Commodities In Lock Step

The fact that commodities are moving higher in lock step with stocks will pose a problem for markets at some point. I view this as a problem for a number of reasons:
  • Higher costs for basic items like food, clothes and energy act as a tax on the lower and middle class. This will be a headwind to growth.
  • The Chinese have an inflation problem, in large part stemming from the rise in commodity prices. Prices for goods coming out of China are rising rapidly. For years we have been importing deflation from China. If this continues we will be importing inflation.
  • Eventually these price increases will show up in government statistics. At that point Ben Bernanke will haveto back off QE II and rates can potentially go a lot higher. 
This is not something that will happen in a day and will likely be a prolonged process if it does occur.  However, the point of recognition for markets does not necessarily need to be a prolonged process. In markets things tend not to matter, until they do.

10 comments:

Anonymous said...

In the US, there is no real inflation at the retail level. REal test is when the dollar menu at your favorite fast food restaurants rise or gasoline doubles. They did not last time in 07 when oil went to $147 and agri futures tripled in price.

short term INflation is the fed's target as it inflates revenues for farmers and oil co's, stock prices, anything. wealth effect.

They probably believe they have alot of room from here to where it becomes an issue and in 07, soaring commodities prices weren't.

Tsachy Mishal said...

Listen to some restaurant and food industry conference calls. The pressure is already there with prices where they are.

Anonymous said...

right. but they cannot raise prices on the retail level and they won't. it's their margins that shrink but they have no pricing power to the consumer. go to costco. a 10lb sack of potatoes is $2. sometimes $1 when they're on sale. i don't see it. there is no REAL inflation.

Anonymous said...

also, the futures market is not real. many farmers don't sell their bushel of corn at quoted futures price. in fact they often have to let it rot cos there isn't a buyer or 10 cents on the dollar. food industry co's who do a better job sourcing cheaper materials obviously do better. that is why the competition cannot raise prices to the consumer. the futures market isn't real..it's just a huge derivative market of financial speculators. i mean they deliver paper GLD for gold future delivery.......

Tsachy Mishal said...

Companies can only eat so much. They will not sell food at a loss and its already a low margin business.

Revelo said...

You can't have sustained inflation without wage increases, and there are no wage increases in sight for the average US worker.

You got it right when you said that higher commodities prices act as a tax. Since when is raising taxes inflationary? More money paid for commodities means less money paid for something else, and since the extra money paid for commodities mostly piles up in foreign reserves rather than circulating back to the US in the form of export demand, this is highly deflationary.

Corporate profit margins are high, hence there is plenty of room for prices and profits to decline before companies are forced to cut supply. What choice do they have? Given the low interest rates, there is nowhere else to deploy capital that would be freed up by deferring investment and thereby letting supply fall. If CostCo or McDonalds raises prices to maintain their margins, then someone else will step into the breach and take away their market share. All companies have fixed costs to pay and that means they have to keep the operating income coming in to pay those costs, even if they are making negligible profits on that operating income.

PJ said...

This is just the 2008 commodities bubble repeated. Once again speculators are bidding up commodities betting on inflation and their ability to get out at high prices by squeezing shorts.

In 2011 as in 2008 economic weakness will kill these trades and force liquidation.

Anonymous said...

Commodity futures prices don't reflect true wholesale prices.

Anonymous said...

Most metal junk sells for less than steel spot.

Anonymous said...

i don't see why the fed isn't trying to inflate home prices. they inflating everything else.