Just when you thought the bond bubble was being saved for another day…

The government managed to auction $39 billion worth of 5-year debt yesterday… barely. Wednesday’s debt sale drew a bid-to-cover ratio of 1.92, the lowest investor demand since September 2008. Low demand forced Uncle Sam to jack up interest rates at the last minute in two separate bond auctions this week — yesterday’s sale and Tuesday’s $42 billion auction of 2-year notes.

So what’s an indebted government to do? Manipulate the market, of course. Bond yields have given back yesterday’s spike partly thanks to the Federal Reserve, which bought $3 billion in U.S. bonds yesterday. They’ve announced their intention to buy again today, which will bump its total purchases of U.S. Treasuries to over $222 billion since March 25.

The U.S. government has already shoved more than $1 trillion in bonds down the market’s throat this year. They’ll likely issue another trillion before 2010. Another $28 billion in 7-year notes will be pawned off today… might be worth keeping an eye on.
The proceeds of some of those bond sales will go straight tothe U.S. Postal Service, which is on track for a record $7 billion deficit this year. That’s more than double last year’s loss.

Postmaster General John Potter bumped up his previous projection by a billion bucks yesterday, citing the growing expenses of six-day delivery and employee retirement/health care plans. Potter and his team are scrambling to cut costs left and right — from a yearlong hiring freeze to early retirement offers to branch closures. But we wonder… will it even matter?

The Government Accountability Office recently labeled the USPS a “high risk” federal program, and while we’re hard-pressed to think of any risk-free government program, we’re inclined to agree.

The Postal Service is facing a perfect storm of business risk: The business is already loaded up with debt. Minimum wage and benefit costs are rising while revenues are plummeting. For example, they are expected to handle at least 27 million fewer pieces of mail this year than in 2008. Is there any business in America that isn’t looking to cut shipping costs? (There’s this new technology we’ve heard about called “e-mail.”)

Then there’s UPS and FedEx, two worthy private-sector rivals. And what about Peak Oil? A summer of 2008 redux could cripple the whole industry. Above all, the USPS is run by the government… c’mon.

Snail mail might not be dead, but we suspect the USPS is going the way of Amtrak, at best.
They can’t even deliver our mail without losing money, yet the public looks to the government to manage our health care? Oy…
“Personalized medicine will revolutionize the medical field with a huge array of technologies,” reports our breakthrough technology analyst Patrick Cox.

“We know that many current treatments work on some people, yet not others. Some drugs are safe for many people, but have dangerous side effects for others. This is because all of us have individual differences in our genetic code based on heredity and environment. Even slight differences can lead to very different reactions to medications.

“This has created serious regulatory problems. Drugs are denied regulatory approval not because they do not work, but because some fraction of the population suffers adverse effects. As a result, we are often denied incredibly effective therapies simply because they are not universally effective.

“This shockingly primitive state of affairs exists because, until very lately, we simply have not had the tools to get to the genetic roots of disease. Scientists and pharmaceutical companies haven’t precisely known how a particular drug’s chemical profile interacts with a genetic one. Medical science, in turn, has been unable to tailor drugs to work with a specific genetic makeup.

“This is rapidly changing. Just a few short years ago, the human genome was first mapped. The genome, as you know, is the entire collection of genetic code that defines us at a biological level. Now scientists are studying single genes and their individual expressions.

“It is meaningful, from the investor’s perspective, that Dr. Francis Collins, the head of the Human Genome Project, has just been selected by the Obama administration to head up the National Institutes of Health. Collins has long been a prominent champion for using the knowledge gained from human genome to accelerate personalized medicine.

“Incidentally, Collins has stated that genomics is currently where the computer industry was back in the 1970s — at the beginning of a technological revolution. While he was speaking in scientific terms, we should remember that the ’70s was also the right time to begin investing in a diversified portfolio of breakthrough computer technologies. Those who did so, despite claims that it was too risky or early, were made rich.”

Want to learn more, including how to get in on the ground floor of this blossoming tech? Check out Patrick’s Breakthrough Technology Report.
No debt woes or health care debates can stand in the way of today’s stock rally. Major indexes opened up 1% this morning and are sitting on 2% gains as we write.

On what news? Heh… mostly Goldman Sachs, which upgraded GE from “neutral” to “buy.” Other than a slightly better-than-expected earnings report from Motorola and a not-so-terrible jobless claims number, that’s it.
“And after months of research, development and testing,” says one of our small-cap analysts, Jonas Elmerraji, “the Small-Cap Recovery Index is finally ready to be put to work.

