A recent article in Harper’s Magazine suggested that the next bubble would be "alternative energy" also known as "going green". I would suggest that there has been a mother of all bubbles forming. This bubble has a different set of rules. This is the commodity bubble. Commodities differ from other bubbles in that we all need commodities. We must eat, travel, and replace failing infrastructure. Commodities are generally consumed. The beloved farmers are having their day in the spotlight. This segment of the workforce must love the job. Dealing with drought, insects, floods, etc. the farmer has many variables to deal with. Their product has been in a "bear" (down/sideways) market for years. Their time has come. With the burgeoning economies of China and India, the worldwide demand for commodities is strong. Five years ago I warned that China was an 800 lb. gorilla that would have a tremendous global impact. Once China began to develop its resources (people) we would see a brave new world. When I was a child, the cheaper toys were made in Japan. At that time there was a stigma attached to foreign made goods. That time is past. Most products on the shelves are made in China, Vietnam, India, Mexico, etc. We are importing about $500 Billion per year of energy products. This transfer of wealth will surely cause a decline in the U.S.
The Federal Reserve is in a "no win" situation. Inflation is on the rise. It is becoming serious. Restaurant prices are up substantially, some by 10-15% in the last twelve months. Expect to see price increases across the board- food, energy, utilities, vehicles, the list goes on. Back in the late 70’s, early 80’s when inflation was moving to a hyper-inflationary status, Paul Volcker (Fed Chairman 1979-1987) increased core interest rates to 13.5% in 1981. For people who had money to invest, those were the good ol’ days. Banks were paying 14-16% on C.D.’S. Companies were borrowing at similar rates. Volcker knew that he had to contract the economy and purge the financial wastes that had accumulated. This was a painful time for the U.S. economy. Unemployment was at its highest level since the Great Depression. Volcker was under political attack. He held his position and rates subsided to 3% range in 1983. The purging was completed. This set the stage for the longest sustained economic expansion in the country’s history. Ben Bernanke has a different set of circumstances to work with. The debt to equity ratio of the private sector is much higher today. The cost of housing in recent years has placed the consumer at risk. Credit card debt in the 1970’s was insignificant compared to today’s levels. The price of commodities was not being affected by China and India. Now, the consumer is tapped out. The real estate bubble has burst and housing prices are declining. Consumers’ balance sheets are getting weaker. Contraction of spending is ahead for most consumers. At the same time, the financial crisis is in its early stages. The Fed needs to cut rates to keep the banking system liquid. Lower rates improve the profits of banks. Higher rates reduce their profit margins. The banks need profits to offset their investment and lending losses. Can the banks recover before their losses must be booked? That is the $64 Trillion question. On the other hand, the primary inflation fighting tool of the Fed is "interest rate increases". You have two opposing forces requiring opposite rate action. What will Ben Bernanke do? He wrote his Doctoral Thesis on the Great Depression and concluded that the depression could been avoided had the Fed pumped more money into the system. This will reduce interest rates and at the same time increase inflation. Remember, true inflation is defined by the increase in money supply. Price inflation is the result of this increase in money. There is more money chasing goods and services. The Fed is also under pressure to keep the economy stable during the election cycle. Rest assured that they will do everything possible to keep the stock market at its current levels through November.
Hyperinflation is ahead! The Fed does not have the "guts" to raise rates and fight inflation. Their mandate is to protect the financial institutions, not you or me. At the same time the economy is in recession. As inflation increases the consumer will continue to respond with reduced spending. This will be observed as a downward spiral. Consumer confidence (or perception) will determine the velocity of this downward spiral. Global demand for commodities will provide a strong price base for commodities. As the Fed injects more dollars into the system, the value of the dollar will decline relative to other currencies. Any dollar denominated investments will decline in "global" value. Since energy has been bought and sold in U.S. Dollars, international owners of this resource are losing money. There will be continued pressure to move away from the dollar in pricing oil. With less demand for dollars, inflation in terms of dollars will increase. Ugly!!!
To summarize:
1. You have a housing bubble that has burst.
2. The Banking System has severe structural problems yet to be fully revealed.
3. The commodities are in a historic bull market which will affect the price of everything we buy.
4. The Fed cannot control inflation.
5. We are probably at "Peak" oil, thus a declining supply in a world of increasing demand.
6. The consumer has reduced ability to spend.
The true global currencies are gold, silver, oil, gas, water, grains, and other base commodities. Your assets should include some of these or you will see your wealth evaporate. Those who prepare for this perfect storm will be a blessing to those who failed to see the storm clouds forming. Cleansing/purging cycles as mentioned in Scripture are necessary. This may be the ultimate purge!