Stocks and Bonds June 11

After reading oversold on Wednesday, the stock market put in a weak, one day rally Thursday then posted fresh lows on Friday.The door is open for another 500 point decline as a result. Whether that will happen remains to be seen. This decline has been, it seems, based on the lack of economic recovery outside the executive suites of the Fortune 500 companies. It may seem strange that Wall Street could be so very insular as to expect the recovery of the Wall Street banks and increases in the executive's pay at the largest companies means that the economy will prosper, but Wall Street has its own set of delusions, fostered, in part, perhaps, by implicit Federal guarantees.

The bond market has been overbought almost forever, it seems, and still shows no signs of heading down. It will happen someday, just not today. Too bad we couldn't have had a second version of William M.Martin or Paul Volcker at the Federal Reserve rather than that damn fool Reagan appointee we did have. We might not have an economy so thoroughly shattered. In another life, perhaps, prudence will reign over politics.

Forex update June 11

The Euro & the Ozzie showed surprising weakness against the USD. The Euro got almost to 1.47 but now seems headed back to 1.40. The Ozzie bulls have made two efforts in two weeks, both unsuccessful. Hard to say whether the bears are in control, but for the moment it looks like 1.0360 will be the next buying zone.

The USD rallied weakly against ChF, went sideways against the $C and against the Yen. The BoJ will be happy if the dollar rallies magnificently, but it is far from obvious that such will be the case. The $C often wanders like a blind mouse against the USD, as it seems to be doing now. The ChF, on the other hand, is very high and looking like it will go higher.

Finally, the Cable or GBP had a small rally, but now looks like it wants to go down to 1.60. A decisive break there could open the door for a move to 1.54

Grains June 11

Thursday's WASDE was not a huge market mover, although there had been some caution going into it.Corn came away looking distinctly bullish in price, but the CoT, late as usual, reflected position reduction that took place going into the report.

Beans, occupying a middle ground with respect to price action -- going nowhere, in other words -- saw expanding longs by funds with a corresponding increase in shorts by commercials. The hoped for bullish surprise wasn't there.

Wheat saw the funds net neutral, commercials long and farmers short. The price actio was not pretty this week, though I'd not rate it as a bear market. 

Just now the price action can be summarized as: corn - bull market; beans-bullish; wheat - bearish. That can all change dramatically by October, though surprises still seem more likely to be bullish than bearish, based on history.

Moody's Says Greece a 50% bet to Default

There you have it, folks, this rating brought to you by the same folks that rated the sub-prime mortgage hodge-podge debt, the collapse of which caused the Greeks to assume. While the likelihood of a Greek default may or may not be 50%, why would anybody put any trust in the 'estimate' of a company that has been shown to give anything a good rating if paid enough?

Major Report - WADSE -Thur

After retreating yesterday, presumably to avoid being caught over-extended, the grain markets are subdued today. Likely, they will be quiet tomorrow as well. The WADSE comes out before the markets open on Thur, so the open could be wild and wooly.

Notes on the Gold Standard

The world was on the gold standard prior to World War One, and attempted to return to it in the aftermath. At that time, there were four piles of gold in Ft Knox, one each for France, Germany, Great Britain and the United States. Other currency values were defined in terms of these four. Prior to the War, currency values were most often converted to Pounds Sterling, the currency of Great Britain. Each month, current account balances were computed. The results were reflected by a fork lift moving gold from the section of the floor for France to the section for Germany or Great Britain or the US. Similar movements were made for each country, and all was right with the world, at least in terms of the vault of gold. Today, many are heard to say that government spending would be controlled, inflation avoided and would once again be right with the world if we would but return to the gold standard. Would it?

Pretend that the economies of the world are at full production and unemployment is moderate but present. Further assume that all the money the government can print at $35 per ounce of gold in the vault has been printed. Now what if both Intel and AMD want to build $17.5 billion dollar fabs or fabrication plants for the latest, greatest computer chip they have just engineered? Where does that $35 billion come from? It can’t be borrowed from the banks because the world is fully invested. Nor can the companies sell stock because, once again, the world is fully invested. So both the creation of jobs, jobs which could absorb many of the unemployed, and progress itself in the form of a better computer brain have to wait until the gold mines produce another billion ounces of gold. Even though this example is a bit contrived, having the amount of money in the economy restricted by the amount of gold mined does lead to a loss of overall wealth and a loss of progress.

On the other hand, would inflation be prevented? Assume the world economy is limping along, as it is today, with high unemployment and factories functioning well below capacity. But the gold mines are chugging right along, producing gold, and a batch of 10 billion ounces is brought to the government with the demand it be purchased. Since only the government is allowed to own gold in excess of a few ounces, as was the case in 1973, the government has little choice other than to buy the gold. Suddenly, the economy has $35 billion in new currency showered on it. If the economists are correct that inflation is too many dollars chasing too few goods, how can this addition of dollars not create inflation?

As a side note, back when… back when the gold standard was in effect, nations running current account deficits were force to raise their interest rate. The US is now, and has been for quite some time running a large current account deficit. Wouldn’t it be a mess if, starting tomorrow, we went back to the gold standard and had to raise rates to 10% or 12%? Imagine trying to sell the houses in foreclosure, those that can’t be sold at 4.5% rates at much higher rates. Inasmuch as we have exported nearly all manufacturing jobs outside the construction industry, how would this country ever get back to a strong economy?