Commodities Indexes

A correction or is the bull market over?  

These targets will be the judge on the outcome of the commodities market.  Clearly, they can correct massively and still be in a bull market.  If this is the greater unwind, then we will see the long-term trend lines broken.

 

I believe the Chinese Olympics are a watershed moment. Once we confirm that the last superpower is being impacted by the great unwind (fourth quarter this year) then that will last us know that the last of the dominos to fall is here.

 

If you look at exports to GDP, China is more dependent on the rest of the world for growth, so it would be logical that if your two largest clients are in trouble and getting worse then your own business will be greatly impacted.

 

 

 

CRB Index Hong Kong

The break in the CRB INDEX is confirming the global slowdown.  The credit crisis has spread to Asia as Hong Kong M3 contracted 3.8% over the past year. 

 

 

 

 

Big Picture Update

The MBA market composites finished down for the week ending July 25, 2008. The market index fell by 14.1% for the week. Most of this fall was due to the refinance index, which fell by 22.9%, but the purchase index also lost significant ground with a 7.8% loss. Activity on the demand side of mortgage markets remains at a near comatose level thanks to the continued deflationary trend and to relatively high contract rates.

 

Ford's Finance Arm Tightens Lease Terms on Trucks, SUVs

http://online.wsj.com/article/SB121734798153793667.html

 

In a debt-laden society, it is imperative that the exponential growth of debt inflation continue or we will witness a deflationary unwinding of all assets.  One of the keys in the big picture is home prices.  Home prices continue to fall in value in the US and as we all know, it is spreading around the world.  

 

AMEX OIL INDEX attached,

 

On another note the commodities cycle and oil picture continue to confirm that the deceleration in global growth. If we have seen the high for oil this cycle then inflation numbers will peak over the coming quarter.  That will allow central banks the headway to aggressively lower interest rates and for governments bonds to outperform other assets.

 

Banking Sector

And who is responsible for breaking the faith? In this country no one is responsible. American banking is governed by law; the law assumes that bankers cannot be trusted not to ruin themselves and their depositors. Therefore, we have more laws to mind banking practice than any other people—and more bank failures in spite of them. The federal and state governments employ thousands of examiners who go round and round, looking into the private books of the banks to see if they are solvent and law-keeping, and the law says that when they find one to be insolvent they must shut it up immediately. And still they fail.  

 

 A BUBBLE THAT BROKE THE WORLD By  GARET GARRETT  June 1 1932

 

How history repeats itself.  Financials were extremely oversold.. due for a bounce. 

 

Q. Is the bottom in? A. Have homes stopped falling in value? 

 

 

 

Wilshire 5000 Target

Rally until Sept?

 

 

Pakistani Investors Stone Karachi Exchange as Stocks Plunge

http://www.bloomberg.com/apps/news?pid=20601087&sid=a111C0hsxBic&refer=home

 

Asset deflation is spreading..

 

Big picture

Leading indicators are accelerating to the downside outside of China.  Lagging indicators are topping here, (CRB index inflation global growth).  I would expect that the hard down phase would occur in the third or fourth quarter.  Oil prices will collapse once it becomes evident that Chinas unsustainable growth is slowing, that would probably be not until the fourth quarter of this year... too much of the current peak oil fears are based on continued growth that would have never occurred outside of the credit cycle. 

 

The global unwind is accelerating as Canada has now joined the asset deflation game. 

 

I looked at the current models this morning and there is a high probability of a Fed cut within the week.

 

A large drop in oil prices along with central banks easing would be good catalysts for this oversold market.

 

 

 

S&P GSCI INDEX

Was that the blow off top?

