Category Archives: Inflation

Investors Plan to Go Overweight Commodities, Credit Suisse Says

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Turning into a stampede?

People want it.

They are scared of the fed ‘printing money’ even in the face of obvious excess capacity?

Watch for storage costs to go up/contangos where there is not a monopolist setting price?

Good market for producers who sell forward, getting paid by investors paying up for forwards/storage?

Investors Plan to Go Overweight Commodities, Credit Suisse Says

By Chanyaporn Chanjaroen

Oct. 7 (Bloomberg) — More than half of investors surveyed
by Credit Suisse Group AG said they plan to hold an overweight
position in commodities in the next 12 months, double the
proportion with such a weighting now.

Of the 180 investors surveyed last month, 51 percent said
they expected to hold an overweight position in the next year,
34 percent a neutral weighting and 13 percent underweight. That
compares with 25 percent overweight now, 38 percent neutral and
30 percent underweight.

The most popular route for commodity investment will likely
be active indexes or funds, followed by exchange-traded funds,
according to the survey, e-mailed by the bank yesterday. Of
those surveyed, 44 percent were from hedge funds and 22 percent
from institutional funds.

The Reuters/Jefferies CRB Index of 19 commodities posted a
record 36 percent decline last year and rebounded 13 percent
this year. Assets under management at commodity hedge funds
increased 6 percent this year to $60.61 billion as of the end of
August, according to Hedgefund.net.

Expectations that inflation will accelerate and the dollar
weaken contributed to investor demand for commodities this year,
Kamal Naqvi, head of global commodity investor sales at Credit
Suisse in London, said by phone today.

Thirty-nine percent said natural gas would be the best
performer among energy products over the following 12 months,
with 32 percent picking crude oil.

Among industrial metals, 59 percent expected aluminum to be
the worst performer over the period, while 51 percent thought
copper would advance the most.


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Fate of the US Dollar?

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I think they want to accumulate financial assets and would like to get a currency they could feel good about to do that.

And at the same time they want to net export.

The only way they could do that is to somehow ‘force’ us to borrow their new currency in order for us to net import from them.

It would be easier for them to instead come up with an inflation index and only sell their exports in exchange for financial assets linked to their new inflation index. As long as the financial assets are linked to their index the currency of denomination isn’t critical. But credit worthiness would be critical.

>   
>   (email exchange)
>   
>>   The following was printed in the Independent in the UK. Doesn’t this move
>>   threaten the US Dollar as the world’s reserve currency?
>   

Doesn’t matter what anything is ‘priced in’ as that is just a numeraire. What matters is what the ‘save in’ which determines trade flows.

>   
>   Interesting. A political move.
>   Seems a clumsy project though: they need to find a name for this ‘basket
>   currency’ (petrodollar?) and then accept payments in any ‘real’ currency
>   equivalent to the value of the ‘petrodollar’ at the time of payment.
>   Possible that all will continue to use dollars for payment.
>   Economic consequences will depend on whether this has any effect on the
>   willingness of foreigners to hold the given amount of dollars they own.
>   

>>   
>>   â€œIn the most profound financial change in recent Middle East history, Gulf
>>   Arabs are planning – along with China, Russia, Japan and France to end
>>   dollar dealings for oil, moving instead to a basket of currencies including
>>   the Japanese yen and Chinese yuan, the euro, gold and a new, unified
>>   currency planned for nations in the Gulf Co-operation Council, including
>>   Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Secret meetings have already
>>   beenheld by finance ministers and central bank governors in Russia, China,
>>   Japan and Brazil to work on the scheme, which will mean that oil will no
>>   longer be priced in dollars.”
>>   


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Rental Vacancies

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Karim writes:
Rent is 30.5% of headline CPI and 39% of core CPI, a 1% rise in the rental vacancy rate typically leads to about a .7% decline in rent and a .25-0.30% fall in core CPI (with a lag). So rise in rental vacancy rate likely not entirely fed through to CPI yet, plus further increase in vacancies plus ongoing slack in economy to push core inflation down even further. GS and JP both currently estimating 0% core CPI by end-2010.

The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980. Nationally, effective rents have fallen by 2.7% over the past year, to around $972. The second and third quarters typically are the strongest periods for rental landlords because they are popular times for people to move. But this year, “vacancies just continued rising,” said Victor Calanog, director of research for Reis. During the third quarter, vacancies increased in 42 markets, improved in 26 markets and remained unchanged in 11 markets. Reis projects that the vacancy rate will peak at well above 8% in mid-2010.


