Monday, May 16, 2011

Global Equity Markets: Sell in May and Go Away?

Some experts have been talking about selling in May and going away.

The premise of this precept is fundamentally seasonal.

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Chart from Equityclock.com

One expert even cited the Tobin Q which implied for high valuations, as one of the 'fundamental' reasons to do so.

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Chart from Greg Mankiw

As I have been saying since 2008, it has been politics that has essentially driven financial markets more than corporate valuations or economics. And that’s why many experts, relying on the former metrics as guidance, have got it all so wrong.

Anything can happen in the markets. Most especially that today’s financial markets have been heavily distorted by various government interventions.

And as I have repeatedly been pointing out, the stock market have been a target for government policies where the US government has even less been coy about this, which they claim represents “success” in policymaking.

This means politics will continue to determine market outcomes or its directions (via the boom bust cycle).

Say for instance, if the US Federal Reserve decides to “covertly” bolster the US Democratic Party to negotiate for the vote on the debt ceiling, all the Fed has to do is to allow 'some' market volatility to pervade by withholding QE or by selling some market securities held by the Fed.

And the ensuing market volatility, as the politicians will point out, will be imputed to the uncertainty from the unwillingness to increase the debt ceiling by the opposing Republican Party.

But the truth is the US Fed has been instrumental in shaping the conditions of the equity markets. It’s been part of Ben Bernanke’s ‘crash course to central bankers’ dogma.

Market volatility, thus, adds to the leverage of politicians in negotiating vital policies.

Also the war on commodities may have ripple effects on global financial markets not limited to equities, as I pointed out in my latest observation on the possible ramifications of global price manipulations on the commodity markets to the Philippine Mining index.

So there are many complex interrelated and intertwined factors that may influence global stock markets more than seasonal factors.

I’d rather use the actions taking shape in major commodity markets, global equity markets, yield curves of major economies and of Asia, and the unfolding geopolitical events as guidance.

War on Commodities: Falling Prices Equals Ballooning Demand For Gold Coins

The implied price controls conducted by some the major governments have apparently been meant to forestall the rise of statistical inflation via the commodity transmission.

Yet instead of the markets freaking out of commodities, physical demand instead has reportedly been swelling.

From Bloomberg, (bold highlights mine)

Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year...

It’s not just the U.S. Mint that saw accelerating sales. Rand Refinery Ltd., which makes the Krugerrand, said May 13 that sales are heading for their best month since August. Demand for physical gold on May 6 was the strongest since early February, Standard Bank said in a report May 11. The U.S. Mint sold 62,000 ounces of American Eagles in the first week of May, as the S&P GSCI slumped 11 percent, the most since December 2008.

UBS AG, Switzerland’s biggest bank, had its second-best day this year for physical sales on May 9, according to a report the following day. The bank’s sales to India, the world’s top bullion consumer, are more than 10 percent higher than in 2010.

So like my earlier post on declining silver inventories, we seem to be witnessing markets taking advantage of the government orchestrated turmoil.

And this has not been an all the private sector affair; Emerging market governments have reportedly joined the frenzy to accumulate.

From the same Bloomberg article, (bold highlights mine)

Another warning sign for the rally may be central banks adding to their reserves for the first time in a generation. Mexico, Russia and Thailand bought about a combined $6 billion in February and March, International Monetary Fund data show. Central banks hold 30,575 tons, equal to about 18 percent of all the metal ever mined, the data show.

The banks were also boosting holdings in 1980 when gold rose to a then-record $850, only to fall for most of the next 20 years. That high is equal to $2,299 in inflation-adjusted terms, according to a calculator on the website of the Federal Reserve Bank of Minneapolis. Prices tripled from 1999 through the beginning of 2008 as the banks sold more than 4,000 tons.

It would seem that the current ploy implemented by the US could be benefiting emerging market economies. Has the rigging of the marketplace also been meant to give EM economies ‘friends’ a discount?

Needless to say, the effect of the price manipulation seems becoming more evident—a policy failure.

Has the Magic of Technology Ebbed?

Marketing guru Seth Godin thinks so. He writes, (bold emphasis mine)

Arthur C. Clarke told us, “Any sufficiently advanced technology is indistinguishable from magic.”

Head back to the 1800s with a Taser or a Prius or an iPad and the townsfolk will no doubt either burn you at the stake or worship you.

So many doors have been opened by technology in the last twenty years that the word “sufficiently” is being stretched. If it happens on a screen (Google automatically guessing what I want next, a social network knowing who my friends are before I tell them) we just assume it’s technology at work. Hard to even imagine magic here.

I remember eagerly opening my copy of Wired every month (fifteen years ago). On every page there was something new and sparkly and yes, magical.

