Bloomberg reports:

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

These are wonderful promises, but we see little substance to back up Geithner’s “targets”.   More concerning was the sell-off in bonds yesterday indicating that foreign central banks may be anticipating a ratings cut in the U.S.A itself and are selling on the rumor.  While concerns over inflation through quantitive-easing have risen over the past weeks, the far greater concern is the threat of a serious bond-market meltdown should Bernanke’s dreams of low interest rates crash against the rocks of inflationary fears  — forcing rates ever higher.

What then of our “green shoots”?   With America’s deficit exploding almost 30% to over $2 trillion in a matter of months, America’s circle of creditors are sure to be casting nervous sideways glances at one another.  Growing international concern that the US may not be a reliable debtor were hightened yesterday, as Britain’s AAA rating was called into question by Standard & Poors, who lowered the nation’s outlook to “negative”.  (It does not take a particularly keen observer to note that the USA may be next in line.)

Also concerning is the “rot within”, as municipal defaults around the USA threaten to place an impossible burden on the shoulders of the Federal government.  One must concede that the concept of “too big to fail” has not yet been truly considered until one grapples with the issue of defaulting state and local governments.    There exists no framework, or precedence for these massive stormclouds forming on the US horizon.  Policy makers everywhere are deeply troubled with the prospective issue of whether the federal government should run to the rescue of state and local budgetary fiascos:  Fiascos brought about by irresponsibility, fraud and the very same ingredients that made up the subprime scandal itself.   To take on these burdens at the federal level would seriously call into question the financial health of the USA itself, and yet allowing local governments collapse under their own financial burdens will have deep and extraordinarily painful repurcussions.

Bloomberg reports:

Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.

Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” he said.

No, Mr. Geithner, they are not.  But while Treasury is correct in not extending TARP support at this time — Geithner’s promise to “work with Congress” hardly sounds like restraint.  The US is sailing swiftly into a scenario which will demand significantly higher interest rates.  While we are fuly cognisant of the pain and hardship that accompany a laissez-faire response to corporate and municipal financial failures — such pain is deeply preferable to the broad systemic collapse that will follow if the federal government tries to backstop our entire bathtub of bursting bubbles.

Brazil’s central bank announced today that transactions between China and the South American nation will increasingly use their own currencies rather than use the US dollar.   Rumors of a Chinese/Brazilian move to break away from USD hegemony first surfaced at the G20 meeting in London last month.  This week, with Brazil’s president Luiz Inaςiao Lula Da Silva involved in high level economic talks in Beijing,  it seems the rumors are swiftly turning into actual policy initiatives.

SKY reports:

The move is significant for two reasons: not only is it a direct challenge to the dollar as the world’s transaction currency of choice but it is coming from two countries with some of the world’s largest foreign-exchange reserves—most of which are held in (yes, you’ve guessed it) dollars.

…

It’s not the first time we’ve heard such posturing. A year ago China – the world’s largest consumer of U.S. government debt – warned it could move those assets into better performing currencies like the euro and as recently as March, the country’s central bank governor pondered replacing those dollar holdings with a standard reserve such as the one used by the IMF. Such words have in the past seemed idle threats but with the prospects of countries like Brazil, Russia, India and China (the so called ‘BRICS’) outpacing shrinking markets in West, a currency agreement between such emerging market titans could challenge the monetary status quo.

We’re still extremely curious as to the specifics of this somewhat “apples and oranges” agreement between the two currencies.  Brazil’s currency floats like any other major currency on world FX markets, while the Chinese renminbi is carefully managed by Beijing at just under 7 per dollar.   It is also interesting that the arrangement is not exclusive and still allows either nation to use USD as a matter of choice — a flexibility which doesn’t exactly ring of confidence in either one of the competing currencies.

The Financial Times reports:

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.

“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”

An aide to Mr Lula da Silva on his visit to Beijing said the political will to enact a similar deal with China was clearly present. “Something that would have been unthinkable 10 years ago is a real possibility today,” he said. “Strong currencies like the real and the renminbi are perfectly capable of being used as trade currencies, as is the case between Brazil and Argentina.”

While many economists scoff at the relative strength of both the Renminbi and the Real — and point out that a real shift away from USD hegemony would take decades to occur, we must point out the following 3 facts which are inescapably true:

1. The United States has a massive debt which is growing larger.
2. The trade deficit in the United States continues unabated.
3. The Federal Reserve has shown that it is willing to “print” dollars as a response to liquidity issues within the US banking system.

