By Michael Trinkle, ForexTraders

Two of the most powerful people in the world will speak Thursday morning concerning the global economic outlook.  The EUR/USD has moved up slightly during the London session on the heels of positive bond auctions in Spain and France; however, the market was unable to bid prices up beyond yesterday’s HI’s at 1.2855 as investors wait for European Central Bank President Jean-Claude Trichet to speak at 8:30 am and Fed Chairman Ben Bernanke at 9:00 am.

Although today is heavy with key risk events, the market may not break out of its trading range until the Non-Farm Payroll release tomorrow morning.  NFP tends to be one of the most revered key leading indicators of economic health, and the market may be hesitant to commit to large directional positions before the NFP confirms economic direction.

Trichet

As stated, the euro found strong support this morning as a result of strong bond auctions in France and Spain.  Strong bond auctions are expected in France, but the market is still watching Spain, Portugal, Greece, Italy, and Ireland very closely.  For several months now, we have been writing about the possibility of the EuroZone Debt Crisis re-emerging this fall.  One of the leading indicators that will show the EuroZone is again in serious trouble will be when and if these struggling countries face difficult bond auctions.  As of yet, there is still plenty of investor demand for these bonds, but if the fiscal concerns do become serious enough that investors are unwilling to buy Greece, Portugal, Spain, Ireland, or Italy’s bonds, then there will most likely be a huge bout of risk aversion that sweeps the market once again.

European equity markets remained subdued even in light of the positive bond auctions as investors were unwilling to bid prices up before Trichet speaks this morning.  The market will be watching and listening closely to see whether Trichet formally commits to extending liquidity to help the European banking system.  GDP blew past market expectations in the 2nd quarter.  The expected figure was 0.7%, and the actual figure came out at 1.0%, which was quite surprising considering the systemic problems the EuroZone faced during the Q2 with its Debt Crisis.  However, Germany was able to benefit enormously from a cheap euro as its exports were much more attractive to foreign buyers, and that increased exporting activity in Germany helped overall EuroZone GDP tremendously.  Now, many economists are concerned that economic growth will slow significantly in Q3 as the euro has strengthened during the last 3 months.

Trichet is also expected to cast a cautious tone concerning economic outlook, but traders will be listening closely for any new verbiage or departure from his normal mood of cautious optimism.  Trichet has also been championing fiscal austerity in developed nations, saying that countries such as the U.S. should turn to decreasing government spending.  Interestingly enough, Fed Chairman Ben Bernanke is actually about to the do the exact opposite as he and the rest of his Board Members at the Fed are currently preparing to inject another round of fiscal stimulus into the U.S. economy.

Bernanke

Today, Fed Chairman Ben Bernanke will be testifying before the Financial Crisis Enquiry Commission in Washington DC.  Bernanke’s testimony comes in 2 parts:  a written, prepared statement and an open Q&A session with the Congressional board.  The prepared statement does not generally move the market as most of his verbiage will most likely be as expected, but during the Q&A, his answers to tough questions oftentimes offer a clearer picture to investors concerning the Federal Reserve’s next steps.

The most likely scenario in the United States is that the economy will enter into a prolonged period of very sluggish growth.  Mr. Bernanke has been communicating this view consistently, but he is concerned that the very sluggish growth could pull the U.S. into a deflationary period, which can be disastrous for an economy and can lead to a decade or more of virtually no economic growth.  This fear is why Mr. Bernanke and the Federal Reserve are seriously considering yet another round of quantitative easing.  They are willing to do anything to stimulate the economy back into robust growth.

Market Price Action

Yesterday, we mentioned the euro was beginning to put pressure on resistance to the upside.  We currently have some very fascinating price action beginning to develop between the euro, pound, and dollar.  Generally, the EUR/USD and GBP/USD move in very tight correlation.  However, we have been seeing that correlation break down over the last few days.  This morning, U.K. Nationwide HPI came out below the market expectation of -0.3% at -0.9%.  This surprise to the downside led the pound to move lower in the immediate aftermath of the release and then to drift sideways and lower throughout the London session.
 
On the other hand, the euro has again moved to the upside during the London session today.  The economic outlook and Central Bank leaders in the U.S, U.K. and EuroZone are diverging.  In the EuroZone, Trichet is by far the most hawkish concerning interest rates and monetary conditions, and the EuroZone is also posting pretty good economic data relative to these other countries.  Therefore, the euro is beginning to move higher, and if economic data continues to back up Trichet’s decisions, we could see the euro move up quite a bit versus both the dollar and pound in the coming weeks.

Of course, the elephant in the room concerning the EuroZone is the possibility that any day the EuroZone Debt Crisis could begin to erupt again, but currently those fears seem to be on the backburner.  If the sovereign default concerns in the EuroZone can remain contained, then the euro could move up quite nicely in the next few months.

We have been calling for a huge drop in the euro at some point in the latter part of 2010, but the reality is that will most likely not happen as long as the Debt Crisis remains under control.  As a trader, be on the lookout for the first signs of major fiscal trouble in struggling EuroZone countries.

More articles from ForexTraders….

By Charles Hugh Smith, OFTWOMINDS
China’s “nuclear option”–selling its vast stash of U.S. Treasuries to wreak havoc on the U.S. economy and interest rates–has been downgraded by the flood of U.S. investors who have exited stocks in favor of Treasury bonds.

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

Zero Hedge

Seeing Past The Hologram, by Mike Krieger of KAM LP

There is no distinctly American criminal class – except Congress.

- All quotes by Mark Twain

We Need Real Confidence to Return, Not Confidence in a Ponzi Scheme

Last week I pointed out that what I got from Banana Ben’s speech in Jackson Hole was that he realized any major public statement of interference in markets was too risky at this point following his announcement at the last meeting to keep the balance sheet steady by reinvesting MBS proceeds into treasury securities.  The operative word in this sentence being “public.”  Anyone that believes this means the Fed and government will just take a back seat and do nothing behind the scenes is deluding themselves.  Washington D.C. and the Fed still fail to comprehend how to increase standards of living in the real world, rather they remain completely addicted to the short-term buzz of printed money heroin as it flows through the house of cards they have created.  They also think that the only thing that really matters in an economy is “confidence.”  As Madoff can attest to, that is indeed the case when you are running a ponzi scheme and since the U.S. government is basically that I can understand where they are coming from.

