Friday, June 21, 2013

Friday, June 21, 2013 - Summertime

Summertime

by Sinclair Noe

DOW + 41 = 14,799
SPX + 4 = 1592
NAS – 7 = 3357
10 YR YLD + .09 = 2.51%
OIL – 1.39 = 92.92
GOLD + 20.80 = 1299.60
SILV + .52 = 20.22


There are certain phrases that seem to paint a picture. Today stocks ended slightly higher after two days of sharp declines. The phrase that comes to mind is “dead cat bounce”.

Stocks, and pretty much everything, slumped since Wednesday when Federal Reserve Chairman Ben Bernanke laid out the Fed's plans to scale back on its $85 billion in monthly asset purchases. The S&P broke under its 50-day moving average, contributing to 4.6 percent pullback from its all-time closing high reached on May 21. This retreat represents the largest since an 8.9 percent decline between September and November.

For the week, the Dow fell 1.8 percent, the S&P was down percent 2.1 percent, and the Nasdaq lost 1.9 percent. It was the biggest weekly decline for all three since April and also the fourth week of losses out of the past five.

In the four weeks since Ben Bernanke first mentioned that the Federal Reserve Board might start to taper its program of quantitative easing (QE) later this year, more than $2 trillion was wiped off the value of global stock markets — and probably far more from the value of global bonds. On Wednesday, Bernanke held a press conference where he repeatedly said the Fed would not exiting its bond buying program until the economy improved quite a bit from current levels. The markets heard what the markets heard.

If tapering does start well before the end of the year, this will surely be bad news for financial markets and the world economy. After all, the Fed's easy money policy has been the driving force behind the markets for several years; if the Fed stops handing out free money to the banks, then they would have to reconsider their valuation estimates for a whole host of financial products.

Did the markets over-react, or is it possible the Fed will taper, and manage to do so in a way which does not cause trauma to the markets? I don't know, but we will see in the fullness of time.

Part of the market reaction might be the double whammy hitting the global markets; the second part of that coming from China, which is cracking down on credit. I won't claim to be fully aware of what is going on in China, but the basic story is that China’s credit market has been in a bubble for years, with too much lending and borrowing, similar to what happened in the United States during the financial crisis. All that lending helps grow the economy until, one day, the bubble bursts, and it all comes crashing down, as happened the United States. China’s economic growth has been slowing, making a similar a crisis more likely. Chinese leaders seem to be trying to prevent a disaster by basically popping the bubble, a kind of controlled mini-collapse meant to avoid The Big One.

In a real, uncontrolled credit crisis like the U.S. financial meltdown, credit suddenly freezes up, particularly between banks, meaning that the daily loans banks were relying on to do business are suddenly no longer affordable. Banks with too many unsafe loans suddenly owe more money than they can get their hands on, sometimes leading them to default or even collapse. And that means that it suddenly becomes much tougher for everyone else – companies that want to build new factories, families that went to buy a home – to borrow money. That’s an uncontrolled credit crisis, and a number of China-watchers have been worried that China, in its pursuit of constant breakneck growth, could be headed for one.
China’s central bank, which is likely to tamp down all that unsafe lending and over-borrowing before it leads to a crash, appears to have forced an artificial credit crisis.

The People's Bank of China, (like the China version of the Fed) has already tightened credit, making it difficult for banks to borrow money. Something called the seven-day bond repurchase rate, which indicates “liquidity” or the ease of borrowing money, shot way up to triple what it was two weeks ago. Basically, it started looking like a credit freeze; very similar to when Lehman Brothers imploded.

Then last night, Bloomberg reported the Chinese Central Bank had stepped in and offer more than $8 billion in relief. Then other news sources said there was no relief effort. Who knows?

What's next? Well, the Chinese leaders will either back away from the credit crunch or they'll push forward and try to clean out the financial system. Or maybe the whole thing will just spiral out of control. If they can clean out the excesses from the financial system without to much damage, without uncontrolled financial collapse it would be a good thing; and the reality is that the Chinese government has some experience in controlling market shocks. Still, the process is likely to be a bit painful.


Today marks the start of Summer, or the summer solstice, officially as of 1AM Eastern. The sun is straight above the Tropic of Cancer. It's the longest day of the year, at least in the Northern Hemisphere. It look's like it will be a long summer of partisan gridlock in Washington. They couldn't even pass a Farm Bill. The Farm Bill always gets passed. Liberal or Conservative, we all share something in common; we like to eat. The Farm Bill is supposed to insure the food we eat. But most Democrats voted against it, because it cut the food stamps program, and a quarter of the Republicans voted against it, because they hate government spending. There was all sorts of political intrigue about the ability to get a simple bill through the House; imagine game 7 of the NBA finals, the defenders sit down, the refs lower the basket to 6 feet and Lebron James misses a slam dunk. The politics of this is pathetic, but the reality is that this could mean all kinds of problems in the agricultural sector. (By the way, courtside seats for Game 7 in Miami were going for $30,000 each, and admission to the luxury suites topped $50,000.

The good news for the agricultural sector is that the weather should be better this summer than last summer, but that might be bad news as well.

The near record-breaking Midwestern drought of 2012 shriveled corn crops and toasted pasture land. But it did have one positive side effect. The drought significantly reduced the size of the seasonal Gulf of Mexico dead zone. Less rain led to less fertilizer runoff—the dead zone is fed by a buildup of nitrogen-based fertilizer in the Gulf—which meant that the 2012 summer dead zone measured just 2,889 sq. miles. That’s still a zone the size of the state of Delaware, but it was the fourth-smallest dead zone on record, and less than half the size of the average between 1995 and 2012.

This year will be different. Heavy rainfall in the Midwest this spring has led to flood conditions, with states like Minnesota and Illinois experiencing some of the wettest spring seasons on record. And all that flooding means a lot more nitrogen-based fertilizer running off into the Gulf. According to an annual estimate from National Oceanic and Atmospheric Administration, this year’s dead zone could be as large as 8,561 sq. miles—roughly the size of New Jersey. That would make it the biggest dead zone on record. And even the low end of the estimate would place this year among the top 10 biggest dead zones on record. Barring an unlikely change in the weather, much of the Gulf of Mexico could become an aquatic desert.

The nitrogen nutrients that flow into the Gulf, especially during the rainy spring season, encourages the growth of explosive algal blooms, which feed on the nitrogen. Eventually those algae die and sink to the bottom, and bacteria there get to work decomposing the organic matter. The bacteria consume oxygen in the water as they do, resulting in low-oxygen or oxygen-free regions in the bottom and near-bottom waters.

That’s what a dead zone—water, essentially, without air. Sealife—including the valuable shellfish popular in Gulf fisheries—either flee the area, much as you or I would if someone were to suck all the oxygen out of the room, or die. That’s why the dead zone matters—the larger it is, the greater the populations of fish that might be affected. With commercial fisheries in the Gulf worth $629 million as of 2009—and still recovering from the impact of the 2010 oil spill—the dead zone means business.

The major factor driving the size of the dead zone—beyond changing flooding patterns—is the use and overuse of fertilizers in the corn belt. It takes about 195 pounds of fertilizer to grow an acre of corn; 40% of the corn crop is used to make ethanol, which is blended with gasoline. The idea is that it is a cleaner way to run our cars.




Here's the weekend reading list:


Washington has missed the real inequality story



The Last Mystery of the Financial Crisis



Profits Without Production


Senator Criticizes Lack of Supervision for Banks’ Consultants

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