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So apparently China has control of 97% of the world’s production of rare metals (elements) that make up your cell phone, PC, MISSLE SYSTEMS. They are cutting off 30% production to Japan, EU, US. Thank you to all who bought mortgages that couldnt pay for them , thereby making the private debts of the lenders AND debtors be absorbed by a government who now is at the Mercy of the YUAN and Rare Metals now. This will be the first of many to come.. In the meantime Im researching MolyCorp (NYSE: MCP). Perhaps the High Frequency traders have not yet jumped on the bandwagon.

From today’s WSJ:

http://online.wsj.com/article/SB10001424052702303550904575561922857320014.html#

SHANGHAI—Chinese officials are signaling plans to further reduce rare-earth exports next year, sustaining its controls of the metals—key ingredients in high-technology batteries and defense products—that have already severely frustrated foreign governments.

Im tired and there will be more insomnia fuelled blabber to come…

Tomorrow could be a game changer in the markets.  A few events that are worth taking a look at:

  • Housing starts at 8:30 AM (grab a cocktail- things could get ugly)
  • FOMC (aka Ben-a-Palooza 2010) meeting 2:15 PM

As I am writing this, the Nikkei is up .37% on the back of a huge Wall Street rally with the S&P 500 up 1.52%.  All in the clear?  Before the bears raise their white flags, let’s take a step back-namely to this past June when economists surveyed, prior to when the existing and new home sales reports were released, expected positive numbers all but finding themselves (surprise!) underestimating the decline of housing demand following the tax credit expiration.  These same courageous souls have once again declared recovery as shown in the recent Bloomberg survey of 73 economists.  I would venture that the majority of the economists in the survey are Ivy League graduates and have based their estimates of 7.1% growth in existing home sales on their same backward looking models.  These people are often paid large sums of money to provide advice to financial institutions and places of higher education and they will probably be way wrong on this call again like they did on their last two guesses this summer.  Maybe breakeven (not trusting any official statistics these days), but likely this number will be in the red as well.  Enough to catalyze broad a correction in equities in through November- perhaps 10 even 20 percent?  Maybe.  Thats if the Fed doesn’t beat that Thursday number to the punch.  The FOMC is bound to disappoint fed watchers on analyst desks that expected another round of quantitative easing this Tuesday (QE2).  While Quantitative Easing, or rather the nuclear option, is likely sooner vs. later, this will not happen until the Fed is convinced that the public markets can stomach 3-5 trillion being pumped into the financial system again.  So, the most likely scenario taking place tomorrow? Scenario 1: Since the massive rally over the past couple of weeks have hinged on rumors of fed liquidity and have been bullish for equities, gold, and some commodtities and bearish for the Dollar, a major FOMC disappointment would most likely mean stocks, gold selloff and major Dollar strength.  Scenario 2: If there is some aggressiveness in the statement, expect at least choppy trading and possibly more gold buying on account of more “unusually uncertain” conditions.   Scenario 3:  Massive quantitative easing is finally unleashed by the Fed.  This scenario has become casually referred to as the “endgame.”  Expect inflationary conditions from massive selling of greenbacks.

Most likely, there will be disappointment and the Fed will wait until the S&P 500 heads below 1000 and the financial superstructure can no longer stomach the massive plunges in home sales that will continue.

Have a fun rest of the week.

Ok, so I obviously have been out of commission for a number of months.  Blame it on the humidity.  Now that we have reached that point of crispness that is late September in Western Pennsylvania, KargBlog will be sure to include more wild-eyed commentary that you have come to love, hate, or have no opinion whatsoever.  As I will be sure to include an October Surprise or two, please feel free to post at will.

According to Israeli newspaper Ha’Aretz, the US has been shipping hundreds of bunker-busting bombs to this small island in the middle of the Indian Ocean, where they occupy an Air Base.  This could be evidence for an American strike upon Iran to thwart their nuclear program.  There are few different ways of looking at this:  Could it be that this is a defensive move to quell a retaliation on Israel should they attack Iran’s sites.  The Obama administration has made it clear that they intend on making sanctions tougher on Iran before they would ever consider a military option.  However, as evidenced by recent diplomatic trips to Israel on the part of the U.S., a rift has grown between the eternal allies.  If the Americans get the impression that a military strike against Iran’s nuclear facilities is imminent, would the best outcome be ultimately an Israeli strike or American one?

In Nassim Taleb’s article  in the Financial Times this week, he recommends a massive overhaul to our country’s debt problems, both private and public.  He suggests a debt-for-equity swap that, whether out of seriousness or wordplay, brings an innovative topic to the constant debate between more vs less stimulus.  Taleb contends that throwing more money at troubled assets and expanding social services inevitably leads to more debt, a situation in which there are few winners.  Burgeoning deficits heightens the risk of hyperinflation, leading to devastating consequences.  His medicine consists of the transformation rather than the inflating of our current liabilities.  In exchange for lower interest payments, a bank offers equity and the banks are able to finally shed light on their “toxic” assets.  Right now, Americans are not in a state of hope that their troubles will be lifted by government interventions and an expanded social safety net.  We are too smart, too immersed in history to succumb to this belief no matter how the cynics may view our people.  Americans want solutions and, most importantly, want to engage and make the solutions come to fruition.  In every great generation that this country has produced, political leaders have rallied Americans to fight against despair, to not accept what hand they are dealt, and instead, remaking this dynamic country to fit the times.  In the President’s inaugural address, he called for Americans to sacrifice and to accept greater responsibility.  I hoped for a new period that We Americans could have a stake in government and work to transform it for the better and, in doing so, make our own lives better.  Unfortunately, no matter how well-intentioned the administration’s policies may be in the much larger role of government and increased social spending, these decisions have alienated or, at best, harnessed the innovative spirit of the American people.  It is not that government’s size is the main issue, although that is a separate discussion.  It is that Americans do not feel that they can have a stake in their destinies.  We are a self-governing people, and whether the size of the bureaucracy is large or small, Americans desire a feeling that they can be the primary deciders, rather than some abstract entities.  If the tone of the debate and the nature of the current policies were directed to this desire, we would be able to climb out a recession and thrive, as Americans have for Our history.  Americans know that we have, through excesses and brought ourselves to this place.  But give us a future to look at, and watch the tides change from doom and gloom to bright days.  Nassim Taleb prescribed a radical shift from the status quo in relying upon debt to fund previous liabilities, and however unlikely, may in fact be the only solution to the current spiral.  Instead of looking to the government to provide an answer, it is time for the government to look for answers in its citizens, the ones who create jobs, prosperity, and the key to delivering the real changes that are necessary.

As we continue the buying spree of Treasuries under the auspices of the Federal Reserve Bank and there is growing evidence that economic growth will be much more gradual than first anticipated, hyperinflation- the sum of all economic fears remains a risk.  Ben Stein, in his latest piece from the NY Times, takes a glimpse of the future following the subsequent collapse of the American economic system.  He identifies the primary source of decline- a political class that, under the guidance of a stimulus-oriented Obama administration, undermines the entire economy through spending sprees and a degradation of the currency.  Although the collapse of the dollar may not come in weeks, there has been strong momentum lately in world currency markets that signifies a reversion to dollar-denominated assets.  Yields on 10 and 30 year treasury bonds have been surging, indicating an exhaustion of investors willingness to fund this debt-ridden nation.  There has been no real political leadership on this issue, either.  As KargBlog evolves, we will shift our focus to this very real possibility of runaway inflation and the indicators which could signify such events.

Back to blogging…  Much of the recent talk of “green shoots” in the economy can be accurately dismissed as noise.  Noise in that we do not know what numbers coming from housing and unemployment are fuzzy math or adequate measures of the real economy.  There is no doubt that there will not be significantly better numbers in jobless claims for a long while and the effects of those numbers will drag on (foreclosures, retail spending).  However, the financial markets have continued to prove resilient.  Despite last week’s setback, the S&P 500 is up approximately 30% since the beginning of March, and financials are leading the way.   One forward indicator we may be overlooking but just as important, if not more, than equity indices is the steepened yield curve.  A steepened yield curve is historically a proven leading indicator of a strong economy moving forward.  As Caroline Baum from Bloomberg notes, the yield curve is a very good predictor of future economic conditions, regardless of the Why?.  For instance, as she writes, between 2006 and 2008 policymakers were terribly vexed as to the reasons that there was an inversion in the yield curve and longer term rates were being dragged lower than shorter maturity treasuries.  The most widely given reason was increased purchases of the longer term securities by Chinese investors.  Regardless of the reason, the inverted yield curve predicted a major economic disruption that equity indices were late in the game to acknowledge.  So, taking history as a clue, one could discount the barrage of news stories that pundits are claiming as green shoots and simply look at these ever-so-important spreads.

Douchebag?

Douchebag?

Major D-Bag

Major D-Bag

Pick-A-Douche

Pick-A-Douche

Deflation is a horrifying idea.  There is less demand for goods and services and, in order to keep up with these changes, producers are forced to cut prices.  For the consumer, this does not sound bad.  But we all know from the past 6 months that such downward pressures on prices have adverse effects on confidence, wages, and employment in general.  The withholding of purchases in anticipation of further prices declines can  result in a downward spiral.  Which brings me to my favorite vending machine.  The vending machine is, no doubt, one of the simple pleasures during a workday that provides nourishment for a (relatively) small amount of expenditure.  In fact, on days where energy levels are lagging (this is frequent), one needs to supplement their diet with a higher caloric intake or risk being caught in the act of drifting into a daydream so sweet that only the high ring of an Outlook calendar can provide the needed jolt back to reality.  So imagine you walk to your most cherished of work locations to suddenly find a sharp increase (7%) in prices across the rows of chocolately and nutty goodness.  What would your most likely reaction be?  I would hope shock and dismay and also expect you, if a rational consumer, to realize that such an increase in prices does not (likely) reflect your financial condition at the current time in that you have not received a 7% increase in your wages overnight.  But, in reality, consumers (myself included) do not act this way.  Even if you were to notice such a onerous change in the price of your sweet tooth-craving treat, a 7% change in the price of something priced less than $1 (USD) would not likely cause you to change habits as it will not make a bit of a difference in your bottom line.  In fact, if you were to do this day in and day out, your overall standard of living will remain the same and you could still afford a couple of brews when your best buddies from college come into town to visit.  That is the utter nastiness that inflation brings.  While we all are in an economic maelstrom and deflation is the name of the game right now, food prices have steadily increased.  If you look at national data from the Bureau of Labor Statistics, you will see that if you look at the CPI Index for only food prices as I have using the years 1982-1984 as your base period= 100, the most current index value stands just under 219.  The year previously (Mar ’08) the index gave a reading of 209.  Going back to March 2007, the index stood at 200.  And why not revisit the wonderful year of 2006 when the times were good, Hummers and condos were selling, and the champagne flowing.  In March of that year, the index stood at 194.  So, from the Age of Bling to the Age of Bailout, there was an increase in overall food prices in this country of approximately 13%.  In the same period, the unemployment rate has doubled.  Obviously the increases in price did not come as drastically as exhibited by the much heralded vending machine.  But the relatively small increases that accumulate over time could have real effects on a person’s bottom line.  And, as spending on discretionary items has rapidly declined, the percentage of personal income spent on food must rise.  Add to that, a marked increase in these prices, it becomes even a larger piece of the pie.  Psychologically, it doesn’t really seem as if anything has changed.  When one sees the prices of washing machines dropping on a daily basis, one thinks they could get a great deal in the marketplace.  But what gives if your favorite light turkey breast costs another quarter per half of a pound.  Unless you are really a cranky individual and the frugality that has developed inside you over the years can make you easily pass for Scrooge on crack, these extra coins here and there are chunk change.   Which brings me to a temporary conclusion (oxymoron??)  When prices for goods and items excluding food once again begin to rise, and the exporting countries of the world realize that they have far more bargaining power with the world’s leading consumer than they ever have, what then will be the price of that ever so delectable mix of sugar and fat to be found in our favorite vending machine?  And let us not forget, the upward pressure on prices coming from demand in developing and emerging markets with burgeoning populations and larger consumer bases.  Further, when will we (the hapless consumers) finally rebel against this ugly brand of pricing power and once and for all reverse the trend? 

Please, comments are desired.  Whether it is about your favorite brand of potato chip or the oligopolistic tendencies of food producers, it doesn’t matter.  What matters is a forum for all of the things you may think but do not say (within reason).  This thread will continue…..

PS:  I apologize to everyone waiting for the D.O.W. as it is being delayed once again this week- I just was thinking about this had to go with it.   Poll to come Thursday afternoon….

With the recent switch in ranks of the Senator from Pennsylvania, Arlen Specter, to the Democratic side, the GOP once again faces its doomed influence within American centrist politics. One of the last few voices of clarity and moderation from the Republican minority in the Senate, Specter is also aligning himself with the political realities that he is up against. His party has diverted from its emphasis on strong defense, effective government, and individual rights. In order to remain politically viable, such a move reflects the notion that moderate Republicans have far less significant voice than once before in the Party. Long gone are the “Rockefeller Republicans,” of whose base was largely the Eastern Establishment- policymakers and Wall Street investment bankers/ lawyers. Although this political “elite” drew up much consternation in the public, they were able to effectively agree upon private and public lines of demarcation had been held as standard for the last half of the twentieth century. We have now moved to the unique position in that the old Democratic party that once represented labor interests, large government, and held a decidedly anti-big business credo,  now represents a party more reminiscent of the Republican Party of Old. The professional classes have now in large numbers moved to the Democratic side in our previous presidential and congressional campaigns. If we have any chance of regaining the spirit that captured the Republican Party in its original days as when Lincoln held the highest office in the land, we must seek in every way to hold on to the few stalwarts, such as Arlen Specter, who manage to inject a refreshing tinge of decency, now and then. Away from the ideologically inflexible majorities in congress and in the Senate to a degree, we need leaders who will challenge, as did our current President, the status quo and work together to bring this great union to its best days ahead.

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