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Friday, May 23, 2008

Oil Crisis and the Blame Game

When looking for a scapegoat, just blame the speculators… its really easy. You don’t even need to know what you’re talking about.

Blame Wall Street for $135 Oil on Wrong-Way Betting (Update3): “Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

“In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Crude for July delivery touched a record $135.09 a barrel on the Nymex today. Oil futures later dropped on signs that a 15 percent run-up in prices this month isn't justified by stockpiles and demand. Oil fell $2.36 to settle at $130.81 a barrel. Prices have more than doubled over the past year.

Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.”

Futures contracts are a zero sum game. There needs to be a buyer and a seller for each open contract. Falling open interest means money is indeed leaving the market. The media has been accusing speculators of running oil massively higher. The reality is that since July 16th 2007, money has been flowing OUT of the oil as speculators reduce their positions. Granted, it would appear that shorts are getting out first, but net falling interest of this magnitude is probably foreshadowing that this oil price spike is nearing the end… and will probably correct sharply lower in the near future.

“In the last year, non-commercial market participants have raised bets on rising prices, known as long positions, by 37 percent to 263,378 contracts, the Commodity Futures Trading Commission said May 16.

The rush to buy back contracts may be linked to the record number of short positions that had been built up in recent weeks by small-sized speculators, which the CFTC refers to as “non- reportable” traders because their holdings are small. Those investors held 123,194 futures contracts betting oil futures would fall in the week ended May 6, an all-time high, and 47 percent more than the number of bets they'd placed on rising prices.”

Those with deep pockets are long and the weak hands were short. Naturally the weak hands get squeezed out first. The retail shorts have been blown out. That eliminates in large part the fuel for this parabolic move.

Maybe we can hammer out a top around here somewhere... Money has been flowing into inverse energy ETFs (DUG for example), indicating that money is for the first time attempting to call a top. Oil and Gas shares have fallen even as oil blew through $130 and immediately tagged $135.

Big energy companies, such as Exxon Mobile (XOM) failed to sustain new highs even as oil rallied hard. Something is up. Pop, and drop. XOM broke resistance and then immediately FAILED. Hmmm...

These prices exceed even the pain threshold of politicians. With their economically illiterate constituents complaining loudly, the time is ripe for the government to do something tremendously stupid in a vain attempt to bring down oil prices.

Although we may not yet know what it will be or when it will be done, you can bet on some kind of brain fart becoming official policy fairly soon…

… because on CNBC prices above $130 have resulted in new name and picture appearing on the screen called: The American Oil Crisis.

Now that it’s a crisis, look out.

I’ve been wrong on oil before (although I managed to trade these opportunities just fine):
Commodities Unravel, Confidence Collapses
Massive De-Leveraging Slams Commodities
Parabolic Commodities: The End is in Sight
Oil and Global Decoupling Theory
Crude Hits $100, Equities Freak

Thursday, May 22, 2008

Bear Wedge Breaks, Goldman, Lehman, Merril, Morgan: Cut to SELL

UPDATE 1-Analyst Bove cuts Goldman, Lehman, Merrill to 'sell': “The ratings for Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) and Merrill Lynch & Co (MER.N: Quote, Profile, Research) were cut to "sell" from "neutral" by analyst Richard Bove, who said the largest U.S. investment banks may perform poorly this summer.

Bove, an analyst at Ladenburg Thalmann & Co, also cut his 2008 earnings forecasts for the banks, as well as that of Morgan Stanley (MS.N: Quote, Profile, Research), which he still rates "neutral."

The downgrades reflect expectations that brokerage stocks "will do poorly this summer for three reasons... weak earnings, clouded secular outlooks, and the seasonal weakness that seems to impact these issues," the analyst wrote.

Bove was one of the first banking analysts to recommend selling financial stocks as credit market problems began nearly a year ago. On July 18, Bove recommended selling shares of Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research), Goldman, Lehman, Merrill and Morgan Stanley, saying the financial system was growing at a pace that could not be sustained by economic growth.”

In my post Slowly Building Shorts I argued that Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER), and Morgan Stanley (MS) were at key technical resistance levels and that it was time to get short. I also presented some fundamental arguments for these short positions as well… that all revolved around EXPANDING Level 3 assets. A list of firms and their Level 3 assets can be found in Bulltrap: ABCP, and Level 3 Bombs.

