Escondido: Buy one home, get one free

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, […]

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USD Carry Trade: China the next Iceland?

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 […]

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US Has Withdrawn from Human Rights Council

The news that the US has completely withdrawn from the Human Rights Council spread like wildfire Friday afternoon (June 6) through the corridors of the Palais des Nations in Geneva.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 […]

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Nuclear Power: The Climate’s Best Friend

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 […]

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Bernanke Optimistic? Poker-Face for the Media? FOREX

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 […]

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Inflation: Weak Dollar Reignites Commodities Rally

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 […]

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Currency War: Paulson Vows Open Talks with China

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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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June 10, 2008

No Way Out? Chasing a Weak Dollar Policy

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paulson-podium.pngSo 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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June 10, 2008

Will Bernanke Make Good on his Inflation Lip-Service?

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ben-bernanke.jpgThe 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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June 10, 2008

Irrational Exuberance: Caught on the wrong side of the oil market

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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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June 10, 2008