Friday, May 20, 2011

Corn Could Be Headed to $8/bu. or Higher

Severe flooding along the lower Mississippi River, a major thoroughfare for barges, and persistent planting delays in several top corn-producing states, have sent corn prices soaring. Already the relentless rain and cooler-than-normal temperatures in many of the top corn-producing states have convinced some analysts to reduce corn acreage estimates.

“We’re looking at 2.5 million to 3 million less acres planted around the Corn Belt compared with the Prospective Plantings report estimate,” says Peter Georgantones, Abbott Futures, Minneapolis. USDA’s Prospective Plantings report put corn acreage at 92.2 million, an increase of 4 million acres from 2010. Acres will be lost in Ohio, the Dakotas, Minnesota, Wisconsin, and along the lower Mississippi, he says.

“We’ll probably find acres in Iowa and Nebraska, but the carryout will be reduced to 600 to 650 million bushels from USDA’s estimated 900 million bushels,” Georgantones says. “That will put us in a very tight situation, similar to the past year.”

Georgantones thinks $8/bu. corn is almost a given. “It could be higher,” he says. Weather issues in Europe have delayed wheat planting there and severe drought in the southern Great Plains has created a dire situation for wheat, and wheat prices should provide additional support to corn. “Corn is on very solid footing right now,” Georgantones adds.

Adam Stout, risk management consultant for INTL/FCStone, Kansas City, says, “Most in the trade are anticipating anywhere between a 1.5-million to- 2-million acre decline from the Prospective Plantings report.” He argues that a lot of the anticipated reduction in acres is already priced into the market.
July corn (May 18) is already 90 cents off its lows of May 12,” Stout notes.

“There’s been a shift in the discussion. The trade has gone from talking about planting delays and the impact on yields to planting delays and less acres.”

For new-crop corn to hit $8/bu., Stout says something more substantial than talk would need to move the market, such as hot, dry weather in the Corn Belt this summer or actual reductions in acreage in USDA’s upcoming supply and demand estimates.

As of May 15, corn planting progress in Ohio, a state plagued by surplus rain and soil moisture, was only 7% complete, and North Dakota growers only had 14% of their corn planted. Planting was also well behind the five-average planting pace in Indiana, Kentucky, Michigan, Minnesota, Wisconsin, Pennsylvania, South Dakota, and Tennessee.


Grain Shipping Woes

Flooding along the lower Mississippi and its tributaries in the Corn Belt has added to planting concerns and shipping issues. Barge traffic was halted temporarily on a 15-mile stretch of the lower Mississippi near Natchez, Miss., Tuesday. When it resumed, barges were limited to traveling one at a time and instructed to move as slowly as possible thorough the area.

In addition to the temporary suspension of barge traffic, many freight terminals along the lower Mississippi between Baton Rouge and New Orleans shut down May 17 because of high water. On a typical day, as many as 600 barges travel up and down the Mississippi, with each one capable of carrying the equivalent of 17 rail cars of grain.

“Not a lot of grain is moving on the river now,” says Jim Tarmann, field services director for the Illinois Corn Growers Association. If shipping delays or suspensions carry into June when grain shipments typically increase on the river, concern over delayed shipments will grow.

“Whenever the river shuts down anything moving north or south is delayed,” says Tarmann. “Those delays cost producers money as the cost associated with shipping goes up.” If grain shipments move to rail or truck, demand for those transportation services and their associated costs also rise.

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Future Agricultural Production Limited

The world’s gross agricultural output needs to increase by 3.4% to meet the growing demand primarily driven by emerging markets across the globe. The two primary ways to increase agricultural production are to either increase the amount of acres planted or increase productivity with technology.

Crop yields have been slowly increasing over time, with the largest increases due to the green revolution and the advancement of hybrid seed technology. Even with the past seed technology, crop yield increases are near 1.0% per year in the U.S while a considerable amount of farmland is being lost to development. Crop production must increase via either new technology or by expanding the amount of cropped land by bringing idle arable land into production.

Land to be Brought into Production

The ability to expand arable acres over the next 40 years will be difficult. The best areas for farming have already been identified and are being used for production. The incremental arable acres to be put into production will be on the periphery, with marginal growing conditions and transportation issues.
Presently, the growth of arable farmland has been flat as development of farmland in North America and Europe is offset by expansion in Africa and South America

There are roughly 1.5 billion hectares that are currently being farmed in the world. The FAO estimates that the world has a total of 2.5 billion hectares of “very suitable” or “suitable” for cultivation. 80% of the reserve land is located in Africa and South America.

Investment bank Credit Suisse estimates that only about 300,000 hectares of additional potential acreage, with the majority in Brazil and Indonesia. The table below summarizes the current and potential global arable hectares.

The primary expansion opportunity lies in Brazil, where the government organization Conab estimates there is an additional 106 million hectares available for agricultural development. The majority of this land is located in Brazil’s cerrado or high plains, a vast savannah in the central-western area of the country. The cerrado comprises of roughly a quarter of Brazil’s land.

Historically the soil was thought of as unfarmable due to the high acidity levels and lack of nutrients. New technologies that allowed farmers to improve soil fertility and a new type of soybean developed to grow in tropical climates allowed farmers to start producing crops in the early 1980s.

