Tag Archives: economics

What Inflation? – Addendum

Clearly, we hit a hot spot with last week’s piece. So much so, that I kept digging. I came up with more questions than answers but in asking those questions I came up with some data points and open ended questions worth pondering. We’ll look at the push and pull relationship between public and private spending and their combined effect on inflation. Then, we’ll finish with the spark of wage inflation struck by the competition between governmental subsidy programs versus rising wages in entry level retail positions.

Continue reading What Inflation? – Addendum

Diminishing Effects of Global Quantitative Easing

More specifically, this piece should be titled, “Diminishing Effects of Global Quantitative Easing in a Long Only Portfolio,” but that seemed a little long. Have we returned to an era where bad economic news guarantees the action of sovereign nations to prop their markets up? Does bad news make front running the Bank of Japan’s direct equity purchases a sure thing? Have we globalized the, “Bernanke Put?” The European Central Bank, the Bank of Japan and the Peoples’ Bank of China have all enacted accommodative interest rate policies since September 8th. Since then, the various global equity markets had all sold off and are now at or near new highs.

Continue reading Diminishing Effects of Global Quantitative Easing

Gold and Bonds Getting Back to Normal

Gold, interest rates and the stock market have a very interesting relationship. Normally, declining interest rates are good for business and bad for gold. Post 9/11 and housing bubble, zero interest rate policies (ZIRP) created an artificial situation that fractured this relationship rendering it virtually useless over the last decade. This began to change last summer when the Federal Reserve Board stated that they would begin slowing the stimulus they’ve provided to the economy thus allowing interest rates to gradually rise. These relationships have begun to sort themselves out over the last three quarters and may actually be telling us something about the current pricing in the gold market.

Continue reading Gold and Bonds Getting Back to Normal

Effects of Deflating the Yen

The Japanese economy has been on life support since their stock market peaked in late 1989. This is also when they began to lose their productivity gains in manufacturing and technology against their neighbors. Their immigration policy and small family sizes have shrunken the labor pool to a point that even with consistent per capita GDP growth, they continue to fall behind fiscally. Their new Prime Minister, Shinzo Abe is attacking deflation in Japan in a way that makes Ben Bernanke look like a spendthrift. The obvious objective of deflating the currency is to make Japanese exports cheaper on the open market. This will grow GDP and spur new hiring thus, improving the domestic Japanese economy. The big questions are, how long can currency depreciation boost their economy, what are the side effects and lastly, will it work?

Japan is an interesting country in that they are a manufacturing country with very little in the way of raw materials or commodities to use in the production process. Therefore, Japan must import virtually, all of the raw materials they use. They’re becoming a high tech assembly country as opposed to their classic vertical production model. Their days of making the steel that goes into the car is over and so are many of the old jobs. It has become cheaper to import Chinese steel than to make it their selves. Currency depreciation will provide an initial rise in Japanese exports, as the inventory that has already been produced will be cheaper on the open market. However, these gains will be offset by newly purchased production inputs paid for in depreciated Yen.

The export market has been the key to Japan’s post WW2 growth. In fact, Japan’s balance of trade (exports-imports) had been mostly positive for 25 years before the tsunami hit in March of 2011. Prior to the Tsunami, Japan generated about 30% of its energy from nuclear power. They are currently running only 3 nuclear reactors out of 54. Manufacturing countries require large energy inputs and Japan uses more than 25% of their gross revenues to import energy and they are third in global crude oil consumption and imports. Depreciating the Yen will severely impact their energy costs. For example, the Yen has declined by 30% since November. That would be the equivalent of paying around $5.00 per gallon of gasoline, right now. This is what Japan will be paying to fuel their manufacturing centers.

This leads us to the effects of a depreciating currency on the local population. The Japanese private citizens are the ones bearing the brunt of this policy in two ways. First of all, Japanese citizens will be forced to pay more for everything that isn’t locally sourced and produced. This will trim their discretionary spending and put a crimp in local small businesses and service providers. Getting less for your money is never enjoyable. Secondly, the individual Japanese citizens are paying for the currency depreciation because the there is no international market for Japanese bonds selling at artificially low rates. The Japanese government is forcing their citizens with historically high savings to use it to buy underpriced Japanese Government Bonds. This transfers the debt from the government to the taxpayer.