“Historically, penny stocks lead the stock market out of recession. Small stocks are nimble and able to adapt — and a recovery in our sector is usually a telltale signal to mainstream investors that it’s a bit safer to test the waters of the market.

“So we’ve created an index to forecast market recovery. The index is made up of 100 small caps from a number of different industries. Each stock is equally weighted, but we’ve chosen to weight some industries more than others (by including more stocks from certain sectors). We gave more potency to industries that either signal to us that growth is under way (based on experience) and/or have a bigger impact on the economy. For instance, retail, the biggest sector of the U.S. economy, is also the biggest industry in our index.

“Our database collects fundamental data on the companies as well as market data and combines it with economic indicators like savings rate and employment numbers. Every day, the database spits out a number that represents our index on that given day. We’re still in the process of collecting data to get a statistically significant range to start making inferences from.

“Right now, we’re waiting to get a statistically significant amount of data before we go public with the index. Eventually, when enough data are compiled, we will have a small-cap index that can point us in the direction of where the market’s going.”

Since forecastin’ is our business, we’ll be keeping an eye on this one… stay tuned.
Today’s stock rally has put the kibosh on the dollar. The greenback had been on the rise this week, given the return of market pessimism. But the dollar index came to a screeching halt today, around 79.5. That puts the pound at $1.65, the yen at 95 and the euro at $1.40.
“We have established a number of longer-term positions based on a weakening euro scenario,” says our currency trader Bill Jenkins.

“The euro has made several efforts at the 1.4300 mark, but has never been able to hold above that. As a matter of fact, given the rebuffed price action from early this week, the euro may be setting up an impressive double top on the hourly chart.

“We suspected something was afoot when Monday’s release of the U.S. housing numbers didn’t even elicit a yawn from the currency market. In case you missed them, here’s the skinny: Economists expected new home sale to be up by 3.8%. The actual number was 11%! That is a HUGE upside surprise.

“Since many forecasters presume that the U.S. housing market must recover before anything else positive happens, the numbers should have shot the risk currencies to the moon.

“But they didn’t budge. Why not? In a word — reluctance.

“The housing numbers should have inspired investors to believe that the recovery is well under way. The very fact that the market refused to respond is telling us that there is some real hesitation about pushing this risk rally further.

“The euro fell to a key support level, the 1.4120-30 area. Over the next few days, we will look to see if it drops below there. If so, a violation of that level would have the euro looking down toward 1.3750. Should that become the case, we may be looking at a double top on the daily chart, which would portend a deeper slide.”

If you’d like to trade this trend, look no farther than Bill’s Master FX Options Trader.
What other currencies of the world are mispriced versus the dollar? Here’s one clue:

“The index is based on the idea of purchasing power parity (PPP),” explains The Economist, “which says currencies should trade at the rate that makes the price of goods the same in each country. So if the price of a Big Mac translated into dollars is above $3.57, its cost in America, the currency is dear; if it is below that benchmark, it is cheap.”

Of course that’s a pretty simple study of PPP, which is probably why it’s so interesting. But as Bill Bonner often notes, things have a way of “regressing to the mean.” We won’t be too surprised if China slowly grows more expensive while Scandinavia comes back down to earth. Great Britan is a good example of this tendency… just a year ago, the Big Mac Index claimed the pound was 25% overvalued versus the dollar.
Commodities are on the rise today. The stock-buying spree has added $3 to crude oil, now at $66 a barrel. And the dollar’s reprieve has stopped gold’s decline. The spot price is up $10, to $940 an ounce.
“The government has started a ‘cash for clunkers’ program,” writes a reader, “to encourage car sales into the slumping U.S. economy. This program may cause some people to buy cars today, instead of next year, but what does that do to next year? The program may give a bump up in car sales this year, but can’t we expect a slump next year? Wouldn’t it be better to have level sales, even if they are low, rather than a bump today and a crisis tomorrow?

“Seems to me the government better be ready to issue the car companies more bailout funds next year. Perhaps the ‘clunkers’ are the car companies, rather than the older cars that qualify for the program. At the end of the day, we have two ‘clunker’ programs: The ‘cash for clunkers’ old car program and the ‘cash for clunkers’ car companies that are too big to ‘NEVER’ fail.”

Source:  Bond Bubble’s Back, USPS in Trouble, Healthcare Tech, Short the Euro and More!