Today, the cerrado is Brazil’s most important soybean producing region and accounts for nearly all its growth in soybean production since 1980. Roughly half of the country’s corn and 90% of its cotton is also produced in the cerrado.

The primary issue expanding acreage in the cerrado is infrastructure as the majority of additional acres are located in Brazil’s cerrado, which is 1,500 kilometers from the nearest ports. Prices will need to rise substantially before the cerrado will be able add to global production.

Indonesia has substantial ability to expand acreage for palm oil cultivation. The Indonesian government estimates that it only using half of its land available for cultivation. In January, 2011, Indonesia targeted expanding the county’s agricultural land by two million hectares in the medium and long-term, although this plan his received much criticism as this would result in the removal of tropical forests.

Ukraine, Russia and Kazakhstan saw a substantial decline is arable hectares and crop yields following the decline in communism. The FAO estimates that arable hectares declined 11% between 2005 and 1992. Credit Suisse estimates that if arable hectares return to 1992 levels, this would add 1.9% to the total global arable acres.

Farmland set aside under the Conservation Reserve Program (CRP), could add to the amount of U.S. arable acres. At the end of 2010, 31.3 million acres were enrolled in the CRP in nearly 738,000 contracts according to the USDA. As the CRP contracts expire, much of this land may be put back into production, but a majority of this land is marginable at best, which is the primary reason it was put into the program in the first place.

Biotechnology Expansion

Although the amount of farmland is limited in the U.S. and in the world, farmland that is able to produce corn is expanding in the Midwest primarily due to biotech seeds. Several large seed and agrichemical companies such as Monsanto, Dupont (Pioneer), Dow Chemical, Syngenta, Bayer Crop Science, among others, have focused years of research and product development on higher performing varieties and hybrids of important food and feed crops.

While Genetically Modified Organisms (GMOs) are not without controversy and are essentially banned in Europe and Japan, in the U.S. better drought and cold tolerance has expanded the land area that can be used for cold sensitive crops. For instance, the land planted to both corn and soybeans over the past 15 years has expanded North (colder) and West (drier). The acreage allotted to corn and soybean production is expanding northwest to regions where growing degree days are in less numbers.

Biotech seed manufactures are currently developing the next generation of biotech traits that focus on greater productivity, improved nutrient use, disease resistance, plant density, and continued drought and cold tolerance.

All farmland that is planted with GMO corn requires a set percentage of the field to be planted with non-GMO corn, called refuge acres. The theory is to prevent pests and disease from becoming immune to the GMO traits that were developed to deter the pests and disease in the first place. Historically refuge acres must make up 20% of planted corn in the Corn Belt, but Monsanto’s Genuity SmartStax (DeKalb Brand) and VT Double Pro Corn seed allows for only 5% of the acreage to be planted as refuge, according to Monsanto.

On average, GMO corn will have higher yields than refuge corn thus any decrease in refuge acres should increase yields and boost the total production. It is the goal of seed manufacturers to continue to decrease the amount of mandatory refuge acres as well as supply refuge seed alongside GMO seed inside the same bag. Refuge in a bag seed corn may become the new staple for the American farmer very soon.

Nitrogen fertilizer is the largest fertilizer expense for corn farmers. Roughly $8 billion is spent on nitrogen by corn farmers each year in order to obtain maximum yields. Seed manufacturers Monsanto and DuPont are working on developing seed traits that are much more efficient with nitrogen use. The theory of efficient nitrogen use among corn would substantially cut down on the need for nitrogen and also maximize corn yields with less input costs.

Precision Farming

Precision farming is drastically changing the efficiency of the entire farming operation through new technology in machinery. Through information technologies, farmers are able to use variable fertilizer and nutrient applications, variable-rate seed populations, minimal tillage methods, and the time saving auto steer capabilities in new tractors.

Real Time Kinematic (RTK) Global Positioning Systems (GPS) are being used in many farm operations across the world. When paired with information technology, RTK GPS allows farmers to save on fertilizer costs, and most importantly, time. Farmers can take on information such as Cat Ion Exchange (CEC) levels from the soil and apply variable amount of fertilizer to accommodate the soil.

Precision farming has made way for strip tillage methods. Strip tilling is when a farmer using RTK GPS and computers tracks their progress within an inch of accuracy. Each year the rows of corn are shifted to the left or right by a few inches to make use of a new area of soil. This new designated strip will then receive the fertilizer and house the feed furrows for the next crop. Auto steer technology must be used with strip tilling for farmers to stay on the narrow strips each year. RTK GPS auto steers the tractor while tilling, fertilizing, planting, and harvesting.

Farmers are able to now use satellite imagery to map out their farmland while matching up grid soil samples and combine yield data within one-inch accuracy to determine the precise amount of fertilizer needed to replenish the soil for the next crop. The calculations can be done within the on board computer system inside the tractor. Varied amounts of fertilizer can be applied to save on money and time while maximizing yields.