 I agree that confidence is a huge part of any healthy economy; however, I do not define confidence in the way these arrogant bureaucrats do.  They think confidence comes from rising asset prices, including stocks and homes.  They think this is enough to spark growth in the real economy.  This is nonsense.  The confidence that is needed more than anything else today is two-fold.  First, confidence that there is the rule of law and there will be the rule of law in the future.  The second is that the money issued by the government will maintain its purchasing power over time.  As I have made clear on various occasions, I do not have confidence in either of these things based on how the government has responded to the crisis.  I do not like buying physical gold.  I do not like feeling the need to write these emails every week to warn people.  I wish I could employ capital into businesses and the real economy.  I hope that one day I will be able to do so, but at the moment I do not trust my government and I certainly don’t trust the fascist Federal Reserve.  So I will hoard what I have as the government prints and let the storm pass me by.  I am not the only one.  People are collectively starting to understand this.  So what happens when the big, smart money takes itself out of the investment and capital allocation game because they don’t trust anything?  What happens when the government’s response to this is to print money to keep up the spending habits of people with no jobs or people with government jobs that produce no goods for the economy?  You get the worst case scenario and that is exactly what is staring us straight in the face.

Is a Trade War with China Coming?

The quicker the dollar is devalued the better.  This is not to say that I think dollar devaluation is a good thing.  It is to say we are past the point of avoiding it.  We could have taken the pain in 2008, but instead it was extend and pretend all over again.  Now the debt and promises are too big.  The behind the scenes manipulations are too entrenched.  There is no avoiding a devaluation relative to things people need (food and energy) and capital goods that are imported.  The best thing would be to get it over with and then change policies and restore the rule of law.  The problem with this is that the main currencies the dollar needs its major adjustment against are those in emerging Asia and China.  What has prevented the realignment from happening in a quick and healthy way is China’s refusal to allow the yuan to appreciate.  This creates a situation where Central Banks throughout emerging Asia take steps to prevent their “free-floating” currencies from adjusting either.  If China does not change its policy I fear that what we are looking at a trade war with China after the November elections.  I think Congress and the Administration will start to introduce aggressive policies to discourage Chinese goods and encourage goods made at home.  Think it can’t happen?  We are a lot closer than you think.  This all goes back to my “think local” theme.  While I am inherently a fan of free trade we do not have free trade in any sense whatsoever.  We have policies that are geared to advantage the multi-national corporations at the expense of the U.S. citizen.  The U.S. consumer has merely been spending borrowed money.  This gave an illusion that the U.S. was benefiting from the global multinational corporate rigged market whose model mainly thrives on companies moving abroad to exploit the labor arbitrage caused by a combination of what was a labor surplus (no longer it seems) and a rigged currency.  As more people realize this, more pressure will be placed on politicians and ultimately this will overpower the corporate lobbyists and a trade war of sorts will begin.  Then the chaos could really ensue as we engage in a trade war with our biggest creditor!

Seeing Past the Hologram

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important.  Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch.  If anything is a hologram and a PR tool it is the U.S. treasury market.  How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government!  The Fed is merely the fiat drug dealer to a government addicted to spending and false promises.  The equity market is the second most useless market in my opinion.  There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing.  Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%.  So what you have seen is high volatility with no real direction.  How can anyone have confidence this that thing is for real?

So what markets do I watch?  I get the most from the FX markets and the commodity markets.  While these markets are no doubt manipulated heavily as well, I think this is where the players that really understand the macro are playing.  The first currency I check in the morning is the dollar/yen.  The reason for this is that the yen is back to the highs of 1995 and if it does not stop appreciating around this level I think the Bank of Japan is going to absolutely panic.  While the yen has not broken higher yet as market participants are afraid of such intervention, unless the BOJ does something extreme soon the market may test their resolve and push this thing further.  I guess the main point I am trying to make is that with the Chinese yuan NOT strengthening and the yen threatening to break out we could be in for some major fireworks.  Meanwhile Japanese 10 year government bond yields have really started to spike lately (chart GJG10 Index on Bloomberg).  Something big is happening in the land of the rising sun.  In the back of my head I think that any panic move from the BOJ could be the spark that breaks government bond bubbles globally and ushers in a period of massive global commodity driven inflation as every country tries to devalue their way to prosperity.  Essentially, a fiat money version of the 1930’s beggar thy neighbor policies.  When this begins the rush into gold and silver that we have seen thus far will look like a trickle.  I don’t think people will be able to find supply anywhere near the quoted price on comex (or as some like to call it “crimex”).

This brings me to silver which potentially experienced a game changer last week.  I can’t remember the last time silver bounced back almost immediately after every attempted raid.  I am starting to wonder how much physical silver is available.  What we do know is that Central Banks do not store silver to manipulate markets.  Even if it doesn’t break out right now, there is no asset in the world that has more upside than silver.  Don’t buy SLV either.  Buy physical silver not something with JPM as a custodian. 

I also continue to watch food prices very closely.  Wheat, which has come off of its high now seems to have found a base at a price that is 50% higher than the end of June.  Corn prices are threatening to break above resistance at levels 30% where they were at the end of June.  Rice looks like it could have a long way to go on the upside as it is only 20% off of its June low.  If I were a foreign government I would be using this opportunity to buy every single grain of rice I could in order to feed my people when things get dicey in the months ahead.  After strong performance in recent months lean hogs and live cattle also look set to make another push to the upside.  How people in the investment world still focus on the government inflation statistics is beyond me.  It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008.  This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt.  It seems the whole play is starting again and people remain focused on deflation.  Deflation in some things yes I agree (discretionary things like homes, technology, stock prices, etc), but not in the things you NEED to buy!!!

