Diverging Crude Oil Prices WTI $12 Cheaper than Brent, Anybody Got A Big Rig?

By: Dian_L_Chu

On Wednesday, Feb. 16 Israel said Iran is sending two warships into the Suez Canal on way to Syria, and that the action is considered a “provocation.” Due to the long history of bad blood between Israel and Iran, this very possible scenario was enough to even send the bear-infested NYMEX crude oil futures volume surging midday.

West Texas Intermediate (WTI) on Nymex rose to just below $85, while Brent crude on the ICE futures exchange spiked $2.17 higher to $103.81 a barrel--a 29-month high--widening the WTI-Brent spread to a new record near $19.

High Middle East Tension

Then on Friday, Feb. 18, AFP reported that permission has been granted for Iranian warships to transit the Suez Canal into the Mediterranean. Canal officials say it would be the first time Iranian warships have made the passage since the 1979 Islamic revolution, while Israel has labeled the Iranian action as "hostile' and said Israel was closely monitoring the situation.

As the worst Israel-Iran conflict scenario failed to materialize, at the close Friday Feb. 18, Brent crude oil for April settled at $102.79 while WTI for April delivery rose to $89.71, narrowing the spread to $13.11.

Crude Glut at Cushing, OK


Since WTI is lighter and sweeter crude which requires less processing, it has historically enjoyed a $1 – $2 a barrel price premium to Brent crude oil. According to Bloomberg, the WTI-Brent gap averaged only 76 cents last year.

However, WTI’s premium disappeared about a year ago and in recent days it has been trading at more than a $10/bbl discount to Brent mainly due to rising inventory levels at Cushing OK, the delivery and price settling point of Nymex crude futures (See Chart). 

Source: Bianco Research via The Absurd Report

WTI Undervalued by $12

Energy research and consultancy firm John S. Herold noted that from a historical point of view, the Brent premium was often short-lived. Since the U.S. economy is growing more rapidly than those of most European countries, Herold believes WTI may be undervalued by $12 per barrel as compared to Brent.

WTI Premium May Never Return

Meanwhile, Deutsche Bank thinks the historical WTI premium to Brent may never return and that Brent premium seems to have shifted to a level of $2 to $3 a barrel from the typical historical discount of $1 to $2 a barrel.

For now, between the two oil markers, Brent seems to have the pricing momentum since it is undersupplied, and more likely to be jolted by the geopolitical unrest in MENA (Middle East and North Africa) due to Europe’s close proximity to the region, and the end markets Brent serves.

Cushing Logistic Fix by 2014

The problem with Cushing is that The U.S. oil infrastructure is built around the country being an oil importer with pipelines mostly flowing from the coast to inland.

Many analysts don’t see infrastructure could improve at Cushing any time soon to move crude to the coast and world markets, while oil production from Canada and U.S. oil shales like the Bakken play in N. Dakota are set to rise adding to the glut.

Credit Suisse, for example, sees it will most likely be 2013 or 2014 before the pipeline infrastructure could improve the situation at Cushing.

Beneficiaries - Gulf Coast Crudes

When Brent is higher than WTI, it also drives up the price of low-sulfur U.S. grades that compete with international oils priced against Brent. The recent spike in Brent has sent the premiums for the Gulf Coast Grades--Light Louisiana Sweet (LLS) and Heavy Louisiana Sweet (HLS) crudes--to the highest levels (above $20) against WTI since at least 1991.

Among producers, the largest beneficiaries of this Brent premium include Canada's Nexen Inc. (NXY) and Talisman Energy Inc. (TLM), and U.S.-based Apache Corp. (APA).

Product Prices Trend With Brent
Meanwhile, with the growing disassociation of the WTI to global markets, the domestic petroleum product prices, particularly distillates, have pretty much ignored WTI and are trending more with Brent. The chart below illustrates this trend where United States Brent Oil Fund (BNO), an ETF, was used as a proximate for ICE Brent. 

