FX Update: Euro traders wearing rose-coloured glasses?

The challenges to the Euro seem to be mounting from the sovereign debt and potential banking system contagion perspective, but the market continues to merrily snap up the Euro on the latest hawkish chatter from the ECB and a fresh high in the CPI today. Can the single currency continue to defy gravity?

The fence around the PIGs?
Euro traders have apparently built quite the PIG-wire fence around the situation in Portugal, Ireland and Greece. As the situation in these three countries sees little improvement in terms of moving toward a resolution of their sovereign debt issues and Portugal teeters toward a default, traders seem to be shrugging their shoulders and only focusing on the latest wrinkle in the ECB rate outlook and probably also today’s CPI estimate for March. We’ve had a number of ECB officials out yesterday and today talking up the higher course for ECB rates in coming months and next Thursday’s hike appears to be a done deal. The year-forward expectations are now pushing 126 bps, according to a Credit Suisse index of central bank expectations. By comparison, Fed expectations are at around 45 bps.

For those of us a bit more worried about the risk of contagion from the PIGs and into the European banking system, there is this Bloomberg article to consider on whether an Irish bond haircut could risk shutting funding for Italy and Spain. This risk is nowhere near being priced into the Euro, as the market still assumes that the situation will somehow resolve itself well – judging from the action in EURUSD, EURGBP and EURJPY.

Today, the Irish bank stress tests will see the release of the capital amounts needed to prop up the Irish banks (expectations running around EUR 20 billion). Some estimates of what the bailout for Ireland will cost taxpayers run into the EUR 65 billion range. On a per capita basis, that would be like the U.S. taxpayer being forced to bailout U.S. banks to the tune of about USD 5 trillion. It is a patent absurdity. Our question for the longer term: why, why, why does Ireland want to keep the Euro? The only way it will do so in the longer run is if it restructures this now national debt that stems from these banks’ bad loans from the bubble days. And the restructuring will need to be more than a haircut – more like a removal of the head and torso as well.

Fed talk
The market shrugged off follow-up comments from the St. Louis Fed’s Bullard late yesterday, who suggested again (after Saturday comments) that ending QE2 ahead of time should be considered, and might be viewed as an “important signal” rather than making any large impact in the market. The outgoing (in October, he is also a non-voter) KC Fed president Hoenig burnished his hawkish reputation by lambasting current Fed policy and partially blaming it on the world’s commodity price spike and the risk of aggravating new bubbles. He said the natural U.S. rate was two percent. It appears we need to see the Fed chairman himself talk the hawkish talk before we see the market tip its hat at the credibility of the Fed and the USD.

Odds and ends
U.K. GfK Consumer Confidence remained at last month’s level at -28 rather than seeing an expected further decline to new recent lows. The Nationwide survey showed March confidence at the lowest level since the beginning of the survey in 2004, while the older GfK survey saw its lowest reading in July of 2008 at -39.

The Japanese manufacturing PMI out overnight is the first hard evidence of how the tsunami/earthquake has knocked the Japanese economy for a loop. The numbers for April are likely to be worse, unfortunately. And the impact of further evacuations on radiation concerns suggest that the disruption could still be spreading.

The data out of Australia overnight showed Retail Sales slightly stronger than expected and Building Approvals down sharply. Both can be contributed to the after-effects of devastating floods from earlier this year, as the areas of the floods saw the sharpest declines in approvals. Still, the data was far worse than expected and the drop in activity is a strong forward indicator that the Australian housing bubble is in danger of unwinding soon.

Please follow this “copper in China as loan collateral” story that ftalphaville has covered on a number of occasions recently, including in a piece today. This shows how unusual the Chinese banking system is and in particularly, how some key commodity prices are possibly being propped up by this “system”. The implications for Aussie volatility are rather clear if this system ever breaks down, so a long volatility card or two in the pocket might be  reasonable.

U.S. Jobless Claims were out “at 6k lower than last week”, but that headline doesn’t show that the 388k number was worse than the 380k expected and that last week’s number was revised sharply up from an original 382k to a revised 394k – so it’s actually a relatively negative data release.

The spiking NZD looks like a result of capital flows from the earthquake rather than any recovery in fundamentals. Consider the drop in the Business Confidence survey in March from 34.5 to -8.7. NZDUSD is on a tear that it can hardly sustain for much longer, but a technical reversal is so far nowhere to be found. One on the way today or tomorrow?

Looking ahead
Our broken record warning for the day is that this is the end of the month/quarter/Japanese financial year and that anything can happen. Also watch out for the release of the stress tests for the Irish banks and the situation in Portugal – which is teetering rapidly toward its own bailout. Tomorrow we have the U.S. employment report and the G20 (likely only a Euro-debt/Japan focus there) this weekend.

In the meantime, just as we are about to go to press, oil and gasoline prices are spiking higher out of the range of the last several days, possibly on news out of the Middle East. Is this really time to leverage up on the risk trades? We have to imagine that the risk bulls are a bit over-extended here now that we have come full circle in risk markets from the catastrophe in Japan.

Be careful out there.

Economic Data Highlights
UK Mar. GfK Consumer Confidence out at -28 vs. -30 expected and -28 in Feb.
UK Mar. Hometrack Housing Survey out at -0.1% MoM and -3.2% YoY vs. -2.7% YoY in Feb.
Japan Mar. Nomura/JMMA Manufacturing PMI out at 46.4 vs. 52.9 in Feb.
Australia Feb. RP Data-Rismakr House Price Index out at 0.0% MoM
Australia Feb. Retail Sales out at +0.5% MoM vs. +0.4% expected
Australia Feb. Building Approvals out at -7.4% MoM and -21.8% YoY vs. +4.0%
New Zealand Mar. Business Confidence fell to -8.7 from 34.5 in Feb.
Japan Feb. Housing Starts out at +10.1% YoY vs. +7.4% expected and +2.7% in Jan.
Germany Feb. Retail Sales out at -0.3% MoM and +1.1% YoY vs. +0.4%/+1.5% expected, respectively and vs. +2.6% YoY in Jan.
UK Mar. Nationwide House Prices out at +0.5% MoM and +0.1% YoY vs. 0.0%/-0.6% expected, respectively and vs. -0.1% YoY in Feb.
Germany Mar. Unemployment Change out at -55k vs. -25k expected
Germany Mar. Unemployment Rate out at 7.1% vs. 7.2% expected and 7.3% in Feb.
Norway Feb. Retail Sales out at +0.7% MoM and +2.7% YoY vs. +0.5%/+1.3% expected, respectively and vs. +0.4% YoY in Jan.
EuroZone Mar. CPI estimate out at +2.6% YoY vs. +2.4% expected and vs. +2.4% in Feb.
Canada Jan. GDP out at +0.5% MoM and +3.3% YoY vs. +0.5%/+3.1% expected, respectively and vs. +3.3% YoY in Dec.
US Weekly Initial Jobless Claims out at 388k vs. 380k expected and vs. 394k last week
US Weekly Continuing Claims out at 3714k vs. 3705k expected and 3765k last week

Upcoming Economic Calendar Highlights (all times GMT)
US Mar. Chicago PMI (1345)
US Weekly Bloomberg Consumer Comfort Index (1345)
US Mar. NAPM-Milwaukee (1400)
US Feb. Factory Orders (1400)
US Fed’s Lacker to Speak (1430)
US Fed’s Tarullo to Speak (1645)
US Fed’s Pianalto to Speak (1805)
New Zealand Q4 Manufacturing Activity (2145)
Australia Mar. AiG Perfomance of Manufacturing (2230)
Japan Q1 Tankan Large Manufacturer’s Index (2350)
China Mar. PMI Manufacturing (0100)
China Mar. HSBC PMI Manufacturing (0230)

Grain report - bullish!