The trade has been quite profitable. I intend to really lighten up these names and may even exit them entirely. The plan is to re-enter them SHORT on the next short covering bounce.

I also played Fannie Mae (FNM) and Freddie Mac (FRE) from the short side. This was far less lucrative as neither have yet really broken down. They will crack… eventually.

FNM and FRE make me angry:
Fannie Mae and UBS Miss, Bankruptcy Filings Up Big Time
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

In the same post I first presented the case for a Bear Wedge in the S&P 500. I was a little early in calling Cracks In The Bear Wedge. Yesterday prices finally broke DOWN and OUT. But not before giving me some heat and going all the way to 1440. (Damn close to stopping me out across the board.)

I’m not the only one to notice the breakout: Motor up… Power Down (Macro Man)

In Gravestone Doji And Cool Correlations: Volatility, Yen I use Volatility (VIX) and the Yen as both leading and confirming indicators. The first Gravestone Doji was followed by a second before the final break occurred. Since then, both the VIX and the Yen are behaving the way they should. This confirms that this down leg in equities is sustainable.

Wednesday, May 21, 2008

CIFG, MBI, ABK and Moody's: The Computer's Made Us Do It

Wow. Talk about just blowing away your (remaining) credibility…

Moody's Begins Probe on Report Bug Caused Aaa Grades (Update1): “Moody's Investors Service said it's conducting “a thorough review” after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an improvement in credit quality. The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors.

Some senior staff at Moody's were aware in early 2007 that CPDOs rated Aaa the previous year should have been ranked as many as four levels lower, the FT reported today, citing internal Moody's documents. The firm adjusted some assumptions to avoid having to assign lower grades, the paper said.”

OMG. OMG. The implications of that last paragraph are absolutely insane. “Some senior staff at Moody's were aware in EARLY 2007 that CPDOs rated Aaa the previous year should have been ranked as many as FOUR LEVELS LOWER, the FT reported today, citing internal Moody's documents. The firm ADJUSTED SOME ASSUMPTIONS TO AVOID having to assign lower grades, the paper said.”

First they make a mistake they shouldn’t have made. I mean, where were the checks and balances? Where were the reviews? Second, they then take that honest mistake and go criminal with it. Just brilliant. Amazing really.

I see lawsuits… lots of lawsuits in the very near future…

“If it is true, does that mean other products haven't been rated correctly? Will they be downgraded? It could lead to turmoil.” -Puneet Sharma, Barclays Capital's head of investment-grade credit strategy in London.

The falling 200 day EMA should provide resistance here. I would expect that this mess puts Moody’s (MCO) under pressure and that prices fall back to support around the $40 area.

Related Blog Posts:
The Dog Ate My Homework (Macro Man)
Defective Moody’s Program Issues Billions of Erroneous AAAs (Naked Capitalism)
My Dog Ate It (Sudden Debt)

CIFG Guaranty's Bond Insurer Ratings Cut to Junk (Update4): “CIFG Guaranty, the bond insurer that lost its AAA ratings in March, was downgraded to below investment grade by Moody's Investors Service, which said the company may become insolvent.

The ratings were cut seven levels to Ba2, two steps below investment grade, from A1 to reflect “the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements,” Moody's said in a statement.

Failing to meet the capital threshold may be tantamount to insolvency and lead to the termination of the credit-default swap contracts the company uses to guarantee securities, according to Moody's. CIFG is among bond insurers struggling to maintain capital after expanding beyond their traditional business of municipal insurance to guarantees on collateralized debt obligations, mortgage bonds and other securities that have plunged in value.”

The market didn’t put up much of a fuss when this hit the wires. I really like this part, “Failing to meet the capital threshold may be tantamount to insolvency and lead to the termination of the credit-default swap contracts the company uses to guarantee securities…”

There go somebody’s hedges. Expect more surprise writedowns at some of the bigger banks and brokers.

“CIFG insured $95 billion of debt at year-end, according to its Web site. The new credit ratings, which affect CIFG Guaranty, CIFG Europe, and CIFG Assurance North America, remain under review, Moody's said.”

