On German Negative Yields

In a nutshell, this article summarizes the problems we are facing.Viewing the remainder of this article requires a Subscription

Bank Runs Are Deflationary First, Inflationary Second

It is Thanksgiving, so for most Americans an opportunity to spend time with family, go crazy, and use the excuse to purchase some frivolous electronics at half of what our neighbors paid last month - a truly feel-good holiday.Viewing the remainder of this article requires a Subscription

Lots of news, but what’s important?

There is a flood of data and headlines that seems almost spiteful to anyone trying to enjoy their usually-slow August. For me, it gives a good excuse to turn away and read even slower as most of the flood is meaningless for my portfolio. That being said, some of it is not.Viewing the remainder of this article requires a Subscription

A Contrarian Take On Oil

60 million barrels sure sounds like a lot, so thank you world governments for releasing that into the system and alleviating consumers' burdens.Viewing the remainder of this article requires a Subscription

It’s the End of The Euro as We Know It…And I Feel Fine

For a brief moment, the markets believed. For a brief moment, the Greek problem was solved. But then reality set it. Greece’s fiscal austerity and monetary headache is going nowhere and German’s are getting fed up with supporting their neighbors.Viewing the remainder of this article requires a Subscription

Black Swan

I continue to think about black swans - not the movie. It's a bit of a tautology to say that we can only identify them in hindsight, that is, we can only tell that an unexpected event will happen AFTER we're caught off guard.Viewing the remainder of this article requires a Subscription

Revisiting the Curve

Remember when the curve was getting steeper each day? Remember when we started warning that the steepness was going to catch a lot of net interest margin (NIM) players flat footed when it finally turned? Well, it might be turning.Viewing the remainder of this article requires a Subscription

On the radio…

Just wanted to send along last week’s radio appearance. The main theme was inflationary pressures in food and agricultural prices – a theme I’ve discussed and which we’ve implemented for clients for a while. This, coupled with our concentrations in precious metals and energy, has worked well and I continue to see opportunities in these areas.
http://www.thewallstreetshuffle.com/thursday-march-31-2011-seg-1/

Relevant ETFs: GLD, SLV, CROP, MOO, DBA, JJA

MacroView

A bit later than usual... As always, MacroView is produced in collaboration with MacroMan. To show the extent of our need to SEEK conflicting data, today's MacroView has a number of charts showing support/resistance for inflation triggers. I'm not in the inflation camp for the time being.Viewing the remainder of this article requires a Subscription

More on the end of the euro

I have discussing the fact that the underlying logic of the euro is under threat as fiscal, monetary, and political needs are in stark opposition.Viewing the remainder of this article requires a Subscription

Feeling like an outsider

Everyone is talking about inflation. All the time. Wheat. Everywhere I turn. Every chart that is burnished. Cotton. Newsletters. Bloggers. Traders. Inflation. Copper. So it makes me feel like an outsider when I don't really think inflation is the problem we need to worry about.Viewing the remainder of this article requires a Subscription

Just to confirm

Jobless claims higher than expectations by about 50K, durable goods orders continue to deteriorate (down 2.5%). We’ll see what that means for inflation expectations going forward, but without wage inflation and without orders to generate revenue and growth, the current inflation scare and commodity run-up might hit a wall.

Inflation fears are back

Inflation fears and fear-mongering are back in full swing, but I don’t buy it. I have to admit that I have benefited on multiple levels from the inflation fears making their rounds, as I have short exposure to treasuries, and long exposure to precious metals including palladium and platinum, which have outperformed gold and silver. I’ve also faced some headwinds, as I have been long the dollar versus the euro and yen for a long time. Separately, I’ve been overweight energy for a whole host of reasons, but inflationary pressures have certainly helped keep the price high.

So why am I doubting the recent fear mongering over ever-higher corn prices and the run up in everything from lean hogs to cocoa? My main reason is the consumer. First, on an anecdotal level: Go into any department store. These days, they’re seeing more traffic than in the recent past, a positive. Yet, almost everything is on sale. 30-50% sales are now the norm, and quite honestly, I don’t know why anyone would buy without the sales, especially given that you can buy so many things pre-sale, namely, buy it now, put it on hold, and get the sale price, while the store gets the carry. That’s fine for cashflows, but it’s only borrowing from future revenue; I guess it’s a cheap loan. Second, inflation in staples can seep through, but we’re not seeing it keeping up with the rise in inputs, which necessarily means a squeeze on margins. Don’t believe me, just check out MCD, which just came out with earnings. This is great for the midwestern farmer (voter) and land owner, fine for the coastal consumer, and crappy for everyone in between. Certainly it’s not a net positive for stocks that won’t be able to keep up earnings and meet these valuation expectations.

