This could be thew first Summer I remember fuel prices going down rather than up... "I would also expect we would see continued build in gas inventories."
A weaker than expected March Retail Sales report from the Commerce Department put downward pressure on stocks and gave a small lift to bond prices in early trading this morning. Retail sales were forecast to grow by 0.8%, but instead only managed a gain of 0.3%. The alarming part of the report shows retail sales actually declining by 0.1% when automobile and gasoline sales are excluded. This is the first decline in retail sales ex-autos and gas since April 2004; that was the beginning of Mr. Greenspan's description of a "soft patch" in the economy. There is now mounting evidence that the U.S. economy, as well as the global economy are heading for a slowdown. We keep hearing of higher interest rates to slow inflation, but the bond market is not giving us higher interest rates. Bond yields are telling us the economy is expected to slow.
The ten-year T-Bill yield has dropped from roughly 4.7% to 4.3% in the last three weeks as we continue to hear this spin from the mainstream financial media that higher interest rates are strengthening the U.S. dollar. It all might sound good to unsuspecting investors who hear sound bites on the six o'clock news, but it's only a manufactured reason for the ramping of the U.S. dollar higher. When we look at the correlation of the ten-year T-bill yield and the U.S. Dollar Index, we can see that the dollar declined as bond yields (interest rates) moved higher, and likewise, when interest rates fell from late December to early February, the dollar moved higher. It has only been the last few weeks we have been hearing about dollar strength due to higher interest rates. Have a look at the charts to see how it all lines up. I will come back to the ramping of the U.S. dollar after touching a few news items.
The lower interest rates have certainly helped to keep the mortgage bubble alive. The Mortgage Bankers Association said their applications index rose 6.1% with the purchase index higher by 6.4% and the re-finance index posting an increase of 5.6%. The thirty-year fixed rate rose slightly to 5.95% and the average one-year adjustable rates fell one basis point to 4.28%. Adjustable rate mortgages made up 35.8% of applications. I recently read that roughly half of all mortgages in California are of the "interest only" variety. It looks like home buyers and real estate speculators will pull any strings possible to afford the monthly payments. Home prices in Southern California and other parts of the country are at ridiculously high levels. I don't see how it can last when wage growth isn't even keeping up with artificially low inflation rates.
Two Sides to Every Story
The big item in the news again today is falling energy prices. We are hearing stories that there is a glut of crude inventory and refineries are now producing more unleaded gasoline to accommodate the upcoming driving season. Today the Energy Department said crude inventories grew for a seventh straight week by adding another 3.6 million barrels to bring the inventory up to 320.7 million barrels. Gasoline stocks rose by 800,000 barrels as refineries are switching more production from heating oil to unleaded gasoline. On the evening news we should be hearing little clips like this quote I found in a Bloomberg article today. "The market is pretty awash with crude," said Paul Horsnell, the head of energy research at Barclays Capital in London.
Now here's the flip side to the inventory situation from the "Commodities Corner" dated 4/11/05 by Masood Farivar. "What is going on? Doug MacIntyre, an analyst at the Energy Information Administration, the statistics and analysis arm of the Department of Energy, says he may have an answer. Oil inventories, he says, are actually not as ample as his agency's data indicate.
True, inventories of both crude oil and gasoline stand above their historic averages. But in terms of the number of days of demand they cover, MacIntyre says, they're barely within the historic range. Simply put, inventories haven't kept pace with rising demand in recent years.
Take U.S. commercial inventories of gasoline, for instance: As of the end of March, these inventories stood at 212.3 million barrels, up some 5% from their five-year average of 202.5 million barrels, according to the most recent EIA data.
But don't be fooled. While relatively high in nominal terms, they don't cover as many days of demand as the numbers suggest.
In fact, on a "forward-cover" basis, current inventories cover 23.1 days of demand as opposed to 24.3 days of demand for the historic average, according to MacIntyre.
That's because gasoline demand has grown by 1.8% a year over the past five years, while stockpiles have increased by only 1% a year during the same period.
The trend also applies to inventories of crude oil. As of the end of March, U.S. crude stockpiles stood at 317.1 million barrels, 5% higher than their five-year average of 302.3 million barrels. But both the current and historic-average levels of these inventories cover about 20 days of input into refineries."
