These press conferences with Federal Reserve Chairman Dr. Bernanke are becoming more amusing as of late:
“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation [..]” – Ben. S Bernanke
Really? On what basis of calculating inflation can one say with a straight face that over the last 30 years inflation has been tame or for that matter stable? Let’s take a look at the 30 year chart of the CRB index, which represents a broad view of commodities as priced in US dollars.
30 year CRB index
Clearly inflation is not under control. However, if the above chart is not enough to make one skeptical of the Fed’s latest remarks, then here’s a 30 year chart of the US dollar index, the currency in which prices are set for all the items we purchase in the United States (and other countries using or pegged to the US dollar).
30 year US dollar index
What one can gather from these charts is that we’re experiencing 30 years of a weakening dollar and extremely volatile commodities prices. Our central bank has the audacity to tell us that inflation is under control, and that in essence one should ignore gas prices, food prices and the prices of other goods which have surged over the last few decades (because all of the official inflation statistics ignore said prices).
I’ve always been a skeptic of the Fed’s press releases and these conferences, but this statement alone is enough to make one’s head spin when put in to context with the charts above. I believe instead that the Fed is claiming inflation is under control as a guise to give them the flexibility to perform more easing should the European contagion come home, or if our own sovereign debt issues begin to become more apparent to bond investors.
Without quantitative easing, twisting (and lots of shouting) our markets would likely have higher Treasury yields, lower equity prices — but people would be enjoying lower prices on food and energy. With the labor market stagnating and the overall economic picture still quite dismal, one has to wonder whether the Fed’s dual mandate of encouraging employment and maintaining stable prices has been abandoned in favor of recklessly supporting the financial system at large, and more specifically US Treasury bond and equity prices. It certainly seems to be the case when objective data is reviewed from a macroeconomic perspective.
It looks like safe haven assets like bonds, yen and dollars are becoming more attractive vs. risky assets like commodity currencies, commodities, equities and emerging markets in general.
I think we may be entering the next leg down as Mohamed El-Erian and others have expressed the same sentiment I have. The rally is running on fumes.
We probably will retest the lows in the market and bring some fear back in to the trading. VIX is up 6%+ today and we’re seeing a lot more put buying as institutions either bet against or insure profits in stocks.
Consumer sentiment was terrible and there is now some question as to whether the FDIC is solvent after taking over Colonial Bank. All the Maes are probably completely toxic now, too. I hope foreign central banks continue their generosity or the falloff here could become a disaster.
The stock market cheered the US central bank’s historic interest rate cut today, surging nearly 5% on the S&P 500 back above 900 to 911.82. The rate cut, combined with continued quantitative easing in Treasury bonds was evident in today’s trading, with a flood out of US dollars in to commodities and other currencies as well as bond yields dropping sharply.
The implications are clear. Inflation will begin in some measure of time, whether it is days, weeks or months. We can see traders already preparing by taking long positions in anything that stands to benefit from the dollar’s fall. Near term we could see the US dollar index fall as low as 72, retesting its prior lows and further confirming the head and shoulders pattern. Commodities and currencies remain attractive buys.
The US dollar index is forming an all too familiar pattern. This is certainly a result of wreckless monetary policy turning deflation in to a potential stagflationary situation. At this point we recommend purchasing commodities (DYY is a good ETF because it is 2x leveraged and well diversified) and other currencies while there are reasonably priced opportunities. We like the Euro and Yen for this trade.
US dollar index shows head and shoulders pattern
The courageous may consider purchasing commodities stocks as they will likely participate, but the future of the equities market is not necessarily certain as the recession is deepening. Today’s unemployment claims were higher than the expected 525k at 573k. That is a very bad sign that the worst is far from over in terms of how many layoffs we can expect.
Commodities have had tremendous strength for the past few days along with commodities stocks seeing money pour in. This is a potential trend worth watching and it is continuing pre-market today. I will have more detail in a later post.
This is not a call on either side, but a recommendation instead to watch the action in DRYS as we are seeing incredible buying interest in this stock over the last few days and especially today. Again, I don’t recommend buying or shorting here. The interesting factor is how this optimism is related to the future expected performance of and demand for commodities.
Commodities have seen a sharp and unprecedented sell off after their inflationary highs earlier in the year. Many, including myself, feel this sell off is overdone. The action in DRYS may confirm that theory. Watch this one closely in the days and weeks ahead!