But traders were cautious ahead of quarterly results from other U.S. banks, while lackluster data from Germany weighed on the euro and kept it rooted in a broad range against the dollar.

The slight rise in risk appetite also boosted higher-yielding currencies such as the Australian dollar at the expense of both the yen and U.S. dollar, which tend to see their biggest gains when investors grow anxious and buy them as safe havens.

“Retail sales were better than expected, so that’s a bit of good news, but there’s been little follow-through as the market is uncertain which way it wants to trade,” said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

The retail sales data came with some caveats, though, as traders noted much of the 0.6 percent gain in June retail sales was driven by higher gas prices.

Salvaggio also said data showing a sharp rise in U.S. producer prices last month, which pushed government bond yields up, may stoke inflation fears.

Midmorning in New York, the euro fell 0.1 percent to $1.3967 and rose 0.1 percent to 130.02 yen . The dollar edged up 0.1 percent to 93.10 yen . The yen had briefly erased losses against the dollar, pushing the greenback down to 92.72 yen as stocks dipped into negative territory, but fell anew as Wall Street recovered.

The euro’s woes were tied partly to a monthly poll of economic sentiment from German think-tank ZEW, which defied upbeat market expectations and fell in July for the first time in nine months.

Currencies considered higher risk, however, did better. Australia’s dollar rose 0.8 percent to $0.7889 , and sterling added 0.4 percent to $1.6297 . Strong Australian business confidence data and better-than-expected UK retail sales and home price data added to demand for both.

Source: NEW YORK, July 14 (Reuters)

And the green shoots brigade gained a firmer hold on investor sentiment. It has become okay to say that the global economy is out of the woods and that the rally in US stocks could be the beginning of a new bull.

Is this optimism justifiable? This is the question we’ll attempt to answer in today’s Notes.

“The whole credit collapse and the recession must have been a hoax,” writes our favorite underground analyst David Rosenberg at Gluskin Sheff.

Rosie is talking about the latest Investors’ Intelligence survey. It shows bullish sentiment at 47.7% (versus 42.5% the week before) and bearish sentiment all the way down to 23.3% (from 25.3% the week before).

Meanwhile, net inflows into US equity funds have been positive now for 12 consecutive weeks, with a total of $2.83 in fresh capital pouring in the week before last. Another sign of exuberance, as Rosie points out, for contrarian investors.

Maybe the bulls haven’t been paying attention to the catastrophe in exports. This from Rosie’s Friday missive:

The latest data on China’s outbound shipments showed renewed hints of slowing. Same for Korea. German exports plunged 4.8% in April and are off 28.7% from a year ago. Canadian export volumes sank 5.1% in April — and this transcended the problems in the auto sector — on top of 2.3% slide in March, taking Canada into a deficit position of $178 million in what is a vivid sign of a hugely overvalued loonie. U.S. export volumes also dropped 4.3% in April after a 0.5% decline in March, taking the YoYo trend down to a new all-time low of -20.4% from -13.8% in March.

Maybe the bulls just don’t care. This has been our suspicion here at Notes since the current rally US stocks kicked off in March. Let us explain…

The credit crunch and the collapse of onetime Wall Street darling Lehman Brothers last September spooked investors bad. Fear spread over a 1930s style great deleveraging, and stocks plunged as a result.

But are we really experiencing a great deleveraging? The upsurge in US stocks signals that we’re not… as does the more recent rise in crude oil prices. A deleveraging is by nature deflationary. But the rise in base metals, stocks and oil reveal that traders and investors are counting on deflation’s nemesis – and the nemesis of earners and savers – inflation.

We’re learning the lessons of history not by studying it but by repeating it. Warns underground investor Bob Carver over at MarketClues.com:

When the Bankster Debt Bubble burst in 2007 and 2008, it was popular for most to think that a great period of de-leveraging had begun. This happened in the Thirties and led to the Great Depression. It wasn’t pretty, but debt was either written off or paid off. The country learned a big lesson about banksters and how their bad decisions blew up the economy. Once those who had learned those lessons were gone, we had to re-learn those lessons, not by studying history, but by repeating it.”

Or, have we learned the lessons? Today, we not only have not learned the lessons of the Bankster Bubble, we are repeating and expanding the bubble of debt. Instead of a Bankster Bubble, we have a Government Debt Bubble that subsumes the Bankster Bubble and expands it. There is no de-leveraging going on. We are simply blowing a bigger bubble, waiting for the day when our lenders cut off the flow of funds.

