The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

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This Week: Oil and Gas Tax Economics

The Markets

Is the U. S. stock market a leading indicator of the U.S. economy?  That’s the presumption I have historically followed as a self-professed “macro trader” –  see, for example, my trading book “If It Rains in Brazil, Buy Starbucks.”

The “markets as leading indicator” view, however, is a presumption that has been increasingly subject to slippage.  One major “problem” is that U.S. markets are increasingly driven by international currency issues.  For example, the domestic economy might be in trouble but with a weak dollar, a lot of big, U.S.-listed multinationals might do well because of foreign earnings – and make U.S. markets look bullish.   A second reason U.S. markets might not properly signal economic strength or weakness is because of the powerful effects of particular sectors like energy and commodities.

That said, my claim for the past several weeks that the strength of U.S. markets has been merely reflective of a “technical bounce” must be reevaluated in light of recent economic data showing at least a slowing rate of job losses.  If it turns out that we are headed more for a “shallow V” recession than the “deep U” many are worried about, that would certainly be bullish.  Stay tuned.

Presidential Politics and Oil Economics

Based on John McCain’s self-professed ignorance of economics coupled with his ties to a gaggle of “tax cut advisors” like Jack Kemp, I was not particularly surprised that McCain is calling for a moratorium on the gas tax.   I was, however, absolutely floored when the Clinton campaign, which has a much more sophisticated economics team,  jumped on the gas tax bandwagon.

Let’s be really clear about this: A short run cut in the gas tax is sheer economic, fiscal, and environmental lunacy.   Such a tax cut would do little or nothing to cut gas prices in the short run, provide the absolutely wrong incentives for energy conservation over the long run, and contribute to a burgeoning budget deficit – while denying necessary funds for public infrastructure.

The “journalist’s view” of gas tax economics, as mouthed by pundits all last week, is that a gas tax cut would increase gas demand and thereby push the price back up to previous levels.  This is an easy idea for  John Q. Public to understand, but it is likely (almost) totally wrong.   Prices won’t rise so much because of increased demand but rather something far more troubling.  To understand the issue requires just a little bit of heavy economic principles lifting.

To wit, with any tax cut or tax increase, who bears the benefit or burden of the cut or increase depends on both the elasticity of supply and the elasticity of demand in the market.   In the case of gasoline, short run demand is very inelastic – that is, it is very unresponsive to price.  However, in the short run envisioned for the gas tax holiday – the summer driving season – the elasticity of gas supply is close to perfectly inelastic.  This is because of severe refinery constraints in many parts of the country.

Conclusion: If the elasticity of gas supply is perfectly inelastic, any cut in the gas tax would simply result in an almost one-for-one increase in the pump price.  In other words, the gas tax “holiday” for consumers would be no holiday at all but merely another windfall for gasoline refiners.

And speaking of windfalls, I found it amusing that the weekend WSJ took Barack Obama to task for advocating a windfall profit tax – while giving him only the very faintest of praise for not falling in with McCain and Clinton on the gas tax holiday.

In fact, the economics of a windfall profits tax are far more compelling than the WSJ lets on.  Economists view a true windfall tax as a one time event administered retroactively to a period of profit activity over and above those profits which might be earned in a competitive market.  Such a one-time windfall profits tax is the ”best of taxes” in that it has absolutely no impact on resource allocation, e.g., it wouldn’t depress oil production.  Such a point got lost, however, in the WSJ translation.

QUICK TAKES

1. One of the reasons I like reading the Financial Times is that it runs front page stories about things like the price of camels tripling.  The reason: with fuel expensive, more and more farmers are turning in their tractors for camels.  Now somebody tell me how I can go long the camel market.
2. My concern that Obama will be torn apart in the general election seems hardly misplaced as the gutting has already begun.   Reverend Wright and elitist criticisms have brought him right back to the pack in a rough enough way to get even the super delegates thinking.  What’s most disturbing about the gutting is the racist tones the McCain surrogates have already begun to strike – a case in point is the North Carolina ads against Obama.

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

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This Week: Cost-Push Inflation

STOCKS

The DJIA, Nasdaq, and S&P 500 all remain in a strong technical position despite broad macro-fundamental headwinds.   The big debate now is whether a bottom -- or a false bottom -- has put in.  You can argue it persuasively either way – which means it’s a tossup from a risk/reward perspective.  That, in turn, means that cash still remains king unless you are a very short term trader.

