China Not Doing So Well: Power Consumption Down

This January and February 2014, Chinese power consumption has been declining month over month. I guess the up move has been broken. We could see continued weakness in industrial commodities and emerging markets as predicted by people like Marc Faber. I think it’s time to kiss Chinese GDP growth goodbye.

Gold Lease Rates Topping Out

Very curious correlation. 

As you know:

Lease Rate = LIBOR – GOFO

And a negative GOFO means there is stress in the gold market. A negative GOFO means that the Lease Rate is high. So stress in the gold market is associated with a high lease rate.

Whenever the gold price goes up though, the stress in the gold market will go away and the lease rate will go down.

Lately I see that the GOFO rates are turning positive and rising again, which makes the lease rate go down. The gold lease rate is topping out.

If we look at history, we will at least see a $2000/ounce gold price somewhere in the next two years if lease rates go back to the 2012 lows.

Why Belgium is Buying so Much U.S. Bonds

Interesting article that says that it isn’t actually Belgium that is buying the U.S. debt. Belgium is actually just an offshore account for foreigners to buy U.S. debt via the banking system.

For what I know, the Fed could even be buying its own U.S. bonds via Belgium.
If this is true, then the Fed isn’t tapering at all if you count the numbers…

Because why is base money supply (red chart) growing at an even higher pace?

Creditor Name: Belgium

Amount of U.S. Debt Owned (January 2013): $143.5 billion

Percent of U.S. Public Debt (January 2013): 1.24 percent

We know what you’re thinking: Belgium? Really? The gross domestic product (GDP) of this small European nation tucked between France, Germany and the Netherlands ranks No. 32 in the world, behind Nigeria and Malaysia [source: CIA World Factbook]. So why is Belgium one of the top 10 purchasers of U.S. debt?

The secret is something called “custodial bias” [source: U.S. Treasury]. Belgium has made a name for itself as one of Europe’s most vibrant international banking centers. Like Switzerland, bank accounts in Belgium historically offered a high degree of secrecy, although that changed in 2011 when the Belgian government began disclosing account information to improve tax transparency [source: Hyslop]. Still, Belgium offers big tax breaks for foreign companies that create Belgian subsidiaries and benefits for investors who choose Belgium for offshore accounts [source: Henley].

Belgium’s status as a tax haven makes it a popular place to buy U.S. debt, even if the investors aren’t from Belgium. The U.S. Treasury tracks purchases of U.S. debt by geographic origin, not the specific nationality of the buyer [source: U.S. Treasury]. This is where custodial bias distorts the debt figures. Belgium is a custodian (or holder) of U.S. debt from investors living in nearby France and Germany or as far away as China and Japan. How much of that debt is owned by actual Belgians is difficult to tell.

We’ll talk more about custodial bias with our next entry: teeny tiny Luxembourg.

Cool Charts at Research St. Louis Fed

The FRED site has created some cool charts with their newest update.

Now you can hover on the chart and see the exact data numbers. You can also zoom in by dragging the chart. But this will only work with Google Chrome and Firefox. Who uses Internet Explorer anyway.

Precious Metals Premiums Down

I find it a little worrying for precious metals investors that the premiums in gold and silver are so low. I would refrain from buying gold at this particular moment, wait for the dip.

Silver coin premiums are down.

 Junk silver is down.

 Shanghai silver premiums are down.

 Shanghai gold premiums are negative.

 Gold coin premiums have been falling.

List of Correlations: 100th correlation

As you know, I keep a page with all discovered correlations here:
http://katchum.blogspot.be/2013/03/update-list-of-discovered-correlations.html

And today I have found my 100th positive correlation. Let’s celebrate!