I have no idea why the Japanese people haven’t revolted. I’m sure much of it has to do with culture. We tend to speak out in protest while they tend to tow the party line. It will be very interesting to see how this turns out as pensions go unfunded and taxes rise to pay for the massive social programs Prime Minister Abe has in store. Japan’s total debt (public + private) is now more than 500% of GDP according to The Economist (9/19/2012). The U.S. total debt to GDP ratio ranks 7th in the world at just under 300%.

The massive devaluation that is taking place will allow Japan to gain market share in the short term, especially against high quality German manufacturers. Continuation of this policy will put the European Union in a very uncomfortable spot. Germany is their economic leader and the country that would be hurt most in a competitive devaluation campaign. This may finally force the European Union to ease further in an attempt to remain competitive outside the Euro Zone. Easing euro Zone monetary policy may be the next link in the chain as the race to the currency bottom heats up. Finally, the pundits have coined a new phrase to help the guy on the street differentiate currency wars from fiscal policy. Welcome to, “coordinated global easing.”

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Third Stage Growth in Agri-Business

The run up in food prices this year has, hopefully, shined a bright light on the oligopoly that controls the world’s grain markets. An oligopoly is a market that is controlled by a small number of producers, which allows them to collaborate and set prices for the market as a whole. OPEC is the most common textbook example. The U.S., Brazil, Argentina and Australia dominate the grain industry. There is grain production in every country but these four control the vast majority of the export market. That may be about to change and bring new, long-term investment possibilities with it.

When crude oil topped $145 per barrel in 2008 it was a painful, but simple adjustment to the world’s lifestyle. When the grain market soared to all time highs this summer, forcing food inflation on the world’s population, the adjustments weren’t so simple. The mechanization of the global grain production process places more and more of the world’s food production in the hands of fewer and fewer people.

The global grain stores are running at multi year lows, just as they were at the beginning of this U.S. growing season. This summer’s drought was the worst in 50 years here. The weather pattern also knocked 13% off of Australia’s wheat crop and they’re the world’s largest wheat exporter. This also led to a nearly 60% decline in their ending stocks over the last three years. The only thing keeping prices in check at the moment is South America’s increasing efficiency. Brazil’s soy production may surpass the U.S. this year and thanks to their long growing season, double crops of corn are becoming normal.

The global demand growth for coarse grain production has been fueled by the Pacific Rim’s meat production industry, rather than by population growth. China’s population growth is less than one percent per year, yet their hog market is growing by an average of 3.5% per year. The growth in their agricultural markets for both grains and meats has been astounding, as production of both have shifted from individual farmers on their own land to the mechanized version of agri-business that is the model of the industrial world. Their soybean imports, which are used for feed, have grown from 3 million metric tons in 1997 to approximately 56 million tons this year.

These wheels have been set in motion and will not be derailed by a collapse in the Eurozone or a surprise in our elections. The trends in population growth and the move towards global improvements in diet are really just beginning. The United Nations and the Food and Agriculture Organization (FAO) just reported that global wheat prices for 2012 were up 25%. They added further that source inputs have now caused the price of dairy to rise by 7% in just the last month.

The arguments over who gets their principal back on a Greek or Spanish Bond is far less important to Greeks and Italians than the ability to put food on the table. Food inflation, as a result of the commodity rallies of ’07 and ’12, was also a primary cause of the Arab Spring. It is far easier to control a population with a full belly than it is to placate a parent unable to stop the crying of a hungry child.

So, where’s the trade? The trade starts with slowing global growth and negative growth across Europe. Negative growth will increasingly put the pinch on Eastern European countries like Kazakhstan, Ukraine and Russia. This is the main breadbasket of Europe and North Africa. Bottom up analysis of these macro trends reveals very large growth potential in several African countries. The BRIC’s have received most of the attention over the last ten years and rightfully so. However, as more and more resources are pulled from African countries for global production, it becomes clear that these countries are also next on the open borders list to develop.

Therefore, using the pending global economic contraction as the setup, I’ll be using declines in the stock market to knock the valuations of agri-business stocks like ADM, Monsanto, Cargill, AgroSA, Bunge, Caterpillar, DeutzAG, down and for retail investors to get washed out. There are two important things to take away from this. First of all, I am not a stockbroker. These trades cannot be executed through me. I stand to gain nothing financially from anyone following this advice. Secondly, I believe that we will get an equity selloff similar to 2008 and I plan on being ready to put cash to work in companies that stand to profit the most from the commodity markets I know best in the coming decade.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Energy Fork in the Road

One economic topic that isn’t getting the attention it deserves is the energy policy. The drought of 2012 along with the expiration of subsidies paid to ethanol blenders will make it nearly impossible to reach the Renewable Fuels Standards (RFS) as early as next year. The standards that were put in place to increase this country’s energy independence were based on protectionist interests and were only viable as long as ethanol produced by the U.S. was subsidized while Brazilian ethanol was simultaneously taxed.

The difference between U.S. ethanol and Brazilian ethanol is the source of their primary inputs. We use corn, which is slower to grow, harder to use and more expensive than the cane sugar Brazil uses as the feedstock for their ethanol production. It will be very interesting to hear how the Presidential candidates debate their renewable energy policies, especially as 40% of our primary crop is diverted from food to energy production. This year’s drought has created a political collision course between food costs and the Renewable Fuels Mandate as well as the Energy Independence and Security Act.

The corn market is about as American as you can get. The U.S. produces as much corn as the next two largest producers, China and Brazil, combined. Unfortunately, production will fall nearly 15% short of 2011’s 314 million tons. The current Renewable Fuels Mandate allotted 40% of last year’s corn to produce 13.95 billion gallons of renewable fuel and 2012 will require an additional 8% increase over 2011. This brings total renewable fuel sources to 15.2 billion gallons on total consumption of 134 billion gallons in 2012.

The drought has pushed corn prices to an all time high of $8.43 per bushel. While the market is now 14% lower at  $7.25, the rally has been more than enough to shatter the profit margins of ethanol blenders. The combination of expiring refining subsidies along with higher input costs is leading to the shut down of major ethanol blenders. This raises the capital market question of who’s going to be responsible for meeting the aforementioned production targets? Ethanol distillers are losing more than $.40 per gallon at the current prices.

The idea of diverting 4.7 billion bushels of an estimated 11 billion bushels in total U.S. production towards an inferior yet, more expensive product seems silly in the face of rising global food prices. This is exactly what would be required to happen to meet next year’s Mandate. Furthermore, reaching next year’s goals using the current 10% ethanol blend is nearly impossible given the current mix of gasoline and diesel motors. Diesel biofuels and biodiesels are given a 50% bonus in RFS for their lower greenhouse gas emissions as measured by the EPA. The friction this creates in meeting the Renewable Fuels Mandate is called the, “blend wall.” The blend wall is the physical limitation of production and blending facilities based on the most common 10% ethanol blend. The mandate calls for 13.8 billion gallons, 10% of expected 2013 US consumption. However, current facilities, assuming they were all open and operating at full capacity, can only produce 13.3 billion gallons of ethanol.

The candidates will have to address the subsidies that farmers and blenders are paid as well as their plan on handling imports. These are most likely, the easy issues to address. Developing a complete energy plan will also include a discussion on the much more economically friendly topic of our vast natural gas reserves which have the capacity to place us on a much more sustainable path.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Sharecropping in Greece

This week’s article is based on a piece I read by Michael
Hudson. He is a research Professor of Economics at the University of Missouri,
Kansas City and President of The Institute for the Long –Term Study of Economic
Trends. His writing is quite dense. I had his articles on one screen and
Mirriam-Webster’s online dictionary up on another. That being said, his basic
thesis is that the European Union’s design has allowed private banks to make
sub prime loans for individual countries’ internal development with little
thought as to whether they had the ability to repay them. Unlike our own sub
prime debacle, it is ending in foreclosure by the banks on entire countries,
instead of just individual houses. He calls this the, “sharecropper” model of
European lending that will create poverty stricken and dependent countries
within the European Union.

The first issue
he raises is with the globalization of the financial industry and its primary
purpose of collecting fees and generating revenue based on the maturation process
of the debt it services. Accounting processes in the last 10+ years have
evolved into a shell game. The idea, following Enron’s lead and supported by
major financial firms like Goldman Sachs, Chase and J.P. Morgan allowed private
banks to make loans large enough to subsidize governmental funding programs
like health care and infra structure loans by creating financial swap

The swap contracts they created are basically like
adjustable rate mortgages with the addition of a second variable. Obviously,
the first variable on an adjustable rate loan is the future interest rate. The
second variable is the foreign exchange rate. The value of the loan is
calculated at the time it is made but the repayment value would vary based on
the relationship between the currency in which the loan was made and the
currency that it is repaid with. For example, in 2003, the Euro and the Dollar
traded at the same value. A loan made in Dollars to the European Union of
$1,000,000 would carry a swap value of the agreed upon interest rate
fluctuation plus an agreed upon currency exchange rate fluctuation. The Euro is
currently worth $1.45. Therefore, the current repayment value of the loan could
have been cut nearly in half based on currency fluctuation. Think in terms of
controlling the new crop seed money.

The swap contracts they created allowed private banks to
lend money to foreign governments, which would be repaid through national
lotteries, airport landing fees, toll roads, etc. The banks profited and debtor
countries, like Greece, remained within the European union’s 3% budget deficit
rule because cross currency swaps were not recognized as official government
debt. The reality was that the accountants at the large institutions found legal
but, covert ways around the European Union’s Maastricht Treaty. The Maastricht
Treaty made no provision for financing individual countries directly by the
Union. The unintended consequence was a shadow lending industry that went
completely unregulated and spiraled out of control. Imagine the U.S. sub prime
debacle on a scale large enough to finance Greece, Ireland, Iceland, Portugal
and Spain combined! Hudson equates this to a land grab of national revenue
producing assets.

The second issue that Hudson raises is the process by which
the debt that is created by the banks and squandered by the individual
governments is then transferred to the general population for repayment to the
original lenders. The borrowing governments use the money received to expand
their balance sheets, which in turn allows them to issue new debt on the open
market. This debt is purchased by the large French and German banks that now
hold roughly 35% of Greece’s debt and can’t afford Greece’s inability to pay.

Germany and France then use their political clout to
engineer a European bailout (QE1 & 2 in the U.S.) to protect the banks and
people of their countries but, in actuality, saddle their own productive
economies with repaying a less productive country’s debt. French and German
taxpayers, unwilling to cover the debts of an irresponsible borrower force
austerity measures on Greece to punish them. However, raising taxes to pay back
the loans does more to damage Grecian productivity than to curb spending. This
places Greece in an even deeper hole forcing them to seek more bailouts to fund
nationalized welfare programs like health care, garbage removal, infra
structure maintenance and so on. This, controls the labor.

Finally, the European Union, as opposed to individual
lending institutions, offers to buy or, lease national services and landmarks
like, the Parthenon or their airports and roadways that would guarantee long
term loan repayment revenue streams. The banks would keep their profits and
remain solvent while Greece gets their own spending habits under control.
However, this process would also strip Greece of their primary national
industry – tourism. Consider this the, “land” portion of the equation.

The spiraling cycle of forcing people to pay more while
making less through controlling the seed money, labor and land is why Hudson calls
this subsistence the, “sharecropper” business model of the Euro financial
institutions, which he believes will end in revolt just like it did here in the

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Setting of the Rising Sun

Japan’s economic crisis has been slowly trudging down a dead end road since their economy collapsed in the early 90’s. Their insistence on maintaining public programs as status quo has been financed by selling government debt to domestic corporations and private citizens. This has cannibalized both private citizen and corporate savings. This tacit deal has allowed Japan to artificially keep interest rates low based on their captive pool of treasury purchasers. This process of spending more than the government is collecting on an annual basis, combined with sales of treasuries to finance the difference has left them ill prepared to handle this disaster at a time of global economic uncertainty.

While some economists are taking the stance that Japan’s rebuilding is just what they need to get their economy back on the right track, I think it’s quite possible that their economy may be too far gone to save. Furthermore, the scale of their disaster will place a huge burden on developed nations who will be called upon to assist them in the process. Many of these nations, including the United States, have no room for error in their own economic policies. The end result could be a localized natural disaster that triggers a global recession.

Professor Ken Rogoff of Harvard School of Public Policy Research wrote a book in 2009 describing the historical relationship between banking crises and sovereign default. His research states that the average historical tipping point is approximately 4.2 times debt to revenue. Once a country is spending 4.2 times more than it is collecting, default is on its way. John Hayman and Lawrence McDonald, cite individually, that Japan’s expenses outpace revenues by more than 20 times annually. Their debt to GDP ratio, their total assets and earnings minus total debts and liabilities, is around 200%. The third largest economy in the world spends 20 times more per year than it earns and owes twice as much as it’s worth. One note of caution, the United States ranks third in the debt to revenue ratio, behind Japan and Ireland and we owe as much as we’re worth. We will be double negative in 2011 if we don’t change substantially.