Onto oil which is also exhibiting some strange moves.  The Asian benchmark Tapis has not experienced the recent volatility and weakness that WTI has and is currently trading at $80/b.  The Asian price is the one I really pay attention to since that is where the demand growth resides.  The spread between the two now is back above $6/b, which is toward the high end of the range for the past two years.  This tells me that one price is wrong and the spread should narrow.  Given what I think about currency debasement and lack of appropriate investment in the space I think WTI should rally.  We shall see…

A Primer on the Federal Reserve

For those that read my commentary on the Federal Reserve as an immoral an fascist institution and think to themselves “what is this guy talking about,” I have attached a video from G Edward Griffith (the author of The Creature from Jekyll Island).  It’s a great description of how the Fed was formed and who it answers to when push comes to shove.  http://video.google.com/videoplay?docid=6507136891691870450#

Also in case you weren’t aware of the power grab that the “Financial Reform” legislation allowed the Fed, read this Bloomberg article. 

http://www.bloomberg.com/news/print/2010-09-02/bernanke-meets-buffett-in-new-role-conceived-to-protect-markets.html

All the best,
Mike

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

Hmmm…. this isn’t so good:

Nonfarm business sector labor productivity decreased at a 1.8 percent annual rate during the second quarter of 2010, the U.S. Bureau of Labor Statistics reported today as hours increased 3.5 percent and output increased 1.6 percent.

Is this an indication that the market is getting "more healthy" or is it the market reaching it’s breaking point with employees being told "work harder, get paid less, or get fired"?

This is difficult to know, but the rise in labor costs does not bode well for forward profit projections at corporations, and unit labor costs are rising:

Unit labor costs in nonfarm businesses rose 1.1 percent in the second quarter of 2010, as the 1.8 percent decline in productivity was partially offset by a 0.7 percent decline in hourly compensation.

This implies (weakly) that we’ve hit the wall on this area of "cost control" when it comes to labor.  That is, we’re still dropping compensation (pay per hour) but now the pushback is occurring, in that output is falling faster than wages.

The fallacy of course that people tend to have in the media is that you can hammer people on compensation on a permanent basis and the market is so soft that they’ll just roll over and take it.

Well, no.  At some point the "Sabots" start flying into the gears – softly or with more dramatic effect.  Whether it’s intentional or simply due to the fact that hiring people at lower rates of pay who happen to be less competent produce less, the impact is the same – productivity starts to drop and if you go too far with this game you wind up getting less per dollar of labor expense.

We appear to have reached that knee point.

The futures this morning didn’t react materially to this number, but IMHO they should have.  This is an important inflection point, as it means that the cycle of driving corporate profits higher via lower labor costs may have reached it’s knee point where it now actually destroys profitability instead of enhancing it. 

If so then corporate profits have reached their peak for this cycle and so have valuations.

I’ve been a skeptic on the "ever-rising mother’s milk" crap that Kudlow and friends have been running for the last year, because it was incomprehensible to me that people would continue to work harder and get paid less on a permanent basis.  Oh sure, for a while it works, as nobody really likes being laid off, and the threat is effective in the immediate term. 

But over time this brings fatigue.  The first time your boss threatens you like this you probably knuckle down and work harder.  But the second, third, fifth or tenth time he probably gets resentment and degradation of output instead of enhancement.  This is the unspoken "human factor", and is why policies that play labor arbitrage ultimately fail – you can play this game in the ultimate sense only by employing effective slave labor, and you need to be able to enforce your slavery – not possible in the US, and increasingly becoming difficult in places like China.

If this trend holds expect to see profits come in and valuations contract – which means that right now stocks are rich, as they’re pricing in continuation of the former trend that appears to have turned.

Then we have claims:

In the week ending Aug. 28, the advance figure for seasonally adjusted initial claims was 472,000, a decrease of 6,000 from the previous week’s revised figure of 478,000. The 4-week moving average was 485,500, a decrease of 2,500 from the previous week’s revised average of 488,000.

I don’t know how this is seen as good, but some people seem to think it is.  Let’s look at the total claims picture, as that’s at least somewhat-accurate.

That’s actual improvement.  But before you break out the pom-poms make sure you look at the previous year figures…..

Sorry, but until I see a mid-300k print on UE claims I’m not saying we’ve turned the corner on employment – because we haven’t.

More articles from the Market Ticker….

By Larry Rubinoff, GoldmanSachs666

Goldman feels heat in suit vs. Dollar Thrifty
New York Post

By JOSH KOSMAN

Goldman Sachs’ mantra that “clients come first” is under fire again.

The investment bank, which is still trying to burnish its reputation after settling fraud charges brought this year by the Securities and Exchange Commission, stands accused in a lawsuit of using information it gleaned from one client to win business from another.

The suit claims Goldman took “non-public information” that it got from advising Dollar Thrifty Automotive Group on one deal and used it to pitch rival Hertz Rental Global Holdings in a bid to win a lucrative investment banking assignment.

Shareholders of Dollar Thrifty, who are suing to block the rental-car company’s $1.2 billion takeover by Hertz so that rival Avis can negotiate a better deal, are questioning the bank’s actions in an attempt to undercut the merits of the deal, although Goldman is not a party to the lawsuit.

Read the entire article here

More articles from Larry Rubinoff….

Oil Price Ignores Long-Term Supply Worries

You could be excused for seeing a grim metaphor for the death of the oil age in the scenes of destruction visited on the U.S. Gulf coast this summer.

However, production from the ocean floor is growing more quickly than from any other type of reserve and is supposed to allay concerns about ‘peak oil’, the idea that the amount of crude the world can produce might suddenly decline.

Now, so far, this notion hasn’t had much of an impact on energy prices.

But, as cheaper oil fields are run down and more crude is drawn from expensive, hard-to-reach offshore reserves, the costs of energy supply are starting to rise.

Drilling agency imposes conflict-of-interest rules

WASHINGTON – Scandalized by federal regulators who had sex with oil company executives and negotiated with them for jobs, the agency that oversees offshore drilling is imposing a first-ever ethics policy that bars inspectors from dealing with a company that employs a family member or personal friend.

