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Who is Blowing Bubbles in the Commodity markets?Gary Dorsch "Too much money, chasing too few commodities," might be the best way to explain the historic rally that is underway in the global commodities markets. Central bankers in eighteen of the top-20 economies in the world have been expanding their money supplies at double digit rates for the past several years, trying to prevent their currencies from rising too quickly against the sickly US dollar. Nowadays, fund managers are pouring billions of dollars into commodities across the board, as a hedge against the explosive growth of the world's money supply, competitive currency devaluations, and the negative interest rates engineered by central banks. To the chagrin of central bankers, much of new money pumped into the global markets, is also going into commodities, instead of the stock market. The remarkable run-up in prices of wheat, corn, soybeans, cocoa, rice, silver, platinum, gold, copper, iron ore, and crude oil, have been blamed on supply shortfalls, strong demand for bio-fuels, and an inflow of $150 billion from investment funds. There are big shifts in demand from the emerging economies, where incomes are rising, and folks are changing dietary patterns. The surging ethanol industry has put a squeeze on the corn market, and bio-diesel demand is fueling soybeans. "I think it is something that the Fed has to watch, but I am not alarmed," said retiring St Louis Fed chief William Poole, in reaction to news that the US consumer price index hit 4.3%, a 17-year high in January. "We can conclude that the current situation is one of substantial stability of inflation expectations. Recent relatively small increases in inflation are apparently due to transitory factors, and not to changes in inflation expectations," Poole declared.  But the charts don't lie, and sophisticated traders are not easily duped by the Fed's smokescreens and brainwashing techniques. The Fed is slashing the federal funds rate at a frenzied pace, to arrest a year long slide in US home prices, which if left unchecked, threatens to topple the US economy into a severe recession. The slide in US home prices accelerated in the fourth quarter of 2007, with prices tumbling 8.9% last year, according to the S&P/Case-Shiller US National Home Price Index. During the 1990-91 housing recession, home prices were limited to a 2.8% drop. The number of US homes facing foreclosure jumped 57% in January from a year ago to 233,000 homes, and a wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default. Nearly 8.8 million US homeowners hold mortgages that are larger than the value of their homes, providing an incentive to abandon houses bought on speculation. In trying to put a floor under the housing and stock markets, the Bernanke Fed has cranked up the growth of the MZM money supply to an explosive 15.4% annual rate, which is also depressing the US dollar and pumping up the commodities markets to astronomical heights. The Fed has unleashed a speculative frenzy in commodities, and traders have lost faith in the central bank's credibility. The Bernanke Fed's aggressive rate cuts have doing more harm than good for the US economy, by leaving the US consumer with slumping home prices on the one hand, and soaring food and energy prices on the other hand, otherwise known as the "Stagflation" trap. According to Bill Gross, chief investment officer at Pimco, the Fed's rate cuts of 2.25% since September have not brought mortgage rates lower, with the Fannie Mae 30-year mortgage rate stuck at 5-3/4 percent. "Here is the startling point, the markets that the Fed is trying to affect haven't changed," he said. Gross thinks the housing downturn is still in its early stages, and expects a 20% decline in total. "A 20% decline in housing prices is confidence destabilizing, its credit imploding," he added. And how long can US Treasury yields stay under the exploding rate of inflation, or negative rates of interest?  Commodities investment guru Jim Rogers said on Feb 25th, "the Fed is printing money and are trying to prevent the recession, they are putting on Band Aids," he told an investor conference in Dublin, Ireland. Rogers added, "as long as the US central bank and the federal government keep making mistakes, you will have a longer period of slowdown, and it will be perhaps, one of the worst recessions we have had in a long time in America," Rodgers predicted. Buoying the commodity markets across the board is the chronically weak US dollar, which has been stripped of its life support, by the Bernanke Fed. After a double barreled rate cut of 1.25% in January, the largest monthly reduction in 25-years, Fed chief Ben "B-52" Bernanke signaled yet another rate cut in March, as an "insurance policy" against an economic recession. Playing down the soaring costs of food and energy, Bernanke told Congress on Feb 15th that "inflation expectations appear to have remained reasonably well anchored." Yet even government apparatchniks said US inflation at the wholesale level soared 1% in January, led by rising food, energy and medicine costs. With the January jump, wholesale prices rose 7.5% over the past 12-months, the fastest increase since 1981, when the country was trapped in "Stagflation."  His right hand man, the ultra
inflationist Frederic Mishkin, defended the Fed's policy
of ignoring food and energy prices, when deciding on the
correct level of interest rates. "Stabilizing core inflation,
which excludes food and energy, leads to better economic outcomes
than stabilizing headline inflation. The shock of energy price
rises is likely to have only a temporary impact on inflation,
because inflation expectations are contained," Mishkin argued
on Feb 25th. "I do not expect the recent elevated inflation rates to persist," Fed vice chairman Donald Kohn told the University of North Carolina on Feb 26th. "In my view, the adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States. Policy-makers must take into account the possibility of very unfavorable developments," he added. "We have the tools. As Chairman Bernanke often emphasizes, we will do what is needed!!" Kohn warned. Those tools include driving the federal funds rate to zero percent, if necessary, pumping the money supply growth to above 20%, or buying long dated Treasury securities with printed money. It could trigger capital flight from the US dollar, and send gold, crude oil, and grains into the stratosphere. "The Fed's credibility on inflation is rock solid," said deputy US Treasury secretary Phillip Swagel on Feb 26th. "Overall, inflationary expectations remain contained," he declared. But in a show of hands, in a packed hall of delegates at the Euromoney Bond Investors Conference in London, listeners overwhelmingly disagreed with Swagel's propaganda and brainwashing. Instead, the audience thought the Bernanke Fed had let the inflation genie out of the bottle. To read the rest of this article, click on the hyperlink below: http://www.sirchartsalot.com/article.php?id=79 Gary Dorsch 321gold Ltd |
