Gold is Almost 20% above its 200 Day Moving Average

Gold is a little parabolic, short term overbought. It looks as if it might go higher before correcting to near the 50 Day Moving Average.

India has bought 200 tons gold from IMF

1) The IMF on Monday announced the sale of 200 metric tons of gold to the RBI, almost half of the total sales volume of 403.3 tons.

2) For India, the purchase is a hedge against a falling dollar.

3) China, Russia and Brazil are also shifting their reserves to gold.

4) The total sales proceeds were equivalent to US$ 6.7 billion at an average gold price of $ 1045 per ounce.

Conclusion: This is more evidence that the world is losing faith in the dollar.

Agricultural Commodities Pull Back; 80% of Banks Tightened Lending Standards for Prime Mortgages; The Dollar's Continued Rally; Fuel Subsidies Counter Productive for Emerging Economies

MWF (Monday) Briefing:

Last week, Bloomberg released their monthly survey of over 50 economists. The median estimate for US recession in the next 12 months was 51%, similar to the 50% readings in the prior two months. 

Commodities have been pulling back.  From Bespoke, gold now is in bear territory "with a decline of over 2% overnight, gold is the latest commodity to hit bear market territory.  The commodity is now down 21.5% from its highs during the collapse of Bear Stearns.  As highlighted below, gold is now at its lowest levels of the year and down over 6% YTD.  Looking back at the prior eleven bear markets in gold, the average decline has been just under 34% over a period of 18 months."  Commodity sales have surged by rising prices, particularly for grains, and by the decline in the value of the dollar, reducing the cost of American exports in other currencies. Both trends have recently reversed, suggesting that the rise in commodity sales will not be sustained.  The dollar rallied in a particularly strong way suggesting that it might hold it's own against other currencies.  That's very bad for exports and agricultural commodities.

China and India lifted much of their gas subsidies within the past few months.  Developing countries support of gas subsidies only hurt their economies more by encouraging waste.

• "In its latest quarterly survey of bank lending officers, the Fed found nearly 80% of banks had tightened their lending standards for prime mortgages since the previous survey in April, when 60% said they were imposing more stringent criteria. For so-called nontraditional loans, 85% said they tightened their standards, up from 75% in the previous survey. And in the subprime market, about six out of seven respondents said they tightened standards, up slightly from the previous survey." WSJ

• The commodities boom looks to be coming unwound, and dollar gains are looking more substantial, but the news isn't necessarily good.Cheaper commodities will ultimately reduce inflation pressure, but the cause of the decline, as well as dollar appreciation, seems to be rapid flagging of growth in Europe and Asia. Economist

• Surge of the Dollar raises global fears. Against sterling, the US currency notched up its 11th consecutive day of gains – its longest uninterrupted rise in more than 35 years – as markets became increasingly convinced that the US was best-placed to weather the global downturn. FT

• Fuel subsidies are a drag.  Many emerging economies employ subsidies that keep domestic fuel prices far below the world price.As a result, these countries consume far more fuel than they would otherwise, ending up being counter productive.  NYT

Returns with Managed Futures CTA Dighton up 18.83% YTD; Jim Rogers States the Secular Bull Market in Commodities Could Extend to 2022

by Fern Phan


Jim Rogers, co-founder of the Quantum Fund and former partner of billionaire George Soros, the legendary trader, states that:

• we are still in the relatively early stages of a bull market that could extend to 2022.

• He believes demand from countries like China is just beginning; pointing out China’s per capita consumption for commodities like oil was just one fourteenth of that of the U.S. Ther are 2.3 billion asians compared to 300 million Americans. It’s not hard to imagine that, from a base of 2.3 billion people, a burgeoning asian middle class will, in all probability, underpin and strongly foster upward pressure on commodity prices for years to come.

• With all emerging markets hard at work becoming prosperous and industrialized, no one is left on the farm to raise crops. Inflation will only get worse and stocks are only going to continue down. It is not price manipulation as the naysayers would like to wish. It is the real thing and its here to say.

• The best way to give your money and investments a chance to go up in value is to put it where prices will continue to go up and up - in commodities as an investment for the long term. We believe the best way to do this is to invest in commodities is in managed futures.

