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
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
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