investors’ short-term deflationary fears are slowly giving way to long-term inflationary worries

TO BE NOTED: From Alphaville:

"Oil at six-month high Posted by Izabella Kaminska on May 29 12:27.

Crikey, that’s quite a spike in WTI oil futures on Friday:

Interestingly, this is how the dollar is trading versus the euro on Friday:

Dollar index:

No similarity there at all, huh?

Related links:
So who says there’s no oil/dollar correlation - FT Alphaville
The coming oil-equity disconnect or the end of efficient markets theory? - FT Alphaville
Oil, the great inflation hedge - FT Alphaville

This entry was posted by Izabella Kaminska on Friday, May 29th, 2009 at 12:27 and is filed under Capital markets, Commodities. Tagged with Dollar, nymex wti futures, oil."

"So who says there’s no oil/dollar correlation? Posted by Izabella Kaminska on May 19 13:57.

When oil behaves irrationally at the moment, it seems there’s usually only one explanation offered: it’s trading in an opposite direction to the dollar.

RBC Capital sums up the return of this significant correlation in the following chart:

As can be seen, it appears the correlation slipped out of place from October 2008 until February 2009 - the peak of the financial crisis - and since then has increasingly been coming back into play.

Barcap’s David Woo, meanwhile, makes a similar observation, but this time charts oil’s performance versus EUR/USD specifically:

Interestingly he concludes (our emphasis):

If the key drivers behind the spike in the EUR/USD-oil correlation in the middle of last year were aggressive interest rate cuts by the Fed and the strong consensus at the time about decoupling, what is driving up the correlation now? In our view, the context is different but the reasons are the same. In recent weeks, sentiment towards global growth has improved, and in particular, the acceleration of the Chinese economy has fuelled hopes that Asia and some parts of Latin American will recover before the US.

At the same time, investors are concerned about the lack of a credible exit strategy from QE and the potential long-term consequences of the massive buildup of US government debt and contingent liabilities. The fact that inflation breakevens on TIPS are widening and gold prices remain above $900 an ounce (Figure 4) despite the dramatic abatement in risk aversion is consistent with the hypothesis that investors’ short-term deflationary fears are slowly giving way to long-term inflationary worries. Related links:
The coming oil-equity disconnect or the end of efficient markets theory? - FT Alphaville
Oil, the great inflation hedge - FT Alphaville
A commodity anchor, or oil as money - FT Alphaville
BNY Mellon’s fx team: Ultimately, buy gold - FT Alphaville

This entry was posted by Izabella Kaminska on Tuesday, May 19th, 2009 at 13:57 and is filed under Capital markets, Commodities. Tagged with Dollar, inflation, WTI."

European pension schemes are increasing their allocation to non-traditional asset classes to manage their risks more effectively

TO BE NOTED: Via All About Alpha:

"European pension funds increase weightings in non-traditional asset classes

United Kingdom
London, 21 April 2009

• More schemes diversify into alternative asset classes to manage risk
• Move from equities to bonds accelerated by last year’s market turbulence
• Operational risks come under greater scrutiny
• Governance processes are further tightened

Following last year’s unprecedented market conditions, European pension schemes are increasing their allocation to non-traditional asset classes to manage their risks more effectively, according to Mercer’s annual European Asset Allocation Survey. The survey of over 1,000 European pension funds with assets of €400 billion found that 35 percent of UK schemes and 60 percent of European schemes (excluding the UK) expect to introduce new investment opportunities into their portfolio to help manage future investment risk.

Tom Geraghty, European head of Mercer’s investment consulting business commented: “Despite being innately diverse in history, culture and regulatory requirements, European pension funds have all felt the effect of the last year’s market turmoil. The banking crisis and collapse of Lehman Brothers highlighted the operational risks associated with the investment of institutional assets and brought counterparty credit risks more into focus. Funds are now looking at ways to manage the risk inherent in their schemes, mainly through further diversification of their assets.”