A quick timeline on where smart money is flowing right now:

• According to Barclays, in 1980 there was $31 billion invested in futures. In 2002, the amount jumped to $50 billion. Currently, it stands at $250 billion.

• There has been a 400% increase in futures in the past five years. We invite you to join the smart money and meet your investment objectives now.

• Like our mentioned high return CTAs above, Dighton and Barbashop, we also have other CTAs who might meet your investment objectives.

Yin Yang Time: Blaming Short Sellers for Market Conditions; Vietnam Cuts Gas Subsidies, but Increases Inflation; Food Commodities Force Mid-East and African Countries to Choose between Food and Water

MWF (Monday) Briefing:

• "Global food shortages have placed the Middle East and North Africa in a quandary, as they are forced to choose between growing more crops to feed an expanding population or preserving their already scant supply of water." NYT

• The Vietnamese government raised gasoline prices about 31% to cut state subsidies and control cross-border smuggling, improving the odds of a further boost to inflation that's already running rampant.Marketwatch

• Blaming short sellers.  Huffington Post New Yorker

Jim Rogers Bloomberg Interview: Dollar is Doomed; US Exporting Inflation; Peak Oil; Massive Fed Problems; China is Where It's At

"In this very recent interview with Bloomberg Jim Rogers says Asia is the future, the dollar is a terribly flawed currency and he doesn't want to own any, oil will certainly pass $200/barrel soon, and the (privately owned) Federal Reserve will disappear within the next decade. ..."

Biofuels Increase Food Prices by 75% According to World Bank. They are Holding the Report for Fear of Embarassing President Bush.

MWF (Friday) Briefing:

The Dow ended Wednesday 20.8% below its close of Oct. 10 set the preconditions for a Dow Theory sell signal. It's more than a regular Bear Market.  Also, a confidential World Bank report found that biofuels have spiked food prices significantly, but has not yet released the report since it would embarrass President Bush.  It's too late now...have a happy 4th of July to everyone stateside.

• Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian. The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body. Guardian

• China is toughening capital controls with a new system for monitoring funds brought into the nation by exporters.  as it seeks to control the surging fund inflows that are complicating the government's fight against inflation. WSJ

• J. Hamilton's paper examines the factors responsible for changes in recent crude oil prices by reviewing the statistical behavior of oil prices, theory, and features of petroleum demand and supply. Also discussed is the role of commodity speculation, OPEC, and resource depletion. 

World Indeces Down Last Week - Dow is Now in Bear Territory

MWF (Monday) Briefing: 

Oil has continued its ascent and OPEC ministers have blamed the U.S. Fed for causing this by lowering the value of the dollar to help the economy and the ever present credit crunch in the U.S. and pushing pricing pressures outside its borders.  Numbers on the Countryside Foreclosure blog show that many home prices have dropped by half from their peak in 2006.  OPEC might be pointing the finger the way some U.S. politicians pointed the finger at oil speculators in the U.S. causing prices to rise to nosebleed levels. Other energy has jumped as well including natural gas making once costly extraction techniques now affordable and viable.

• "As reported over at Real Time Economics, the Fed basically outsources the global inflation fight. The Fed, whose monetary policy applies to all those countries who peg their currencies to the dollar, is unwilling to sacrifice domestic economic goals in order to stabilize global inflationary pressures. While this stance makes domestic political sense, it ignores the monetary hegemon status of the Fed and its role in creating the global inflationary pressures in the first place." MacroMarket Musings

• Country Wide Foreclosures Blog shows that there are homes in Florida and California that have dropped 50% from their 2006 highs. 

