Mish's Global Economic Trend Analysis

Laid Off Firefighter Panhandles On Street
Playing Chicken with Debt Limits: Obama as a Senator vs. Obama the Hypocrite President Today
Sound Money, Gold Fever, and Crackpot Ideas
Hedge Funds Raise Crude Bets to Four-Year High; CFTC's Position Limit Plan Gains Steam; Everyone is Happy; Impact on Silver and Crude

Laid Off Firefighter Panhandles On Street

Posted: 05 Jan 2011 07:14 PM PST

Here is a story of a laid-off firefighter blaming the wrong thing for his woes. Meet Jason Pickering begging for money.

"We took an oath to save people's lives ... and the city just threw us to the curb," Jason Pickering told WGN-TV.

The 34-year-old Pickering, a 10-year department veteran and one of 34 Gary firefighters who lost their jobs, now goes out begging, dressed in his cold-weather firefighting gear, collecting dollar bills in a boot. A hand-made cardboard sign he has strung around his neck reads: "Laid off Gary firefighter. Family of 6. Thank you and God bless."

Since Sunday, he has collected $475. But he says it's not enough to make ends meet for his wife and four children. At the end of January he will lose his health insurance, and he gets only $350 a week in unemployment compensation.

Jason says he will continue begging and protesting the layoffs.

Hello Jason. The city did not put you on the curb. The union did. Gary is broke. And now so are you. And the reason why Gary is broke is the same reason why you are broke. That reason Jason, is the union. The union refused to take pay or benefit cuts to save your job. That is why you are on the curb.

You see Jason, the union does not give a rat's ass about you. All the union cares about is preserving the pay and benefits of senior members.

Jason, if you want to protest, I suggest you stand outside your former headquarters and ask every firefighter going into the building why they voted to put you on the curb.

Then again, Jason, how did you vote on those wage and benefit cuts the city needed? If you voted no, the harsh reality is you helped put yourself on the street.

By the way Jason, unemployment benefits are taxable. Now that you are panhandling, how does it feel to have taxes collected out of your small check to pay monstrous benefits to the remaining union members who tossed you on the curb?

Think about that Jason while you are whining about your lost job begging everyone else who has been in your situation for years, paying taxes so that you accrued benefits they will never see.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Playing Chicken with Debt Limits: Obama as a Senator vs. Obama the Hypocrite President Today

Posted: 05 Jan 2011 12:21 PM PST

President Obama is very concerned that Republicans might "Play Chicken" with the debt ceiling. The president is so concerned his aids are sending out dire warnings about dollar defaults and "catastrophic impacts" to the economy.

Please consider Don't 'play chicken' with debt ceiling

Some Republican lawmakers said Sunday they opposed raising the ceiling on the nation's debt without tackling government spending, and President Barack Obama's top economic adviser warned against "playing chicken" on the issue.

Austan Goolsbee, the chairman of the White House Council of Economic Advisers, said that refusing to raise the debt ceiling would essentially push the country into defaulting on its financial obligations for the first time in its history.

"The impact on the economy would be catastrophic," Goolsbee told "This Week" on ABC. "That would be a worse financial economic crisis than anything we saw in 2008."

Goolsbee added: "I don't see why anybody's talking about playing chicken with the debt ceiling."

Flashback March 20, 2006 - U.S. Senate Floor

Inquiring minds just may be wondering what the president's position was when he was a senator, just a few year's back.

Please consider Flashback: Previous Debt Limit Votes Have Not Been Good Ones

March 20, 2006: This was the last stand-alone debt limit vote on which then-Senator Obama voted. He was one of 48 members to vote against the increase, which passed with 52 votes.

He said: "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. … Increasing America's debt weakens us domestically and internationally. Leadership means that 'the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

Truer Words Never Spoken

America's debt problem is a "sign of leadership failure"
We have "reckless fiscal policies"
Washington "shifts the burden of bad choices today onto the backs of our children and grandchildren"
America has a debt problem and a failure of leadership.
Americans deserve better

Yes Mr. President, America does deserve better. I suggest you do the best thing you can possibly do for your country today: Resign.