Farmland lighter, sandier, soils can greatly benefit from variable seeding rates. The goal of farmers is to maximize yields from the available nutrient base while keeping input costs down. By cutting seed populations down from 35,000 seeds per acre to 15,000 seeds per acre on lighter soils, these plants will make use of the nutrients more efficiently by having less competition from each other which will create larger yields. Too high of a seed population will hurt yields. When using variable-rate seeding, the end result is less seed cost and higher yields.


The U.N estimates that global agriculture will need to produce more food in the next 50 years than what was produced during the previous 10,000 years, putting more and more pressure on future farmers and the land they use to produce our food.

Traditional farming methods cannot keep up with growing food demand, but increased planted acres, biotech development, and precision farming will ease some of the demand. Rising commodity prices and growing demand for food will continue to drive innovation and new technologies, but farmers have an uphill battle to solve the world’s food supply.

Caution Being Short The July Corn

I have been telling you for weeks to be careful 'bear" spreading or shorting the "old crop vs the "new crop" corn and or beans for that matter, and I think we are starting to see why. To add more confirmation, I urge you to remember we will still have close to 20 million more acres of corn to plant even after next week's USDA crop planting report. Throw in the fact that most producers have already marketed a large majority of their "old crop" corn, and the fact that the USDA may have simply been "hoping" that higher prices would curtail ending stocks to the level they have forecasted, is reason enough to heed serious warning to the recent basis explosion. This has been and continues to be a "demand" driven market...period. If the Eastern rail market continues to feel as if it may not be able to get enough corn to satisfy demand then watch out. As I mentioned in the opening comments, this market is not 2008 all over again. This market is more demand driven. If the Eastern rail market feels as if they will be unable to obtain the corn needed to fill demand they will continue to pressure and bid up the basis. I have producers in several areas of the Midwest that say they have never seen corn being loaded in the mass it has been lately on to rail and heading out of town. Many in the Midwest are starting to become a little more concerned that higher coastal premiums may eventually leave the midwest short corn later in the summer. With thes South somewhat hampered due to heavy rains you have to wonder just how much of the new crop will arrive early, how much will it need to be dried down, how will the quality be in comparison. With so many unknowns, more end users seem content on paying up now rather than risking the consequences of finding "NO" corn down the road, or having to pay huge premiums to get their hands on it. If the USDA was wrong in their estimates we could very well see one of the biggest short squeezes ever in the history of the corn market coming down the pipe in the July contract. I am not going to guarantee anything, but I urge you to be very careful listening to anyone that wants you to get short that July contract at this stage of the game. They may end up being right and the market fizzles out, but I simply see too much risk to try and prove your point at this stage. You may actually start to see "longs" in the marketplace starting to play for keeps. My thoughts are west end-users have become more concerned that they may not be able to secure corn later down the road. With this in mind they are willing to pay up aggressively now for the corn to secure their needs. Throw in the fact that poor pasture conditions in Kanas, Oklahoma and Texas have prompted many farmers to move cattle to the feedlots early, now forcing the feedlots to secure more feed which is also pressuring the bid. If some of the end users start to have trouble securing the bushels they need locally or from their regular sources it could become a very real possibility that you see longs actually try and take delivery of their July futures contract. Simply stated, "shorts" who are waiting for the "longs" to buy back their positions may be faced with the more realistic chance of having to deliver on their short positions. If you don't have the physical bushels to play this game and cover your short position I would simply steer clear. If you actually have the bushels and are looking to play the basis then that is whole different game. Remember, June options expire on this Friday, all I can say is keep your head on a swivel and start looking for the volatility in the markets to heat up even further.

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Cyclicals Bounce

by Bespoke Investment Group

Below we highlight the performance of the S&P 500 from 4/29 through 5/17 and over the last two days. From 4/29 through 5/17, the S&P 500 declined 2.54%, but the cyclical sectors got crushed. Energy was down 9.14%, Materials was down 6.93%, Industrials was down 4.26%, Financials was down 3.24%, and Tech was down 3.06%. At the same time, the Defensive sectors rallied! Utilities rose 2.80% from 4/29 through 5/17, while Health Care rose 2.39% and Consumer Staples rose 2.10%.

Over the last two days, the S&P 500 has risen 1.01%, but Energy, Materials, and Industrials have outperformed. On the other hand, the Utilities sector is down 25 basis points.

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Sector Valuations

by Bespoke Investment Group

It's been awhile since we posted the trailing 12-month P/E ratios for the ten S&P 500 sectors, and some interesting trends have emerged. As shown below, the S&P 500's trailing 12-month P/E currently stands at 15.16. Four sectors have P/Es that are lower than 15.16 -- Energy, Health Care, Utilities, and Financials. After having a negative P/E ratio during the collapse, the Financial sector now has the lowest valuation of all sectors at 13.42. The Telecom sector has the highest P/E at 18.85, and surprisingly, the Consumer Staples sector has a higher P/E ratio than the Technology sector.

Below is a chart showing the change in P/E ratios for the ten S&P 500 sectors since the end of 2009. A lower P/E ratio means that earnings have risen faster than price for the sector over this time frame, while an expanding P/E ratio means price has risen faster than earnings. As shown, P/E ratios have dropped the most for Materials and Financials. Technology and Energy are the other two sectors that have seen pretty significant drops in their P/Es. And the four sectors that have seen the biggest expansion in their P/E ratios since the end of 2009 are all defensive in nature. Telecom has seen its P/E expand by 3.46, followed by Consumer Staples (1.33), Health Care (0.56), and Utilities (0.38).


