Market Talk

Here’s a link to the latest quarterly musings of Jeremy Grantham, always informative, thought-provoking and entertaining. Titled “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever,” here’s a nice little taste:

Now no one, in round numbers, wants to buy into the implication that we must rescale our collective growth ambitions. I was once invited to a monthly discussion held by a very diverse, very smart group, at which it slowly dawned on my jet-lagged brain that I was expected to contribute. So finally, in desperation, I gave my first-ever “running out of everything” harangue (off topic as usual). Not one solitary soul agreed. What they did agree on was that the human mind is – unlike resources – infinite and, consequently, the intellectual cavalry would always ride to the rescue. I was too tired to argue that the infinite brains present in Mayan civilization after Mayan civilization could not stop them from imploding as weather (mainly) moved against them. Many other civilizations, despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources. This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.

Anyone betting that manufacturing will continue to lead the US economic recovery might think twice after reading comments from survey respondents in Dallas Fed’s April Texas manufacturing outlook.

Similar to Philly Fed’s gauge last week, Dallas headline number tanked, to 8.1 from 24.1 in March. The Philly survey’s headline number fell to 18.5 from 43.4 in March, but unlike the Dallas survey, Philly doesn’t include respondent comments in its report.

Down in Texas there’s a fair measure of cautious optimism among survey respondents, and plenty of concern about high costs and soft demand. Here’s one from a plastics and rubber products manufacturer that sounds pretty good:

“We are very encouraged by the breadth of activity with our cross section of customers in the Dallas–Fort Worth area. It is not just a few companies with increased requirements for plastic parts, but pretty much all of our diverse customer base.”

Now here’s one from the other end of the spectrum, a furniture/related product manufacturer: “Our industry has hit another brick wall. Rapidly increasing costs and fuel costs have shocked the consumer away from any nonmandatory spending. They normally adjust, but it may take several months.” Continue reading…

I sat in a room with these three guys – John Mauldin, Marc Chandler and Christian Menagatti — for an hour yesterday along with a handful of other reporters, and it was completely fascinating, so the 35 minutes you might invest in this video is well worth your time.

Incidentally, we’ll have Mauldin on tomorrow’s Markets Hub, live at WSJ.com at 10:30 a.m.

- The Fed is often accused of being behind the curve, and for good reason. Look at this headline that ran earlier on the broadtape, quoting Dallas Fed’s Richard Fisher:

*DJ Fisher: Sees Early Signs Of Unconstructive Market Speculation

Early signs? Take a look at a chart of any commodity or major stock index. Early signs of unconstructive speculation? And this comes from a guy who’s considered to be one of the FOMC’s biggest hawks. Good heavens. Here’s his quote, reported by Newswires’ Frances Robinson in Brussels:

“We have abundant liquidity, now there’s excess liquidity, which is working through the system,” Fisher said. “There are in my view, early signs of speculative activity that I don’t consider constructive.”

If he’s only seeing “early signs,” how far behind the curve do you think the rest of the Fed gang is? By the way, Fisher quipped that protectionism is “the syphilis of economics.” Interesting analogy. What’s the gonorrhea of economics? Probably speculation. It’s bad, but you can get rid of it pretty quickly.

Meanwhile, Philly Fed’s Plosser is dishing up some hawkish comments, saying headline inflation is “all that matters,” and core is just for filtering noise. The frank talk is welcome, but stock market ignores him because his hawkish tendencies are well know.

- US stock markets seemed to find euro strength a source of comfort yesterday, and have frolicked with the single currency again today. But euro’s lost some zest in early afternoon trading and is catching some notice from stocks, which have since pulled back from their earlier highs.

As is often the drill, IBM and CAT together account for roughly 40% of the DJIA’s advance, at this point up 70.

- Now to the absurd file. JPMorgan strategist Thomas Lee takes the cake today for the headline on his morning US equity strategy note: “History showing post-nuclear disaster bounce is 9.6% for the next 3-mos plus negative investor sentiment point to upward bias in next few weeks.”

We kid you not. That’s what he wrote. After nuclear disasters, stocks usually bounce about 10% in the next three months. Uh, yes, sample size is a little small, so be careful taking this one to the bank, citizens.

Question for Mr. Lee: What are the returns for stocks three months after two regimes are deposed in North Africa, another nation erupts in civil war, a third European nation collapses financially and needs a bailout, and the world’s third-largest economy gets hit with a 9.0 earthquake, followed by a tsunami, followed by a nuclear crisis?

(Paul Vigna contributed to this post.)

Bernanke and company’s continued insistence this week that the Fed’s uber-accommodative policy hasn’t played a role in driving up commodity prices continues to grate, and undermine the central banker’s credibility.

We’ve highlighted the extensive (and comprehensive) list of commodities with rising prices in ISM’s manufacturing survey, with few commodities reported as being in short supply. And no commodities — zilch — falling in price.

Well, no surprise, ISM’s February non-manufacturing survey out today shows essentially the same thing. Count 41 separate items listed as commodities up in price, while only three — cotton, cotton products and electrical components — are considered in short supply. Two commodities were down in price –  computer supplies and janitorial services.

