What Commodity Strength Abroad Means for Economy at Home

While stocks have pulled back in recent days, we continue to see firmness in commodities (DBC; top chart), especially gold (GLD; middle chart) and oil (USO; bottom chart). In a contracting world economy, we would expect commodity consumption to be lower and commodity prices to collapse. This would put pressure on the currencies and stock markets of commodity-producing nations.

In an expanding world economy, we would expect to see rising commodity prices, reflecting growing consumption of commodities especially by rapidly growing emerging countries. That should be supportive of the currencies and stock markets of commodity-producing nations.

The commodity markets at present speak more to the possibilities of runaway growth than to economic contraction. This is one reason commodity producer nations such as Australia and Norway have hiked interest rates: their concerns are for inflation, not deflation. Meanwhile, the U.S., U.K, and Japan find themselves staving off economic weakness with continued monetary ease and fiscal laxity.

I continue to believe that the relative stock market performance of emerging markets (EEM) to established markets (SPY), as well as the performance of commodity markets, will be excellent gauges of anticipated global growth. As long as the U.S. has to transition from a consumer/consumption economy to an export-driven economy, we should continue to see a falling U.S. dollar over time and no rush to raise short-term interest rates. Once that transition has taken hold, we could expect to see a sustained steepening of the yield curve for Treasuries and more serious concerns over inflation.

If this scenario continues to unfold, it is difficult to make the case for concentrating one's assets in U.S. equity and debt markets: headwinds of a falling dollar make those investments questionable relative to the assets in growing countries with relatively strong currencies and firm-to-rising rates.

Comments

[User 353732]

In my opinion demand growth in the Global South plus commodity export driven better times in Russia, Canada and Australia are a secondary reason for the risen commodity prices, as expressed in nominal dollars.
The primary reason is global contempt for the fiat, and now fake, dollar and the resulting markdown of the dollar, the US Regime and America's global stature by investors.

It is more accurate to write that the dollar is falling than commodities are rising because the values of real assets ( the inter- asset exchange rate) relative to each other are not changing much and the non-dollar prices of commodities are also not rising as much as the dollar prices.

Seeing the world through the increasingly warped and dirty lens of the dollar and the US Regime can be dangerous. There is greater clarity in seeing the world through the prism of real assets and the Global South.

2009 Nov 04 09:30 AM

[Mad Hedge Fund Trader]

mhr Those of you searching for the “newnormal” better take a close look at the China National Offshore OilCompany’s (CNOC) efforts to top Exxon Mobil’s (XOM) $4 billion bid fordevelopment rights to a giant new field off West Africa. This is onlythe latest chapter in a global bidding war for essential resourcesthey, and we, need. Long gone is the day when the Standard Oil Companyonly needed to deliver King Saud a new Cadillac every year to assurerights to his kingdom’s oil supplies, even though it often had to betowed by teams of camels, as there was no refining capacity yet on thepeninsula. Decades later, I was part of a SWAT team at Morgan Stanleywhose schmoozing kept the crude flowing and the cash surplusesrecycling. Having grown up in the desert near Indio, California, I wasthe only one in the company who actually liked caravanning out into thedesert to scoop up cooked rice with my fingers off of giant brassplatters, and guzzle illicit Johnny Walker Red, said to be smuggled inby a wayward member of the royal family. I never did get used to thesheep brains, though. But I digress. To the current generation of oiltraders, I might as well be talking about the Pax Romana than the PaxAmericana, which is now equally ancient history. The hard truth is thatthey are out there bidding against the new 800 pound gorilla in themarket, as are others for coal, iron ore, copper, gold, silver, wheat,corn, soybeans, and myriad other essentials. If you have any doubtsabout China’s acquisitive determination, look at the chart belowshowing that the Middle Kingdom’s outbound direct investment isoutstripping inbound investment for the first time. Will the PebbleBeach Golf Course next? For you and I, this means we can count on theprice of everything to go up in the future, a lot. Keep food,commodity, and energy ETF’s permanently on your radar, like thePowerShares agricultural (DBA), the Rogers International Commodities(RJI), and the Oil Trust (USO). Jim Rogers, are you listening?

2009 Nov 04 01:13 PM