Last week, when we pointed out what was then a record $77 billion in Treasury sales from the Fed's custody account, in addition to noting the patently obvious, namely that contrary to what one hears in the media, foreigners are offloading US paper hand over first, there was this little tidbit: "The question is what they are converting the USD into, and how much longer will the go on for: the last thing the US can afford is a wholesale dumping of its Treasurys.
Thursday, January 12, 2012
Loonie Erases Gains
Canada’s dollar declined against most of its major counterparts amid concern economic growth may be less than forecast in the U.S., the nation’s largest trading partner. The loonie, as the currency is nicknamed, weakened after sales at U.S. retailers in December rose 0.1 percent, restrained by cheaper fuel prices and holiday discounting that helped hold down the value of goods sold. Canada’s dollar erased earlier gains against its U.S. counterpart on comments by the European Central Bank President that the region’s debt crisis is easing.
China Hoarding Gold Bullish For Traders
Gold traders are the most bullish in two months after mainland China imported the most metal ever from Hong Kong and investors bought U.S. bullion coins at the fastest pace in more than a decade. Eighteen of 23 surveyed by Bloomberg expect the metal to gain next week, the highest proportion since Nov. 11. Mainland China imported almost 102.8 metric tons in November, valued at about $5.5 billion, trade data on Jan. 11 showed. The U.S. Mint said it sold 82,500 ounces of American Eagle gold coins in the first 11 days of January. Full-month sales would reach 235,000 ounces at that pace, the most since 1999.
Commodity Markets Lower Amid Strong Fundamentals
Nelson Louie, Global Head of Commodities in Credit Suisse's Asset Management division, said, "Commodities were lower in December, ending an already volatile fourth quarter. Broad-based commodities indices essentially traded sideways in an extremely volatile range, as investors continuously re-evaluated the European debt crisis' potential impact on the global economy. Despite these headwinds, the global manufacturing PMI actually improved in December. We believe this may reflect underlying strength in the US and key emerging markets."
Euro Rises On Draghi Comments
Gold futures extended sharp gains on Thursday, climbing to a fresh four-week high as the euro rose against the U.S. dollar following positive comments from European Central Bank President Mario Draghi. On the Comex division of the New York Mercantile Exchange, gold futures for February delivery traded at USD1,661.05 a troy ounce during early European morning trade, rallying 1.28%. It earlier rose by as much as 1.35% to trade at USD1,662.85 a troy ounce, the highest since December 13.
Ethanol Futures Plummet
Ethanol futures fell the most in more than six months after a government report showing that supplies of corn were higher than forecast sent futures for the grain down the exchange-imposed limit. Ethanol tumbled 5 percent after the Agriculture Department said corn inventories on Dec. 1 were 9.642 billion bushels, compared with 9.439 billion forecast in a Bloomberg News survey of analysts. Ethanol is expected to use 5 billion bushels of corn this year and the lower corn price might ease expenses. “The big story is the surprising USDA report, which was really pressuring ethanol,” said Dan Flynn, a trader at PFGBest in Chicago.
Gasoline Extends Loss Rising Inventories
Jan. 11 (Bloomberg) -- Gasoline futures extended a loss after the Energy Department reported stockpiles rose more than forecast last week. The government said inventories of the motor fuel increased 3.61 million barrels to 223.8 million in the seven days ended Jan. 6. The median estimate of 12 analysts surveyed by Bloomberg News called for a 2.25 million-barrel increase. February-delivery gasoline fell 2.53 cents, or 0.9 percent, to $2.7475 a gallon at 10:35 a.m. on the New York Mercantile Exchange. Prices were $2.7633 before the report’s release at 10:30 a.m. in Washington.
Heating Oil Inventories Up, Prices Down
Jan. 11 (Bloomberg) -- Heating oil futures fell after the Energy Department reported distillate demand slid 7.1 percent last week and inventories rose to the highest level in 12 weeks. Futures declined as stockpiles increased 3.99 million barrels to 147.6 million. Demand for diesel and heating oil slipped to 3.28 million barrels a day last week, and over the past four weeks was 2.2 percent below a year earlier. “I’m hearing that European demand might be softening, and it hasn’t been that cold this winter,” said David Pursell, a managing director at Tudor Pickering Holt & Co. LLC in Houston.
Gasoline Futures Lower
Jan. 12 (Bloomberg) -- Gasoline slid, reversing an earlier gain, after a report that a European Union embargo on imports of Iranian oil may be delayed six months, according to an EU official with knowledge of the talks.
COMMENTARY: How Does $115 Trillion Dollars Stack Up? January 12, 2012 |
| The National Debt Clock |
The U.S. debt of approximately $15 trillion is comprised of two-thirds public debt (Treasury bills, notes and bonds owed to people, businesses and foreign governments) and one-third "Government Account" securities backing a promise to pay Social Security and other trust funds when Baby Boomers retire over the next 20 years. The U.S. debt is the largest in the world as reflected by the table below.
| Rank | Country | Debt - external (Billion US$ as of January 1, 2011) | |
|---|---|---|---|
| 1 | United States | 13,980 |  |
| 2 | United Kingdom | 8,981 | |
| 3 | Germany | 4,713 | |
| 4 | France | 4,698 | |
| 5 | Netherlands | 3,733 | |
| 6 | Japan | 2,441 | |
| 7 | Ireland | 2,253 | |
| 8 | Norway | 2,232 | |
| 9 | Italy | 2,223 | |
| 10 | Spain | 2,166 | |
How did it get so large? First, government debt is simply an accumulation of budget deficits. Trickle down economics resulted in lower taxes and increased spending through such governmental policies as tax cuts (i.e., the AMT patch), bailouts (AIG and other Wall Street firms), military spending (some $800 billion a year), and economic stimulus packages in addition to reduced income from the the ebbs and tides of economic growth and recession. Yet even before the latest economic crisis (a repeat of the 1990 savings and loan crisis only on a much, much bigger scale), our debt grew 50% from $6 trillion to $9 trillion from 2000-2007. Finally, the $700 billion bailout grew our debt to $10.5 trillion by December 2008. The debt is tracked by the national debt clock (see link above).
