Friday Lite

Another bruising week in nearly every market - maybe it's time to go on vacation and check back in around Labor Day. Had market participants sold in May and gone away, a summer vacation could have been much more luxurious than one paid for with proceeds from recent sales.

Oh well - on to the Liteness that is Friday.

Commodities and Credibilities

One thing that hasn't been bruised in the last few weeks is the credibility of central bankers. It's too bad you can't trade futures contracts for central bank inflation fighting credibility. Maybe now that the Chicago Mercantile Exchange offers futures and options trading for residential real estate they'll offer a similar product for central bankers where traders can place bets on how successful Federal Reserve officials are in influencing inflation expectations.

If you'd had call options on the Fed talking inflation down, you would have done quite well over the last month - maybe it's time to sell the calls and buy some puts.

The commodities markets have taken a beating as a result of all the inflation fighting talk. Gold and silver are dropping like rocks and copper is back down around $3.40 from highs near $4. But, what does the recent market correction really mean? Was that the popping of a commodity bubble?

To put things into perspective, consider the chart below - a precipitous decline, following a strong run-up from under $500 which commenced shortly after Ben Bernanke was nominated as new Fed chief last fall.
A rise of 70 percent in a year is a bit much, but the vast majority of this gain occurred within a six month period leading up to the May high - maybe gold and other commodities are already off on an early, extended summer vacation.

Double Counting of Gold

Speaking of the price of gold, the IMF has recently reported that central banks, one in particular, have been counting gold that has left their vaults as though it were still there.

International Monetary Fund (IMF) seems to have had apparently directed member central banks to double-count their gold when it had been leased or swapped or otherwise had left a central bank’s vault or possession. Such a provision allowance for the central banks may have led to the gold price suppression which lasted between 1989-2001, after which price started moving upwards.

Gold hit a 26-year high of $732 an ounce on May 12. Gold has dropped 11% since then. Gold has not yet been able to cross the high of $ 830 mark it hit in 1988.

Central bank of US in particular has been seen as the primary mover in suppressing the gold price by lending the gold for trading without accounting for it. However, there have been no concrete proofs in this regard.

The paper, “Treatment of Gold Swaps and Gold Deposits (Loans),” written by Hidetoshi Takeda of the IMF’s Statistics Department and published in April acknowledges at length the potential for double-counting central bank gold under current IMF rules and suggests rules to prevent it.

Maybe that's why Fort Knox hasn't been audited in twenty five years.

The Best Week Ever

No, not the markets - no more talk about financial markets today. This week has been the best week ever in the ongoing quest to secure the number one spot on all the major search engines for the phrase, "Friday Lite".

Previously the best showing was #1, #1, and #7 on Google, MSN, and Yahoo! respectively, which was followed by a big fall at MSN and a slight rise at Yahoo!.

This week, as has been the case for months now, the top spot is secured at Google, but this blog is also back in the good graces of Yahoo!, garnering the top two spots there. As the normal check sequence is Google, Yahoo!, and MSN, there was brief hope that a trifecta would be achieved, however, the search at MSN shows a third place finish.

It's the usual nemeses again - Strategic Public Relations and The View from Her. Perseverance will win in the end - it's just a matter of time.

A Damn Fine Dam

The Three Gorges Dam took on its first real strain earlier in the week after a temporary dam that had protected it during its construction was demolished. There were additional cofferdams set for demolition later this week, all leading up to the full operation of world's largest hydroelectric dam, five times the size of Hoover Dam.

The Three Gorges Dam has been engineered to prevent and control floods and "even in the rare occurrence of a 1,000 year flood, mass damages or injuries can still be prevented," according to Zhang.

Deadly floods are a frequent occurrence along the Yangtze, China's longest river and the world's third longest after the Nile and the Amazon.