BONDS

After more than two decades of a bull market in bonds, we may now be entering what is likely to be a long term bear market.  The culprit is “cost push inflation” putting upward pressure on yields and downward pressure on bond prices.

Like “moral hazard,” which became the pundits’ favorite buzzword in the midst of the credit crunch, “cost push inflation” will be fashionable on the tube and in the papers over the next some months.  Cost push inflation comes from increases in the prices of production inputs like energy and natural resources.  It may be distinguished from “demand pull inflation,” which is too much money chasing too few goods when an economy is growing robustly.

Demand-pull inflation is easy to cure.  The government  just raises taxes or interest rates. This triggers a contractionary shock and this type of inflation eases as economic growth slows.

Cost-push inflation is a totally different matter.  The worst case scenario is when you have cost push pressures AND a slowing economy.  That’s the “stagflation scenario.”

Right now, cost push pressures are building throughout the world.  The deflationary basket case of Asia – Japan – just saw the first rise in core inflation since 1998 because of non-core elements creeping into the core.   Not surprisingly, this inflation news triggered the worst one-day fall in Japanese bond prices in five years as yields rose significantly.

The Big Picture

It’s easy to get lulled into a false sense of security with the U.S. stock market indices bouncing nicely up.  However, there are too many damn and disparate pressures building in the U.S. and globally to get really comfortable with any bullishness.

• Much of Europe is facing strong inflationary pressures even as Spain and Italy circle round the fiscal profligacy/housing bubble drain.

• Much of what we used to call the “Third World” is suffering from high food prices and protests – with a ripple effect of government interventions bound to totally screw up world grain markets. .

• China and Vietnam are experiencing their worst inflation crises in decades.  Remember that Tiananmen Square was not about democracy but inflation.

• The U.S. consumer continues to fade out of the picture, making a quick recovery all the more uncertain.

• OPEC won’t produce more, Russian production has begun to fall, and Venezuela provides a textbook case in how nationalizing oil production winds up reducing production and revenues.

• Talk of nuking Iran continues to heat up in the face of Iranian nuclear proliferation.

I could go on…but you get the idea.

QUICK TAKES

1. A week after my lament about Peggy Noonan’s column was relegated to the WSJ back pages, she gets put on the main editorial page for the week.  The irony is that it was her worst column of the year.
2. My over-arching point on the Clinton-Obama dustup is not about which candidate would be a better president.  It has simply been that Obama, with his inexperience, is going to get easily ground up by the Republicans leading up to the November election.  That this SHOULD be a major concern to even the most ardent Obama supporters should be evident in the various events of the last few weeks and the hits Obama is taking.   Super delegates take note.
3. Dem Chairman Howard Dean is causing a lot of Dean-like screeching on the Obama side of the ledger.  In a Financial Times interview, Dean was quoted as saying the super delegates should vote for whoever has the best chance of winning the November election – not who wins the most regular delegates or popular.  That’s a sharp counterpoint to Nancy Pelosi’s dictum.
4. Keep your eye on CYD, China Yuchai.  It was one of my picks last week on CNBC.   Nice story stock about diesel provider of choice in China.
5. How about we wake up and stop subsidizing the use of corn to produce fuel.  It’s a net negative on both fuel efficiency and environmental grounds.

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: The Bounce is Back

The technical bounce is definitely back after a brief GE derailment several weeks ago.  Momentum, sentiment, and strength indicators all favor the long side.  I don’t recommend being long this market, however, unless you have a very short term horizon and can turn on a dime.  Storm clouds continue to pile high in the sky.  Cash remains king.

In other notable market news, China’s Shanghai market hit a milestone of sorts, falling to half its  value relative to last October’s high.   While the stock market is usually a leading indicator of a country’s economy, China’s fall from bullish grace tells us little because it is due almost entirely to classic bubble bursting activity.

And what was the most bearish news of an otherwise bullish week is a significant spike in the Libor rate, which is used to adjust a lot of debt instruments, including adjustable rate mortgages.  Libor spiked 20 basis points last week and this spike rippled through the bond and futures markets.  To understand its bearish implications, think of a Libor hike as a tax hike on homeowners and corporate borrowers.

