Commodities have been falling off a cliff lately, and pundits abound are stepping over each other to declare it's because global growth is slowing. And everybody thought I was hearing things! The unfortunate part is that most of what you read talks about slowing growth because of commodity prices, sort of a tail that wags the dog.
Many are missing the main clue however. The stock market normally rises when commodities fall. In fact it used to be synonymous - the market almost always went the opposite of oil. Not so much anymore for one simple reason: the massive influx of government stimulus through quantitative easing has changed the rules.
The QE programs have done 2 things:
- Flooded the market with excess speculative money - What is obvious (to some at least) is the fact that commodities and stocks have been rising in tandem. That's not supposed to happen folks. So much excess money has been coming into the market that it has been chasing everything higher at the same time.
- It has pushed the dollar lower and created inflation - I don't I have to explain this one, unless you don't eat or drive.
Both of these effects have been by design. The Federal Reserve has said point blank that they are trying to create the wealth affect through higher stock prices. When people feel richer, they spend money. In addition the lower dollar has two benefits: it makes our exports cheaper so we can supposedly "grow" our way out of our fiscal mess and it creates some inflation to counter act deflation.
But now the QE programs are all gone... or are they? With the absence of stimulus, you can see why stocks and commodities have been falling. The problem is that with global growth declining, who will buy our exports. Worse yet is that our own recovery has been lackluster to say the least, as GDP came in at a feeble 1.8% last quarter. So, what we are seeing is the markets screaming at Helicopter Ben for more stimulus or else. It's not the first time. Last year when QE1 ended, stocks got hammered and the Fed responded with QE2.
And here we are again. The stimulus going bye bye and domestic growth waning. The question is, is Bernanke listening and will he do anything about it. My guess is he certainly will, whether with a QE3 or a horse with a different name. He'll likely wait to pacify the inflation hawks, but he realizes that without it, it's unlikely the recovery can stand on its own. Therefore I look for a continuation of the easy money programs accompanied by higher stock prices, but very selectively. However, when it turns it will turn hard and fast so we all had better be prepared.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.