The floods have claimed more than a million lives in the past century, with the latest flood, in 1998, responsible for about 1,000 deaths and approximately 100 billion yuan (US$12.5 billion) of damage.
...
Designed for power generation as well as flood control, when operating at full capacity the dam's generators are expected to produce 18.2 million kilowatts of energy up to one ninth of China's output.

Damn, that's a lot of energy.

A Damn Fine Movie

The Da Vinci Code was pulled from movie theatres across China after only three weeks in general release. Ticket sales were brisk, and it was well on its way to becoming one of the highest grossing foreign films of all time.

The withdrawal is to make way for domestic movies, Weng Li, spokesman for China Film Corporation one of the two co-distributors of the Hollywood blockbuster on the Chinese mainland told China Daily yesterday.

The decision was made in response to calls for promotion of domestic movies by the Chinese Movie Distributors' Association, the Chinese Movie Producers' Association and the Chinese Urban Movie Theatres Association last month, he said.

"We are not against foreign films," the spokesman noted. "My company will continue to arrange their screenings in China according to market demand."

A gatekeeper at the Cineplex in Beijing's upscale Oriental Plaza said: "It is surprising news. The movie has drawn the largest number of viewers in the year."
...
Before the movie was released in China, the Chinese Catholic church issued a notice to followers nationwide asking them to "firmly boycott" it, accusing the movie of going against, and distorting, the tenets and history of the Catholic church.

Maybe it was Tom Hanks' hair that was objectionable, it certainly couldn't have been anything to do with Audrey Tautou.

Mentos and Soda

Poking fun at their goofy TV spots isn't the only enjoyment that can be derived from Mentos candy. According to this report, the small oblate spheroids, with a slightly hard exterior and a soft, chewy interior, have a violent reaction to carbonated drink.

What happens when you put a handful of Mentos candy into a bottle of diet soda? As many fans of Web video have found out, the results are pretty explosive.

But it's no secret -- folks are taking video cameras and posting images of their homemade soda explosions on the Internet -- and there is actually a scientific explanation. Michele Norris speaks with science correspondent David Kestenbaum about the science behind Diet Coke and Mentos.

Torrey's science experience can be viewed on Google Video here, while the much more elaborately produced eepybird film, which concludes with an oral demonstration, can be found here.

Gold is Really a Noxious Gas

From The Onion it is learned that gold is really a noxious gas - at least that's what one rogue scientist claims.

Only months after abandoning a tenured position at Lehigh University, maverick chemist Theodore Hapner managed to disprove two of the three laws of thermodynamics and show that gold is a noxious gas, turning the world of science—defined for centuries by exhaustive research, painstaking observation, and hard-won theories—completely on its head.

The brash chemist, who conducts independent research from his houseboat, has infuriated peers by refusing to "play by the rules of Socrates, Bacon, and Galileo," calling test results as he sees them, despite overwhelming evidence to the contrary.

"If you're looking for some button-down traditionalist who relies on so-called induction, conventional logic, and verification to arrive at what the scientific community calls 'proof,' then I'm afraid you've got the wrong guy," said the intrepid 44-year-old rebel, who last month unveiled a revolutionary new model of atomic structure that contradicted 300 years of precedent. "But if you want your results fast and with some flair, then come with me and I'll prove that the boiling point of water is actually 547 degrees Fahrenheit."
...
Hapner is undoubtedly taking a great risk with his latest study, but the maverick scientist is confident his work will pay off.

"Bombarding a plutonium nucleus with accelerated electrons, long believed to produce a nuclear fission reaction, has, in fact, no consequence at all," Hapner said. "I'm going to prove that if it's the last thing I ever do."

Independent research performed on houseboats has been proven to be the most reliable form of research.

Read more...

A Cat amongst the Pigeons

More tough talk was heard yesterday from the Federal Reserve. According to this story($) in the Wall Street Journal, William Poole, president of the Federal Reserve Bank of St. Louis has about had it with the "inflation wimp" tag that has been applied to the boys (and girls) in the big leather chairs that meet every six or seven weeks to set short-term interest rates.

