Corn’s at an all-time high, supposedly on surging demand.
But just remember that whatever such increases there are, it’s primarily not going into people’s bellies, but their gas tanks just as crude oil is reliving its 2008 superspike.
Haven’t we seen this movie before?
We’ve been bellowing (and we’re not totally alone on this, as the Bank of Japan’s recent report shows) about how QE has been cascading untold liquidity into the financial markets, allowing for stocks to nearly double the past two years and commodities to surge toward, or past, their 2008 peaks. Much of the thanks for that can go to the nation’s central planners bankers, and the free-money bonanza of the last decade.
We’ve long plowed the road here of how the Federal Reserve helped goose the credit markets that allowed for dodgy borrowers to get dodgy mortgages. Then even-dodgier securities were created for “sophisticated” investors looking for the next best thing.
But the half-wits in Congress — dithering over how to cut a few billion here, a few billion there as shut down of the US government looms — have commodity-spike blame as well. Beyond refusing to enact trade deals that would boost US exports and potentially help develop new supplies of commodities in those markets, we get things like farm subsidies that incentivize not raising crops or animals and laws requiring ethanol — largely developed from corn — to be added to gasoline while its benefits are in question.
So until we get enough grown-ups on Capitol Hill and in the halls of the Federal Reserve able to bring about responsible policy, the likes of Dallas Fed President Richard Fisher will seemingly just be playing the role of graveyard whistlers or token dissidents while crony capitalism lives on and fans the flames of inflation.
Hopefully it’s not like the 1970s. Not like I would remember, being a tyke back in those days. But there’s no need for me to get first-hand experience, thank you.
And if anyone knows a thing or two about accommodative monetary conditions, it’s Japan.
The report certainly gives credit to global economic growth for pushing up commodities, but it also says “speculative investment flows into commodity markets have amplified the intensity of the price surge.”
Here’s a sentence from the summary that should have Bernanke, Dudley and other deniers at the Fed turning crimson: “Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”
Is the stock market rising on strong fundamentals, or strong liquidity? We get into that debate today, and we were lucky enough to have best-selling author John Mauldin on to help us get to the heart of it.
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.
Economists seem generally unfazed by the drop in ISM’s March non-manufacturing index, with most rationalizing that after some strong gains it was due to ease, and all readings still signal expansion.
Goldman Sachs noted the headline decline “was driven by a sharp drop to 59.7 from 66.9 in the business activity index — the biggest drop since late 2008 — which is the component we have found to be most closely correlated with GDP growth.”
Firm notes it’s “the first meaningful disappointment in a business survey in several months, so it deserves some attention.” Nomura points out that the decline narrows “the general divergence” seen recently “between hard data and survey-based data.”
Our favorite observation following the ISM services report comes from RDQ Economics, aimed at the Fed’s tale on rising commodity prices.
“The broad-based nature of price increases make the Fed’s assertion that commodity price increases are demand driven and have nothing to do with ultra-easy monetary policy nonsensical,” the firm said. To further illustrate the absurdity, roofing shingles were listed in the report among commodities reported “up in price.” Roofing shingle prices “are rising in the U.S. because of demand even though there is very little building going on?” RDQ very appropriately wonders.
Which brings us once again to Chairman Bernanke and his comments last night. Newswires Michael Derby reported that Bernanke said that the rise in global commodity prices — which is all demand driven, mind you — will be transitory and prices “will eventually stabilize.”
If you buy the Fed’s demand-driven thesis, then demand — particularly in Asia and emerging markets — needs to cool off a lot, and cool off quick in order for commodity price gains to prove to be temporary. The necessary sharp pullback in global growth, and particularly in emerging-market growth, is not a widely held view, as far as we’re aware.
The run-up in commodity prices may indeed prove temporary, but only after the Fed finishes with QE II and then begins to signal an interest in drawing down the liquidity it’s poured into the global financial system.
It’s almost embarrassing to watch the contortions the Federal Reserve is engaging in to absolve itself of any role in fueling the run-up in commodity prices since the end of August.
The latest comes in the form of an “Economic Letter” from San Francisco Fed economists Reuven Glick and Sylvain Leduc. That’s right, who better to objectively state that the Fed’s policies aren’t pumping up commodities…than a branch of the Fed? This four-plus pager, best I can tell, rests on the conclusion that the Fed’s QE measures aren’t to blame for the spike in commodity prices because “commodity prices actually tended to fall” following Fed announcements on large-scale asset purchases.
Sounds as if Glick and Leduc aren’t familiar with the old adage “buy on rumor, sell on news.”
For my money, the only “announcements” that mattered were Bernanke’s late-August Jackson Hole speech, which got the whole commodities complex (not to mention stocks) a-running, and the fait accompli announcement November 3rd with the program details. And whether or not commodities dipped on those days — or any other LSAP announcement days — is irrelevant because the trend has remained higher since Jackson Hole.
