Category Archives: Commodities

IMF issuing bonds…?

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Foreigners buying US Dollars?

I’m attempting to put a couple puzzle pieces together so here goes…

1) China has tons of US dollar and dollar denominated debt.  Additionally I heard suspictions that China may be purchasing land, companies, etc… with the debt.  Considering that we have no real access to their books, and they can really tell us anything they want I find this easy to believe.  If they had long-term dollar denominated deals they could exchange their dollars for tangible assets, which protects them from a declining dollar.  The US government will probably default on their debt via inflation so China goes and buyes an asset and says we will pay you in US dollars.  China’s holdings of US debt pays interest, and has a principle payement at expiration.  So, it seems plausible that they could use all their US holdings to buy up tangible assets.

2) BRICs (Brazil, Russia, India and China) are purchasing our debt.  Why?  What if they were willing to purchase dollars to placate the US only to use them to purchase raw materials, or IMF bonds (see #3).  We know China has been stockpiling commodities.  Oil has to be transacted in dollars. Are they paying for all the commodities with Yuan or dollars?

3) IMF Bonds… http://online.wsj.com/article/SB12441969…

China is thinking about purchasing $50b in IMF bonds.  Since when has the IMF sold bonds?  I didn’t see anything (see further down in my post) about which currencies would be used to purchase these bonds, but why can’t we make a leap and say that perhaps they would use US dollars.  The IMF holds a multitude of currencies so they buy dollars to keep the dollar stable for a bit and then use the dollars to purchase assets, which may be partially valued in dollars, but not a 100% exposure. The dollars are then held at the IMF, which issues bonds based on a basket of currencies.  This pulls dollars out of circulation (for now), helping to strengthen the dollar at least in the short term.

I don’t know if a scheme like this is even viable or makes sense, but it jumped into my head and I wondered if I’m completely off or there may be a bit of truth in it all.

Yet IMF is issuing bonds?

I’m pondering

a) the move by the IMF to issue bonds, and

b) that nations are cashing in their US obligations / cash for these newly created bonds.

So, I did a bit of digging…

http://blogs.wsj.com/economics/2009/06/01/imf-bonds-are-coming-soon-but-you-cant-buy-any/

The International Monetary Fund is putting final touches on its plans to issue its first bonds. Russia has already said it would buy $10 billion of the bonds, which would be priced in the IMF’s quasi-currency, “special drawing rights.” SDRs are a basket of currencies consisting of the euro, yen, pound sterling and U.S. dollar. As of Friday, 1 SDR equals $1.55.

So these are the major players when it comes to currencies, but excludes the Yuan.  All of these nations are in trouble.  The UK is in worse shape than the US and Europe is fracturing.  Perhaps this is an attempt to shore up some of the weaker currencies so they don’t collapse.  If hard currencies were to skyrocket (as many predict) this is a nail in the coffin to fiat currencies.

and

http://www.imf.org/external/np/sec/pr/2009/pr09207.htm

Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today welcoming Brazil’s intention to invest up to US$10 billion in notes to be issued by the IMF:

http://www.imf.org/external/np/sec/pr/2009/pr09204.htm

Same thing as with Brazil, but notice my bolded parts…

“This decision will be beneficial to all,” Mr. Strauss-Kahn added. On one hand, IMF members’ investment in Fund securities will boost the Fund’s capacity to help member countries—particularly developing and emerging market countries—cope with the crisis and thus benefit all members by facilitating an early recovery of the global economy. At the same time, the new notes will offer members a safe investment instrument with reasonable return.

Reading a bit into this I’d say that there is a huge and continued growing concern that the previously risk-free and safe investments are no longer considered so.  IE: US treasuries.  This is nothing new, but perhaps to prevent an all out run on our debt, by consolidating these first world countries many believe that it will shore up confidence in our debt.

More ideas:

http://blogs.reuters.com/felix-salmon/2009/06/10/switching-from-treasuries-to-imf-bonds/

Perhaps by backing these instruments by a basket of currencies priced in dollars foreign holders will feel better about holding dollar denominated assets backed by a multitude of nations.

What might be the effects of such actions?

Is this to shore up confidence with developing nations?  They have the oil, the raw materials, and everything we need to produce the stuff that we buy.  For now they need us as consumers, but that gig is about up if not over.

Unless I’m mistaken this look like a move away from the dollar as the reserve currency.  As this unfolds I wonder how much transparency there will be as far as IMF holdings with regards to the backing of these bonds.  I don’t know enough about the IMF to make any solid presumptions or predictions, except is this slowly a move to a global currency?