It seems they're ready to bring the entire world economy down in order to get core inflation back to two percent.

"If inflation turns out to exceed ... our target range, I do not believe we can count on a slowing economy to bring inflation down, by itself, quickly," William Poole, president of the Federal Reserve Bank of St. Louis, said in an interview. If inflation expectations rose in "a persistent way...we could expect to see that show up in measured inflation in fairly short order."

Mr. Poole said to keep expected inflation from rising further, the Fed needs "an upside bias" in setting interest rates.

Mr. Poole, who has held his job since 1998, has long been on the hawkish side of the policy-making Federal Open Market Committee. The FOMC consists of seven Washington-based governors and 12 regional-bank presidents, of whom five vote in a given year.

Nonetheless, Mr. Poole's remarks echoed Fed Chairman Ben Bernanke, who on Monday indicated he is more concerned about the recent rise in inflation than signs of slowing economic growth. Mr. Bernanke's remarks prompted futures markets to sharply increase the odds that the Fed will raise its short-term interest-rate target to 5.25% from 5% at its meeting on June 28-29. Mr. Poole's remarks, made in an interview Monday and published yesterday on WSJ.com and Dow Jones Newswires, caused those odds to rise further, to 80% from 72% Monday and 48% Friday.

The tough talk is certainly having an impact on financial markets, however the combination of the lagged effect of previous rate moves and a long history of the Fed tightening too much has to weigh on the makers of monetary policy going into another election this fall.

Everyone understands high gas prices, while virtually no one understands high health care costs, but few blame the Fed for the pain at the pump or their higher co-pays. When consumer confidence polls show expected inflation increasing to five percent or more, why should this be a cause for concern? People's homes are still increasing at twice that rate, and have been for years - no one ever complained about reigning in those price increases.

And you can still buy lots of imported goods at low prices at your favorite Big Box retailer.

Apparently the "inflation expectations" concern is based on studies, by none other than new Fed Chair Ben Bernanke, showing that long term economic growth is enhanced when people believe that prices are not rising too quickly.

When the public expects higher inflation, it may set prices and wages in a way that makes that expectation a reality. Mr. Poole said that effect is more powerful than the "output gap," the idle capacity that exists when the economy is operating below its potential. "If inflation expectations were to rise ... it might take a very long time before the [output gap] would be able to offset what's going on with inflation expectations."

Mr. Poole noted that investors' expectations of inflation, judging from the behavior of inflation-protected Treasury bonds, have risen about 0.2 percentage point this year. "It's not a huge number, but from my perspective, it's going in the wrong direction" because inflation is already "at the upper end of what I would like to see." Many officials say they prefer that inflation, by their favored price index, remain between 1% to 2%, which Mr. Poole called a "fully acceptable range," though he personally would prefer a lower target. By that measure, inflation was 2.1% in April.

Analysts say Mr. Bernanke's speech may in part have been meant to squelch doubts of his willingness to administer tough anti-inflation medicine. If so, he appears to have succeeded.

With the release of yesterday's consumer credit report, where outstanding consumer installment credit increased at three times the expected rate, this tough talk would be better described as anti-economy medicine.

Americans like their credit plentiful and cheap - it's our birthright.

With the release, later today, of the Federal Reserve's Flow of Funds report, there will surely be more indications of an insatiable appetite for debt in the U.S.

Does Ben Bernanke realize that the U.S. economy, and hence the entire world economy, is based on easy money?

Read more...

The Return of the Short Sale

If you lived in California about fifteen years ago you probably remember short sales - it looks like they're about to make a comeback. A report from Sacramento this week sounds eerily similar to the 1990-1996 California real estate bust, except home prices are multiples of what they were back then.

The possibility of a short sale arises when you need to sell your house, but you owe more than it's worth - like a fully-financed new car being driven off the dealer's lot, you are "upside-down" on your loan. That's a phrase we might be hearing a lot more of in the years ahead - "upside-down".