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Payrolls

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Karim writes:
Reaction possible dampened by the recent rally, but this is a really bad number, especially as it relates to consumer income and spending.

But really weak across many metrics and shows a worsening, not just less bad.

  • NFP -263k w/net revisions -13k
  • UE rate up from 9.657% to 9.832%
  • HOURS -0.5%
  • Diffusion Index 34.9 to 31.9
  • AHE +0.1%
  • Total Unemployment (Discouraged workers, would rather be full-time,etc) up from 16.8% to 17%
  • Main weakness was retail (-30k net change), Education (-43k net change) and State and Local Govt (-30k net change)

Labor Income is HoursXJobsXHourly Earnings. Looks like will be down about 0.5% for the month and will drive y/y personal income even more negative.

Tough to see inflation with that background!


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PCE/Claims

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Yes, not looking good!


Karim writes:

Attached is the Fed’s favored inflation measure, the core PCE deflator.

Putting aside that 1% is the lower end of their defacto ‘comfort zone’, the speed of the move is as much a concern as the level.

  • M/M Core PCE was 0.09%
  • Personal income and wage and salary income were both 0.2% m/m, but are down -2.6% and -5.2% y/y respectively.
  • Initial claims up 17k to 551k (prior week revised +4k).
  • Total Ongoing Claims (continuing+extended+emergency) +35k


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Chinese Export Prices/Anecdotals

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>   
>   (email exchange)
>   
>   On Thu, Oct 1, 2009 at 7:27 AM, wrote:
>   
>   May be of interest-from JPM China weekly-so much for lower dollar being inflationary!
>   

Details suggest that:

the fall in export prices is rather broad-based across manufactured goods, including chemicals, metal products, machinery and

equipment, telecom products, autos, handbags, and shoes. Indeed, feedback from exporters in coastal areas showed that

although orders from the EU and the US have been increasing, importers are very sensitive to prices and have been negotiating

prices aggressively. The general trend is consistent with our view that although external demand, especially from the G-3

economies, is experiencing a cyclical rebound, the bounce is from unprecedented lows. As such, there is still plenty of slack in

the global economy and the large output gap is depressing the pricing power of producers everywhere.

and Japan has to be seeing the same thing.

Won’t surprise me if they start buying dollars and test the US admin’s resolve on that issue

Be nice if they do and help sustain our real terms of trade!


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Value added tax

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Yet another regressive proposal that punishes lower income earners disproportionately, as the Obama administration seemingly continues to pursue policies that shift real wealth from the bottom to the top, as Europe has done for decades. It’s also highly contractionary as it reduces aggregate demand, and the higher prices add to headline inflation and get passed through to CPI indexed contracts:

Podesta Says Value-Added Tax ‘More Plausible’ as Deficits Grow

By Heidi Przybyla

Sept. 25 (Bloomberg) — John Podesta compared the nation’s current budget crisis to the situation former President Bill Clinton faced in 1993 and said some form of a value-added tax is “more plausible today than it ever has been.”

“There’s going to have to be revenue in this budget,” said Podesta, Clinton’s former chief of staff and co-chairman of President Barack Obama’s transition team, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing today.

A so-called consumption tax would “create a balance” with European and Japanese economies and “could potentially have a substantial effect on competitiveness,” said Podesta. Value- added taxes in Europe and Japan encourage savings by taxing consumption.

Podesta said such a tax may be regressive, but can be balanced by exempting some products and using “the money to support low-wage workers.”

Response:

>   
>   (email exchange)
>   
>   On Sun, Sep 27, 2009 at 10:20 PM, Wells wrote:
>   
>   I am totally with you on this Warren. This VAT is a truly regressive tax.
>   

right.

>   
>   People like Forbes pushed for this a new years ago but it went nowhere.
>   After studying it I was left feeling that it hides the true cost of
>   government by burying it in the many stages of production with the end
>   product being just the tip of the tax iceberg. No doubt it probably does
>   encourage savings, as if savings are the be all, end all.
>   

Reducing consumption also reduces ‘savings’- the old paradox of thrift.

The only way it could increase savings is if it threw people out of work and the federal deficit went up, as savings of net financial assets of the non govt sectors can only come from govt. deficit spending.

It’s also a transaction tax, which serves to make transactions more expensive and thereby reduce them. This reduces our real standard of living as it discourages specialization of labor and economies of scale as people tend to do more things themselves rather than do them for each other.