Michael Bromwich, head of the Bureau of Ocean Energy Management, said the new policy should help restore credibility to his beleaguered agency, which was widely criticized under its former name — the Minerals Management Service — for being too close with oil and gas companies.

President Barack Obama and Interior Secretary Ken Salazar have pledged to end the agency’s “cozy relationship” with industry and slow the revolving door between government and the energy industry.

Pemex looks to shale

Pemex is considering opening an entire line of exploration that concentrates on shale gas wells in the northern state of Coahuila.

Pemex board member Hector Moreira told Market News International the new line could reduce the company’s dependence on natural gas imports.

OPEC oil output falls to lowest since Nov 2009

LONDON (Reuters) – OPEC crude oil supply fell in August to the lowest since November 2009 as reduced supplies from Nigeria, the United Arab Emirates and Iraq offset increased output in Angola, a Reuters survey showed on Wednesday.

Supply from the 11 members of the Organization of the Petroleum Exporting Countries with output targets, all except Iraq, averaged 26.83 million barrels per day (bpd) last month, down from 26.95 million bpd in July, according to the survey of oil companies, OPEC officials and analysts.

The Gas Bulls of Summer Turn into Bears

Recently, the last of the raging bulls on natural gas prices traded in their horns for bear uniforms – and we don’t mean the Monsters of the Midway variety! By throwing in the towel on gas prices for this year, these bulls-turned-bears then proceeded to claw their future gas price forecast by stating they expected $6 per thousand cubic feet (Mcf) to be the long-term average. The reality is that these bulls of summer were really merely acknowledging the power of the market as natural gas prices are about two dollars per Mcf below where they were at the start of 2010, and well below the $7.50/Mcf average gas price the bulls had forecast.

Feds downplay risk of leak when well cap moved

The federal government’s point man on the Gulf of Mexico spill response said Wednesday there is no “significant risk” that more oil will leak into the sea when engineers remove the temporary cap Thursday that first contained the gusher in mid-July.

Retired Coast Guard Adm. Thad Allen said vessels will remain on standby just in case to collect any leaking oil.

FACTBOX – Key political risks to watch in Uganda

(Reuters) – Uganda expects to become an oil-producing nation in 2011, but a protracted dispute with British exploration firm Heritage Oil may delay production and risks unsettling other investors.

With the potential to be a top 50 oil producer, Uganda stands to reduce its budget dependence on foreign aid and improve poor infrastructure.

Nissan starts selling all-electric Leaf sedan today

At long last, Nissan begins taking actual orders today for the first next-generation fully electric car from a major automaker, the Leaf.

Carpooling

Passengers might be the most under-appreciated factor in how much fuel and money you waste. As I write this, for example, a business headline boasts of Toyota’s multi-million-dollar plan to boost fuel efficiency by 25 percent, with the usual discussion of what this will mean for the economy and the climate. Any of us, however, can boost the efficiency of our cars by several hundred percent instantly, with no additional expense or technology, simply by getting more people in the car.

This fact is also forgotten when we judge car owners by the wastefulness of their vehicles. An SUV is a spectacularly inefficient machine compared to a Prius, for example, but pack that Dodge Durango full of people and suddenly it is greener than the electric hybrid driven alone.

Transit systems easier to predict with smart phone apps

Allen Stern says he had a 40-minute wait between buses when he lived in Manhattan. Using a free mobile app that became available about a year ago, he could at least tap into the Metropolitan Transit Authority with his cellphone and find out exactly how far away the next bus was from his stop.

Jatropha: A new form of energy

SINGAPORE – Biotechnology firm JOil is confident that it can breed and genetically engineer the Jatropha plant to be a more sustainable alternative to fossil fuel and other biofuels.

It plans to create a Jatropha hybrid that can produce more fruits and match the four to six tonnes of oil per hectare that palm trees can generate.

Pedal power takes off as exercise produces electricity

Pedal power is gaining traction as thousands of bikes and elliptical machines are retrofitted to produce electricity.

Gyms are using sweat equity to help power their facilities. A Brooklyn eatery uses it to make smoothies. Female inmates at a Phoenix jail pedal to power their TV to watch soap operas. Actor Ed Begley Jr. bikesrides a bike to run his toaster.

Obama lobbied to add solar panels to White House

A campaign to make the White House greener is intensifying as a group of environmentalists plan this month to give President Obama a solar panel that used to sit atop 1600 Pennsylvania Avenue.

Points of departure

There is a strong correlation between energy consumption and economic growth. We can for sure hope for “decoupling” – to be able to have continued economic growth while maintaining or even reducing energy use – but no country has ever managed this Indian rope trick and that does not bode well. Maybe we are high on energy, listening a little to closely to the voice of intoxication, but it will unfortunately all too soon be replaced by a massive hangover.

The Peak Oil Crisis: Prospects for China

The key question in all this is how much longer China’s economic miracle can continue before the realities of finite mineral resources force a slowdown? Another five years of 10 percent annual economic growth will result in Beijing increasing its oil consumption by another 2.5-3 million barrels per day. This alone would likely mop up much of the world’s spare capacity to produce oil and result in very large price increases. When China’s ever growing demand is added to that of India, Brazil and the oil exporting states, the likelihood that we will see a substantial increase in oil prices within the next five years becomes very high.

Secret German military study warns of dramatic oil crisis

Berlin : A confidential German army study warned of a looming oil crisis which could have dramatic political and economic consequences for the world, the Hamburg-based weekly news magazine Der Spiegel said Tuesday.

According to the report, a think-tank of the German army has for the first time ever analyzed the security policy dimensions of the peak oil problem.

