In order for Ben Bernanke to begin tapering of QE, he needs another form of economic stimulus to help bolster the economy. Ideally, that stimulus would come in the form of a commodities sell-off, which would reduce materials costs for businesses. In short time, that reduction in input costs would be reflected in falling Producer Price Index figures, which would spur confidence in the markets, and lead to more aggressive investment and hiring by businesses.
Just like the Fund managers who are obsessing over his every move, Bernanke needs a hedge. He needs movements in the marketplace that will create additional downward pressure on commodities' valuations, and further reduce input costs for businesses, so the economy can remain on stable footing as QE is withdrawn. In the final week of July, he got what he needed. The first windfall came with the New York Times piece on manipulation of the aluminum market, which pushed aluminum prices down, and led some lawmakers to call for a review of TBTF Bank practices of warehousing industrial metals. At the time of this story, aluminum futures had already fallen to $1823.50 per Metric Ton. A second windfall came at the end of the day on July 25th, with news that the Chinese government had issued orders to draw down production in over 1400 plants involved in the production of 19 different categories of materials. Industries affected by the orders to reduce production include the energy intensive aluminum and concrete industries. Although a decline in Chinese production of commodity metals and concrete may increase prices for some industrial commodities, the associated drop in worldwide coal, oil and natural gas demand as Chinese factories dial back their production schedules and energy consumption is the key factor for the Fed to consider.
Bernanke now has a trifecta that provides him with a green light to proceed with tapering of QE. Tapering of QE should spark a sell-off in all commodities sectors. Although it's reasonable to claim that some of the projected decline has already been priced into markets, there's still reason to believe that further declines will occur once QE is actually trimmed. The threat of Congressional action against manipulation of commodities markets should have a chilling effect on stockpiling of metals, and could have a spillover effect which leads some lawmakers to question why oil and gasoline prices are so high when US oil imports have fallen by more than 1 Million barrels per day in the past year, making the nation significantly less reliant on OPEC production. Congressional action regarding oil markets is especially likely if shrinking crack spreads pinch oil refiners' profits, and spur them to flex their political lobbying muscle. A reduction in commodity metals and concrete products production by Chinese factories should lead to a decline in worldwide demand for oil, natural gas and coal, which will reduce energy input costs for companies in the rest of the world. Falling input costs are a form of economic stimulus, and provide the Federal Reserve with some breathing room to go ahead and begin trimming back on Quantitative Easing.
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