Fed's Positive Inflation Maneuvers Bullish for Commodities

Diversified commodities have suffered approximately the same peak-to-trough percentage decline as equities, illustrating the point that commodities are not a valuable hedge to a stock portfolio in a deflation scare and a liquidity crisis. However, just as it is not the time to abandon stocks, this is not the time to abandon commodity positions in the context of a diversified multi-asset portfolio. Those who are predicting an extended deflation (which would obviously be a negative backdrop for commodities, as well as equities) should re-read Fed Chairman Bernanke’s 2002 speech on the subject of preventing a Japanese style deflation in the U.S.

In the midst of last deflation scare six years ago, Bernanke stated:

Deflation is always reversible under a fiat money system…Under a paper based system, a determined government can always generate positive inflation.

He went on to enumerate (prophetically, in light of the current environment) all of the tools at the government’s disposal to inject money into the economy. In the months ahead, it would not be at all surprising to see debt issued by the Treasury to fund tax cuts or federal spending “monetized” by the Fed (i.e. purchased by the Fed using newly created dollars rather than sold to investors). This is money printing in its purest form and would clearly be bullish for commodities.

Comments

[Jolly_Rancher:]

Looking at the Fed's balance sheet, what evidence do you have that the Fed is actually printing money rather than using the proceeds of newly sold Treasury debt?

2008 Nov 12 02:17 PM

[cyclingscholar:]

If the money is physically printed and disseminated, it is true that inflation can be forced.

If the money is in the form of bank loans and reduced interest rates, however, the Fed is pushing on a string and the expansion will be swamped by a decline in the velocity of money.


Mv=pY dude!


2
Its the new E=mc

cyclingscholar

2008 Nov 12 02:32 PM

[Socialism c...:]

"However, just as it is not the time to abandon stocks, this is not the time to abandon commodity positions in the context of a diversified multi-asset portfolio."

Ummm...false premise?! Who says it's not the time to abandon stocks!? That appears to be exactly what it IS the time for...this thing is obviously persisting much longer than originally thought and appears to be heading deeper as well. Where do you see any growth in the next 5 years? We'll be lucky if we even maintain civil order!!

The only new investments I'd recommend are gold, guns, and canned goods!!

2008 Nov 12 04:14 PM

[Steven Hansen:]

i love you socialism cannot compete! this is the time to buy that pretty little farm in the country, plant your vegetables, and come back out of there 10 years from now to survey the damage to the rest of civilization.

this is not the time to hold equities, commodities, or real estate if you are an investor. if you are a survivalist, gold, silver, and a good plot of land with a mobile home with solar panels and a good lister genset works for me.

and i second cyclingscholar, about inflation. Bernanke did not consider that inflation cannot occur if money is not spent - no matter how much money is pumped into the system. and if the government spends money it does not have to create money flow. it is recessionary and further exasperates this crisis.

i think the washington big boys are now realizing that they have to be very careful now as their ammunition is running low.

2008 Nov 12 08:02 PM