The U.S. Department of agriculture today released the long awaited report about U.S. farmers' planting intentions for the 2011/12 crop season.

The total acreage came in slightly higher than expected at 239.4 mio acres, which is 9.4 mio acres more than the 2010/11 season.

The biggest winner, compared with expectations, was wheat and corn while the losers were soybeans and cotton (see table below). The corn acreage will be the second largest since 1944 as strong demand for food and ethanol has reduced world stockpiles. It has outpaced  increases for wheat and soybeans as farmers can make more profit per unit of corn compared with the other crops.

The USDA also released first quarter stock levels where both corn and soybeans levels were lower than expected, while wheat was higher.

Despite almost meeting expectations and considering the current tightness in especially corn and soybeans, this report looks bullish for the whole sector as dwindling stock levels means weather developments over the coming months will be absolutely crucial in order to achieve status quo.

The global market will struggle to absorb weather related shocks like the ones we saw in 2010 - in particular the Russian drought and flooding elsewhere.

FX Update: Month-end has been subdued in Asia

Despite it being month-end and the end of the Japanese financial year, activity in the Asian session was relatively subdued. We saw early USDJPY demand into the Tokyo fix but momentum soon ran out and we were quickly back down below 83.0.
On the data front we perhaps saw the first effects of the earthquake/tsunami taking its toll on the economy with Japan’s manufacturing PMI falling below 50 for the first time this year, slumping to 46.4 from 52.9 previously. Australia’s retail sales for February beat forecasts with a 0.5% m/m increase, and private sector credit was higher (suggesting the Ozzie consumer might be feeling a touch more confident about spending) but building approvals were shocking – down 7.4% m/m and 21.8% y/y. However, the market was willing to look through the building approvals and AUDUSD climbed to a new 29-year high, peaking just short of 1.0350 again as the spike faded.

In other data, New Zealand’s activity outlook and business confidence were disappointing, coming in at 14.7 and -8.7 respectively. NZD was lower on the day but most of the losses were recorded pre-data. U.K. consumer confidence remained mired at low levels while Hometrack house prices recorded the fastest annual pace of decline since October 2009, falling 3.2%.
Overnight, interest rate outlooks continued to be the dominant driver in FX land, with the EUR managing minor gains along with the dollar while the JPY and CHF remained under the thumb. ECB’s Bini Smaghi joined the hawkish train with comments saying rates will be raised in a gradual way first, with the current policy stance deemed not appropriate. GBP was given an initial lift from a firm CBI reported sales survey which came in at +15 rather than the -2 expected and +6 prior but the high-riding dollar and EURGBP buying kept gains limited.

On the U.S. data front, Challenger job cuts showed job cuts at the lowest Q1 total for 15 years while the private ADP employment report was a mild disappointment, showing +201k jobs compared with 208k expected and a downward revision of 9k to the previous month’s data. The auction of $29 bln worth of 7-year notes was okay -  bid/cover ratio of 2.79 compared with 2.86 last time and a higher yield of 2.895% compared with 2.854% last. Wall St closed slightly higher in a last-minute rush to buy recent gainers – DJIA up 0.58%, S&P +0.67% and the Nasdaq +0.72%.

Looking ahead, today in Europe and we can see German retail sales and unemployment, U.K. Nationwide house prices and Norway retail sales. Expect fixing activity into month-end to pick up later. The North American session features Canada’s GDP numbers for January, weekly US jobless claims (with annual revisions so the numbers may have more impact than normal), Chicago PMI, factory orders and NAPM – Milwaukee.

Economic Data Highlights

• US Weekly Mortgage Applications out at -7.5% vs. +2.7% prior
• US Mar. Challenger Job Cuts out at -38.6% y/y vs. +20.0% prior
• US Mar. ADP Employment Change out at 201k vs. 208k expected and revised 208k prior
• UK Mar GfK Consumer Confidence out at -28 vs. -30 expected and -28 prior
• UK Mar. Hometrack Housing Survey out at -0.1% m/m, -3.2% y/y vs. -0.2%/-2.7% prior resp.
• JP Mar. Nomura/JMMA Manufacturing PMI out at 46.4 vs. 52.9 prior
• AU Feb. Retail Sales out at +0.5% m/m vs. 0.4% expected and 0.4% prior
• AU Feb. Building Approvals out at -7.4% m/m, -21.8% y/y vs. 4.0%/-12.8% expected and revised -11.6%/-16.4% prior resp.
• AU Feb. Private Sector Credit out at +0.5% m/m, 3.4% y/y vs. 0.3%/3.2% expected and 0.3%/3.3% prior resp.
• NZ Mar. NBNZ Activity Outlook out at 14.7 vs. 36.6 prior
• NZ Mar. NBNZ Business Confidence out at -8.7 vs. 34.5 prior
• JP Feb. Housing Starts out at +10.1% y/y vs. 7.4% expected and 2.7% prior
• JP Feb. Construction Orders out at +19.5% y/y vs. -10.7% prior

Upcoming Economic Calendar Highlights
(All Times GMT)

• GE Retail Sales (0600)
• UK Nationwide House Prices (0600)
• GE Unemployment Rate (0755)
• Norway Retail Sales (0800)
• UK BOE Credit Conditions Survey (0830)
• HK Retail Sales (0830)
• EU Euro-zone CPI Estimate (0900)
• UK BOE’s Miles to speak (1015)
• CA Jan. GDP (1230)
• US Initial Jobless Claims (1230)
• US Chicago PMI (1345)
• US Bloomberg Consumer Comfort Index (1345)
• US NAPM – Milwaukee (1400)
• US Factory Orders (1400)
• US Fed’s Lacker to speak (1430)

Oil Prices Rise as Disrupted Supply in Libya may be Permanent

Oil prices rebounded in European session as Qaddadi's troops recaptured a key oil port, dampening hopes that the unrest will end soon. The front-month contract for WTI crude oil price climbed above 105 while equivalent Brent crude contract jumped a 2-week high of 116.78. The DOE/EIA said in a report that the extent and duration of Libya's supply disruption will depend on several factors: 1) Much will depend on the political outcome and the acceptance of the government in power by both the Libyan people and the international community following the end of hostilities; 2) sanctions would need to be lifted to allow for international participation (both in terms of investment and trade) in Libya's oil sector and 3) following commercial and contractual negotiations, any infrastructure that has been damaged will have to be repaired and the knowledge base will have to return to the country before production can begin to ramp up. The oil agency said large uncertainties remain in the oil market.

In the report, the agency also compares changes in crude oil production from pre-disruption level among 4 OPEC countries. It appears that only Kuwait's oil production managed to exceed pre-disruption levels after the invasion by Iraq in 1990. For Venezuela, Iran and Iraq, a large amount of output lost during crises proved to be permanent.

 

Gold prices remained firm with the benchmark Comex contract extending gains to 1430. IEA's forecast that oil revenue to the OPEC may rise to $1 trillion this year will help gold. Apart from rising inflation pressures, higher oil prices boost commodity indices which usually weigh energy more heavily than gold. Fund managers will have to raise their gold purchases as the indices are moved higher. This helps lift gold prices. Moreover, as a major gold buyer after China, India and the US, surging oil revenues may boost gold buying in Middle East countries.