Special Notes on the Food Crisis

One of the few special interests that love food crises like the current one is my clan of economists.  This crisis provides an absolute textbook case about how screwing around with the free market typically just makes things worse:

Consider first the effect of grain export bans.  Egypt, Vietnam, and Indonesia, among others, have slapped restrictions on rice exports.  Kazakhstan has halted wheat sales.  Malawi has suspended sales of maize.  And so it goes.  Export bans drive up prices in international markets for three reasons:

1. Available supply in world markets is reduced
2. Rising prices and the fear of shortages create demand over and above what it would otherwise because governments try to buy more grain to increase stockpiles.  Increased demand drives up prices further.
3. The ensuring panic creates “phantom demand” as traders order more than they otherwise might to insure order fulfillment in a supply constrained market.

Consider next the effect of export tariffs like in Argentina.  This effectively reduces the price that farmers can get in the marketplace.  Farmers plant less than they otherwise would, reducing supply.  This increases price pressures.

Consider finally the effect of export restrictions on inputs into the farming process like fertilizer.  China, for example, has slapped a 100% export duty on fertilizer.  This reduces prices to domestic producers who will produce less.  It increases fertilizer prices in world markets, which put cost-push pressures on final grain products.

Oh, and let’s not forget how subsidies to biofuels are putting upward prices pressures on everything from seeds and fertilizers to grains.

Madness, I say.  Madness….

QUICK TAKES

1. Whenever I want to read modern American literature, I don’t go for Hemingway or Faulkner.  I just take in Peggy Noonan’s column that is buried deep on the back pages of the weekend WSJ.  Nice little piece this week on why over half of America now doesn’t trust Hillary and what Barack is likely going to lose not because of his skin color but his inexperience.  Take it all in with a grain of salt as she’s a rock-ribbed Republican.  Still, she makes Ann Coulter’s purple prose look like it comes out of the Kindergarten bin.
2. And speaking of Hillary, she’s been the only candidate in either party to get it right on China – going after the People’s Republic of late on everything from human rights to currency manipulation.  So it is very troubling that all she gets for her truthsaying is the resignation of one of her top China hands, UCLA political scientist Richard Baum.   My guess here is that Baum was taking a lot of gas from his colleagues at UCLA’s Center for Chinese Studies, and its always hard to get an appropriately hard line from any academic operating out of such centers because of the funding imperative.   It would be nice if another member of Clinton’s inner China circle, Susan Shirk, stood up for her to offset this bad press.
3. See my letter to the editor in the weekend edition of the WSJ re: Greespan.  It begins thus:

 “The maestro doth protest too much. In fact, Mr. Greenspan's spirited defense of his legacy has more in common with revisionist history than two essential truths: He may legitimately be blamed for both the 2001 recession and the (likely) current recession, as well as the collapse of the tech bubble and formation of the housing bubble.”   Click here for full letter.

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

60 Minutes Alert: If you missed the April 6^th show, you can catch it on the web by clicking here.

This Week:  GE Whiz That Hurt

Last week, I noted that the U.S. markets had pulled off the Houdini of a strong technical bounce in the face of an ever-tightening fundamental stagflationary squeeze.   As it has now turned out, this may be one of the shortest bounces in recent stock market history.

The technical bounce got absolutely crushed by bad news from the bell weather General Electric, which suffered one of its worst one stay stock price losses in its entire history on missed earnings and lowered guidance.  Given that GE is almost its own ETF for the U.S. economy, this news hit the markets very hard.

Where does this leave us?  From my macro perspective, the U.S. markets remain in a downward trend that will be very difficult to reverse and even more difficult to trade on the long side.  Cash continues to be a good place to park your bucks – unless you are really good at picking biotech stocks, which are largely outside the business cycle bear hug.

More broadly, I continue to be amazed by the parade of ominous signals emanating from seemingly all parts of the globe.   Oil topping $112 bucks and $4 a gallon summer gasoline on the horizon.  Airlines dropping like Chapter 11 flies.  Spain forced to import water because of record drought.  A billion of the world’s poorest facing starvation as food prices spiral upward and many food-producing countries slap on export restrictions.  Iran moving full speed ahead on uranium enrichment.  Rising risk spreads signaling a resurfacing of worries over a world credit meltdown.  Mugabe thugs in Zimbabwe making a mockery of democracy.  A young punk Iraqi mullah studying Allah knows what in Iran unleashing yet another wave of violence killing U.S. soldiers and exposing the surge’s feet of clay.  Tens of thousands of high-paying Wall Street jobs turned into pink slips.  Las Vegas dying on the recessionary vine.  Consumer sentiment at a 26-year low.  It goes on and on.

