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Inflate Until It Pops

Very rarely will history repeat so quickly. However, since the public announcement in late August about quantitative easing part two by the Federal Reserve Bank, the stock market could be on a fast track to another major commodity bubble. All commodities have exploded higher since early July and have accelerated throughout September and October.

The first bubble that usually comes to mind is the action in silver and gold. However, while gold and silver get a lot of media attention and are often mentioned as bubbles, these two commodities are actually not in a bubble. The reason that they are not in a bubble is because they are actually a form of currency. Bubbles only occur when everyone owns something. Just ask your next door neighbor if they own any gold outside of their jewelry. They answer is most likely a 'no'. Therefore, gold and silver may pullback or correct but they are not in a bubble and will likely present another buying opportunity down the road.

Many other leading commodities are starting to form a bubble. Cotton just reached new all time highs. The iPath Dow Jones UBS Cotton Subindex Total Return ETN(NYSE:BAL) is finally declining today after reaching an all time high. Yesterday companies such as Levi Strauss said they will be raising the price for jeans due to the high price of cotton. The iPath Dow Jones UBS Copper Total Return ETN(NYSE:JJC) is trading at a new all time high. Considering that the growth in the world is only taking place in China and the rest of Asia this is not something beneficial to the world economies. Many of the soft commodities such as sugar, coffee, cocoa, and others are also reaching new highs. Therefore, the prices of food items will all increase for consumers.

The Federal Reserve Bank is walking a fine line right now. They have had the Fed funds rate(overnight lending rate to the large major banks) at at zero percent since December 2008. This action alone causes inflation. Just look at the last days of former Fed Chairman Alan Greenspan. He will be remembered for the housing and credit crisis that he caused. Anyone with a half of brain can only wonder what the effects of this recent quantitative easing(money printing) will cause down the road. Short term gain is usually not worth the long term pain. Just look at all the homes that are on the market right now. Foreclosed properties remain at all time highs. Commercial real estate vacancies are at the highest levels in 20 years. These are just some of the negative repercussions being felt from the long term pain.

It looks as if the Fed is a one trick pony. They continue to use the inflation theory. However, they may inflate themselves right out of any credibility.