We now have more barrels of crude inventory, but it represents less time-supply because of the increased demand. The above inventory relative to demand comes from an analyst at the International Energy Agency. Now today we get more information from the IEA, but they are singing a different song. The Bloomberg headline today reads, "Oil Falls to Six-Week Low After IEA Cuts Global Demand Forecast." The article went on to say, "Oil demand growth is slowing in China, the world's second-largest consumer, the Paris-based agency said yesterday as it lowered estimates for the first time in four months. Increased production by OPEC and higher global inventories will also lead to a price decline, according to the agency, which gives energy advice to 26 industrialized nations."
There you have it. Less demand and more inventory means the price goes down. I remember Alan Greenspan a couple weeks ago suggesting higher inventories would work to bring the price down. At least they have the message discipline coordinated for the markets. Do you notice how we are not seeing any news about possible supply disruptions, even though we are still fighting a war in the Middle East, or there could be a Nigerian strike again, or Chavez cuts us off from Venezuela, or Yukos decides to halt production for some unknown reason? There isn't any suggestion right now that we could see supply disruptions. I guess those pipelines in Iraq are all in safe hands.
On the demand side of the equation, it looks like the IEA is backpedaling on their earlier forecasts, which is clearly affecting the market today. This also comes at a time when it is relatively easy to talk down the energy markets. We are now in a period of seasonally slow demand. The energy bears are also getting some help from better than expected weather. Bloomberg ran another article this morning with basically the same message discipline, suggesting natural gas will fall in sympathy with crude oil as inventories build and the weather remains mild. "The upper Midwest and Northeast will have above-normal temperatures from April 18 to 22, the National Weather Service said. Normal temperatures will dominate elsewhere. The result will be heating demand 36% below normal in the six-to-ten-day period, Belton, Missouri-based Weather Derivatives said." All this bearish news took its toll on energy today with crude falling $1.51 to close at $50.35 a barrel and unleaded gasoline dropped a full nickel to $1.48 a gallon.
Now we have the IEA cutting energy demand, but the IMF is saying just the opposite. Once again the headline from Bloomberg, "Economic Slowdown Is Leveling Off, Solid Growth Ahead, IMF Says." The article goes on to say that "the slowdown in economic growth has begun to bottom out and the world economy appears set for solid expansion in 2005… Growth in the U.S., the largest economy, and China, the world's fastest growing major economy, as well as in emerging market countries has been stronger than earlier forecast…" Based on what the IMF says, they seem to be in disagreement with the IEA about China's reduced demand for energy products.
Now let me cut the chase and be very blunt about where I'm going with all this energy talk. Yesterday I almost went into shock when the U.S. dollar made a very sudden and unexpected rise after the horrid trade data was released. The dollar tanked immediately, but within minutes rose from the ashes, while CNBC reported that traders were more focused on the release of the Fed minutes later in the day. They said the dollar went higher because they speculated the Fed minutes would imply higher interest rates to come. The Fed was less hawkish than expected, but the dollar still didn't break down. Looking at the one-minute charts from yesterday shows gold and silver getting bashed lower as the dollar shorts were getting squeezed out of their positions.
I called and emailed a few of my market analyst cohorts, and they all completely agreed that what we saw was a pure ramp job on the U.S. dollar along with the late explosion of stock prices. Yesterday when the Dow Industrials were down about 50 points they came out with the indictments of fraud for the NYSE specialists. I figured that confidence breaker should have been good for another 50 points down, but the market rallied to close higher…because the Fed released the minutes of their meeting, of course. The projected softness for interest rate hikes and big declines in energy prices didn't do squat for the stock market today. The Dow was hammered for 104 points to 10,403 and the NASDAQ was clocked for 31 points to 1,974. Right now, stocks are the least important for our market managers. The dollar is critical, as there appears to be MUCH going on behind the scenes in the FOREX markets, and the bond market is critical because interest rates affect everything, especially housing prices right now.