Beneficiaries - Midwest Refiners

Inland crude in the U.S. is getting cheaper, while petroleum product prices are trending with the higher-priced Brent. Theoretically, this means higher crack spread for refiners, but not all U.S. refineries can get crude at the low WTI benchmark price. WSJ quoted Valero (VLO) that logistical restraints at Cushing have limited Valero to only about 300,000 barrels of WTI a day. 

So, only a few Midwest refiners (PADD 2, where Cushing is) with access to Cushing are able to take advantage of this WTI pricing anomaly. Delek US Holdings Inc. (DK), Frontier Oil (FTO), Holly Corp. (HOC), Western Refining (WNR) and Valero (VLO) are among the lucky ones that could see higher earnings in coming quarters.

Anybody Got A Big Rig?
Bloomberg quoted Raymond James that producers can ship crude via rail to the Gulf Coast for about $4 to $6 a barrel and by truck for between $8 and $10 a barrel. Many market players reportedly are using rail and truck shipments to move the glut out of the Cushing to the Gulf Coast where the same barrel of oil would trade at much higher in recent days (see chart below).

However, the economics of these alternative transportation modes--trucks in particular--would only work if the spreads stay elevated at the current levels. According to Bloomberg, the WTI-Brent spread between the June contracts already dropped to $9.41 from $11.35 on Feb. 16. And capacity limit of these alternative transports will be another factor.

ConocoPhillips already said it isn’t interested in reversing the Seaway pipeline that brings crude from the U.S. Gulf Coast to Cushing, Ok. So, with Cushing storage near 39 million barrels, barging, rail, trucking, and possibly some pipelines reverse flows may help ease the bottleneck at Cushing and narrow the WTI-Brent spread, but they are unlikely to significantly improve the WTI predicament in the next 18 months or so.

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THE RARE 100% IN 100 WEEKS RALLY

by Cullen Roche

The current market rally of 100% in 102 weeks is highly unusual.  How unusual?  We’ve only experienced this kind of market performance 3 times in the last 80 years.  This chart from The Chartstore shows just how unusual a rally of this magnitude is:

But who cares what the market has done.  We want to know where the market is going.  Although the sample size is poor it’s useful to gain some perspective from the past.

The 1932-34 rally took the market higher by 140% in one year.  Although the market ultimately powered higher in 1935 the 34 market was largely sideways to down.

After the breather in 1934 the market continued its climb.  Between 1934 and 1937 the market more than doubled again.  Ultimately, the gains were given back as 1937 proved to be a disastrous year for the market.  Equities traded sideways for the next 6 years.

The 1952-1956 rally was similar to the 34 rally.  The market powered higher in a near straight line over the course of a 95% rally.  The market then hit a wall for two years before correcting 15% from its peak and then continuing its bull run.  The 50′s ultimately proved to be a stellar year for equities.

The question the reader must then decipher is whether we are in the 50′s or the 30′s?  While one was a disaster the other proved to be one of the great decades in investing history….

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Gold Uptrend Lacks Enthusiasm

By: Merv_Burak

Well, it was up, up all week long for gold.  However, there seemed not to be any enthusiasm behind the move and trends do not last long without enthusiasm.  Maybe it will enter this coming week.

GOLD : LONG TERM

Over the past few weeks I had mentioned that my long term P&F chart gave a bear signal BUT that there was still one more support level on the chart that needed to be breached for that bear signal to have meaning.  Well, as we have seen, that support has held and we have been in a rally for the past three weeks.  The big question now is, is this only a rally or are we in for a new bull move?  I’m not very good at predicting the future.  It’s enough effort just to understand where we are right now least of all where we will be next week or month.  So, where are we right now?