Total debt is still rising sharply, according to the Fed’s Flow of Funds Report. In 2008, Federal debt grew 24% and in the first quarter of 2009 grew by 22.6% at an annualized rate. Household and business debt was virtually unchanged, while state and local government debt is rising at a 4.9% annual rate in 2009. Don’t take our word for it. OptionARMaggedon did some charts which show that the debt bubble is still expanding. The last two years were simply a sneak preview of what’s coming when the, by then much larger, debt bubble blows up in the future. The longer this goes on, the worse it will be. The public is sitting idly by while this pile of explosives is being built higher and higher, just waiting for the day when someone with a match lights the fuse.

Put simply, the only way out of a debt induced depression is to pay down debt or write it off. Leveraging up only delays the inevitable.

Given this “leveraging up,” it should come as no surprise that oil prices have risen sharply recently. The black goo is now trading at over $70 a barrel, just off its nine-month high of $73.20. The rate of gain is astonishing: oil prices have risen 100% since their $38 low in January.

Underground investor David Fessler at Investment U recommends four ways to profit from oil’s price moves (three long and one short).

• 1. Certainly one of the big drillers like TransOcean  (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
  2. The United States Oil Fund LP  (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
  3. If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN  (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
  4. But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone. For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

The 30-year Treasury is now at its highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts – which began in March – to keep yields down through direct purchases of government bonds.

Tom Porcelli, economist for RBC Capital Markets, described it as a “terrible auction.”

Why is this bad news? Because such poor demand in the face of America’s requirement for record amounts of public debt will make it very difficult for the Fed to keep interest rates low.

You see, politicians pretend that there are few adverse consequences to their worsening debt addiction. And since the collapse of the debt bubble in 2007, they have been putting Americans in hock like it was going out of fashion.

Of course, all of this borrowing has very real consequences for Americans. As investor confidence and risk appetite return and US equities rally, investors are turning their backs on the low-yielding US bond market. As investors shun US treasuries, interest rates move higher to lure investors back into the market. This rise in treasury rates puts pressure on interest rates everywhere – from homes to cars to the interest corporations must pay on any new bonds they issue. Mark our words, higher interest rates in this market will just wind up choking off any real recovery.

The very real consequence of the rising long-bond yields can be seen in the recent rise in mortgage rates. This, again, from the FT:

Mortgage rates have been following the government bond yields higher. A 30-year fixed-rate mortgage averaged 4.84 per cent last week, according to a Freddie Mac survey, compared with 4.78 per cent the week before.

As underground investor Tom Dyson (who edits the excellent 12% Letter ), a rise in the long bond’s interest rate can crush certain income investments.

If the long bond’s yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.

As Tom says, the long-bond market is “weaker than a wet paper bag” right now. He reckons the magic number for shorting long bonds is 124.07. And the long bond closed at 123.26 on April 28 and is now making new five-month lows.

Here at Notes we smell opportunity. We have our eye on the ProShares UltraShort 20+ Year Trea ETF (NYSE:TBT) . This ETF has risen over 6% in the last five weeks or so.

The dollar fell anew against the euro and yen while yields on U.S. and European government debt traded at or near historic lows on Wednesday, a day after the bold credit easing by the Federal Reserve to combat a worsening recession.

Oil prices dropped as much as $3 a barrel after dealers said a record supply cut by the Organization of Petroleum Exporting Countries would not be enough to counter slumping energy demand brought on by the global economic downturn.

Equity markets on either side of the Atlantic slid as the initial enthusiasm over the Fed’s surprisingly aggressive interest rate cut on Tuesday gave way to weak financial results at key banks and European data reinforced a dismal outlook.

Despite yields already at historic lows, investors piled into debt. Short-term government bonds still offer a safe-haven for investors fearful that a deepening recession will lead to further losses in other assets.

The yield on 30-year U.S. government bonds led a rally in the United States, touching a series of record lows to yield as little as 2.58 percent. Yields move in the opposite direction of bond prices.

“We are trading in no man’s land and expect this will continue into year-end,” said Thomas di Galoma, head of government trading at Jefferies & Co. in New York.

The benchmark 10-year U.S. Treasury note was up 36/32 in price to yield 2.14 percent.

Two-year German government bond yields hit their lowest level since the euro zone was created, with the two-year Schatz hitting 1.842 percent , according to Reuters data.

It was the lowest level since the rate-sensitive Schatz was launched in 1991.

The Fed’s surprisedly large cut further eroded the U.S. currency’s appeal against the euro, which has gained a staggering 11 percent so far during the month.