On the macro front, US' initial jobless claims probably fell -2K to 380K in the week ended March 26. Separately, the Chicago PMI is expected to have slipped to 69 in March from 71.2 in the prior month. Indeed, the focus this week is the March employment report which will be released on Friday. Non-farm payrolls might have increased 190K, easing from 192K in February, while unemployment rate should remain steady at 8.9% during the month. In the Eurozone, the market is awaiting the stress test result for 4 Irish banks. It's likely that all of them will be nationalized- to come under control by the state.

FX Update: EURUSD to follow GBPUSD through support?

GBPUSD dipped tentatively below 1.6000 today despite already very steep losses late last week. EURUSD has traded only marginally lower as the critical 1.4000 level looms. A break of that support offers better technical support for the bearish case. Will the Euro bears get what they want this week?

Merkel and Sarkozy suffer in the polls
Local elections in both Germany and France saw the parties of those two leaders suffering resounding defeats – Merkel in the large German state of Baden-Wuerttemburg, traditionally a CDU stronghold, and Sarkozy’s party lost out heavily to the opposition Socialists in local elections.

In Baden-Wuerttemberg, Greens gained strongly and will lead the state government there, kicking the CDU out for the first time in 58 years. Meanwhile, Merkel is getting stretched rather thin in trying to placate her constituents on the one hand, while working to save the EuroZone on the other, as she moved to reduce the German contribution to the post mid-2013 ESM bailout mechanism by more than 50%.

In France, the local “elections” are for representation at local councils and are more of a political poll than a real election, though they are important for gauging voter temperature ahead of the presidential race in April of next year. According to an FT article, the right-leaning National Front would receive more votes if elections were held today than Sarkozy’s UMP party.
In other EU news, Reuters reported today that the ECB is working on a new liquidity facility aimed at supporting banks for a longer period of time relative to the current ELA mechanism that has received so much attention in connection with Irish banks.

Chart: EURUSD
EURUSD is trading just above the 1.40 level his morning as the market. Fed rate expectations are sharply higher on the day, while events over the weekend are seeing gathering clouds over the Euro. Will the market lean toward Euro weakness, or is the remarkably strong risk appetite in this environment going to prevent any further greenback rally? A break and close below the 1.40 level would weaken the up-trend at minimum and cause significant damage to the bullish case.

More Fed Hawks?
After the Fed’s Plosser on Friday outlined his desired trajectory for a Fed exit strategy that involved both rate hikes and a contraction of the Fed’s balance sheet, the St. Louis Fed’s Bullard was out this weekend arguing for an early exit from QE2.  This was the same Bullard who is supposedly rather influential within the Fed and was the purported mastermind of QE2 in the first place. His previous main rhetorical push was for a “tapering” of the . Other Fed officials, even those more or less opposed to QE2, have suggested that QE2 will run to completion, so this is surprising to say the least, and Fed rate expectations eased even lower today after a sizable drop on Friday. Of course, almost all recent hawkish comments from the Fed concerning QE have been made based on the belief that the US economy is doing well. The more interesting going forward is whether the US economy can stand on its own two feet without QE.

Chart: GBPUSD
While a couple of Fed officials are making hawkish noises, we had the BoE’s Posen (the known dove who continues to vote for further expansion of asset purchases) out suggesting that inflation could fall to 1.5% next year in the UK. This did little to affect the trajectory of the UK rates today, but GBPUSD is trading below the 1.6000 area today that has served as support previously and the coming days are important. For the short term, the action looks awfully steep, but the sell-off has emphatically rejected the previous choppy uptrend for now.

Looking ahead
The coming days are critical for the foreign exchange market, with the end of month/quarter/end of Japanese financial year on Thursday. In terms of Japanese equity performance versus the rest of the world – is the risk more to the side of yen strength due to the underperformance there or will the yen lose out due to the rate implications of all of the Fed jaw-boning? We could see volatile times for the market over the next five trading days.

Certainly also this week is a key test for whether rate differentials count more than risk appetite in determining the relative value of currencies at the moment. We’ve had a powerful round of rhetoric from a number of sources within the Fed that is supportive of the USD from a rate spread perspective, but the market has historically shown an aversion to buying the greenback when risk appetite is healthy. Which development is more important? And while on the subject of risk appetite, AUD and CAD are going great guns at the moment on risk appetite while the very largest currencies all look weak in comparison.
 Elsewhere, the Middle East situation remains an important source of catalysts for the energy market and the Japanese nuclear situation has not been sufficiently resolved to put behind us for now, either.

Watch out for the Fed’s Lockhart and Evans out speaking later today. Evans is a known dove.

Buckle up, this could be an interesting week for foreign exchange.

Economic Data Highlights

• Sweden Feb. Retail Sales out at 0.0% MoM and +3.0% YoY vs. +0.4%/+4.3% expected, respectively and vs.+2.4% YoY in An.
• Sweden Feb. Trade Balance out at +12.0B vs. +9.0B expected and +7.7B in Jan.
• US Feb. Personal Income rose +0.3% MoM vs. +0.4% expected
• US Feb. Personal Spending rose +0.7% MoM vs. +0.5% expected
• US Feb. PCE Core out at +0.2% MoM and +0.9% YoY as expected and vs. +0.8% YoY in Jan.

Upcoming Economic Calendar Highlights

• US Feb. Pending Home Sales  (1400)
• US Mar. Dallas Fed Manufacturing Activity (1430)
• US Fed’s Lockhart to speak (1640)
• US Fed’s Evanst to speak (1940)
• New Zealand Feb. Trade Balance (2145)
• Australia RBA’s Edey to Speak (2200)
• US Fed’s Rosengren to Speak (2200)
• Japan Feb. Jobless Rate (2330)
• Japan Feb. Overall Household Spending (2330)
• Japan Feb. Retail Trade (2350)
• Japan Mar. Small Business Confidence (0500)

Today's Call: USDJPY – Bullish above 80.40

After two strong days of gains from the month's bottom, last week’s buy strategy relied on the bullish Hammer signal at the low as a pattern consistent with exhausted bear market momentum and the start of a new positive bias. On the week, trading was consolidative with a small improvement in prices but going into this week the forecast remains bullish. Positive momentum signals are still increasing, indicating buying interest is strengthening and as long as prices remain above 80.40 the targets are for buying through 82.00, the high on the 18th March, to 82.46, the 2-week top, then the high for March at 83.31 and potentially February's 83.99 high trade.

Risk to this forecast would be selling back through 80.40, a correction of 50% of the strong rally on 18th. This should be a bearish signal that the improvement is stalling and sentiment is deteriorating further to 80.00 then 79.00.

Why the Latest from Libya Won't Really Affect the Oil Market

 This morning I am returning home from St. Petersburg, Florida, where I spent the last several days with the Money Map team at 2011 Investment U.

But while we were enjoying the sun, good food, and good conversation, matters continued to develop elsewhere that will impact investor approaches to global energy.

Information has surfaced that forces opposing Libyan leader Muammar Gaddafi secured the major oil towns of Brega and Ras Lanuf (both port cities on the Mediterranean).

The insurgents now control fields producing between 100,000 and 130,000 barrels a day, and they say that will quickly increase to 300,000, with exports renewing in a week. That higher figure would account for about 19% of daily exports from Libya before the unrest started.

To the extent that anti-Gaddafi forces can secure the oil fields presently under their control, at least some of those exports should begin to flow again.

Yet those forces have their primary interest, these days, in driving on to the capital city of Tripoli. Already, they are fighting their way west along the coast and have closed in on Sirte, Gaddafi's hometown, within 300 miles of the capital.

That means the actual protection of this oil flow will depend upon the NATO-engineered no-fly zone. The overall strategy on that zone, in turn, depends upon an emergency meeting to be held in London tomorrow (March 29).