With home prices apparently falling in Sacramento after a phenomenal run-up in recent years, many of those who purchased real estate at last summer's peak and put little or no money down, today owe more than their home will fetch in a real estate market now crowded with inventory.

If, for one reason or another, these homeowners must sell, then they are faced with a few choices, none of which are very appealing:

1. Sell the house, and pay the difference to the lender
   
2. Walk away, and give the house back to the lender
3. Make a deal with the lender to accept less than the loan amount

According to the story, Scott L. Williams of Re/Max, who specialized in this sort of thing in the 1990s, has dusted off his short sale notebook and is now out helping people hand their homes back to their lender with the least amount of fuss and muss. Going seven years without a single short sale, his office has done nine in the last few months.

The two cases cited, one seller upside-down by $30,000 and the other by $60,000, are likely a sign of things to come in Sacramento and elsewhere in the country as the real estate market continues to cool and prices continue to weaken.

Back in the early 1990s, this became routine ... but not at first.

When homeowners first began losing their defense jobs as a result of the Cold War ending, and as the S&L scandal widened, banks were reluctant to negotiate with distressed sellers who bought near the peak and then wanted out.

This was back in the days when most people had to put money down before a loan would be made, so lenders had a bit of a cushion to start with. It wasn't until housing prices declined by 20 percent, then 30 percent, and in some places 40 percent or more, that the problems really began.

In 1992 and 1993, lenders were adamant.

The seller had two choices - make good on their obligation or face foreclosure. Many people just walked away, "Oh yeah, Ernie got laid off about six months ago, so when the money ran out, he and Betty just packed everything up and left. It's too bad, because they just got finished remodeling the place before he lost his job".

So, houses like Ernie and Betty's would revert back to the lender and they would sit there for a while until the paperwork was final and the bank had time to take a look at the place to see what had to be done to get it ready to sell. By that time, the lawn had died and there were a few broken windows and maybe somebody had taken up residence on an occasional basis.

As the number of people taking the same approach as Ernie and Betty multiplied, the banks quickly fell behind and the amount of time it took them to get the abandoned houses fixed up and back on the market stretched out to a year or more. After a while, some lenders would immediately nail plywood over all the windows so that "guests" would at least have to break a sweat to take up temporary residence.

Lenders then realized that maybe they should be a little more receptive to offers of partial loan repayment, as the mounting inventory was requiring an increasing amount of repair work to get back on the market, and the worst part for the bank's bottom line - prices were still declining.

By 1995 and 1996, lenders were embracing short sales - they were becoming routine.

With a reasonably competent realtor, a seller could simply fill out a few forms with all their financial information (kind of like when they bought the house), and the bank would come back with their offer. Based on a sale price estimated by the realtor, depending upon their assets and income, the seller would be asked to make a lump sum payment and/or agree to a repayment schedule.

Depending on the particulars, this would amount to anywhere from zero to maybe half of the difference between the sale price and the outstanding mortgage balance.

If you lost your job and had little or no savings, it was fairly straightforward - the bank didn't ask you for much, unless of course you were dumb enough to leave thousands of dollars in a savings account and include that amount in the paperwork submitted to the lender. Usually it was just a matter of selling the house, paying all the transaction costs, and what was left was send back to the bank.

For those who remained employed but still had to sell, it was much more complicated. Then the bank would ask for at least some sort of a monthly payment to get the deal done. Sellers could always try to negotiate the terms with the lender, and some had reasonable success, but the banks quickly got good at this and the realtor was always ready to offer advice that would help an agreement be reached.

The funniest part about the whole process was how the asking prices were set.

The seller didn't really care - he just wanted out. The bank was inundated with borrowers in similar situations - they just wanted it sold and off their books. The realtor was the one that influenced the asking price most - he just wanted a commission.

These homes were priced to move and the neighbors hated it, "They're asking how much? They're destroying property values in this neighborhood."