QUICK TAKES

1. Yet more hate mail from the Obama-ites over my latest oped on the “unity ticket.”  Click here to read it.  It’s damn comic irony that these Obama zealots hurl the worst sort of epithets my way in praise of a candidate they describe in the same breath as a facilitator, unifier, and master politician.  And by the way, if you want to ready my memoir about being in San Diego politics, click here.  It’s yet another freebie from yours truly.
2. Now here’s some more stuff for you Obama-ites to chew on: John McCain just absolutely crushed both Hillary and Barack on American Idol.  Each had 60 seconds to address the largest TV audience this side of Beijing.  McCain was just very warm and funny and loose.  Meanwhile, Barack eyes darted back and forth like a hamsters as he read his teleprompter – lose that thing Dude and start speaking from your real heart and not the scripted one.  As for Hillary, she was, in Randy Jackson’s lingo, “just all right dog.  Nothing special.”   And you don’t think this matters?  Guess again.  If McCain gets charisma, the Dems are up the creek without a war hero.
3. It’s tax week, and America’s pain is going to be considerably amplified as people try to pay the IRS out of dwindling bank accounts.  Look for that to show up in the May economic data as yet another bearish force.

This article appeared in the Providence Journal Tuesday, April 8, 2008

Tuesday, April 8, 2008

IRVINE, Calif.

I WAS BARACK OBAMA before Barack Obama — sort of. My strong advice is that he should graciously embrace a “unity ticket” with Hillary Clinton at the top and himself as the vice-presidential candidate. The likely alternative is a McCain victory — and the ritualistic Republican gutting of a once promising politician.

My own “Obama experience” occurred in 1992, when, as a whiz kid, I ran for mayor of what was, then anyway, the sixth largest city in America — San Diego. Like Obama, I was a gifted orator who could stir a crowd. Like Obama, I had a Harvard pedigree and was full of new ideas. Like Obama, I also had a horde of grassroots supporters who could swarm precincts all over the city.

However, like Obama, I had never run much of anything, especially a major city. Like Obama, I was more prone to mistakes than most seasoned politicians. Like Obama, some of my positions were simply too liberal for the mainstream. Nor had I been fully “vetted” politically, which is to say there were yet some skeletons in my closet.

My own election result was what the writer John Barth might have described as a “paradigm of assumed inevitability.” As the white knight running against a gaggle of shopworn politicians, I decisively won the primary election and emerged as toast of the town. However, by general election day in November, I was toast.

What did me in is precisely what will do Obama in: Youth and inexperience flying headlong into the Republican meat grinder and spin machine. As a result of the mountain of mud thrown at me, almost half the city hated me by November while even some of my own staunchest supporters were disillusioned. I not only lost the race (albeit by a few percentage points). My once promising political career was effectively over — all because I reached too high too soon.

These same perils await young Barack and are precisely why a “unity ticket” offers the best long-term path for his political career. As the VP candidate, much of what the Republicans can throw at him, particularly on the experience issue, simply goes away, while his running mate Clinton has taken every possible hit they’ve ever thrown at her and remains standing tall.

Equally important for the strategic calculus, [FOR FULL ARTICLE CLICK HERE OR CUT AND PASTE http://www.projo.com/opinion/contributors/content/CT_navarro8_04-08-08_GE9BDVR_v22.39d82fc.html

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

60 Minutes Alert: Please tune it to 60 Minutes this Sunday for a very interesting segment on sovereign wealth funds.  If you miss the April 6^th show, you can catch it on the web by clicking here.

This Week:  Don’t Fight the Tape

The tape is telling us that the major U.S. market indices are now in a clear technical rally.  It is not exactly clear as to why this is happening, but both the DOW and QQQQ are technical-indicator longs while SPY is moving close to the long side.  (A technical bounce for the dollar is perhaps helping.)