From a long term perspective, although it does appear as if gold has been in a several month topping and turning mode it remains above its positive sloping moving average line.  The long term momentum indicator has been moving lower and lower since October but is in one of its upward turns.  It is still in its positive zone and now above its long term trigger line.  The trigger line has also turned upwards which is a very positive sign.  The volume indicator has been moving sideways since December and is very close to breaching into new high ground.  During this sideways period its trigger line has moved right up to the indicator and has flattened out but still is in a very, very slight up slope.  Everything is still looking okay for the long term.  The rating remains BULLISH.

INTERMEDIATE TERM

 The intermediate term perspective is also okay.  Gold has crossed above its intermediate term moving average line during the week and the line itself has turned to the up side.  The intermediate term momentum indicator was in its negative zone for a few days but has once again crossed into its positive zone.  It is also above its positive sloping trigger line.  The volume indicator is slightly positive and above is positive trigger line.  All in all the intermediate term rating remains BULLISH.  This rating is confirmed by the short term moving average line crossing above the intermediate term line.

There are many, many technical indicators one can look at to assess where we are but these simple indicators tell us the trend, strength of the trend and interest by speculators in the trend.  What more do we need?  We wouldn’t be right all the time but I hope we are right most of the time.  More importantly, we should not be wrong for any length of time to cause major financial losses.  We do not blindly hold as the trend goes against us.  That is the sign of an amateur.

SHORT TERM

The short term has been great for the past few weeks but could be coming to an end.  We are inside an upward trending wedge pattern.  These patterns unfortunately are most likely to be broken on the down side.  The strongest move would come when the price is two thirds along its way towards its apex point.  As it continues closer and closer to the apex the strength of any break becomes less and less.  So, we are not yet at the strongest location should the price break below the lower support line.  That would still take a couple more weeks of steady up trend within the confines of the wedge.  From here, that does not look probable, so, we should get a break soon but not one that is of any great strength (or longevity).

For now the short term position of gold remains basically positive.  Gold has been above its short term moving average line for over two weeks and remains above.  Its moving average line remains sloping in an upward direction.  As for its short term momentum indicator, well that is comfortably in its positive zone and above its positive trigger line.  Only the daily volume action leaves a lot to be desired.  During its entire few weeks of price rally the daily volume has remained relatively low.  It had remained below its 15 day average value throughout the advance.  This does not bode well for longevity of the rally.  However, despite the poor volume showing the short term rating remains BULLISH with the very short term moving average line confirming by remaining above the short term line.

With events as volatile as they are in global politics I wouldn’t even try to guess the immediate direction for gold.  The direction of least resistance, however, seems to be getting closer and closer to the down side.  The Stochastic Oscillator remains in its overbought zone and can’t stay there for much longer.  The next turn to the down side by the SO should also see gold turn lower.

SILVER

Silver continues to put in a great performance versus gold.  This past week gold advanced by 2.1% while silver advanced 7.7%, almost 4 times the weekly performance.  The chart shows that silver has entered new bull market highs and is heading towards its all time high in the low $40s way back in January of 1980.  Depending upon the chart one uses the all time high in silver was about $41.50.

A few weeks back silver gave a P&F bear signal, however, I had mentioned a support just below the break that needed to be breached before really going bearish.  That support held and silver quickly moved higher.  We need to go back to the P&F chart of 17 Dec 2010 where I still had projections to $32.50 and $34.00 that were not met at that time.  Well, the recent sharp rally has met the $32.50 projection.  Now, on to $34.00.  However, with the latest move a new projection can be calculated, to the $42.00 level, just $0.50 above silver’s all time high.  One thing all these projections seem to say is that there is still more upside potential for silver.

Without going into details, one can guess that the ratings for silver in all three time periods is BULLISH. 

For a cautionary note it is interesting that silver price is now butting up against the previous support up trend line, which can now be considered as a resistance line.  Couple this along with weakness in both the momentum and volume indicators and we have the prospect of a reaction very soon.  I would suspect that any reaction off that resistance line would not stop at the very narrow up trending channel lower support but break below it also.  Just something to be aware of.