 

 

Target for the Wilshire 5000

 

 

 

 

Credit Market "New Era"

"The thesis of this paper is that the existing depression was due essentially to the great wave of credit expansion in the past decade. There is a lamentable lack of comprehensive and accurate data concerning this process of debt creation. But highly suggestive information may be assembled regarding the growth of bank loans and investments; the increase in mortgage indebtedness, urban and rural; the increasing volume of securities outstanding; and the expansion of installment credit… [I]n the six years after 1922, loans and investments held by banks had increased over $18 billon. This is over 45 per cent…

"The great field of credit expansion in the last decade lies in the realm of urban real estate mortgages… We have undoubtedly expanded the credit structure, spending today and postponing the accounting until tomorrow. We have been guilty of the sin of inflation. And there will be no condoning the sin nor reduction of the penalty because the inflation is of credit rather than a monetary one.

"Thus the area covered by credit sales enlarges and the volume of credit expansion increases. As in monetary inflation the immediate results seem favorable. Credit expansion results in business activity, in full employment, in optimistic outlook and in a flood of gratulatory literature proclaiming us wiser than our predecessors. But the evidence is consistent and cumulative. The past decade has witnessed a great volume of credit inflation. Our period of prosperity in part was based on nothing more substantial than debt expansion.

"Several financial devices of recent invention have contributed to this process of debt inflation… The Federal and Joint Stock Land Banks refinanced a growing proportion…of rural land mortgages into long term paper. This gave the borrowers security… Of similar tendency but more obvious in its recent developments is the newly originated and rapidly introduced device of urban real estate bonds. As a method of credit inflation this plan could hardly have been bettered… The volume successfully sold rolled up with the speed of the proverbial snowball traveling down a steep hill. The fruits of such sales gave us building activity and contributed to the flush times of the decade…

 

The Quarterly Journal of Economics - November 1930
Charles E. Persons, excerpt from "Credit Expansion, 1920 to 1929, and its Lessons"

 

"In a flood of gratulatory literature proclaiming us wiser than our predecessors..."    It seems we could insert Bernanke here..

 

Why was this false sense of security from the use of this steroid of debt fostered onto the public again?  

 

No fear yet!

The market is very sold, but there is not enough fear and no positive impetus for the market, yet.  

 

 

Irish Market

No sudden crash just a steady deleveraging; the Irish is a good proxy for the global markets.  Ten years of gains gone,.  While the market is becoming cheap, it will be interesting to see if relative value goes by the way of the do do bird…

  

 

Global Bank Index FTSE EPRA Nar Index

Both the global banking index and the global Real index points to new lows., while the leaders are oversold, the  global economy is not going to heal until the banking index turns around, highly unlikely as the Global Real Estate boom is turning into a bust.

 

Fw: Ex-Intel head pushes electric cars

http://www.chicagotribune.com/technology/sns-ap-grove-plug-ins,0,5941045.story

 

"The drumbeat of the electrical transportation is accelerating like nothing I've ever seen in my life," he said. 

 

Grove says the fledgling plug-in hybrid movement offers parallels to the Homebrew Computer Club from the mid-1970s that helped electronic hobbyists in Northern California set the stage for personal computers. Plug-in hybrid conversion shops could spread the technology in similar ways.

"The personal computer ... went to individuals first before it went to corporations. The conversion goes to individuals," Grove said. "Electric cars ... the corporations are sitting, wishing this whole friggin' thing to go away. Which is exactly what the computer companies' attitude was to personal computers

 

 

The Japanese spend about 1 million a minute on alternatives research, it is a wonder they are so far ahead of most car companies.   A point about alternatives that I agree with in the Solar Revolution is that energy will become decentralized, like computers.. 

 

 

Extremes

Monthly charts on two important indicators, one is leading the other is lagging, BOTH are at extremes..

 

Why the banking system is more important because a bank with deposit of 5 million can lend out 100 million, so a fall of 50% does not translate into 2 million but 50 million. That's the problem with asset deflation because capital requirement means selling or curtailing lending, which is why the Fed is panicked, because the market is doing the tightening for them. and that credit contraction is now going on in the US.

 

 

CSP

 

Today from  the CSP conference, this map, which shows the land mass required to power all the worlds' energy needs is about 2%.