This is the kind of technical rally you should feel free to trade IF your horizon is relatively short.  However, the emerging fundamental situation seems just too bearish for there to be a sustained upward trend.  Consider that:

1. The U.S. economy continues to slow and the situation of consumers continues to deteriorate
2. The Japanese economy has begun yet another retreat
3. Inflation is a significant problem in the eurozone that is constraining the ECB from cutting interest rates as economic woes mount.
4. Global cost-push inflation in the form of fuel and food price shocks continue to take their toll both economically and in terms of increased political instability.
5. Everywhere I go, Main Street cabbies, restauranteurs, merchants, et.al. are all telling me about how slow things are.  Doesn’t matter whether I’m in Newark or Halifax or Chicago or Vancouver or the OC.

On top of this, the presidential race is motivating politicians to embark on large scale bailouts that are going to create a fiscal drag on the U.S. economy, likely for years to come.

QUICK TAKES

1. My ruminations on Clinton-Obama have dramatically increased my hate mail.   To further fan the flames, check out my oped scheduled to run at www.projo.com on Tuesday, April 8.
2. Please send me your ideas on how to play the higher food prices in the market.   Any good restaurant stocks ripe for a short?
3. The latest Congressional bill for a real estate bailout includes billions for the developers in tax breaks for losses taken.  This is the height of both stupidity and corruption in Congress.  No wonder we can’t balance a budget.

Sell the Rallies, Short the (Industrial) Metals

The U.S. market is in a clear downward trend.  Relief rallies occur as Bernanke runs the printing press.  However, there is an “unvirtuous encirclement” emerging to strangle any hope for a renewed upward cyclical trend.  From a macro view, here are the kinds of disparate events that I find so troubling:

1. Wheat is soaring and rice rises 30% in a single day as major exporting countries slap on export restrictions to avert rising prices at home.  Food riots erupt in Burkina Faso, Cameroon, Egypt, Morocco and Senegal.  Thai farmers are sleeping in their fields to avoid theft.  Stagflation and geopolitics a deadly combo.
2. While Germany and France and the Eurozone is generally holding up, some countries in the zone like Spain are being taken down by their housing bubble and budget deficits.  Meanwhile, on the periphery, from Iceland and Turkey to Hungary, Latavia and Romania, inflation is rapidly rising against a backdrop of large budget deficits and budding hyperinflation.  If countries start collapsing economically, that can only spread.
3. Japan’s economy and stock market have fallen back into a huge funk – this despite the burgeoning China trade.  We’re going on 20 years of nothing in the land of the Rising Sun.  There is a lesson to be learned for America….
4. China’s inflation is now spilling over into its export sector and threatens both internal unrest and a hit on their exports and growth.  PLUS, come Olympics time, there is going to be a huge gap internationally in goods shipped as the country shuts down for a month.  Huge contractionary shock.

I see nothing but trouble ahead in the next six to twelve months or more, which means the market has not yet fully discounted all of the problems.  Nor do I see the U.S. political process resolving any of this.  Instead, we will have three candidates competing over how big or small the bailouts are going to be – but all will call for bailouts of some sort.

If the global economy does downshift and decoupling fails, industrial metals will be at the vanguard of commodities that take a hit – even as gold might remain an inflation hedge.  As for oil, it could go either way depending on the fate of the dollar.  As long as the dollar continues its downward trend, oil prices must rise, even in a global slowdown.

QUICK TAKES

1. I watched a video clip of James Altucher pimping a couple of biotech stocks, including SVNT on macro trend grounds – more people getting asthma.  Gotta laugh since the technicals are flashing a straight short on the beast.  It would be refreshing if some of these stock pickers woke up to the idea of picking stocks on fundamentals is fine but only if you properly time the entry using technical analysis.  On that ground, SVNT ain’t no buy now.
2. Whether you are for Hillary or Barack, you can’t condone Obama’s legal ploy to disenfranchise the voters of Florida and Michigan.   That ploy is just as corrosive as the Supreme Court’s rigging of the popular vote in Florida in 2000 in favor of W. 
3. California is officially now in play for McCain – remember the Golden State’s last two governors were Republicans.  (I’m not counting Gray Davis – He belonged to the Show Me the Money Party).
4. Hank Paulson is off to China once again for another summit.  Tibet and China’s currency manipulation are said to be on his agenda.   Waiting for Godot will be shown in Mandarin for his pleasure in the Forbidden City’s Hall of Supreme Harmony.