What I really want to know is if countries are buying US debt, yet are in serious talks about purchasing IMF bonds… something isn’t adding up here.  Say they purchase the bonds in US dollars then the IMF will have a bunch of dollars.  Unless the Fed reigns in the money supply somebody has to hold our dollars unless they dump them on the market causing a crash in the dollar, which doesn’t make sense unless they have found a way around this.

I know this is a lot of fragmented thoughts, but something is going on… Will someone please help fill in the missing pieces.

Some See China’s Buying Spree on Commodities as Short-Lived – NYTimes.com

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Some See China’s Buying Spree on Commodities as Short-Lived – NYTimes.com.

With the advent of Central Banks printing their way out of this mess the probabilities continue to point toward inflation.  While the rate of expansion of the money supply has lessened it is no less continuing to rise.  Should the Fed decide to sell some of its assets I can only imagine a depression ensuing.  As some have said they are threading the needle between inflation and depression, but at some point I think the hole will close and we will be stuck on the side of inflation.

The rebound in commodity prices is staggering.  Many factors influence commodities, among them currency valuations, supply and demand, forecasted demands, hedges against currency devaluations, and inflation.  China plays a major role in the demand factor.  In a recent NY Times article, referenced above, they state that while China is stockpiling commodities production lags.

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

“There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.

China is getting ahead of it future needs, which makes sense, but how long can it continue?  I have no doubt in my mind that we will see higher prices for everything, while wages stagnate and job losses continue.  The question however is if commodity prices will continue to rise without a correction?  If I had a crystal ball I would say yes primarily due to our fiat money system, record low levels of food supplies, and energy stocks being depleted while further exploration and extraction projects are being put on hold.  Until we see higher energy prices they won’t be put into full swing, which take years to develop. Nothing goes in a straight line however, so a mild correction would be encouraging for buying on the dip.

Back to the demand situation…

Richard S. Elman, the chief executive of the Noble Group, Asia’s largest diversified commodities trading company, bounced up from the conference table in his office here when asked about freight rates during an interview on Tuesday morning. He walked over to his desk, dominated by three computer screens that partly obscure a perfect view of Hong Kong’s harbor, and quickly punched up on one screen a list of daily charter rates for large bulk carrier freighters.

The list showed ship owners charging $58,000 a day now but just $24,000 a day for charters next year or in 2011 — an indication that there will be more ships than cargoes in the years ahead, particularly with shipyards still finishing vessels ordered during the recent boom.

Pointing to the rates for the next two years, Mr. Elman said, “That’s the real market” for ships.

As demand drops so do shipping rates.  There just isn’t as much stuff being moved around the globe.  Thanks to our inflated demand for goods we have excess capacity.  How many more ships can sit idle while China continues to stockpile?  If China slows it stockpiling, and demand for goods continues to drop and the recession continues and joblessness rises then what will be the impetus for prices to rise.  Again we have to go back to the fiat money system, and increasing debt to GDP all around the world.  How will our debt be paid off?  Inflation.
Even with a drop in demand for raw goods and materials if central banks continue on their present path we are headed for higher prices.  So, I’d like to see a correction in the price of goods due to a demand drop and then hold on for a wild ride as prices increase.
While I say I’d like to see this for profit potential, unfortunately there is a consequence on the human level.  If prices rise, while wages stagnate people will protest in anger.  It is a catch-22.

A bond bubble… Really?

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Bonds, bonds, bonds…  United States Government bonds ARE the safest investment in the world besides cash.  Right?  They are aren’t they?  I mean they are backed by the taxing power of the United States Government so they have to be.  Well, sure you will get your money back at a measly 2.x% these days.  Isn’t that below the rate of inflation you ask…  why yes it is.  T-bills are paying tenths of a percentage so you choose.  Besides stocks and commodites have cost many a small fortune so investing in bonds is a wise decision.  Right?

There is much talk about a bond bubble, and I’ve been watching bond prices and their rates take off recently and also have a nice correction.   Generally I watch $TNX, which is the 10-year government bond yield.  Remember bond yields move inversley to their prices.  So, if yields go down then prices go up and vice versa.

So, we have seen equity and commodity prices collapse, housing prices, and while that was occuring treasury bond prices have taken off.  This MUST be a bubble right?  Perhaps, but you have to take into account who buys and sells bonds.  We have the individual investor, which makes up a small group.  The major purchasers of bonds are large institutions and governments.  For institutions let’s look at the money market industry.  They must hold a number of bonds based on their funds requirements.  For governments they buy and sell bonds all the time.  They sell them to raise money and other governments or institutions buy them for a “safe” return.

As a last resort the Federal Reserve will purchase bonds directly, thus monetizing debt (PRINTING MONEY), thus keeping bond prices high and yields low. Therefore bonds aren’t really controlled by investors as we like to think, but much larger fish in the sea.