Since that is unlikely, I urge Republican to take the measures Obama recommended in 2006 when he crossed party lines and voted with Republicans in 2006 to not raise the debt limit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Sound Money, Gold Fever, and Crackpot Ideas

Posted: 05 Jan 2011 09:58 AM PST

Larry Hilton, an attorney and insurance salesman has authored the "Utah Sound Money Act". A couple of state legislators are considering sponsoring the bill. Here are a few things the bill would do.

Requires State To Accept Gold As Money

Among other things the sound money act requires the state to accept gold as payment and would allow but not mandate businesses to accept gold as payment.

Creates Defense Force to Protect Gold

Part 5 of the bill requires the governor to "recruit, form, train and deploy such troops and regiments of the Utah State Defense Force ... as the Governor may deem necessary and appropriate to store, safeguard, protect and transport the Registered Specie holdings of all Utah Governmental Entities, as well as provide a means for the exchange, between and among Utah Governmental Entities and Utah Taxpayers, of Registered Specie, either by transfer of ownership of the same held in a secure storage facility or by physical delivery according to the recipient's preference."

Mandates Treasurer to Fix the Price of Gold and Silver Periodically

The Utah State Treasurer would have responsibility to "periodically set a Specie Exchange Rate for gold as well as one for silver. These rates shall equate a specific quantity of Federal Reserve Notes, or fraction thereof, to one Troy grain of each metal."

Periodically means "no more than once per day, bank holidays and weekends excluded. Newly set Specie Exchange Rates shall not be disclosed to anyone other than the Utah State Treasurer's staff until such new rates take effect at 12:01 a.m. the following day, at which time the new rates shall be published and readily available to Utah Taxpayers, residents and citizens."

Limits Price Movements

Moreover "No single Specie Exchange Rate change effected by the Utah State Treasurer shall differ by more than one percent from the previously effective rate."

Crackpot Idea?

The Salt Lake Tribune "Gold Fever" editorial calls Larry Hilton's proposal a "crackpot idea".

The 2011 session of the Utah Legislature is looking like uncommonly fertile ground for crackpot ideas. So far there is a bill to name an official state gun and two calling for conventions to amend the U.S. Constitution. But the most outrageous scheme to surface yet is the Utah Sound Money Act, a system of commerce within the state that would be based on gold and silver coins.

So far, the bill hasn't found a sponsor. Here's hoping it doesn't. Utah can't secede from the Union, and it shouldn't try to secede from the federal currency, either.

Volatility Argument Flawed

The editorial's primary argument against Hilton's bill was in regards to volatility of the price of gold, measured in dollars. The irony of that logic is that price volatility of nearly everything is a result of boom-bust cycles caused by the Fed and fractional reserve lending.

Prior to the Fed, boom-bust cycles were exacerbated by banks lending out more paper gold than there was backing for it. Fractional Reserve Lending has always been a problem with banks and needs to be stopped.

It is governments, paper money, and fractional reserve lending that create volatility.

Hilton's Bill Fatally Flawed

However, Hilton's bill is indeed fatally flawed for numerous reasons including price fixing by the treasurer and authorization of a defense force to protect stored gold. As a practical matter, gold owners would not pay dollar debts in gold in the first place.

One does not (or at least one should not) attempt to fix the price of gold in dollars. Nor can one set prices once a day or hold price movements to 1% a day. Those are flawed ideas that cannot and will not work.

Instead, one dollar should represent a fixed amount of gold and every dollar should be 100% backed by that amount of gold.

Gold will buy what it will buy, and prices of goods and services will fluctuate by supply and demand. As a result, prices will be far more stable under a 100% gold backed dollar. Those who disagree need answer this question: How can the purchasing power of dollars backed by something not be more stable than dollars backed by nothing and conjured into existence at will by the Fed?

In spite of Hilton's good intent, a 100% gold-backed dollar is a proposal that must happen at the federal level. I am quite sure Ron Paul will introduce a valid proposal in due time.