We continue to watch with concern as the Federal Reserve continues to throw money at the weakest parts of the US economy, tarnishing the dollar and preserving those parts of our economy which should be allowed to fail.  If Ben Bernanke believes that such actions won’t ultimately destroy the privileged role of the US dollar — he is seriously mistaken.

In a televised speech by Thomas Woods,  author of the New York Times bestseller “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse“, had some gems of concise insight that we thought we’d echo here:

“The recession is just the economy trying to re-adjust after all the mal-investment and misdirected resources caused by the Fed in the first place.”

“When you’re the “Soviet commisar” in charge of money and interest rates, when you’re Alan Greenspan, you can create money out of thin air and now the banks have a ton to lend and can keep the illusion going.  But it’s an illusion all the same.”

“This is not just a matter of “We need a little more regulation”.  That is the most irresponsible, intellectual laziness imaginable.  …  If the institutional structure gives rise to this [boom bust cycle], ecourages excessive risks by making credit artificially cheap — you can have all the regulation you want …

…  It is the institutions that are giving rise to this.  It is the money itself.”

And our favorite summary of where things are today:

“What we have here is a slow-motion train wreck as we watch Washington and the Fed trying to put everything back together.  … Who is being held up to us as the people we should listen to?  First let’s talk about Ben Bernanke…  Why be awed by a man whose investigators examined the mortgage market a couple years ago and found that it was healthy as ever?  Why should we listen to a guy who said the housing bust will be over by December 2008?   Why should we have listened to Hank Paulson, who told us in 2007, the world economy was in the ‘best shape’ he had ever seen it?   These are the people we are supposed to care about?  Seriously, you should want to do the exact opposite of what these people recommend.”

“Instead of listening to [Bernanke, Paulson, et al], who have been wrong for years, who have given us the wrong advice, who have contributed to the largest asset bubble in the history of mankind… Instead of listening to them, let’s listen to the people who saw it coming.  … Why don’t we listen to them?  Their phones are not exactly ringing off the hook from the Obama administration.  The Obama administration seems to be of the opinon that the bigger blockhead you were, the more surpised you were by the crisis, the less sensible advice you have — well, the more we want to hear you.   But if you saw this coming?  Forget about it.”

The complete speech (via C-Span) is available here, and is well worth listening to:

http://www.booktv.org/watch.aspx?ProgramId=PC-10285

The first quarter of 2009 saw the worst performance in the history of the 16-nation Eurozone since its establishment in 1999.   The 27 nation E.U. also marked the worst performance in its history as GDP shrank by 2.5%.  This annualized loss of 10% to Eurozone GDP is far worse than the worst case expectations of many economists.

Germany, the heavyweight of Eurozone economies, hit the mat even harder with a 3.8% plunge in the first three months of 2009.    (An annualized loss of 15.2%)

Even more alarming were the 1Q’08/1Q’09 performances of  Estonia (-15.6%), Latvia (-18.6%) and Lithuania (-10.9%).   What is notable about the Eurozone figures overall is that the Eurozone is getting far more bruised by the global financial crisis than either the US or the UK.

The credit collapse of both the US and the UK has led to an export collapse in the Eurozone manufacturing economies.  Even though Europe’s exporters managed to avoid the levels of credit bubble insanity experienced by their neighbors to the West, Europe’s export economies are the ones being hit the hardest by the crisis.

As it stands now, these frightening plunges in GDP have not yet resulted in widespread job-losses across the Eurozone, but in our estimation this quiet cannot last.  We foresee job-losses ramping up quickly towards the end of this year as Europe’s manufacturers see continued quarters of tepid demand for exports. There is no easy fix for the Eurozone’s economic problems, and macroeconomic problems are likely to be felt on a far more personal level across the Eurozone soon.

It’s a rare thing when insiders speak their minds publicly against the powers-that-be.   Today in a global investment conference held in Qatar,  an insider accused the entire US bank bailout of being a “sham”, and said it publicly at a global conference of his peers.   Meet Mark Patterson, chairman of MattlinPatterson advisers, a firm which utilized the TARP program’s ‘matching funds’ to buy Flagstar Bancorp in Michigan.   Patterson certainly didn’t pull any punches in blasting US Treasury Secretary, Tim Geithner’s bailout as being a deeply flawed plan which will not only ultimately fail, but is enriching Wall Street insiders in the process.