As crude-oil futures spiked through $100 a barrel Wednesday, they left behind two partners that had previously accompanied them on such rallies: the euro and the Australian dollar.

It’s early days, but some see moves like this one–or non-moves, as was the case for the stagnating Aussie dollar and European currency–as a sign that a once iron-clad correlation between crude and high-yielding growth currencies is breaking down.

In that previous relationship, a perpetually falling dollar was associated with a range of “risk-on” strategies. These included buying gold, silver and other commodities, or investing in currencies that are typically sensitive to global economic growth trends, or, for a while, piling into U.S. stocks. For some, the rationale was that the U.S. Federal Reserve’s aggressive “quantitative easing” bond purchases, or QE2, was depleting the dollar’s value and forcing investors to seek out “hard assets” and growth-sensitive currencies such as the Australian dollar and the euro that could function as a hedge against inflation. But for others, it became a kneejerk binary reaction based on the simple observation that one thing was leading another. That approach was doomed to break down eventually.

Once oil and other commodity prices rose so high that they were met with a wave of selling earlier this month, a sharp unwind of those negative-dollar bets ensued, putting the same relationship into reverse. Now that this move has more or less played out–marked by oil’s rebound Wednesday–many investors feel such simple rules of thumb are no longer applicable. That has left traders in different markets struggling to find clear direction.

In foreign exchange, it means traders are distinguishing between those currencies with a legitimate tie to commodities and those without it.

“Some currencies will always have a strong connection to commodities, like the Australian dollar, but the euro’s relationship to commodities is much more indirect,” said Jens Nordvig, head of G-10 foreign exchange strategy at Nomura Securities in New York, noting that its correlation to oil seems unanchored.

Other factors come into play for the euro, most importantly a renewed focus on the euro zone debt crisis, which has lately weighed on the single currency. However, factors that underpinned its earlier gain against the dollar in tandem with oil are still in place, creating a somewhat confusing set of trading signals. In particular, despite the drop in commodity prices, inflation risks from high food and energy prices remain, which was seen driving the European Central Bank to keep raising rates, a euro-supportive trend.

Notably, the euro’s flat performance Wednesday coincided with the release of minutes from the U.S. Federal Open Market Committee’s late April meeting in which it offered few signs that it is about to tighten monetary policy soon. That should have reinforced a dollar-negative contrast with the ECB’s apparent tightening bias.

Amid these conflicting signals, it’s almost certainly too early to predict a new correlation to replace the old risk-on/commodity one, Nomura’s Nordvig said. The currency market is almost certainly in a “consolidation” phase as it waits for the old trend to possibly pass, he said, following last week’s “correction” and major sell-off in commodities.

For that reason, his bank is advising a trade where investors bet on the euro moving within the tight band of $1.37 to $1.47 for the next two months.

And this consolidation phase could last awhile. The vestiges of the old correlation will need to fade first, and in terms of the historical data it is still very much imbedded into statistical measures of the relationship.

According to market data compiled by Dow Jones Newswires, there is a 85% correlation over a 30-day timeframe between front-month crude contracts and the euro-dollar pair. That’s a remarkably strong relationship for a pair that has not traditionally been so closely aligned.

But when measured over the last five days, that correlation has gone sharply negative, to minus-36%. That could suggest that a lasting break is underway.

Confusing matters, traders are watching other correlations too, some of which have also been extremely volatile. A 30-day correlation of 62% for euro-dollar against the S&P 500 stock index has become minus-1% over the past five days.

With this change, equities investors who had been treating the falling dollar as an auto-pilot signal to buy the stock of companies in energy, materials and broader commodities sectors are now expected to become more choosy. “People are reallocating to under-appreciated assets like financials and staples,” said Jamie Cox, managing partner of Harris Financial Group. “It’s a rotation more than anything.”

Foreign exchange traders, who must try to determine dominant new themes that tend to wax and wane over time, won’t have it so easy. For them, the direction could be hard to ascertain for a while.

But if we are at the beginning of a new cycle, Douglas Horlick, head of FX institutional sales at Bank of America Merrill Lynch in New York advises looking to the U.S. economic outlook for future clues.
“It’s all about the dollar,” said Horlick. “The dollar is going to benefit if we see a correction in the S&P and it likely benefits if we get our fiscal house in order,” in the U.S., he said.

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The Coming IMF Crisis

AFTER STRAUSS-KAHN - Countries pushing for a quick resignation of disgraced IMF chief Strauss-Kahn, and others arguing a slower approach underline by coded messages who stands to gain or lose when a new IMF chief is named by a weighted majority vote at the IMF's 24-person executive board. But whoever wins, we all lose when the IMF-run gold laundering and illicit or 'gray' capital recycling operations get known.