One of the top analysts I sent an email to had this as part of his reply, "To be honest Mike, I am sick to death with what I see these jokers do day in and day out. It does appear we have entered some brave new world in which our financial masters know what is best for us pitiful peasants. I suppose the stakes are so high they feel justified in playing their games, but they do so from the shadows like thieves lurking in the night." He went on with a great deal more and I read testimony after testimony of many investors that thought there was some heavy intervention with the dollar. Bill Murphy titled his piece last night, "Manipulation OF US Financial Markets Intensifying." I think my buddy said it all when he wrote, "I suppose the stakes are so high they feel justified in playing their games." Folks, the stakes are incredibly HIGH!!! The euro is competing for dual status as a global reserve currency with the dollar, Iran might be opening a commodities exchange denominated in euros, China is being pressured to remove its peg to the U.S. dollar, and on and on. The stakes are very high indeed! Fiat paper money across the globe is being called into question, especially the fiat U.S. dollar.
All this stuff is highly complex. I keep thinking and wondering if they will be able to keep the dollar propped-up. They have to keep flooding the markets with liquidity to keep paper asset prices high (stocks and bonds), but have to keep a lid on inflation. We know from experience the Fed has VERY LITTLE discipline in controlling monetary aggregates, so they have chosen the easier course by doing all they can to suppress commodity prices, especially gold, silver and oil. All this bearish news with crude oil inventories, reduced global demand from the IEA, Greenspan saying oil will go down, and the Saudis pumping more crude are all intended to push energy prices lower. In a month or so we will probably see that this is just an ordinary correction in an ongoing bull market for energy. The overall bull market for commodities is way far from over, they just need to pump the money and contain inflation by trying to keep commodity prices in check.
I learned these things from someone far savvier in the markets than myself. As I watch the developments, all I can think of is the "strong dollar policy" that was implemented by the Clinton/Rubin gang. It also involved Lawrence Summers with his input from Gibson's Paradox. Gibson's Paradox shows the correlation between the general price level, interest rates, and gold. The gold price must be contained in order to keep interest rates low and demonstrate there is no price inflation. Suppression of gold and commodities, I believe is the cornerstone of the strong dollar policy. We have to speculate, because our leaders have never defined the policy that creates a strong dollar.
To understand what is happening in the markets today, I think it is absolutely mandatory to read this most excellent essay by Peter Warburton titled, "The Debasement of World Currency; It Is Inflation, But Not as We Know It." What really amazes me is the fact that Mr. Warburton wrote the article way back in April 2001. You could put today's date on his paper and every bit would still apply! I want everyone to have a taste of what he had to say so I'm going to cut in three key paragraphs, but please do yourself the favor of reading the article in its entirety. At the end of the article he lists his ten top investment candidates for the early years of the 21st century, but here's the excerpt on commodity price suppression thanks to our friends at the Prudent Bear:
Central banks are engaged in a desperate battle on two fronts
What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.
It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first. Last November, I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil and commodity markets? Probably, no more than $200bn, using derivatives. Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world's large investment banks have over-traded their capital so flagrantly that if the central banks were to lose the fight on the first front, then their stock would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil and commodity prices.
Central banks, and particularly the US Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the equity index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade.
When Mr. Warburton suggests the Fed is deploying their heavy artillery in the battle against a systemic collapse, you better believe the stakes are very high! In 1987 the Working Group on Financial Markets was created to intervene in the financial markets as a defensive measure to stop a market meltdown, but since then I believe they have become "pro-active" in their efforts to influence the financial markets. The war in the Middle East is clearly for more than a fight to eliminate weapons of mass destruction. If you care to take the current situation with the dollar even further, take some extra time to read Jim Willie's essay, "PUTIN SHAKES THE PETRO-DOLLAR REGIME." He goes MUCH deeper into detail on the relationship of oil to the dollar and what Mr. Putin is doing to undermine our global dominance in monetary and financial affairs. You better believe the stakes are extremely high… We want our markets to be free of intervention…free of manipulation! I have said this is the year for trade wars and currency wars. Our country is definitely at war, but I fear the war is more about power and global dominance to control the world with a single reserve currency and not allow the dollar to be knocked off its pedestal. The stakes are very high and that is why we see manipulation of the financial markets. In the end, I still believe justice will prevail!
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