The Telegraph UK reports:

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

Well said indeed, Mr. Patterson.  We’d love to hear Mr. Geithner respond, but he’s off skipping through fields of green shoots, and worse yet, seems blissfully unaware that the US taxpayer is bearing most of the cost while seeing precious little of the upside.  Perhaps when the last $100 billion of TARP funds has been magically transferred into private coffers, Mr. Geithner will make the hard choices we’re hoping for.

More from the Telegraph UK:

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

We couldn’t agree more with Mr. Patterson, and he has our sympathies for exercising good judgment, but bad luck in choosing to short this rally from the start.    As our colleague Tyler Durden at Zero Hedge once said, “Anyone with any common sense is losing money in this market”.   Our only hope is that more insiders speak up like Mark Patterson did before the situation gets any worse than it already is.

We continue to watch with concern as Ireland’s economic condition worsens.  The country is undergoing a painful economic deflation as liquidity evaporates and their monstrous housing bubble collapses.  A report released last Thursday showed retail prices dropping 3.5% in April as consumer spending waned.  The current deflation in Ireland is the worst the country has seen since the 1930’s.

The AP reports:

“Consumer Prices in April, as measured by the Consumer Prices Index, decreased by 0.8 percent in the month. This compares to an increase of 0.1 percent recorded in April of last year,” the CSO said in a statement.

“As a result, prices on average, as measured by the CPI, were 3.5 percent lower in April compared with April 2008.”

In January, a 0.1-percent 12-month decline was the first time the country had experienced falling prices since the early 1960s. The annual rate of inflation stood at minus 1.7 percent in February and minus 2.6 percent in March.

To date the Irish government has embarked on a massive program of borrowing in an effort to stabilize the downward plunge.    The government has increased social spending a whopping 63% since 2003.   Now the devastated economy is decimating tax receipts leaving the government with an 11% budget deficit — making Ireland the weakest economy in western Europe.

Barron’s reports:

The risk is that Ireland will lose control of its destiny. Some believe that if the government doesn’t soon begin to cut costs, it may not be able to borrow enough to meet its needs and then will have to be rescued by its European neighbors. This could destroy Ireland’s allure for foreign investors such as Intel, HP, Microsoft , and Pfizer that helped make it a shooting star for almost two decades.

“An international bailout will wreck our competitiveness,” says the blue-jean-clad O’Leary, sipping vending machine espresso bought with a euro bummed from a flight attendant. “For a company the only reliable way to restore profits is to lower costs. The government needs to get off its backside and radically cut spending.”

As its troubles mount, Ireland also stands in danger of losing a rare gift: its image as a beacon for talent – and as the EU’s leading land of opportunity. Chefs from France, construction workers from Poland, and accountants from the Czech Republic are heading home. In 2007, 67,000 more people arrived than departed. This year 30,000 more workers are expected to leave than arrive, reversing 14 years of strong immigration and raising fears that the curse of the ’70s and ’80s – the steady exodus of the best workers – is again exerting its grip.

We see Ireland’s mandate quite simply at this point:   The country must reduce it’s private labor costs, and steer clear of raising taxes as its government deficit soars.  Crucial to the latter, and to maintaining Ireland’s low tax environment will be a lowering of wages for public-sector workers as well.  Fortunately, the nation isn’t bound by the same labor and union regulations as its neighbors on the continent — a flexibility which should in theory allow Ireland to reduce labor costs with greater ease than many other nations in the Eurozone.   While the cure for Ireland’s ills may be simple to describe, the treatment itself promises to be painful both socially and politically.

Unemployment claims continue to drive ever higher in the United States, hitting the 15th straight week of records for the week ending May 9.   Last week’s new jobless claims came in at an alarming 637,000 according to the US Department of Labor — bringing the continuing claims total to 6.56 Million. (Continuing claims data lags new jobless claims data by one week).   The unemployment rate reached 8.9% in April and judging from the new claims, is apparently continuing to rise.

The Department of Labor reports:

UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT

SEASONALLY ADJUSTED DATA

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 637,000, an increase of 32,000 from the previous week’s revised figure of 605,000. The 4-week moving average was 630,500, an increase of 6,000 from the previous week’s revised average of 624,500.