The IMF board has its 400-pound gorilla, the USA represented by Timothy Geithner and seconded, as Alternate US governor of the Fund, by Ben Bernanke with a total of 17.75 percent of votes as of May 18, 2011 according to the IMF website. No other country at present holds more than the approximate 6 percent of votes each held by Japan and Germany. Voting power of member states is the focus of protracted, mostly secret discussions. The latest started in 2008 and reached an interim accord in 2010, but the basic target is who gets their hands on IMF powers like its gold sales, its help to private banks with and through the BIS, its SDR printing rights, and its control of capital flows.

The USA's 17.75 percent of votes is set against the European bloc led by Germany, France, and UK with a total of about 14.5 percent. Adding other European states including Italy and Holland, the weighting tilts in favour of the Europeans, but the solidarity of the European bloc is itself less than certain. Officials in developing nations also show no special sign of unity to back a single candidate, when there is an IMF leadershiprace, despite the claim that non-OECD G20 countries led by the "BRIC group" are pushing to boost the say of emerging economies in the IMF and World Bank. Among the BRIC we can note the careful statement on how to select Strauss-Kahn’s replacement from Chinese Foreign Ministry spokeswoman Jian Yu, stressing this process must be “fair, transparent” and aimed at finding the best person for the job.

Clearly underlining the fragility of the so-called divide among IMF member countries along North-South lines, Brazil's President Dilma Rousseff has no intention of using the current crisis to push an emerging market candidate to lead the fund, according to government officials speaking off-record. Brazil's Finance minister Guido Mantega put things a lot clearer in a 17th May Brazilian TV interview, saying: “I am rooting so that this situation resolves itself in a positive way for Strauss-Kahn", prompting observers to note that as IMF chief, Strauss-Kahn has been an ally of Brazil and other emerging markets seeking greater IMF power to decide key issues at the IMF. Behind the scenes, this also concerns central bank gold reserves, which in Brazil's case are low, while Brazil's ex-colonial mother country of Portugal has huge financing deficits but also large official gold reserves hocked to the IMF as part of the 2011 bailout.

What has happened during the 3-plus years when Strauss-Kahn headed the IMF is a fantastic change of the gold market and world central bank finances, to the extent that IMF gold laundering is the right term to apply, along with IMF cash injections to selected big-name private banks, operated with the BIS. With Strauss-Kahn suddenly gone, the situation is ripe for crisis because so many trial balloons were flying, along with the false flags and market-fooling operations set up by this long-time player in French political infighting, supposedly to save the global finance system.

The vast change in the IMF's role and power in world finance and money system functioning is shown by IMF bailout operations since 2006. These exploded more than 100-fold to around $ 91 billion in 2010. This trend continues as the world finance and banking crisis deepens, and the IMF has to generate its own financial resources to operate ever bigger bailouts. Since the start of 2011 these include the IMF's one-half share in the $ 146 billion 2011 bailout operation for Greece with the European Union and central bank (ECB),and the $ 111 billion bailout for Portugal.

As far back as May 2009 the key future role of the IMF as lender of last resort to failing government finances and weakened private commercial banks was highlighted by IMF members approving a sudden jump in future resources to $ 500 billion, following the proposal for that jump made only one month before, at the April 2009 G20 meeting. Of this, the Obama administration would pledge $ 100 billion. Separately, the IMF would issue - that is print - additional SDRs or special drawing rights to a total of $ 250 billion in exchange value, that is SDRs exchanged for US dollars as and when needed.

Overall these actions would increase lending power of the IMF by $ 750 billion. We can note that in 2006, total IMF whole-year operations were less than $ 1 billion in exchange equivalent.

To be sure these amounts may be massive, but they run behind the debt-and-deficit crisis of governments, and the closely-related crisis of the supposedly "still in recovery" and restructuring private bank system. This has its own lender of last resort - the Bank for International Settlements or BIS in Bale, Switzerland.

The debt and bank failure crisis is far more massive than what the IMF can get its hand on in the way of gold reserves, or dares to print as SDRs. US Federal debt has grown by about $ 3 600 billion from December 2008 to April 2011, to more than $ 14 500 billion or close to 98 percent of US economic output. European government debt growth since Dec 2008 is probably close to, or larger than this. Asian OECD countries led by Japan in debt terms have also suffered runaway debt growth. Global debt growth and therefore search for liquidities since end-2008 is likely at minimum $ 25 000 billion, almost exactly one-half of world annual GDP today.

The link between state level financial bailouts run by the IMF featuring loans and support to the sale of state debt, and support to the world's private banking system by the BIS, is covered by accords and protocols dating back to the IMF's founding in 1944. The BIS was founded earlier, at the start of the 1930's Great Depression.

The processes described in IMF and BIS publications are not related to most real world operating arrangements run by these two semi-secret entities, and their real arrangements are unpublished and held secret, in particular the sale and swapping of central bank gold and the reporting of illicit or illegal capital flows. Concerning gold, the claimed reasons for this secrecy include the market effect of announcing gold sales and impacts on the currency exchange rates of bailed-out countries.

In the 3-plus years since Strauss-Kahn took power at the IMF, according to IMF reports and statistics the firewalls between central bank gold sales and swaps, and illicit, grey or "hot" capital flows and flight have stayed firm and leakproof, despite global financial and monetary upheaval. As one example, IMF reports claim that as of year 2010, global capital flight to and from low income and small island countries (these including non-OECD tax havens) is around $ 25 billion. The probable amount is more like $ 200 billion. Other estimates run higher.

The same deliberate opacity, or less politely simple lying applies to IMF and BIS gold sales and swaps. For the USA, the powerful GATA movement underlines that the US no longer even calls the supposed large hoard of gold at Fort Knox “gold reserves”, but instead calls them reserves and swaps. In other words, like the IMF, the US central bank carefully avoids saying how much of the hoard is “loaned” or "pledged" through the BIS and either directly or indirectly handed over to the so-called bullion-banks, the select group of private banks authorized to re-sell government gold, with the IMF and BIS.

In the same way as other central banks, the US government will not say how it could possibly replace sold or swapped gold, and how much of the gold stored at Fort Knox officially belongs to other governments. If it tried to buy gold - like other central banks are trying - the purchase of large tonnages of gold could only and would only drive up the price of gold. Today, the actual amount of US gold still held at Fort Knox and able to be sold, that is "unencumbered" and actually belonging to the U.S, is a closely-guarded state secret.
The IMF website as of May 18, 2011 continues to say the IMF will maintain gold sales, and suggests rather than states it can and will if necessary sell about 400 tons per year, as in 2009-2010 when IMF-origin gold sales were about 403 tons.

The website doe not give any firm data on the balance of swap gold versus freely saleable gold making up the claimed gold reserves of the IMF. It goes on to say that reserves available to the fund, including swaps with central banks - as of April 1978 - were exactly 3226 tons. As of March 2011, it claims this amount is 2814 tons when reporting to the World Gold Council, but has also published the figure of 2981 tons for the same date. Whatever the exact number, and knowing there are 32 150 Troy ounces to a metric ton, we find this is a tiny amount relative to gigantic financing needs.

We can compare this 2011 claim for IMF gold reserves with the 1978 base, and the global economy's growth since 1978, OECD debt growth since 2008, and the programmed future growth of IMF bailout operations in the near-term. In real terms, IMF gold reserves have plummeted. Even worse and in reality, they are likely even smaller, needing political fixers like Strauss-Kahn to weave plausible- looking stopgap solutions.

Many observers suggest actual physical, unencumbered and available-to-sell gold reserves of the IMF as of April 2011 are well below 200 tons. Around 2600 tons of claimed reserves are therefore in the form of gold pledges and swaps with central banks, for example the US Fed, the Portugueseeeee and Brazilian central banks and others, also involving the BIS, and its friends the authorized bullion banks including JPMorgan Chase, Barclays, Scotia Mocatta and the Sino-English HSBC. This last bullion bank, without ever declaring it, operates a major gold buying strategy for Chinese authorities only at the second-tier bullion bank level, that is semi private purchase rather than directly with the IMF through offsetting IMF SDRs against physical gold.

All these rightly named players are effective sellers of physical gold - when they have it. When they dont have it, and in last resort they have to buy it. All face rising competition from the gold ETFs (exchange tradable gold funds) and private metal buyers. Upstream and only in the case of the IMF, it has the master privilege of being able to print SDRs, and swap these for gold from any central bank willing and able to do so. The second condition is increasingly determinant, but the first one is also getting sticky.

Evidence shows that being able to sell gold is getting harder with every passing day. This is marked by the massive rise in gold prices since year 2000, and further shown by the leaden predictability of central banks buying gold when its price is rising, like today, and selling gold when its price is falling. The second case is exemplified by the UK's Bank of England dumping up to one-half of its physical gold reserves early this century (starting in May 1999) at the ultimate bottom market price: a veritable triumph for the hands-on finance minister of the period, 'Goldfinger' Gordon Brown.

With Strauss-Kahn the IMF had a person with his fingers on an ultra-fast fly zipper, charged with creative gaming claimed to avert terminal and global economic nemesis. The founding of the BIS in 1930 and the 1944 founding of the IMF were set in times of global economic crisis and its sequel: world war 2.
The Keynesian doctrine is that fiat paper money must be defended by "de-monetizing" gold, that is central banks acting in concert to depress gold prices, by dumping gold without warning on the physical market. To do this, central banks need to constitute large physical gold reserves - but should they buy gold when the price is rising ? Keynes himself never considered that question !

When gold gets too expensive and-or where the physical gold does not exist it must be invented, through the interplay of IMF SDRs and gold swap arrangements - and creative lying. Showing the fundamental schizophrenia of this economic doctrine, and its succeeding neoliberal mutant version, inflation is seen as the greatest evil next to declining economic growth, itself enshrined as the only way to create employment and provide social security. In this Neo-Keynesian doctrine, gold prices must be permanently held down and fiat paper money must be printed in sufficient amounts to drive economic growth, but not to generate inflation. When inflation inevitably rises, it is magicked out of the statistics by creative lying. The solid backstop for this is inventing CPI-price inflation data that coyly ignores food, energy and rental housing.

The role of Keynesian-type economics and spiralling government debt are in fact and reality mother-and-son related, as is well known, but since 2008 this fine tuning has gone into meltdown. For the IMF-BIS system or process for bailing out both governments and private banks, the writing in on the wall.