PRECIOUS METAL STOCKS

All precious metal stock indices had a good week, some better than others.  The silver stocks were, of course, the better weekly performers as is noted by the Indices that have silver stocks as their major components.  Although the Indices had a good week ONLY the Merv’s Penny Arcade Index made it into new all time high territory.  Go pennies GO.  This is one of my best indicators that the major long term bull market in precious metal stocks is not yet over and still has more to go.  During the last bull market top when the major Indices (and gold and silver stocks) topped out in early 2008 this Penny Arcade Index topped out a year before the majors.  I don’t expect the same year’s notice but I do expect that the pennies will top out before the universe of precious metal stocks top out and therefore we should have this advance warning.

The Penny Arcade IS weakening as far as the momentum (strength) of the recent move is concerned.  Although the Index has made new highs the momentum indicator is still below its previous recent high.  This is not yet a serious concern as the indicator is very strong, above the 80% level so a slight weakness is not a big deal, but it is so far a weakness in the latest move.  Something to watch.

Merv’s Precious Metals Indices Table

It should be noted that the Index values for the FTSE Indices are for the period Thursday to Thursday.  For some reason my data vendor does not provide the most recent data for these Indices.  I would welcome suggestions for obtaining same day Indices values for the FTSE gold Indices.

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Silver Showing Amazing Strength

By: Clive_Maund

Silver has shown amazing strength in recent weeks, surprising even its staunchest advocates by making light work of recovering the ground lost in the January reaction, and even went as far as to break out to new highs late last week, hugely outperforming gold in the process, which not unnaturally has silver bugs *****-a-hoop. We were looking for a big rally in the last update posted at the end of January and we have not been disappointed.

The breakout to new highs last week was undoubtedly a very bullish development and it makes an advance towards $50 a reasonable objective for later this year. However there are signs, principally in the behaviour of gold and Precious Metals stocks, including the volume patterns in individual silver stocks, that silver is first going to react back before it continues much higher. 

On its 8-month chart we can see the bullish engulfing candlestick pattern that was a factor enabling us to predict the rally, and as we had also expected the large number of traders who had bids in near the $25 support level were left standing at the station as the train pulled out without them. 

Despite the longer-term bullish implications of the breakout to new highs, silver is thought to be very close to topping out now on a short to medium-term basis, which has more to do with what we can see developing on the gold charts and the charts of PM stock indices and individual silver stocks, than it has to do with the silver chart, although we can see that silver on Friday hit a trendline target which could mark the top of a broadening pattern that silver could now react back across. 

If silver is now destined to react back with gold and PM stocks, how far might it drop? A reasonable objective for a reaction would be the January low from which this advance started, although bearing in mind the obvious strength displayed in recent weeks, it may not drop back further than the support level in the $28 area. 

The latest silver COT chart shows that the Large Specs have ramped up their long positions again over the past couple of weeks, and remember that this chart is only up to date as far as last Tuesday's close, so we can expect their positions to be considerably higher than shown here after silver's sharp rise on Thursday and again on Friday, which means that downside risk has reappeared. The COT chart was a factor that assisted us in determining that silver was set to rally in the last update, as at that time the Commercial short and Large Spec long positions were at a very low level.

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Gold Rally About to Reverse to the Downside Again

By Clive Maund

Gold and silver have reversed to the upside and advanced substantially exactly as predicted in the last updates posted on 30th January, and now the majority 
 of commentators are raving bullish again, but the internal technical condition of the sector following this rally suggests that it is about to reverse to the downside again, although longer-term the outlook remains strongly bullis.

