Bear Market


The all-powerful Fed

June 30, 2013 by · Leave a Comment 

The conventional wisdom is that the big jump in interest rates since the beginning of May is the result of a poorly conceived or poorly communicated shift in policy by the U.S. Federal Reserve. The conventional wisdom is wrong.

Prior to the Great Recession, I thought we had all agreed on the practical limits on the Fed’s capabilities. We understood that to some extent the Fed could control the short-term interest rate by changing the supply of reserves available to the banking system. But we also understood that the Fed’s influence over longer-term interest rates was much less immediate and direct. The Fed can communicate its long-run inflation objectives, and certainly the 10-year inflation rate is a very important determinant of long-term yields. But regardless of what the Fed may say about its 10-year inflation goals, the market would form its own view of whether the Fed could or would achieve those. Other determinants of long-term yields, such as the term premium, long-run economic growth rate, and global saving and investment decisions were understood to be even farther beyond those things that the Fed can hope to control.

In the fall of 2008, the interest rate on U.S. overnight loans fell essentially to zero, and reserves ballooned far beyond levels that banks needed to meet reserve requirements. These developments meant that the Fed lost its most important policy tool for influencing interest rates. The Fed was forced to rely on even blunter instruments for conducting policy, such as hoping through massive asset purchases to alter the supplies and demands for assets such as Treasury bonds and mortgage-backed securities. You would think that in an environment in which the primary instrument of monetary policy is useless, the Fed has less, not more, control over long-term rates than it used to.

But somehow many observers seem to have persuaded themselves otherwise, thinking of the current interest rate on a 10-year Treasury bond as if it were a direct policy choice of the Federal Reserve. Among those who take this view, retirees have been mad at Bernanke for making the interest they earn on bonds so low, while many other observers are upset with Bernanke for now raising rates too quickly, threatening the struggling economic recovery.

The yield on 10-year U.S. Treasury bonds is up 85 basis points from where it had been at the start of May. But only 13 basis points of that rise came on June 19, the day that the Fed released the statement from the latest FOMC meeting and Bernanke held a post-meeting press conference. Of course, just because rates were climbing before the Fed’s statement doesn’t mean the Fed didn’t cause them, as markets are always trying to (and usually do) anticipate the Fed’s moves before they are announced. And the fact that rates continued to rise another 27 basis points in the week after the Fed’s statement also doesn’t mean that the hikes weren’t caused by the Fed. Sometimes it takes a while for analysts to digest what’s been reported and figure out what it really means.



Interest rate on 10-year Treasury security inferred from CBOE TNX, July 2012 through June 21, 2013. Source:
Yahoo Finance.
10y_june30_13.jpg



But as I argued last week, it’s hard to see how the Fed’s statements on June 19 changed anything, even (and especially) if you had anticipated them verbatim 6 weeks before they occurred. The accurate message from those statements is that while the Fed is eventually going to stop its large-scale purchases, even slowing down the rate of purchase is still quite a bit down the road. That’s what a reasonable observer should have believed before June 19, and it’s what a reasonable observer should still believe today.

It’s also worth noting that the interbank loan rate in China has been climbing since May. Although the dramatic spike in Chinese rates came immediately after (and appeared to be caused by) the Fed’s statement on June 19, an earlier spike had hit Chinese banks in the second week of June.



Overnight Shanghai interbank offer rate, Jan 4 to June 28, 2013. Data source:
Shibor.org.
shibor_jun_13.gif



Some remarkable investigating by Izabella Kaminska documented that one important source of short-term funding within China had resulted from over-invoicing of exports, with loans extended for goods that never shipped. Evidence of this can be seen in an explosion of goods that Chinese companies claimed they had shipped to Hong Kong that are not matched by imports that entities in Hong Kong claim to have received.



Source: WSJ.

china_misinvoice_jun_13.jpg



Business Week reported last May:

Slower growth in last month’s official trade data may reflect measures announced by China’s State Administration of Foreign Exchange (SAOFEZ) to crack down on speculative funds entering the country disguised as payments for trade.

