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A trend in motion, will stay in motion,
until some major outside force, knocks it off its course." After
gyrating within a sideways trading range over the past 18-months, the
"Commodity Super Cycle," measured by the Dow Jones-AIG Commodity
Index, (DJCI), resumed its upward course in the second half or 2007. Led by
the agricultural, energy, and precious metal sectors, the DJCI closed at an
all-time high.
According to famed hedge-fund trader
Jimmy Rogers, the 20th century has seen three secular bull-markets in
commodities from 1906-1923, and from 1933-1955, and 1968-1982, spanning an
average of 15-years. The current bull market for the DJCI is now six-years
old, and Mr Rodgers thinks the "Commodity Super Cycle" has many
more years to run, albeit with some nasty corrections along the way.
The latest commodities boom began at the
end of 2001, when China's
industrial revolution was just starting. China's
voracious appetite for raw materials for its industrialization has made it
the #1 consumer of copper, steel, and iron ore in the world, consuming more
of theses metals than the United States
and Japan
combined, and ranking #2 in consumption of oil and energy products. And China's
population of 1.3 billion has become the world's #1 consumer of soybeans.
Evidence of an impressive bull-run is
stacking up, with crude oil surging 60% to $96 per barrel in 2007, and
tripling since late 2003. Platinum climbed 34% to an all-time record high of
$1,550 /oz, and if the world's 500 million cars were fitted with fuel cells,
the world's platinum supply would be exhausted in 15-years. Copper was a
laggard, with a 10% gain, but is still five times higher since 2003, hitting
a record $8,800 /ton in 2006, while lead and tin are now at historic highs.
Agricultural commodities joined the
party in 2007, with wheat futures in Chicago climbing +77%, as global demand
outpaced supply, soybeans up +79%, corn up +16%, and rice futures were up +35
percent. A weaker US dollar makes American grain prices less expensive to
buyers abroad, and US wheat exporters already have sold more than 90% of the
1.18 billion bushels the US Department of Agriculture expects will be
exported during the whole marketing year, which ends in June 2008.
Rough rice futures in Chicago
soared to all-time highs, led by strong export demand and weather-related
Asian crop shortages in India,
the world's second-largest rice exporter, and in Vietnam, the third-largest
shipper. Global rice supplies fell 6.5% in the fourth quarter alone to 72.1
million tons, and according to latest estimates, supplies are headed down to
50 million tons, the lowest level since 1983-84.
Food prices are 18% higher in China from a year ago, and the Communist
kingpins in Beijing,
fear that runaway inflation could ignite social unrest. The price of pork,
which forms the core of most Chinese diets, was up a staggering 56%. "We're
facing a grave situation," said Ma Kai, the country's top planner. China
has a fifth of the world's population, with 1.3 billion people using 7% of
the world's farmland.
Zheng Guogan, head of the State Meteorological Administration
forecasts global warming will cut China's annual grain harvest by
up to 10 percent. That would mean about 50 million tons less grain in the
current tight supply situation and a potential for further food inflation in
world markets. "Given the tightened food supply in the international
market, a decline in domestic grain production could lead to more price
hikes," said Song Tingmin, VP of the China
National Association of Grain.
The US Department of Agriculture has
also cut its estimate of world wheat stocks for 2007-08 to 112.4 million
tons, a 30-year low. If sustained, sharply higher wheat prices will
eventually work their way into the grocery aisle for bread, cereal, cookies
and other products. Fearing a further rise in prices, India, Pakistan,
Egypt, Morocco, Algeria,
Indonesia and Iraq have all
booked large cargoes of wheat.
And it's not just the Fed's weak US
dollar policy that is driving up agricultural prices to record highs these
days. Growing Bio-fuel demand has pushed up corn and soybean prices, and
creating a linkage with crude oil. Furthermore, the cost of transporting dry
goods such as coal, iron ore, and grains overseas, as measured by the Baltic
Dry Index, have doubled from a year ago. Higher transportations costs, by
land or by sea, are expected to be eventually passed along to the final
consumer.
Riding on the wings of the
"Commodity Super Cycle" and global inflation was the glittering
Gold market, up 32% in 2007. Gold was energized by reckless central bankers
and the explosive growth of the world's money supply. In Australia, the M3
money supply rose 20.7% from a year ago, Brazil's M3 +17%, Canada's M3
+12.9%, China's M2 +18.5%, the Euro zone's M3 +12.3%, Hong Kong's M3 +31.5%,
India's M3 +21.5%, and the USA's M3 +15.8%, a 47-year high.