No doubt that there will be magic again one day... magic of biotech, say, or quantum string theory, whatever that is. But one reason for our ennui as technology hounds is that we’re missing the feeling that was delivered to us daily for a decade or more. It’s not that there’s no new technology to come (there is, certainly). It’s that many of us can already imagine it.

The current generation, whom have been key beneficiaries of the transformative technological innovations, may seem to be less appreciative of the contributions of technology to our current welfare. That’s because technology has been giving us constantly more for less.

Thus, the diminishing returns on expectations from the impact of technological progress: the perceived loss of magical touch.

But I think it goes more than that.

Perhaps most people may be a lot less familiar with the antecedent of today’s state of technology. Or, people may have forgotten the roots of today’s progress: our ancestors compounded efforts or actions.

As the great Ludwig von Mises once wrote, (bold highlights mine)

Nobody denies that technological progress is a gradual process, a chain of successive steps performed by long lines of men each of whom adds something to the accomplishments of his predecessors. The history of every technological contrivance, when completely told, leads back to the most primitive inventions made by cave dwellers in the earliest ages of mankind. To choose any later starting point is an arbitrary restriction of the whole tale. One may begin a history of wireless telegraphy with Maxwell and Hertz, but one may as well go back to the first experiments with electricity or to any previous technological feats that had necessarily to precede the construction of a radio network. All this does not in the least affect the truth that each step forward was made by an individual and not by some mythical impersonal agency.

When people forget about history; the contribution of a multitude of individuals in today’s progress through the years, then they became less appreciative of the blessings that has been happening.

Many people today seem to think that the progress from technology is just a given. It is not.

For as long as people are allowed to trade, trade will then function as the main driver of technological progress.

Writers like me will try to keep that magic alive.

IMF Head Arrested For Sexual Molestation

From New York Daily News

A top French politician nicknamed "the great seducer" was dragged off a flight at Kennedy Airport Saturday after he was accused of sexually assaulting a Manhattan hotel maid.

Port Authority cops grabbed Dominique Strauss-Kahn, the head of the International Monetary Fund and a presidential hopeful in France, moments before his Air France plane took off about 4:45 p.m.

Strauss-Kahn, 62, allegedly crept up behind a maid after she entered his room and forced her to perform oral sex on him, sources said.

The woman broke free and ran out of the room. Strauss-Kahn quickly headed for the airport, sources said.

Charges against Strauss-Kahn, who is married to well-known French TV journalist Anne Sinclair, were pending Saturday night, sources said.

Hours before Strauss-Kahn was pulled from the flight, a close Socialist Party ally claimed he was the target of a smear campaign by French President Nicolas Sarkozy.

My two cents.

Politics is a dirty game.

While this sorry event shows how officials are subject to the same frailties as anyone else, the difference is that the political class have the tendency to abuse their powers just to meet their personal desires.

Besides, the law applies differently to everyone. Remember this? (hat tip Charleston Voice)

clip_image002Or that maybe too much of economics can increase one's libido too?

Sunday, May 15, 2011

Phisix: Why I Expect A Rotation Out of The Mining Sector

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.-Charles Mackay

Let me open by saying that I remain a long term bull on the mining sector.

However given the current ‘blitzkrieg’ seen in most of the major mining issues, which has substantially bolstered the Philippine mining index, I am inclined to believe that bigger profits premised on lesser risk can be made on other sectors, over the interim.

Mining Index’s Remarkable Outperformance Needs A Reprieve

Even as most of the world’s major equity markets appear to stagger, ASEAN equity markets have remained buoyant. The biggest gains over the week had been posted by Thailand (+3.25%), Singapore (+2.07%), Philippines (+1.73%), Malaysia (+1.67%), Vietnam (+1.47%) and Indonesia (+.88%). Asia was largely but tentatively positive with decliners seen only in Bangladesh, Australia and Japan’s benchmarks.

Such buoyancy had likewise been reflected over the broad markets of the Philippine Stock Exchange.

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Advancers modestly eclipsed decliners (376-309), while most of the sectoral averages registered positive except for the financial industry.

The Mining and oil sector remained the leader, whose gains were matched by the Holding sector (powered by the peripheral issues—JGS Summit +7.42% and DMC Holdings +6.84%) followed by the service sector (led by the heavyweights PLDT +2.98% and ICT +3.13%).

The turbocharged mining sector has unwaveringly advanced for 7 consecutive weeks!

In addition, the mining sector has assumed the market’s leadership (also co-leadership as the above) in the last 4 out 5 of the weeks.

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Year to date, the mining sector, has exhibited such domineering trait: While the Phisix has been up by a meager 2.17%, the mining sector has skyrocketed by an astounding 27.98%! The rest of the other sectors have only to watch helplessly as they get left behind.