So the question is, will what's happening in Libya improve the crude oil on the market?

The Bottom Line: Libya Doesn't Drive Prices

Without an ongoing Western military presence in Libya, there is no assurance that exports – even if they are renewed – will continue. Additionally, the delivery and export infrastructure needs to be evaluated to determine how extensive the damage has been.

The primary oil field development projects remain under the control of Western majors, and those companies have yet to return their technicians and specialists to Libya after pulling them out. The central logistical coordination for the Libyan oil sector remains in Tripoli.

With the capital city now certain to be the focus of renewed fighting, there will be few prospects to increase export flow… even if the combination of insurgent military action on the ground and NATO strikes from the air do retain control over reclaimed fields.

Crude oil futures now hold at $105 in New York and $115 in London. Improvements have emerged, but they are quite subdued. A rise in Libyan flow is welcome, but will not change aggregate prices very much.

After all, before the unrest began, Libya was providing only 2% of the daily worldwide crude volume.

And in early January – before the broad-based explosions in the MENA (Middle East and North Africa) region and the disasters in Japan – we were still experiencing the highest crude oil prices on record for that time of year… ever.

Libya is the conflict du jour, the unfolding news that now transfixes the international media. But it is not the primary pressure destined to increase prices.

A resolution of its problems, therefore, will not bring a sudden forward-looking drop of any consequence in either West Texas Intermediate (WTI, the benchmark for NYMEX trading) or Brent (the London-based benchmark, having a more important impact on a broader range of international prices).

What really matters are two overarching dynamics now underway.

1) First, MENA unrest is intensifying across the board.

Here, the events I watch with the greatest concern are those in Bahrain. That's because, in addition to having factors addressing oil and the advancing economic difficulties, Bahrain also has the single greatest volatile factor in the entire region – a Sunni minority ruling class and a Shiite majority population.

This is akin to playing with dynamite in the streets.

It is already a religiously inspired opposition. That they are making their case for more participatory rule right in the middle of the primary source of oil in the world hardly occasions a greater comfort level.

Also, a causeway connects Bahrain to the eastern region of Saudi Arabia, where an absolute majority of that country's oil production is located. That area is also Shiite-dominated, while the ruling family in Riyadh is closer to Sunni (they are actually Wahabi, but very opposed to Shia).

When the 1979 Shiite revolution erupted across the Gulf, in Iran, the eastern province of Saudi Arabia also erupted.

Little wonder, then, that this time around Saudi security forces and police are putting down disturbances early on their own territory, while also moving into Bahrain "to keep the peace."

This is the geopolitical dimension taking over in the region.

It is no longer merely about removing a certain ruler (whether it's Gaddafi in Libya, Hosni Mubarak in Egypt, or Zine al-Abidine Ben Ali in Tunisia) or improving the life prospects of a wide portion of populations.

For the world to have confidence in the oil flow continuing, stability is required.

Yet the situation is now confronting the major internal threat to stability; a renewing collision based on the successors of Muhammad. And that had been going on for some 1,300 years…

2) Second, there are other factors at work in the oil market.

The volume coming on market is guaranteeing an increase in prices for both the crude and the oil products produced from that crude.

We do not yet have a situation in which the availability of supply is an issue. We do have sufficient oil out there – but it is costing more to extract, process, and refine. Unconventional sources – such as heavy oil, bitumen, oil sands, or oil shale – will fulfill needs for some time to come, but the price will be rising, right along with the need to use sources that are more expensive.

At some point, of course, the overall cost will begin to have a significant impact on wider economic considerations. Not simply at the pump, with the price of gasoline or diesel, but throughout the market, as increasing prices for consumer, commercial, and industrial usage begin taking their toll.

Libya is one of the last places on Earth that provides light, sweet crude – the volume that is easiest and least expensive to process.

Unfortunately, even if all of that supply returns to market, we will still be relying increasingly on more costly production.

NATO's actions may bring the Libyan oil flow back, but it cannot stem an even greater tidal wave of demand from regions worldwide.

Nor, for that matter, will no-fly zones provide any benefit in allaying the rising base of religiously driven unrest about to race across the very area we rely upon to develop the bulk of the globe's oil reserves.

Sincerely,

Kent Moors.

China's Stance in Libyan Issue and Impacts on Oil Supplies

Fighting in Libya continued with the NATO taking command of allied military operations. While it appears that no quick resolution is in place for the issue, consolidation of oil prices suggests that the impacts of the turmoil in Libya have more or less been priced in. While it is not a top priority focus for oil investors, market player may find it interesting to understand China's attitude towards the issue and how it will affect her oil investments in Africa in the future.

Despite the tradition of 'noninterference' of international affairs, especially matters related to human/civil rights, China, in the UNSC meeting, voted on February 25 for sanctioning against Qaddafi and the Libya authority who harmed civilians. People believe that China's decision was for the safety of over 30K Chinese workers and citizens in Libya. However, in less than a month, the permanent member of the UNSC abstained from the vote on the resolution to allow 'all necessary measures' to stop Qaddafi. There have been rigorous debates on China's 'contradicting' stances regarding Libya's issue. According to China, it has 'serious reservations' about imposition of a no-fly zone in Libya but it gave up the veto power amid requests from the Arab League and the African Union.

While the Chinese ministry reiterated the non-interference principle remains 'one of the pillars of China's foreign policy' and 'will not change', it also noted the country has 'actively and constructively taken part in Security Council activities'. In our opinion, China may need to modify the 'non-interference' stance somehow as it's playing an increasingly active role in the political and economic stages as it clout grows in recent years. 'Acting against' its western counterparts may not be favorable for China in other foreign affairs.

As the world's second largest oil importers, China concerns very much about oil prices and oil supplies. China's largest oil fields are mature and production has peaked, leading companies to focus on developing largely untapped reserves in foreign countries. According to Stephanie Hanson in her article titled 'China, Africa, and Oil', China adopts a 2-fold strategy on oil investments in Africa. First, it secures deals with smaller countries such as Gabon, Equatorial Guinea, and the Republic of Congo as large oil producers such as Nigeria and Angola have built closed relationship with western countries. Second, it approaches these large producers by offering 'integrated packages of aid'. Recently, the Chinese ambassador to Angola, Zhang Bolun unveiled that China has loaned a total of $14.5B to Angola for national developments of the country. China receives a secured stake of oil supply in return. In 2009, Angola exported 644K bpd of oil to China, surpassing Iran to be the second largest source of Chinese imports after Saudi Arabia. While some market participants find it 'unusual' when China favored sanctioning Libya despite the country's heavy oil demand, the fact is that oil from Libya take up only 3% of China's total imports. The benefits to China are far more than the costs if the UN successfully contains the unrest and stabilizes global oil prices. 

 

Major macroeconomic data are concentrated in the US today. Growth in personal income probably eased to +0.4% in February from +1% in the prior month. Personal spending might have gained +0.6% in February after climbing +0.2% in January. Core PCE inflation is likely to increase 0.2% in February, matching the gain in core CPI. Pending home sales are expected to have climbed +0.9% in February, following a drop of -2.8% a month ago.