The dollar hit a fresh 2-1/2 month low versus the euro and fell towards a recent 13-year low against the yen, in a plunge that stoked speculation Japanese authorities may intervene to rein in its climb, which is hurting the nation’s exporters.

“The underlying story in the FX market remains yield. The fact that the Fed made this major policy move yesterday really changed the balance of power towards the euro for the time being,” said Boris Schlossberg, director of currency research at GFT Forex in New York.

The dollar fell against a basket of major currencies, with the U.S. Dollar Index off 1.48 percent at 79.011. Against the yen, the dollar fell 1.21 percent at 87.85.

The euro rose 1.65 percent at $1.4331.

U.S. and European stocks fell. Morgan Stanley shares slid after reporting a worse-than-expected $2.2 billion quarterly loss as the credit crisis caused more write-downs.

BNP Paribas revealed an 11-month loss at its investment banking unit, hit by exposure to an alleged fraud by U.S. financier Bernard Madoff.

“Weaker company data are back in focus,” said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Bonn, Germany.

“The news about BNP is the main trigger regarding European banks, while Morgan Stanley’s results only seem to seem to have a marginal impact,” he added.

Apple Inc was a major weight on the Nasdaq after the iPod maker said Chief Executive Steve Jobs will not deliver the keynote address at the Macworld trade show next month, reviving concern about his health.

Apple’s shares tumbled about 7 percent.

Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey, said investors were initially enthused after the Fed’s moves on Tuesday made it clear it would do whatever it takes to get the U.S. economy back on track.

“This morning we awaken with a hangover and the realization of how many bullets do they have left?” Arnuk said.

Before 1 p.m., the Dow Jones industrial average was off 41.50 points, or 0.47 percent, at 8,882.64. The Standard & Poor’s 500 Index was down 3.55 points, or 0.39 percent, at 909.63. The Nasdaq Composite Index was down 6.67 points, or 0.42 percent, at 1,583.22.

The FTSEurofirst 300 index of top European shares closed down 0.76 percent at 828.53 points.

OPEC announced an agreement to cut 2.2 million barrels per day of output starting Jan. 1 — the biggest single reduction on record — adding to previous cuts of 2 million barrels since September.

U.S. light sweet crude oil fell $2.36 percent to $41.24 a barrel.

Spot gold prices rose $8.00 to $864.70 an ounce.

Asian stocks rose overnight, supported by sectors sensitive to interest rates in anticipation regional policy-makers will take more aggressive steps to support growth after the Federal Reserve’s easing on Tuesday.

The MSCI index of Asian-Pacific stocks outside Japan rose 2.3 percent to the highest since Nov. 11. But Japan’s Nikkei share averagE shed early gains to end down 0.5 percent as the yen’s strength walloped exporters.

Herbert Lash
NEW YORK, Dec 17 (Reuters)

How do you measure these things? In yields. This, by the way, is how you’ll know the bubble is popping. When that happens (bond yields rise like a rocket ship) it’s going to unleash financial chaos. But for now, the bubble just keeps on getting bigger and yields on short-term U.S. bonds keep approaching-and even reaching-zero.

“The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent,” reports Bloomberg. It’s, “the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.”

How do you think that conversation goes?

“Thirty billion you say? For four weeks? And you’ll pay me how much interest?”

“Nothing.”

“I’ll take it!”

“If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56,” reports Daniel Kruger.

Yes. That’s how much investors currently prefer government backed bonds to equities at the moment. It implies there will be hardly any inflation at all over the next yen years. But that notion should make you spew milk through your nose as you laugh, unless you’re unfamiliar with the growth in the global monetary base. If so, let us remedy that.

Source: Federal Reserve Bank of St. Louis

You can see that in the U.S. alone the adjusted monetary base is…growing. So why isn’t the increase in the monetary base showing up in the kind of inflation that would terrify bond investors and lead to a rebound in commodity prices and equities? That’s another question we got last night.

The answer is that so far, the huge liquidity injections have been quarantined in the financial sector, mostly on bank balance sheets, or on deposits by banks at the Federal Reserve and other central banks. In other words, all the new money is going into bonds and central bank accounts, not into new business or consumer lending.

Put another way, the quantity of money is increasing, but its velocity is not. That’s because the new money isn’t getting into the hands of people who are just itching to spend it. But it will soon enough. And when it does, look for bond yields to rise and the great inflation to begin. Also, televisions and hookers.