Yet such grand performance is likely to draw in much of the crowd. It is when the impulsive and emotionally driven crowd steps in is when we should exercise cautiousness. The greater fool theory works in a crowd driven trade.

In observing the crowd phenomenon, a popular quote attributed to author Gustave Le Bon[1],

When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.

Given the above, there are two investing axioms to keep in mind:

One—no trend goes in a straight line

Second—never get married to an investing theme

Given such axioms, there are four factors which I think should make the mining sector vulnerable to a correction:

1. Buy the rumor sell the news,

2. seasonality,

3. war against commodities and

4. rotation

Buy the Rumor, Sell the News

‘Buy the Rumor, Sell the News’ is a popular trading strategy built around the premise where stock prices in reaction to rumors (based on myriad issues such as new products, new markets, mergers and acquisition, joint ventures, new investors and etc...) substantially rises. And once the rumors gets either confirmed or denied, the stock prices falls.

‘Buy the rumor sell the news’ functions like a miniature boom bust cycle applied to specific issues. Only that this phenomenon occurs mostly during bull market cycles which accentuates sharp gyrations of the marketplace given the underdeveloped state of the local equity markets underscored by the lack of depth, sophistication and alternatives.

The ranking of the Philippine mining index based on weightings as of Friday’s close are as follows, [this includes the year-to-date performances]

Philex Mining 26.6% [22.73%]

Lepanto Consolidated 26.06% combined [A-76.08%, B-80.22%]

Semirara Mining Corp 18.72% [15.03%]

Atlas Consolidated 10.62% [23.19%]

Manila Mining Corp 6.64% [A & B-108.7%]

One would easily note that the gist of the fantastic gains of the Philippine Mining Index revolves around two issues: Manila Mining [MA, MAB] and Lepanto Mining [LC, LCB].

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In addition, the one year chart shows that three issues have relatively strong correlations—particularly Philex (blue line), Lepanto (red line) and Manila Mining (black candle) where the undulations appear to be synchronized. The difference is in the magnitude of price actions.

On the other hand, Atlas Consolidated (green line) has only partly shadowed the actions of her peers. While coal mining energy based Semirara has fundamentally distanced its price actions with activities of the precious metals group.

Last week, following a voluntary trading halt, the three companies with strongly linked movements disclosed that they have closed a deal[2].

Philex Mining [PX] will reportedly get a 5% interest of the Kalayaan Copper Gold Resources which is 100% owned by Manila Mining [MA], in exchange for $25 million. Philex has the option to expand its stakes to 60% in Kalayaan in the condition that the feasibility and other pre-development expenditures will be shouldered by the company.

Incidentally, Lepanto [LC] owns a 20% share of Manila Mining.

We see overbought technical conditions for mainly Manila Mining and Lepanto and partly with Philex. Such signs of euphoria combined with the confirmation of the rumor—which is now a news could be negative for their share prices. Without further developments to speculate on, profit taking will likely take hold.

Should my prediction hold true where a corrective phase on these 3 issues would occur, it is unclear if Atlas [AT] or Semirara [SCC] will follow their footsteps, as they have not been part of the event based actions.

As said above, “buy the rumor sell the news” are issue specific activities that may not necessarily influence the price actions of the contemporaries.

Considering that the weightings of participants of that deal constitutes about 59.3% of the Mining index, then any significant correction will likewise be reflected on the bellwether.

To add, given the variances in the degree of gains, the correction phase will also respond accordingly.

Seasonality

Based on seasonal performances, the precious metal groups appear to be most senstive to price corretions during May to September.

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This is not limited to the metals as exhibited by the gold future[3] seasonals see top window in the above chart, but also to the Material sector[4] (S&P 500) (also see window below).

And since the metals function as the main drivers of the stock prices of mining securities then perhaps such seasonal forces may add to the profit taking mode.

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Over the past 8 years the Philippine mining index has shown some semblance of seasonally influenced performance.

The Mines strengthened mostly during the last quarter then peaked during the first or second quarter then downshifted or consolidated. The timing may not be perfect or that there may be variances but the cyclical essence holds.

This applied in 5 out of 6 years, except in 2008, where the mining index responded to exogenous forces more than the seasonality flows.

One would also note that price declines (based on peak-trough) from anywhere 25-40% (ex-2008) delineates the downcycle phases of the mining index.

War Against Commodities

US, Europe and China has openly engaged in a supposed campaign[5] against so-called “speculators”.

These governments have actively or indirectly intervened in the marketplace by changing the rules of the game, particularly for the US and China, in abruptly raising of the credit margins of commodity trades.

This hasn’t been a one-time affair, but appears to have been deployed successively to almost the entire commodity sphere.

Such ‘Pearl Harbor strategy’ has been meant to “shock and awe” speculators to forcibly bring down prices.