Peak Oil from a Security Studies Perspective

The Strategic Institute of the German Bundeswehr has now published a document on the implications of peak oil for security (more precisely: the study was leaked). The study is very well written and recommended as an essential read not only for geostrategist but especially for those involved in global sustainability questions. In fact, at least in wording the authors care about such diverse issues as environmental impact of unconventional oils and the impact of global-marked-induced land-use change on indigenous populations. It is worthwhile to have a closer look on some of their results:

Remembering Matt Simmons

Matt Simmons, a long time friend of the Maine coast and its islands and a student of the winds and waters of Gulf of Maine, loved to tell the story of his first trip to Maine, courtesy of a labor strike while he worked construction one summer as a college student in his home state of Utah. When a labor dispute suddenly shut down the construction site, he and a buddy were only too happy to collect their strike checks and head out on a jaunt. They went north into the Canadian Rockies then turned right and headed toward the Inscrutable East, dipping back down into the United States via the border at Jackman, where they drove along the shores of Moosehead Lake before ending up in Boston. On a lark, Matt ducked into the Harvard Business School, which had not had a long history at that point of actively recruiting students from Mormon country in Utah, but the visit was enough to entice him to apply and enroll. Matt loved telling that story because it held the kinds of mutually opposed contradictions he loved to explore-a businessman who owed his right future to a labor strike. If genius is the ability to hold mutually opposing ideas in the mind at the same time without being paralyzed, Matt Simmons would certainly qualify.

Oil Drops, Caps Worst Month Since May, as Hurricane Earl Threatens Demand

Oil tumbled, capping its worst month since May, on forecasts Hurricane Earl will pelt the U.S. East Coast, curbing fuel demand during the Labor Day holiday weekend.

Crude dropped the most in 12 weeks amid speculation that stormy weather will keep beachgoers and travelers at home. Labor Day is the traditional end of the U.S. summer driving season, the peak gasoline demand period. U.S. gasoline demand slid to a 12-week low last week, MasterCard Inc. reported today.

“It’s the last thing we need,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “It’s a big gasoline consumption weekend. Given how poor the gasoline demand has been, it will be a final parting blow for the summer driving season if people won’t hit the beach in droves.”

Ethanol Surpasses Gasoline for First Time Since December

For the first time since December, ethanol prices are higher than gasoline as corn surges and refiners profit from tax breaks.

Gas Prices Explained

So what determines the price of gasoline? Speculators? Evil conspiring oil companies? Well, actually no. It’s demand and supply, of course. On the demand side the American automobile fleet gets better gas mileage than it did a few years ago and Americans, whacked by the recession and high unemployment rates, are driving a bit less than they used to. In addition, thanks to government subsidies, about 9 percent of what goes into our gas tanks is ethanol produced from corn, which also reduces the demand for refined crude. On the supply side, global oil supplies are ample and refiners in the U.S. evidently believed the Obama administration’s rosy “recovery summer” scenarios and stockpiled a lot of gasoline.

Sinopec Plans to Cut September Oil Processing by 4% at Refinery in Hainan

China Petroleum & Chemical Corp., Asia’s biggest refiner, will process 4 percent less crude oil at its Hainan plant in September compared with last month, an official at the refinery said.

FACTBOX-Key political risks to watch in Saudi Arabia

(Reuters) – Saudi Arabia, under the rule of an ageing King Abdullah, has the dilemma of making reforms that keep the austere clerical establishment that opposes change on side and violent Islamist militants at bay.

Any instability at the helm of Saudi Arabia, which controls more than a fifth of the world’s crude oil reserves and is a regional linchpin of U.S. policy in the Middle East, would be a concern for the rest of the Arab Gulf region.

FACTBOX-Key political risks to watch in Yemen

(Reuters) – Rising al Qaeda militancy, a surge in violence in a secessionist south and crushing poverty will be this year’s critical tests for Yemen, neighbour to top oil exporter Saudi Arabia.

Reid hopeful for GOP energy votes after elections

WASHINGTON (Reuters) – Senate Majority Leader Harry Reid said he hoped to pick up Republican votes for a pared-down energy bill after the midterm congressional elections.

“Maybe after the elections we can get some more Republicans to help us on these issues,” Reid, a Democrat, told reporters in a teleconference on Tuesday.

Sinopec Sees Solid Gas Growth Ahead

While oil production experienced sluggishness in the first half, natural gas production showed solid growth. China is ramping up gas production as it seeks to find alternatives to coal, which emits high carbon levels. It is set to raise the country’s energy needs from the current 3% to 10% by 2020.

Insurance likely to reduce BP’s liability for Gulf of Mexico oil spill

BP PLC has taken on some of the blame for the Deepwater Horizon rig that spilled millions of gallons of oil into the Gulf of Mexico earlier this year, but the company is still expected to have limited liability for mistakes made misreading pressure data that indicated a blowout was imminent.

BP Raises $363 Million in Malaysian Asset Sale to Help Pay for Gulf Spill

BP Plc, seeking cash to help pay for the worst U.S. oil spill, agreed to sell its Malaysian chemical assets to Petroliam Nasional Bhd. to focus on projects in China and India.

BP will sell its 15 percent stake in Ethylene Malaysia Sdn and 60 percent interest in Polyethylene Malaysia Sdn for $363 million, the London-based company said today in a statement. It will also be eligible for a possible $48 million dividend from the ethylene unit.

A Nuclear Giant Moves Into Wind

Exelon, a nuclear giant that recently backed away from building new nuclear plants, is moving into wind.

Canada company builds major waste-to-biofuel plant

VANCOUVER, British Columbia (Reuters) – A Canadian company started construction on Tuesday on what it says is the world’s first industrial-scale plant to turn municipal waste into biofuel.

Privately-owned Enerkem Inc said the C$80 million ($75 million) facility in Edmonton, Alberta, will produce enough biofuel to keep more than 400,000 cars a year running on a 5 percent ethanol fuel blend.

Thorium Cures the Free Market

Obama could kill fossil fuels overnight with a nuclear dash for thorium … If Barack Obama were to marshal America’s vast scientific and strategic resources behind a new Manhattan Project, he might reasonably hope to reinvent the global energy landscape and sketch an end to our dependence on fossil fuels within three to five years.

