Commodities Bull Market Revived
Commodities / CRB Index Oct 10, 2007 - 08:16 PM GMTBy: Jim_Willie_CB
Numerous favorable signals point to a resumption of the commodity bull. It had been stalled for almost a year. The US Federal Reserve interest rate cut on September 18 clearly marked a turning point, a watershed event, a sea change. The USEconomy is the weakest on the planet, not surprising since it grew on the back of a housing bubble, which has since entered a slow motion crater. The US financial sector, the engine behind the so-called FIRE economy, has sputtered from bubbles mixed with kooky engineering mixed with leverage steroids laced with mispricing misrating fraud.
So the next phase will be powered by the USFed doing regular and frequent back-peddling on monetary ease, which is a euphemism for making money cheaper as officials flood the system so as to avert a breakdown, and secretly bail out the big bankers that wish not to hide losses or have them subsidized by public money. Included this week is a potpourri of charts and summaries. Many more details appear in the October issue of the Hat Trick Letter, due out in mid-month.
THE PURE COMMODITY INDEX
Let's use the index without the rigged nonsense ordered by Goldman Sachs, used to paint a false picture of moderating commodity costs. These guys ply their craft well, the quintessential rig being their cut of the gasoline weight in their GSCI index in August 2006, which engineered a significant drop from $2.30 to $1.45 in just a couple months time. Congressional elections were their motive last time. Hiding the cost explosion is their motive this time on the CRB index.
So turn to the Continuous Commodity Index instead. Reminds me of Classic Coke and their ploy to replace Coke. The CCI index has revived strongly, a clear direct response to the expectation of a new monetary easing cycle. If not an entire cycle to kick in quickly, probably a new cycle which will come with the USFed kicking and screaming as their incorrect forecasts, false perceptions, and inept policies must be constantly and predictably reworked.
THE AUSSIE DOLLAR AS RESOURCE CURRENCY
A telling chart ratio is seen with the Aussie Dollar as a ratio of the Continuous Commodity Index. Its message is loud, that the commodity trade is back, and certain currencies like the Aussie$ and Canadian Dollar are leaders. The loonie ratio chart is similar, but with a little more slump upon an early 2007 exchange rate correction. Reversal upward is next, with some amplified but favorable volatility. First the flow of funds goes into the proper currencies, then into the individual investments like corporations and stocks.
MINING STOCKS OVER GOLD METAL
Since the USFed rate cut, a sure turning point, the precious metal mining stocks have responded with more vibrancy than the gold metal price. This is urgently needed by investors in stocks leveraged to the price of metal in the ground. The ratio of HUI to gold actually began to rise before the Sept 18 rate cut. It has continued upward. Note how the current week is displaying a BULL HAMMER pattern. The open and current prices are at highs, while intra-week prices have fluctuated lower. This is a bullish signal, indicating higher ratios ahead.
ENERGY STOCKS OVER OIL PRICE
Pressure on the energy stocks has come from two opposite forces. The prospect of slowdown in the USEconomy points to reduced energy demand. The weaker USDollar pushes higher the crude oil price. Add to the mix the lack of damaging hurricanes, warmer winters, and more volatility is seen in this ratio than in the metal ratio above. The strong main current is growth in the developing nations, led by China . The message here is that a reversal off a double bottom is rather clear. The stochastix cyclical is flashing positive. Keep an eye on the moving average crossover. We need to see the faster 20-wk MA cross back above the slower 50-wk MA. My guess is it will very soon. Hey, Chevron is buying back $15 billion of its own stock, a signal that energy stocks are under-valued.
MINING STOCKS POISED IN BREAKOUT
The major precious metal stock indexes are all showing the same positive picture. The HUI, XAU, GDX are showing breakout and current consolidation. Notice how the HUI refuses to stay down on an intra-week basis. Attempts at selloff failed in the last two weeks. The old technical adage applies here. The longer a price remains in a bound range, the bigger and more powerful is the breakout when the resistance is overwhelmed. Very positive technical indicators are the rising cyclical powered by the rising moving averages. Notice how both the uptrend channel has been overwhelmed, AND the current consolidation is occurring above the old 730 high mark from April-May 2006. Targets are outlined in the September and October Hat Trick Letter reports.