$95 billion isn’t huge. MBIA (MBI) and Ambac (ABK), now that’s huge. They can’t be far behind. Their CDS’s are already perking up…

“Credit-default swaps protecting against the risk that MBIA and Ambac won't be able to make good on their guarantees and debt payments rose after CIFG's credit rating was reduced.

Contracts on MBIA's bond insurer, the world's biggest, jumped 40 basis points to 815 basis points, London-based CMA Datavision prices show. Ambac rose 39 basis points to 860, according to CMA.”

These guys are quietly circling the drain. I don’t think the market fully appreciates the consequences of MBI and ABK failing.

Monoline Related Posts:
MBIA Reports Scary Earnings; NEGATIVE Revenues
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Tuesday, May 20, 2008

ZEW Hits Record Lows, LIBOR Woes Hurting Eurodollar

Just another 15 year record low…

German Investor Confidence Unexpectedly Fell in May (Update3): “Investor confidence in Germany unexpectedly fell for a second month in May on concern faster inflation, the stronger euro and fallout from the U.S. housing slump will hurt economic growth.

The ZEW Center for European Economic Research said its index of investor and analyst expectations declined to minus 41.4 from minus 40.7 in April. Economists expected a gain to minus 37, according to the median of 41 forecasts in a Bloomberg News survey. The gauge reached a 15-year low of minus 41.6 in January. A negative reading means that pessimists outnumber optimists.”

In case you live in a cave and missed it, this actually correlates quite well with recent U.S. consumer sentiment… and makes it hard to argue for a 'second half recovery'.

U.S. Consumer Sentiment Decreases to 28-Year Low, (Update1): “Confidence among U.S. consumers fell in May to the lowest level in almost 28 years as record-high fuel prices, lower home values and fewer jobs rattled Americans.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 59.5, the weakest level since June 1980, from 62.6 in April. The measure averaged 85.6 in 2007.
Consumer spending, the biggest part of the economy, is cooling as surging food and fuel costs erode Americans' buying power and job losses mount. Declining home prices and stricter lending rules are also preventing owners from tapping real- estate equity to buy expensive items like cars and furniture, raising the risk that growth will stall in coming months.”

I keep saying it, if the economies with most of the world’s wealthy consumers dive into simultaneous recessions, you can’t expect the rest of the world to do well. Everybody, from Latin America, India and China will feel serious pain as they don’t yet have a sufficient consumer base to absorb the higher margin consumer goods they currently produce for export.

TED Spread Falls to 9-Month Low, Signaling Credit Crunch Easing: “Lending confidence at banks rose to the highest level in more than nine months, according to a key market indicator, signaling the global credit crunch is easing.

The so-called TED spread, which measures the difference between what the U.S. government and banks pay to borrow in dollars for three months, dropped below 78 basis points for the first time since August. It held at that level as of 11:56 a.m. in London, after touching 77.7 basis points. The cost of borrowing dollars overnight dropped to the lowest level since December 2004, the British Bankers' Association said today.”

Volatility (VIX) too has dropped drastically. This can’t be good. Complacency is back in a big way. With the S&P 500 (SPX) less than 10% of the record highs reached during the world’s largest credit and real estate bubble, I will say this: Look out below.

Eurodollars' Appeal For Rate Speculation Dims Amid Libor Woes: “Eurodollars, the world's most actively traded futures contract, are becoming a less attractive tool for speculating on Federal Reserve monetary policy amid concern about the accuracy of the London interbank offered rate.

Trading volume in Eurodollars slid 7.5 percent in April from the prior month, to an average of 2.6 million contracts a day, according to Chicago Mercantile Exchange data. Eurodollars are U.S. dollars held in commercial banks outside the U.S. The value of the contract at expiration is determined by the interest rate on three-month Libor, and its yield in the meantime represents the market's forecast.

An average spread of about 11 basis points between Libor and the Fed's target rate for overnight loans between banks since 1997 had made the contract a popular way to make wagers on interest-rate expectations. That changed in the past year as volatility in the difference in the spread surged after the collapse of the U.S. subprime mortgage market, prompting traders to rely more on options such as federal funds futures.”