Trends in asset allocation

The steady reduction in benchmark allocations to equities in markets with traditionally high exposures was accelerated by last year’s market turmoil. In the UK the allocation fell from 58 percent in 2008 to 54 percent in 2009 and in Ireland from 67 to 60 percent. The UK has also seen a signification decline in allocation to domestic equity over the last few years, from 57 percent of the total equity allocation three years ago to 51 percent in 2009. Exposure to equity markets remained low across other European markets.

Crispin Lace, principal at Mercer commented: “Both in the UK and Ireland the move away from equities is driven by both the market downturn and the increasing maturity of schemes. As schemes close they tend to reduce their exposure to equities in favour of bonds with the average closed scheme having a bond exposure that is around 10 percentage points higher than the average open scheme.”

While bonds continue to be the dominant asset class in most European countries, an increasing number of funds are diversifying to non-traditional investment opportunities. Allocations to alternative asset classes have increased from 10 to 11 percent in Germany, from 9 to 11 percent in the Netherlands and from 4 to 6 percent in the UK.

In the UK schemes favour hedge funds, GTAA and active currency. The percentage of schemes that had some form of strategic allocation to one or more of these opportunities varied from 5 – 9 percent depending on the asset. Interestingly, over 50 percent more UK schemes have allocated to these asset classes since the 2008 survey. According to the report, in the rest of Europe, schemes favour hedge funds (14 percent of schemes have an allocation), commodities (12 percent) and high yield bonds (10 percent).

Mr Lace said: “The pattern of allocation to non-traditional asset classes varies from market to market, due both to historical trends and preferences and to the level of sophistication of investors.”

Reviewing the impact of the market turmoil

Turbulent markets are prompting broad and deep reviews of all aspects of pension scheme policy. Over two thirds of respondents to the Mercer survey have either undertaken investment related reviews in 2008 or said they intended to do so in 2009. Of those, close to 70 percent reviewed their counterparty exposure risk in 2008 and over half reviewed their cash management. Over 70 percent expect to review stock lending programmes in 2009 and 46 percent plan to analyse transaction costs.

“Many schemes were not aware of the additional risk being run within their stock-lending programmes or collateral management programmes elsewhere in their portfolio,” said Mr Lace. “While many schemes did review their counterparty risk and stock lending exposure last year, the majority will continue to keep a close eye on this part of their portfolio to avoid any nasty surprises going forward.”

Improvements in governance structures

Governance structures continue to be strengthened as demonstrated by a 35 percent increase in companies with designated investment committees. In nearly 30 percent of cases, decisions on the hiring and firing of investment managers are delegated to an investment committee, while, in nearly 5 percent they are delegated to the consultant or other third-party specialist. The survey also showed a growing number of schemes formally reviewing their investment strategy at least once a year (16 percent).

Looking to the future – UK & Ireland

In both the UK and Ireland, 33 and 47 percent of schemes respectively have indicated they are planning a further decrease in equity exposure over the next 12 months. Irish schemes are looking to couple this with an increase in exposure to both government bonds (34 percent of schemes) and non-government bonds (12 percent). UK schemes envisage a different approach with 27 percent of schemes planning an increase in allocation to corporate bonds at the expense of government bonds where 18 percent plan to reduce their exposure.

ABOUT MERCER

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.com"

commodities because it's the only thing I know where the fundamentals are improving

TO BE NOTED: From Jim Rogers:

"Why Should We Invest in Commodities

It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years.

And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining.

As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.

That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view. "

If I were running the Chinese central bank, I'd buy oil, wheat and zinc. Which is what folks there are already doing.

TO BE NOTED: From Jim Rogers:

"April 16, 2009

Chinese Central Bank Buying Commodities?

If I were running the Chinese central bank, I'd buy oil, wheat and zinc. Which is what folks there are already doing.

(Newsweek, April 2009)"

"The financial crisis aside, DRC is facing a huge humanitarian and security crisis in the east brought on by armed conflict"

A post on the Congo from Africa Can...End Poverty:

"DR Congo Perspectives on the Financial Crisis

Submitted by Emilie Mushobekwa on Sat, 12/27/2008 - 04:19.