Weekly Review and Outlook: Extended Recovery in Risk Appetite Sent AUD/USD to New Record High, Euro Firm on Rate Expectations

Weekly Review and Outlook: Extended Recovery in Risk Appetite Sent AUD/USD to New Record High, Euro Firm on Rate Expectations

Risk appetite was strong last week in spite of continuous negative news out of Eurozone. The strength was clearly reflected in extended rebound in global equities as well as rally in commodities. In the foreign exchange market, risk sentiment was manifested in the clear strength in Aussie and Kiwi and the weakness in swiss franc as well as dollar. Among European majors, euro was the biggest winner as rate expectations remained firm. Meanwhile, support to Sterling faded after markets cooled down from overshoot rate expectations. In summary, S&P 500 close 1313.80 last week, 5.1% above post Japan earthquake spike low of 1249.05. CRB commodity index closed at 359.97, 6.7% above equivalent low of 337.44. Gold made new record high of 1448.6 while crude oil is back pressing 106.95 near term high. Dollar index dipped to as low as 75.52 before recovering while AUD/USD made new record high just shy of 1.03 level. Near term sentiments would likely continue to support Aussie and Euro, but the greenback could have a chance to rebound against Swissy, Sterling and possibly the Canadian dollar too.

Eurozone debt crisis was a major focus last week as worry on Japan nuclear crisis eased while situation in MENA took a back seat. Fitch downgraded Portugal's rating from AA- to A+ and that was followed by S&P's downgrade of Portugal from A- to BBB. Portuguese prime minister Socrates resigned after the new austerity plan was rejected by the parliament. The highly anticipated EU summit produced nothing solid. Domestic political considerations in Finland and Germany delayed the finalization of the details of a plan to boost the lending capacity of the EFSF to June. Nevertheless, as noted before, Euro was firmly supported by expectation of rate hike from ECB in April and such expectation was firmly affirmed by rhetoric from central bankers last week. The common currency should remain supported ahead of April 7's ECB meeting but there could be risk of a near term reversal after expectation becomes fact.

Sterling lagged behind Euro even though inflation data beat market expectations and jumped to 4.4% yoy in February. BoE minutes was a disappointment to sterling bulls as they showed no change in the voting. Three members favored increasing interest rates during the meeting with Andrew Sentance maintaining his call for an increase the policy rate to 1% while Martin Weale and Spencer Dale voting for a move to 0.75%. The minutes cooled down speculation for a Q2 hike from BoE even tough a Q3 high is still priced in.

Near term outlook of the greenback is a bit mixed for the moment. Dollar should maintain weakness against Aussie and Euro. But technically, some further rebound would possibly be seen against Sterling and Swissy. Canadian dollar also found it difficult to sustain momentum against dollar. On important development to note is that we have possibly seen the pull back in US 10 year yield finished earlier in the month and stronger rise in yield ahead would help the greenback extends rebound against other major currencies, except versus Aussie and Euro. Meanwhile, Japanese yen continued to stay in range last week. The broader bearish outlook in yen crosses remained unchanged as key resistance levels still hold after G7 intervention triggered rebound.

Technical Highlights

S&P 500 was firmed supported by the medium term rising channel in spite of the post Japan disaster selloff. Current development indicates that the larger up trend is resuming for a new high above 1377.04. 

Similarly, the CRB commodity index was also firmly supported by medium term rising channel after Japan's disaster triggered selloff. And the recent up trend is likely resuming for a new high above 366.71. 

Dollar index recovered from 75.25 but there is no change in the bearish outlook. We'd expect upside of the current recovery to be limited by 76.88 support turned resistance and bring another fall through 75.25 temporary lot o 74.19 support next.  

The Week Ahead

Developments in Portugal and Eurozone will remain a major focus but might continue to have muted impact on Euro's up trend. Main focus would indeed be on CPI estimate which could alter speculation on ECB rates beyond the April hike. UK manufacturing PMI will be another major focus as BoE rate expectation will continue to flip flop. A number of US data will be released today, including personal income and spending, ISM and NFP.

• Monday: US personal income and spending, pending home sales; New Zealand trade balance; Japan household spending, unemployment, retail sales
• Tuesday: German Gfk consumer sentiment; UK current account, GDP final; US S&P house price, consumer confidence
• Wednesday: Japan industrial production; Swiss KOF; US ADP employment
• Thursday: Australia retail sales, building approvals; RBNZ business confidence; German unemployment; Eurozone CPI flash; Canada GDP; US jobless claims, Chicago PMI, factory orders
• Friday: Japanese Tankan; China PMI manufacturing; Swiss retail sales, SVME PMI; UK PMI manufacturing; Eurozone unemployment; US non-farm payroll, ISM manufacturing

FX Update: AUDUSD testing multi-decade high

With equity markets storming back, strong metals prices and a renewed focus on QE3 potential, AUDUSD has had a look at its 28-year high from the last trading day of 2010 above 1.0250. Is there more gas in the tank for the rally or is it overdone? Also - Euro continues to weigh perils of Portugal versus the vigilane of Trichet as the EURUSD tug of war changes direction twice daily it seems.

Euro braggadocio – second thoughts?
The snapback rally in Euro from yesterday is having second thoughts today as the implications of the Portuguese downgrade are chewed over a bit more thoroughly. After the S&P ratings agency downgraded Portuguese debt from A- to BBB, LCH Clearnet, a major clearing house, said that Portuguese bonds would no longer be eligible for delivery. This effectively “eliminates international trading in Portugal’s debt” according to an FTalphaville article. This has rubbed EUR sentiment the wrong way late yesterday and into today, though on the ECB expectations front, we see nary a ripple of fear in expectations for the ever-vigilant Mr. Trichet’s intentions, as forward expectations are still at the high end of the recent range, around 120 bps for the next 12 months.

Soaring AUD to have wings clipped or soar higher?
The AUDUSD came within a couple of pips of its highest level since early 1982 after a remarkable 6-day run after its post-Japanese tsunami low. The Aussie is generally sharply higher across the board – notching massive gains versus even the Canadian dollar and European currencies as well. While we understand the impulse to buy Aussie with such a strong equity market recovery and particularly in light of the metals rally, we wonder if the relative outperformance of the Aussie is overdone. Testing the waters in the likes of AUDCAD might be an interesting way for some to express an Aussie-negative view that doesn’t involve the greenback.

Chart: AUDUSD
AUDUSD on a 6-day sprint higher – a bit of caution at least before trying higher or will the pair do as it has in the past and simply refuse to push consistently above the 1.0200+ area? We recall back in 2009-10, when it took the pair the better part of a year to fully take out the 0.9300/0.9400 area after initial achieving that objective, and back in 2004, the AUDUSD touched 0.80, only to spend a bit over three years. 

 Chart: AUDCAD
AUDCAD is an interesting way to look at the relative risks among the commodity currencies, though Aussie remains a more “pure” commodity currency than its North American counterpart. It is also an interesting way to express a view in energy prices versus other commodity prices. The risk for CAD is that a weak US drags the currency down, while the risk for Aussie is exposure to a potentially struggling China. From a longer term valuation standpoint, CAD looks relatively cheap. (It also looks relatively cheap in recent interest rate spread comparisons, though the market doesn’t seem to be focusing very intently on these at the moment.)

Odds and ends
The Swiss franc dropped sharply overnight, as USDCHF set a new 7-day high and EURCHF burst through local resistance and the 55-day moving average. The CHF seems to have an odd premium built in considering the environment of rising rates and higher risk appetite. Is CHF downside a further risk here in the short term?

The RBNZ’s Bollard suggested that the Christchurch rebuilding could add 2.5% to GDP growth next year and that there may be “some challenges managing the bottlenecks around it [earthquake reconstruction]” and New Zealand short rates were a bit higher again as the NZD found some further support in the crosses – even against the Aussie. Have we seen the bottom in NZD  from the earthquake effect?

The German March IFO beat expectations and only barely managed to come in below the February number, though the drop in expectations was the reason for the slight fall in the overal index, while the current assessment actually rose to a new high for the cycle. This is a testament to the strength of the German economy for the moment.