In the meantime, as convoluted as Hilton's bill is, it's important to remember the crackpot idea here is not a gold backed dollar, but rather crackpots who would rather have a dollar backed by nothing than gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Hedge Funds Raise Crude Bets to Four-Year High; CFTC's Position Limit Plan Gains Steam; Everyone is Happy; Impact on Silver and Crude

Posted: 05 Jan 2011 01:55 AM PST

Hedge funds, pension plans, and small speculators have all been plowing into commodities with abandon. The result is easy to spot, particularly in the energy markets.

Bloomberg reports Hedge Funds Raise Crude Bets to Four-Year High

Hedge funds raised bullish bets on crude oil to the highest level in more than four years on speculation that futures will climb as the U.S. recovers from the deepest recession since the 1930s.

The funds and other large speculators increased net-long positions, or wagers on rising prices, by 4.6 percent in the seven days ended Dec. 28, according to the Commodity Futures Trading Commission's weekly Commitments of Traders report. It was the biggest total in records going back to June 2006.

Oil prices will average $93 a barrel this year and are "very likely" to climb above $100, Jason Schenker, president of Prestige Economics in Austin, Texas, said yesterday in an interview with Deirdre Bolton on Bloomberg Television's "InsideTrack."

Futures advanced as high as $92.58 yesterday after the Institute for Supply Management's U.S. factory index climbed to 57 in December, the fastest pace in seven months. Fuel demand increased to the highest since May 2008 in the week ended Dec. 24, Energy Department figures showed last week.

"Crude oil prices are up, and people expect them to keep going up," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "It speaks to the frame of mind that people are in more than it speaks to the underlying reality. We have no physical tightness here."

CFTC's position limit plan gains needed support

Please consider CFTC's position limit plan gains needed support

A top official at the U.S. futures regulator said on Tuesday he was now in favor of a stalled position limit plan, a key turnaround that would allow the controversial rules to advance to the public comment stage.

The Commodity Futures Trading Commission introduced on December 16 its long-awaited plan to curb speculation in the metals, agriculture and energy markets but at the meeting, Chairman Gary Gensler abruptly postponed a vote on the proposal.

Commissioner Bart Chilton, the most vocal proponent of cracking down on speculators, was key to the postponement as he told Reuters he would have voted against the plan. It would have included a two-step approach to allow more time for the agency to gather information on the opaque swaps market.

"While I will now support publishing a position limit proposal for public comment, I will continue to make the case that we need to address excessive speculation in these markets immediately," Chilton said in a statement on Tuesday.

A coalition of businesses dependent on buying commodities which has pushed for the limits said it supports Chilton's plan as an interim measure.

"In light of the existence of large speculative positions in today's energy and agricultural markets, it is imperative that the Commission to do something now, and without delay, in order to address these large positions and send a message of confidence and certainty to market participants," said Jim Collura, spokesman for the Commodity Market Oversight Coalition.

U.S. Commodity Regulator to Review Speculation Limits

Let's flash back to December 16 and a recap of U.S. Commodity Regulator to Review Speculation Limits

The top U.S. commodities regulator will consider today steps to curb speculation in raw materials including oil, gold and wheat as part of the most sweeping rewrite of Wall Street rules since the 1930s.

Four of five members of the Commodity Futures Trading Commission said they will vote in favor of publishing a two-part proposal to restrict the number of contracts one firm can hold. The plan, if approved after a 60-day public comment period, would limit traders to 25 percent of deliverable supply in the contract nearest to expiration, followed by an all-month ceiling of 10 percent of open interest up to the first 25,000 contracts and 2.5 percent thereafter.

"At the core of our obligation is to protect market integrity," Gensler said at the hearing today. The rule will shield the markets from excessive speculation by ensuring positions aren't too concentrated, he said.

Gensler, along with Commissioners Bart Chilton, Scott O'Malia and Michael Dunn said they will vote today in favor of publishing the rule for comment. Dunn and O'Malia said they may not ultimately support imposing position limits. Commissioner Jill Sommers said she would vote against the rule.

"It's bad policy to promulgate regulations that are not enforceable," Sommers said, adding that the commission lacks the data needed to enforce effective caps.