The main impact of the global financial crisis on the DRC economy is the slowdown in overall economic growth, which is projected to be 6 percent in 2009. With the crisis going on, the situation is likely to deteriorate. Two of the major sectors expected to drive DRC growth in 2009, i.e. infrastructure and mostly mining, have already been severely affected by the crisis.

The fall in global prices for key DRC commodity exports (including copper which declined by half within a few weeks) is at the foundation of the problem( YES ). As a result, a number of mining companies are scaling down activities until commodity markets stabilize. This also poses a great threat on employment. Most of the investment in infrastructure for the coming years is expected to be financed through the Chinese deal “Infrastructure against Mining”. Given the sharp decline in mineral prices, infrastructure investment at this scale can no longer be achieved or will have to be postponed. Export revenues will decline significantly due to lower commodity prices, and the current account surplus, sustained by booming commodity prices, is projected to turn into a deficit in 2009-10. International reserves are also expected to decrease significantly, and debt service payments are to be delayed. In the domestic financial system, there is risk of bank deposits and credits shrinking. Foreign aid is likely to be affected as well.

The financial crisis aside, DRC is facing a huge humanitarian and security crisis in the east brought on by armed conflict( YES ). These two crises are expected to have a considerable impact not only on the government’s fiscal position (lower revenue and higher security spending), but also on social sectors due to the mass movement of people( YES ). To address the crises issues the government is working to maintain macroeconomic stability and is in discussions with the donor community for emergency financial support and to agree on a PRGF (The Poverty Reduction and Growth Facility (PRGF) is the IMF's low-interest lending facility for low-income countries. PRGF-supported programs are underpinned by comprehensive country-owned poverty reduction strategies.FROM DON) which is expected to lead to HIPC ( September 2006 marked the tenth anniversary of the HIPC Initiative. Started in 1996, the Initiative was enhanced in 1999 as an outcome of a comprehensive review by IDA and the IMF, including public consultations. The Initiative’s debt-burden thresholds were adjusted downward, which enabled a broader group of countries to qualify for larger volumes of debt relief. Moreover, a number of creditors, including the main multilaterals, started to provide earlier assistance to qualifying countries in the form of interim relief at decision point. Finally, the “floating completion point” was introduced, providing incentives to speed up reforms and increase country ownership.FROM DON ) completion point as soon as possible."

This shows how war effects an economy.

"On an annualized basis this works out to $1,460 per person. "

I've talked about the decline in the price of oil being a stimulus. Now, let's see about a Commodity Stimulus from Bespoke:

"The Commodity Rebate

In the chart below we calculated the 2008 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers wallets this year. Less than five months ago, the price of oil and other key commodities impacting the consumer were trading at record highs. Because of these price increases, the average consumer was spending an additional $4.77 per day compared to the start of the year.

Five months later, we find ourselves in a situation where these key commodities have now declined by record amounts. As a result, the cost of higher commodities has turned in to the windfall of lower commodities. While consumers were spending an additional $4.77 per day in July, they are now getting a benefit of 4.02 per person per day. On an annualized basis this works out to $1,460 per person. While there are certainly plenty of headwinds out there, it's nice to see that at least some things are going in our favor.

I guess you could say that this is paradoxical as well.

"Gold is really the only commodity holding up at all, although it continues in a downtrend."

From Bespoke, some Commodities recent performance:

"Bespoke's Commodity Snapshot

Below we highlight our trading range charts of ten major commodities. The green shading represents two standard deviations above and below the commodity's 50-day moving average. As shown, oil continues its epic collapse along with most other commodities. Natural Gas hit new lows today as well and even had a 5 handle for awhile. Gold is really the only commodity holding up at all, although it continues in a downtrend.

"The cost of living in the U.S. probably fell in October by the most in almost sixty years"

Well, Bloomberg says this:

"The cost of living in the U.S. probably fell in October by the most in almost sixty years, while manufacturing and homebuilding sank deeper into a recession, economists said before reports this week.

Consumer prices probably dropped 0.8 percent last month, the most since 1949, according to the median estimate in a Bloomberg News survey. Builders broke ground on the fewest houses in at least a half century and factory output weakened further, other reports may show.

Commodity costs plunged in October when the economy, which descended last quarter, went into freefall as credit and financial markets collapsed. Slumping sales are forcing retailers to lower prices, giving the Federal Reserve scope to keep cutting interest rates to limit the damage.

``Tumbling energy and commodity prices have altered the inflation landscape,'' said Ryan Sweet, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. ``More rate cuts are needed as the economy is sinking deeper into recession.''

The Labor Department's consumer-price report is due Nov. 19. Fuel, clothing and auto costs probably dropped last month as sales at U.S. retailers fell 2.8 percent, the most since records began in 1992, economists said.

The slump in crude oil is feeding through to prices at the pump. The average cost of a gallon of regular gasoline plunged 17 percent last month to $3.08, according to AAA."

Here's the thing: Shouldn't the drop in the price of gas and other commodities act as a stimulus?

"Commodity Deflation

``We are seeing the fallout of global recession on inflation,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``In commodity prices, it's leading to deflation.''

Core prices, which exclude food and energy, rose 0.2 percent last month after a 0.1 percent gain the prior month, according to the survey median.

A report from the Labor Department on Nov. 18 may foreshadow the drop in retail costs. Wholesale prices fell 1.8 percent last month, the most since records began in 1947, according to economists surveyed.

As sales fall, manufacturers are cutting output and firing workers. Ford Motor Co. plans temporary shutdowns at nine North American plants this quarter after an 18 percent drop in U.S. sales this year, Angie Kozleski, a spokeswoman for the Dearborn, Michigan-based automaker, said last week.

Auto cutbacks probably pushed down manufacturing output last month, economists said a report from the Fed tomorrow may show. Overall industrial production, which includes factories, mines and utilities, rose 0.2 percent in October, led by a resumption of work at Gulf Coast refineries after Hurricane Ike shut down oil rigs the prior month, economists forecast."

I'm going to post about Yves Smith's post on this.

"Hurricane Rebound

A report from the New York Fed the same day may show manufacturing in the state contracted this month at the fastest pace since at least 2001. A similar report from the Philadelphia Fed on Nov. 20 may show regional activity shrank for an 11th time in 12 months.

The economic slump will intensify this quarter and persist into the first three months of 2009, making it the longest downturn since 1974-75, according to economists surveyed this month.

The housing recession at the heart of the economic downturn shows no signs of letting up. New-home starts in October dropped to a 780,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast to report Nov. 19."

Here's a case where a weather word can be used both literally and metaphorically.

"Outlook Dims

A gauge of the economy's course will point to continued weakness, economists project a private report on Nov. 20 will show. The New York-based Conference Board's index of leading economic indicators probably fell 0.6 percent after increasing 0.3 percent in September.

Central bankers are battling to cushion the economy from the worst financial crisis in seven decades.

``Policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant,'' Fed Chairman Ben S. Bernanke said Nov. 14 at a panel discussion in Frankfurt hosted by the European Central Bank.

Heads of state of the Group of 20, which represents almost 90 percent of world output, met in Washington Saturday to lay the framework for coordinated actions to stem the global recession."

They must be reading Roubini.

No Current Problem With Inflation

Bob McTeer explains why inflation is not an imminent or the most important threat for the Fed to deal with:

"Even if money growth had been faster and long-term interest rates lower than they have been, I doubt that inflation would accelerate under present circumstances of slowing economic growth and the freezing up of credit markets. In my opinion, a deceleration of inflation is more likely than acceleration, and the decline in oil and other commodity prices may be the early signs of disinflation. The Fed seems vindicated in its belief that the weakening economy would help restrain inflation while it concentrated on actions to unfreeze credit markets and sustain the real economy."

McTeer know a hell of a lot more than me, but I can't but help seeing inflation in our future.