The currency regulator said May 6 that it will send out warning notices to companies whose goods and capital flows don’t match as well as those bringing large amounts of cash into China. SAFE on May 22 told banks to improve checks of customer documents related to special trade zones amid speculation that the areas have been exploited to mask money inflows as exports.

The withdrawal of an important funding source would have created a sudden tightening of credit. One manifestation would be the interbank lending rate displayed in the first figure above. Another could be Chinese sales of other assets such as U.S. Treasury securities.

And broader asset sales outside the United States could be a more important development than anything that was said or not said by Ben Bernanke.

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MCX Natural Gas negative support 211 208

June 30, 2013 by · Leave a Comment 

For intra-day, support for the commodity is seen at 211 and 208 levels. Resistance for the futures is seen at 216.5 and 220 levels. and nbsp;MCX natural gas futures for July delivery was seen trading down by 0.61% at Rs.213.50 per mmBtu as of 02.28 PM IST on Monday.

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NCDEX Spot Exchange ties up with Punjab National Bank to provide credit to farmers

June 30, 2013 by · Leave a Comment 

With this agreement, the bank will get wider reach to the farmers, processors and traders trading on NSPOT. NSPOT delivered more than 500,000 MT of Agri commodities on its platform last year. It has more than 960 registered members and more than 3000 Mandi participants.

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Profitability of Indian Urea manufacturers to decline on Natural Gas price hike: India Ratings

June 30, 2013 by · Leave a Comment 

However, a majority of the profits for urea manufacturers comes from urea sales above the cut-off quantity as the subsidy is linked to import parity price (IPP). Under the current urea manufacturing policy, urea manufacturers are paid subsidy assuming a retention price of 85% of IPP for the quantity sold above the cut-off level to incentivise higher production.

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MCX Crude Oil sideways resistance 5860 support 5780

June 30, 2013 by · Leave a Comment 

For intra-day, support for the commodity is seen at 5780 while resistance is seen at 5860. If prices break the level of 5780 then prices are expected to move towards 5750. and nbsp;MCX crude oil futures for July delivery was seen trading up by 0.82% at Rs. 5810 per barrel as of 05.39 PM IST on Monday.

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Shale Oil bull is in fact a guerrilla!

June 30, 2013 by · Leave a Comment 

If one refers to military language, conventional oil and gas companies can be compared to army platoons that require long term planning before deployment. Shale oil companies are more like Guerrilla groups who should think and move micro-scale and should have a thorough knowledge of the environment they operate in.

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Europe sees silver lining as UK’s manufacturing grows faster

June 30, 2013 by · Leave a Comment 

A factory gauge rose to 52.5 in June from 51.5 in May, Markit Economics and the Chartered Institute of Purchasing and Supply revealed on Monday. It showed that above the 50 level it divides expansion from contraction.

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Welcome Serfs to the new Housing System: How all cash investors are distorting the housing recovery

June 30, 2013 by · Leave a Comment 

“… say 50,000 homes sold in the Las Vegas region alone last year (say an average of 50 percent all cash).  That is 25,000 homes that were bought with 100 percent equity.  You would need 500,000 equivalent 5 percent down regular home purchases to have an equivalent amount of equity from this investor deluge!  In other words, nearly 10 years of regular home purchases.  You can apply this to other large investor markets as well.  So when you look at the below chart, we have been on a race to inflate equity quickly but how much of this is because of the cash crowd”

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Sprott: India Gold Crackdown Leads to Huge Silver Demand (interview)

June 30, 2013 by · Leave a Comment 

Eric Sprott points out the suspicious ally-oop of India in attempting to squelch gold demand at the same time the Fed & co. seek the same, has the whack-a-mole effect of the same dollar value of buying (if not more) going into silver, which means 60x or more the silver ounces being purchased. The silver physical market is, of course, even tighter than gold…

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Egypt’s Brotherhood HQ overrun after protests

June 30, 2013 by · Leave a Comment 

“The massive protests showed that the Brotherhood has not only alienated liberals and secularists by seeking to entrench Islamic rule, notably in a new constitution, but has also angered millions of Egyptians with economic mismanagement. Tourism and investment have dried up, inflation is rampant and fuel supplies are running short, with power cuts lengthening in the summer heat and motorists spending hours fuelling cars.”

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