The advance seasonally adjusted insured unemployment rate was 4.9 percent for the week ending May 2, an increase of 0.1 percentage point from the prior week’s unrevised rate of 4.8 percent.

The advance number for seasonally adjusted insured unemployment during the week ending May 2 was 6,560,000, an increase of 202,000 from the preceding week’s revised level of 6,358,000. The 4-week moving average was 6,337,250, an increase of 128,750 from the preceding week’s revised average of 6,208,500.

The fiscal year-to-date average for seasonally adjusted insured unemployment for all programs is 5.011 million.

UNEMPLOYMENT INSURANCE DATA FOR REGULAR STATE PROGRAMS

---

	Advance				Prior1
WEEK ENDING	May 9	May 2	Change	April 25	Year

---

Initial Claims (SA)	637,000	605,000	+32,000	635,000	375,000
Initial Claims (NSA)	565,395	537,539	+27,856	580,377	325,480
4-Wk Moving Average (SA)	630,500	624,500	+6,000	638,250	369,500

	Advance				Prior1
WEEK ENDING	May 2	April 25	Change	April 18	Year

---

Ins. Unemployment (SA)	6,560,000	6,358,000	+202,000	6,293,000	3,063,000
Ins. Unemployment (NSA)	6,166,785	6,262,622	-95,837	6,299,278	2,845,952
4-Wk Moving Average (SA)	6,337,250	6,208,500	+128,750	6,081,500	3,006,750

While most of the increase in claims is due to auto-worker layoffs,  (Chrysler laid off an estimated 27,000 workers after declaring bankruptcy on April 30th. )  we should expect an additional bout of layoffs next month when General Motors slashes jobs.

Even with such dismal employment figures, the mainstream media is awash with reports of “improvement”.  Again, we’re forced to point out that a slowing rate of decline is a far cry from actual improvement.  As we’ve noted before, pointing to the second derivative as a sign of “improvement” is akin to watching a parachutist open his chute — and as his descent begins to slow, concluding that he is about to start gaining altitude.

The latest round of economic indicators of can’t be reassuring to market bulls.  Significant improvements in housing affordability and mortgage rates below 5 percent are not yet helping home prices in the face of continuing foreclosures and job losses.  Retail sales data from the US Dept. of Commerce also disappointed.  Not only were April numbers down by .4%, but March numbers were also revised lower to -1.3% from a previous estimate of -1.1%

Bloomberg reports on the latest housing market data:

May 12 (Bloomberg) — Home prices in the U.S. dropped the most on record in the first quarter from a year earlier, led by California and Florida, as banks sold foreclosed properties.

The median price fell 14 percent to $169,000, the National Association of Realtors said today. Prices dropped in 134 of 152 metropolitan areas, with the deepest declines in Cape Coral and Ft. Myers, Florida, followed by San Francisco and San Jose.

Distressed sales increased transactions in 17 states from the fourth quarter as speculators and first-time buyers purchased bank-owned properties. Such homes typically sold for 20 percent less than others, the NAR said today. The inventory of previously owned homes on the market dropped to 3.7 million in March from 3.8 million a month earlier, according to NAR data. The number of new homes for sale fell to 311,000, the lowest since January 2002, according to the Commerce Department.

“There are a lot of forces pushing the market in different directions,” said Brian Bethune, economist at IHS Global Insight in Lexington, Massachusetts. “We’ve seen huge improvements in affordability, not only in prices but also in terms of mortgage rates below 5 percent, but what’s pushing down those prices is foreclosures and job losses.”

Total existing home sales fell 6.8 percent from a year earlier to a seasonally adjusted annual rate of 4.59 million units, the NAR said today. Sales were down 3.2 percent from the fourth quarter. The figures include single-family homes, condominiums and co-ops.

‘Bifurcated Market’

“We are very much in a bifurcated market with sharp differences between foreclosures and short sales on one hand, and traditional homes on the other,” Lawrence Yun, the NAR’s chief economist, said in a statement.

Some areas showed “dramatic” drops in home prices, Yun said.

“In areas with the biggest price declines, we also see much higher levels of distressed sales which are distorting the data,” he said.