This article appears in the Sunday, March 23, 2008 edition of the San Francisco Chronicle

Fed should focus on economy's bygone assets

Peter Navarro                      

   "First, do no harm." Federal Reserve Chairman Ben Bernanke should take this physicians' advice to heart. So far, everything he has done only drives us deeper into recession while making the dollar weaker, the stock market lower and oil prices higher.

   Why is our current economic crisis so hard to resolve? This question can only be addressed by first understanding the nature of the crisis itself and its origins in America's now-burst housing bubble.

   After the Sept. 11 terrorist attacks, a panicky Federal Reserve Chairman Alan Greenspan adopted an ultra-easy money policy, drove mortgage rates to record lows and got the bubble blowing.

   About the same time, China joined the World Trade Organization and used "currency manipulation" to dramatically boost its U.S. exports. In particular, to keep its currency undervalued and therefore its exports artificially cheap, China recycled more than a trillion dollars back into the U.S. bond market. This currency manipulation bid up bond prices, drove down bond yields, and further fueled the growing housing bubble by artificially depressing mortgage rates - all the while laying waste to America's manufacturing base and ability to create jobs.

   Over the next five years, "flippers" entered the market in ever-increasing numbers, often buying multiple houses to turn. Meanwhile, renter family dupes desperate to get into the market often were gulled into signing zero-down, highly risky adjustable rate "subprime mortgages" doomed to foreclosure. Unscrupulous real estate appraisers "helped" by appraising any property as high as necessary for a borrower to qualify.

   As a vital part of the bubble's creative financing, Wall Street began to slice and dice home mortgages into complex "mortgage-backed securities."  Huge financial institutions and hedge funds jumped in to speculate in highly leveraged schemes that allowed them to hold $20 or more of the securities per $1 of collateral. Like a deadly virus, these mortgage-backed securities spread out to infect portfolios all over the

world.

CLICK HERE for full article or paste

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2008/03/23/INJ2VMKU7.DTL

This Week:  Tops to Bottoms

Last week’s historic actions by the Fed – and action on Wall Street – pose questions inquiring minds certainly want to know: Have the dollar and U.S. stock market reached a bottom and have gold, oil, and industrial metals hit a top?

Let’s start with the dollar.  The dollar has been under pressure for two big reasons: a chronic trade deficit and a series of Fed rate cuts which have dramatically increased the spread between U.S. interest rates and many other countries in the rest of the world.  For the dollar to have reached a bottom, one or both of those fundamental factors would have to improve.

Rule out any improvement in the trade deficit large enough to matter for the dollar.  However, the interest rate differential argument may carry some weight, particularly for the fate of the dollar/euro pair.  Indeed, as the European economy stalls, look for the ECB to possibly cut rates.  If the stall is bad, look for a very significant downward lurch of the euro.

Now what about the U.S. stock market?  A stronger dollar would draw funds back into the U.S. stock market and help prop it up.  But any real bullish move would have to come from an economic forecast that showed a shallow recession and relative quick rebound.  After all, stock prices are simply a reflection of the expectations of a future stream of earnings and only will rise if expectations improve.

Right now, there are some few voices insisting things aren’t as bad as they appear – the UCLA forecast for one which says there ain’t no recession.  However, ECRI just called a recession and sees a dim outlook ahead.  So it’s anyone’s guess, but a key ingredient will be whether the housing market finds its own bottom soon and whether the credit contagion has now been contained by Helicopter Ben’s money drop and bailout.

So how about gold?  It’s strictly an inflation and dollar hedge.  If the dollar stabilizes and the recession deepens, you damn well better be short gold.

The fate of oil more broadly hinges on the decoupling scenario we’ve talked at length about in earlier newsletters.  Oil will hit its top if and when the Chinese economy begins to show signs of significantly lower growth.  Ditto for industrial metals.  In other words, if decoupling fails, shorting oil and metals is a lot better side of the trade – the broader secular bull market in these commodities notwithstanding.

QUICK TAKES

1. Nobody cares if Bill Richardson endorses Obama.  And he should have been a lot more loyal to the hands that fed his political ambitions.
2. The failure of Michigan and Florida to resolve the Democratic delegate issue augurs a very messy convention.
3. China is totally blowing it with its handling of Tibet.  Trying to spin the Dalai Lama as Che Guevara is just plain stupid.
4. Hank Paulson is the most short-sighted tall guy I’ve ever seen.
5. Where’s Paul Volcker when we really need him?