Looking ahead
The next few trading days will help determine whether 1.40 or 1.4275 will break in EURUSD, though we have a “no expectations” EU summit to look forward to here. And the next several trading days could be very cyclically important considering we have the end of the quarter approaching (some window-dressing/benchmark chasing going on in equities at the moment?) and the end of the financial year for Japan. Meanwhile the USD is teetering near multi-year lows. And the big question shortly after the turn of the quarter will be the degree to which incredibly input costs increases have squeezed corporate margins as Q1 earnings reports begin rolling out. So it appears that the risk of a major transition period might be under way during the next 2-3 weeks. Stay tuned.

In the meantime, have a wonderful weekend and be careful out there.

Economic Data Highlights

• Japan Feb. Nationwide Department Store Sales rose +0.7% YoY vs. -1.1% in Jan.
• Germany Feb. Import Price Index rose +1.1% MoM and +11.9% YoY vs. +0.9%/+11.6% expected, respectively and vs. +11.8% YoY in Jan.
• Sweden Feb. Household Lending rose +7.5% YoY vs. +7.7% in Jan.
• Germany Mar. IFO Survey out at 111.1 vs. 110.5 expected and 111.3 in Feb.

Upcoming Economic Calendar Highlights

• US March Final University of Michigan Confidence (1355)
• US Fed’s Plosser to Speak (1615)
• US Fed’s Fisher to Speak (1700)
• EuroZone ECB’s Gonzalez Parmo to Speak (2015)
• US Fed’s Bullard to Speak in France (Sat 0800)

Commodity Weekly: A strong comeback for commodities

Commodity markets have bounced back strongly after the carnage caused by risk adversity in the wake of the Japanese earthquake.
The big losers of last week have turned into big winners this week with attention now firmly on potential supply disruptions from continued geopolitical uncertainty. Military strikes in Libya have intensified and unrest elsewhere in the region continues to attract buyers of oil. The radiation risk in Japan combined with continued aftershocks is still causing major problems and hindering the reconstruction process, which is estimated to cost Y25,000 billion ($309 billion) compared with Y10,000 billion after Kobe.
In Europe the sovereign debt crisis returned to the front pages with the Portuguese government stepping down after failing to pass a deficit reducing budget. It is now very likely that Portugal will request an international bailout in the coming days. The immediate risk is one of contagion with Moody’s cutting the rating of 30 Spanish banks.
The DJ-UBS index, which tracks 19 commodities with 1/3 exposure to each of the three major sectors energy, metals and agricultural, has risen 3% over the last week.

 Silver outperforming gold - again
Silver has now rallied 12% from the lows last week reaching a new 31 year high in the process. Investors have returned in full strength after the recent setback as they look for alternative investments amid the ongoing concerns about Libya and Europe’s debt crisis. Gold on the other hand continues to find it very tough breaking into new territory with sellers continuing to emerge on any rallies. Given the strong performance by silver and general amount of uncertainties around, new highs will probably be seen eventually.

Sharp increase in oil prices despite lower Japanese demand
The price of WTI crude oil has also moved sharply higher over the past week as supplies from Libya remain off line. Lingering doubt persists about Saudi Arabia’s ability to meet the shortfall, given the difference between high quality North African oil compared to the heavier and lower quality Saudi oil. Reduced demand from Japanese refiners of some 1.3 million barrels per day has so far received limited or no attention.
We have yet to see any global demand destruction from the recent events and with economists still expecting synchronized growth in emerging markets and developed markets prices should be supported in the months ahead. This is also the reason why various investor surveys continue to highlight the energy sector as potentially the best performing one during 2011.
During the recent 10 dollar sell off we only saw a limited reduction in the speculative long WTI crude position among hedge funds and large investors, a clear indication that it takes more than that to shake the bullish view on the sector.

 The U.S. market continues to be well supplied with inventories rising for a third week with overall demand increasing to 19.3 million barrels a day, some 21% of total global consumption. Gasoline consumption rose by 2.8% to 9.07 mbd and is clearly not showing any signs of slowing down despite the average price at the pump being 28% higher than the 2010 average.
Grains higher after speculative washout
The agricultural sector which experienced the biggest wash out also saw the strongest come back this week with the DJ-UBS grain sector rising by nearly 8% on the back of strong comebacks for corn and rice. Why did corn drop by 18% in a matter of weeks give the strong fundamental outlook for this crop?
The speculative build up of positions over the last six months probably caused most of the selling as investors had to reduce exposure towards riskier assets. This resulted in the grain sector seeing positions being scaled back by 69,000 lots last week and since early February the total reduction has been 232,000 lots as better news on crop forecasts began to reach the market. It does highlight the risk of what happens when the speculative bow gets strung to hard, something that the investor needs to take into account when planning his allocation.

Prospective planting report setting the tone
The overriding focus in the days ahead will be a March 31 report from the U.S. Department of Agriculture showing planting intentions among U.S. farmers. The Prospective Plantings Report will give the first indication for the 2010/11 crop outlook. This annual battle for acreage is currently expected to benefit corn and soybeans as rising prices make these crops more profitable.
The price of wheat has struggled to recover with investors failing to respond to the 30% price collapse since early February. The U.N. Food and Agriculture Organization sees global wheat production for 2011 season reaching 767 million tons, up 3.4% from last year. This will primarily be led by a possible 33% jump in Russian output as the country recovers from the devastating drought last summer.

FX Update: GBP can’t catch a break

The pound sterling was pounded with a steep loss almost across the board today on weak retail sales data for February. Meanwhile, the Euro is showing remarkable resilience considering yesterday's news flow. Can ECB expectations really trump a fizzle of a summit this weekend and Portugal in the bailout queue?

GBP pounded
The pound suffered another setback today after a very weak retail sales report for February that saw ex Auto Fuel  spending shrinking a full -1.0% after a strong January that saw pent-up demand from the most disruptive December weather in decades. While it would be best to wait for March and April data are coming to check the temperature on end consumption demand, the extremely poor confidence numbers coming out of the UK of late (the GfK number is close to 2-year lows and the Nationwide confidence number is at its lowest level in the nearly 7-year history of the survey). The weak pound also came despite the BoE’s Dale out today discussing why he voted for a 25-bp increase to rates and talking up inflation concerns, as the BoE has estimated that CPI could exceed 5% at times this year.

Chart: GBPUSD
Cable is diving steeply back into the range after the recent runup failed to maintain altitude, and now we’re back in the 1.60-1.63 range in which we’ve spent the better part of two months. For the USD to push the pair back through the key 1.6000 support and sustain below there, we’ll likely need a bout of risk aversion, easing in crude oil prices, and doubts on whether QE3 will be forthcoming after the end of June.

Market brushing off Euro-worries for the moment?
The power of ECB expectations to hold sway over other important developments in Europe is remarkable (namely, yesterday’s developments, which included the news that this weekend’s EU summit will result in no new major accomplishment and will look to push key decisions on the EFSF all the way to June and the news that Portugal’s prime minister has resigned after his government’s budget failed to pass a parliamentary vote.) From this morning’s action, in which we have seen a snapback rally in EURUSD and EURGBP and even EURCHF trying at the range highs, we can see that the market is still wowed with continued ECB rhetoric of late suggesting that the central bank is as serious as ever on moving on rates despite the hiccups in the sovereign debt crisis and Portugal on day-to-day bailout watch.