So, what might we see when the world loses faith in the bond markets?  Auctions will be devoid of foreign buyers signaling that foreign demand has dried up.  This will spark the necesitated increase in interst rate as an incentive for others to borrow.  Simultaneously we might see a flee from bonds as investors are concerned about their future safety.

If you look at the news you will see exports are way down from exporting countries, which means that importing coutries aren’t importing anywhere near previous levels.  Welcome to a major recession, yes there are grumblings of this being a depresssion.  I supose it depends on your viewpoint.  Now what happens when these net exporting countries decide to stop buying our debt because they have their own problems at home and have to use their saving?  They will no longer be purchasing our debt, which will make it more and more difficult for the USA to spend, and service existing debt.  Being that most of our debt is short term as the interest rate rises so do the debt servicing costs.  As these costs rise, tax income decreases then we are stuck with either printing more money (the short and easy “solution”), we cut back on gov’t services, or a combination of both.

Watch out for rising interest rates and a falling dollar.  So far we have neither, but once we do this will signal a shift from the US Dollar as secure to the US dollar as a high risk.  Expect other currencies in better situtations than us to see their currencies gain value, while the major winners will be commodities and gold.

Congressional Budget Outlook :: CBO

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Hold your hats folks as here are some of the forecasts for 2009 (link):

  • GDP falling by 2.2%
  • Slow recovery in 2010
  • > 9% unemployment by 2010
  • Decline in inflation (hmmmm… if monetary policy says anything this will reverse or at least eventually destroy the dollar)
  • Continued decline in housing prices
  • Decline in real consumption of more than 1%
  • Indeterminate on the financial system

And the best of all

$1.2 trillion dollar budget deficit for 2009*

*That doesn’t include the proposed stimulus package
*That amounts to 8.3% of GDP

So, we have an economy in decline, and digging a deeper and deeper hole to climb out of.  What I really want to know is how are we going to pay for 1) a 1.2T dollar deficit, and 2) a large fiscal stimulus package of a indeterminate size.

Let’s see our foreign friends have been purchasing our debt, which enabled us to essentially live off of their productive labor.  China for example is seeing a marjor reduction in exports, its economy is contracting, and eventually it is going to have to decide if it is worth supporting the American lifestyle at their own expense.  Presently, everyone is so intertwined I think there is a fear that if one jumps the house of cards falls down and we all lose.  However, is it possible for say China to pull out of the house of cards with minimal damage?  Is there a way they can reduce their exposure to US debt, and not have their savings collapse?  This is something I’d really like to know.

Seems to me that if they slowly shift some of their dollar reserves into commodities and other currencies SLOWLY, especially when there is increased demand they will be able to lessen their exposure.  The US import market is tanking, and has been tanking.  With unemployment increasing Bloomberg people are going to have a smaller income and will be forces to save thus hurting exporting countries.  This isn’t a US phenomena alone as Europe and frankly the rest of the world is contracting simultaneously, while being fed a mouthful of credit from central banks to re-inflate the bubble.  Last I checked it is very difficult to inflate a popped bubble.

Let’s take the latest number from Taiwan Bloomberg.  Their exports dropped by a record 41.9%.  We all know that Taiwan exports electronics, which have been a major boon ever since the technological revolution, which also saw a major hiccuup in 2000-2003.  So, this is confirmation of a major exporting taking a major hit.  There will be ramifications for the Taiwanese economy.

I can’t imagine that after the dust settles the world’s economies will look the same.  The sea of money will shift to where is sees the most opportunity and in its movement will tear apart the economies of many.

Here are a few more headlines on Bloomberg alone that tell a um telling story:

Fed Revives Discussion of Inflation Target to Counter Risk of Price Slide

ECB Expanded Balance Sheet by 36 Percent Last Year to Revive Bank Lending

Apartment Rents Fall, Vacancies Rise to Four-Year High on U.S. Job Losses

Shopping Center Vacancies in U.S. Approach 10-Year High as Stores Fail

Procter & Gamble Fights to Refinance as U.S. Borrowings Reach $2 Trillion

U.S. Banks Will Need to Raise More Cash in 2009, Meredith Whitney Writes

I’ll leave it at that, but what I’m seeing is RECESSION coupled with the Fed trying to stave it off through any means necessary, which is now including outright purchases of securities on the open markets.  Again we have no savings and are either monetizing debt or borrowing it from somewhere.  To do this will be disastrous to the dollar and our reputation as a solid financial center of the world.  Sure there are plenty of other economies in dire situations, but in the end who will come out with the heads up high and who will come out still in the sand?