Similar to the failed coordinated interventions by central banks against speculators to stem the rise of the yen last March[6], I expect these intrusions to have short term effects.

To add because such interventions does not address the fundmanental reasons why commodities have been rising, government actions will only exacerbate imbalances already put in place by earlier polcies. So this seems like another case where the cure is worse than the disease.

Since we should expect global governments to persist on such actions for unstated political goals, commodities will, thereby, be subjected to sharp gyrations.

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So far the war on commodities has diffused to global mining indices such as the S&P/TSX Global Mining Index (SPTGM) and the Dow Jones US Mining Index (DJUSMG). This should serve as a temporary headwind against local mining industry.

Nevertheless such intrusions may also engender “regime uncertainty’, or an aura of regulatory risks which may also affect the general marketplace.

By June, the US Federal Reserve is scheduled to end QE 2.0 (Quantitative Easing or a.k.a. ‘Credit Easing’ policies).

I am not sure that the US Federal Reserve will automatically reengage in QE 3.0, since this seems largely a political issue. Although, I suspect that QE 3.0 will be implemented sometime within the year. Of course the other issue will be the controversial vote on debt limit which will likely be associated with QE 3.0. A vote to raise the US debt ceiling implies of more pressure for the US Federal Reserve to put QE 3.0 on the pipeline.

Besides, part of the ‘signaling channel’ or one of the tools used by central bankers to control or manage inflation expectations could be to project some market “volatility”. This may be used to justify the next round of money printing measures. Thus, for the interim, the marketplace could be subject to more of politics than of market based action.

Promoting fear seems as the best way to advance policies of social control.

Market volatility may be an outcome of deliberate tactical operations, or as unintended consequences in the battle being waged against the “inflation”.

Rotational Process

A prominent symptom of inflation is that prices are affected unevenly or relatively.

Eventually prices in general moves higher, but the degree and timing of price actions are not the same.

It’s the same in stock markets, which represents as one of the major absorbers of policy induced inflation.

Prices of some issues tend go up more and earlier than the others. At certain levels, the public’s attention tend to shift to the other issues which has lagged. This brings about a general rise in prices.

These are the spillover effects which I call the rotational process.

I have been predicting that the mines will outperform the rest of the equity markets[7] since 2003. Yet while this has been fulfiled, in retrospection, the path towards attaining today’s conditions hasn’t been straightforward.

The early periods had been marked by refusals and denials which gradually segued towards slow acceptance and finally transiting into today’s mid-cognizant phase. Yes even today’s boom has not fully convinced many disbelievers.

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The path to glory isn’t without pain.

One would note that mines gyrated steeply from 2007-2010. And this period hallmarks the gradual acceptance stage.

Yet while the mines had racked up the biggest gains as exhibited by the index overtime, it suffered periods of the deepest losses (2008) and periods of ennui or underperformance (2010).

People tend to see what is recent (anchoring bias), and project the present into the future. That’s how I think many see them today.

Yet given the above outlook: war against commodities, overheating on several mining issues, buy the rumor and sell the news, the seasonality phases, and signs of euphoria—all these seem to point to a possible correction.

Importantly even if the Philippine central bank, the Bangko Sentral ng Pilipinas recently raised interest[8] for the second time this year, local policies still seem very accommodative as policy rates are considerably below previous[9] and projected (from 5[10]-7%[11]) economic growth rates.

Also I also believe that inflation rates have been meaningfully underestimated.

If the promulgated reason for raising interest is to “to control inflation expectations amid rising oil and food prices”, then the rates of increases of food and gas here and abroad would seem far been greater than current levels of interest rates.

This, essentially, points to a ‘negative real interest’ environment[12], the implication of which is throw more fuel to the boom phase of domestic financial asset markets.

This means that if the mining index declines, then some sectors would have to pick up the slack.

Trade The Opportunity

Bottom line: No trend moves linearly.

I predict that the local Mining index will undergo a corrective phase over the next quarter or so. But eventually should pick up steam anytime during the late 3rd quarter or during the last quarter of the year.

One could take some profits off the table while leaving most of one’s mining holding positioned for the long term or in the event of my miscalculation.

Proceeds from the profit taking could be used for repositioning to other sectors in anticipation of a rotational process or to relish the fruits of one’s triumph.