• Natural Gas 75% Gain Speeds Horizontal Drilling at Devon Energy , Range Resources (RRC). iStockAnalyst

Billionaire George Soros: Bubbles Perculating; Food Commodities Crisis in Emerging Markets; Demand Elasticity of Oil

George Soros, in his current book, The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means, states that the world is in the worst financial crisis since the 1930s. We're still in the stages of deleveraging after a quarter century of credit expansion. Though he believes regulation is necessary to keep the bubbly froth off commodity prices, he's not really quite sure how much there should be either from government or within the industry.  There is a lag effect as to when people will start to feel the fallout. Much of that capital has rotated in to commodities.  His testimony before the U.S. Congress in May reflected themes from his book. He mentions the credit crisis as being part of a super bubble economy that started in the 1980s, at the same time, he stresses that within commodities, there are still strong underlying reasons for prices to be as high as they are...only the froth is added by speculators.

• Institutional investment in essential products, like food and oil is reminiscent to what happened in 1987 when institutions bought portfolio insurance. It was the Tulipmania of that era. Everybody jumped on the wagon and created a crash. With or without increased regulation for stocks, we're entering into a time period where the outcome for stocks isn't good.b

• The dollar has weakened and it has had a twofold affect.  It exported the recessionary forces from the U.S. to the rest of the world. That has added one percent to the U.S. GNP, which is a positive outcome.The weak dollar is also importing inflation - goods cost more at stores.  There is no real alternative to the dollar and so there has been a general flight from currencies, which has contributed to the commodities boom. The dollar will no longer be the unquestioned reserve currency.  It will, though, still be the most widely used currency according to Soros, but it will depend more on the willingness of the rest of the world to hold dollar reserves.

• That limits the Fed's ability to lower interest rates. If the U.S. continued lowering interest rates beyond this, the dollar would suffer further decline, so you can't go anywhere in that direction.

There is a very strong fundamental trend in place for a continual increase in oil prices, but also, there is a "froth super-imposed" on the fundamental trend. Institution market buying commodity indexes only has distorted the upward move into hyperbole.  That makes it a difficult environment to navigate for both investments and trading. He is in favor of fine tuning regulations and not necessarily adding more regulation e.g. more bureaucracy and the attendant slowness of response time to anything.

Emerging Markets; Agricultural Commodities; Oil; Disappearing Homes; Social Networks

MWF (Wednesday) Briefing:

There is more pressure on agriculture commodities and gas due to flooding.  Proven business models get a boost and the housing bubble continues to deflate effecting much more than subprime.

• The Department of Agriculture stated half of the U.S.'s corn crop is in good or excellent condition this year due to floods in the midwest.  This will add more pressure on prices, including gas (ethanol).

• LinkedIn, the social network for business, is now valued at $1 billion. Bain Capital Ventures, Sequoia Capital, Greylock Partners and Bessemer Venture Partners announced they are taking a 5 percent stake for $53 million. LinkedIn 

• Housing crisis is still trickling up. In some parts of the U.S. foreclosed homes make up the majority of the sales.  SeekingAlpha

• An offshore drilling agreement in the South China Sea was reached between Japan and China.  President Bush is seeking to end the ban on offshore oil drilling.  NYT

• Inflation in Europe came in higher than expected at 3.7% level in May. Le Monde

Pop Goes Some Economic Bubbles. That & Inflation Aren't Necessarily a Bad Thing.

MWF (Friday) Briefing:

The G-8 will make an announcement next week to express concern over commodities being a challenge to the global economy.  Inflation is often the side product of growth, related to bubbles and innovation so it is a matter of trying to keep in check.  The dollar is coming back, though still quite weak against other major currencies.  That might not be all bad considering it makes American exports look like a deal.  The trade imbalance with China is still massive standing at $20 billion.  A lot of tough talking by fiscal types over this.  Asian markets took big losses, many of the indices down by half since Fall 2007.

• Economic bubbles, man's best friend.  Speculative fevers often emerge during times of major innovations and technological change. By definition, the impact of innovation is unpredictable. What will win out is impossible to predict. A bubble is capitalism's way of rapidly transforming an economy. Businessweek

• Asset allocation expert says go big on commodities exposure. Hard Assets

• The deal is officially dead. After first rebuff, Microsoft came back with a proposal to buy 16% of Yahoo at $35.  Yahoo then announced a search deal with Google that will add $250-$450 million per year to its bottom line WSJ  Wired or is it?