The steepest price decline was in Cape Coral-Fort Myers, down 59 percent from a year ago, followed by Saginaw, Michigan, with a 54 percent drop. The next biggest decreases were Akron, Ohio, with a 48 percent decline; San Francisco, down 43 percent; and San Jose, California, with a 42 percent drop.

The largest sales gain from a year ago was in Nevada, up 117 percent; followed by California which rose 81 percent; Arizona up 50 percent; and Florida with a 25 percent increase.

Those four states accounted for the 26 highest foreclosure rates in the first quarter among U.S. cities with a population of 200,000 or more, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data.

Slowing Declines

While the quarterly drop in prices set a record, the declines slowed in each of the three months. The U.S. median home price dropped 12 percent in March compared with a year earlier, according to NAR. That was slower than the 14 percent decline in February and the 18 percent slide in January.

“I do think we have some early signs that the market overall is stabilizing,” Housing and Urban Development Secretary Shaun Donovan said today in a speech at an NAR conference in Washington. “Since January we’ve seen both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate.”

Bank-Owned Homes

Donovan said the government will allow first-time homebuyers to use the $8,000 tax credit approved by Congress in February as a down payment on mortgages guaranteed by the Federal Housing Administration. To qualify for the credit, purchases must be completed before Dec. 1.

U.S. banks held $26.6 billion of repossessed real estate at the end of 2008, more than double than a year earlier, according to the Federal Deposit Insurance Corp. in Washington. The banking industry lost $26.2 billion in the fourth quarter, the largest loss in FDIC records.

The average U.S. rate for a 30-year fixed mortgage was 4.84 percent last week, down from 6.05 percent a year earlier, according to mortgage buyer Freddie Mac. The rate fell to a record low of 4.78 percent last month.

On an annual basis, the fixed rate will probably average 5 percent this year and 5.3 percent in 2010, according to a forecast posted on NAR’s Web site. Last year, the rate was 6.1 percent.

Sales of existing homes likely will reach 4.97 million in 2009, up from 4.91 million last year, according to the Realtors’ forecast.

This article via the NYT shows retail sales dropped more than analyst expectations in April:

By THE ASSOCIATED PRESS

Published: May 13, 2009

Wall Street is down sharply in early trading after the government reported weaker-than-expected retail sales in April.

The market has put on hold a two-month rally amid concern that an economic recovery won’t be as fast as once hoped. The disappointing retail sales report has added to the week’s drop.

The Commerce Department said retail sales fell 0.4 percent in April. Economists had forecast sales would be flat for the month.

March sales figures were revised lower as well, to a decline of 1.3 percent from a previous estimate of a decline of 1.1 percent.

In the opening minutes, the Dow Jones industrial average is down 154 points or 1.8 percent. The Standard & Poor’s 500 index is down 1.8 percent, while the Nasdaq composite index is down 1.4 percnet.

In Europe, the FTSE 100 index in London was down 1.4 percent and Germany’s DAX fell 2 percent. The CAC-40 in France was 1.4 percent.

Europe’s main markets had opened higher in the wake of solid gains earlier in Asia and a late rally on Wall Street on Tuesday, which helped the Dow Jones industrial average end 50 points higher at 8,469.11.

The markets had expected retail sales to drop a modest 0.1 percent in April from the previous month, compared with the big 1.2 percent decline reported in March. Excluding auto sales, retail sales are expected to be flat.

Investors are looking to see if the retail sales news will help provide some direction after relatively flat trading through the early part of the week.

The main talking point in the markets though is whether the two-month rally seen in stocks around the world represents a bear market rally or whether it is something more.

Advocates of the bear market hypothesis point to historical precedents, such as false dawns in the stock markets during the Great Depression of the 1930s. While acknowledging some improved economic signals around the world, they think the optimism has been overdone — especially as banks could still encounter more problems.

Those arguing that the recent hefty stock market gains represent a turning point in the global economic crisis reckon that the forward-looking indicators have pointed to a resumption of growth possibly by the end of this year — stock markets usually start rallying between 6-9 months before an actual economic recovery emerges.

“We have greater sympathy with the bear market line of attack, but while we are dubious about the ability of this bull market in equities to continue we also do not believe that we are likely to see a rerun of that 1930s dramatic leg lower.” an analyst at Calyon Credit Agricole, Daragh Maher, said. “Our hesitancy simply reflects the fact that the optimism has swung so far so quickly,” Mr. Maher added.

