2.6% in the second.

No doubt high oil and commodity prices have something to do with it.

Excluding Japan, the OECD said it anticipates the G7 to post 3.2 per cent annualized first-quarter growth and 2.9 per cent in the following three-month period.

The OECD added there are many factors in favour of the global economy: corporate balance sheets outside of the financial services are robust, labour markets are  improving.
"Considering the balance of strengths and fragilities, and with financial conditions improving across the board, it seems likely that the recovery is becoming self-sustained,".


The OECD said economies are improving so much that central banks in some countries "will need to deal with a risk that inflation expectations may become unanchored." In addition, policy-makers need to address inflated balance sheets with "credible and growth-friendly medium term plans," with emphasis on spending cuts and not tax increases (why if the recovery is so good?)

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Currency Wars: I.M.F. Now Endorses Capital Controls, Brazil Reacts

The IMF's is now endorsing capital controls for the first time. However, internal tensions were so sensitive that "some member countries even objected to the title".
Emerging markets are desperate wit the low U.S. dollar and wanted the International Monetary Fund to endorse them for blocking inflows of money.

Although the IMF contained the language for the first time, it said they should be a last resort only. The Brazilian representative at the IMF, Paulo Nogueira Batista, reacted angrily to the recommendations in a time when Brazil faces huge pressure on exchange rates. "The IMF has no accumulated knowledge on the subject, " Nogueira said. "Brazil will do whatever it takes to stem the flow of dollars."

Advanced economies, as expected, completely opposed the idea as it goes againat their export interests.
The IMF opted to call the document a "framework".

Yahoo reports: "The IMF said the framework was an important first step in creating a consensus on how to manage the sudden surge of investor funds flowing into emerging markets in search of higher yields, which risks fueling both asset bubbles and inflation.

The framework helps countries choose from a menu of policy options, including capital controls, to help ward off unwanted surges in capital, a break from a long-held IMF taboo on capital controls.

Allowing for currency appreciation, and purchasing foreign exchange if reserve levels are not adequate, tops the IMF policy list. Other options include lowering policy rates, or tightening fiscal policy to allow space for monetary easing, consistent with inflation objectives and when overheating is not a concern.

The IMF said capital controls could be considered when a country's currency is not undervalued, the economy is overheating and there is no scope to tighten fiscal policy. But it advised against imposing restrictions if an exchange rate is undervalued or as a substitute for other policy steps."

We track all currency ETFs live here.

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Tuesday, April 5, 2011

Gold jumps today, miners and ETFs

The chart above shows spot gold today (green spike).

Gold ETFs (tracking live)

Goldminers (tracking live, seniors, intermediate, and juniors). Rangold doing very well.

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Monday, April 4, 2011

Walmart Warns of Very Serious Inflation on Food, Clothing Soon

Walmart is warning of serious inflation coming soon in the U.S. The low U.S. dollar, and the corresponding high price of oil and commodities was bound to take a toll and cause serious issues.

Bill Simon, Walmart, CEO, said that  that U.S. consumers "face serious inflation in the months ahead" for clothing, food and other products,

He added that Walmart will need to get "back to its roots as the lowest priced one-stop shop for consumers".

According to the USA today, he said: "We're seeing cost increases starting to come through at a pretty rapid rate."

"We're in a position to use scale to hold prices lower longer ... even in an inflationary environment,"  "We will have the lowest prices in the market."

Please note that we track inflation since the the 1920s here.

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Yen: New 4-Week Low, Strong Uptrend for U.S. Dollar

The high Japanese Yen post-earthquake seems indeed to be history. From INO's 24h live tools:

Strong uptrend refers to the USD vs the Yen.

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Saturday, April 2, 2011

Currencies and ETFs: Yen Tumbles, Brazilian Real Shoots Higher, Dollar Tumbles or Rises? Depends!

Currencies moves are all relative. There were classic examples today. While investors in the U.S. were focusing on the "higher" U.S. dollar at the open, in Brazil it was quite the opposite. The U.S. opened significantly lower.

In fact, the dollar the trend continued throughout the afternoon. Yesterday, the dollar rose 0.06% and was quoted at R $1.63 at closing. At 16:05 today, the dollar dropped 1.10% to R $1.612, the lowest rate since August 2008!

Analysts say none other than the Central Bank (BC) Brazilian was hoping for positive activity data in the U.S. That positive data came in for the form of "good" unemployment figures, yet the dollar fell badly - in Brazil.

The ETF for the Brazilian currency is BZF (note that it had a huge distribution in December, that's the drop you see in various other charting systems). BZF is in fact trading at all-time highs:

And the 5y chart:

We track all currency ETFs live here.

Real 3 days, what a chart:

Yen 3 days:

 UUP 3 days:

Bottom line is don't believe what you read out there. It's all relative.

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Friday, April 1, 2011

New Video of Japanese Nuclear Reactor: Massive Destruction

BBC Brasil has a video made on one of striken nuclear resctors in Japan. Massive destruction can be seen. The video was shot with a camera mounted on top of crane.

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The Yen Crashes Down: Straddles

It was just a matter of time until the Yen dropped back to pre-earthquake levels:

The above is the U.S. dollar rising against the Yen.

The Bank of Japan will intervene again at some point, but this may still have legs to go.

Here are straddles on FXY for April and May, which allow profit regardless of direction, as long as the stock moves ther necessary amount.

Note: Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss. Computed with StraddlesCalc Tool

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Roubini Says No to Banking Bailouts As Will Lead To Sovereign Crisis; Spain Too Big to Save, Serious Fundamental Problems

In Italy today, Nouriel Roubini said today that Fed and ECB's "policy divide" may be destabilizing.

  • He says covering the banking losses and putting them in balance sheet of governments does not make sense. The backs of the governments will be broken. There may be a sovereign crisis on top of  a banking crisis.. Now that will damage the real economy.
  • Says fundamental problems of Spain are serious. Danger of spreading to Spain, too big to fail, but too big to save.
  • ECB will likely start raising rates in April, but 5 countries on the periphery where there is no growth and serious issues. Early hikes will worsen competitiveness.
  • There are economic policy splits between ECB and U.S., they are on different paths, and also on fiscal policy (stimulus in US, austerity in Europe): Dangerous and destabilizing.
Dr. Doom is very gloomy.

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