All Calm on the Western Front

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Christmas is past, New Years on the horizon, hope for change lingers in the air like a slow moving mist.  2008 will go down in the history books.  Oh it was memorable, but like a lemon is bitter.  Collapse oh what collapse the economy is fine.  Bush reassured us that the fundamental of the economy are solid.  Head on over to my quotes page and you will see the stumbling follies.  How could so many miss the storm with its blackening clouds enveloping the world to unleash thunder and hail that would bring equities and commodities crashing down?

So, here we are awash in retail inventory priced to go, but to whom?  People are losing their jobs, being moved out of their houses, hoping not to foreclose or go into bankruptcy.  Silently they pray and hope things will get better.  They remind themselves that change is on the horizon, and we will be saved.  However, just as when we overextend ourselves with credit change will do the same, and at an enormous cost to the present and future generations.  How big a pit will be dug I don’t know, but I’d place a large wager that it will be quite large.

Like the eye of the hurricane all is calm in the eye, but the pre and post can be devastating… if you survive.  As we sit in the eye watching the clearing above, the clouds move by, the presents exchanged, and champagne ready to be uncorked.  As we go about our daily lives in the eye we want 2008 to go in the history books, and not to come back.  Oh I wish that were possible as it would be as sweet as honey.

As the eye passes the next front moves in.  The wind grows fierce, sheets of rain and hail pelt all and everything in its way.  Yes, I think the time is near.  Batton down your hatches, have your “preparedness kit” at hand, and be ready for 2009, it will be another year for the history books. While Subprime was the 2008 buzzword are you ready to learn all about Alt-A and Option ARMs?  Or what about oil exporting countries such as Russia who need oil to stay above $40.00 a barrel?  What happens when they sell their foreign debt?  Expect much higher interest rates.

Ahh but you say wait a minute everything will be okay as change is in the air.  The government will stimulate us out of this mess and we can continue on our merry way…  Perhaps, but I don’t concur.  Remember we are a debt laden economy with a very large trade imbalance funded by our exporting friends.  Sure we will “print” money, but I ask you at what cost?  To print money means to make more out of thin air.  To take a bit from you, me, and the rest of dollar holding persons is theft, but unseen theft.  Add that to more debt that we have no way to repay and I see a storm brewing so violent that everyone will be in shock, awe, and amazement at its velocity and ferocity.

Just remember with every crisis there is opportunity.

The case for inflation

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The following are responses that Richard Maybury gave in an interview with Investor Insight.

He makes a case for the coming of a great inflation. We haven’t seen the beginning yet as we are still going through a process of de-leveraging.

–Article–

Obama is a boomer, and I think an understanding of the boomers is a valuable tool for seeing what is coming. Boomers were raised in government-controlled schools and colleges where they were taught Keynesian and socialist economics. Neither Keynesianism nor socialism contains the concept of malinvestment, meaning the distortions caused by the government injecting massive money into the economy. These two forces, the injection effect and malinvestment, are the foundation of the economic crisis, and I’ve never heard Mr. Obama or his advisors say anything about them.

Money responds to the law of supply and demand just as everything else does. When the supply of dollars goes up, the value of each individual dollar falls, and prices rise to compensate. That’s inflation. Inflation isn’t rising prices. Inflating the money supply causes rising prices.

As prices rise, people become poorer and they demand relief. The politicians stop injecting money, people have less to spend, and business slows down, often causing a recession. The shakeout can be very painful, depending on how long the inflation has lasted and how many new dollars have been injected into the economy.

The government has only two ways to finance its spending — taxes, and printing money. Seven years ago the White House and Congress decided to finance the war by printing dollars instead of raising taxes. According to the St. Louis Federal Reserve’s MZM measure of money supply, the number of dollars circulating in the US on 9-11 was $5.3 trillion, and now it’s $8.7 trillion.

What is generally overlooked is the fact that the Federal Reserve has been inflating the money supply almost without pause ever since the Fed was created 94 years ago. So, underpinning the most recent seven years of injections and malinvestment, we have the residual from the previous 87 years.

Remember that I said events will control Obama much more than Obama will control events. Ever since the Great Depression, the way the federal government has dealt with shakeouts has been by re-inflating. They halt recessions by expanding the money supply further, which stops the shakeout. But that leaves a lot of bad investments in place, and it also creates a lot more. Of course, the so-called rescue pushes the day of reckoning into the future.

The interview continues and he mentions that eventually as the reserve currency the United States will have to do something to regain support of the dollar. He proposes this will be done through a return to the dollar being backed by some basket of currencies. Something will have to be done if the dollar isn’t to be completely destroyed. The entire interview is worth the read. Here it is: Interview.