 

What was interesting during the conference was the direct cost inputs were very realistic and are either today cost competitive or will be within two years..  Also the future cash cow for utilities once capital costs were gone, because the advantage of CSP or any alternative is that the fuel is free, which will make it with time cost competitive with any other type of energy. 

 

If all cost were factored in over a ten to fifteen year period,, such as  CO2 taxes, long-term fuel uses of uranium, oil, coal then CSP competes TODAY with any other type of energy., and it only become cheaper with time because fuel prices are guaranteed not to go up.

 

It is up to society and politicians to make the change.

 

 

Inflation Not the problem

http://bigpicture.typepad.com/comments/files/053008_Welling_Edwards-Montier_REPRINT.pdf

So it's likely that you're going to get a rapid decline in the U.S. current account  deficit over the next 6 to 12 months, which means the emerging economies' surpluses come down very sharply, so they don't have to intervene so much in their currencies — which means the growth in their money supplies collapses, which means the growth of liquidity in their economies collapses. Any analysis of what drives emerging market growth rates and emerging market equities and bond performance, shows that the printing of money by these emerging economies' central banks has been a huge factor in bolstering their economies. But that is going into reverse in the next 6 to 12 months, in a major way. The reserves will still grow, but at a much, much slower rate. That will produces a big sucking noise in terms of the impetus for emerging market growth, and actually put downward pressure on commodities. If you blow up the emerging market growth story, then you kick away the crutch for the secular bull market in commodities for a while.

I cannot tell you how many reports that I read that Asia can grow exponential from here!  The exponential growth came about from cheap credit and oil prices.  So where is Asia going to be in about ten years. Will it collapse because of the toxic use of coal to facilitate growth from the west, which came about from credit, which is akin to steroid use?  I mean how are you supposed to grow if your two biggest clients are headed for a major slowdown, which is over 50% of your business?  Do you think the collapse in their stock markets are telling us something??

 

Have you ever seen a body builder come off steroids, no matter how hard they work out or eat properly there mass will collapse anywhere from 30-50%.  That exactly what is going to happen to the OECD countries over the next ten years.  Simply because the steroid in this case was credit, and that credit has begun a systemic unwinding which was a movement of consumption to the present. That is gone today. It is delusional to think that as a company or country  it can do well when their major customers are retrenching. 

 

BRIC

http://en.wikipedia.org/wiki/BRIC

 

 

How well are the BRIC countries holding up?  Most of the OECD numbers point to a deceleration with the exception of Russia. 

 

 

Commodities

The exponential rise is intact, with a rise it will force the savings surplus countries to rein in growth, more importantly it will stop the madness of the central bankers from stopping the global leverage unwind, which according to indicators will accelerate this fall.

 

http://ap.google.com/article/ALeqM5ivNvD_jdPad4lPulmUIt1_aw2xvwD91H0GKG0

Architect hopes new skyscraper keeps us spinning

Giant wind turbines installed between every floor, he said, will generate enough electricity to power the entire building, and lifts will allow penthouse residents to park their cars right at their apartments.

 

With all that capital flowing into Dubai the great building boom continues, this has to be an interesting concept if ever built.

 

 

The houses that saved the world March 30 2002

 

ITS OVER!

Debt Deflation Update June 1 2008

Debt Deflation---In his debt-deflation hypothesis, Fisher asserted that (nominal) over-indebtedness and deflation are the dominant forces that account for "great" depressions. Specifically, he argued that given nominally denominated debt contracts, a protracted fall in prices and nominal incomes substantially increased real debt burdens, led to debtor
Insolvency, lowered aggregate demand, thereby contributed to a continuing decline in the price level, and thus further increases in the real burden of debt.