 The next chance the ECB will have to follow up on its rhetoric will be at the April 7 ECB meeting in two weeks time. The consensus is looking for a 25-bp hike. We must also note that the signs of sovereign debt stress are still only really evident for the most peripheral countries of Greece, Ireland and Portugal, while countries closer to the core like Italy and Spain have seen their perceived default risk improve markedly from the levels of just two weeks ago.

US Data
The US Durable Goods Orders report for February was downright awful, especially in light of the already weak January number, and this adds up to the most significant correction in this indicator since it began declining with the general economic malaise that was gather in mid 2008. Still, it tends to be a volatile indicator, and only a third month of weakness this month would suggest a major alarm bell is ringing on this area of the economy, even if this data point raises quite a red flag. The gross level of durable goods orders, by the way, topped out in December of last year at approximately the same levels as the US first saw in mid-2006. The weekly initial claims data was reasonably strong, in-line with expectations and slightly below the last couple of weeks of data.

Looking ahead
We’re not sure what took hold of market sentiment this morning, but we had a very strong move higher in equities and swoon in bonds ahead of the US data. This saw a bounceback in many of the JPY crosses and strength in the pro-cyclical currencies like the commodity currencies while the USD remained relatively weak. NZDUSD is above its 200-day moving average again after pausing at the level in recent days.

Next on the agenda is tomorrow’s German IFO data, which could finally disappoint slightly under the weight of the run-up in crude oil prices and the Japanese tsunami. Other than that, the focus will remain on the EU and how the politicians there try to spin what appears to be a disappointment summit in waiting. The SNB’s Danthine is also out speaking later today. The market has actually priced in 57 bps of policy tightening from the SNB in the coming year – a good 20 bps more than for the US Fed – is this realistic?

Economic Data Highlights

• China Mar. HSBC Flash Manufacturing PMI out at 52.5 vs. 51.7 in Feb.
• Germany Mar. preliminary PMI Manufacturing out at 60.1 vs. 62.0 expected and 62.7 in Feb.
• Germany Mar. preliminary PMI Services out at 60.1 vs. 58.4 expected and 58.6 in Feb.
• Sweden Feb. PPI out at 0.0% MoM and +0.3% YoY vs. +0.5%/+0.7% expected and +0.5% in Jan.
• EuroZone Mar. preliminary PMI Manufacturing out at 57.7 vs. 58.3 expected and 59.0 in Feb.
• EuroZone Mar. preliminary PMI Services out at 56.9 vs. 56.3 expected and 56.8 in Feb.
• UK Feb. Retail Sales out at -0.8% MoM and +1.3% YoY vs. -0.6%/+2.4% expected, respectively and vs. +5.1% YoY in Jan.
• UK Feb. Retail Sales ex Auto fuel out at -1.0% MoM and +1.2% YoY vs. -0.6%/+2.5% expected, respectively and vs. 5.0%  YoY in Jan.
• US Feb. Durable Goods Orders out at -0.9% MoM and -0.6% ex Transportation vs. +1.2%/+2.0% expected, respectively
• US Feb. Nondefense, ex-Aircraft Capital Goods Orders out at -1.3% MoM vs. +4.3% expected
• US Weekly Jobless Claims out at 382k vs. 383k expected and 387k last week
• US Continuing Claims out at 3721k vs. 3700k expected and 3723k last week

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly Bloomberg Consumer Comfort Index (1345)
• Switzerland SNB’s Danthine to Speak (1700)
• US Fed’s Duke to Speak (2330)
• Japan Feb. National CPI (2330)
• Japan Feb. Corporate Service Price Index (2350)
• China Mar. MNI Business Condition Survey (0135)
• Japan Feb. Nationwide Department Store Sales (0530)

This Is How the "American System" Was Corrupted and Destroyed

This Is How the "American System" Was Corrupted and Destroyed  
By Porter Stansberry with Braden Copeland 

Who is the world's most influential investor?

Most people would say Warren Buffett. He is a living legend – probably the most successful investor in history. He is the CEO, chairman, and largest shareholder of Berkshire Hathaway, which controls more than $60 billion of publicly traded stocks and holds total assets of around $370 billion.Who is the world's most influential investor?

Most people would say Warren Buffett. He is a living legend – probably the most successful investor in history. He is the CEO, chairman, and largest shareholder of Berkshire Hathaway, which controls more than $60 billion of publicly traded stocks and holds total assets of around $370 billion.

Buffett is famously bullish on America. In his most recent letter to shareholders, he says:

Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.

The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932, and 1941, America's best days lie ahead.

We have no doubt America's best days lie ahead of us. We are confident 20 years from now, America's economy (and the technology that enables its growth) will be virtually unrecognizable to an investor from 2011.

Over the long term, our standard of living will undoubtedly improve.

We part ways with Buffett only on one point: We don't believe the "American system" remains alive and effective. In almost every critical way, the system of incentives, responsibilities, and freedoms that powered America's ascendancy have been corrupted, regulated, or simply destroyed.

The American Revolution delivered to the world a huge nation, virtually free from the burdens and tyranny of government, with a sound currency, little debt, and a population dedicated to avoiding foreign wars. These principles translated into huge financial advantages, making us the wealthiest nation in the world by about 1850. We stuck to these principles, with a few notable exceptions, until about 40 years ago.

No doubt, in its historic form, the "American system" works. But does it still exist?

Buffett was born on August 30, 1930. In that year, the federal government's total budget was less than 3% of GDP. Today, total government spending exceeds 40% of GDP. America no longer has any significant advantages in regards to the size of our government. We have at least as big of a domestic government burden as any other major economy. And thanks to our military spending, a much bigger burden in total.

Our military now stations troops permanently in more than 150 countries. Almost 400,000 of our 1.5 million active-duty personnel are serving outside the United States. Our founding fathers feared having any standing army. Today, we keep a standing army in harm's way – spending as much on our military as the rest of the world combined. Whether you agree with these decisions or not, there's no arguing the point that this kind of foreign policy is radically different than America's historic position.

Finally… the most important change to the "American System" came when Nixon took us off the gold standard in 1971.

The banking system of the United States was backed by gold for more than 200 years. During certain emergencies – like the Civil War and the Great Depression – gold backing was suspended. But eventually… the dollar was always returned to its foundation in gold.

Gold has always been a key part of the "American system." It assured creditors their debts would be repaid in currency that was literally as "good as gold." Besides serving as a yardstick for creditors and debtors, gold reserves have also limited the amount of credit available in our economy. This is its real function – something most observers (including Warren Buffett) don't fully grasp.

Basing our money on gold limited the amount of new credit banks could create to the size of its reserves. And this limited the amount of money that could be created inside the system, holding inflation in check. The gold standard prevented massive credit bubbles from forming because credit creation was linked to the size of the economy via gold reserves. Growth in reserves could only be achieved by increases in production or through trade.

The gold standard's powers shouldn't be exaggerated. A gold-backed monetary system doesn't prevent bankers from making bad loans. It won't stop investors from paying too much for lousy investments. And it doesn't work to prevent bubbles when debts outside the banking system are created without limit, as occurred with the various trust companies prior to the Great Depression. The gold standard only works to the extent that it's enforced, just like any other standard.

Historically, it was used wisely. That's why the ratio of debt (both public and private) to GDP had been remarkably stable at around 1.6 times GDP though most of U.S. history. The size of our gold reserves limited our debt burdens. And reserves could only grow in correlation with the overall economy. Bankers couldn't build up onerous amounts of debt.

That all changed in August 1971. Rather than cut the government's spending and raise interest rates to slow demands from our trading partners for bullion, President Nixon took us off the gold standard. From that point, our creditors had no legal claim to our gold reserves. And the banking system had nothing but the Federal Reserve to limit the creation of additional credit and money.

