As the world waits for China of “will they or won’t they stimulate more”, there are increasingly bullish data points that line up for the inflation trade everywhere.
We hate you guys
The elephant in the room is how the U.S. and the rest of the world pay for all this fiscal stimulus. The most obvious path is to print money. Despite China’s enormous reserves, China can’t hold up the world but is
getting increasingly frustrated with it:
Even at the elite level, the sense of frustration occasionally bubbles over. "We hate you guys," Luo Ping, a director-general at the China Banking Regulatory Commission (CBRC), complained last week on a visit to New York. "Once you start issuing $1-$2 trillion . . . we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do."
The path of least resistance seems to be resorting to the printing presses, but with Eastern Europe in trouble, the difficulties with the USD will not likely show up in the foreign exchange market, but the commodity market.
Commodities recovering
A look at the
Continuous Commodity Index, which is the continuation of the old CRB Index before its
re-balancing in 2005 to give greater weight to the more liquid energy complex, shows that commodities prices appear to be stabilizing as a whole. The
Baltic Dry Index is also giving the same message of stabilization.
Despite the underperformance of the energy sector relative to other commodities, I indicated
before that energy stocks aren’t giving up their relative leadership in the market, indicating that the sector may lead this market up in the next cycle.
SWFs and strategic buyers moving into the market
Some sovereign wealth funds have indicated that they are likely to move more into commodities. Strategic buyers are also moving into commodity suppliers to take advantage of these depressed prices.