[1] Nowandfutures.com Some favorite quotes, A world of Possible Futures. I say attributed because I can’t find it in Gustave Le Bon’s The Crowd

[2] PSE.com Lepanto Consolidated Mining Company Agreement between MA and PX for exploration and development of Kalayaan Project; Lifting of trading suspension, May 12, 2011

[3] Equityclock.com, Gold Futures Seasonal Chart

[4] Ibid., Material Sector Seasonality

[5] See War On Commodities: China Joins Fray, Global Commodity Politics Intensifies, May 14, 2011

[6] See Did the Joint Currency Intervention for a Weaker Yen Succeed? May 14, 2011

[7] See Philippine Mining Index Surfs The Commodity Tide, April 24, 2011

[8] Philstar.com BSP hikes interest rates by 25 basis points, May 6, 2011

[9] Abs-cbnnews.com Philippines posts record 7.3% economic growth in 2010, January 31,

[10] Mb.com.ph Latest WB forecast puts Philippine GDP growth at 5% to 5.4% for 2011 and 2012, January 14, 2011

[11] Breakingnews.ph NEDA chief confident of 7-8% GDP growth, February 10, 2011

[12] Wikipedia.org Negative real interest rates

Saturday, May 14, 2011

Did the Joint Currency Intervention for a Weaker Yen Succeed?

Japan’s triple whammy calamity, last March, pushed the yen to the stratosphere. This prompted global finance ministers to jointly intervene in the currency markets to stem its rise.

This from UK’s Guardian.co.uk last March, (highlights mine)

Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen

The Bank of Japan began selling yen overnight to depress its value. Other central banks are expected to follow suit as their markets open through today, in a rare concerted move.

The intervention signified as war against speculators: central banks versus speculators.

Over a month since the intervention, the New York Federal disclosed yesterday its participation in the joint action:

The U.S. monetary authorities intervened in the foreign exchange markets on one occasion during the first quarter, on March 18, buying $1 billion against Japanese yen, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress.

During the three months that ended March 31, the dollar depreciated 5.5 percent against the euro but appreciated 2.5 percent against the Japanese yen. In this period, the dollar’s trade-weighted exchange value depreciated 3.7 percent as measured by the Federal Reserve Board’s major currencies index.

The coordinated G-7 intervention was carried out by the foreign exchange trading desk at the New York Fed, operating in conjunction with Japanese monetary authorities, the European Central Bank (ECB) and the monetary authorities of, Canada and the United Kingdom. The intervention amount was split evenly between the Federal Reserve System Open Market Account and the U.S. Treasury’s Exchange Stabilization Fund (ESF).

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The blue arrow marks the date when the US government (US Federal Reserve and the Treasury) intervened along with central banks of other nations in a grand scale of collaboration against speculators.

Over the short term, the intervention proved to be a success; the yen weakened.

Today, the yen is seen back at the level where the global governments intervened. In short, billions of dollars of taxpayers money went down the drain.

Bottom line:

Interventions did have immediate effects (which resonates with today’s war against commodities). However, eventually the effects wear out.

Yet who bears the losses from such interventions? Obviously taxpayers!

The battle was won by the central banks in March, but they appear to be losing the war.

Humor: How to Make a Pass at an Economist

From Modified Rapture

The Top Ten Lines for Hitting on an Economist

1. You’ve got the curves to supply my demand!

2. Let’s go to bed and try to disprove the law of diminishing marginal utility.

3. You’re my very favorite kind of moral hazard.

4. I have a feeling you really understand the “nature of the firm.”

5. Baby, I love you so much I’m willing to forgo my exit option.

6. Wanna talk about our private goods?

7. You’re an economist. I’m an economist. How about a little horizontal integration?

8. Now those are some tangible assets!

9. I’ll reveal my preferences if you will.

War On Commodities: China Joins Fray, Global Commodity Politics Intensifies

The Europeans have reportedly been breathing down on profits by the banking sector from commodity trades.

The US has been rigging the rules of the game by apply a Pearl Harbor strategy via a spate of margin hikes in the commodity markets over a short period of time.

Now, China joins the bandwagon on the assault on commodity prices.

Reports the Marketwatch,

The Shanghai Gold Exchange said Thursday it will raise margin requirements for silver futures as part of risk-control measures, its third round of increases in less than a month, according to a statement posted on the exchange's web site. Margin requirements will rise to 19% of a contract's value from 18%, while the daily price limit for the one kilogram silver forward contract will rise to 13% from 10% above or below the previous session's close. The new trading requirements will be effective from May 13.

China has been combating her inner demons during the past 2 years and seems as the most problematic nation among major economies in dealing with inflation (aside from India).

Since China has been a key player in the commodity markets then it’s apparent that coordinating policies with her major trading partners might mean more success in attaining price control goals.

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From Hostra University

The above chart reveals of the China commodity consumption story as of 2009, relative to the world. And it’s the reason why China’s growth story has partly been tied with commodity price trends.

There is also the supply side story which we won’t be dealing here.

Relative to China’s silver’s price margin hikes:

China’s industrial demand for silver comprises nearly half of the world’s silver consumption.

