Notes From Underground:Just A Few Quick Hitters After Last Night’s Deluge

Today was a very slow news day and thus little news to slow the steady rise of equities and the sell off in other asset classes. There was a story in the Financial Times about the Brazilian government cutting the tax on ethanol producers. The government is going to cut the tax on sugar-based ethanol producers by 80%–from 120 REALS per cubic meter to 25 REALS. It is an effort “… to support ethanol producers, many of whom are facing bankruptcy because of heavy debts and DIFFICULTIES COMPETING WITH SUBSIDISED PETROL PRICES IN BRAZIL.” There has been a global sugar surplus, which has kept pressure on sugar prices, but this move may help lift sugar prices and allow Brazilian growers to grab some of the agricultural profits that have supported the Brazilian economy. The U.S. economy is a corn-based ethanol producer and this has helped put upward pressure on global grain prices which has benefited Brazil’s farmers.

It is time to watch sugar, which has been a dormant market for the quite awhile. An increase in sugar-based ethanol production will help relieve some of the demand on global grain markets. Let’s watch to see if there is any movement on sugar. Brazilian ethanol producers claim that the biggest obstacle to higher ethanol prices is the government program of capping petrol prices resulting in the flex-fuel cars choosing gas rather than ethanol. The cut in taxes on ethanol production may be able to make Brazilian producers more competitive in global biofuels market.

***A story out of Japan today could have huge market significance. BLOOMBERG NEWS ran a piece, “Kuroda Says Bank of Japan Will Consider Buying Derivatives.” If the BOJ were to begin buying derivatives it could have an explosive impact on prices. IMAGINE a central bank with a printing press and the ability to buy bonds on the future markets and employing massive amounts of leverage. Presently, the BOJ buys bonds with maturities of up to three years. This is as of now an UNDEFINED program and may well be talk and jawboning, but if central banks invoked that power it COULD render the entire market based debt pricing mechanism totally irrelevant.

If DEBT market participants–being either hedgers or speculators–lose the ability to price their risk because of CENTRAL BANK MANIPULATION, the effects on alternative instruments will be dramatic. The need to create the vast amounts of liquidity to distort the markets will lead to massive purchases of  other currencies, equities and force a return to precious metals. The G-20 meeting ended with an agreement that central banks would not sell their currencies to purchase other nations debt and only do Quantitative Easing to boost their domestic economy. Today’s statement by Kuroda throws that into question.

***More bullish news from Mexico. It seems that President Enrique Nieto is adhering to his campaign promises and in swift fashion moving to end certain monopolies that result in Mexican consumers paying higher prices for many services. Carlos Slim, the world’s richest man has made his fortune by using the monopolistic pricing power to gouge consumers using Television and Telephones. Senor Nieto is building his power base by trying to lessen the burden on Mexican technology users. Carlos Slim has been well rewarded for his investments–time to end the age of the robber barons and bring the Mexican economy and society into the 21st century.

***Last: I am putting in a Bloomberg chart of the present U.S. 2/10 yield curve just to provide a graphic. The curve is steepening and thus could be a powerful driver of U.S. financial assets. On last night’s BLOG, Richard Papp posted a very good idea about how to measure the steepening curves impact. Choose whatever financial or banking ETF to measure the curves impact–if you have the charting ability do an overlay to visualize the impact.

U.S. 2/10 Yield Curve

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5 Responses to “Notes From Underground:Just A Few Quick Hitters After Last Night’s Deluge”

  1. Joe Says:

    “IMAGINE a central bank with a printing press and the ability to buy bonds on the future markets and employing massive amounts of leverage.” Wouldn’t take too much imagination at all.

  2. Ronald Ferrill Says:

    Good on for Brazil – lower taxes gotta be good.

    Yikes! on BOJ.. what the heck are they thinking/over-thinking? Am I missing something or could that exacerbate the whole currency “war” thing, and manipulate equity prices out of reasonable valuation range, and probably impact global warming (oops! climate change – sorry about that PC Cops)?

    Having spent a great deal of time dealing in and with Mexico for many years, I am skeptical. Guess a small bet there can’t hurt – much

    I am not certain what to make of the 2/10 spread. Either I’m too dumb or too over-data’d. I’ve kinda been looking at the 2/20 and thinking about what to do when that spread hits an upward parabolic inflection. Not a “trader” and not really competent to trade in interest rate securities/derivatives. So, taking some profits on some long term gains and paring back on losers that have gotten a pop the last 4-5 months. Back into cash – wait for opportunities, and hoping I’m not as early as I was in 1996-7 when I went all into cash due to my own view of the “irrational exuberance”.

  3. yra harris Says:

    Ronald–yes the BOJ is doing a great deal of talking and let us hope they have not lost their minds with Kuroda on the idea of buying derivatives–the impact could be so huge and it will bring the currency war into full view–or whatever we wish to the active effort to depreciate your currency.Mexico has broken mnay hearts and I am always cautious but there is no doubt that NIETO has done more in 2 months then the previous Presidents have ever done–and confronting Carlos Slim and his monopolies is as important as allowing foreign investment into the energy sector.The 2/10 is just an effort to show how important steepeners and flatteners are to the investment horizon—go and look how the curve inverted jsut before the onset of the credit crisis.The steepening curve will reflect that the FED will stay loose for far longer then economics justify—and the banks will again be rewarded

  4. Rob Syp Says:

    How bout the Sugar story with the new round of subsidies from the government and thanks for posting the 10 2 treasury spread chart with suggesting to look at with the XLF.

    Cheers

  5. yra harris Says:

    Rob–the sugar story is amazing,but nothing new as the sugar lobby ties to the cuban vote in florida.Dennid Gartman has covered that for the last 20 years.Hey,how about ethanol produced from sugar–oh yes the corn growers would go crazy but cattle and hog farmers may be happy—the more lobbying the more nonsense

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