Tracing IMF gold sales, the gold price shows that since 2008 its surprise sales strategy has little or no lingering impact on gold prices, and the role of major second tier players like Goldman Sachs Co, is only to cause short downturns and downward ripples in the gold price expressed in US dollars, euros or yen, or alternatively short upturns in the value of the US dollar. Exactly like other out of control commodities like oil, the world gold market now includes a vast overlay of futures trading players, resulting in a physical-to-paper gold ratio for open market gold trading of at least 1 : 200.

The IMF can print SDRs, utilise these to obtain gold pledges from central banks that may or may not have the physical god they claim to have, and with its shadowy ally and partner the BIS can prop the overstretched private banking system of the OECD countries, by laundering this gold. To this capital injection we can almost certainly add IMF and BIS recycling and cleaning of black and illicit capital flows,, perhaps as much as $ 180 billion per year.

Few persons know exactly how much of the claimed physical gold reserves still exist in the world's central banks, and how, and how much illicit capital flows are channelled to the world's private high street banks. One of them was however Dominique Strauss-Kahn. With the sudden disappearance of this sex animal the risk for the IMF and BIS is a break in the logjam of hidden and grey data: the killer facts could heavily weaken the scam, or even make it disappear - at a critical moment.

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Corporate Bond Spreads Match 2007 Market Highs

Corporate bond spreads or the difference between investment grade (Aaa rated) and high yield (Bbb rated) are currently 80 basis points. They last reached these low levels in October 2007 at 79 basis points.

When this spread comes down to such low levels it signals an overbought corporate bond market as high yield debt no longer lives up to its name. Similar to the "dash for trash" in equity tops.

Bbb rated corporate debt yields peaked in October 2008 at 9.49% and now yield 5.83% (a 38.6% drop in yield). The following chart shows the inverse relationship between Aaa / Bbb spreads and the SPX.

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Living Through A Currency Devaluation

Lonerangersilver writes: In 1976 I was managing an American subsidiary of a successful large US Company in Mexico. It had been a financial turnaround for our team. Cash flow had accumulated in our bank in Mexico and corporate didn’t want the money repatriated to the US. Although we had already paid a 35% income tax to the Mexican government, we would have to pay an additional 30% exit tax to repatriate the money. In addition, we would have to pay high fees for the peso/dollar exchange, in order to make the transfer. The company wanted to expand our successful business and so we decided to keep the money in Mexican pesos to be used for further expansion.

One morning, as my wife and I were on a trip driving on the highway, we heard a national message from the President of Mexico, Luis Echevarria, one of the most corrupt presidents in Mexican history. “It is a lie that we are going to devaluate the peso,” he said. I stopped at the nearest motel to make a collect call to the US headquarters and I asked my boss, the head of the International Division, to allow me to immediately open a new US dollar account in Mexico. I wanted to convert the pesos into dollars for deposit. My boss, laughing, asked me why I wanted to do that and I responded that the peso was going to devalue. He asked me how I knew this and I told him that the President of Mexico had gone on the radio and announced that rumors of a devaluation of the peso were false, which meant they were true. He continued to laugh but allowed me to do it.

I then called my CFO and directed him to go to the bank and get everything ready for me to sign leaving only the necessary funds to continue to operate. We immediately returned to Mexico City in time before the bank closed. Everything was ready for my signature, but the bank manager was rather bewildered and probably thought I might be overreacting.

One week later the peso was devalued from 12.50 pesos to $1 USD, where it had been for decades, to 26.00 pesos to $1 USD. A few days later it improved to 24.50 pesos to $1 USD. The reason for the devaluation of the peso was simply that it had been pegged to the USD for too long and they rose and fell in unison. Because of better economic conditions in the US, the dollar continued to go up in value and the peso increased in value artificially. Mexican goods were too expensive to trade with other countries and hence the devaluation, which allowed exports to increase. For the first time in decades the peso was allowed to float and since then it has been allowed to freely rise and fall against the dollar. The decision to devaluate the peso was made by the president, which made him unpopular, as well as his economic advisors, which included the Secretary of the Treasury and Chief of the Central Bank of Mexico.

Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight. The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before. Luckily for me, I had also exchanged my money and my salary had been set in US Dollars when I signed my contract with the company to work in Mexico. For me, it was like getting a 100% raise, since for a long while; my house rent remained the same as well as utilities, clothing etc. I remember that on my boss’s next trip, he bought himself a couple of nice suits at a nice discount.

Businesses were unable to immediately raise their prices. They had to do it slowly, and through many sacrifices. The positive side was that the company had a loan in Mexican pesos for an expensive property and was able pay it off with the new dollars at, practically a 50% discount. Before the devaluation, we had been leasing other properties, some of which had expired and had been on a month to month basis. Thankfully, immediately before the devaluation, I renegotiated and signed some of the leases with modest increases for a term of 5 years. After the devaluation occurred, the landlords wanted to renegotiate these leases, but because of the terms, we enjoyed low rents for that period. Later, as we leased new properties, the owners introduced clauses tying the annual increases to the value of the US dollar, which appreciated every year until the recent fall of the dollar in the exchange rate.

