It seems now all the world markets are moving in the same direction – down. The European debt problems and China’s economic slowdown are front-page news. Add to that the relatively weaker manufacturing data coming out of France and Germany and you have a euro under pressure. These days, a euro under pressure means a stronger U.S. dollar, and a stronger U.S. dollar means a continued unwinding of the overweight commodity sector.
Now many see the trimming of the commodity sector as bad news because one fear bigger than inflation is deflation. Deflation is the boogey man Bernanke and crew slew with the policy of quantitative easing (QE1 and QE2). Or did they? The “Bernank” has told us again and again that inflation is not a problem at least in the U.S., and any sign of inflation is transitory.
It appears he was onto something, as if he knew something many others did not. Perhaps he actually understood what would happen when the Fed implemented QE and then removed QE. Perhaps he understood all along that the Fed QE program would drive up commodity prices. In fact, he did, and he said so. The goal of the Fed was to create what his brand of economists call “The Wealth Effect.” The idea is to make money cheap, so hedge funds and investment banks will speculate in, what else, commodities, such as oil. Once that wagon gets rolling, mutual funds, pension funds, other institutional investors, and, finally, the retail investor jump on the wagon as it rolls forward to higher ground. As commodity prices rise, so do equities, as the money spreads out like thick oil on a flat table. Everyone then feels as if the “money is flowing again” and confidence rebuilds a shattered economy.
Of course, lots of liquidity in the system also means a weaker U.S. dollar, which then encourages greater U.S. exports, which means more manufacturing, which means more jobs. Well, it worked, but now that the policy is ending (sort of) money is leaving commodities and equities, as the two sectors are tied at the hip in this economic scenario, and the U.S. dollar is showing some strength.
Now we come full circle, back to the European debt, the softening in global manufacturing and the perception (once again) that the Chinese economy (the driver of global economic growth) will crash from its overheated engine, as opposed to an engineered soft landing.
As always, I could be wrong, but I think Bernanke and crew do know what they are doing. I could be wrong, but I see the global manufacturing “issues” as a normal part of the larger economic cycle. I could be wrong, but I see a slowdown in the Chinese economy as good for the rest of the world, as it opens doors for other nations to export more goods, which will then lift manufacturing, which will create more jobs. As well, cheaper commodities (food and oil) means more discretionary consumer spending, and we all know the benefits of that.
The European and U.S. debt issues, however, are wildcards, and the battle between the U.S. dollar and the euro is one that could change the game for the U.S. economy. I could be wrong, but I think these issues will work out as well in the near future, and if they do …
Trade in the day – Invest in your life …