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quick macro update

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Market functioning has finally returned, helped by the Fed slowly getting around to where it should have been even before all this started- lending unsecured to its banks, setting its target rate and letting quantity adjust to demand. It’s not technically lending unsecured, but instead went through a process of accepting more and varied collateral from the banks until the result was much the same as lending unsecured.

A couple of years back (has it been that long?) when CPI and inflation expectations were rising, the Fed said it was going to restore market function first, and then work on inflation. It’s taken them this long to restore market functioning (eventually implementing in some form the proposals I put forth back then regarding market functioning) and with the inflation threat subdued by the wide output gap it looks like they are on hold for a while, though they would probably like to move to a ‘more normal’ stance when it feels safe to do so. That would mean a smaller portfolio (not that it actually matters) and a modest ‘real rate of interest’ as a fed funds target is also based on their notion of how things work.

It is more obvious now that the automatic fiscal stabilizers did turn the tide around year end, as the great Mike Masters inventory liquidation came to an end, and the Obamaboom began. The ‘stimulus package’ wasn’t much, and wasn’t optimal for public purpose, but it wasn’t ‘nothing,’ and has been helping aggregate demand some as well, and will continue to do so. It has restored non govt incomes and savings of financial assets to at least ‘muddle through’ levels of modest GDP growth, and we are now also in the early stages of a housing recovery, but not enough to keep productivity gains from continuing to keep unemployment and excess capacity at elevated levels.

This also happens to be a good equity environment- enough demand for some top line growth, bottom line growth helped by downward pressures on compensation, and interest rates helping valuations as well. There will probably be ups and downs from here, but not the downs of last year.

There also doesn’t seem to be much public outrage over the unemployment rate, with GDP heading into positive territory. Expectations of what government can do are apparently low enough such that jobs being lost at a slower rate has been sufficient to increase public support of government policies.

The largest macro risk remains a government that doesn’t understand the monetary system and is therefore unlikely to make the appropriate fiscal adjustments should aggregate demand suddenly head south for any reason.

And here’s a new one, just when I thought I’d heard it all:

‘Black Swan’ Author Taleb Wants His Vote for Barack Obama Back

By Joe Schneider

Sept. 16 (Bloomberg)— U.S. PresidentBarack Obama has failed to appoint advisers and regulators who understand the complexity of financial systems,Nassim Taleb, author of “The Black Swan,” told a group of business people in Toronto.

“I want my vote back,” Taleb, who said he voted for Obama, told the group.

The U.S. has three times the debt, relative to the country’s economic output, or gross domestic product, as it had in the 1980s, Taleb said. He blamed rising overconfidence around the world. U.S. Federal Reserve Chairman Ben Bernanke, who was appointed to a second term last month by Obama, contributed to that misperception, Taleb said.

“Bernanke thought the system was getting stable,” Taleb said, when it was on the verge of collapse last year.

Debt is a direct measure of overconfidence, he said. The national debt, according to the U.S. Debt Clock Web site, is at $11.8 trillion.

The nation must reduce its debt level and avoid “the moral sin” of converting private debt to public debt, he said.

“This is what I’m worried about,” Taleb said. “But no one has the guts to say let’s bite the bullet.”

As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to protect investors from market declines while profiting from rallies. He now advises Universa Investments LP, a $6 billion fund that bets on extreme market moves.


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Fed understands fiscal stimulus but not its own operations

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Glad they are getting up to speed on fiscal.

Sorry to see they are still out to lunch on the ramifications of their balance sheet.

The Fed on Stimulus: Seems To Be Helping

Fiscal stimulus — the tax cuts and spending increases passed by Congress to boost the economy – isn’t the province of the Federal Reserve, but fiscal policy affects the economy and monetary policy has to take it into account.

When the Fed’s policy committee — the Federal Open Market Committee — convened Aug. 11 and 12, the topic came up. ”A number of participants noted that fiscal policy helped support the stabilization in economic activity, in part by buoying household incomes and by preventing even larger cuts in state and local government spending,” the just-released minutes of the meeting record.

“Participants generally anticipated that fiscal stimulus already in train would contribute to growth in economic activity during the second half of 2009 and into 2010, but the stimulative effects of policy would fade as 2010 went on and would need to be replaced by private demand and income growth,” the Fed added.

But that’s not the only risk. “Participants noted concerns among some analysts and business contacts that the sizable expansion of the Federal Reserve’s balance sheet and large continuing federal budget deficits ultimately could lead to higher inflation if policies were not adjusted in a timely manner,” the minutes noted.


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