The financial system is so rotten now that prices of all kinds of financial instruments are being adversely affected. Markets require transparency to most accurate estimate risk. Greater transparency results in a more accurate pricing of risk. This in turn reduces overall volatility and increases price multiples. Now that all major financial participants are busily reducing their transparency, volatility will increase, volume will fluctuate wildly and price multiples have to contract significantly as a greater level of risk must be priced into all financial instruments.

“Trading in fed fund futures, which were first offered on the Chicago Board of Trade in 1988, surged 55.3 percent in April from the prior month to an average of about 98,500 contracts a day. The contracts settled against the average daily fed funds overnight rate as calculated by the Federal Reserve Bank of New York.

Eurodollar futures open interest, or the total number of futures contracts that have not been closed, liquidated, or delivered, declined 17.6 percent in the past two months, according to CME Group data. Outstanding contracts dropped 3 percent in April from the prior month, and were down 21.4 percent versus the previous year. Open interest in fed fund futures at the end of last month more than doubled from the prior month, and has risen 9.2 percent from the prior year.”

Trading the Fed Funds Futures appears to be much safer as, unlike LIBOR, nobody can mess with the calculation.

But before you get excited about the volatility dropping, the TED spread narrowing and LIBOR easing off a bit…

“The difference between the rate of three-month dollar Libor relative to the overnight index swap rate, a measure of what traders' expect the overnight federal funds rate to average over that time, averaged 11 basis points for the 10 years prior to last August, when the global credit crunch began. The spread, known as Libor-OIS, ranged from 24 basis points to 90 basis points this year. A basis point is 0.01 of a percentage point. The gap narrowed 2 basis points to 68 basis points today.”

The LIBOR-OIS Spread is still indicating stress.

“Eurodollar futures are almost useless as a tool for predicting changes in Fed interest-rate policy. With less and less trading in Eurodollar futures, the federal funds contracts are quickly becoming the liquid arena of the fixed income market in terms of betting on central bank policy.” -Stan Jonas, who trades interest-rate derivatives at Axiom Management Partners LLC in New York

“Because Eurodollars settle to Libor, if there is an issue with the Libor fixing, it throws the whole thing off. If you just wish to speculate on what the Fed is going to do, then Fed fund futures are certainly the place to do it.” -Alexander Manzara, a futures broker at TJM Institutional Services on the Chicago Mercantile Exchange

Related Posts:
Libor Poised For Shake-Up, Credibility GONE
RISE Dark Lord Libor! RISE!
Ambac Gets Crushed, Another Bank Wobbles
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Monday, May 19, 2008

From Bubble To Bubble, More Hidden Losses

This shouldn’t come as a surprise…

Banks Hide $35 Billion in Writedowns From Income, Filings Show: “Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show.

Citigroup Inc. subtracted $2 billion from equity for the declining value of home-loan bonds in its quarterly report to the Securities and Exchange Commission on May 2 without mentioning the deduction in the earnings statement or conference call with investors that followed. ING Groep NV placed 3.6 billion euros ($5.6 billion) of negative valuations in its capital account, while disclosing only an 80 million-euro depletion to income.

The balance-sheet adjustments are in addition to $344 billion of writedowns and credit losses already reported on the income statements of more than 100 banks. These companies have raised $263 billion from sovereign wealth funds, their own governments and public investors to shore up capital. The balance-sheet writedowns also reduce equity, which needs to be replenished. Adding the $35 billion leaves the banks with a $116 billion mountain of losses to climb.”

It’s those damn account rules.

“Taking losses on a balance sheet instead of an income statement is acceptable under accounting rules, which make a distinction between so-called trading books and long-term investments. Changes in value on the trading side go straight to revenue. Changes in the value of bonds held for the long haul can be marked down on the equity line of a balance sheet, as long as the declines aren't considered permanent.

Banks that are more willing to acknowledge their balance- sheet writedowns, such as Amsterdam-based ING, say the valuations of assets will be reversed when markets recover. ING, the biggest Dutch financial-services company, said in its first-quarter earnings report last week that the drop in the value of bonds tied to home loans that are held to maturity is irrelevant as long as the underlying mortgages don't default.