DANGEROUS DEPENDENCE FOR US$
Emerging markets are the driving force for global FOREX reserve growth. Clearly, the trend is led by China , but other nations such as South Korea , Russia , and Brazil are accumulating money quickly. The growth is powered by emerging economies. In the past four quarters, emerging economies have financed almost the entire US Current Account deficit. These are not all friendly nations to the increasingly pushy hostile feisty desperate Untied States. See the trade protection legislation directed against China . Its duplicity screams loud, since trade partner Japan is a chronic violator of currency manipulation, an order of magnitude worse than China for at least two decades. The difference is that Japanese bankers are US lackeys, fully subservient. The other difference is that the US has heavy influence on Bank of Japan so as to ensure the financing of the Yen Carry Trade.
The US financial syndicate wants to control China . Aint gonna happen. The ugly response to any trade sanctions against China could reliably be a shun or boycott of USTreasury Bond purchases from trade surplus recycle. China is going to take its place as the primary major global banker in the next couple years. With that change comes a tectonic shift to global power, and a certain topsy turvy to the global monetary order. They might choose to stand by and watch the colossal waste of money on US military pursuits. The must see the futility of US Military emphasis. The real game is industry and accumulation of wealth.
TAKE YOUR BEST SHOT AT GOLD & OIL & EURO
We all know the powers that be, closely aligned to governments and their central banks, will take a shot at the gold price and crude oil price, as they try to push back down the euro currency exchange rate. Well, they have not succeeded in doing much. They whacked gold almost $20 on a single day last week, yet the gold futures price remains near 745. Artificial sell pressure from paper futures is enormous, all uneconomically inspired, yet permitted by lapdog regulators.
They tried to take down the crude oil price, a couple days knocking it down by almost $2 on single days, yet it remains above the 80 level. The rigged goofy September Jobs Report, a jobbed tally, triggered a profit taking session for the euro. It fell from 142.7 to about 140.5, but has regained its balance in the mid-141 range, well above the breakout at the 138.5 level. The USDollar, gold, and crude oil make for a key currency triangle, all inter-connected. If this is the best the corrupted desperate megalomaniac power centers can muster, we are going to have a powerful follow through when the USEconomy shows its next bout of weakness.
NEXT USFED RATE CUT
The great unwind of the nightmarish bond bubble will continue to put downward pressure on not only the housing market but the USEconomy generally. We are in a very early phase of the great unwind where structured finance has proved to be of substandard construction, certainly not to meet the building code. The USFed will be cornered repeatedly. The USDollar is secondary as a priority to the USEconomy. Foreigners have noticed! The retired serial bubble engineer Sir Alan Greenspan has spoken on the housing decline certainty, on the economic recession likelihood, and more.
The most recent important forecast call comes from Standard & Poor economist David Wyss. “The panic has subsided but the housing market has not hit bottom yet. It will not hit bottom until winter. Housing prices will not hit bottom until next summer and the losses will not peak for another two years, until 2009. We are not halfway through this crisis yet.” Since the rate reset procedure in adjustable rate mortgages (ARM) continues into the first quarter of 2008, we should regard the Wyss assessment as very optimistic.
Officially, the S&P sees the USFed cutting interest rates another 50 basis points before year end. The Fed Funds futures contract has lost some of its enthusiasm. The prospect of a second big rate cut has faded somewhat. They must be paying too much attention to the nonsensical Jobs Report. Perhaps the decisions by the Euro Central Bank and the Bank of England not to hike rates influenced them. These converted monetary doves have taken pressure off the USFed, so they think. In reality, easier US$ money offered means more funds, investment, and emphasis will be directed toward Europe , making their need to hike rates even more motivated.