Chinese and Indian Imports fuel
"Commodity Super Cycle"
Maybe, the longevity of the
"Commodity Super Cycle," boils down to one simple equation. According
to the latest population count by the United Nations, the world had 6.5
billion inhabitants in 2005, 380 million more than in 2000, or an annual gain
of 76 million persons. By 2050, the world is expected to house 9.1 billion
persons, assuming declining fertility rates. So a world of finite raw
materials, along with an increasing population base, translates into higher
commodity prices. China
and India
house one-third of the world's population with 2.3 billion inhabitants.
In an ironic twist, China has become a victim of its
own phenomenal success. China's
economy expanded at a blistering 11.5% last year, but was plagued with a 7%
inflation rate, largely linked to the country's voracious appetite for global
commodities. China's
imports climbed 20.5% to $865.5 billion in the first 11-months of 2007, from
the year earlier period, and Chinese demand effectively put a floor under the
DJCI, whenever panicky commodity traders in London,
New York, Tokyo,
or Shanghai
got the urge to turn paper profits into cash.
To combat consumer inflation, the
People's Bank of China (PBoC) has tightened its
monetary policy, ordering banks to set aside 14.5% of their deposits as
reserves, an all-time high. The PBoC also raised
bank lending rates five times to 7.47%, and announced a special bond sale of
750 billion yuan to drain cash from the financial
system. The latest tightening moves took some steam out of the Shanghai stock
index, which still ended 97% higher last year, the world's gold medal winner.
Then on Dec 27th, China's
central bank signaled it would allow the yuan to appreciate faster in 2008, in a move designed
to lower the cost of dollar denominated commodities imported from overseas. Yao
Jingyuan, chief economist of the state statistics
agency, explained, "The weakening dollar and rising global commodity
prices would create inflationary pressures for China next year, but a quicker
appreciation of the yuan would probably help offset
some of those price increases."
But a stronger yuan
vs the US$
will also boost China's
purchasing power abroad, and could exert more upward pressure on commodity
prices worldwide. And China
must compete with India,
the world's second fastest growing economy, with one billion consumers for
global commodities. India's
imports rose to $20.8 billion in October, up from $4.6 billion in February
2004, also supporting the commodity markets.
Interestingly enough, India could
face a supply shortfall of about 4-million tons of rice in 2008, threatening
to turn the world's largest exporter of rice into a net importer. With tight
supplies of wheat this year, Indian demand for rice could grow to 96 million
tons or higher, and above the rice crop of 92 million tons last year. India is also Asia's
third-largest oil consumer, and imported 9.25 million tons of crude oil in
November, or 2.8 mil barrels per day, up 6.5% from a year ago.
Bernanke Fed
Re-Ignites "Commodity Super Cycle" in 2007
For 24-months until June 2006, the
Federal Reserve embarked on a long, but predictable road of lifting
short-term US interest rates, to reach an unknown "neutral rate,"
that would neither stimulate nor weaken the US economy. The Fed was also
tracking the "Commodity Super Cycle" and appeared to have finally
gotten ahead of the inflation curve with its last rate hike to 5.25% in June
2006.
"The Fed will be vigilant to ensure
that the recent pattern of elevated monthly core inflation readings is not
sustained," declared Fed chief Ben "B-52" Bernanke
at the International Monetary Conference on June 6, 2006. "The Fed must
continue to resist any tendency for increases in energy and commodity prices
to become permanently embedded in core inflation," he said, telegraphing
the last rate hike to 5.25%.
The 2-year cycle of Fed rate hikes was
the longest in a quarter of a century, and finally put a dent in the
"Commodity Super Cycle." Crude oil tumbled $30 per barrel, and gold
fell $160 /oz in the second half of 2006. The Fed had finally corralled the
"Commodity Super Cycle", and put the fed funds rate on ice for
15-months. The Fed relied on other G-20 central banks to tighten their
monetary policies to keep the "Commodity Super Cycle," in check,
while it sat on the sidelines.
