Let's Wait Before Annointing Bernanke "Slayer of the Evil Commodities Bubble"

The stock market rose at the end of last week and commodities prices fell sharply, all in the wake of the rescue of Bear Stearns (BSC). Prior to that, equities had plummeted, commodities had skyrocketed, the dollar completely cratered and a powerful flight-to-quality had ensued.

I mean, a snap-back in the wake of hundreds of billions of Fed intervention was not particularly surprising, no? But from last week's headlines it looks as if the Fed and Bernanke won. Won what? A three-day reprieve from a long-term problem that is necessarily exacerbated by the Fed's historic injection of liquidity to avert crisis? I mean come on. Can't we even wait a few months before knighting Sir Ben and anointing him "Slayer of the Evil Commodities Bubble?"

Even by journalistic terms these headlines are hopeful if not outright fanciful. Oil drops to $102? Gold to only $910? Wow, happy days are here again! How about this formula: have a deadline, need a headline, look at data in the absence of context, stir for 2 minutes, write a story. This from Bloomberg in a story titled Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke:

March 21 (Bloomberg) -- The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.

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"Bernanke took care of the commodity bubble," said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better."

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Gold had its biggest weekly loss since August 1990 after reaching a record $1,033.90 an ounce on March 17. Oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever. Corn dropped more than 9 percent for the week, the most since July.

Until this week, commodities had outperformed stocks and bonds as the Fed reduced its benchmark rate five times since September, eroding the value of the dollar and fueling concern that inflation would accelerate. This week's rate cut brought the Fed's target for overnight loans among banks down to 2.25 percent.

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Oil, soybeans, platinum and wheat all jumped to records this year. The weighted UBS Bloomberg Constant Maturity Commodity Index of 26 futures has gained more than 20 percent every year since 2001. The index is up 10 percent this year.

Gold had rallied as much as 43 percent since Sept. 18, when the policy makers began lowering the federal-funds rate for the first time in four years.

Has confidence been revived in U.S. financial firms? Nobody I know, myself included, feels this way. Did Bernanke take care of the commodity bubble? Commodities are coming back to earth? Really? Relative to their highs over the past week? And have commodities simply outperformed stocks and bonds during the Fed's easing? What about the data in the article that discusses price of the UBS/Bloomberg commodities index rising more than 20% per year for the last six years and is up over 10% this year? This isn't called outperformance; this is called a trend.

There were a few professionals quoted in the article that take a more balanced view of the proceedings, and their comments are nicely stashed at the very end of the article:

"He has taken extraordinary measures, things that we haven't seen since the Great Depression," said former Fed vice chairman Alan Blinder, a Princeton University professor. "He's working overtime, literally and figuratively, to get this panic under control. But so far, it's not under control."

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"This is all about money," said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois, who has been trading gold since 1973. "The Fed can control the price of money but the banks still don't want to lend."

Only time will tell, but in any case a declaration of victory for anything other addressing this week's crisis is months if not years away. Let's not lose sight of this fact, because the minute those in positions to make large policy decisions stop using their brains and begin thinking the worst is over, watch out. Because their overconfidence will only sow the seeds of turmoil.

Comments

[bhakta]

Thanks for putting this common sense posting on the board. The trend is not broken and the financial debacle is not over. Two or three days of relief, have not cured the all-devouring cancer in the system.

[Britishsteel]

what the fed have done along with Paulson and Bush is ILLEGAL. sign the petition Now'

financialpetition.org/......

[ponchovilla]

This is a bi-polar deer market and very nervous. Price and value are totally disconnected. Fundamentals are disconnected from price movement. "Journalism" is at a low. Slap a chart to a headline and declare total victory today. Slap a chart and declare defeat tomorrow.
Short today, cover shorts tomorrow. Insanity, stupidity brilliance or is this normal. Place your bet and watch the wheel spin.

[Indeendent]

I also have the feeling that the market is schizophrenically ignores the fundamentals. Whether this behavior is invoked on purpose by the major players is a good conversational piece for those who believes in conspiracies.

[the finalhorseman]

to britishsteel your link didnt work.

as usual, the big guys made billions. they bought in at $3 or $4 and after JPMs announcement, they made at least 3 times their investment. where is the SEC on this? i cant believe everyone is taking this quietly.