According to Goldcore,

Today industrial uses account for 44% of worldwide silver consumption and in conjunction with investment and store of value demand, industrial demand continues to grow.

And China’s silver imports have exploded over the years which turned her from an exporter to a major importer.

According to the Wall Street Journal, (bold emphasis mine)

China's net imports of silver hit a record high of 400% in 2010 to 3,500 tonnes .

China used to be a silver exporter now China has become the importer of silver

About 70% of China's silver demand comes from the industrial sectors. Silver is widely used in the China is the third largest producer of mined silver in the world.

China also is a major consumer of silver, absorbing large and rapidly growing volumes of silver in its manufacturing sector.

Chinese silver mining witnesses significant growth and development in recent years, fueled by technological strides in exploration and an increase in production in response to steady growth in domestic and international demand China is a major global producer and consumer of silver-based brazing alloys.

China has some of the world's largest manufacturing facilities for home electronics and electrical appliances, which utilize various type of silver-based solder.

China is the world's largest producer of solar power and electronics.

Silver price increased more than 80% in 2010.

Silver demand in China is soaring thanks to increasing use for industrial and jewelery purposes.

About 70% of China's silver demand comes from the industrial sectors. Silver is widely used in the China is the third largest producer of mined silver in the world.

So controlling silver prices from spiking could mean ‘less statistical inflation’. This should also represent subsidies to her industrial users. Hence the incentive to join the price control bandwagon.

According to the Financial Times,

Chinese speculators have emerged as a big driver of silver’s spectacular rally and subsequent crash with trading in the metal in Shanghai soaring nearly 30-fold since the start of the year.

The commodity, nicknamed “the devil’s metal” for its wild price swings, surged 175 per cent from August to a peak of almost $50 a troy ounce two weeks ago. Since then, it has plummeted 35 per cent, hitting a low of $32.33 on Thursday.

At the same time, silver turnover on the Shanghai Gold Exchange, China’s main precious metals trading hub spiked, rising 2,837 per cent from the start of this year to a peak of 70m ounces on April 26, according to exchange data.

The number of contracts outstanding, an indicator of investor exposure, doubled over the same period.

Manipulating silver’s prices also means punishing savers who buy silver in the form of hedging against currency debasement. As the article above implies, about 30% of silver’s demand in China have been due to “jewelry”. Given the underdeveloped conditions of China’s capital markets, hedging may come in the form of jewelry.

The global war on commodities is becoming more evident by the day...

Reports the Reuters (highlights mine)

There's no question pressure from Washington is growing.

A group of 17 U.S. senators on Wednesday called on the Commodity Futures Trading Commission to crack down immediately on excessive speculation in crude oil markets, demanding the agency's plan to impose position limits within weeks.

...as we see more and more calls for interventions from politicians around the world.

And the assaults on the commodity markets have also been expected to cover agricultural futures soon.

So we should expect continued volatility until governments would run out of ammunition or once commodity demand and supply backfire on their policies.

Yet for as long the US Federal Reserve pursues the policy of inflationism (this includes other major central banks or even China)…

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Chart from Minyanville

…the outcome will be higher commodity prices!

Scapegoating speculators and intervening in the markets may temporarily achieve political goals. However, such actions would only worsen the economic balance and lead to even higher prices—the law of unintended consequences.

It is just a matter of time.

In my view, this telling chart forebodes on why the concerted intervention in commodity markets.

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Printing money does not equal higher inflation, that’s what’s being portrayed. Why? Because the Fed and their acolytes think that they need more of these, since government spending, for them, is holy grail to resolving socio-economic problems.

Money printing is the way to prosperity, so it is held.

I see higher inflation.

War on Commodities: Intervention Phase Worsens and Spreads With More Credit Margin Hikes!

[This post, which I published last May 10, seems to have vanished from my inventory of articles. Perhaps this could be an unintentional omission as part of the patching of the technical glitch, or the alternative, I don’t like to think about it. Nevertheless I am reposting it, but with slight revisions. Anyone who has a copy of the old post pls resend to me benson.te@gmail.com. Thanks]

So the mainstream picks up on the war being waged on commodities.

For politicians it’s all been about political correctness, thus any deviances or incorrectness must be faced with 'discipline'.

Bloomberg’s Matthew Lynn writes, (bold highlights mine)

The battleground that matters most for the banking and finance industry right now is the profits it is making from commodities trading.

Over the last few days, prices have been bouncing all over the place, a reminder for everyone of just how unstable the market in food and raw materials has become.

Now there is a backlash building. The banks should take note of that. If they don’t, they could easily be driven out of this business -- and they will only have themselves to blame.

Investors held a record $412 billion of raw-material assets at the end of March, almost 50 percent more than a year earlier, according to estimates by Barclays Capital. Trading in futures and options contracts is rising rapidly. For banks and fund managers, it is a lucrative business. And the more volatile it is, the more profitable it gets.