With that logic, most of the writedowns on the income statements could be reversed if asset prices recover. While some declines in valuations may reverse, most of the losses are permanent impairments caused by surging defaults on U.S. mortgages, said Janet Tavakoli, author of ``Collateralized Debt Obligations & Structured Finance,'' published in 2004 by John Wiley & Sons Inc.”

Worse still, the writedowns are overly conservative. The best evidence of just how inadequate these writedowns really are can be found in the continued explosion of Level 2 and Level 3 asset values. These values are growing rapidly and in many cases now the entire fate of a company rests on these arbitrary values.

For example, just recently Freddie Mac (FRE) moved $156.7 billion, or 23% of its assets, to Level 3. In so doing, FRE was able to report losses of “just” $151 million. By moving $156.7 billion into the Level 3 asset bucket, FRE now has the ability to come up with its own valuation. This was all perfectly acceptable under FAS 157. Despite these desperate measures FRE reported that the “fair value,” or estimated market value of its net assets, was a negative $5.2 billion as of March 31. I can’t imagine that FRE is valuing its Level 3 assets at anything but reckless, fantasy levels. Therefore, I have to assume that the fair value of FRE assets is actually worse than the negative $5.2 billion reported.

I think Janet Tavakoli has it just about right:

“Of course we can't tell how much of a bank's portfolio may actually be good stuff that will pay back at maturity. But there's tremendous value loss that's fundamental, not just due to credit market gyrations.” –Jane Tavakoli, author of “Collateralized Debt Obligations & Structured Finance

That means those asset prices won’t come back… EVER.

“Ignoring bad debt and postponing inevitable losses was one of the main reasons behind Japan's decade-long economic slump that began in the 1990s, said Boston University law professor Charles Whitehead.

Faced with new capital requirements and a weakened ability to meet them, Japanese banks deferred the recognition of their losses, aided by regulators who refrained from implementing the rules, Whitehead wrote in a 2006 paper published in the Michigan Journal of International Law.

The new bank-capital regime, known as Basel II, has gone into effect in some European countries and is being implemented in the U.S. and others starting this year. It allows financial institutions to use in-house risk models instead of just relying on external credit-worthiness ratings in calculating their risk- weighted capital requirements.

The largest U.S. securities firms have been under capital requirements shaped by Basel II since 2004.”

So, despite Bernanke having specialized in the great Depression and having written papers criticizing how Japanese authorities handled their own real estate and credit crisis, Bernanke looks set to repeat exactly those same mistakes.

“U.S. regulators may be tempted to go soft on banks too. The new capital rules already rely significantly on self-modeling by the banks. So if anything, the risks may be greater in the U.S. today than they were in Japan in the 1990s.” –Charles Whitehead, Boston University law professor

“A review of the balance sheets and regulatory filings of more than 50 banks showed that 20 of them chose to keep some subprime- related losses off their income statements. The marks were recorded instead on balance-sheet items labeled “other comprehensive income” or “revaluation reserves.”

This is exactly what the Japanese did. They ended up with a Zombified financial system for the next 15 years. Despite the fancy accounting footwork there are more losses yet to come.

“Declines in asset prices have spread beyond subprime though, affecting other mortgage bonds, securitized car and student loans, leveraged lending that backs private equity buyouts and credit derivatives. When all that is included, the IMF estimates that total losses from the U.S. subprime debacle will reach $1 trillion, of which $510 billion will be born by banks. That means some $130 billion in losses remains to be taken.”

The S&P 500 bounced significantly of the panic lows around 1255, but the banking and mortgage indices have not. With more writedowns pending, that makes sense. What does not make sense is the assumption that crippled banks won’t seriously negatively affect the broader economy. When that finally becomes obvious it will unleash a real vicious Bear market…

Related Posts:
Bulltrap: ABCP, and Level 3 Bombs (A list of Level 3 assets by firm and by amount)
Something To Think About: Goldman Sachs, Level 3
Level 3 Rules

Oil Producers Mask Decade's Worst S&P 500 Profit Drop (Update1): “Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.

Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998. Energy companies made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as oil prices surged past $100 per barrel, the data show.