On the 8-month chart for gold we can an array of factors pointing to a probable reversal to the downside here. In the first place it has rallied up to the strong resistance at the boundary of the Distribution Dome shown that has capped rallies for many months now. Secondly, the 50-day moving average is still in unfavorable alignment, indicating that it is too early for a sustainable uptrend to get started - this indicator looks like it first wants to drop down closer to the 200-day moving average before a major uptrend can begin, which would be normal. Thirdly, the uptrend from the end of last month appears to converging, meaning that it is a bearish Rising Wedge, which is another factor portending a reversal, particularly as upside volume in gold proxies and PM stocks has been noticably poor on this rally, which is why we ditched some of them last week for a good profit, although if we had a time machine we would zip back and sell them on Friday instead. It will take a clear break above the Dome pattern to negate this short-term bearish picture.

On its 2-year chart we can see that gold rallied from its long-term uptrend as we had expected. However, from this chart it is clear that if gold reacts back to the first support level shown and its 200-day moving average as expected, it will result in a marginal breach of the uptrend, which is not regarded as a problem. In addition we should note that a deeper reaction back to the strong support in the $1250 area is possible that would serve to more adequately correct the entire advance from 2009. Again, this would not mean an end to the bullmarket - we would simply have to draw a less steep uptrend line from the April 2009 low beneath the correction bottom later that would define a more moderate - and more sustainable - uptrend.

As you can see on this chart predicting the latest advance did not involve any rocket science or complex algorithms. Look at all the circles on the RSI and MACD indicators and what happened after these indicator lows were hit. Given that gold was on its long-term trendline and just above its rising 200-day moving average at the time of its latest circles it should have been obvious to anyone with an ounce of common sense that a rally was probable - but unfortunately common sense is not to be found in abundance at market bottoms.

We have alluded above to the shaky technical condition of the sector after this rally, notwithstanding silver's sparkling performance, and now we will proceed to examine it on a couple of stock index charts. On an 8-month chart for the large stock XAU index we can see that this rally looks really feeble, and while we have made more than a few shillings out of it, this chart suggests that we should be prepared for an immediate or imminent reversal to the downside. Moving average alignment is decidedly unfavorable with the 50-day dropping away towards the 200-day but still quite a long way above it, suggesting that the corrective phase is still in force and that the recent rally has been the middle B wave of a 3 wave A-B-C correction which has unwound the short to medium-term oversold condition and thus renewed downside potential, and with a bearish "shooting star " candlestick appearing yesterday that borders on being a more bearish "gravestone doji", as the index tried to rise up above the 50-day moving average, the time of reversal to the downside may well be upon us. The gravestone doji differs from the shooting star in that the open, close and low for the day are at the same point. We cannot see the marked bearish volume pattern of the recent past on this XAU index chart, but we can on the Market Vectors Gold Miners index, which we will now take a look at.

The 8-month chart for the Market Vectors Gold Miners index presents a surprisingly ugly picture, given the fine performance put in by many stocks in the recent past and the sparkling performance put in by silver. In the first place we can see that the heavy reaction in January brought this index back down to the vicinity of its October lows, opening up the possibility that this month's rally from deeply oversold may end up forming the Right Shoulder of a Head-and-Shoulders top, a possibility that could easily become a reality if the broad stockmarket's "forever" rally comes to an abrupt end. The appearance of the bearish shooting star candlestick by the close of Friday's session after the index hopped some way above its falling 50-day moving average was therefore an ominous development. Even more worrying (worrying for committed bulls, that is) is the decidedly bearish volume pattern of recent weeks. After heavy volume on January's decline, which is itself bearish, volume has been conspicuous by its absence on the rally - and it should be other way around. What this implies is that the rally of recent weeks is a countertrend rally, the B wave of an A-B-C correction. Pulling all of this together it looks like the sector is about to abruptly reverse to the downside, and given that the MACD indicator's oversold reading has now more than fully neutralized, it is clear that there is plenty of scope for a significant drop from here. Note that a parallel potential Head-and-Shoulders top exists in the XAU index, but it has not been drawn on to reduce clutter.