Not everyone is happy about that. Last month, Barclays Plc was targeted at its annual general meeting for its trading profits in food commodities. The World Development Movement, a London-based group, claims that Barclays may be making as much as 340 million pounds ($554 million) a year from “food speculative activities.”

That may be exaggerated, but there will be plenty of sympathy for that view. French President Nicolas Sarkozy has blamed speculators for pushing up food prices. The European Union’s financial services commissioner, Michel Barnier, is even calling for limits on trading in commodities...

It would be easy to dismiss those protests as nothing more than the complaints of a few anti-business fringe groups and grandstanding politicians. Easy, but wrong. In reality, there is a serious issue here. Speculation in commodities isn’t like trading in financial instruments. People don’t eat Nestle SA shares. They don’t need Treasury bills to keep their factories running. The prices of those instruments can jump around like crazy without it affecting people’s lives.

But when the price of wheat or copper soars, it makes a big difference. Some people can’t afford to eat anymore because food is too expensive. Companies that used to be profitable start losing money and firing workers because the cost of their raw materials has risen so much. If they think the banks are to blame for that, they will be angry.

As I have been saying governments have been so predictable;

First governments inflates, then blames everybody else.

Then they apply propaganda to justify their actions.

Next they’ll impose price controls in the hope that edicts will be able repeal economics.

Eventually reality catches up and the facade collapses.

And as we have been pointing out inflation and price controls are like (fraternal) twins. Fraternal because both emanate from government policies, however one aspect is monetary while the other is administrative or fiscal.

Now the propaganda-price control stage is getting clearer

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And this has been part of the slew of propaganda being tossed out by the Fed which for me constitutes part of the ‘signaling channel’ conditioning for the next QE.

Here is a Fed study which attempts to show that the link between US dollar and inflation has been fading.

From the Wall Street Journal Blog,

Currency weakness leading to higher import prices is a hallowed cause-effect connection for economists. But it’s a link that may be eroding...

Certainly, import prices have increased as the dollar has weakened. Over the year ended April, the trade-weighted value of the dollar fell about 6%, while the prices of non-oil imports increased 4.3%.

Much of the price gain, however, reflects higher costs for imported commodities and supplies. The prices of imported capital and consumer goods — items that feed more directly into broader U.S. inflation measures — are up only about 1% over the past year.

Economists at the Fed have looked into the link between exchange rate and import prices. What they found is the pass-through effect from a weaker currency eroded from the 1980s into the early 2000s.

What’s behind the looser link?

One reason, the economists theorize, is that a greater share of imports are goods with prices less sensitive to currency movements. For instance, Apple — not the forex market — sets the price of iPads.

Also, companies are more able to hedge against currency moves or shift production and supply sources around the globe.

Another reason for the erosion is China dominance of the U.S. import market.

With all the gobbledygook, we should start believing them. Unfortunately technical gibberish won’t supplant the law of economics. Printing more money relative to actual output of goods and services will lead to HIGHER prices.

And that’s what’s been happening.

Yet if you look at their chart which tries to identify the so-called decoupling, it simply is not there, see the trend lines I drew—red nominal imports; blue trade weighted US dollar.

The immediate effects may not be as strong as the previous, but it doesn’t mean the current divergences should translate to a deepening trend.

One development which may induce this temporal decoupling would be by intervention via the financial markets, which is what the governments been doing now.

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The charts above reveal that prices of non-commodity imports have been rising.

Then Northern Trust notes,

Prices of consumer goods excluding autos increased 0.4% in April and are up 0.6% from a year ago. Prices of autos have risen 1.8%, while that of capital goods have increased 1.0%. The import price index of manufactured goods posted a 5.5% increase in April.

At the present time, the upward trend of non-oil import prices reflects the impact of a weak dollar. It is conceivable that these prices will be more threatening as demand gathers steam.

So politicians in realizing these, appears to be in an intense denial, thus the transition towards the psy-war and intervention phase.

It should be a reminder that denial and anger is part of the human psychology when undergoing substantial stress.

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This can be seen in the Kubler-Ross Grief cycle.

Of course the intervention phase, so far, has not been directed at the consumer level, but as pointed out by Mr. Lynn, rather through the financial markets.

The desperate attempts to control commodity prices have been worsening.

Notes Tyler Durden of Zerohedge.com, (bold emphasis mine)

CME goes full retard, and is now seriously threatening to destabilize the clearing structure of the market with what appears a panicked margin hike every single day in one or more commodities. Among today's products impacted RBOB and RBOB crack spreads, up by 21% and 50%, respectively, as the CME makes it all too clear which products the Obama memo said need to be killed post haste.

