16 January 2011

Are We In A Commodities Bubble?


Are commodity prices already overdone? Like everything else, it depends. Each commodity has its own story -- amply demonstrated by the chart above. _Minyanville

Read the rest of the article linked above to get a better idea of what you may have to do to free yourself from the false euphoria that comes from breathing too much commodity laughing gas.
The author recommends a "bottom-up" approach. Look at the news and fundamentals for each commodity, using all of the information resources available. Then do your own calculations as to whether current or futures prices are inflated or undervalued.

An alternative approach is to take a "top-down" viewpoint. What are the realities and trends of the overall markets, which tend to drive demand for commodities?

Take the US: The stock market has been doing better, and recent retail sales seem to have rebounded somewhat from earlier in the current and ongoing downturn. The nominal "unemployment rate" has been relatively stable for years, albeit at a higher-than-comfortable level of unemployment. The nominal "inflation rate" has stayed relatively low, and interest rates should be encouraging more economic expansion.

But the US housing market continues to sink ever lower, with sky-high foreclosures continuing. Homes are traditional stores of value in the US, as well as one of many leading economic indicators. And "real employment" is actually getting worse, as more and more people drop out of the job market in discouragement. The true growth enterprise in the US under Mr. Obama is the federal government.

Underlying everything else is the spectre of inflation, and how many parts of the economy can be blown apart by an intentional inflationary policy.
Why does inflation serve the largest banks and corporations disproportionately while hurting the average working citizen?

Greater Inflation is desired because the largest banks still hold massive amounts of "bad" loans on their books that simply cannot be justified under any scenario except elevated housing prices. Greater inflation is desired by large multinational businesses so that they may increase current pricing levels and continue to grow profitability for shareholders. Greater inflation is sought so that the Fed can regain credibility and maintain the illusion of being in control of the markets. Inflation in basic necessities such as food, energy, health care and educational expenses have the potential to drain the resources of anyone below the upper strata of society. Making life harder for those on the margin to protect those at the top is not only bad economic policy, it's immoral.

What might the potential long term effects of a near zero Fed funds rate be?

The longer the Fed keeps rates at zero, the longer the banks have to develop strategies for operating in a "risk" free capital environment. Given past history, it's only a matter of time (when, not if) until the banks blow the economy up yet again. Low rates directly benefit the banks and large corporate sectors of the economy. They can borrow at historic low rates whereas the average citizen has no capability of obtaining such funding. While mortgage rates have moved to levels we have not seen in a decades, the corresponding tightening in loan qualification standards means that many cannot take advantage of them. Profits to the largest businesses and no tangible benefit to the American citizen - can you see a pattern developing? _SeekingAlpha
Looking at it that way, the ongoing runup in commodities prices take on a whole new meaning.

Central bank-generated inflationary bubbles are a whole different pickle than investor euphoria-driven bubbles. If the bubble we see developing is coming from the US central bank, it is an ominous sign of an out-of-control economy in the making. As if the government debt build-up was not bad enough, the Fed under Obama appears to be intentionally filling the entire economy with noxious gases.

Time for average people to focus on issues of essential function and enduring value. The US dollar does not have enduring value, and serves an essential function in fewer and fewer locations around the world. The US government has fallen under the control of persons who are in over their heads, treading water, flailing for their lives.

But their flailings have a definite trending, which appear to benefit a small, select group of insiders, at the expense of the taxpayers and citizens at large.

More interesting thoughts on a US Fed-induced bubble from Zero Hedge and Powerline

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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