However, other G-20 central banks were
reluctant to tighten their money spigots, and only lifted their lending rates
in tiny baby-steps, that failed to rein-in double digit credit and money
supply growth. Central bankers were clandestinely inflating their economies
to prosperity, by pumping up stock markets with monetary steroids, and in
turn, hoping to bolster consumer confidence and spending.
However, the bursting the $1.8 trillion
sub-prime credit bubble in the summer of 2007, rattled the Bernanke Fed into a series of rate cuts totaling 1% to 4.25%. The Fed's aggressive rate cutting
campaign knocked the US dollar index to 20-year lows, and ignited the fastest
money supply growth in 47-years, with US M3 hitting an annualized 16% in
November, while the narrower MZM money supply soared to +12.8% higher from a
year earlier.
Because most international commodities
are traded in US dollars, the Fed must defend the value of the US dollar in
the foreign exchange market, with higher interest rates if necessary, to keep
the "Commodity Super Cycle" in check. But with the Fed moving in
the opposite direction, and slashing the fed funds rate to 4.25%, the US central bank
let the inflation genie out of its bottle, awakening the "Commodity
Super Cycle" from its 18-month siesta.
Thus, the finger of blame for global
inflation points to the Bernanke Fed and the US
Treasury, for engineering the devaluation of the US dollar in the second half
of 2007. Traders should only trust the money that flows thru the commodity
markets for real time indications of future inflation, and not government
statistics, which are manipulated by apparatchniks
and adopted as gospel by the mainstream media.
Money supply growth is explosive, at a
time when inflation is rearing its ugly head across the globe, led by sharply
higher food and energy prices. European and US central bankers are
intellectually dishonest about food and energy prices, routinely subtracting
the "essentials of life" from their inflation equations, reckoning
that commodity price spikes are self-correcting, due to the laws of gravity,
and shouldn't be countered with higher interest rates.
In the US, producer prices were 7.7%
higher in November from a year ago, the highest in 34-years. Consumer prices
rose at an annual rate of 4.2% through the first 11-months of 2007, the most
in 17-years, thanks to soaring food and energy prices. Yet remarkably,
federal funds futures traders in Chicago
are betting on a quarter-point Fed rate cut to 4.00% on January 30th, to bail
out Wall Street bankers from massive losses in sub-prime mortgages, despite
dangerously elevated inflation.
There's a big difference between the way
US
households and the Fed view inflation. To the average household, food and
energy prices are the most closely watched costs. To the Fed, food and energy
are subject to cyclical swings and ignored. "If inflation expectations
are well anchored, changes in energy and food prices should have relatively
little influence on core inflation," Fed chief Ben "B-52" Bernanke told the National Bureau of Economic Research on
July 10th, 2007.
So far, investment banks and brokers
have recognized $97 billion of losses, related to the collapse of the $1.8
trillion sub-prime mortgage market. That could just be the tip of the iceberg
of bank write downs for 2008. But additional Fed rate cuts could weaken the US
dollar, and unleash the fastest rate of inflation and money supply growth
that the world has seen in decades, - leading to the "Stagflation"
trap.
European Central Bank fuels Global
Inflation
Under the leadership of Jean
"Tricky" Trichet, the European Central
Bank has veered far away from its monetarist roots and its original 4.5%
growth target for Euro M3. Since Trichet got his
hands on the printing presses in November 2003, the Euro M3 money supply has
exploded from a 5% growth rate to an annualized 12.3% in October, its fastest
in history, lifting the Euro zone's inflation rate to a six-year high of
3.1%, and far above the ECB's target of 2%.
Trichet has
immunized the Euro zone stock markets from record high oil prices with
carefully calibrated dosages of monetary morphine. The ECB engineered an 11%
Euro rally against the US dollar in 2007, by running the printing presses at
a slightly slower pace than the Bernanke Fed. Still,
North Sea Brent crude oil rose to a record 65 euros per barrel, and European wheat
futures closed at 248 euros, posting a 68% gain on the Paris-based Euronext exchange.
ECB chief Trichet
and his sidekick Bundesbank chief Axel Weber have
forgotten the sound advice of the late ECB chief Wim
Duisenberg, "Trying to use monetary policy to fine-tune economic
activity or asset markets, or to gear it above a sustainable level will, in
the long run, simply lead to rising inflation - not to faster economic
growth," Duisenberg warned on Sept 5, 2003, just before he retired from
the ECB.
