This is what inflation looks like….
May 18, 2009 10:15 am
I thought it would be interesting to post some of the recent levels on items that could be the industrial indication that inflation continues its slow but persistent creep onward. Yes, I know that Mr. Bernanke has scoffed at the idea, but Mr. Taylor is starting to believe that the stimulus hose is pumping out too much green water.
The Federal Reserve may soon need to raise interest rates, said John Taylor, the former Treasury official who devised the “Taylor Rule,” a formula for rate- setting based on the outlook for inflation and growth.
“My calculation implies we may not have as much time before the Fed has to remove excess reserves and raise the rate,” Taylor, a Treasury undersecretary under President George W. Bush from 2001 to 2005, said yesterday at an Atlanta Fed conference in Jekyll Island, Georgia.
Unless we are able to thread a very small hole in a very small needle, prices are going to continue to move higher as a combination demand and quantitative easing take hold. There is virtually no way that an easy take off after such a sever move by the Fed that includes printing record levels of money and providing massive and perhaps reckless levels of stimulus. (Picture the Fed as a living and breathing animal which now has stimulus shooting shooting of every orifice.)
China may be is hoarding, but no matter what it is called, the process still makes prices run up – simple supply and demand. Oil demand is up, but consumption is down. How? Think of speculation entering in again as many of the same players (Morgan Stanley, Goldman Sachs and JP Morgan) are filling up ships with crude and floating throughout the world’s oceans until such time as they must deliver or sell at a higher price. The Contango trade at its best…
We are also watching the Dubai Mercantile Exchange as the next breeding ground for the oil price battle. Last year’s speculation loopholes have finally closed and not players are looking for alternative exchanges to ramp up pricing without the pesky need to expose their positions. Last year, Goldman Sachs, Morgan Stanley and others bought a significant stake in the DME and the time is just about right for oil prices to begin to start seeing a speculative run, right before the summer driving season begins.
Copper on the other hand is clearly being bought up and stockpiled for use by China and other nations that are in the process of massive infrastructure development. (Listen to Dennis Gartman on The Disciplined Investor Podcast discuss Copper –via iTunes)
Then there is the question as to whether or not food commodities will see another run-up in prices as we experienced last summer. Corn may be headed higher as the soggy planting season has pushed the crop cycle back. This and the additional strain due to ethanol use should push prices higher through the summer. As for wheat, we have heard several reports that India’s trading ban have been difficult on wheat and now massive/surplus levels are laying, tarp-covered, in parking lots, schools and fields. After the recent election, the ban may be lifted and could push a nice supply onto the markets, thereby moderate and eventually helping to stabilize prices.
Still, it appears that even if we are not in a domestic or global recovery just yet, commodities, especially food based ETFS – MOO and DBA) may be good investment ideas to help diversify a portfolio during difficult market conditions.
(Horowitz & Company clients are LONG positions mentioned as of the publish date)