 

"The very effort of individuals to lessen the burden of their debts increases it, because of the mass effect to liquidate. The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not righting itself, but is capsizing."    Irving Fisher 1933 The Debt-Deflation Theory of Great Depressions

 

Model update

 

Interest rates- Are moving back higher, I would caution that if inflation hold and interest rates would spike, the OECD countries Real Estate and stock market would correct massively...this is NOT the seventies...The consumer it up to their eyeballs in debt

House prices are accelerating to the downside, home prices around the world are peaking and more are rolling over, Canada will join the list within this quarter

Credit growth- slowing and decelerating

Wage growth- rolling over OECD countries

Bank Lending- The markets are doing much of the tightening, and many global banks are raising lending standards. (Not what you want to do in a the global credit cycle)

Gas and food- I understand that many think that this is inflationary, but unless wage demand picks up around the world, it forces consumers in the industrialized world to curtail discretionary income. The other half of the world economy spend an inordinate amount of their incomes for the necessities of life, they can least afford higher gas and food prices.

Business cycle- If we understand one thing about business cycles and recessions is that they cure inflation very quickly... all of the world economies are approaching the end of their prospective business cycle.. I would watch once it is evident that Asia is rolling over, probable after the Olympics, that commodities will correct, that will be the signal the deflation is on its way.

 

Variables -China and Asia – Chinas growth rates will slowly decelerate. Here is why, The US is headed into a recession, so is Europe, gas prices were raised yesterday, China is increasing reserves, the Yuan is headed higher, so are interest rates, and lastly the stimulus of the Olympics will be gone

 

-66%

 

Sub index down 66%, back to the initial panic in early 07, top in 2001, and the Asian crisis of 1997.

 

The fastest growing economy pays the price for speculative money, seems no matter what your political persuasion , human nature is the same!!

 

 

Alternative Energy Update

IBM to Push CIGS Cells as Cheap Alternative to Silicon

 

http://www.ecogeek.org/content/view/1768/83/

Tech Giant Intel Joins IBM and Applied in Big Solar Bet  

http://www.cleantechblog.com/2008/06/tech-giant-intel-joins-ibm-and-applied.html

http://www.cleanedge.com/reports/reports-solarUSA2008.php

 

All the major players are now focusing on solar.. As long as oil prices head higher the green movement is going to accelerate.  There are two huge advantage to solar, one the learning curves are faster than any type of energy play, two implementation is faster than any other type of energy use.  Efficiency rates are improving and costs are coming down in spite of energy cost rising ten time in the past decade.

 

Backward looking governments will look for more oil, uranium and coal to solve problems while the private sector forges ahead..  The green movement will simply continue to grow because of price, and top of that they are the fastest growing industries in the world..

 

One other aspect that many people seem to miss is that the poorest parts of the world have an abundance of solar radiation.. 

 

 As Dr. Scheer said, "the price of fossil energy will only go up, going forward, and renewable energy costs will only go down. Anyone who relies on traditional fossil energy does so at their own peril."

 

Did you notice the Fuel costs...FREE

US 30 Year bond

The long-term trend line is intact, the deflationary forces of credit contraction, home prices falling and stock prices, and now higher interest rates. While I think this is temporary, it is worth watching because this only decelerates credit demand.

US Household Assets

 

Chart courtesy of BNP Paribas Economic Research

 

Not since the great depression have US households seen their home, stock and pension values fall in value...  what is interesting in that time frame we did not see commodities prices head higher, now to put a nail in the coffin, maybe I should say a rivet... interest rates are headed higher.. If the Fed has to raise rates... my indicators say no for now... this  will accelerate the big unwind.

 

Checkmate for the central bankers..

 

 

 

Technical signs flash warning for "Toronto" house market

http://www.thestar.com/Business/article/442529 

 

Of course, it's all part of a pattern which was evident to me - and anyone else with a grasp of reality - months ago. Sales volumes crash first, prices later. In fact, an analysis of the last Canadian housing declines in the Eighties and early Nineties shows the pattern clearly - the greatest of fools are those who are tricked by numbers, blinded by greed, and buy into a market where prices are high and sales thin.  Garth Turner

 

 

I would add the household formation in Canada is about 180,000 and we have been building about 220,000 this decade..

 

 

The Toronto composite high weighting in energy in holding the index, while most sub-indexes are headed lower...