With Euro zone inflation getting out of
control, Trichet and Weber are conducting
"open-mouth" operations thru the media, talking tough and making
bold threats, but taking no action to tighten monetary policy. European gold
traders have seen through the ECB's propaganda and
empty rhetoric, and are bidding 570 euros for an ounce of gold, up 75% from
just three years ago.
Writing in Germany's Bild
am Sonntag newspaper on Dec 31st, Bundesbank chief Axel Weber said that high energy and
food prices would keep inflation elevated through the first half of 2008, but
warned European workers not to ask for higher wages to compensate for the
higher cost of living. "The current, unusually high inflation rates in Germany and
the Euro zone must not be the yardstick for the next wage round. A spike in
prices as a result of excess wage rises can endanger medium-term price
stability. We would act decisively against this," he warned.
"Our primary goal is to preserve
price stability. We are alert and everybody must know that we will do
whatever is needed to deliver price stability in the medium term and be
credible in that delivery. The single needle in our compass is price
stability," warned ECB chief Trichet on Dec
14th. But alas, the ECB's compass has been broken
for three years, with Euro money and credit expanding at double digit rates.
How are we to interpret the ECB's latest riddles, designed to keep commodity and gold
speculators off balance. Would the ECB actually hike its repo
rate to 4.25% to rein-in its money supply, when other G-7 central bankers in Canada, England,
and the US
are lowering their lending rates? That's doubtful. Yet the ECB would look
like a hawk, by simply resisting the temptation to follow the rate-cutting Bernanke Fed and the Bank of England, by leaving its repo rate unchanged at 4.00 percent.
Still, "the persistence of the
current inflation shock entails the serious risk that inflation expectations
could become unhinged and our credibility as central bankers could be
significantly damaged," Bank of Spain chief Miguel Angel
Fernandez Ordonez warned. Spain's
consumer price index soared to +4.1% in November. "We are monitoring the
situation very closely, and are permanently alert. Central bankers, even the
best ones, cannot prevent an increase of oil prices or other international
commodities," said Belgian central banker Guy Quaden
on Dec 13th.
That's music to the ears of global
commodity traders, and why the world economy could be headed for
hyper-inflation. "Central bankers always try to avoid their last big
mistake. So every time there's the threat of a contraction in the economy,
they'll over stimulate the economy, by printing too much money. The result
will be a rising roller coaster of inflation, with each high and low being
higher than the preceding one," said Milton Friedman, the late Nobel monetarist.
"Inflation is always and everywhere
a monetary phenomenon. As the government increases the rate at which it
prints money, the result is too much money chasing too few goods and
services. Higher wages don't cause inflation, and the whopping oil price
increases between 1973 and 1980 didn't cause the stagflation, - a stagnant
economy with rising inflation. Rather, the oil price hikes were the form
inflation took" from rapid money supply growth, Friedman and Anna
Schwartz argued.
Gold is a Safe Haven during US Banking
Crisis
Nowadays, bankers are so afraid to lend
money to each other, that they prefer to park their excess cash in "safe
haven" Treasury bills and notes, even at negative rates of return, after
adjusting for inflation. Big banks are reluctant to lend money in the LIBOR
market, because of suspicions that borrowers might be holding big undisclosed
losses in toxic sub-prime mortgages.
Global banks are also hoarding cash to
plug future losses that must be written off their balance sheets in the year
ahead. The fear factor in the banking system is measured by the TED spread,
which is the difference for yields on US$ Libor rates (ie
Eurodollar rates) and for US Treasury bills. Since August, there have been
two eruptions in the TED spread that lifted US$ Libor rates to +210 basis
points above 3-month Treasury bills rates, the highest since the 1987 stock
market crash.
Gold has done a reasonable job of
tracking widening credit spreads between Libor rates and Treasury bills, and
acting as a safe haven in a time of risk-aversion in the stock markets. Yet
the same sophisticated bankers that bought $1.8 trillion of toxic sub-prime
mortgages over the past few years are now locking in 10-year bond yields
below the inflation rate, even though hyper-inflation might lie on the
horizon.
When measured in "hard money"
terms, the US Treasury's 10-year Note lost 20% of its value compared to an
ounce of gold since August 2007. Wouldn't it make better sense to park excess
cash in gold, rather than US Treasury IOU's, during periods of double-digit
money supply growth, and soaring commodities?
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Information
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