“I think this will be the greatest time in my life to buy stocks at these prices. I just wish I had more capital,” said one of the attendees at the Doomer’s Ball last night on Southbank. We heard this sentiment time and again over the course of the evening. And there is no doubt that the valuations are good.

There is doubt, however, about what the Australian resource sector will look like in a world where capital is scarcer. Will it lead to a contraction in the number of viable firms? Is the credit crunch like a meteor strike that kills all the giant reptiles that fail to adapt to the new conditions? If it does, there will be a huge survivor bias favouring the stocks that remain.

But there was also some anxiety about further falls in stocks, especially the longer the bar was open at the Ball. One reader is forecasting another 20% fall on the ASX before the lows are in. In fact, if the All Ords reaches the 2003 lows (2,673) it’s a decline of 24% from today’s levels. If it overshoots that low-as markets tend to do when they correct-you’re looking at a thirty percent fall from current levels.

If you treat it as a thought experiment and ask yourself what would have to happen for the ASX to fall that much, you get some alarming possibilities. The liquidation of Oz Minerals? The dismemberment of Rio Tinto? The fall of a major investment bank or leveraged institution?

Or perhaps it’s something simpler: more falling prices for commodities. That’s what the World Bank seems to think anyway. As reported in the FT, the World Bank’s Global Economic Prospects report says the commodities boom has, “come to an end.” It adds that, “Over the longer run, the price of extracted commodities should fall.” It reckons slower population and income growth will contribute to slower resource demand growth.

Naturally, this is diametrically opposed to the logic of the boom that began in 1999. Then, you had 200 years of falling real prices for tangible goods seemingly reverse itself, mostly because of growth in global population and per capita income. So which thesis is right?

Well you know what we think. We think the Money Migration is the long-term transfer of the world’s wealth from the debt-based consumption economies of the West to the world’s savers and producers, roughly in the “East.” This certainly favours Aussie resources for at least a generation.

But the migration has been massively disrupted by the credit crisis, which is really just an epic attempt by the U.S. and other English-speaking economies to avoid their Day of Reckoning. But don’t you worry. That day is coming. It’s just taking longer than we originally thought. Ben Bernanke is a creative man. And he’s desperate too.

But why don’t we ask China what it thinks? After all, it’s a pretty important party to this discussion. China? What do you think? Hello China. Are you there?

Hmm. China is not taking our calls. Maybe that’s because some Chinese firms are too busy looking for ways to take advantage of the current situation by securing long-term supplies to resources at lower market prices. And maybe actions speak a lot louder than words about Chinese desire for Aussie resources.

“Shenzhen Zhongjin Lingnan Nonfemet Co., China’s fourth-biggest zinc producer by output, said it agreed to acquire a 50.1 percent stake in Australian miner Perilya Ltd. through a private placement,” reports Bloomberg. And Forbes reports that Chinese steel-makers are set to push for a major reduction in iron ore prices to reflect the fall in global steel prices.

The average price in October for a metric ton of iron ore fines, according to Forbes, was $US90.60. But Chinese steel makers reckon that with steel prices back at 1994 levels, iron ore prices should roll back to. In 1994, a metric ton of fines was US$20.40.

A lot has changed since 1994. Supply of ore is up. Demand is up too. But costs for resource producers are way up too. It’s unlikely the steel-makers are going to get a price cut that large. And if they do, it will put some smaller ore producers under enormous pressure (even harder to with stand if you don’t have access to credit).

Where are we then? A year ago BHP held the whip hand and chased Rio in a dream of grand ambition. Now BHP is reconsidering its strategy. Rio is reeling. And pricing power has switched back to resource consumers in China, who are eager to use the whip as well, it appears. There’s been a lot of whipping going on, hasn’t there? More on what it means tomorrow.

Finally, yes. We too saw the reports circulating that the International Monetary Fund is getting ready to dump a bunch of gold on the market. So far, we haven’t found anything to substantiate them. We’re looking around, and will report back on what Diggers and Drillers editor Al Robinson digs up as well. Until then…

Source: The World Bank Goes Nuclear on Commodities

A tentative rebound in global stocks spluttered on Wednesday while euro zone government bond yields hit a three-year low as gloomy economic news highlighted the case for more aggressive interest rate cuts in Europe this week.

The euro stayed on the backfoot and oil held near a 3-1/2 year low a day before the European Central Bank, Bank of England and Sweden’s Riksbank are all widely expected to cut borrowing costs.