Positive correlations:
1) Silver premium Vs. Silver Price 
2) Baltic Dry Vs. Industrial Commodities
3) Baltic Dry Vs. Copper
4) Copper Vs. S&P
5) Oil Vs. Dow Jones
6) Agriculture Price Vs. Health of Economy
7) Agriculture Vs. Fertilizer Price 
8) CRB Index Vs. Commodity prices (oil, agriculture, metals)
9) MZM velocity Vs. Inflation
10) MZM velocity Vs. 10 year U.S. treasury yield
11) Case-Shiller Index Vs. Housing Market Index
12) Capacity Utilization Vs. Inflation
13) Rhodium Price Vs. Automotive Industry
14) Housing Price Vs. Rise of Wages
15) O-metrix Score Vs. Stock Value
16) Outlay Spending Vs. Hyperinflation
17) Gold Money Index Vs. Gold Price
18) Stock Dividend to Bond Yield ratio Vs. Stock Price
19) War Vs. Silver Price
20) Exchange Rate Vs. Treasury Bond Valuation
21) PMI Vs. GDP Growth Rate
22) Gold Lease Rate Vs. Gold Price
23) Economy of Australia/Canada Vs. Industrial Commodities
24) Jim Sinclair’s Fed Custodials Vs. Gold Price
25) LCNS silver net short positions Vs. Silver Price
26) ECB Deposit Rate Vs. Euribor and Deposit Facility
27) China Gold Imports from Hong Kong Vs. Gold Price
28) AUD/USD Vs. Iron Ore
29) Chinese yoy GDP growth Vs. Chinese yoy Power Consumption (link 2)
30) Chinese yoy Power Consumption Vs. Chinese yoy Power Production
31) M1 and Gold
32) Obesity Vs. Debt
33) Global Equity Prices Vs. Global EPS revisions
34) Total Public Debt Vs. Interest Payment on Debt
35) U.S. Bond Yields Vs. Interest Payment on Debt
36) Federal Reserve Balance Sheet Vs. S&P
37) Federal Reserve Balance Sheet Vs. Gold Price
38) Balance Sheet Ratio Fed/ECB Vs. EUR/USD 
39) China Manufacturing PMI Vs. Base Metal Prices
40) COMEX stock level Vs. CFTC Open Interest
41) Manufacturing component of Industrial Production Vs. CRB Metals Index
42) Net Short Interest Gold Vs. Gold Price
43) Central Bank Net Gold Buying Vs. Gold Price
44) LCNS silver Vs. Silver Open Interest
45) Bond Yields Vs. Gold Price
46) Gold Miners Bullish Percent Index Vs. GDX
47) Daily Sentiment Index Gold Vs. Gold Price
48) Commercial Net Short Interest Vs. Silver Price
49) Food Stamp Participation Rate Vs. Unemployment Rate
50) Bitcoin Price Vs. Gold Price
51) Credit Expansion Vs. Economic Health (second link)
52) Gold Volatility Vs. Gold Price
53) Total Stock Market Index Vs. GDP
54) Brent Crude Oil Vs. WTI Crude Oil
55) EPS revisions Vs. P/E Ratio
56) Citigroup Surprise Index (CESI) Vs. S&P 
57) EPS revisions Vs. S&P
58) Dow Theory: Dow Jones Transportation Average Vs. Dow Jones Industrial Average
59) Margin Balance Vs. S&P
60) Federal Debt Growth Vs. 10 Year Treasury Yields
61) Fed Funds Rate Vs. 10 Year Treasury Yields
62) Total Central Bank Balance Sheet Vs. Gold Price
63) Large Commercial Short in Copper Vs. Copper Price
64) Bond Yields (<3%) Vs. P/E Ratio
65) ECB Lending (LTRO) Vs. Deposits at Banks
66) Disposable Income Vs. Housing Prices
67) Fixed (conventional) Mortgage Rate Vs. Treasury Yields
68) Adjustable Mortgage Rate Vs. Federal Funds Rate
69) Silver Vs. Bitcoin
70) Open Interest Trend Vs. Price Trend
71) Wage Inflation Vs. Consumer Price Index (CPI)
72) Marginal Cost of Gold Suppliers Vs. Gold Price (link 2)
73) Durable Goods Orders Vs. S&P
74) Gold ETF Trust (GLD) Vs. Gold Price
75) PMI (leading indicator) Vs. S&P Revenues
76) Federal Funds Rate Vs. LIBOR Rate
77) Lumber Price (leading indicator) Vs. Housing
78) Building Permits (leading indicator) Vs. Housing
79) Pending Home Sales Vs. Mortgage Applications
80) Employment-Population Ratio Vs. Real GDP per Capita
81) Trade Surplus/Deficit (leading indicator) Vs. Currency Strength/Weakness
82) German Treasury Yields Vs. U.S. Treasury Yields
83) Consumer Sentiment Index (leading indicator) Vs. S&P 500
84) Bitcoin Price Vs. Bitcoin Users
85) Potemkin Rally Vs. Employment to Population Ratio
86) LME Copper Warehouse Stock Level Vs. Copper Contango
87) Art Price (leading indicator) Vs. CPI
88) Total Credit Market Debt Vs. Dow Jones
89) SGE gold deliveries (leading indicator) Vs. China Gold Imports from Hong Kong
90) Retail Sales Vs. Disposable Personal Income Per Capita
91) CRB Index Vs. Emerging Markets
92) Non Farm Payrolls Vs. Job Hires
93) Currency Debasement Vs. High Yielding Assets (Carry Trade) 
94) Deposits over Loans: Excess Reserves 
95) Food Price (leading indicator) Vs. Potash Price 
100) Federal Funds Rate Vs. CPI

