5% Chance Of Sustained Deflation--SF Fed

You would not know it by listening to Zimbabwe Ben and company, but the chance of sustained deflation in the US is extremely low according to research from the San Francisco Fed.

The full article is available here

The bottom line from the Fed's own research:

The recent economic slowdown has raised concerns about the possibility of sustained deflation in the years ahead. However, a refined model of inflation-indexed and non-indexed Treasury bond yields, which captures accurately the possible inflation outcomes perceived by bond investors, suggests that the probability of sustained deflation is just 5.3%. The model accounts accurately for the behavior of inflation-protected Treasury bond yields during the financial crisis and could prove reliable in evaluating deflation risk.

Click chart for larger image.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
What this research indicates is that the only people even mentioning deflation are unconnected academics (most of whom said housing was not in a bubble). The market sees no such outcome. The only time when the market saw the possibility of prolonged deflation was after Lehman's collapse when the entire financial system was almost destroyed. You can see from the chart below what the market thinks of inflation (blue line--5 year break even rate). One thing to keep in mind about this chart is that it only goes to Aug 13. 2010. The 5-year break-even rate has rebounded during the interim to 1.55%. So far, the bond market is predicting low inflation, at least for the time, but the risk is to the upside not downside. 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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5% Chance Of Sustained Deflation--SF Fed

Update On Stans Energy

As you know one of my investments is a little rare earths company called Stans Energy. I wrote it up a few months ago which is available here. Since then there has been a lot of news concerning China and its reduction of export quotas for rare earths. The stocks have all moved up significantly so it is a good time to review the investment.

A few days ago Stans Energy CEO Robert Mackay gave an interview with Theinvestar.com, which covered important aspects of the rare earths market and in particular Stans Energy. In fact it answered most of my concerns regarding Stans. Here are a few excerpts.
From theinvestar.com

Theinvestar.com: What does the timeline look like to get to production?

Robert Mackay: This is the big question. Time is a function of money and right now we’re progressing our project as fast as we can while conserving the money we have. Our plan is to have all the pieces for a feasibility study at the beginning of January, 2011, one year after the purchase of the mine. From there, with debt financing and some upgrades, best case scenario would be production in late 2012.

Theinvestar.com: How much is it going to cost to refurbish the mine, buildings and surrounding infrastructure?

Robert Mackay: The other big question… That is for a feasibility study to determine, and we are currently in negotiations for the processing facilities, so I cannot comment on the buildings. As far as infrastructure is concerned, it’s all there; roads, rail, power and water. You can drive a Cadillac into the bottom of the pit. There are even many knowledgeable people still living in the area who used to work at the mine. On a relative basis, it is safe to say that Kutessay II will require a fraction of the capital necessary for many other REE properties.

Theinvestar.com: Will you need to raise any funds over the next 6-12 months?

Robert Mackay: We may need to raise money for the feasibility study, and possibly for additional acquisitions, however over the past couple months we’ve been contacted by a number of institutions including a bank who are interested in our project, so we will have financing options.

Theinvestar.com: Are you going to go it alone on this project, or could you take on partners?

Robert Mackay: We are a growth oriented company, and so we will try to stay nimble. We believe that end-users are going to determine which REE projects are successful and which aren’t. A partner in Japan would be ideal as they are the biggest importer of HREEs in the world.

Full interview: Click Here

I really believe that given the strategic nature of Stans deposit, they will be able to arrange some sort of off-take/financing agreement with a major user of rare earth minerals. This should keep dilution much lower than if they were forced to rely exclusively on equity financing.

My only real concern after listening to this interview was Mr. Mackay's reference to possible acquisitions. For a company with no cash flow and no mine until late 2012 (best case), it is way to early to get distracted with acquisitions. Furthermore, this course of action would lead to severe dilution. I really hope Stans does not make any acquisitions until the mine is in production and cash flow positive. Then you will have all the money required and will not have to dilute shareholders. The primary concern has to be the rare earths mine.

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Update On Stans Energy

World Trade Rebounds In August

From Dow Jones:

World trade volumes rebounded in August, an indication that the global economic recovery may still have some momentum.  Figures released by the Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Monday showed trade volumes rose 1.5% from July when it fell 1.0%.

The CPB's figures are closely watched by policy makers, including a number of central banks, because they provide the earliest available measure of global trade.

"In most parts of the world, import volumes rose significantly," the CPB said. "On the export side, emerging economies outperformed advanced economies, the euro zone being the only one of three major [developed] blocks to achieve positive export growth. In Japan, both import and export volume declined substantially."

The only thing you can extrapolate from this is that US exports were probably weak in August and into September as well (following subdued outbound port volumes). No problem, the US is back in the old habit of buying useless garbage from China at record amounts.  

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World Trade Rebounds In August

Federal Reserve's Balance Sheet By Duration

Below is chart of the Fed's balance sheet. 

Click chart for larger image.

You can see how the the Fed has been primarily buying Treasuries in the 1-10 year range. According to Goldman and Morgan Stanley QE 2 will target the 5-7 year range. Morgan Stanley noted that that there are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years. If the Fed really wanted to really lower longer term yields it would concentrate its buying on longer dated maturities.

The one real risk for the Fed is a rise in interest rates, which could force them to potentially sell assets at a loss. It would be politically uncomfortable for the Fed to report large losses.

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Federal Reserve's Balance Sheet By Duration

State Unemployment Charts

The Bureau of Labor Statistics released the unemployment situation for all 50 states. Most states reported a flat or slight decline in the unemployment rate.

Here are the best states with the lowest unemployment rate. You can see that the states with the lowest unemployment rate have a large agricultural sector which is largely immune for the business cycle.

Click charts for larger image

Next up are the worst states with the highest unemployment rate.

No surprise my home state communist California is among the top 3. You would think that with an unemployment rate of 12.4%, the legislature would do all it could to promote job growth. Instead they are going ahead with their carbon taxes and fake green economy rhetoric. Despite the fact it will destroy not create jobs. Californians have the opportunity to stop these carbon taxes by voting yes on prop 23, which would prevent the implementation of California's Global Warming Act of 2006 until unemployment falls below 5.5%. This seems like a fair proposal considering the dire economic condition in California. So far the proposal is losing so I guess Californians get what they deserve--one of the highest rates of unemployment in the country.  

Black Swan Insights

Related Articles:

Why The Unemployment Rate Will Stay High For Years To Come

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State Unemployment Charts

Predictions From Intrade

One of my favorite indicators is Intrade, a site which allows people to bet on future events. While the stock market is no longer a predictor of the economy, other markets like Intrade are thriving and show that not all markets are broken. So lets see what Intrade is currently forecasting:

2010 Elections

• Republicans will take back control of the House of Representatives (90% certainty)
• There is a good chance that Republicans will gain 50 or more seats (57% chance)
• Democrats will lose seats in the Senate but will still maintain a slight majority (56.9%)
• In California Jerry Brown will be the next Governor (85% chance)
• Barbra Boxer will defeat Carly Fiorina for the Senate in California
• Rand Paul (of the Tea party) will win the Senate in Kentucky (81% chance)
• California will defeat the marijuana legalization proposition (only 36% chance of passing)

Wars and the Middle East

• There is a very low chance of the US/Israel attacking Iran by Dec 2011 (only 23%)
• No chance of ever catching Bin Laden by June 2011 (8% chance)--he is probably dead anyway
• Guantanamo Bay prison will still be open by the end of 2011 (6% chance of it being closed)

Economy

• The US economy will not enter a recession during 2011 (only 30% chance)

2012 Elections

• Sarah Palin will run for President before the end of 2011 (70%)
• But she will not win the Republican nomination (only 18% chance)
• Currently Romney is the front runner for the Republican nomination (29%)
• Obama has a slight edge in 2012 against a Republican challenger (60%)

There you have it, the future according to Intrade. Personally, I have found Intrade more accurate than opinion polls so I always keep an eye on what it is predicting.

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Predictions From Intrade

The Double Dip Arrives For Housing--Clear Capital

An interesting piece from Clear Capital about the sudden fall in home prices. The double dip is on big time for the residential housing market. Get ready for another homebuyer tax credit by the increasingly desperate keynesians. From Clear Capital:

Most recent data shows a two-month 5.9% price decline representing a magnitude and speed of decline not seen since March 2009; similar declines for September and October expected to appear in other industry indices in coming months.

“Clear Capital’s latest data shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

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The Double Dip Arrives For Housing--Clear Capital

All Credibility Lost: Bernanke and Fed Face Tough Criticism by Hedge Fund Manager

The once venerable title of Fed Chairman has been reduced to nothing more than a joke. At one time, direct criticism of the Fed and its members was taboo for most investment professionals and the media. But how times have changed, thanks to Zimbabwe Ben and his money printing ways. Today, respected hedge fund manager Paul Singer of $15 billion Elliott Management publicy derided QE and warned that the US could suffer inflation that "no American can imagine." Furthermore, he rejected the notion that QE does anything positive for the economy. All QE has done is juice the stock market in nominal terms. Monetary policy cannot solve the problems facing America, including high employment, loss of competitiveness, and stifling regulation.

Mr.Singer made these comments at the New York Hedge Fund Roundtable in front of over 100 hedge fund industry participants. He went on to say that the threat of a Weimar Republic style hyperinflation keeps him up at night. The challenge for money managers is not only about simply generating returns, but also about staying ahead of inflation in real terms. He notes " the path [of inflation] can be torturous. It is not a straight line, but it is a road  with lots of twists and turns." This dynamic makes it very hard for managers who do not want simply to buy billions of dollars in gold and sit tight.

The fact that it is now acceptable to openly mock the Fed shows how far the US has fallen as it spirals down to Third World status. It really doubtful that we have any rational or good intentioned officials left. Instead, we only seem to have corrupt bureaucrats who make their money by looting the taxpayers. The situation has become so endemic that it no longer makes headlines--people have come to accept it. Even when prominent people criticize these insane and misguided policies, it makes no difference since those who are in control no longer pretend to care what the people think. "Back in the day," officials at least used to pretend they cared, but they are now quite open about their disdain for the public. The Fed is clearly printing money to monetize the debt and create inflation. As if we have not had enough inflation over the last 75 years! Now the Fed openly states that higher inflation is the goal. Inflation is the secret confiscation of our wealth by government (or its sidekick The Fed).

 The Fed's credibility is now on par with that of the Reserve Bank of Zimbabwe when it comes to inflation and  currency debasement.  Every time Bernanke opens his mouth, gold and other hard assets rise, signaling the market's complete loss of faith in the Chairman and the Fed. QE may work for boosting stocks in nominal terms, but beware of the stock market's performance in real terms. Down, Down, Down. Depending on what measure of inflation you use (let's just use the CPI to make it easy), the market is down more than 30% over the last 10 years. With commodity prices surging, and gold at new all time highs, we are told deflation is the threat-- not inflation. I don't know about you, but most most Americans cannot afford any more of this new style of "deflation"--$3.70 copper, $80 oil despite record inventories, and $1350 gold. Deflation? It's a nice concept but an elusive one in the real world. At least during the Depression,  prices actually fell significantly to compensate for lower wages.

This time around, we face the opposite scenario: declining wages and rising commodity prices. The worst of both worlds, courtesy of Bernanke and his bankster friends. If Bernanke wants inflation so desperately, he might revert back to the 1990 method of calculating the CPI, which is currently showing 5% inflation (Shadowstats). 

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All Credibility Lost: Bernanke and Fed Face Tough Criticism by Hedge Fund Manager

Barclays Bullish On Gold--Sets $1850 Price Target By Dec 2011

The RELIC, as its detractors like to call it may not be so useless after all according to Barclays. The firm has set a price target for the yellow metal of $1850 by Dec 2011. They cloak their bullish argument on generic reasons like demand from emerging markets and supply constraints. Those factors may be important, but the real reason for gold's rise is dollar devaluation (same can be said for the Euro, Pound, Yen, Yuan, Peso, etc.). The RELIC, as it turns out has a very important use: protection against competitive currency devaluations. Unfortunately, most people will not realize this fact until it is too late. From Barclays :

Gold prices are likely to hit $1850 an ounce by the end of next year on strong demand from emerging economies and supply side constraints, Paul Horsnell, managing director of Barclays Capital said in a media briefing in Mumbai on Thursday.

Gold will first slide to $1,310-1,325 early next year on profit booking. But, the precious metal will get good buying support from central banks in Asia and West Asia regions, who are looking for opportunities to increase their gold portfolio.

Any aim to pick up gold in good volume will raise prices steadily to $1,450 by mid-next year and then the targeted $1,850 towards the end, Horsnell said.

Gold surged over 34 per cent since October 1, 2009 and 23 per cent so far this year.

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Barclays Bullish On Gold--Sets $1850 Price Target By Dec 2011

The New Normal: Jobless Claims Remain Stubbornly High

Despite the market's relentless rally, there has been little improvement in the jobs market. The DOL announced that initial jobless claims came in at 452,000, a decrease of 23,000 from the previous week's revised figure of 475,000. The 4-week moving average was 458,000, a decrease of 4,250 from the previous week's revised average of 462,250.

While claims fell week over week, they remain very high for a typical recovery and have been stuck above 450,000 for quite sometime.

Here is a chart of initial jobless claims (4-week moving average) since 1980.

Click chart for larger image.

Here is a chart of continuing claims (4 week moving average) since 1980.

Black Swan Insights

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The New Normal: Jobless Claims Remain Stubbornly High