 

 

US Debt Deflation

I did some numbers, if this model is right, that is I have the right inputs, we should from March 08 on see the first signs of a credit contraction.

INPUTS

ASSETS ---Falling

Banking- restrictive lending, Real Estate, commercial, stocks, mortgage Equity withdrawal

Borrowing-demand has plateauted, except credit card growth

Incomes -falling

Costs-- Rising

Shanghai Property Index

Here is an update from last year, regarding the Shanghai Property index, many on the list could not find places to short the index...  so much for China will not let the stock market fall before the Olympics.

 

 

 

 

Oil prices

http://www.morganstanley.com/views/gef/archive/2008/20080610-Tue.html#anchor6508

Malaysia announced on June 4 that the country’s retail fuel prices would be raised by an average of 47.8%. Amid surging world oil prices, Malaysia is the fourth economy in the region to decide to raise domestic retail fuel prices recently; the others are India (10-15% on June 4), Taiwan (13-16% on May 28) and Indonesia (25-33% on May 24).

Will China be the next to hike retail fuel prices? At it stands now, China’s domestic retail fuel prices are only about half of the international benchmark levels. This means that if China’s domestic retail fuel prices were to be allowed to converge to international levels, they would need to rise by 70-90%, depending on the product type.

 

That is a large number; they will probably wait until after the Olympics to raise prices.  The systemic slowdown is spreading around the world; we could see a dramatic falloff in demand over the coming year. Let prices do what they always do is change supply and more importantly change demand.  

I hope to have the final numbers regarding oil, but I am sticking with 150-200 dollars a barrel. At that price, oil becomes too expensive as a major source of energy...  The trend that accelerated in 1998 is still on tract... Oil, uranium and coal prices are heading higher, and alternative prices continue to fall.

 

 

Shanghai Composite

http://www.latimes.com/business/la-fi-asia11-2008jun11,0,2533856.story

 

The systemic slowdown continues

Irish Market New Lows

I have been using the Irish Market as a precursor to the global stock markets… the chart tells the story..

 

S&P Super 1500

The chart tells the story

 

 

 

Debt Deflation

It appears these comment I made back in Feb are becoming more of a problem, US home prices are still falling, and many OECD countries are witnessing the same problem.

 

The causes of asset deflation and the serving of that debt came about because of banks and individuals and some corporations were unable to service existing debt with overinflated assets.  Once the cycle of asset deflation starts it starts the process of the upwind in reverse.  Asset inflation allows banks and corporations to lever more. That process started to unwind in the US in 1925, with the unwinding of Florida real estate, the inflation in assets moved to stocks in the late twenties, while there signs that the economic was already slowing dramatically.

 

Debt deflation, indebtedness-overinflated assets- asset prices fall-losses- repayment-distress selling- -money contraction-spending=deflation

 

The feedback of assets falling started a process of feedback of continued selling to get out of debt.  Banks were calling in loans and this accelerated the process. Once you stated to see layoffs the consumption and continued pullback continued, then as incomes fell again to service the debt became a further problem.  I will not go into the governed polices that made the situation worse.

 

Fisher, Bernanke, and Minsky all agree that all tried to reduce their level of debt accelerate the process of selling assets, understand that as assets fell the balance sheets of banks, the contraction of money supply during the thirties was in part of debt being reduced as prices continued to contract.  It became an endless loop.  Counter to many arguments the Fed and the authorities did nothing, what they could to stop the last great unwind, but it all came down to servicing the debt, which are affected by assets values, employment and income.  Take one or two or even three, the economy can survive, give the economy over inflated assets with debt levels that are brought upon by very low interest rates, and financial engineering then it is only a matter of time before the house of cards starts to unwind. 

 

The only way to continue this supercycle of debt are much lower rates, much higher inflated assets, more of Wall Street’s creative financial engineering, that can only come about if assets have not started to fall, once it breaks it’s over.

 

Morgan Stanley World

The push by the market has not held... the bear market rally seems to be over...

