Thursday, October 1, 2009

Desperately Pumping Commodities

Anybody else think yesterdays rocket was a little bit of an overreaction? Could be sour grapes, true, but since when does a  modest to modest plus draw in Rbob deserve 11 cents? ESPECIALLY  on a big decline in imports.  Take a look at the days of supply increasing steadily .





Anyway ramping oil has worked before, but didn't get much follow through abroad, and in fact barely got equities back to unch. yesterday.

David Rosenberg via Mish's Global Economic Trend Analysis
Rosenberg: “We are certainly in a deflationary state”
The bond bulls can only hang their hat today on the knowledge that the world is still awash with deflationary pressures — as Euroland reported that the region’s CPI deflated 0.3% YoY in September from -0.2% in August and the fourth month now in negative terrain. So, we have Euroland at -0.3%, the U.S.A. at -1.5%, Canada at -0.8%, Japan at -2.3%, and even China at -1.2% — even in the face of this year’s commodity price rebound. That tells you something. Imagine where these deflation figures line up when economic activity begins to slow down next year. This puts fixed-income product in a very positive light, we might add, because real yields in most jurisdictions, whether in the government or corporate sector, appear very attractive.

Does This Make Any Sense?

Since June 10, the yield on the U.S. 10-year Treasury note has plunged 70 basis points and at the same time the S&P 500 has rallied 14%. The bond market is telling us that we still live in a deflationary world, yet the equity market is at this juncture pricing in over $80 of operating earnings, which would be double from the current four-quarter pace.

The real question is, if we in fact do have this sustained reflation trade going on, which is actually necessary to justify the earnings expectations embedded in equity valuation, why it is that the yield on the 10-year Treasury note isn't north of 5.0% already? Instead, it is 3.3%. And history shows that when bonds and stocks do diverge, as was the case in the summer of 1987, the fall of 1994, the summer of 1998, the winter of 2000 and the summer of 2007, it is the former that proved to be prescient.

Bank Credit Still Contracting

The monetary base has surged at a 51% annual rate over the past thirteen weeks, and that has churned out less than 3.0% growth in M1 and -4.0% in M2 over that period. This is classic ‘pushing on a string’ monetary policy. The Fed hasn't really fixed anything per se — the Fed, along with the FHA and other government agencies, have basically supplanted the banking system with taxpayer-funded credit. Bank lending to the private sector plunged some $40 billion in the week ending September 16 and to put this in a certain context, the decline over the past three months has exceeded 16% at an annual rate, which is unprecedented. And, the contraction in credit is very broad based — down 5.3% for consumer loans; -9.4% for real estate credit; and -20.4% for business (C+I) loans.

The banks are still sitting on over $1 trillion in cash assets, and they are putting the proceeds to work in the government bond market, snapping up over $20 billion of Treasuries and Agencies so far this month — 22% at an annual rate over the past thirteen weeks. This may be one reason — from a flow-of-funds basis — as to why the yield curve is flattening right now. This and the nagging notion among some very important bond investors, such as Pimco, who see the U.S. economy as we do … deflationary."

I would venture to say some of that 1 trillion went to buying oil as well.

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