Observing the price action in the commodity markets today has given me great reason for concern for that which I feared seems to have occurred, namely, the crude oil market has broken out to the upside. I suppose it was just a matter of time based on the orgy of fund buying across the commodity sector but I was secretly hoping that we might avoid such a close mainly to prevent what now seems to be a certain price rise for the cost of energy. Heretofore, the soaring CCI (Continuous Commodity Index) has been moving higher mainly based on food and metal costs. Now we have the trifecta where the three main segments of that index are moving higher in tandem. Actually, given the extent of the price run in the food and metals sector, the energy sector has a lot of ground to make up.
Yesterday crude put in its best close in 26 months. Today it has closed above what has become both technical and psychological chart resistance at the $90 level. Should it end this trading week above $90, holiday trading conditions or no holiday trading conditions, it will put in its best weekly close since October 2008. Moving forward into the New Year, it looks most probable that it is going to make a run at $100.
My fear mentioned above is that in addition to consumers soon to get walloped with sticker shock at the grocery stores within the space of a few months as the price rise works its way through the distribution channels, they were also going to get hit with rising gasoline and energy costs, a double whammy for their pocketbooks at the time that many can ill afford it. There are so many struggling families dealing with lost incomes and underemployment for those fortunate enough to have found work, that any further price pressures on the energy front would act to take some of them over the edge financially. Many are having to cut expenses drastically in an attempt to stay in their homes. How soaring food and energy costs are supposed to benefit the economy escapes me.
The ivory tower types of the monetary realm are completely disconnected from the havoc and harm that they have caused so many with their incredibly short-sighted and foolhardy monetary policies. The Federal Reserve is presiding over the deliberate and planned unleashing of the inflation genie without the least bit of concern as to how that is going to affect the average middle class American. Words cannot express the contempt and disdain I have for this group of elitists. Keep in mind how this entire debacle began and the “medicine” that has been brought forth to supposedly cure it. If this is the cure, they are only succeeding in slowly killing the patient.
There does not seem to be any end in sight to the continued money creation efforts of the Fed so all that we can do is attempt to protect ourselves and our loved ones from their depredations upon our life savings. The bond market, while currently being artificially propped up by these snake oil salesmen, looks heavy, even in spite of the massive buys it is seeing as the Fed makes the purchases that are part of its QE (money printing) program. Once that market breaks down in earnest, it will not take much to see a cascade of selling erupt as bond holders head to the exits. I suspect that the Chinese are more than seriously concerned about their national wealth, a large part of which still remains trapped in these worthless IOU’s called Treasury Debt.
Long term rates could then rise quite rapidly as bondholders experience a selling panic and feverishly attempt to avoid being the last man standing in what might well become a sort of perverse game of musical chairs. Their actions will create a cycle in which selling intensifies. The resulting rise in longer term interest rates will work to continue depress the Real estate sector not to mention hit thousands of homeowners trapped in adjustable rate mortgages which will then reset to a rate that may force even more of them out of their homes. Quite frankly, I see nothing on the horizon preventing this from occurring at this point because the Fed cannot create enough money to buy up all the outstanding Treasury debt that is going to be unloaded. Oh they conceivably could I suppose but at what cost to the Dollar!
Jim has said it more than once over the last few years that these derivative creators and vile peddlers have destroyed us all in their greed. Many of you have not understood what he has been saying or perhaps felt that it was an overreaction. Rest assured, the fallout from this sordid mess is now rapidly descending upon us.
The Fed created this travesty under the tenure of Mr. Greenspan who never saw a potential problem on the horizon without throwing money at it. For that, he was stupidly hailed as “The Maestro”. His madness, of lowering interest rates to ridiculously low levels, gave rise to the hedge fund industry and its attempts to then find yield in any sector that it could. The wave of speculative frenzy unleashed then crashed into one sector after another only abating when the derivative market blew all to hell which was inevitable. Enter Mr. Bernanke, who then revitalized the beast of speculative frenzy by one upping his predecessor. Much like Beowolf’s golden horn raised the dragon, Bernanke’s QE idiocy fan the fires of leveraged insanity as he practically begged the hedge funds to buy commodities to induce inflation and ward of his ridiculous fear of deflation. The results are now obvious. Nice going guys – you can sit in your ivory tower and quietly study the effects of your brain child while Middle America slowly dies of price asphyxiation. A pox on your entire house.
Click either chart to enlarge in PDF format with commentary from Trader Dan Norcini