• Mass transit surge: Most riders since 1957. CNNMoney

• Consumer Price Index (CPI) rose .06% in May due to higher fuel and food costs. Department of Labor

• Gold ends the week with stiff losses as the dollar strengthens against major currencies lessening demand for precious metal as an inflation hedge.  Marketwatch

Expectations of inflation is never results-based, but still has huge repurcussions

MWF (Wednesday) Briefing:

The expectation or perception of something happening has as big of an effect or maybe even more of an effect on human behavior than the reality of the situation. The dance around the globe currently centers on the maypole of inflationary worries caused by a spike in fuel and lowered global demand for goods and services.  The acclimatization process associated with expectation many times creates the outcome.

• China's benchmark stock index fell 7.7% to its lowest close in over a year, due to increasing worries that the country is vulnerable to a slowing global economy and soaring inflation. WSJ

• The Foreign Corrupt Practices Act (F.C.P.A.) is swinging back in style after decades of being ignored, going after a broad range of companies for alleged kickbacks to government officials around the globe.  Portfolio

• The lack of investment opportunities and the massive flow of money into private equity funds are leading fund managers to get creative in their investment strategy. NYT

• Fear of inflation makes it inflation?  The economy continues to display output growth but shows recession-like symptoms with other indicators. Consumer-experience barely positive growth isn't that different from no or negative growth. But as Menzie Chinn points out, there are other things to consider not just growth, but also how growth compares to potential expansion. In a post on the economy's "negative output gap", Mr Chinn attempts to place our current situation in context. He uses the National Bureau of Economic Research's recession definition. Economist

• Willie Horton goes Web 2.0 with Obama. Wired

• China released its monthly crude oil import figure show that imports during May reached their second highest levels on record regardless of the fact that oil has hit its highest price. China is considering dropping gas subsidies.  This should take some of the artificial demand inelasticity off gas demand as consumers in China will actually have to pay something closer to market prices for their gasoline.  Bespoke

• Fed Vice Chairman Donald Kohn said on Wednesday that the rise in energy prices has fueled an inflationary psychology in the U.S. If it continues, expectations might start to build in for future inflation perception and radically change spending habits to follow the inflationary psychology.  It might be a problem if it's not mitigated soon. NYT

Understated Inflation in the U.S.; Decline in BRICs without Oil; More Defaults

MWF (Friday) Briefing:

Classic economists have some of the catchiest phrases.  Currently, Williamson's classic Transaction Cost Analysis (TCA) pops to mind since we are in a period of heightened, as he would say, "information impactness."Inflation is much worse than what's reported in the U.S.  All BRICs are not created equal, though they are not so different.  More Defaults are on the way from Wall Street to mainstreet.  The losses are trickling up and up.

The irony to Williamson's TCA is that it's not an agency-based economic theory whatsoever, which was what he assumed.  It's actually a sociological theory once you pull back and see that it's a structural argument to transactions.  Things are quite different sometimes when you look at the bigger picture.

• Bill Gross, in his June 2008 Investment Outlook, presents comparative charts on inflation reporting.  U.S. inflation is understated and commodities would then not be valued correctly at this time.  He questions the authenticity of U.S. inflation calculations"by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S. An observer’s immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S."  Pimco

• India and China aren't holding up well under the BRIC name. "Give me a BRIC...hold the I and the C" is an order many BRIC investors would have loved to have made over the last six months... Brazil is up 9% and Russia is up 7% since early December, while India is down 21% and China is down 31%.  If things don't begin to turn around for the two laggards soon, we'll probably start seeing just Brussia ETFs." Bespoke

• Fuel costs threaten trade. In the industrialized era, the cost of shipping manufactured goods fell by some 90%. This massive decline in transportation costs, and coincident improvements in communications technologies, allowed firms to fracture and disperse their production chains.  Globalisation owes at least as much to declining transportation costs as it does to institutional liberalisation. So what happens when transportation costs go up? And up and up and up? At Econbrowser, Menzie Chinn cites a Thomas Net story on the subject:The impact of rising transportation costs, driven significantly by high oil prices, is already being seen in capital-intensive manufacturing.  Economist