If the potential Head-and-Shoulders tops on PM stock index charts became operative it would of course imply a deeper correction for gold, and would likely take the wind out of silver's sails, but in addition it would also imply a reversal in the broad US stockmarket. We have all sat and watched with complacent amusement as the broad market has floated steadily higher, as if it was on its way to heaven, greatly assisted by truckloads of freshly printed cash from the Fed arriving at the tradesman's entrance of Wall St, and the policy of maintaining zero interest rates and printing however much money is required to keep the system limping along, which has been going on for so long now that it has become accepted as a new normality by many. So let's be clear - it is totally abnormal and is likely to have dire consequences. In the first place this policy of ballooning the money supply and holding interest rates at zero, which has become a necessity due to the magnitude of debt, must undermine the dollar, and to the extent that it continues will lead to its collapse. A collapse in the dollar will mean high inflation as the cost of imports ramps up. Next, interest rates must rise accordingly, as only someone intent on financial suicide would lend out money at say 2% per annum when inflation is running at say 10%. If the Fed attempts to hold rates at 0% lenders will simply bypass it. Given the massive and crippling level of debt in the US, sharply rising rates will implode the economy, so the moment the market gets its head around the fact that rates are set to rise, which it must once the dollar's decline really accelerates, the stockmarket will cave in, and given that the market tends to discount macro events 6 to 9 months out, it should be obvious that we are drawing ever closer to this turning point. Almost all technical indicators for the broad stockmarket are now firmly in negative territory, many have been so for months and it is only meddling on a grand scale that has kept the uptrend going - so it will be interesting to see what happens once the music stops.

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RISK MARKETS ARE DEPENDENT ON FRIENDLY INTERVENTION

By Rohan Clarke

How to reconcile equities markets punching towards new all-time highs within two short years of the worst financial crisis since the Great Depression?  It’s not easy. Intuitively equities should do best when times are good.  But they aren’t good are they? That is why we have all this stimulus…

Big Government is back

Global risk markets have become unusually dependent upon government and its egocentric offspring. It’s an outcome of economic stress. Albert Edwards may have maintained the bearish rage throughout, but he did make the point (in December 2009 here) to buy equities when the government is stimulating.  It was a good call – the same one that David Tepper was later to make.

Looking ahead, where does all this ‘intervention’ take us? If we assume that times are not good (as the Fed would have us believe), then the first conclusion must be… to more intervention.
Following this line of logic, and admittedly it’s the bear case where the global economic pie gets no bigger for years to come, the task then is to understand how intervention may evolve. Who will be the winners and how will markets respond? Is all intervention good for risk markets?

In the Middle East

While rational expectations theory may deeply flawed, I do believe that we are all driven by a selfish desire for more. Our various systems of government are designed to aggregate this singular ambition to exist. As such, institutional frameworks often embody this same cloying need to continue – let’s call it the ‘status quo’.

So, for example, while Egypt rejoices over the removal of Mubarak (coming in at number 20 on Parade’s worst dictators list here) there is little chance that western style democracy will fill the void.  That’s because the void is already full.  The institutional structure of the Egyptian economy is constructed around the all pervasive influence of its military.  If democracy exists, it exists within the heirarchical structure of that institution. US aid and arms exports (see Fortune’s cover story here) are designed to support that institution. If the hungry masses bang their fists on the gate, then it’ll be important to watch how the military responds. History would suggest that the path of least resistance will be to repress unrest, and the military is well designed for that purpose.

Large tracts of the planet are under the influence of such institutional systems – certainly the Middle East is riddled with them. These regimes ultimately maintain hegemony through force. They rely on a chain of command and the Nuremberg defence. They are not fountains of democracy. If the global economy continues to struggle, and the continued stimulatory response leads to food price inflation, then I think we can expect oil markets to remain sensitive to the changing of the guard in the Middle East.

