The Chart

The chart below is as bullish a long-term chart can get.  Higher lows for the past half-decade. As you see, the 2008 and 2010 highs, which used to be previous resistance held as support in 2011 and 2012. We bounced perfectly off that area and now are at new highs. If we had closed below that, it would’ve signaled a short-term top (on the weekly) and some selling might have come in. However, that did not happen and as the market corrected this month, bonds took off.

This simple chart pattern told you, “Bonds were never a short”! Catching tops is a suckers game, even if you believe in the myth of bond vigilantes and negative downgrade effects over a sovereign currency issuer.

10 Year U.S. Treasury Notes  ($ZN_F)

Tags: $ZN_F $TNX $IEF $TLT $MACRO

One of the first things people say when they talk about $FED “money printing” is that commodity prices have gone up. Well, have they really? Prices (Overall Inflation, $CPI)  may have gone up, but that has more to do with than just commodity prices. So,  lets check if QE2 really caused any inflation. QE2  started on November 12, 2010. It’s been 1.5 years since the start of the monetary operation, obviously most commodity prices are up huge since then right?

The Stats

(Note: Using the closing price of the first day of QE as my starting base price. I believe this is a fair starting point.)

$CRB Index (Commodity Index)  = -4.6% (At the lowest point since 2010)

(Via Bespoke)

Metals

• Gold = +12.6%
• Silver = +6.15%
• Copper = -10.25%
• Platinum =  -14.7%
• Palladium = -12.2%

Energy

• Crude Oil = +9.4%
• Natural Gas = -34%
• Heating Oil = +23.7%
• RBOB Gasoline = +33%

Meats

• Live Cattle = +17%
• Lean Hogs = +24.6%
• Feeder Cattle = +37.7%

Grains

• Corn = +11.2%
• Oats = -2.3%
• Soybeans = +10.8%
• Wheat = -9.2%
• Soybean oil & meal  = -2.3% & +22%

Softs

• Cocoa = -18.8%
• Cotton = -41%
• Orange Juice = -27.5%
• Coffee = -12.8%
• Lumber = +12% (Rough estimate, was not able to get exact prices)
• Sugar = -22.4%

Currency, Bonds, Market

• US Dollar ($DX_F) = +4.1%
• US 10 year = = +15%
• US 10 year Yield ($TNX)= Down about 100 basis points (Won’t use % here since it is VERY misleading)
• S&P 500 ($SPX) = +11%

Final Thoughts

As everyone was screaming about money-printing inflation back when QE2 was in full effect, I knew most of the run-up was caused by some type of financial speculation/psychological shift in thinking (This was before I even fully understood the modern monetary system) . As I stated here, QE2 effects were mostly short-to-intermediate term which caused no fundamental changes on the real economy. Yes, some commodities are up, however as shown above, some commodities are down as well. At the end of the day, long term fundamentals (have you ever heard of supply and demand?) take control. A lot of commodities are very sensitive to China. Oil and gold are up because of basic fundamentals (Not enough Supply, Strong demand). Natural Gas is down because of the huge glut supply. Orange Juice is ‘hyperdeflating’ because of warm weather. I can’t say this enough, but

“INFLATION IS NOT JUST A MONETARY PHENOMENON!”

Tags: $MACRO $FED $CRB $USO $GLD $UNG

Now, as I talked in my last post about accounting identities, this means that if the Treasury (public sector) had surplus, someone had to have run a deficit. Presuming that the trade deficit (Foreign account) did not decrease significantly in April (We just got the data for March today and the trade deficit actually increased which likely means no jump in April), this must mean that the Private Sector as a whole, ran a net deficit. All that means is that the amount of Net Private Savings (Savings-Investment) went down.

Now usually, a Treasury Surplus would be a bad thing during weak economic times (especially now during a balance sheet recession), but given that this is only 1 month, I am not worried because the annual Treasury budget is going to still be a deficit. In fact, the treasury surplus can be a GOOD sign for the economy.

Why do I think a decrease in Net Private Savings (a public sector surplus) is a good thing? Is it because the US Government is finally “tightening its belt” and paying down its debt? No. That would be a drag on the economy and would weaken any mediocre growth we see.