USECONOMY WEAKENING SLOWLY BUT SURELY
The USEconomy is destined to suffer a recession. How can one be avoided when housing is in decline? If the USEconomy rode the back of the housing bubble boom on the way up, it will ride it on the way down also, since the manufacturing sector is still absent, missing in action, or better described as dismissed and abandoned. There are limits to US exports, with aircraft, military hardware, and telecom computer networking equipment as the three-horse team pulling that load. The home equity raid trend is long gone. What was once $700 billion per year in power assist to spending by households, has been reduced to $140 billion per year nowadays. That amount is less than the $180 billion spent on alcohol annually, to put it into perspective.
Job losses from large companies dominate the scene. Small businesses are struggling to remain alive with rising costs across the spectrum. Try to tell that to clueless corrupted conmen at the Bureau of Labor Statistics, who issue the Jobs Report. Their Birth-Death Model showed +120 thousand job additions in August, even construction job adds, indefensible to be sure. The Challenger Gray & Christmas tally of job cuts at large financial firms has jumped markedly. The finance sector is shedding jobs, and every such job lost probably results in two lost jobs downstream in the tangible economy.
The ADP Jobs Report is far more accurate, but less optimistic typically. So it is not placed in prominence by the press & media. It has been proved as far more accurate over time, but is not under the control of the USGovt agencies, who prefer to doctor and distort all statistics, thus painting a rosy bright picture. The ADP non-farm payroll statistics are in steep downtrend. Perhaps, the BLS jobs data reported last week is correct and the USA economy truly grew by 110 thousand jobs. Put big doubt on that number! It is not rational to expect positive job growth in the midst of a credit crisis where both liquidity and insolvency problems threaten the system. Banks distrust the borrowers even less than other banks.
CONCLUSION
Many more rate cuts are to come by the US Federal Reserve. They will be caught flat footed consistently. They have never gotten it right, not once. Greenspan has tried to explain that the USFed shoots in the dark, employs faulty models, fails to understand the link between economy and credit extension, and probably cannot avert a recession led by a certain housing bear market. Horrendous home inventories and accelerating foreclosures guarantee much lower home prices ahead. More rate cuts are to come. Imports to the US are in decline, year over year, with evidence being reduced Los Angeles port traffic.
Not a single economic myth mantra has been correct so far. Their claim of avoided spillover into the tangible economy is just an admission that it has yet to occur. The latest myths promoted are that the USDollar decline is orderly, and the price inflation is contained. Neither is true. The Euro Central Bank probably has another one or two rate hikes ahead. Europe is powered by exports, has a trade surplus, and can point to a viable broad industrial core, unlike the Untied States. European corporations also benefit from ongoing expansion in Eastern Europe , although some relaxation in their frenetic growth is to be expected soon, if not already.
The gold price from here onward will react to global monetary inflation, led by the US , Europe , and Japan , MORE SO than to USDollar weakness. The gold price will rise from an under-current of global banking distress. Capital inflows into the United States are inadequate to meet current account deficit needs. The gold price will rise from monetary inflation in unison, almost coordinated, as global central banks have been converted to monetary doves at the point of a gun. Soon the English housing bubble will unravel, leading to a benefit to the USDollar bilaterally.
By this time next year, the EuroZone economy might flatten on growth. It is only a matter of time before the higher euro currency exchange rate slows down their economy naturally, from higher export prices. However, Europeans receive a discount on oil costs, material costs, and possibly food costs from the higher euro, which is the opposite effect on Americans. So the EuroZone should hum along longer than some expect.
A declining USDollar currency is a curse, despite the propaganda doled out by Wall Street spinmeisters. If in doubt, they are lying to you. It is that simple. Lastly, the trade war heating up with China points to less imports, less USTreasury Bond subsidies, and the potential for severe capital flow disruption. That translates to higher US domestic prices for finished product, higher borrowing costs, and shock waves to financial markets. Not much positive there, unless you are a precious metal or energy investor.
The US is no longer the sole global engine of growth. China , Russia , India , and Brazil will continue to exhibit strong growth. In order to keep the USEconomy and US banking system and US financial markets from faltering, constant measures will be ordered, all good for gold and energy, whether or not the USDollar declines another 10%. When the dust clears in a few years, the total bailout ordered by the USFed and various other USGovt agencies will reach $2 trillion. It is still early.
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By Jim Willie CB
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