Most sellers agreeing to a short sale didn't realize the income tax implications of the deal when they signed their paperwork. When a deal was made with the bank, money squirreled away in retirement accounts was untouchable, so if you had no other savings and very little or no positive monthly cash flow, you usually go off pretty easy.

Many were surprised to hear at tax time that they were liable for taxes on something called "debt forgiveness", where, to the extent that it does not make you insolvent, an individual must pay taxes on the amount of debt "forgiven" by a lender.

The idea was that since the bank was going to write this off as a loss, the IRS would attempt to collect it elsewhere, and the tax laws at the time required that if you were forgiven $40,000 in debt when your short sale was complete, and you had a net worth of $25,000, you owed taxes on $25,000.

If you were able to show zero net worth, then all was forgiven. The really bad news for some people was that the IRS insolvency calculation included retirement savings. In many cases this allowed sellers to get off easily as far as the bank was concerned, but not with the IRS.

News of short sales and of goings on in real estate in general didn't travel very well or very fast back in the mid 1990s, as the internet was still in its infancy and there were no such things as blogs, where individuals could report what was going on in their neighborhood.

It will be interesting to watch how the lender/borrower, foreclosure/short sale relationships play out this time around.

Read more...

Tough Talk or Tough Love?

In the scheme of things, tough talk about "inflation" will have little effect on what happens in the U.S. and world economy over the coming months and years - too much of the outcome is already "baked in the cake". While economists can prattle on about "core inflation" or any other measure of consumer prices that may or may not bear any relationship to what consumers actually pay for things, this is much more a story of the declining value of the U.S. dollar, a decline that now appears to be accelerating.

Nevertheless, the "inflation" discussion that was prompted by yesterday's hawkish remarks by Fed Chairman Ben Bernanke, and the response by financial markets, are certainly fun to watch.

In trying to make sense of yesterday's speech, a chart of the daily change to the Dow Jones Industrial Average and a marked up copy of the three month core inflation numbers from the Bureau of Labor Statistics were whipped up.

The idea?

To have a look at what effect all this talk about "inflation" is having on stocks and to see how unusual the inflation numbers are - to try to judge whether all the gyrations that equity markets are experiencing is warranted.

The chart of the Dow over the last three years clearly shows the effect that the new Fed Chair is having on the share prices for thirty of the largest publicly traded companies in the world. Over the last three years, three of the worst five days for the Dow have occurred in just the last couple weeks. Four of the five worst days have occurred with Ben sitting in the big chair or getting ready to.
Recently it's been the question of his inflation fighting credentials and his communication skills. There have been weak economic reports, then talk about pausing, then a misunderstanding, then the Maria Bartiromo incident, then tough talk about inflation, then more weak economic reports, then tough talk about inflation.

It's enough to wear you out if you own lots of ExxonMobil and GE and have been waiting patiently for the Dow to poke through its 2000 high.

Why not just change how "core inflation" is calculated once again and let everyone get on with more of the "asset inflation" that we have all come to know and love?

So what about the inflation numbers cited in yesterday's speech? All this talk about core inflation, of energy prices "feeding into" the core, about underlying inflation, about rising inflation expectations. From the speech, the key passages were as follows.

Consumer price inflation has been elevated so far this year, due in large part to increases in energy prices. Core inflation readings--that is, measures excluding the prices of food and energy--have also been higher in recent months. While monthly inflation data are volatile, core inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth. For example, at annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months. For core inflation based on the price index for personal consumption expenditures, the corresponding three-month and six-month figures are 3.0 percent and 2.3 percent. These are unwelcome developments.
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Therefore, the Committee will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.

Uh-oh. It looks like the "inflation vigilantes" at the Fed are going to run us into a ditch again.

It's not as if home builders are going to saw up two-by-fours and send truckloads of them to the Federal Reserve building in Washington D.C. because interest rates are too high for people to afford to buy houses. That's what happened to Paul Volcker in the 1980s when he was pushing rates well into the double digits.