Changing rules of the game won’t change the outcome.

As the great Professor Ludwig von Mises presciently wrote, (highlights mine)

The public discussion of economic problems ignores almost entirely all that has been said by economists in the last two hundred years. Prices, wage rates, interest rates, and profits are dealt with as if their determination were not subject to any law. Governments try to decree and to enforce maximum commodity prices and minimum wage rates. Statesmen exhort businessmen to cut down profits, to lower prices, and to raise wage rates as if these matters were dependent on the laudable intentions of individuals. In the treatment of international economic relations people blithely resort to the most naive fallacies of Mercantilism. Few are aware of the shortcomings of all these popular doctrines, or realize why the policies based upon them invariably spread disaster.

These are sad facts. However, there is only one way in which a man can respond to them: by never relaxing in the search for truth.

Blogger’s Friday the 13th Snafu

Blogger’s been down for more than a day. But it’s obviously back.

Unless one is stricken by Friday the 13th phobia or friggatriskaidekaphobia, then blogger.com’s foul up has most likely been a coincidence.

Hopefully it’s been a technical glitch….

Notes the CNET,

"We're nearly back to normal -- you can publish again, and in the coming hours posts and comments that were temporarily removed should be restored," Eddie Kessler, tech lead/manager at Blogger, wrote in a post on the Blogger Buzz site around 10:30 a.m. PT.

The post continues:

Here's what happened: during scheduled maintenance work Wednesday night, we experienced some data corruption that impacted Blogger's behavior. Since then, bloggers and readers may have experienced a variety of anomalies including intermittent outages, disappearing posts, and arriving at unintended blogs or error pages. A small subset of Blogger users (we estimate 0.16%) may have encountered additional problems specific to their accounts. Yesterday we returned Blogger to a pre-maintenance state and placed the service in read-only mode while we worked on restoring all content: that's why you haven't been able to publish. We rolled back to a version of Blogger as of Wednesday May 11th, so your posts since then were temporarily removed. Those are the posts that we're in the progress of restoring.

The publishing site has millions of active blogs, he said.

…and not seeds towards online censorship.

Thursday, May 12, 2011

Graphic: Devil Finds Work For Idle Hands

Here is another wonderful illustration from Jessica Hagy’s Indexed which she calls as ‘Often A wonderful thing’.

For me, this looks more like the idiom the ‘devil finds work for idle hands

Steve Forbes: The US Will Revert to the Gold Standard in 5 years

The US will embrace the gold standard in 5 years, predicts publisher Steve Forbes of the Forbes magazine.

According to Humanevents.com (hat tip Bob Wenzel) [bold emphasis mine]

A return to the gold standard by the United States within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills, Steve Forbes predicted during an exclusive interview this week with HUMAN EVENTS.

“What seems astonishing today could become conventional wisdom in a short period of time,” Forbes said.

Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending, the media mogul and former presidential candidate said. The United States used gold as the basis for valuing the U.S. dollar successfully for roughly 180 years before President Richard Nixon embarked upon an experiment to end the practice in the 1970s that has contributed to a number of woes that the country is suffering from now, Forbes added.

If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed, Forbes told HUMAN EVENTS. The constantly changing value of the U.S. dollar leads to marketplace uncertainty and consequently spurs speculation in commodity investing as a hedge against inflation.

The only probable 2012 U.S. presidential candidate who has championed a return to the gold standard so far is Rep. Ron Paul (R.-Tex.).

The gold standard has been gaining much of public’s attention as I have pointed out earlier.

And the gold standard has been associated with Congressman and presidential aspirant Ron Paul, which implies that Dr. Paul’s advocacy throughout the years has been successfully gaining followers.

I don’t think going back to the gold standard would come orderly or casually.

Considering that most politicians are intuitively averse to cut even the slightest of their expenditures, a gold standard would translate not only to less spending, but a substantial reduction of political power for power hungry politicians. And this seems to be a universal phenomenon, which means this applies to most politicians of every government.

I don’t think that this would happen even if Mr. Ron Paul successfully wins the US Presidency in 2012. (Although Dr. Paul could aid or facilitate the process, but an orderly transition is something else. Dr. Paul will be fighting entrenched and powerful vested interest groups who will vigorously oppose him by hook or by crook)

In other words, a gold standard will only happen once a severe financial storm slams the US and the world economy and markets sooooo strong or powerful enough for people to compel politicians to renege on the current system.

That’s unless politicians wake up one day and find themselves assimilating angelic virtues, all willing to abandon their functional entitlements. But this would be a black swan for me.

In effect, my interpretation of Mr. Forbes prediction is that over the next 5 years a big crisis will buffet the US for her to reluctantly adapt to a gold standard (of course this means the world too).

Have a nice day.