• The rate of new foreclosures and late payments surged to the highest levels since 1979 affecting 1 in 10 American homeowners.  The period from January to March 2008 marked the worst quarter for American homeowners in nearly a quarter-century, according to a widely watchedreport put out by the Mortgage Bankers Association, a trade group. NYT

• We highlight historical default risk for JP Morgan, Lehman, Morgan Stanley, Merrill, Goldman and Citigroup as measured by their 5-year credit default swap prices. After peaking in March during the Bear Stearns blowup, default risk for banks and brokers declined sharply but still remained elevated when compared to normal historical levels.Bespoke

Art, Russians, Hedge Funds, Commodities & Skyrocketing Prices

by Fern Phan

If I were to buy a balloon flower for several million dollars, my only requirement would be that it not be deflatable.

Flush with oil profits, many former Soviets (now capitalists) are bidding up the art market in modern and contemporary work. According to the NY Times, art dealers say they believe that the Ukrainian billionaire Victor Pinchuk, who lives in Kiev, bought both “Hanging Heart” and “Blue Diamond,” works by Jeff Koons. “Hanging Heart (Magenta/Gold)” set a record for $23.5 million at Sotheby’s for most expensive work sold for a living artist November 14, 2007. Koons sold “Diamond (Blue)” for $11.8 million at Christie’s that same month. Russians are believed to be major buyers of modern and contemporary art. Many of the expats live in London.

Image from Bloomberg

The below “Balloon Flower (Magenta)” is officially on Christie's London auction block. It's expected to bring in a minimum of US$23.5 million and was originally bought by the Rachofskys of Dallas for US$1.1 million in 2001. Mr. Koons made five “Balloon Flowers,” each in a different color, yellow, red, orange, blue, and magenta.

Background: Jeff Koons, the artist, started out as a commodities broker on Wall Street to feed his art habit. From that he parlayed it into a highly controversial, highly financed, and highly lucrative art career. The "Balloon Flower (Magenta)" is a signature piece from his series "Celebration," a body of work he created partly out of grief over a lost son and his attempt to communicate with his boy. Koons' only child was basically kidnapped by his ex-wife, the one time porn actress, Italian parliament representative for the Green Party, and a sex talkshow radio personality. Cicciolina (name christened from her habit of addressing male prison population radio callers "cicciolino" or little bear) also has an advanced degree. Koons' estranged son now lives in Italy with his ex-wife. It has been said he nearly went bankrupt over in the process of creating the "Celebration" series.

The Rachofskys (Howard Rachofsky runs a hedge fund), owners of the balloon flower, became art fanatics. They buy up and sell artwork to aquire more artwork to augment their two-pronged themed collection - minimalist and identity. The highly regarded collection will eventually belong to the Dallas Museum of Art along with the Richard Meier house where it is for now, floating in the pond out front. Though they love the sculpture, the Rachofskys are selling because it has appreciated so much and they would like to use the proceeds to add to their collection. They sold their first work by Koons in 2001, “Woman in Tub” at Christie’s for $2.8 million. The proceeds from that sale went to buyng “Balloon Flower (Magenta)” along with other artists works.

The Russians. Deregulation of state enterprises and the oil boom have created a new and extremely wealthy class in the former Soviet Union, including it's satellite countries. Many now live abroad including in London, a traditional oil expat enclave for rich middle easterners. The art they buy and whether or not they are pushing up prices of modern and contemporary works is somewhat conjecture considering the auction houses do not publish bidders or buyers names. They only provide nationality percentages. American bidders still predominate. There's is a high probability that the nouveaux riches of the former Eastern Bloc and Soviet Union are buying up culture since the money is there and new money being new money...

Skyrocketing Returns. The Rachofskys hit it big with the Koons buy and also maybe the hedge fund business. A 25x guaranteed return in seven years ain't bad. The prices are, by antecdote, driven by the new found wealth in oil, deregulating industries, and emerging market wealth related to infrastructure boom (which ties into commodities). Like what happened with the real estate and conglomerate rich Japanese buying all the impressionist works in the 1980s, this might be the harbinger of the beginning of the end until it all starts again - for art, anyway.