New Warnings About Costs of Nuclear Power

As anticipation grows about a possible renaissance for the nuclear power industry — and about its potential for curbing greenhouse gas emissions — some politicians are stepping up warnings about the high cost of such projects.

Last week, Traicho Traikov, the Bulgarian economy and energy minister, said the cost of building a second plant near the Danube River had reached 9 billion euros, or $11.4 billion, according to the Sofia News Agency.

The original cost of the project for two reactors was expected to be just under $4 billion.

Homeowners Must Pay Off Energy Improvement Loans

Many homeowners who participated in a program that let them repay the cost of solar panels and other energy improvements through an annual surcharge on their property taxes must pay off the loans before they can refinance their mortgages, two government-chartered mortgage companies said Tuesday.

The guidance came from Fannie Mae and Freddie Mac as efforts to resolve a dispute over the program — called Property Assessed Clean Energy, or PACE — have failed.

Calif. rejects ban on plastic shopping bags

SACRAMENTO, Calif. – California lawmakers have rejected a bill seeking to ban plastic shopping bags after a contentious debate over whether the state was going too far in trying to regulate personal choice.

The Democratic bill, which failed late Tuesday, would have been the first statewide ban, although a few California cities already prohibit their use.

A Greener Champagne Bottle

“This is how we’re remaking the future of Champagne,” he said, pointing to the area just below the neck. “We’re slimming the shoulders to make the bottle lighter, so our carbon footprint will be reduced to help keep Champagne here for future generations.”

The Champagne industry has embarked on a drive to cut the 200,000 metric tons of carbon dioxide it emits every year transporting billions of tiny bubbles around the world. Producing and shipping accounts for nearly a third of Champagne’s carbon emissions, with the hefty bottle the biggest offender.

Cleaner Cars, A to D

The Obama administration has proposed new stickers for cars and light trucks that will make it easier to see whether you are buying a fuel-efficient one or a guzzler, and how much it contributes to global warming. The stickers are a symbol of how far this country has come in providing a wider range of environmentally responsible choices to help ensure cleaner air and a healthier planet.

L.A. mayor, Latino activists take on oil companies over Proposition 23

They say the ballot initiative to suspend the state’s climate change law would hurt low-income communities already suffering the most from pollution.

Jeff Rubin: High energy prices make Copenhagen green

There is certainly much to be said for Denmark’s leadership in green energy. While North American carbon emissions have risen by around 30 per cent since 1990 (the reference point for the Kyoto Accord), Denmark’s emissions are actually lower than they were two decades ago. That’s generally ascribed to the fact that a world-leading 20 per cent of the power generated in Denmark comes from wind.

Less commonly known is the source of the other 80 per cent. I was surprised to discover that it comes from good old King Coal. In fact, coal’s share of power generation in Denmark’s power grid is basically the same as it is in China.

Tiny creatures reveal ancient sea levels

“It was a very big surprise,” says David Barnes, lead author of the study at the British Antarctic Survey, of the find of similar bryozoans 2400 kilometres apart in seas on either side of the West Antarctic ice sheet, which is 2 kilometres thick.

“The most likely explanation of such similarity is that this ice sheet is much less stable than previously thought and has collapsed at some point in the recent past,” he says.

“And if the West Antarctic ice shelf has been lost in recent times we have to re-think the possibility of loss in future with climate change.”

If one wants to be taken seriously in the world of policy analysis, one should at least use an internally consistent framework. This consideration, apparently, has not troubled Mr. Reidl.

To quote from The fatal flaw of Keynesian stimulus, in the Washington Times:

Last week, the Congressional Budget Office released a report claiming that the $814 billion “stimulus” has added 3.4 million net jobs.

…

Such implausible analysis does not come from actually observing the post-stimulus economy. Rather, it comes from Keynesian economic models that have been programmed to conclude that government spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. In other words, these models are programmed to conclude that stimulus spending always creates jobs and growth, no matter how the economy actually performs.

Well, not quite. As I described in this post, there are a variety of ways in which multipliers are obtained. Oftentimes, the impacts are estimated either directly or indirectly, by estimating the marginal propensity to consume. The article continues:

But there is one problem with the government stimulus theory: No one asks where Congress got the money it spends.

Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.

It is intuitive that government spending financed by taxes merely redistributes existing dollars. Yet spending financed by borrowing also redistributes existing dollars today. The fact that borrowed dollars (unlike taxes) will be repaid some years later does not change that.

Here, I think Mr. Riedl is invoking Ricardian Equivalence, despite the fact that there is no empirical evidence, to my knowledge, that validates pure Ricardian Equivalence (actually, Ricardian equivalence wouldn’t necessary hold for government spending on goods and services, anyway). Now, at this juncture, I thought that he might be invoking a real business cycle model, or an older, nonstochastic version of the RBC, namely a flex price Classical model. But then the next paragraph reads:

Some believe stimulus spending is the mechanism by which the Federal Reserve injects new dollars into the economy. Yet the Fed could run the printing press and then inject those dollars into the economy by buying existing bonds (with mostly inflationary results). It doesn’t need an expensive stimulus bill to conduct monetary policy.

Accepting that the Fed can stimulate via monetary policy then implies either (1) sticky prices so an expansionary monetary policy can affect the real interest rate, or (2) a financial accelerator model such that collateral constraints or some other financial rigidity holds. In the latter case, it seems prima facie that Ricardian Equivalance cannot hold.

Next, I was thrown for a loop, because Mr. Riedl seems to conflate real saving and the monetary multiplier. He argues that government deficits can only be financed by foreign saving, private saving and “idle saving”. This he describes thus:

Idle savings. The only government spending that truly increases current purchasing is the amount that would have otherwise sat idle in safes and mattresses. Those are the only dollars not already circulating through the economy as consumption, or through the financial markets as investment spending.

Idle savings are rare. People and businesses generally invest or bank their savings, where the financial markets transfer them to other spenders. Banks that receive savings either lend them out to a spender, or (when afraid to loan) invest them conservatively to earn some interest. They are not hoarding customer deposits in massive vaults (beyond the required cash reserves).