Well, the reason why I see this as a good thing is because there was a MAJOR jump in receipts (taxes) collected. Now was this because taxes were raised? No. The “Fiscal Cliff” (The expiration of the Bush & payroll tax cuts) is next year and no tax rates were raised in April. Since no rates were raised and tax reciepts increased, this means that there was significant economic growth.

What actually caused the increase in receipts?

Below is a chart of the total Reciepts and Outlays, and on the side is the total Deficit/Surplus (click to enlarge).

There was a major  jump in receipts, an ~86% increase Month-over-Month (MoM). Now, the outlays saw a drop MoM (~30%), but there was no significant deviation from the trend like there was in outlays. The drop is probably just cyclical.

Now, to dig deeper. What was the specific reason for the increase? To find out I compared the March and April Treasury Statements, but specifically, I looked at classification breakdown of the Receipts.

1. Individual Income Receipts  increased from 59K (in Millions) to 179K.
2. Corporate Income Receipts  Increased from 24K to 28K.
3. Social Insurance & Retirement Receipts (All sub-categories) Increased from70K  to 94K.
4. Excise Taxes increased from 6.3K to 7.4K
5. Estate & Gift Taxes increased from0.9K to 2.6K
6. Customs Duties & Miscellaneous Receipts stayed stable at around 11K.

Below is a chart of the breakdown (Note: I’m pretty sure ‘Income Taxes’ means both Individual and Corporate).

Final Thoughts

Both Income and Social Security & Retirement receipts saw big increases in April, which contributed to the biggest one month collection since April 2008. Individual income can be defined as  Employment Income (Wages, Salaries, Other Earnings), Tips, Interest, Dividends & other distributions (like capital gains), Rent, Retirement Plans/Pensions & Annunities, Social Security (excludes SSI), and other income. Social Security & Retirement receipts are funded by FICA, SECA, and the Medicare HI tax. Since both of these type of taxes are linked pretty heavily to jobs, this means that there was more income paid (higher and/or just more) which is a good sign for the economy (because that signals idle capital is being transferred to labor via hiring and/or higher wages/salaries).

Now a couple of caveats. One month “does not a trend make”, so this could just be a hiccup. Also, April seems to be the strongest month of the year for receipts collected. In fact, April has been THE strongest month dating back to 1981 (except for in 1983, where it narrowly missed), so there definitely is some type of cyclical trend there.

Presuming that we see a continued strong trend in receipts collected this year, this will certainly be a positive sign for the economy going forward, even if that means smaller government deficits (which have been covering for the weak aggregate demand from the private sector as they deleverage).

Addendum
I forgot to state that the reason why the April receipts are so high is because of the tax deadline in mid-April. This is why April is the highest month usually. However, my point was that the jump this April was so significant/big, that there must have been some type of economic growth, since it was SO much higher than the previous months.

Tags: $MACRO $FED

In the US we have a current account deficit, which means the foreign sector is in a surplus. That means one of the two other sectors has to run a deficit. As we know, the US Government is the one that runs the deficit (which is the only thing stopping us from falling into another recession). The US private sector is running a surplus, which means the Net Savings (Savings – Investments) of the sector is positive.

Just take a look at the chart below of the Sector financial Balances as a % of GDP. They balance out.

Below is how you can replicate the chart of Net Private Savings and the Government Deficit on FRED. As you see, it is nearly identical, with the the foreign sector being the only thing missing. The Private sector cannot net save (note difference from net save and save) if the government does not run a deficit (unless the foreign sector is running a deficit, which means Net positive exports). This is crucial to understanding basic monetary system in which we operate in. So to preach that the Government needs to ‘tighten its belt’ just like the ‘people’ (private sector) do is hoping for a recession (as shown by this chart).

Note: How the government runs the deficit (Tax cuts, Spending, or both) is up for debate because that is a discussion of policy decisions, and not fact.

Tags: $MACRO

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One thing I’ve noticed  is the very similar pattern of gasoline when compared to Last year. There are a couple of things that are similar to last year which gets me thinking that we might see cheaper gas in the future.