Stocks have rallied strongly over the last few weeks — with some major indexes now in positive territory for the year — prompting some investors to claim the markets are over the worst. Many markets ended last week more than 5 percent higher.

The trigger for the gains has been better than expected economic news, particularly in the United States, the world’s largest economy. Mounting hopes that the global economy may recover before the year’s end has fueled an increased appetite for risk. Stock markets usually start recovering between 6-9 months before an actual economic recovery emerges.

Markets have also been buoyed by indications that the banks are now in much better health to deal with any potential losses associated with the recession after raising significant amounts of cash.

Earlier, in Asia, Japan’s Nikkei 225 stock average rose 41.88 points, or 0.5 percent, to 9,340.49, while Hong Kong’s Hang Seng dipped 94.02, or 0.6 percent, to 17059.62.

In the oil markets, an unexpected drop in American crude inventories propelled oil prices to near $60 Wednesday on indications that demand may be picking up.

Still, forecasts were less than rosy. OPEC, in its monthly report, said it expected oil demand for next year to grow less than in its previous estimate because of continued clouds over the world economy.

Benchmark crude for June delivery was up 87 cents to $59.72 a barrel in electronic trading on the New York Mercantile Exchange. On Tuesday, the contract rose to a six-month high of $60.08 a barrel before settling at $58.85, up 35 cents.

The American Petroleum Institute said oil stocks fell 3.13 million barrels to 370.7 million last week. Analysts had expected a gain of 1.4 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Companies.

Oil prices rose briefly back above $60 today on news that China’s demand for oil rose 14% in April and is now approaching record volumes of imports.   At the same time, car sales in China hit a historic record last month as a result of China’s aggressive economic stimulus measures.  What is even more telling is that China has embarked on a buying spree for commodities, driving up prices for a variety of raw materials.

While China’s national news service attributes the increased demand for commodities as a direct result of growth, what this says to us is that China is becoming increasingly nervous about the buying power of its enormous stockpile of US Treasuries, and is seeking to rapidly exchange them for a basket of  alternative value-preserving assets.

Bloomberg reports:

Deliveries reached 16.17 million metric tons last month, or 3.9 million barrels a day, a statement on the Chinese customs department’s Web site showed today. Oil also climbed as the dollar fell to the lowest level against the euro since March, bolstering demand for commodities as an alternative investment.

The rising price of oil comes at a time when U.S. demand for oil has fallen to it’s lowest level in ten years.  There is rising concern among economists that the higher price of oil might reduce the chances of economic recovery.

The Wall Street Journal reports:

Oil’s rapid return to $60 has sparked concern that rising prices could slow an economic recovery. Noting that a $10 a barrel rise in oil prices translates into a $5.5 billion monthly hit to U.S. consumers and industry, J. P. Morgan analysts recently said that “in the current fragile economic state, [rising oil prices] may be an unnecessary shock.”

While the concern of higher oil prices is indeed valid — as high oil prices reduce the capacity for business, and the level of disposable consumer income — we are still a far cry from last year’s $145 a barrel.   Furthermore, it should be noted that higher prices as a result of stimulus are not sustainable unless the stimulus creates real growth.  At this point, that isn’t something we’re seeing.

Rail freight statistics for the US, Canada and Mexico are showing continued weakness in total volume and across all major commodities  groups and do not point to any economic recovery in the real sector having occurred so far this year.

The Association of American Railroads reported today that US rail traffic in April was down 23% compared to April, 2008.

U.S. rail freight also fell in all 19 major commodity groups tracked by the AAR for April, including coal (down 13.4%); metals and metal products (down 62.1%); motor vehicles and equipment (down 46.7%); and grain (down 28.3%).

Canadian rail carload traffic was down 26.4% year-on-year in April and 22.2% y-o-y for the first four months of 2009.

Canadian carload declines in April 2009 were led by chemicals (down 32.7%); metallic ores (down 32.7%); and coal (down 37.1%).

Combined total volume on US and Canadian railroads is down 19% year to date, compared to the same period last year.

“Unfortunately, it’s hard to find much in rail traffic data in April to support the idea that the economy is starting to see ‘green shoots’ — it may still just be weeds,” said AAR Senior Vice President John T. Gray.