We as a country can't handle that kind of tough love, and Ben Bernanke is not the man to deliver it.

Tough talk - yes. Tough love - definitely not.

Besides, the "core inflation" numbers aren't that bad. He seemed to be concerned about the three month 0.8 percent rise that works out to be an annualized rate of around three percent, well above the two percent comfort level for the "core" rate. But, from a historical perspective, a 0.7 or 0.8 percent increase over 3 months is not that big a deal - look how many times it's happened in the last ten years.
This is not really a story of the Fed losing control of inflation. This is much more a story of the Fed losing control of inflation "expectations" due to high gas prices and that pesky owner's equivalent rent that makes up thirty percent of the figure. High gas prices are largely due to ethanol delivery problems at the refineries, which should soon pass, and now that home prices have about peaked, maybe it's time to revisit the whole owner's equivalent rent issue - maybe home prices really should be used for the "inflation" calculation.

In response to a question from a recent appearance before Congress, Ben Bernanke himself stated that the current calculation for consumer prices overstates inflation by nearly one percent.

It's pretty clear where this is all going. Whether recent comments indicate another quarter point rate hike is in the works for later this month or not, what we should expect from Ben Bernanke is much more "tough talk" than "tough love".

Read more...

Barron's on Jim Rogers

Barron's is really catching on to this whole commodity thing. Last week it was a dismissal of the commodity bubble thesis and an interview with Goldmoney.com founder James Turk. Gracing this week's cover($) we find commodity investor extraordinaire Jim Rogers.

Lately, this publication has become the preferred weekend reading material here, despite the fact that they have never fulfilled their promise of a complimentary print subscription - an attempt to compensate angered subscribers some time ago when they redid their online subscription plans.

A reader posted a comment on last week's Barron's post indicating that you have to call them to get the print subscription activated. Oh well, one more thing to add to the To Do list.

Aside from the little subscription quibble, the only complaint with recent issues of this publication is the title applied to this week's Jim Rogers story - Last Laugh. It seems a bit inappropriate, implying a sort of finality to the current happenings in commodity markets, in conflict with the substance of the interview and other views expressed in the pages of Barron's recently.

WITH THE PRICES OF OIL AND INDUSTRIAL METALS like copper, zinc and nickel screaming higher in recent months, such observers as Warren Buffett and Morgan Stanley's Steve Roach have proclaimed that commodity markets are in a bubble destined to burst soon.

But Jim Rogers, fabled hedge-fund manager of the 'Seventies and now ardent commodity bull, finds such talk ridiculous. Indeed, he has been pounding the drum for investing in commodities in recent years in numerous speeches and media interviews, even writing Hot Commodities, a book propitiously published in late 2004 that predicted a coming price boom in everything from aluminum to zinc.

Barron's caught up with Rogers on a recent rainy morning as he worked out on a stationary bike in the fourth-floor exercise room of his five-floor mansion on New York's Upper West Side. Bloomberg Radio droned in the background as he talked while occasionally glancing at a laptop computer, perched precariously on the machine's handlebars. "How can anybody say that a bubble has developed in commodities yet" -- brief pant -- "with sugar 80% below, silver 75% below and corn and cotton less than half their all-time price highs?" he huffed. "You can't have a bubble when the media has only begun to pay attention to commodities in recent months after years of disinterest. We're now only in the early part of a long-term commodity price boom that has years to run and will likely see literally dozens of raw- material prices make new highs. Even crude oil and copper have a long way to go, even though they recently set price records."

How long will the surge run? Based on the past longevity of commodity bull markets (Rogers mentions ones that, by his reckoning, lasted from 1906 to 1922, 1933 to 1953 and 1968 to 1982), the current boom could last eight to 14 more years. The commodities-bubble crowd scoffs at that, just as skeptics did when Rogers predicted the current boom a few years ago.

Living in Southern California suburban sprawl it's hard to imagine exactly what a five floor mansion on the Upper West Side of New York might be like, but it sure does explain the deferential comments that are made by every other guest on Cavuto on Business.