This is an odd conflation of saving, measured as a flow, and financial assets. But lets take the equation at face value, there is an incredibly counterfactual observation that there no reserves are behing held in excess of required cash reserves. According to the St. Louis Fed, excess reserves are now approximately $1 trillion dollars. Well, no need for facts to get in the way of a good polemic.

Mr. Riedl’s main point is:

All government stimulus spending requires first borrowing dollars that would have otherwise been applied elsewhere in the economy. The only exception is money borrowed from “idle savings,” which for reasons described above likely constitute a minuscule portion of the $814 billion stimulus.

As I’ve mentioned here and elsewhere, this is true in a full employment model. (I’m working off of textbook models; move to coordination models, or allow monopolistic power, and you have lots of other inefficiencies arising).

Mr. Riedl concludes:

Economic growth requires raising worker productivity to create more goods and services. Government stimulus spending represents a naive “magic wand” attempt to create purchasing power and wealth out of thin air.

No wonder the unemployment rate remains high.

Well, if we’re in a Classical world, then there is no involuntary unemployment. If we’re in a New Classical world, then whatever involuntary unemployment exists is not systematic. If there is involuntary unemployment, then there are resources that are not being utilized, and putting them to use naturally raises productivity (remember labor productivity is defined as output per man hour).

It pains me to say that Mr. Riedl is a graduate of the University of Wisconsin, in economics and political science.

Postscript: Here is Deutsch Bank’s assessment of the impact of the ARRA on the growth rate of GDP.

Figure 1: Dobridge, Hooper, Slok, Sufian, “The growing risk of fiscal drag in the US,” Global Economic Perspectives, New York: Deutsche Bank, July 28, 2010.

Level impacts are depicted in this post. Here is CBO’s latest assessment.

Read more….

By Michael Trinkle, ForexTraders

After nearly 2 weeks of trading within a tight 150 pip range, the euro broke upside resistance at 1.2780 during the London session early Wednesday morning.  The euro actually broke through 2 key swing HI’s on the hourly chart as it broke to the upside, so we could see further euro gains in the coming days.  
 
In this chart, you can see the two clear swing HI’s in the green-shaded boxes that the euro broke above in order to post new HI’s this morning.  Then, the euro continued to push higher in early New York trading as buyers bid EUR/USD up to the 1.2850 area.  The euro will face heavy resistance in the 1.2900 area and should see sellers protect the area initially.  If the euro moves higher during the NY trading session and pressures the 2900 level, there may be very strong selling interest today.  The euro has already moved beyond its daily range at the start of the NY session, and when a currency pair is overbought as the euro is today, it oftentimes has strong difficulty breaking through key areas of support and resistance.

The push from 1.2800 to 1.2850 during early NY trading was due to the ADP Employment figure that came out at 8:15 est.  The number was a big disappointment as it posted at -10k versus the expected figure of +15k.  This means there was a loss of 10,000 jobs instead of the expected gain of 15,000.  The focus in the United States is heavily on employment figures.  The very poor labor market conditions are weighing on economic recovery and this number today is yet another confirmation that the U.S. economy is really struggling.  Economists and investors know this, but each disappointing figure just makes it worse.

The ADP Employment number can also be a leading indicator for Friday’s Non-Farm Payroll, and if it is in this case, we could see a very strong bout of risk aversion enter the market.  The question is which direction will the Dollar go?

Case for Dollar Weakness

Generally, when U.S. data comes out very poor, the Dollar tends to get strong as investors rush into the safety of the U.S. Dollar.  Then, as U.S. data comes out good, investors tend to sell the Dollar as they rush out of the low-yielding Dollar and into higher-yielding currencies.  However, during the last 3 months we have seen this correlation break down.  During the months of June and July, market participants aggressively sold the U.S. Dollar as key economic data came out negative.  Let’s break down why this has been happening.

The current global recovery is facing a major wall of resistance as the U.K., U.S., China, and the EuroZone are all facing uncertain financial conditions.  The U.S., however, seems to be facing the most difficulty at the moment.  China is still moving forward in very strong fashion, they are simply going through a period of slower than usual growth.  The same seems to be true in the U.K. and the EuroZone.  The U.S. is in a different place, though.  In the U.S., the threat is not only an economic slow-down, but an actual economic contraction.  Key economic indicators seem to be pointing to a possible double-dip recession in the United States, and some economists are beginning to predict that the Q3 GDP may read negative in the U.S.  Two consecutive quarters of negative GDP constitutes a recession.  Since the U.S. is really facing this potential threat alone, investors are beginning to raise the possibility of selling the U.S. Dollar as U.S. news continues to come out negative.

If this phenomenon continues, it could serve disastrous for the U.S. Dollar.  Investors have long been not interested in holding the Dollar during good times because of the incredibly low yield offered.  However, the market has tended to hold the Dollar during bad times since investors want the safety of their capital above everything else.  What will happen if the U.S. heads into economic contraction and other developed nations do not?  How will this affect the U.S. Dollar?

Most likely the U.S. Dollar will weaken significantly because there will be no reason for investors to hold it.  This could be the beginning of the great U.S. Dollar bear run that many economists and experts have been predicting for some time.  We have seen hints of this phenomenon unfold during June and July and we have seen it again today.

Case for Dollar Strength

Unfortunately, it seems that the only case for real U.S. Dollar strength during the 2nd half of 2010 and into 2011 is if the global economy slows significantly.  Currently, investors are unsure of the economic outlook.  There are many mixed signals in the market, and the economic outlook is probably more uncertain right now than in recent history.  At the beginning of The Great Recession, at least investors knew we were in trouble.  Now, no one is sure.  Are we going to rebound and move up from here, or is there still significant downside risk?  Of course, there is downside risk, but no one knows how far we will fall, if we will fall, or when we will fall if we do.  The outlook is very uncertain.

As long as the global outlook remains uncertain, the U.S. Dollar should find strength as investors are unwilling to completely depart from the safety of U.S. Treasuries.  However, if the global economy does deteriorate during the next month to several months, and it becomes clear that other countries are in the same degree of trouble as the U.S., then the Dollar should remain in bullish mode.