Perhaps there are some nuances to supply and demand, and their effect on commodity prices that Dr. Bernanke has uncovered to explain all this. I’m certainly not an expert, but I can read a chart, and just about every commodity I look at began rising right after the Fed chairman’s Jackson Hole QE2 warm-up speech in late August.

To illustrate this even better, let’s go back to ISM’s reports, pre-Jackson Hole. Take a glance at the August manufacturing survey. Just three — three commodities – up in price (caustic soda, copper and corrugated containers); three down in price (polyethylene, polypropylene and steel) and only one — capacitors — listed in short supply. Continue reading…

“Only don’t tell me you’re innocent. Because it insults my intelligence — and makes me very angry…”
-Michael Corleone, The Godfather

Listening to Ben Bernanke repeatedly deny that the Fed’s QE2 program has played any role in jamming up commodities prices stirs the same emotions Michael felt when his brother-in-law Carlo denied fingering Sonny for Barzini’s people.

Bernanke continues to insist that rising commodity prices are due to supply and demand dynamics, and denies any culpability of the Fed’s easy money monetary policy. Senators at today’s testimony on the Hill let that assertion go unchallenged. Would’ve been nice if someone asked Bernanke to reconcile ISM’s February manufacturing survey today, listing roughly 30 commodities up in price, none down, but only three commodities — capacitors, cocoa powder and electric components — in short supply.

It’s a simple enough question: Dr. Bernanke, there’s a laundry list of commodities up in price, and many of their run-ups began in late August, coincident with early mentions of potential QE2. Less than a handful of commodities were reported by manufacturers as being in short supply. So how can supply and demand dynamics alone explain the sharp run-up in commodities during the past six months, when there appear to be few, if any, supply constraints?

For an organization like the Fed where credibility is crucial, it’s amazing that its officials continue to stand by such a flimsy rationale for high commodity prices. Continue reading…

Marc Chandler, head of currency strategy at Brown Brothers Harriman, talks forex with Dow Jones’ Veronica Dagher.

Good year in 2010 for US stocks, not such good one for Byron Wien’s list of “top ten surprises.” As a strategist, and now Blackstone vice chair, He’s been doing this a long time. Doesn’t mean he’s getting any better at it, though.

By our count, he was completely wrong on eight of his predictions, mostly wrong on his No. 1 (GDP would grow at 5% real rate, unemployment would drop below 9%; S&P 500 operating earnings would come in above $80 — that looks safe.)

Big swing and a miss on the following:

- Fed would raise interest rates, with Fed funds rate at 2% by year end. We’ll be lucky if that one happens by 2012.

- Yield on 10-yr note would go to 5.5%. See above. Equally fanciful.

- S&P rallies to 1300, then falls below 1000 and ends year at 1115. Nice try. Not even close.

- Dollar rallies vs yen and euro, with EUR/USD dropping below $1.30. Briefly correct on that one, but didn’t last.

- Congress would pass bills providing loans and subsidies for new nuclear power plants. Didn’t happen.

- Democrats would only lose 20 House seats in November. Whoops.

- Civil unrest reaches crescendo in Iran, Ahmadinejad gets pushed out. Also didn’t happen.

- Japan’s Nikkei 225 rises above 12000. Not quite. Continue reading…

Yesterday we took issue with St Louis Fed President James Bullard’s assertion during a CNBC interview that there was no evidence that QE2 is a factor in jacked-up commodities prices, though he conceded that their relationship should be studied.

Well, study this, Mr. Bullard: today US corn futures close at their highest level since July 2008 at $6.02 a bushel. Nymex Feb crude futures hit their highest close since October 2008, at $89.82 a barrel, and up 6.8% this month. Nymex heating oil at a fresh 2010 high at $2.5164 a gallon. Cotton hits a fresh post-Civil War (yes, that Civil War) high at $1.59 a pound. Comex copper futures settled at an all-time record high at $4.276 a pound.

Now, we’re not saying it’s all because of QE2 and no influence from supply/demand, China, whoever, but come on. All of these different commodities hitting fresh or all-time highs simultaneously?

Meanwhile, an asset class that Fed officials admitted QE2 was, in part, aimed at — stocks — also rose today to fresh two-year highs.

Not a coincidence. Study complete. Good luck at the gasoline pump or grocery store, citizens.

The euro earlier slumped to a session low $1.3072 vs US dollar (after earlier rising to $1.3202), continuation of a drop sparked when the Fed announced it will extend existing US dollar swap line facilities with a handful of foreign central banks.

US stocks appear generally oblivious to the develop, which could be chalked up to a simple focus on wrapping up the year’s business, and trying to grind out more gains in thinner, pre-holiday, formulaic and mechanical trading. Slap the blinders on and buy.

The Fed’s swap-line extension is telling — it’s reinforcement that the debt problems in Europe have a certain intractability, a stubbornness that won’t be dissolved by wishful thinking, promises of new “support mechanisms” or kind words from the Chinese. Continue reading…