Negative correlations:
1) Copper Price Vs. Copper Futures Contango
2) Interest Rates (bond yields >3%) Vs. P/E ratio of gold mines
3) Non-Farm Payrolls Vs. Unemployment Rate
4) Federal Debt Held by Foreigners Vs. U.S. Bond Yields
5) Size of Governments Vs. Their Economies
6) Stocks Vs. U.S. Dollar
7) Silver Stock at CME Vs. Silver Price
8) China Reserve Requirements Vs. Shanghai Real Estate Prices
9) Capacity Utilization Vs. Unemployment Rate
10) Net Commercial Short Positions Vs. Bond Yields (Alternative Site)
11) Net Non-Commercial Long Positions Vs. Bond Yields
12) % Change in Gold Vs. Real Interest Rates on 10 Year Treasuries 
13) Shanghai Silver Premium Vs. Silver Price
14) Probability of Recession Vs. 10 year – 3 year Yield Spread
15) Junk Silver Premium Vs. Silver Price
16) Wage Inflation Vs. Unemployment Rate
17) Initial Unemployment Claims Vs. S&P
18) Gold/Silver Ratio Vs. S&P
19) GLD Flows Vs. Shanghai Gold Premium
20) Unemployment Rate Vs. Real GDP (leading indicator)
21) Mortgage Rates Vs. Mortgage Applications
22) Single Family Housing Starts Vs. Unemployment Rate
23) Tax Revenue Vs. Personal Savings Rate
24) Change in Non-Farm Payrolls Vs. Change in Unemployment Rate
25) Fed Funds Rate Vs. Unemployment Rate
26) Labor Force Participation Rate Vs. Unemployment Rate
27) M1 Money Supply (leading indicator) Vs. CPI

These are a lot of correlations that you need to monitor on a day to day basis!

Federal Funds Rate Vs. Consumer Price Index

From the first FOMC meeting lead by Janet Yellen, we noticed one important statement:

“The Fed Funds Rate will be kept low when inflation stays at this low level.”

Thus, we chart the Fed Funds Rate against the CPI and get this result.

There is a strong correlation between the Fed Funds Rate and the inflation rate (CPI).

So we expect that an increase in interest rates will only happen when inflation starts to rise. The unemployment rate is not on the radar anymore.

Notice that historically the Fed Funds Rate is higher than the inflation rate (positive real interest rate (above 0%)), but today the Fed Funds Rate is lower than the inflation rate (negative real interest rate (below 0%))

U.S. Debt

It is interesting to monitor how the public and private debt curves are trending.

Since the crisis of 2008, total credit market debt as a % of GDP has been going down for the first time since history. Private debt was in a debt deleveraging mode (blue graph), while the Federal Reserve’s public debt was in a debt expansion mode (red graph).

If we look at the nominal value of debt, we can see that since 2014, total, private and public debt are all growing again, resuming exponential expansion.

Rising Food Prices Pushing Up Potash Stocks

Agriculture prices have been going up since the beginning of 2014 and I think that if this trend continues, we will see demand going up for potash, which is used for agriculture.
The chart below monitors the food prices. You can see the recent surge in 2014. Many foods went up like coffee, sugar, even wheat.

RJA agriculture

If we chart the agriculture index RJA against the largest potash producer Potash Corp., then we get this.

Food (RJA) Vs. Potash (POT)

We see a correlation here between food prices and potash prices. Food prices are obviously a leading indicator for potash sales and as a consequence we can say that higher food prices will push up potash prices.

So if you want to bet on higher potash prices (because of the recent surge in food prices), then you should buy the potash companies like Yara International, Potash Corp. or Allana Potash.

Belgium Buys Another Load of U.S. Treasuries

Thanks to Econoblogger Martin I was reminded that today we have another update on the U.S. foreign debt holders and surprise surprise. Belgium keeps on buying more than $50 billion of U.S. debt, much more than any other country is doing now. If Belgium keeps buying like this, it will hold even more debt than China in a year or so. I’m just wondering where they get the money from.

Foreign U.S. debt holders

Look how much they bought, starting from November 2013.

U.S. debt held by Belgium

I have no idea why they are doing this. That the ECB would buy U.S. treasuries to get the euro down, maybe. But why is Belgium buying so much U.S. treasuries? $50 billion accounts for 10% of Belgium GDP. Can they support this?

We see Belgium’s own public debt has been rising since the crisis. Instead of using the money for servicing its own debt, they buy U.S. debt.

Debt to GDP Belgium

Let’s look at Belgium’s treasury yields. The 10 year is at 2.2%, which is below the 2.7% of U.S. Nothing much to see here, but look what happens in November 2013. Yields on U.S. treasuries are going up. Do you remember what happened then?

Yes, the Chinese came out saying they will stop buying U.S. debt. So who goes to the rescue? Belgium.

Belgium 10 Year Yield

U.S. 10 Year Yield

Probably Belgium is the heart of Europe as Europe started from Belgium. These European people want to support the U.S.

But actually, I think being in U.S. treasuries isn’t such a bad idea at this moment. When stocks collapse, U.S. treasuries are pretty safe.What I’m worried about though, is that the U.S. dollar is now starting to collapse. The dollar cash index is moving towards 70, when Belgium holds all of these U.S. treasuries, it will realize losses on the U.S. dollar currency value. A 10% loss in currency value, means at least a $30 billion dollar loss for Belgium and I heard that they even bought U.S. treasuries that the Russians dumped in March 2014. These are dangerous things to do.

For more info, here is a link to Zerohedge.