The macro-economic environment right now is performing exactly as I described it would in October, when I questioned Andrew Sorkin at a Chapel lecture at a Pitt U campus. This is what I predicted on October 19:
- A devaluation of the USD currency before 2011
- The creation of a commodity drive, possibly a bubble, as speculators, fund managers, and hedge funds hedge their portfolios, increase their positions in commodities across they board in every sector to fight against falling equity prices, as well as inflation. (When our money depreciates in value, it takes more dollars to purchase the same amount of commodity.) So, in essence, when they purchase commodities during a time of inflation or fiat currency devaluation, they not only protect their clients' capital investment, they turn a profit for them as well.
- The resulting raise of direct fixed and variable input costs for manufatuers & services due to commodities increasing in price.
- Unemployment to stay at near same levels in the short-run, then increase substantially in the long-run.
Well now, lets see what happened.
(I use crude oil since it is typically the most important commodity to the infastructure of our economy, as well as a represenative hard asset purchased by those who wish to hedge against inflation. Most traders, fund managers and analysts use crude oil as the benchmark for the investor sentiment of commodities.)
Shortly after I made my predictions, warning signs of those predicions appeared. Early Novemeber, QE2 (Quantitative Easing Two) was implemented, which whether or not anyone in the FED or financial firms will admit, is a devaluation in the governments ability to fix the economy, as well as the stimulus's failing to spur economic growth, and will most likely lead to a devaluation of our dollar.
So what is the purpose of this QE2?
- Force capital out of the bond & money markets, so investors will purchase equities.
- Lower T-bill & Treasury bond rates, mortage rates, etc.
- Make the equity markets rise in value.
Reason it has been implemented? Simple. The FED, as well as the politicians in Washington, want to artificially prop the equity markets up, so they can make the economy look like it's recovering. Shortly after commodities across the board began trending quickly upward. D.C and Bernanke & Co, may have created a POSSIBLE (nothing is for certain) future econmic crisis. Because of QE2 it has made the already terrible macro-economic conditions worse. Funds, managers, traders everywhere re-allocating funds and weight portoflios heavier towards commodities, especially crude oil. This is very worrisome and dangeous to the U.S and below is why.
The American consumer's purchasing power is still weak. We have an unemployment rate of nearly 10%, as well as the U.S economy and spending power of the U.S consumer still being very low. There is a very strong possibility that oil will pass $110 a barrel and push towards $120 a barrel. This rise in oil prices will put an even greater pressure on a already weak U.S economy. When oil & commodities rise in price, it takes more dollars to purchase the same amount of commodity, therefore acting as a tax on the U.S producers & consumers, destroying potential consumer purchasing power. Those same dollars could be used to purchase goods and services, but now instead will be spent on buying the gasoline.
What's even more striking is that gas is now past $3 dollars per gallon.Winter is usually the weakest time for gas prices. The recent surge in crude oil has raised the possibility that gasoline could hit $4 a gallon by summer, which is the peak driving season, as well as the highest demand season for gasoline. Gas prices that high would almost certainly destroy an already weak recovering market, as well as damage many services due to lack of consumers traveling and having less money to spend on products & services.
We are also seeing a rise of all manufacturing & services fixed and variable industrial input costs, which simply means that many business will have to in turn raise prices on the consumer. Businesses will react to this by cutting hours, labor, and laying off workers. Some businesses may have to close down, all leading to unemployment and less money being spent in the economy. Equities will fall in response to the loss in corporate earnings due to this rise of input costs and destruction of consumer spending on their goods.
What is just as worrisome is the direct upward movement of food price indices since QE2 was implemented.
All of these rises in commodities (oil, food, copper, precious medals) leads to one thing - long term bearish sentiment of the U.S macro-economy. Their rise in price will restrain the U.S economy from recovering, as well as possibly create another large drop in the equities markets. Based on these macro-economic factors as of now, I would be inclined to purchase commodity futures or commodity based ETF's profit in the short run, as well as hedge against a crash in equities induced by this upward trend of commodities. Hopefully, things will turn around, and commodities will fall, markets change direction quickly. However, current macro-economic analysis says otherwise.