Supporting those expectations, economic reports on Wednesday showed the euro zone’s services economy fell deeper into recession in November than initially thought and inflationary pressures eased.

“This is a horrible survey across the board, showing that the euro zone service sector is being hit ever harder by the financial crisis, muted consumer spending and markedly weaker activity in key export markets,” said Howard Archer, economist at IHS Global Insight.

Australia’s economy grew at its slowest pace in eight years in the third quarter as gathering recession abroad and evaporating equity wealth at home curbed spending by consumers and businesses.

Central banks worldwide are cutting rates to fight recession. They are also considering more measures to stabilise financial markets and restore battered consumer and investor confidence, including help for struggling U.S. auto makers.

The FTSEurofirst 300 index of top European shares fell 1.5 percent in early trade with Britain’s FTSE 100 index down 0.9 percent and Germany’s DAX  shedding 1.7 percent.

MSCI world equity index eased 0.4 percent.

“The markets are still looking very tender,” said Justin Urquhart Stewart, investment director at Seven Investment Management.

“Markets are not focusing on any of the good news and the good news is rates are being cut, commodity pries are coming down, stimulus packages are being put together and banks are being supported. But the market’s feeling very depressed.”

Japan’s Nikkei managed to eke out a 1.8 percent gain following a rebound on Wall Street on Tuesday, but MSCI’s measure of other Asian stock markets put on just 0.2 percent.

EURO PRESSURED AS ECB CUT EYED

Also under pressure, the euro fell 0.7 percent against the dollar on the day to $1.2626 and was also weaker against the yen , while the dollar climbed 0.6 percent against a basket of major currencies.

But demand for less risky assets continued to mount, helping to push government bond yields lower.

The 10-year euro zone government bond yield plumbed a low of 3.004 percent — a level last seen in Sept. 2005, while the benchmark 10-year yield for U.S. Treasuries was at 2.727 percent, not far off a five-decade low of around 2.651 percent set on Monday.

“Economic indicators are plunging like there is no tomorrow and central banks are gearing up for significant easing,” said Elwin de Groot, a strategist at Rabobank, noting 100 basis point rate cuts from Australia and Thailand this week.

The ECB meets on Thursday and most economists expect an interest rate cut of 50 basis points, while the Bank of England is forecast to cut rates by an aggressive 100 basis points.

Sweden’s central bank is likely to slash rates by a record 100 basis points, or possibly more, on Thursday when it announces the result of its meeting, which it brought forward by almost two weeks.

Meanwhile, U.S. crude edged up 41 cents to $47.37 but was within striking distance of Tuesday’s trough of $46.82 — a low last seen in May 2005.

Gold slipped to $774.80 an ounce, down $6.70 from New York’s notional close on the back of a broadly firmer dollar.

By Ian Chua
LONDON, Dec 3 (Reuters)

A weaker oil price reflecting poor economic demand ahead shut off a rally in world stocks on Friday while government bond yields sank.

Wall Street looked set for a poor start and the dollar recovered from early losses.

Oil fell below $54 a barrel, on course to end the month down more than 20 percent, as OPEC ministers prepared to meet in Cairo to discuss potential further supply cuts to combat a global fall in demand .

Indian stocks were higher as a siege in Mumbai between police and Islamist gunmen continued, but India’s 10 year bond yield fell to its lowest level in three years on expectations that the attacks will an impetus to rate cuts.

Globally, the MSCI all-country world index was flat, although it had gained around 11.6 percent, the first weekly gain in four weeks.

“On a range of measures, there is undoubted value to be found in many of the world’s equity markets,” said Sarah Arkle, chief investment officer with Threadneedle Asset Management.

But economic woes held back an earlier rally.

The pan-European FTSEurofirst 300 was down 0.3 percent, led lower by oil-related companies.

Earlier, Japan’s Nikkei average climbed 1.7 percent for its best week in a month. It gained 138.88 points to 8,512.27, while the broader Topix was up 0.7 percent to 834.82.

A monthly Reuters survey found that Japanese retail investors became slightly less pessimistic about domestic equities in November, fitting with other signs globally that recent market sell offs may be bottoming at least temporarily.

OPEC TO MEET

Oil fell below $53 a barrel for a while before recovering slightly. The Organization of the Petroleum Exporting Countries is to hold an informal meeting on Saturday in Cairo, as it struggles to slice output fast enough to keep pace with a recessionary reduction in fuel demand in the West that has sent crude prices down nearly two-thirds since July.

U.S. light crude for January delivery stood at $53.32 a barrel, down $1.12.