As to the "Last Laugh" title, based on what appears in the beginning of this story, a more appropriate phrase might be something along the lines of "Not the Last Laugh, but a Big Smile".

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References to studies about how commodities have outperformed equities keep popping up in Barron's. Last week it was an Ibottson study, this week Barry Bannister of Stifel Nicolaus, Gary Gorton of the University of Pennsylvania, and K. Geert Rouwenhorst of Yale all chime in with the same idea.

Alert reader John Law (not his real name) has provided this link(.pdf) to the Yale study.

It all seemed so obvious to a select few people around the turn of the century, and seems obvious to more people today, but the idea of equities as second fiddle to boring commodities is anathema to the vast majority of those with money to invest.

To Rogers, the past few years have witnessed another changing of the guard; commodities will rule over stocks and bonds for the next decade or more. Inflation will continue to flare and not just because of rising raw-material prices. According to Rogers, new Fed Chairman Ben Bernanke is "an amateur with no knowledge of markets" whose academic work revolved around how nations could avoid depressions by printing more money. And, finally, he throws into this witches' brew the likelihood of a collapse in the dollar as a result of America's accelerating debtor status. Rogers views commodities as the ultimate refuge from these scourges.

That's a stinging criticism of the new Fed Chairman and a cogent summary of his writing on both the Great Depression and the "lost decade" in Japan. Even if you don't agree with him, or if you think that he's just talking his book (in this case, both the Rogers Raw Material Fund and his book Hot Commodities), it's refreshing to hear someone speak this bluntly about monetary policy.

He was no fan of Alan Greenspan, and may think even less of Ben Bernanke.

Rogers has been bullish on all things Chinese for many years now, and rightly figures that despite many bumps along the way, the emerging Chinese middle class will eventually drive global consumption, exposing the underinvestment in infrastructure and exploration during the last two decades for what it was - a poorly timed cost saving measure.

CHINA IS NOW the No. 1 consumer of copper, steel and iron ore, and No. 2 in the use of oil and energy products to feed its industrial maw, which is growing at a prodigious rate of nearly 20% a year. And the torrent of textiles, refrigerators, color TVs and computers aren't just flowing to overseas outlets like Wal-Mart. Burgeoning economic growth is also creating a Chinese middle class aspiring to better meals and more creature comforts. In Rogers' view, it's delusional to deny that competition for commodities will continue to heat up as a result of China's pell-mell rush from a peasant economy to economic giant. Today, there are only 30 million private vehicles on the roads in China, versus 235 million passenger vehicles in the U.S., even though China has almost 4½ times as many people.

From a recent documentary, the image of a young Chinese couple living in what looked like a 400 square foot apartment going to the local automobile dealer to purchase their very first car will forever remain fresh in my mind. Give these eager young workers credit cards and then, later on, wacky home loans, and we'll soon find that China doesn't need the U.S. or our dollars to sustain their manufacturing output.

Citibank is working on that.

As to the recent investor interest in commodity funds and the theory put forth elsewhere by certain quacks in the financial media that the new commodity ETFs are driving prices ever higher, someone who might know a little something about commodities weighs in.

In all, some $90 billion in institutional and individual investor money has poured into various commodity index products with the Goldman Sachs index boasting around $60 billion of the total. Hot performance has been part of the lure, to be sure. In addition, the commodity markets have become infinitely more respectable as a result of academic studies, such as the earlier-mentioned Gorton-Rouwenhorst paper, asserting that fully collateralized futures positions shield investors against inflation while offering stock-like total returns over the long haul, though timed to different stages in the economic cycle.

Some observers contend that the advent of commodity index funds, along with the addition of exchange-traded funds based on a single commodity, such as gold or silver, artificially pumped up prices through collective buying. The ETFs purchase physical commodities as money pours in, while the index funds concentrate on futures that are near expiration. The latter activity also boosts "spot" or cash price of commodities, some maintain.