Second, despite what many perceive as increased risk that the US may not be able to repay its debt (i.e., the first ever rating agency downgrades of US Treasury debt) countries increased their holdings of Treasury debt as a safe haven taking their holdings from 13% in 1988 to 31% in 2011. In addition, countries prone to manipulating their own currencies to keep them low relative to the dollar increased their holdings of Treasuries (typically export economies). Yet despite the downgrade of our debt and what many perceive as increased default risk, buyers of our debt expect the U.S. economy will be sufficiently strong to pay them back. In fact, US debt may be the ultimate example of "moral hazard" in that we are such a large customer of countries like China and Japan that despite strong rhetoric to the contrary, they need us to buy their exports so they allow us to run such a huge deficit .
Foreigners hold $4.49 trillion of our debt leading some to believe that we are in the process of mortgageing our country to China (owning $1.1 trillion) and Japan (owning $900 billion). In addition to the two Asian economic powerhouses (one could argue Japan is no longer a powerhouse), the U.K. owns $300 billion of our debt ) while oil exporting countries such as Brazil, Hong Kong, Russia and Canada own between $100-$280 billion each. Finally, it has been estimated private sovereign and hedge funds are holding $100's of millions of our debt using Belgium, Caribbean banking centers, and Luxembourg as fronts to conceal their identities
Third, logically it would seem that the buyers of our debt would demand higher interest to compensate them for an increasing risk. And while this would ordinarily force our government to limit the amount of debt it issues, Congress simply continues to raises the ceiling in an effort to prevent a default and the near zero global interest rate environment is enabling our addiction to debt.
In addition to the windfall effect of foreigners increasing their Treasure holding, another unusual factor is at work here. The Social Security Trust Fund ran at a surplus and while some would argue that the money should have been invested (no duh!!!) the money in the fund was "loaned" to the government interest-free loan to help finance our deficit. This had the "mobius loop" effect of keeping rates low thereby allowing more borrowing. This is in essence robbing Peter to pay Paul since this "loan" can't be repaid when the Boomers retire without increasing taxes (estimated by some to be a $5.3 trillion shortfall - yikes!).
Finally, I plead guilty to sensationalism. The eye catching headline of this blog pertains to the total US unfunded liabilities rather than the total debt. To the left you can what a stack of $100 bills looks like compared to the old World Trade Center and Empire State Building (look carefully and you can see the Statue of Liberty).
The 114.5 trillion dollar pile represents the amount of money the U.S. Government estimates it is short (this is where the term "short" comes from in trading which means to be "short" of dollars and thus having to borrow them) to pay its bills based on estimates of current tax and funding inputs, and future demographic shifts in the US population.
My next blog will discuss why the problem with the deficit is that it may be that it's not big enough!
My next blog will discuss why the problem with the deficit is that it may be that it's not big enough!
Robert L. Teel, Principal and Founder
Robert Charles & Co., L.P., a Commodity Trading Advisor
Robert Charles & Co., L.P., a Commodity Trading Advisor
www.therobertcharlesgroup.com / rlteel@therobertcharlesgroup.com
CME Speaks About C.F.T.C. Inquiry
To expand on the article by Ben Protess and Azam Ahmed on Friday, Jan. 5 (“MF Global Inquiry Turns to its Primary Regulator”), it is no surprise that CME Group is included in the Commodity Futures Trading Commission’s review. In November, the C.F.T.C. requested that CME Group not conduct its own investigation, but rather take part in the agency’s inquiry, and since then we have worked together closely.
Buy these three commodities for 2012
It’s true that commodities underperformed in 2011 — but that makes it easier for them to outperform in 2012. In fact, Goldman Sachs said earlier this month that it expects commodities as a group to rally 15% in 2012. Here are three commodities that I believe could outperform in 2012 … and how you can play them …
Coca-Cola alerted FDA about OJ fungicide
NEW YORK (AP) – Coca-Cola Co. said Thursday it alerted the Food and Drug Administration after it discovered via testing its own and competitors' products that some Brazilian growers had sprayed their orange trees with a fungicide that is not approved for use in the U.S.
Commodities Trader Jailed After Threatening To Kill Regulators
An ex-commodities trader who pleaded guilty to threatening to kill financial regulators, including Commodity Futures Trading Commission Chairman Gary Gensler, said the CFTC offered to settle a civil case against him for a $175,000 fine and a lifetime ban from the industry. Vincent P. McCrudden, awaiting sentencing in a Queens, New York, jail, told U.S. District Judge Denis R. Hurley in Central Islip, New York, about the offer in a letter made public Jan. 9. Settlement negotiations on Dec. 12 were unsuccessful, according to an order by U.S. Magistrate Judge A. Kathleen Tomlinson, who, according to McCrudden “endorsed” the CFTC’s offer.
The Breakfast Trade
Orange Juice: The juice trade continues to liquidate as fungicide fears fade. As of morning trading, OJ futures were down another 2 percent, washing out all of the gains made earlier in the week on overblown fears of a potential supply disruption.
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