The results leave the benchmark for American equities vulnerable to declines as oil companies' costs balloon and production slips. The industry is getting less profit from a barrel of oil than at any time since 2005, just as the rest of the U.S. economy is sputtering. Still, energy shares posted the S&P 500's steepest gains in the past year, bloating their representation to 15 percent of the index.”

The better energy does, the weaker the rest of the S&P. The effects of energy temporarily mask some of the weakness in the rest of the S&P. Furthermore, the better energy does, the more pressure it puts the rest of the economy. High energy prices are adding stress to an already stressed financial system. Consumers have clearly started to buckle. When they finally start defaulting on revolving credit with any significant scale, it will come at a time when banks are particularly vulnerable.

Pre-market oil is again at new record highs.. again. Oil has hit the runaway, parabolic, super spike phase of its speculative cycle that can only end in a massive blowout top. Unfortunately this means prices will probably carry to some ridiculous level that effectively sucks all the oxygen from the global economy before marking a top. This will cripple and even collapse most other asset classes unleashing slective asset price deflation. Then as oil collapses itself, true GLOBAL deflation will set in as credit is destroyed the world over and all asset classes get sucked down until they are valued at low or no leverage prices.

TIPS Show Bonds See Bubble Burst for Commodity Prices (Update2): “Treasury bond traders are telling Americans to stop fretting about inflation.

Consumers expect prices to rise 5.2 percent in the next 12 months, according to a monthly survey by the University of Michigan in Ann Arbor, the most pessimistic they've been since 1982. Treasury Inflation Protected Securities, or TIPS, show traders anticipate inflation of about 2.9 percent by January, in line with its average of 3.1 percent the last 20 years.

The disparity has never been wider. While consumers grapple with gasoline above $3.70 a gallon, record rice prices and the escalating cost of wheat, TIPS say the commodities market is a bubble about to burst. A commodity slump would worsen losses in the $500 billion TIPS market, where investors lost 2.35 percent in April, the most since December 2006.”

“There's a lot of people who just don't believe the economy's going to stay strong enough to keep prices of things where they are. Part of what's going on here is a lot of people view this price rise in oil, a lot of commodities, as being somewhat bubbleish and that they'll come off again very quickly.” -Chris McReynolds, who trades TIPS in New York at Barclays Plc, the largest dealer of the securities

From one bubble to the next… Long live cheap and easy money! Long live the age of Fiat Currency!

Related Topics:

A speech by Bernanke in May 31, 2003: Some Thought on Monetary Policy in Japan: “Rather, I think the BOJ should consider a policy of reflation before re-stabilizing at a low inflation rate primarily because of the economic benefits of such a policy. One benefit of reflation would be to ease some of the intense pressure on debtors and on the financial system more generally. Since the early 1990s, borrowers in Japan have repeatedly found themselves squeezed by disinflation or deflation, which has required them to pay their debts in yen of greater value than they had expected. Borrower distress has affected the functioning of the whole economy, for example by weakening the banking system and depressing investment spending. Of course, declining asset values and the structural problems of Japanese firms have contributed greatly to debtors' problems as well, but reflation would, nevertheless, provide some relief. A period of reflation would also likely provide a boost to profits and help to break the deflationary psychology among the public, which would be positive factors for asset prices as well. Reflation--that is, a period of inflation above the long-run preferred rate in order to restore the earlier price level--proved highly beneficial following the deflations of the 1930s in both Japan and the United States. Finance Minister Korekiyo Takahashi brilliantly rescued Japan from the Great Depression through reflationary policies in the early 1930s, while President Franklin D. Roosevelt's reflationary monetary and banking policies did the same for the United States in 1933 and subsequent years. In both cases, the turnaround was amazingly rapid. In the United States, for example, prices fell at a 10.3 percent rate in 1932 but rose 0.8 percent in 1933 and more briskly thereafter. Moreover, during the year that followed Roosevelt's inauguration in March 1933, the U.S. stock market rallied by 77 percent.”

Related Blog Posts:
Misconceptions About Gold
Why Does Fait Money Seemingly Work?

Related Posts:
Fannie Mae and UBS Miss, Bankruptcy Filings Up Big Time
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops