Too Much Debt!

Treasury Secretary Henry Paulson says the administration intends to keep pursuing a policy of “robust engagement” with China that will include filing unfair trade cases as needed and pressuring the Chinese to move more quickly to revalue their currency.Paulson, delivering a speech outlining the goals of a high-level meeting the two countries will hold next week, said it was important for both nations to resist calls for erecting protectionist barriers.

“It is clear that our strategy for robust engagement with China — intensive dialogue but with resort to WTO dispute settlement and WTO-sanctioned trade remedies if needed — is more productive than protectionist policies or legislation,” Paulson said in his prepared remarks.

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So the employment data merely confirmed what should have been obvious –

the US economy was in very bad shape. They did not provide conclusive evidence on the key questions of the depth and severity of the downturn. The reaction owed much to complacency.

The truly bad news came from the record rise in the oil price. Oil and the dollar traded in line all last week, with oil prices juddering downwards as Ben Bernanke, Federal Reserve chairman, talked up the dollar on Tuesday, and rising after the dollar fell on the European Central Bank’s words on rate rises on Thursday, and again after the payroll figures.

Many factors are pushing oil but, in the short-term, currency is the most important.

If the US is indeed avoiding a bad recession, this is because the weak dollar has helped exports. But a dollar this weak brings an oil price that neither US consumers nor central bankers can bear. If oil prices do not correct soon there is no way out for the US economy – a good reason for equities to sell off.

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The Federal Reserve is starting to talk tough about inflation. But is there any substance backing up these words?

Bernanke hinted that the Fed’s rate-cutting campaign has come to a close.

Bernanke said “the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations.” He added that the Fed “will strongly resist an erosion of longer-term inflation expectations.”

All that suggests that the Fed may be starting to consider interest rate hikes later this year. That would help support the dollar and contain inflation. But some think that the sooner the Fed acts the better and that the Fed needs to do more than just talk.

The Fed’s benchmark federal funds rate is now 2%. By way of comparison, the European Central Bank’s main interest rate has held steady at 4% since last June.

As long as U.S. interest rates are relatively low, some believe that the dollar will just continue to weaken against the euro and that oil prices will keep climbing.

“It is a problem having Europe’s rates high and our rates low. It puts a lot of pressure on the dollar,” said Alan Skrainka, chief market strategist with Edward Jones. “Enough is enough. I don’t want to second guess the chairman of the Federal Reserve but they’ve cut rates enough. It would be problematic if they cut rates more.”However, there is a small, but growing, school of Fed watchers who think the Fed should shock the markets and raise rates at its next meeting.But with crude oil hovering around $136 a barrel, maybe a big shock is exactly the right medicine.

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Traders say many speculators bet early last week on falling oil prices through short sales – in which they sell the commodity in the hope of buying it back later at a lower level.

They were gambling that prices could drop below the critical $120 a barrel level on further signs of demand erosion in the US and the partial removal of fuel subsidies in some Asian countries.

Data from the US Commodity Futures Trading Commission shows that for the week to June 3, speculators were getting out of the crude oil market. If you include futures and options, then speculators sold a net 4,500 contracts through the liquidation of some previous long positions – bets on higher oil prices – and the establishment of fresh short positions.

By Wednesday last week, it had started to become clear that the bet might not work. US oil inventories, instead of moving higher because of lower demand, fell sharply. Some traders started to unwind their bearish positions.

Oil prices then failed to fall below $120 a barrel – a critical support. If that had been broken, it could have triggered further sales.

As the US dollar weakened 2.4 per cent in two days, some investors panicked and tried to buy back their short oil positions. Mr Serio says that the rapidity and strength of the rebound suggested it was largely due to “a large short covering of the short positions”.

A trader with a US hedge fund adds: “It was a massive short-covering.”

But the situation got even worse for the speculators on Friday: as trading started in London, the market reacted to comments by the Israeli transport minister – and a former chief of the Israeli military – who said an attack on Iran was “unavoidable”. Then, as New York opened, Morgan Stanley, the investment bank, warned that prices could jump to $150 a barrel in two weeks.

The Israeli threat plus the Morgan Stanley forecast triggered fresh buying of spot contracts – rather than long-term ones – in turn further undermining the short-sellers. By mid-afternoon in New York, traders say, they were forced to throw in the towel and cover their positions, sending oil prices rocketing more than $11 at one point.

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In a sign of how difficult it is to sell new homes in Southern California right now, a San Diego developer is offering a “buy one, get one free” deal, pairing million-dollar homes with less expensive homes.

“We thought, ‘Why does it just have to be on Pop Tarts and restaurants? Why not buy one home, get one free,’” Dawn Berry of Michael Crews Development told 10 News in San Diego.

More: “Michael Crews Development is offering new, 2000-square foot cityscape row-homes worth $400,000 in Escondido for free — if you buy one Royal View Estate home in San Pasqual Valley starting at $1.6 million. ‘You know it’s a straight-up legit deal; no prices have been increased, there are no hidden costs. Michael is just giving away a free home for people that buy at Royal View,’ said Berry.”

“Adam Rossman of Michael Crews Development added, ‘People have been coming in saying, ‘How can you do this?’ Well, it’s our way of dealing with current market conditions to move some inventory.’ ”

Source special thanks to Options Armageddon

For a few years now a very common carry trade has been to borrow & sell low return Japanese Yen and use the proceeds to invest in the U.S. and elsewhere. But after the Fed’s significant rate cuts the past few months, the dollar itself may be the new currency to finance speculative bets. The best evidence seems to be China’s exploding foreign exchange reserves.

China has been a net importer of currency for some time, given their large trade surplus and the interest payments their accumulated reserves generate. And yet these two sources of income explain less than half of the recent increase in reserves. So where is the rest of the money coming from?
Most stunning isn’t the size of China’s foreign reserves, though that is stunning. It’s the rate at which their growth is accelerating.

In the year 2000, China had $166 billion of foreign reserves. By January 2004, that number had grown to $416 billion.

At the end of March, the figure was $1.682 trillion. And estimates for April suggest another $82 billion was added that month. At these rates China could accumulate nearly $1 trillion in 2008 alone.

“Scary” as Brad Setser puts it, both for the U.S. and for China.
It’s so-called “hot money,” a crude term referring to various speculators betting on continued appreciation of China’s currency against the dollar.

A primary beneficiary of such China investments is the country’s currency, the Yuan. Three years ago one Yuan was worth 12 cents. Today it is worth nearly 15 cents, a 21% increase.

And speculators would likely have pushed up its value far more if the Chinese government didn’t continue to restrict the range in which it allows the Yuan to trade.

Conventional wisdom in the United States is that as China accumulates so many dollars, the country can buy much of the U.S. economy out from under Americans. That certainly IS a threat that should worry all Americans.

And yet in the short-run, such massive inflows of capital pose significant challenges for China too. The first, of course, is inflation.

To keep the dollar’s value from falling even MORE against the Yuan—cutting into Chinese economic growth which is driven by exports—China’s Central Bank must mop up all those dollars that are flooding into its economy by way of the trade surplus, foreign direct investment and “hot money” inflows. It does so by buying up those excess dollars with Yuan.

Source special thanks to Options Armageddon

The news that the US has completely withdrawn from the Human Rights Council spread like wildfire Friday afternoon (June 6) through the corridors of the Palais des Nations in Geneva. There was general consternation amongst diplomats and NGOS. Reached by phone, the American mission in Geneva neither confirmed nor denied the report. Although unofficial, the news comes at a time of long opposition by the Bush administration to the reforms which created the Human Rights Council in June 2006. Washington announced from the beginning that the US would not be an active member but its observer status would mean that it could intervene during the sessions. To date even this has rarely happened.

“We don’t understand the reasons nor the timing of the decision”, said Sebastien Gillioz of Human Rights Watch. “There have even been some positive signs during this Council. For example Belarus was not re-elected as a member in 2007 nor Sri Lanka this year”.

The stupefaction was made greater by the fact the US actively took part in the universal Periodic Review (UPR) process where 32 countries were scrutinized by their peers in April and May. In particular a series of recommendations were made regarding Romania, Japan, Guatemala, Peru, Tunisia, Ukraine, Indonesia and others.

Diplomats are equally concerned. If the current president of the Council, Doru Costea, declined to comment, his predecessor, Luis Alfonso De Alba said that he didnt see any reason to justify such a decision. Several observers mentioned Washington’s growing discontentment with the influence of the Islamic and African countries in the Council.

“It is an aberration”, said Peter Splinter of Amnesty International. “It seems that the government has lost its mind.