The dollar regained traction against major currencies after early losses.

It was 0.2 percent higher against a basket of six major currencies, while the euro lost 0.4 percent to $1.2838 . The dollar lost 0.1 percent to 95.22 yen .

Euro zone government bonds rose, reflecting concern about the economy and expectations of interest rate cuts. Two-year Schatz yields sank 10 basis points to 2.213 percent.

By Jeremy Gaunt, European Investment Correspondent
LONDON, Nov 28 (Reuters)

Bond yields have risen sharply off their four-year lows in mid-March. Core inflation is strengthening. Also, the broadest gauge of money supply, the expansion of credit, is running at a dizzy 16% annualized rate. This data suggests the Fed is way behind the inflation curve and will start raising lending rates this fall.

But could the market be wrong?

I believe this rate hike prediction is WAY too premature. In fact, I’d say the Fed’s not even done easing credit conditions at this point. I’m still forecasting the Fed will hack the Fed Funds rate by at least another 1% before this easing cycle is over. The Fed Funds rate now sits at 2%.

To heal the banking system, the Fed must remain accommodative. Meanwhile, housing is still in a complete freefall and it’s showing no signs of bottoming. That’s yet another industry that can’t afford higher rates. Plus, with the unemployment rate gradually rising since last winter, the Fed will unlikely start cutting off precious liquidity when consumers and companies need cash flow.

Banks are still bleeding losses. It’s becoming increasingly clear that the credit crunch is far from over. Wachovia and Washington Mutual won this week’s booby prize for dropping another bomb on the financial services sector.

Mark my words: the Federal Reserve will sacrifice the dollar in its desperate attempt to revive growth and bank lending. Provided the bond market doesn’t fall apart along with stocks, this strategy should continue for the remainder of 2008.

I don’t expect the dollar to post big losses from these levels, but it won’t post a major bear market rally under these circumstances, either. Eventually, and assuming oil prices come down, the euro will start to deflate along with other European currencies, which I view extremely overvalued against the dollar.

The way to play this sluggish economy is to remain invested in select commodities, including gold, high grade corporate bonds, blue-chip global multinationals (excluding most banks) and Asian currencies, including the yen.

ERIC ROSEMAN, Investment Director

EDITOR’S NOTE: Click here to get an insider’s look at Eric’s commodity portfolio – and find out how to make 600 to 900% off his favorite brand of commodities for 2008.

Source: The Fed’s Not in a Rush to Raise Rates

Specifically, real estate and the German wage demand has been threatening Europe’s post 2003 boom. But frankly, it’s not just real estate or German wage demand threatening Europe’s post-2003 boom…it’s the high current account deficits.

Most of the European Union’s newest members over the last five years sport dangerously high current-account deficits. These are the same kind of economic imbalances that triggered the Asian Contagion in 1997.

Speculators specifically target countries that have vulnerable economic imbalances, once these countries’ respective trade balances turn decisively negative.

Iceland is the latest casualty this year with its economic imbalances. Hedge fund managers and other speculators are swooping in following a series of margin calls on Iceland’s banking system.

Iceland, by all intents and purposes, has literally been run like a hedge fund since 2002. Banks made huge bets on global stocks, venture capital and other investments with leverage. Now the credit crunch is coming home to roost. Iceland’s current-account deficit as a percentage of GDP is now a staggering 14.8%.

Other countries are in far worse shape than Iceland, but speculators have yet to attack because of their close relationship with the EU. Latvia and Bulgaria harbor wickedly high current-account deficits at 22.8% and 21.6% of GDP, respectively. Other danger spots are Estonia (15.9%), Romania (13.9%), and Lithuania (13.7%).

Italy, a bastion of some of the finest manufactured goods in the world, remains an economic basket case. The stock market has been among the worst performing bourses in Western Europe over the last three years.

Italian government bond yields remain excessively above those of comparable German bonds, indicating investors are worried about sovereign credit risk in 2008. Greece is also in this camp and has recently been joined by Spain and Portugal as yield-spreads or the difference between Eurozone government debt markets, continues to widen. That’s something that shouldn’t happen because all countries share the same currency.

For Europe, the main issues and challenges in 2008 are “bubbles” in several real estate markets; economic overheating and chronic trade deficits in Eastern Europe; rising wage pressure in Germany, and high producer and consumer prices.

All these issues will compel the European Central Bank to stand firm on monetary policy at a time when credit markets are still fragile.

ERIC ROSEMAN, Investment Director