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"With only the slightest degree of hesitation, the Dow
Jones Industrials penetrated the psychological 11,000-level this week,
extending its historic gains to +70% above its March 2009 lows, and melting
away deep-seeded skepticism over whether equities have gone "too-far,
too-fast," in what is the least-loved bull market in history. Yet the
bearish skeptics might want to judge the outlook for the US-economy through
the lens of the stock market, rather than vice versa.
Just as the
decimation of global stock markets in late 2008, erasing $30-trillion in
market capitalization from the peak in October 2007 was an accurate predictor
of just how severe the economic recession would be, conversely, the V-shaped
recovery rally since March 2009, recouping more than $15-trillion of market
value, is signaling a robust rebound in the global economy. China is the
locomotive that's pulling the global economy, leading the way at a blistering
+12% clip in Q'1, 2010.
While a tsunami
of money injections by the G-20 central banks initially fueled the stock
markets' historic advance, further gains must be earned the old-fashioned
way, - through a solid recovery in revenues and earnings. On Wall Street,
S&P-500 profits are expected to rebound +37% from a year ago, and so far,
that's looking like a conservative estimate. There's been better-than-expected
numbers by cyclical bellwethers such as CSX Railroad, Intel, UPS, and
JP-Morgan, and Fed chief Ben "Bubbles" Bernanke and his band of
super-doves, have reiterated that they'll keep short-term rates locked at
zero percent for an "extended period" of time.
The Fed has its
foot pressed firmly on the monetary accelerator, and driving recklessly over
the speed limit, favoring faster growth over fighting inflation, in order to
insure a sustainable recovery that can lead to a noticeable decline in the
9.7% jobless rate. The Fed believes it can help the economy to create new
jobs, by simply printing money and stoking euphoria and speculation in the
stock market.
News that
US-employers added 162,000-jobs in March was one of the most encouraging
signs that the Fed's radical "quantitative easing" (QE) scheme is
bearing fruit. With job creation strengthening, US-businesses have restarted
to rebuild inventories from record low levels, and according to the Purchasing
Manager's Index, orders for US-exports soared to its highest level in
21-years. Retailers reported growth in sales across a broad spectrum of
categories.
Behind the
scenes, the Fed has kept the stock market rally intact, by funneling
$1.75-trillion into the coffers of the Wall Street Oligarchs, and locking
down short-term interest rates at zero-percent. Banks have funneled the Fed's
high-powered money into high-grade corporate (LQD), and junk bonds (JNK,
HYG), making the stock market look more attractive. In turn, ultra-low bond
yields have prevented any meaningful decline in the stock market, and fueled
a parabolic V-shaped recovery. In the next phase of the rally, otherwise
cautious investors typically capitulate, by returning to the equity markets,
and buying stocks at marked-up prices.
Alongside the
booming stock markets, - industrial commodities are also responding to
stronger economic growth in China, India, Brazil, and other emerging nations.
Speculators are re-engaging the "yen carry" trade, and funding
their purchases of industrial commodities at ultra-low interest rates of
0.1%, financed by Japanese brokers. China's voracious demand for crude oil,
aluminum, iron-ore, copper, and rubber, showed no let-up in March, with
imports rising rapidly despite higher prices paid by factories returning to
work after the long Lunar New Year holidays.
Chinese crude oil
imports jumped to 5-million barrels per day in March, their second-highest
monthly level on record, and 29% higher than a year ago. Imports of copper
surged to 456,000-tons, up 22% from a year ago. Traders estimate that the
amount of copper in Shanghai warehouses is bulging at 200,000-tons, twice
February's level. China even recorded a trade deficit of $7.2-billion in
March, the first gap since April 2004, with imports surging +66% higher from
a year ago.
Global crude
steel production rose to 108-million tons in February, up 24% from a year
earlier, with nearly half the world's steel output emanating from China.
Capacity utilization for steelmakers worldwide rose to 79.8%, a 15-month high
and 12% higher than a year ago. Iron-ore, used in making steel, skyrocketed
on the Chinese spot market to $167 /ton last week, nearly tripling above last
year's low. The price of DRAM computer chips in Taiwan have also tripled from
a year ago.
The explosive
rallies in key raw materials, utilized by factories, poses a major
inflationary threat to big importers such as China and India, where food and
energy account for more than half of the average household budget. So far,
the central banks of China and India are still favoring faster growth, over
combating inflationary pressures. India's wholesale price index is 10% higher
than a year ago, and the Bank of India is expected to hike its cash rate a
quarter-point to 6% next week.
Despite growing
signs of a rebounding US-economy, and healthy profit growth for S&P-500
companies, the propaganda artists hired by the Federal Reserve, continue to
paint a gloomy picture of the economy in the media. Fed officials are aiming
their gloomy rhetoric at the bond market however, as part of a brainwashing
operation, working to keep bond yields locked at artificially low interest
rates.
"There are a
lot of people who are unemployed. There are a lot of factories that are not
producing at full steam, so we have excess slack. There is little
inflationary pressure in the economy that is operating well below its
potential," said Dallas Fed chief Richard Fisher, on April 13th.
"The pain is still with many of us to be sure, and we are a long way
from a full recovery," added Richmond Federal Reserve Bank Jeffrey
Lacker. But there is no pain on Wall Street. In fact, the hallucinogenic side
effects of QE have made any attempt at short-selling the stock market, as
futile as trying to submerge a helium filled balloon under water.
In the United
States, the Dow Jones Commodity Index is hovering +20% higher than a year
ago, an early warning signal that inflation will accelerate in the months
ahead, regardless of what government apparatchiks say. In theory, signs of a
rebounding economy, accompanied by higher commodity prices, should lead to
higher Treasury bond yields. But in reality, that hasn't been the case.
Instead, the Fed has demonstrated its mastery over the Treasury bond market,
by locking longer-term bond yields within narrow trading ranges, thru
jawboning and stealth QE.
As the Dow Jones
Industrials blasts thru the psychological 11,000-barrier, and the S&P-500
Index climbs through the 1,200-level, Fed officials are aware that the stock
market rally could short-circuit, and fizzle-out, if Treasury yields are
allowed to climb above key resistance levels. Another threat to the stock
market, is a possible "Oil Shock," as crude oil prices surged to
$86/barrel this week.
Last week, when
the US Treasury's 10-year yield briefly climbed to 4-percent, a key
resistance level, the Fed covertly intervened at the weekly T-note auction,
disguised as an indirect bidder, to knock yields lower. Keeping a lid on the
pressure cooker is essential, to keeping the euphoria on Wall Street intact.
A record 4-to-1 cover at the 10-year auction, convinced short sellers in
Treasury notes to scramble for cover, out of fear of the magical powers of
the "Plunge Protection Team," (PPT).
Former Fed chief
"Easy" Al Greenspan warned on March 27th, that if the Fed and the Treasury
want to avoid trouble in the stock market, the 10-year T-note yield should be
capped at 4-percent. "If the 10-year yield begins to move aggressively
above 4%, it's a signal that we are in difficulty. There is basically this
huge overhang of federal debt, - never seen before. It's going to have a
marked impact eventually unless it is contained, on long-term rates. That
will make a housing recovery very difficult to implement and dampen capital
investment," he warned.
Just hours before
the ten-year and thirty-year Treasury auctions, Fed chief Ben
"Bubbles" Bernanke, tried to reassure skeptical foreign central
banks that the US-budget deficit would not lead to higher inflation.
"Inflation is not really the issue here, because the Federal Reserve is
not going to monetize the government debt," Bernanke said. China was a
net seller of $61-billion of US Treasury notes over the past four-months, but
cash rich buyers from the United Kingdom, picked-up the slack, purchasing
nearly $125-billion during the same time period.
At the same time
however, "Bubbles" Bernanke is playing a shell game, by jigging-up
the stock market to sharply higher levels, with ultra-low interest rates.
"The Fed has stated clearly that it anticipates that extremely low rates
will be needed for an extended period," Bernanke told the Joint Economic
Committee, touching-off a wild buying frenzy on Wall Street. At the same
time, primary bond dealers are loathe to lift the Treasury's 10-year yield
above 4%, without the Fed's permission, reckoning the central bank would
intervene again, to put a lid on yields.
"If huge
amounts of government borrowing push-up bond yields would the Fed then step
in and buy a bundle of Treasuries just to hold rates down? I think not,"
declared Dallas Fed chief Richard Fisher on March 27th. "Monetizing the
debt via Fed purchases of government bonds, inevitably leads to
hyperinflation and economic destruction, and the central bank will not be
complicit in that action, if it were pressured to do so," Fisher said.
"The markets, fearing the consequences of runaway deficit financing,
have bid-up longer-term nominal rates, resulting in a yield curve that is now
historically steep. Some of this might reflect an improvement in economic
growth, but we cannot turn a blind eye to the effect that growing government
indebtedness has on confidence and Treasury yields," he added.
Traders have
bid-up the price of gold, to as high as $1,155 /oz this week, seeing thru the
haze of the Fed's smoke and mirrors. The fact is, the Fed has already
monetized trillions of dollars of new supply, through its QE scheme, and many
investors have lost all faith in the anti-inflation resolve of the G-20
central banks, and ultimately, the value of paper money. In fact, the
ballooning size of the US Treasury's debt, which hit a record $12.8-trillion
last month, has been a steady linchpin supporting the historic rally in the
gold market over the past decade.
As a general rule
of thumb, every $1-trillion of fresh debt issued by the Treasury equates with
a $125 /ounce increase in the price of gold, regardless of how the Fed is
manipulating the federal funds rate or bond yields. As long as the Fed and
G-20 central banks continue to peg ultra-low interest rates, - and G-20
governments continue to flood the debt markets with huge quantities of IOU's,
- it translates into monetization, and the trajectory for the gold market
would stay bullish.
Situated in a
sweet spot, alongside booming global stock markets, and soaring prices for
base metals, are the mining companies listed on the Australian Stock
Exchange. Carry traders are borrowing Japanese yen, and gaining exposure to
the higher yielding Australian dollar, by speculating in Australian mining
and natural resources shares. Also fueling the Aussie dollar's gains from
77-yen in early February to 87-yen this week are high and rising Australian
interest rates, and a surge in the spot price for iron ore, which hit $167
/ton, led by frantic Chinese steelmakers.
Recently, Vale,
the Brazilian mining giant, said it negotiated a whopping 90% increase in the
contract price for iron-ore, with one of its key Asian customers, Sumitomo
Metal, Japan's third-biggest steelmaker. Australian miners BHP Billiton and
Rio Tinto quickly re-negotiated the terms of their iron ore sales, and moved
future sales to quarterly contracts, adding to volatility on the spot market.
Global demand for
iron-ore is expected to reach a record 1-billion tons this year, boosting
Australia's terms of trade, which is expected to rebound 15% this year as
higher iron ore and coal spot prices are built into new export contract
prices.Iron ore and coal account for nearly 40% of Australia's exports by
value, and price increases for these two commodity exports alone could add
$21-billion to the local economy.
If Beijing allows
the yuan to appreciate against the US-dollar, as expected, it would cut the
cost of China's imports of commodities, which totaled $244-billion in 2009.
Last year, China spent 607-billion yuan ($89-billion) on importing crude oil,
343-billion yuan ($50-billion) on iron ore and 206-billion yuan
($30.2-billion) on copper. However, the Chinese ruling elite are fearful,
that any revaluation would backfire, by touching off a global stampede of
speculators into commodities.
This article is
just the Tip of the Iceberg of what's available in the Global Money
Trends newsletter. Subscribe to the Global Money Trends
newsletter, for insightful analysis and future predictions about the (1) top
stock markets around the world, (2) Commodities such as crude oil, copper,
Gold, Silver, and grains, (3) Foreign currencies (4) Libor interest rates and
global bond markets, (5) Central banker "Jawboning" and
Intervention techniques that move markets.
GMT filters
important news and information into (1) bullet-point, easy to understand
reports, (2) featuring "Inter-Market Technical Analysis,"
with lots of charts displaying the dynamic inter-relationships between
foreign currencies, commodities, interest rates, and the stock markets from a
dozen key countries around the world, (3) charts of key economic statistics
of foreign countries that move markets.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
Mr Dorsch worked on the trading floor
of the Chicago Mercantile Exchange for nine years as the chief Financial
Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH
Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for Charles
Schwab's Global Investment Services department, Mr Dorsch handled thousands
of customer trades in 45 stock exchanges around the world, including
Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South
Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange
Traded Funds.
He wrote a weekly newsletter from
2000 thru September 2005 called, "Foreign Currency Trends" for
Charles Schwab's Global Investment department, featuring inter-market
technical analysis, to understand the dynamic inter-relationships between the
foreign exchange, global bond and stock markets, and key industrial
commodities.
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