What Triggers the Change to Deflation?

A trend of credit expansion has two components: the general willingness to lend and borrow and the general ability of borrowers to pay interest and principal. These components depend respectively upon (1) the trend of people's confidence, i.e., whether both creditors and debtors think that debtors will be able to pay, and (2) the trend of production, which makes it either easier or harder in actuality for debtors to pay. So as long as confidence and production increase, the supply of credit tends to expand. The expansion of credit ends when the desire or ability to sustain the trend can no longer be maintained. As confidence and production decrease, the supply of credit contracts.

 

 

 

The push by the market has not held... the bear market rally seems to be over...

How do economists forecast any recovery in the global economy since the long-term secular trend of credit is over??

 

US Long-term rates

The US economy needs much lower rates or else the credit deceleration will increase, this will only place more downward forces on the economy.  

 

The seasonality for rates are in the Apr-June time frame..

 

 

 

 

S&P Bank Sector

Long lead indictors continue to point to a gradual global systemic unwind, as more and more of the global banking system faces write-downs. 

 

The global economy cannot afford higher rates, note the huge drop-off in mortgage apps and refinance this morning in the US because of the move back up in interest rates. If we were to get a move of higher rates in the global economy, I do not know how this could not accelerate the deflationary forces of asset deflation...

 

Northern Ireland

http://calculatedrisk.blogspot.com/2008/06/northern-ireland-bursting-bubble.html

 

Today the Irish Financial Index also broke the March lows... the great deflationary forces are spreading...

 

The UK Economy

 

 

 

 

The fifth largest economy UK is decelerating very quickly as the impact of higher interest rates, oil and gas prices along with house prices having rolling over and bank tightening lending standards is impacting growth.. This systemic unwind of credit expansion is spreading.

 

 

China's Wind Power Development Exceeds Expectations

http://www.worldwatch.org/node/5758

In 2007, cumulative wind installations in China exceeded 5 gigawatts (GW), the goal originally set for 2010 by the National Development and Reform Commission (NDRC), China's top economic planner. The Commission had set the target in its 2006 mid- and long-term development plan for renewable energy. The plan's target for 2020 was 30 GW, a level that is now projected to be reached by 2012, eight years ahead of schedule.

In March, the NDRC revised its mid-term target, doubling it from 5 GW to 10 GW for 2010. Yet this new goal is still too modest, with wind installations likely to reach 20 GW by 2010 and 100 GW by 2020. China is witnessing the start of a golden age of wind power development, and the magnitude of growth has caught even policymakers off guard.

 

 

I would have thought that it would take about twenty five to thirty years before the world would switch to alternative energy in a large way.  The run up in oil prices is now accelerating that change even faster, that should not be a surprise with the large run up in oil prices.

 

Expect "real exceeds expectations" to continue as long as oil prices move higher. Oil, gas, uranium, and coal will eventually become too expensive to use as any form of energy.

 

 

 

Debt is the Financial system's Carbon Dioxide

http://www.debtdeflation.com/blogs/wp-content/uploads/2008/06/KeenDebtWatchNo23June2008.pdf

There are at least five strong similarities between this ecological issue and the economic one

Of accumulating debt:

While in one sense this slowing down in debt growth is a good thing--in that an unsustainable trend may finally be coming to an end--it also may presage very tough economic times ahead. One aspect of my focus on the debt to GDP ratio is the contribution that change in debt then makes to aggregate spending. Aggregate demand in the economy, for everything from commodities to net asset transfers, is the sum of both income (GDP) plus the change in debt

Today, the annual change in debt is the source of over 19% of aggregate demand. Should that turn around–as it must even to stabilise the debt to ratio at its current historically unprecedented level–then demand in the economy could “unexpectedly” evaporate.

Since the world has experienced a global boom it would only make sense that a global economic contraction will take place. The run up in gas prices as I suggested would happen if any type of reflation attempts would occur just have made the problems worse. Long term indicators clearly show the global economy continues to decelerate.