But back to our mongering…The question remains of what happens to the firms in between that are getting squeezed? For starters, I don’t think employment can pick up, which in turn will lead to continued low savings. In fact, numbers just released show that consumers are dipping into their savings at unprecedented levels. Considering the fact that these funds aren’t coming from HELOCS, they must come out of investable and liquid assets. That can only go on for so long. In a debt deleveraging cycle, which we are facing, the main problems will be margin contraction coupled with more difficult financing. Inflation fears today will end up being ephemeral and much deeper, scarier structural problems will surface. For traders playing the rotation, this is a fine time to look at underperforming commodities and just consistently rotate into them. For investors, the commodity space, except some very specific exposures, will not provide the anticipated returns.

Relevant ETFs: MOO, COW, DBA, GLD, SLV, PALL, PPLT

Separating the noise from the louder noise

There’s obviously been a lot of news since last night and I’ve been trying to wrap my head around it, but for starters let’s mention some of the big items:

Belgium and Spain are only the latest, but not the only(!), reasons for the euro to fall…and fall it did. We’re back to a 1.32 handle. Why do I say that they’re not the only reasons? Well, for starters, I thought the euro was structurally flawed before any downgrade, and continue to think so. The euro is now trading by default since there’s no alternative in Europe. Imagine for a moment if Germany came out tomorrow and said that it would start issuing Marks. The euro would be DOA.

On our side of the pond, we have treasury yields continuing to move up. 10 year yield is now above 3.5%! We’ve discussed the phenomenon before where we can have deflation AND rising yields at the same time. Locking in 3.5% for 10 years isn’t that attractive afterall. We’ve been calling it biflation, but I’ve been researching some underlying elements to help explain the phenomenon. Each time I come to the same issue: What cause yields to rise?

• If yields are REACTING to inflation and inflation expectations, then they are lagging commodities, but still part of the same message we’re getting from other asset classes. This could be bullish for equities and real estate, as well as supporting the runup of commodities in general (such as copper, industrial commodities, etc).
• If they are LEADING and are a result of fear over solvency, or frontrunning the pack (e.g. fear China will sell their holdings), then the recent run-up could be part of a debt-deflation cycle which is very negative and could be a harbinger of increased real costs of borrowing, economic slowdown, deflation across asset classes, etc. This would be very bearish for industrial commodities such as copper, but still supportive of precious metals as stores of value.

This dichotomy is the debate being had across the street. The first case is easier to deal with – we have the fiscal and monetary tools to stop inflation, and while painful down the road, we know it. The second case is similar to what happened during the Great Depression (and I don’t use that comparison lightly). It’s a world where fiscal and monetary policies are powerless, and it’s the scenario Bernanke fears most. Unfortunately, increased government spending does not and will not stop scenario two from occurring, so it just leaves us more vulnerable. We are maintaining our short treasury exposure.

Gold down. Oil up. Noise for me, since these are long term positions.

Muni bonds have gotten hit recently (as we predicted a few months ago). Noise for me at this point since we cut all exposure. At some point, yields will become attractive enough to take long term positions, but for me, not yet.

Tax bills, healthcare constitutionality, and WikiLeaks – all noise.

David Rosenberg (Rosie) discussing the rise of inputs versus no retail pricing power causing the mother of all margin squeezes?

The U.S. PPI, at +0.8% MoM in November and the core (which removes the effects of food and energy) at +0.3%, were both above expected but skewed by a seasonal rebound in auto pricing. Outside of that, core would have been as expected at +0.2%.

What is striking, however, is how cost trends are accelerating at the early stages of production in lagged response to the recent leg of the commodity boom. The “core crude” PPI jumped 3.1% MoM and is now up 30.2% on a year-over-year basis. This is the very early pipeline stage.

At the same time, core intermediate PPI leapt 0.7% and is up 4.7% from a year ago. When we get to final core goods PPI, the YoY trend is running at a mere 1.2% (and -0.7% on a three-month annualized basis).

In other words, the closer you are to the commodity complex, businesses have greater pricing power. And, the closer you are to the consumer at the final stages of production, the less pricing power you have. (emphasis mine)

That’s not noise. It’s just further confirmation that equity valuations are too high.

The Fed can’t manage the economy, but they can still do interesting research

The Breadth of Disinflation

By Bart Hobijn and Colin Gardiner

In recent months, inflation as measured by the personal consumption expenditures price index has been trending lower. This slowdown, known as disinflation, has raised concerns that inflation might actually drop below zero and enter a period of deflation. An examination of the distribution of inflation rates across the range of goods and services that compose the index suggests that downward pressures on inflation are relatively high by historical standards.

For the full paper, click here. I continue to believe that debt deflation will put downward pressure on the traditional stores of value (real estate, equity, bonds), while monetary and fiscal policies will haphazardly put pressures on “needs” or inputs – biflation. This will have the effect of squeezing margins, and increasing pricing uncertainty, which in turn will make it difficult for businesses to invest and plan. Coupled with high unemployment, increasing unfunded pension liabilities, and geopolitical instability, the “fingers of instability” which we have discussed in the past are now long and networked – meaning a small disturbance can have large consequences.