Debt will surely rise even further as Japan borrows to rebuild. Standard and Poor’s downgraded Japan’s credit rating to AA in January, prior to the disaster. Japan will have to move to the open market to finance their reconstruction. Their domestic lenders will be busy financing their own rebuilding processes. This will force Japan to pay open market rates for most of their new debt. Open market rates will be AT LEAST 100 basis points and most likely, closer to 200 basis points higher.  The interest payments would total more than 25% of the country’s revenue. Japanese credit default swaps will sky rocket.

The strain of rebuilding Japan will affect us whether we lend financial assistance or not (which we will). The demand of replacing 30% of Japan’s energy source will show up in the price of fossil fuels. Japan currently consumes 5.2% of the world’s oil supply. Replacement of lost energy will add another 1.3 million barrels per day plus the added oil necessary for the reconstruction. Their added demands equal Italy’s total consumption. Add this to the global uncertainty of North African fuel supplies and the added fuel that goes into fighting a third global conflict and we have questionable supplies coupled with increasing demand.

Rising oil prices couldn’t come at a worse time for our economy, which had been gaining some traction. GaveKal research published a chart in which rapidly rising oil prices are overlaid with economies growing more than 2% above their leading indicators, which we are. This has happened 5 times in the last 70 years. Four of the five led directly to recession. The fifth was in 2005 and was ameliorated by the credit and housing booms, which may have delayed the recession until 2007. Rising fuel costs act as a tax on the economy.  The latest housing numbers, the worst ever, blame much of it on high gas prices. Furthermore, while the unemployment rate is stabilizing, the length of time people are unemployed is at an all time high of 37 weeks. Finally, the stock market has returned to its upper 10%, in normalized valuations. Japan’s natural disaster could very well mean this is the zenith of our economic recovery.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Over Priced Crude – Not Our Problem

The fall of dictators in North Africa and the refusal of others to leave has created a political mess throughout the oil producing regions. Tunisia, Egypt, Libya, Iran and others are all facing internal military conflicts. Some may turn into civil wars while others may squelch civil unrest through political concessions or direct government aid to their people. However, when it comes to the world’s supply of oil, the method of reconciliation isn’t nearly as noteworthy on the open markets as the fact that there are issues to reconcile in the first place. The era of instant press and relatively equal opportunity to generate information has created millions of on site reporters in the form of the common man producing cell phone videos, Tweets and Facebook networks.

The news has created an oil spike. The manic pursuit to grab the headlines has brought speculation in oil futures trading to new heights. Libya is responsible for 2% of global oil output. Egypt and Tunisia are irrelevant and Iran produces a sour crude of such low quality that they don’t have the domestic capabilities to refine it themselves and have to import 40% of their gasoline. Saudi Arabia has already broken ranks with OPEC and volunteered to increase output to appease the market and I wouldn’t be surprised if Obama tapped the strategic reserves.

There is a fundamental disconnect between the price of oil on the open markets and the fundamentals that move prices over the long term. The crude oil traded in the U.S. is typically referred to as West Texas Intermediate (WTI) while the oil that is produced and traded in the North Sea, Iran and Russia is Brent Crude. Brent crude is a lower quality crude that is both produced and consumed throughout Europe and Asia. WTI is easily refined and produced in the Gulf of Mexico, Alaska and the Black Tar Fields of Canada.

WTI crude oil is stored in Cushing, Oklahoma and the storage tanks are nearly full. Commercial traders of WTI strongly believe the market will not support these prices. In fact, they have accumulated a record short position. They have never sold so much of their future production at market prices as they are doing now. This is exactly opposite the of the Commodity Index Traders (CIT’s) and small speculators who have jumped on board the news events. History has shown that no one knows their market like the people who make their living in it. Therefore, it is not wise to bet against commercial traders for very long.

It is comforting to believe that the commercial traders may be right and that oil won’t stay at these levels for very long. However, Middle Eastern politics is a wild card game at best. The Schork Report states that we could have $4 gasoline with WTI crude trading at $115 per barrel. This is due to the refining and crack spread issues we discussed two weeks ago. Gas didn’t hit $4 in 2008 until oil traded over $145. This would have a serious effect on our economy. Ball State released a paper on January 21st, stating that GDP will decline by 2% if oil climbs to $110. Furthermore, 10 of the last 11 recessions accompanied rapidly rising oil prices.

It’s already been speculated that Obama may tap the strategic reserves to prevent higher energy prices from dragging down our struggling economy. Saudi Arabia isn’t the only oil exporter aware of the bearish fundamentals of the oil market and I suspect that other oil producing countries will sell all the forward production they can at these prices. I don’t expect energy inflation to dictate monetary policy. Ben Bernanke co-authored a paper in 1997 stating that the correlation between high energy prices and recessions had more to do with the over tightening of fiscal policy to clamp down on inflation than did the actual price of energy. Therefore, I don’t expect to see knee jerk rate hikes in response to the howls of inflation hawks.

Currently, the primary beneficiary overseas is Russia. They have the reserves, refining capacity and infrastructure to supply old world Europe and Asia. These are the areas most greatly affected. They are fully industrialized and their economies are heavily reliant on oil imports. The question we should be asking ourselves is why we spend between $50 and $100 billion a year to protect roughly $35 billion dollars worth of the oil we import. This amounts to the 15% of our total U.S. imports that come from the Golden Crescent. Two separate pools of academic research, nearly 10 years apart, 1997 and 2006, have addressed this issue and gone nearly unnoticed. Why is it that we pay the bill to keep the oil flowing overseas to other countries?

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Defending the Global Slowdown

I’ve taken a bit of heat over the last few weeks as I’ve suggested that we may be nearing the end of a very good bull run in all tangible markets. These include the stock and commodity markets which are at levels we haven’t seen since before the economic crisis began. More and more data has come out on the negative side of things going forward and it’s being discussed and given weight to, by several economists, central bankers, traders and hedge fund managers.

Here is a consensus survey of their bearish take on the global economic landscape:

China – Their economy is slowing down. I mentioned the declining velocity of trade in China a few weeks ago. This includes shipping, fertilizer sales, stock market turnover, raw steel manufacturing as well as other factors. China has also raised the required lending reserves on their banks as well as raising the outright interest rates at which they can lend to fight off inflation and cool down their economy.

United Kingdom – Their economy shrank by .5% in the last quarter of 2010.  Their unemployment rate is 7.7% and rising. They’ve yet to work through the excesses of their own housing bubble. Finally, the voting members of the Bank of England are already at odds over raising rates to combat inflation. High unemployment, high interest rates and declining production are spurring fears of stagflation.

Eurozone – Ireland and Greece have been forced to accept bailout money and enact austerity measures that would cause civil upheaval in the United States. Spain and Portugal are on the cusp of having bailout funds and austerity measures jammed down their throats and Italy is now on the short list, as well. Germany is the only Eurozone country that benefits from a strong Euro, which attracts capital to their value added manufacturing and technology industries. The agrarian and tourist based economies of southern Europe desperately need to weaken their currencies to allow them to compete in the global market. This is creating a huge political disconnect between Germany and the other members of the European Union.

India – India nearly doubled their interest rates in 2010 and just raised it another .25% on Tuesday. The sincerity of India’s government to get a grip on inflation dropped crude oil nearly $2 per barrel due to forecasts of declining Indian demand.

Brazil – Brazil’s currency has appreciated 40% since the bottom in 2008. The global surge in food prices is placing severe strain on the manufacturing and public service sectors. Brazil is using interest rate manipulation to cap currency valuation. This is effective on low value added agricultural exports but hinders the ability of the manufacturing sector by making capital more expensive. This also hurts the public sector as workers are laid off and look to more expensive government programs for support.

United States – The broad strokes are best covered by Gary Shilling in his January 2011 edition of, “Insight.” We look for slow U.S. economic growth of 2% or less this year. The post-recession inventory bounce is over. Consumers are probably more interested in saving and repaying debt than in spending. State and local government spending and payrolls are falling. Excess capacity will retard capital equipment spending while low rents curtail commercial real estate construction. Economic growth abroad is unlikely to kindle a major export boom. Housing is overburdened with excess inventories. QE2 will be no more effective than QE1 in spurring lending and economic growth, while net fiscal stimuli will decline $100 billion in 2011 compared with 2010.

These global factors all point to a pending slowdown in economic activity. Many of the discussions I’ve had recently have focused on the recognition of the turn. The simplest predictor I can share is when what has been making money quits working. We use pattern recognition to determine market setups and risk values. When the bullish patterns stop working and the bearish patterns start to pan out, the turn will be near. Fortunately, this tool can be used on everything from one- minute charts to weekly charts. We will watch for the turns in scale as they progress from minute to hourly, daily and weekly. This is not doom and gloom. It’s simply the ebb and flow of the markets and with these tools we hope to see the tide’s reversal.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.