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CO2-per-kilowatt-hour map of the US and two bright patches of low-carbon happiness jump out. One is the hydro-powered Pacific Northwest. The other is Vermont, where a 30-year-old nuclear reactor, Vermont Yankee, keeps the Ben & Jerry’s cold. The darkest area corresponds to Washington, DC, where coal-fired power plants release 520 times more atmospheric carbon per megawatt-hour than their Vermont counterpart. That’s right: 520 times. Jimmy Carter was right to turn down the heat in the White House.

There’s no question that nuclear power is the most climate-friendly industrial-scale energy source. You can worry about radioactive waste or proliferating weapons. You can complain about the high cost of construction and decommissioning. But the reality is that every serious effort at carbon accounting reaches the same conclusion: Nukes win. Only wind comes close — and that’s when it’s blowing. A UK government white paper last year factored in everything from uranium mining to plant decommissioning and determined that nuclear power emits 2 to 6 percent of the carbon per kilowatt-hour as natural gas, the cleanest of the fossil fuels.

Embracing the atom is key to winning the war on warming: Electric power generates 26 percent of the world’s greenhouse gas emissions and 39 percent of the United States’ — it’s the biggest contributor to global warming.1 One of the Kyoto Protocol’s worst features is a sop to greens that denies carbon credits to power-starved developing countries that build nukes — thereby ensuring they’ll continue to depend on filthy coal.

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Commentary: Disclosure- I am invested in nuclear energy companies.

As the administration is so fond of saying, a nation’s currency reflects the underlying strength of its economy, and in that sense can be seen as a nation’s economic report card. In truth, a strong currency is in the interest of every nation, just as good grades are in the interest of every student. Using this basic analogy, a flunking student cannot improve his grades by simply telling his parents, teachers, and fellow students that he has adopted a “straight A policy.”

In his speech this past Tuesday, Ben Bernanke finally admitted that the weakness in the dollar was contributing to both higher inflation and elevated inflation expectations. This stands in stark contrast to his recent testimony in front of the House Banking Committee, where in response to a question asked by Congressman Ron Paul, he confidently declared that the weakness of the dollar only effected Americans who travel abroad. It is amazing how little attention this complete reversal received.

The media of course wasted no time in declaring that Bernanke’s speech heralded the opening of a new front in the campaign against the falling dollar. For example, CNBC’s Larry Kudlow proclaimed that Bernanke had endorsed “King Dollar” (someone needs to remind Kudlow that the king has long since abdicated his throne) and the network ran an entire segment on how to profit from the new dollar rally.
As far as the media and Wall Street are concerned, words without action are enough.The real take away from Bernanke’s comment is not that the dollar is about to rally, but that it is now more likely to sink even lower. I believe the main reason Bernanke has refrained from mentioning the dollar in the past is that he did not want to be put in a position of actually having to do something about its decline. He is now so fearful of an imminent dollar collapse that he must have felt compelled to throw down the gauntlet.

My guess is that currency traders will ultimately see this as an act of desperation.
If Bernanke does nothing the world will finally see a naked emperor and the dollar’s decline will turn into a rout. If, on the other hand, the Fed raises rates to defend the dollar, and only a short term bounce results, then all remaining confidence in the Fed’s ability to support the dollar will evaporate as well. This is probably Bernanke’s greatest fear. The fact that he felt compelled to do so now likely means he knows the game is coming to an end.

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Corn futures shot up to a record for a second day Friday, driven higher by a slumping dollar.

Other commodities traded broadly higher, with crude oil soaring more than $11, and gold, silver, copper and other agriculture futures also rising sharply.

Corn for July delivery surged to an all-time high of $6.6325 a bushel on the Chicago Board of Trade before easing back to settle at $6.5075, up 7.5 cents. It was corn’s highest settlement price ever. Prices have jumped nearly 40% since the start of the year.

U.S. farmers were expected to plant 86 million acres of corn this year, but wet weather in Midwestern states has left 4 million acres unplanted. If the remaining fields aren’t planted by June 10, farmers will either leave them empty and take insurance payments or switch the acres over to soybeans, which have a later growing cycle.

Other agriculture futures also rose. Wheat for July delivery rose 25.5 cents to settle at $8.11 a bushel on the CBOT, while July soybeans added 5.5 cents to settle at $14.575 a bushel.

Meanwhile, rough rice futures for July delivery added 60 cents to settle at $19.96 per 100 pounds.

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