Lately, we have seen poor U.S. news come out, the market sells the Dollar aggressively, and then after 15-30 minutes of Dollar selling, the market reverses course and begins buying the Dollar only to retrace all the Dollar weakness and actually move into further Dollar strength within several hours.  This is what is playing out during the NY trading session at the moment, as investors remain very uncertain of the economic outlook.

More articles from ForexTraders….

By Karl Denninger, The Market Ticker

The next two days could prove to be very interesting – but probably won’t.

Dick Fuld is prepared to later assert:

Lehmans demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments.

Uh huh.  It wasn’t caused by 30:1 leverage Dick?  You know, leverage you got "enabled" to use by Pauslon?  Of course you weren’t forced to use that, but heh, if the music is playing, you had to get up and dance, right?

In 2007, when the U.S. housing market began to show signs of weakening, Lehman Brothers and many of its competitors had already accumulated large positions in what were considered less liquid assets. Many market observers, including government officials charged with oversight of the financial markets, believed that the problems in the subprime residential mortgage market were and would be contained.

You were wrong.  But a prudent CEO, and a prudent company, doesn’t "bet the firm" on a premise that their largest-concentration of assets in what is clearly a bubble economic environment, unsupported by the macro level fundamentals, will not only go on forever but will see it’s equivalent of multiple expansion continue forever. That by definition – the belief in expansion of a compound-growth function at ever-increasing rates – is a Ponzi Scheme.

Ponzi schemes are broadly illegal.  While it’s not illegal to place bets on asset appreciation, when you claim to be in a position of "systemic risk" you should be held to a higher standard.  That standard was not only loosened it was destroyed in the years from 2003-2007.  Bear Stearns was a final warning that the Ponzi had collapsed, yet Lehman refused to heed that warning, instead choosing to rely on the premise that a government tit would be proffered to suckle from.  When it was not the firm collapsed.

Then there’s Wachovia.  I read through Scott Alvarez’s testimony (FRB’s Counsel) which goes through the usual mantra of how Wachovia’s business deteriorated due to macro-level economic developments not under it’s control, along with the seizure of WaMu. 

Notably missing from this analysis, along with Steele’s, Wachovia’s former CEO, is any mention of the fact that Wachovia was writing credit-default swaps (CDS) on their own deals in the Option ARM space and bundling them with the lower-rated tranches as a means of being able to sell them!

This is important for two reasons: It is roughly equivalent to you writing fire insurance on your own house, when the entirety of your net worth including all your liquid cash is contained within the house in a shoebox.  Should the house burn you will of course be unable to pay off on your self-dealt "insurance."  Second, there is no mention as to where those instruments are now or what they’re actually worth.  We know where they are – they’re off-balance sheet at Wells, which now has roughly one trillion dollars of off-balance sheet exposure – with no way to evaluate the "wisdom" (or lack thereof) on the marks on those "assets."

It is that fact, incidentally, that led myself and many others, including hedge fund managers, to short the stock.  That in turn drove the CDS spreads out.  But the predicate act that led people like myself to reach this conclusion – that the bank was hiding losses and likely was insolvent – was an act taken by their own hand and enabled by willfully-blind regulators.

Indeed, the bottom line problem here with Wachovia is the same as it has been up and down the line since this mess began – ridiculously over-optimistic asset "values".  This has not abated, as we keep seeing every week with FDIC bank seizures, where banks that are allegedly solvent (by their accounting of "assets" and "liabilities") are nonetheless seized and huge losses, often as much as 30% of the asset base, are absorbed.  This isn’t possible unless the "asset values" are pure works of FICTION.

After the 1929 crash the Pecora Commission was formed to find the causes and prevent it from happening again.  What Pecora found was that too much leverage combined with self-dealing and lies about asset valuations led to the collapse of banks and other members of the financial system when the falsehood of those asset "value" claims was exposed to the light of day, and that self-dealing in various forms led to covering up these deficiencies until they reached critical levels (where banks were literally unable to pay the light bill), by which point the entirety of the depositors’ funds were often gone.  Just as today, banks often maintained that they were "fine" right up until the fact that their assets were worth pennies was exposed.

Glass-Steagall was an attempt to prevent that from happening again by separating deposit-holding banks from securities activities.  Between that and strict leverage limits, along with bank examiners, it was believed that loss-hiding would no longer be possible to a degree where these sorts of panics could develop.

For 40 years it worked.

Then we had the S&Ls, which gamed the system.  Bluntly, they broke the law, "trading" assets between themselves with a wink and a nod, thereby "establishing" asset valuations that were false.  This "supported" their lending and other activities – right up until, just as with the 1920s (and now) it led to their destruction when the truth began to leak out. 

But unlike today Bill Black came in with a mandate and started referring cases to prosecutors, who promptly sent over 1,000 people to prison for their lies and scams.

The FCIC will fail to be effective unless we have another Bill Black.  We must reverse those decisions of Congress to extort FASB, as well as exposing and laying bare on the table the inside baseball, hidden caches of alleged "assets" that are not really worth what is being claimed, and other forms of rooking the public while laying off the costs on taxpayers.

Sadly, I see no evidence that the FCIC will do any of this.  There is nothing in the hearings I’ve seen to date that suggests that Wachovia’s Steele, for example, nor The Fed, will be called to account on exactly where are those CDS, what are they worth, and why did The Fed and other regulators ignore their existence and lack of public valuation and disclosure?

Nor has the FCIC asked Henry Paulson (or Tim Geithner for that matter) why is it that the former 14:1 leverage limit was removed and why shouldn’t it be put back in force now, since it is now a known fact that had it been in place neither Lehman or Bear would have failed, and if it had applied to AIG they wouldn’t have failed either!

No, instead we have a circle jerk of monkeys, prancing before the cameras, but with no substantive progress and disclosure.

Phil Angelides is no Ferdinand Pecora.

More articles from the Market Ticker….