1. Big run up from the previous year into the end of quarter one of the current year.
2. Run-up caused by speculation/premium of  Supply decreases and future possible shocks. (Arab Spring Last year, Iran this year)
3. Improving economic numbers in the new year.
4. Strong momentum in risk markets (thus strong/similar technical patterns).
5. Gasoline Demand peaking earlier in the year and not in Summer (saw a stat earlier this month that said it has been happening for 3 years straight now)

These thing have led me to believe that we could see a decent drop in the price of gasoline in the following few months is very possible. The charts are even looking the same, however, there is a major negative divergence occurring as well in the RSI and MACD indicators. I don’t use these indicators too much but when the patterns are very identitcal, it is hard to not look at them.

The Chart

$RB_F – Gasoline Futures

Tags: $RB_F, $UGA, $USO

Unleaded Gasoline ($RB_F, $UGA) has had a nice run since December, however, if you had been paying attention to the weekly chart, you would have noticed that it ran up right to resistance from last year. It just couldnt get above that. Call it demand destruction, call it Obama talking down oil, but as a trader, I see that as previous resistance acting as resistance!

The Chart

Below is the weekly chart of RBOB unleaded gasoline ($RB_F). As you see, after setting up a nice base in 2011 above the important 2.50 level, RBOB gasoline saw a a nice run starting in December. It then hit a wall of resistance at 3.40 and has since broken the uptrend line and is now selling off. Since the setups are very identical, will we see a similar sell-off like last year where we almost saw a dollar drop in $RB_F?

It’s hard to say and many will probably be doubtful especially with all the geopolitical risk.  However, we had similar conditions last year and nobody was expecting the price of oil to fall over by over a 1/3rd  (except for one guy). Also, it is interesting to note that the front-month contracts are trading at a discount despite the fact that the height of driving season is yet to come.

However, unlike last year, I am more neutral on oil (and gas) for a couple of reasons.While there is a possibility for more weakening demand from Europe and China, the possibility of supply shortages should build premiums in the price of oil that might put a floor to the downside. Bespoke Investment Group also had a nice article out today talking about the possibility of some relief at the pump as well.

$RB_F - Gasoline Futures

Tags: $RB_F, $UGA, $USO, $CL_F

The $FED, just like all other times, is trying to ease as much as they need in order to get strong growth again. First they dropped rates. Then they tried Quantitative Easing (QE1). Then they conducted QE2. This was then followed by Operation Twist. Then they tried doing what Edward Harrison of Credit-Writedowns calls “rate easing” (committing to low rates for a specific amount of time). Now they are supposedly thinking about more QE, either sterile or in the more “traditional” way (Hello QE3!). All of these actions by the FED causes rates to stay low or head even lower. You can’t blame the Fed for trying, as its in their dual mandate (to lower unemployment along with price stability) and it has worked in the past. However, we are in an abnormal environment of the BSR and the Fed (as a whole) does not realize this, or cannot publicly realize this (I love political pressure, dont you?).

Having low rates means having less interest income. Low interes rates are also labeled as “Financial repression” on us by the FED. I don’t buy this argument (Where in the constitution does it say you have a right to high interest income?).Besides, the entity doing the financial repression is on the fiscal side (Hint: Congress). The Fed will raise rates once growth returns to its normal output, which will bring real demand-pull inflation (and not just inflation expectations caused by the Fed). Only then will we see this era of “financial repression” end.

One last thing about low rates/QE; They effectively act as a tax on the private sector due to the net fiscal effects (Watch Mike Norman explain it). What do I mean by this? We’ll, if there was no QE2, rates would have likely been a bit higher, and all that interest would have gone to the private sector! By removing the supply of bonds and thus lowering interest rates, the Fed is “Stealing” Net Financial Assets (NFA) from the private sector. And as we all know a decrease in private sector savings has never been good. Interestingly, QE technically lowers the deficit, as the Fed is required to turn over ANY profit to the Treasury, thus lowering the national debt (However, we do not want that, especially in a BSR)!

The Charts

The charts below show how devastating the collapse in interest income has become.

1) Interest income  

Here is just a simple chart showing the nominal dollars of Personal Interest Income in the economy. As you see, we are about 30% below the high. That means 30% of total interest income has been zapped away from the private sector (and continues to be).

2a) Interest income/GDP

Here is a better way of measuring, in my opinion. Interest income as a % of GDP. As you see, the collapse is really greater than the previous chart shows.

2b) Interest Income/Income

Similar chart like above, except this measures Interest income as a percent of total Personal Income. Similar trend.