(While such systems are not inherently evil, their stability seems to gravitate around individuals that are. At the extreme you arrive at Stalin’s earthly paradise where, as Khrushchev notes in his “Cult of Personality” speech, of the 1,966 delegates to the 17th party congress, 1,108 were arrested on charges of antirevolutionary crimes – while 98 of the 139 members of the party’s Contral Committe were shot.  ”This very fact shows how absurd, wild and contrary to common sense were the charges of counter-revolutionary crimes made against a majority of participants at the party congress”. And yet it happened.)

And China…

This type of analysis exposes a serious flaw in the commodity super-cycle theory. On the face of it, China operates under a institutional structure that has all the hallmarks of those hierarchical regimes described above. It is most certainly not a democracy even though portions of its population have been enjoying rapidly growing wealth. This makes blind faith in Chinese industrialisation a dangerous choice.  China does not have to continue down that path. History has plenty of precedent to suggest otherwise. If threatened from within, the centre is more likely to reassert control via the party hierarchy. The leadership may fear revolution, but the balance of probabilities favors the iron fist rather than glasnost as a way of containing it.

The point here is not that the iron curtain is about to be rehung. It is that there is a real risk that if the system is stressed, then the reaction of the institutional structures are unlikely to be ‘capitalist’ friendly. Now place that risk in the context of commodity prices that are priced for absolute certainty that China will industrialise over the next decade and the conclusion must be that the downside risk baked into industrial commodities prices in the current market is extreme.

Whether China is likely to get stressed, I’m working on the assumption that it is easier to spend money than it is to reign in rampant price increases. So like all ‘swimming naked’ metaphors, we will only learn how command capitalism really works when the tide turns. If it is true that China has a serious case of over-investment, as seems reasonably likely, there is no ultimate escape from that mal-investment. The probability of a tipping point increases as commodity prices trip higher and squeeze the disposable income of the Chinese homemaker.

And the US…

So to the land of the free, in the absence of a commensurate revival of fortunes, the fat fingered hand of government is going to be handing out the food coupons for a while yet. The question is ‘for whose benefit’?
While the administration has been busying itself with support for all and sundry, the institution that has really been driving the redistribution of wealth effort has been the Fed.  Its QE programs, designed to lift asset prices ‘higher than they would otherwise be’, have sent equity markets skyward and with them the prices of real assets – principally the commodities that we all consume.  The owners of at least these assets have benefited.  But, remembering that the economic pie isn’t any bigger, at the expense of those that live a more cashflow oriented life.  Bernanke would have it that higher commodity prices aren’t a problem – that disposable incomes in the US aren’t sensitive to the price of corn, meat and wheat.  This is the clearest indication yet of where the Fed as an institution sits – and that is outside the political system.  It may not be sensitive to higher food prices, but the Congress sure is.

This points to the conflict that is brewing between the political process and the institutional structure that has built up around the Fed. Ultimately, the Fed reports to Congress - and while QE’s non-inflationary magic may cloud the looking glass for a while, the more that capital benefits at the expense of wage earners, the more the pressure for change will grow.

In short.

1) For the Federal Reserve, QE once started will be near impossible to get off.  QE will never deliver real economic growth in a deleveraging economy – wages and home prices will be the last to benefit from the unconventional easing.  So the Fed will keep running up the credit card until…

2) The political process stays stop.

Conclusion

To draw this random walk to close…

1) We are still running by the playbook that simply says – ‘risk-on’ when governments are stimulating, ‘risk-off’ when markets are left to their own devices. With valuations stretched to extremes from our assessment of fair-value, and liquidity now being tightened in China, and the end of QE2 on the near(ing) horizon, it’s time to de-risk the portfolio once again.

2) Political meddling in all its varied guises is going to be a feature of the world economy for years to come. We retain a core position in energy and a preference for the long side of precious metals and agricultural assets – as capital continues to run to real assets.  We’re out of industrial commodities – the risk/reward skew strongly favours the downside if you like to play that side of the fence.

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