Augustus Greenspan.

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Lyrics: Willy Wonka and the Chocolate Factory Soundtrack

Various Quotes from Links Above:

Flattening oil curve signals long-term strength

Speculators and consumers have been steadily buying up long-dated crude oil futures since mid-2003, pushing them to record highs.

Over-the-counter energy market traders say the same. "The entire flattening of the curve shows a belief that long term oil prices will be high," said one dealer.

Open interest in December 2010 sits at 21.4 million barrels, using the most recently available data, more than triple the 6.8 million seen for the December 2008 contract at this time in 2003, when that future had the same time to run before delivery.

This has flattened off the forward curve for crude futures.

Analysing the current curve is made more complicated by the presence of a heavy contango in the first six months -- a discount for prompt futures driven by plentiful supply of physical crude in the U.S. Gulf.

But looking past this at the December 2005-December 2006 spread shows that this part of the curve has flattened dramatically in the past 12 weeks.

The Greenspan Conundrum

Lacy Hunt, of Hoisington Management, tells me that the Leading Economic Indicators from ECRI are now down year-over-year. This has happened 10 times in the modern era, and we have had seven recessions and two serious slowdowns following those events. (The other was during the Iraqi War and we had massive stimulation after a recession. No such future stimulation is possible.) Further the OECD's world leading economic index is down from projecting 7% growth to only 0.1%, a rather dramatic drop. It will probably go negative when we get the data in April.

Strategists perplexed as 10-year yield falls

"Most of us are scratching our heads wondering why the yield is down here around 4%," says John Caldwell, chief investment strategist at McDonald Financial Group.

Normally, when the economy is growing and the Fed is in tightening mode, long-term rates rise.

But "Something else is driving (long-term) rates other than economic data points," says Bill Dawson, vice chairman of fixed income at Federated Investors.

Robert Gahagan, director of taxable bond investments at American Century Investments, offers another selling point for bonds: They are up for the year, while the major U.S. stock indexes are down. "There is safety in Treasuries," he says.

Bond Yields Plunge Amid Falling Rates World-Wide

But economists are baffled by the behavior of long-term rates. "It's a mystery," said Raghuram Rajan, research director of the International Monetary Fund. "You need a combination of relatively low inflation and relatively low expected growth to explain where rates are."

Manufacturing activity was the slowest in two years world-wide in May, J.P. Morgan Chase said yesterday, based on reports from purchasing managers around the world. Fed officials believe the slowdown in the U.S. is a temporary response to high factory inventories. Others blame high energy prices, which are pressuring profit margins. Yesterday, crude-oil prices jumped $2 per barrel.


PS. It's the oil prices.