3) Interest income/GDP & Interest income/Personal Income compared to Federal Funds Rate

While the correlation is not super-strong, both stats tend to follow the trend of the FFR. Both measurements of Interest income are very strongly correlated as well. The Fed lowers rates and interest income drops.

4) Personal Dividend Income

Interestingly enough, dividend income has stayed strong, even if you measure it up agaisnt GDP or Personal Income (To save space & not make a cluttered chart below, I wont post those charts). This is kind of what Bernanke wants. He wants people to invest in risky assets, and it looks like they are as dividend income has nearly recovered despite the market being about 15% away from its 2007 high.

Final thoughts

As the $FED drops rates, interest income falls with it (obviously). To exit this era of “financial repression”, Congress must act accordingly on the fiscal side of things and get the economy going again. The Fed can only do so much in a balance-sheet recession as monetary policy is pretty ineffective. Once the economy picks up, inflation will pick up with it and the FED will then be forced to raise rates. With that, we will see this trend of falling interest income reversed.

Tags: $MACRO $FED

The Jobs

I’ve already made the argument that Private Sector Job creation under Obama has been solid (not great but solid) when compared to Bush Jr and the circumstances Obama was put in. Given the fact we had a relatively weak fiscal stimulus package and the bursting of the first nationwide asset bubble since the Great Depression, we could have been in worse shape (However, it could have been better, don’t deny that!).

What has killed Obama overall is the loss in public sector jobs. As you will see in the chart below. Following the previous 3 recessions, public sector jobs also rebounded along with private sector. However, this was not the case this time. Austerity on the state and local levels has shed tons of jobs that were not shed during Reagan’s recovery. In fact, the not only did Reagan stop shedding jobs but he also started adding public-sector jobs by the end of his first term. The state and local governments under Obama are still shedding jobs.

(H/t Mark Thoma For the Chart below)

If Obama follows Reagan’s path, we would be seeing an extra ~600 Thousand people at work by the end of 2012. Not only that but the unemployment rate would easily be below 8% by now with a higher labor participation rate. This doesn’t include any “domino-style effect” that could come with an extra 600K people at work. More people at work means a stronger economy which means more more to be spend which could mean more jobs in the private sector. And in no way can one argue that more public sector job growth hurts private sector job growth. It doesn’t or else Reagan would not have had one of the strongest private-sector job growth post-WW2.

Reagan (Public Sector vs Private Sector)

Like I said earlier, I do not see a recovery in public-sector jobs. State and Local government are still in austerity mode as they are saddled by debt (on average), although I can say that the austerity looks to be in its final stages.

The charts below shows the total number of Government (Federal, State, Local) during Reagan’s first term and Obama’s current term. Unless you expect some major shift to occur in the next 7 months, Obama is likely to have the worst public-sector job total loss on record.

Reagan (1981-1985)

Obama (2009-Present)

(Note: Spike in 2010 is the Census hiring)

Tags: $MACRO 

There’s a very similar correlation with commodities and China going on right now for over the past year or so.

Below is a chart of the Shanghai Composite (China’s main stock Index) and the Reuters Jefferies CRB Index (Commodity Index). As you can see, there is a very tight correlation. China goes down, commodities follow. China bounces, commodities follow. Yes, there are small divergences here and there but the correlation seems to be very tight.

This correlation also makes a lot of sense on the $MACRO side of things. China is a fast growing nation that has about 1/5th of the world’s population, thus having a massive effect on global demand. Not only that, but many nations depend on China for their export economy. If China slows, they slow as well.

$SSEC (Black solid line) vs $CRB (Black/red dotted line)

Tags: $SSEC, $CRB, $FXE, $MACRO

However, the dollar is getting to a big inflection point, one that can light a little fire for risk assets.

The Chart

Below is the chart of the US Dollar Index ($USDX). You can see there has been a decent channel that has been established since mid-last year. After failing to make another high and getting denied at $81,  there is a good probability that the Dollar breaks below the channel and sees some technical damage. The wick at $81 gives me caution. A break below could spark another leg up in the market and give some support to commodities, which have been really weakening as of late.

US Dollar Index ($USDX) – Weekly Chart

Tags: $USDX $DX_F $UUP $DXY