You can see what happened next in the chart below…

 

At Jim Grant's recent conference in London, David Stockman, director of the White House Office of Management and Budget under Ronald Reagan, explained why credit exploded:

American lawmakers have been freed of the classical monetary constraints. There is no monetary squeeze, and there is no reserve asset drain. The Fed always supplies enough reserves to the banking system to fund any and all private credit demand at rates which are invariably low.

By 1990, the total debt-to-GDP ratio in the U.S. had grown substantially to 2.6 times GDP. It reached 3.6 times by 2007 – even before the financial crisis. Today, total debt in the United States stands at $56 trillion – 3.8 times GDP.

That's $180,000 in debt for every man, woman, and child in the United States. That's nearly $700,000 in debt per family in the United States. The interest on these debts is more than $3.5 trillion per year. To give you some idea how much money we're spending on interest alone… just consider the total budget of the U.S. federal government is also $3.5 trillion. Again, $3.5 trillion just covers the interest!

These debts are completely unaffordable. How many families in America do you know that can afford to finance and repay $700,000 in debt? Not many… Certainly not the "average" family.

This debt crisis leaves us in a difficult position. Should we default on our debts (many of which are owned by foreign investors) and risk a collapse of our economy? Or should we simply print more money to pay for these debts, and risk a massive inflation?

So far it seems clear our political leaders are choosing inflation. That's why the Federal Reserve is printing trillions of dollars – aka "quantitative easing." It's buying around 70% of all new debt issued by the U.S. Treasury. This is greatly expanding our monetary base, in hopes the resulting inflation will make it easier to repay our debts.

In our view, this is complete madness. What's the point of paying our debts if the resulting inflation impoverishes the entire country? That's clearly what's happening.

America is in the early stages of a massive debt crisis and currency collapse.

We created this economic tragedy over the last 40 years by abandoning the "American system" Buffett references. We have abandoned, willingly, our core economic advantages. Our leaders, including Buffett, convinced us these things didn't really matter… and we could succeed without them.

They will be proven wrong.

You can see for yourself what's going to happen. The dollar is crashing. Against other major currencies, it has lost 35% of its value in the last 10 years. Against a standardized basket of commodities, it is down more than 50%. To bail out our banks and profligate housing speculators, we are burning the family furniture. As the currency crumbles, the value of every asset in America declines. As the currency crumbles, so does our standard of living. And we are increasingly at the mercy of our foreign creditors.

And for what? We've gone three generations into debt for mortgages on houses we don't need. We spent almost $100 billion to save a car company whose products no one wants. We spent perhaps hundreds of billions of dollars to bail out a handful of Wall Street firms – the same companies whose financial products got us into so much debt in the first place. Then in our spare time, we became the proud overlords of Iraq and Afghanistan, where $1 trillion and thousands of destroyed lives gets you… nothing.

Inflation will soar. The bond market will get wiped out. Our standard of living will plummet. Just imagine what the historians will write about the "American Empire" in 100 years.

Ten years ago, America sat on a pinnacle of power almost unimaginable even 50 years ago. We controlled the world's reserve currency. And it was just paper. We had no military rival. We invented the computer and built the Internet. Our military, our corporate brands, and our banks dominated the world economy like no other empire in history…

And then we went broke.

How could that have happened? It is as if our success and power convinced us we could break the laws of economics with complete impunity – while breaking all history's blood rules, too.

Down payments? Who needs those? Everyone deserves a home. Home prices never fall. Besides, we'll just get AIG to insure those bonds. What could go wrong?

Afghanistan? The Graveyard of Empires? We can handle it.

What about a civil war-prone country (Iraq) with Stone Age infrastructure, three rival indigenous tribes, and a unifying, religious-based hatred of Americans? Why not? Let's invade. We'll get the British to help. They had such success last time…

And why bother managing all these government employees? Let's let them set their own wages and benefits. What could go wrong?

Health care? Of course we can afford it. Let's toss in Viagra and other prescription drugs, too. That'll get us some votes.

Taxes? Nobody wants those. We'll cut 'em. How will we pay for all this? The rich will pay. Oh… that doesn't work? Well, we'll just keep borrowing from the Chinese. Have you seen what interest rates they'll accept? What a bunch of fools… Besides, everyone knows deficits don't matter.

And so it went… for nearly 10 years.

You couldn't have written a piece of fiction with a more absurd twist. It doesn't make any sense. But that's exactly what's happened. Like Charlie Sheen on a bender, we've jumped head first into more bad ideas over the last decade than perhaps any other country in modern times. And now we've come to the logical conclusion… The day of financial reckoning is here for the global paper currency system.

The solution is simple for anyone interested in preserving their wealth through all this: Own the money that mattered in the original "American System." Own gold.

Good investing,

Porter Stansberry    

Oil Strengthens ahead of Inventory Report

Commodities moved higher in European session as investors gauged the impacts of radiation leak in Japan. Radiation emitted from crippled nuclear plants has been found in ocean and agricultural products. The US, being the first country t block Japanese produce, said it will stop imports of mile, fruit and vegetables from areas of Japan near the nuclear plan. According to the government, the damage from the earthquake and tsunami on March 11 may reach 25 trillion yen, the costliest among natural disasters on record.

Indeed, we retain the view that the situation in Japan is supportive for oil prices in the medium-term, if not in the long-term. Japan will release an additional 22 days' worth of crude oil from reserves to ease shortages in the northern. This represents around 58.1 mmb of reserves, following the release of around 7.92 mmb from mandatory stockpiles last week. Concerning refining capacities, news reported that half of the refineries that were disrupted after the earthquake may resume operations in coming weeks. According to IEA's report on March 15, 6 refineries with a total refining capacity of 1.4M bpd, or 30% of Japan's total refining capacity, have been shut down. Reopening half of the suspended capacity means 700K bpd would remain offline for at least several months. We expect little to no gasoil exports from Japan for coming months and this would tighten the middle distillate market.

As investor await DOE/EIA's inventory report, the industry-sponsored API estimated crude oil inventory rose +0.97 mmb to 349.6 mmb while gasoline and distillate stockpiles declined -7.9 mmb to 222.3 mmb and -0.61 mmb to 155.0 mmb respectively. The market forecasts a +1.6 mmb jump in crude oil inventory but draws in both gasoline and distillate stocks.

At BOE's minutes for the March meeting, policymakers remained split on monetary policies. Concerning leaving the Bank rate at 0.5%, 3 members opposed the policy as they favored increasing interest rates. Andrew Sentence favored raising the policy rate to 1% while Martin Weale and Spencer Dale preferred a hike to 0.75%. On the asset-buying program, while the majority voted for leaving it at 200B pound, Adam Posen suggested to increase the size of the program by 50B pound to a total of 250B pound.

Weekly change in inventory as of 18/03/10	Change	Consensus	Previous
Crude oil		+1.60 mmb	+1.75 mmb
Gasoline		-1.50 mmb	-4.17 mmb
Distillate		-1.30 mmb	+1.14 mmb

Comparison between API and EIA reports:

		API (Mar 18)			EIA (Mar 18)
	Actual	Inventory	Previous		Forecast (using API's inventory level)	Inventory
Crude oil	+0.97 mmb	349.59 mmb	+0.91 mmb		-1.05mmb	350 mmb
Gasoline	-7.90 mmb	222.35 mmb	-0.46 mmb		-2.69 mmb	222 mmb
Distillate	-0.61 mmb	155.03 mmb	+0.53 mmb		-1.32 mmb	155 mmb

API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA