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Key News

• European inflation accelerated to the fastest pace in almost 16 years. (Bloomberg)
• The Bank of Japan injected a record amount for same-day funding operations on Monday to cool overnight call rates, as they jumped well above the central bank’s policy target due to strong fiscal year-end funding demand. (Reuters)

Key Reports Due (WSJ):

• 9:45a.m. Mar Chicago PMI. Expected: 46.3. Previous: 44.5.
• 10:30a.m. Mar Dallas Fed Mfg Production Index. Previous: 7.1.

Quotable

"Both the boom/bust pattern and its explanation are almost too obvious to be interesting. The amazing thing is that the reflexive connection between lending and collateral has not been generally recognized. There is an enormous literature on the trade cycle, but I have not seen much awareness of the reflexive relationship described here. Moreover, the trade cycles that are generally discussed in textbooks differ in duration from the credit cycle I am discussing here: they are short-term fluctuations within a larger pattern. There is an awareness of a larger cycle, usually referred to as the Kondratieff wave, but it has never been ’scientifically’ explained. At present, there is much concern that we may be approaching another recession but the general assumption is that we are dealing with a recession just like any other; the fact that we are in the declining phase of the larger cycle is usually left out of account. I contend that all previous recessions since the end of World War II occurred while credit was expanding, while the one we may or may not be facing now would occur when borrowing capacity in the real economy is contracting. This creates a situation that has no precedent in history."

George Soros, Alchemy of Finance

FX Trading - Commodities Trouble Lurking? A Visual…

From Barron’s Magazine over the weekend [our emphasis]:

"CHINA, AS EVERYONE KNOWS, IS A BIG FORCE IN THE extraordinary boom in commodities. Its voracious appetite for everything from corn and wheat to copper and oil has helped push up U.S. commodities prices by some 50% over the past 12 months.

"But China is by no means the whole story. Speculators — including small investors — are also playing a huge role. Thanks to the proliferation of mutual funds and exchange-traded funds tied to commodities indexes, speculative buying has gone way beyond anything the domestic commodities markets have ever seen. By one estimate, index funds right now account for 40% of all bullish bets on commodities. The speculative juices are even more plentiful — nearly 60% of bullish positions — if you count the bets placed by traditional commodity "pools."

"Here’s the problem: The speculators’ bullishness may be way overdone, in the process lifting prices far above fair value. If the speculators were to follow the commercial players — the farmers, the food processors, the energy producers and others who trade daily in the physical commodities — they’d be heading for the exits. For right now, the commercial players are betting on price declines more heavily than ever before, says independent analyst Steve Briese."

Food commodities were crushed after March 2004 in a nasty shakeout that lasted about a year:

… but gold and crude did okay…

But, there were a couple of key differences in March 2004 compared to now. One is that food supplies seem a lot tighter now, and the Fed Funds rate was poised to head sharply higher then, and in fact started climbing in June 2004. Few anticipate the Fed funds rate to be heading higher anytime soon. Below is a weekly chart of Fed Funds Futures Inverted (we have inverted it to portray interest rates heading higher).

But caution is required, because maybe commodities are more tightly linked to the broader credit cycle than near-term fluctuations in the Fed Funds rate. Unlike March 2004, now there is a major scramble for liquidity underway among institutional and increasingly individual investors. That usually means investors dump otherwise solid investment assets to raise cash. It can become self-feeding as big, and little boys alike, rush to the exits, dampening existing collateral values, forcing increasing amounts of liquidation, further hampering real economic demand (because of the link between financial asset collateral values and the real world), then justifying more selling based on a decline in real demand. A virtuous circle turned vicious.

Be careful out there.

Jack Crooks
Black Swan Capital
http://www.blackswantrading.com

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