While some Fed officials have been more frank about the role of QE II in pushing up commodity prices, others have dismissed it out of hand, instead placing the blame squarely on supply and demand and surging growth in emerging markets. Indeed, that’s the official story from the central bank, as if that global growth trend only became obvious seven months ago, coincidentally at the same time Fed chair Bernanke first suggested QE II was a real possibility.
We’ve taken issue with the Fed a few times before (here, here and here) over this “don’t-look-at-me” attitude, pretending its free-flowing liquidity measures aren’t affecting commodity prices. In some cases, like cotton, we’re sure there are legitimate supply and demand issues. But we’re not buying that story for every commodity across the board.
Silly exercises like the one from the San Fran Fed are wholly unconvincing and, as we’ve noted before, only serve to further undermine the central bank’s credibility.
The rally train rolls on as stocks open 2Q on a positive note, trudging higher but finishing well below session peaks.
Encouraging March employment report, ISM manufacturing generally as expected and decent auto sales prod markets higher. NY Fed’s Dudley also helps sentiment, countering recent hawkish tone from some Fed officials with market-reassuring dovish language of his own.
Again, volume not especially impressive, particularly considering the first day of a new month and quarter. Looked as if bulls might fade in final hour, but had enough kick to finish fine.
DJIA adds another 56.99 to 12376.72; earlier reached highest intraday level since early June 2008. Nasdaq Comp rises 8.53 to 2789.60, S&P 500 ends 6.58 higher at 1332.41.
Kind of quiet for economic data next week, FOMC minutes due out Tuesday could be interesting but not necessarily market moving. Otherwise, week’s peppered with some Fedspeak, expect them to continue guiding expectations toward a QE II finish in June and then no more.
Alcoa kicks off 1Q earnings reporting season a week from Monday, and commentary/outlooks from corporate America may serve as the next test for stocks. Can’t rely on Fed liquidity forever, eventually the investment story needs to come back to the pace of profit growth and margin expansion. Will executives have enough faith in the economy’s forward momentum to pick up hiring and capex, or will they stay cautious and focused on controlling costs in a wait-and-see mode?
The headlines tomorrow will be all about the major U.S. stock indexes posting their best first-quarter in more than a decade (and their second best ever.) It’ll make for some great bullish-sounding soundbites, and the fact that stocks are up at all given all the craziness of the 1Q is a testament to…something. But while it’s true, of course — the numbers don’t lie — it misses so much.
Just two weeks ago, the S&P 500 and Nasdaq Comp were in the red on the year, negative, down, losing ground, and the DJIA was a couple dozen points away from joining them. Now, they didn’t just rebound, they rebounded sharply, almost violently, in the face of a constant stream of bad news. Kind of makes you wonder what’s really going on, doesn’t it?
DJIA slips 31 points today (0.3%) to 12320, after Fed’s Kockerlakota suggests rate hikes could come later this year; still the index gains about 6.4% on the quarter. S&P 500 loses 2 to close the quarter at 1326. Nasdaq Comp adds 4 to 2781. Again, too, NYSE volume is low, like it’s been this entire rally. Volume equals validity, as the say on the Street, but there hasn’t been much validity in this rally.
Stocks were hardly breathing through most of today, but that late speech from the Minneapolis Fed chief Kockerlakota — suggesting rate hikes could possibly come later this year — sends markets down. So in addition to all the attention on the jobs report tomorrow, everybody’s going to be scrambling to recalculate their equations about when rate hikes are coming.
The difference between a fed funds rate of zero and 1% doesn’t mean much to the vast public — remember, it was that 1% rate that sparked the housing bubble — but it means a lot to traders, who have made a lot of money off that zero rate.
The stock market has recovered all its losses suffered after the Japan earthquake/tsunami/nuclear crisis, shrugging off at least the economic consequences of the event. That’s a posture that seems entirely premature, and the New York Times had a story Saturday that illustrates why it’s too soon to make conclusions about the disaster’s impact on the global economy.
The NYT headline reads “Global Supply Lines at Risk as Shipping Lines Shun Japan,” and the gist is that some shipping companies are reluctant to call on ports in Tokyo Bay because of concerns about radiation spewing from the damaged Fukushima Daiichi nuclear plant.
Cargo carriers have a lot at stake. As the story notes, they’re obviously concerned about the safety of their crews, but they also don’t want to risk contaminating cargo or their ships. One industry source explained that a vessel may need to be scrapped “if quarantined even temporarily for radioactivity, because they would face extra coast guard checks for years at subsequent destinations.”
Sounds extreme, but those extra inspections would make it hard for a ship to stay on schedule, and who wants to ship cargo on a vessel that’s always delayed?
So it’s no small matter, this reticence to sail into Tokyo and Yokohama. As the Times story says, those ports “are normally Japan’s two busiest, representing as much as 40 percent of the nation’s foreign container cargo.” Continue reading…
J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees […]
David Oreck, founder of a well-known maker of vacuums and air purifiers, says he’s upset his namesake company is in bankruptcy. He says Nashville, Tenn.-based Oreck Corp. was a perfectly profitable company when he sold his stake in it to a private equity firm in 2004. He blames the firm, New York-based American Securities Capital […]