"Without specific swaps data, we have no ability to claim we are applying enforceable limits without understanding the full size of the market," O'Malia said in a statement.

The plan exempts so-called bona fide hedgers who use contracts to offset commercial risk. Swaps dealers, who sell derivatives, are free from limits as long as the transaction is made on behalf of an end-user, while facing caps for trades made to mitigate bets dealt to speculators.

The proposal covers 28 commodities, including crude, natural gas, gasoline, heating oil, gold, silver, copper, platinum, palladium, corn, oats, rice, soybeans, soybean meal, soybean oil, wheat, feeder cattle, live cattle, lean hogs, milk, cocoa, coffee, orange juice, sugar and cotton.

The commission estimated that the spot-month rules would affect 70 traders in agricultural contracts, six in base metals, eight in precious metals and 40 in energy. The combined caps may affect 80 agriculture traders, 25 in base metals, 20 in precious metals and 10 in energy.

Nearly Everyone Is Happy (For Now)

"Super Silver Bulls" want limits thinking it will force prices up and crush JPMorgan. Meanwhile, buyers of energy and agricultural goods think limits will reduce prices. For a while, this means bulls, bears, and buyers all all happy.

The only ones not happy with limits are a the few commissioners who think limits will not work. I side with those who think limits will not work. I have both short and long-term reasons.

Short-term, position limits will likely reduce liquidity and further distort the markets.

The most likely long-term impact is that trading will move to less regulated foreign exchanges. If so, US commodity exchanges will lose their global importance.

Long-term, commodity prices are going to go where they are going to go anyway. Attempts to curb speculation brought on by loose policies of the Fed cannot work in the long run.

The Impact on JPMorgan

Short-term prices might depend on exactly what the limits are, who is affected, and how the CFTC implements the rules changes.

Here is one key paragraph: "The plan exempts so-called bona fide hedgers who use contracts to offset commercial risk. Swaps dealers, who sell derivatives, are free from limits as long as the transaction is made on behalf of an end-user, while facing caps for trades made to mitigate bets dealt to speculators."

I fail to see how that will necessarily curb JPMorgan's massive short position. (I am assuming JPMorgan is hedged). However, let's assume JPMorgan is not hedged.

How will the CFTC phase in the rules? If they do so by limiting the buying of silver futures until position limits are reached (the method used to end the Hunt cornering attempt) , then silver will likely get hammered short-term.

Thus, I do not agree with zero-hedge who writes "And if indeed this news was the catalyst for today's precious metal and other commodities sell off, it is woefully misinterpreted, as the only major institutional parties impacted will be those who hold outsized short positions in the precious metals space."

It's not that Zero-Hedge is necessarily wrong; it's just that he is not necessarily right.

However, if I had to bet one way or another, I would bet that whatever method the CFTC comes up with will not adversely impact JPMorgan in any significant way.

Thus, if anyone is impacted in the short-term, I suspect it will be silver longs, even though long-term the price of silver will get to wherever it is headed.

My friend "HB" agrees. He just pinged me with this comment. "The GATA crowd should be livid when it realizes that position limits may - gasp - depress the silver price."

Crude COTs

click on any chart below for sharper image

Crude Weekly Chart

Commodity charts and open interest are not always as correlated as show above.

By the way, much of that crude open interest is hedging various crack spreads (crude vs. gasoline, heating oil, diesel, etc).

Crack spread is a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it - that is, the profit margin that an oil refinery can expect to make by "cracking" crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products).

In the futures markets, the "crack spread" is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more derivative products, typically gasoline and heating oil. Oil refineries may trade a crack spread to hedge the price risk of their operations, while speculators attempt to profit from a change in the oil/gasoline price differential.

Is the CFTC ready to sort this all out?

Silver COTs

It is hard to predict anything at all regarding the price of silver from the following COT chart.

Silver Weekly Chart

Finally, it is worth pointing out that commodities in general simply might be ready for a strong pullback. Sentiment is extreme. It it happens, attributing precious metal declines to a smackdown by gold and silver shorts is beyond silly.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Wednesday, January 5, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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