Our attorney in his 50s, of German descent, who spoke English and Spanish with a German accent didn’t take my advice on the oncoming devaluation. After the devaluation, he was so desperate that he came into my office one day, accompanied by another attorney that worked for him, carrying an old-fashioned suitcase, which he placed on my conference table. He opened the suitcase, which was completely filled with high denomination peso bills. I had never seen that much cash in my life and I was completely surprised. He pleaded with me to accept the money right then and allow him to purchase shares in our company. I told him that this was not the proper procedure, but he asked me to consult with corporate headquarters and insisted I put the money in our safe. As I expected, corporate said no and much to his distress, I returned the money to him.

People were so desperate to exchange their pesos into dollars that the supply of dollars dried up and some, who had them, sold them at a premium in the black market. The situation was so dire that a presidential order was passed banning the banks from allowing customers to open US dollar bank accounts. A few years later, when the peso stabilized, this practice was reversed.

Of course, on my next trip to corporate headquarters, I was received like a conquering Roman hero. My boss kept asking me to tell other executives why I decided that the peso was going to be devalued. My answer was simply that I didn’t trust politicians and had decided that the president was telling a lie in his address to the nation. This, of course, was very funny to them after seeing the results.
Today, Mexico’s financial situation is very much improved and the peso has been appreciating against the USD. Mexico holds more than $120 billion in USD reserves.

As I am writing this, the USD index is at 75.71. This means the USD is already devalued 24.29% and most people don’t know what this means. At the latest G7 and G20 meetings, countries have been arguing that the USD must be dropped as the international currency because its decline in value is making the price of all commodities too expensive.

Commodities are priced in dollars worldwide and this doesn’t fare well for other countries where there is a growing unrest amongst the population. The world governments blame this on the US government for passing laws allowing the Federal Reserve to print trillions of dollars out of thin air. This money has been used to bail out the banks and to purchase US bonds that countries like China, Japan, Russia, etc. are refusing to continue to buy. The money received by the federal government is spent in the expanded military wars and countless pork barrel programs. The government is unable to control the budget deficits by cutting expenditures because of poor presidential leadership and irresponsible and politicized congress.

The US has agreed that something needs to be done. One of the most favored proposals at these meetings is to use a basket of currencies which is to include the USD and backed partly with gold to serve as a new world currency. This proposal would mean a devaluation of the USD of 50% for the US to be able to participate in the program. It is not clear if it is 50% off the current value or if it will be 100% of face value.

As long as we don’t repay our national debt, cut government spending, increase interest rates or stop the Federal Reserve from printing more dollars out of thin air, the plan to change the dollar from being the international currency will become a reality. Some countries are already using their currencies to trade with each other, especially in oil purchases, to bypassing the present purchase of US dollars to make the payments. Several countries are buying gold and silver to replace some of the dollar reserves and hedge the value of their dollar reserves. Mexico recently purchased nearly 100 tons of gold to replace some of their dollar reserves. We still don’t know how much American gold is in Fort Knox as no audits have been completed since the 1950's. The rumors are that there are no gold reserves remaining. We know that the US mint is purchasing gold blanks from Australia to make American gold coins. Either way, this is bad news for the US dollar and also for any of us living in the US.

My experience with the peso devaluation makes it necessary for me to move my investments away from paper into physical gold and silver. I am doing this more as a defense mechanism to ensure my net worth is not devalued. Economic think tanks are already undergoing feasibility studies to predict the ramifications of the devaluation both domestically and internationally.

It is going to be a very tough time for the US and I anticipate the Mexican devaluation will pale in comparison to our dollar devaluation, not only to this country, but worldwide. What is the answer for Americans? Many feel that owning physical silver and gold in coins and bullion will serve as an increasing source of value with which to barter. In Mexico, the US Dollar was the logical answer since it was stable and had appreciating value at the time. 

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by Cullen Roche

Here’s more evidence that oil is the most important input in inflation expectations. As you can see in that chart below, inflation expectations and brent crude prices have correlated near 1:1 over the last year. As I’ve previously shown, this rise in motor fuel accounts for the majority of the spread between core CPI and the headline. Societe Generale says the recent hiccup in oil prices is likely temporary and not the start of a new bear market:
Conditions for a correction had been emerging over the previous weeks.
Several key factors drove the correction, which affected most commodities, not just oil:
- Macroeconomic concerns about the US, Europe, and China have increased.
- Worries about a “hard landing” in China.
- Markets increasingly focused on the end of US QE2 program: end of excess liquidity injection, leading to declining inflation expectations and stronger dollar, both bearish for crude oil prices.
- Markets increasingly concerned about oil “demand destruction” as a result of high prices: it will be moderate and limited to the US but weak US demand data has affected market psychology.
- Oil markets have focused less on the MENA geopolitical situation.
That would all mean an increase in inflation expectations, however, the contrarian call (that ECRI is making) says a global slow-down is on the horizon. And with it we’re likely to see lower oil prices and inflation expectations. But make no mistake – this cost push inflation due to motor fuel is merely reallocating spending from one segment of the economy to another. On the whole, it is likely to be accompanied by lower growth and not a surge in overall inflation.

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