ROGERS FINDS SUCH contentions preposterous. First, he argues, the commodity index funds are minuscule, compared with the index funds that operate in the stock and bond markets. Also, commodities index funds must constantly roll their futures positions forward as their existing futures approach expiration. This relieves buying pressure on nearby futures. The Rogers funds, in fact, buy only futures two delivery periods away from expiration.

Finally, the large commercial interests that trade commodities aren't about to let speculators wrest control of prices. "ExxonMobil can drown all the index funds, hedge funds and other speculators in the energy markets if anyone tries to manipulate prices," Rogers asserts. "It's largely the surging global demand for raw materials that is pushing prices up."

It should also be noted that copper and zinc, the commodities that have gone vertical in the charts above are poorly represented in existing commodity indexes. In the Goldman Sachs Index cited above, these base metals account for two percent and one percent of the total index, respectively.

In conclusion, and again demonstrating the inappropriateness of the title of this article, the following prognostication is offered.

THE COMMODITY BOOM, like all bull markets, eventually will end in a crescendo of hysteria. The public will feel an overwhelming desire to invest in raw materials rather than stocks or bonds. Financial publications will be chronicling the derring-do of commodity kingpins with the reverence and wonder once accorded the dot-com billionaires. Seemingly insatiable demand for commodities will provoke investment in new sources of supply, but few investors will notice as supply and demand start to come back into balance

But that day won't dawn for a decade or so, says Rogers, who hopes to be on to the next big thing by then.

Recent talk of a commodity bubble bursting seems awfully premature and maybe somewhat of an instinctive, defensive response from a financial media that has been conditioned for more than two decades to just promote stocks and bonds.

The public is not on board yet - not by a longshot. The public is either thinking about how to make next month's mortgage payment or still dreaming of granite countertops - how to divest themselves of a good portion of the money that has piled up in their houses in recent years.

There is no hysteria save for the financial media who were reluctant to call housing a bubble but eager to apply the label to commodities as a whole, when only a few items have experience extreme price rises, many still far below nominal highs reached over two decades ago.

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Loyal to the End

It's hard to critique John Snow's performance as Treasury Secretary from the perspective of fulfilling expectations. When he was brought in a few years back to replace Paul O'Neill it was clear what the job entailed - be a loyal spokesman for the White House.

It should be entertaining to contrast the public statements of the incoming Secretary with those of the outgoing Secretary, who, in this commentary on Friday's jobs report is proving to be loyal to the very end.

"With unemployment at a remarkable 4.6 percent, this month's employment report shows continued strength in the U.S. labor market and an economy moving in the right direction. These gains are broad-based, with Hispanic unemployment at a new record low and African American unemployment reaching historic lows, lower than the average of the 1990s.

"We have now seen thirty-three straight months of job growth and more than 5.3 million new jobs created since the President's 2003 tax cuts took effect.

"Today's report is good news for American families. It shows that our economy is on solid footing and that we are heading in the right direction, giving Americans a renewed sense of optimism.

"With more people working, more good jobs, and more businesses hiring, it is not surprising that federal government revenues are up smartly. The surge in tax receipts is bringing down the government deficit ahead of the President's goal. Clearly this demonstrates that Americans can enjoy the benefits of rising prosperity and low tax rates with a declining federal deficit.

"My recent announcement that I will leave Treasury marks this as my last official jobs day statement. I am pleased to note that virtually everywhere one looks there is good economic news. I take great satisfaction in the strong expansion the country is enjoying."

Many thought the report was remarkable in ways very different than those enumerated by Secretary Snow. Maybe he figured that this was going to be his last commentary regarding employment, and felt inclined to lay it on extra-thick.

ooo

The cartoon in The Economist this week was not particularly exciting, but this ad from the CIA was pretty eye-catching. The blurry, offset font in the title is very curious - what could they have possibly been thinking when this was being discussed with the advertising agency?

Click to enlarge

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