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As a general rule, the most successful man in life is the man who has the best
information
The Fed has been
dumping billions of dollars into the US markets each and every trading day since late
2010. Because of this
massive money creation the dollar became much weaker.
Movements in the dollar influence commodity prices, commodity prices influence
bonds, which then
influence stocks:
- A falling
weaker dollar pushes
up the price of commodities,
rising commodity prices tend to push bond prices
lower. A falling
dollar is bearish
for bonds and stocks because it is inflationary
- A rising
dollar is noninflationary
so the rising dollar
produces lower commodity prices. Lower commodity prices lead to lower interest rates and higher
bond prices. Higher
bond prices are bullish
for stocks
- Commodity markets
move in the same direction as Treasury bond yields and
in the opposite direction of bond prices -
bond prices and bond yields
move in opposite directions
Today’s strange
market conditions (the dollar up, markets down) are temporary and
are providing a huge buying opportunity. Here’s why…
As soon as the QE program, part 1 & 2, ended in June, the markets had to get by on a lot less money and liquidity - the effects of QE x
2 have worn off. The stock market
and commodities are tanking
while bond yields are making new lows - the dollar is getting stronger.
Today the dollar is up because the EU, and the
world, have an acute shortage of dollars for the necessary bailouts and needed liquidity, the markets have already priced in a Western recession
but do not know how the Greek situation is going to be
resolved.
If Greece is allowed
to default markets would plunge.
But, massive central bank bond buying will keep both
the Italian and Spanish
bond markets afloat. This
would be perceived as the double threats
of a systemic breakdown and a return to the 2008
global crisis significantly
receding.
“We are in a fresh cyclical downturn within a structural slump/depression. We need global co-ordinated monetary action
and the ECB must cut rates by 50 points. It made a
terrible mistake by raising
rates in July.” Andrew Roberts, credit
chief at RBS
The EU will use its bailout fund, the European Financial Stability Facility (EFSF), to purchase
bonds and recapitalize banks.
French Finance Minister François Baroin and Olli Rehn, the European Union’s head of monetary affairs, signalled that they were open to using “leverage” to
expand the scope of the €440-billion
($611-billion) EFSF. The US Federal Reserve, Bank of England,
Bank of Japan and the Swiss
National Bank are all going to provide
dollars to European banks
– this will be very inflationary.
The US will also end its leading up to election time partisan politics,
it’s this author’s belief the US will return to Quantitative Easing
(QE) early in 2012, if
not before, and
initiate a massive stimulus program via an
infrastructure maintenance and build program, the European Union will follow suit. All of this would be very
positive for commodities
China, even
if growth slows, is still predicted to grow at nine
percent and the urbanization of both
China and India and the astounding
prospects of Africa are far from
over.
“In terms of
long-term structural trends, demand
is now driven by an urbanization process that is far more structural than
consensus generally believes.
On our analysis, China is only 20 to 25 per cent along the path towards being a mature materials market and it may take at
least six to nine years before demand intensity peaks.”
Andrew Keen, Thorsten
Zimmermann and Lourina Pretorius, analysts at HSBC
As an aside the business section of the China Daily newspaper had a lead story on
the front page about 20 Lamborghini dealerships opening in China. Lamborghini sold
28 cars in 2007 and believe
they will sell 300 in 2011 - they expect China to be their largest
market in 2012. Ferrari expects to sell 600 vehicles and Porsche expects to
sell more than 20,000 vehicles this year.
Conclusion
The sheer size of the European bailouts would be inflationary – a weaker US dollar - and a market return to “normal” would
resolve the current uncertainty.
Today the dollar is up and commodities are down
but more money creation, on a massive scale, an unprecedented level, is both
necessary and coming.
Inflation is “baked
into the cake” for the foreseeable
future. In today’s fiat money driven economies deflation is simply unacceptable. When a government wants inflation they will get it.
This is bullish for commodities, the world’s
future supply of commodities
are controlled by junior resource
companies, they should be on every investors radar screen. Are resource juniors on
your radar screen?
If not, maybe they should
be.
Richard Mills
Aheadoftheherd.com
If you're interested
in learning more about the junior resource market please come and visit
Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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