Commodity Prices Rise as Inflation Pressures Mount

The profit taking in the currencies ended yesterday, but there’s been no “real rebound”…yet. The mother of all cyclones hit Australia yesterday, and ripped apart homes, and destroyed anything in its path… But, the Aussie dollar (AUD) was unaffected… That’s really strange, don’t you think? But, as I said yesterday, I think there are two drivers right now for the currencies: rate differential and a renewed enthusiasm for risk assets. And when the risk asset has a nice yield differential, well, they get a double bounce… And so it was with the Aussie dollar yesterday and overnight. Two of the commodities that are being affected by the cyclone are sugar and bananas, both of which saw their prices surge yesterday.

Gold and silver are not participating in this renewed enthusiasm for risk assets, which is pretty strange, given the fact that the rest of the commodities are kicking tail and taking names, right now. I see where copper prices hit $10,000-per ton for the first time yesterday… And copper isn’t the only commodity on a run like this. As I’ve been telling you for some time now, inflation in the US is already moving higher, (except in housing and wages) and commodities are really reflecting higher inflation. Take for instance the CRB… The CRB is the Commodities Research Bureau, and is monitored by: Reuters/Jefferies in an index that tracks commodity prices. Well, normally when people talk about commodities in general, they talk about the CRB, or the Rogers International Commodity Index… Well, there’s a newer index that works pretty well, as it has an equal weighting of the commodities in the index… It’s called the CCI Index (Continuous Commodities Futures Price Index) …

Well, folks, the CRB and CCI indexes are showing commodity prices are rising, and have been rising for about seven months now… Or… About the time that the CABAL began talking about QE2… And all of them are reflecting index prices that are now higher than they were before the financial crisis! WOW!

Let me take you back to pre-financial meltdown, spring and summer 2008… The price of oil $145 per barrel, and inflation pressures were all around us… The dollar was hanging by a thread and the gold price and silver price were at “then record highs”… Then it all came crashing down… First we had the deleveraging, then the collapse of Lehman Bros. and then 144 banks fail, and so on… I guess what I’m attempting to get at is the scenario where we pick up where we left off in August of 2008… We all know – the government doesn’t, and the CABAL (the Fed) doesn’t – but we all know that inflation pressures are all around us, and commodities are soaring again… Looks to me like we’re picking up where we left off in August of 2008, eh?

A couple of weeks ago, I wrote in the Pfennig about how the dollar index had fallen to a level that it had bounced off of three previous times… Here’s a snippet of what I wrote in the essay “China Disses the Dollar” on January 18th…

Well folks, we could be at a crossroads, and the dollar may be sinking down… The dollar index has fallen to this level of 78.85 three times since the end of November… Could this be the time it continues through this level, and brings a ton of markets people that want to sell the dollar, but are waiting for a sign of real conviction, into the arena to sell? Could be, folks… Or… It could bounce off this level like it has three previous times… The thing you have to do is make a decision, and stick with it… The choice is up to you, but we’re here at the crossroads… What are you going to do?

Yes… That was from January 18th… And today, the dollar index today is: 77.21… So, the idea I brought forward to you on January 18th came to fruition… Not that I’m blowing my own horn here, but shoot Rudy, I don’t write this letter for my own amusement – although that’s how it feels sometime… I write it for you, dear reader! In hopes that you can take the information I give you, and then form your own opinion, and prosper from it!

OK… The European Central Bank (ECB) is meeting this morning… I don’t expect them to address the rising inflation with a rate hike, just yet…. But I do expect them to announce that they are removing stimulus measures, like bond buying…. And that should be taken in by the markets as good for the euro… We’ll have to wait-n-see, eh? I would bet a dollar to a Krispy Kreme that ECB President, Trichet, is going to love the day when he gets to step down as ECB president, and let someone else deal with this dilemma of rising inflation, while the periphery countries suffer…

You know… I’ve quoted Nassim Taleb before… He’s the author of the book, The Black Swan… Sounds like he’s been reading the Pfennig – or my paid subscription newsletter, The Currency Capitalist – because he is ripping on US Treasuries, and the dollar… Taleb said that the “first thing investors should avoid is US Treasuries, and the second is the dollar.” He went on to say that he would rather hold euros than dollars… “Euros have Germany, the dollar has nothing. As skeptical as I am about Europe, I prefer it to the US. The US is just like Greece, only without the IMF to enforce discipline. The only thing that can happen in the US is a bond riot, as this would force some discipline into the Treasury market.”

WOW! I’ve talked about all of these things in the past… Just recently I talked about the bond vigilantes, and so on… It’s nice to see that I’m not out here on the limb by myself!

Yesterday, I told you about the rally in pound sterling (GBP)… Well, the rally continues, with the pound rising to the 1.62 handle overnight. The Bank of England (BOE) meets next Thursday… And overnight we saw UK service companies return to growth in January… So, add this to the growing list of things pushing inflation higher, and the BOE back to the rate hike table… Recall, that at the last meeting, on January 13, I told you that two members voted for a rate hike… It will be interesting to see if more BOE members move over to the rate hike camp… Judging from the recent price action in pound sterling, the markets are beginning to price in a rate hike… Why else would the pound have a reason to rally like this?

In New Zealand last night, their jobs data was not good… The New Zealand unemployment rate rose to 6.8% from 6.4% in January, and that data knocked the stuffing right out of kiwi (NZD) late yesterday. Kiwi lost 3/4’s of a cent (0.75) in a New York Minute after the data printed, and hasn’t recovered… The other thing weighing on kiwi right now, is the recent speech by the Reserve Bank of New Zealand (RBNZ) Governor Bollard, who believes that the government’s plans to shrink the country’s deficit, will negate the need to raise rates further… Hmmm… I think he’s wrong on two counts there… 1. The government will not have the political will to make meaningful cuts in the deficit, and 2. Therefore he will need to raise rates further!

I’m going to be interviewed by the Street.com today… I do believe we are going to talk about China… I have been doing some research on the side, reading at home, etc. and believe that I have more info China’s plans to gain a wider distribution of their currency, the renminbi (CNY)… Think about all the gold they’ve been buying… Are they planning on tying their currency to gold? Wouldn’t that make it very attractive? Think about that… I’ll have more for the interviewer today, and then when I research it more, I’ll come back to you with it!

Yesterday, I told you about the Fed (I prefer to call them the CABAL), now owning more Treasuries than China… There was more in the FT that another reader sent me (thanks Peter!)… And then Peter has his own view…. When taken together, the message I get is that America’s credit quality is slipping to the point that foreigners are losing interest and the Fed has become the purchaser of last resort and is, in effect, propping up a market that would otherwise look a lot sicker. When I have to buy your stuff, and you have to buy my stuff, because “arm’s reach” third parties are no longer interested, then one has to worry.”

Couldn’t have said it better myself! Another reader asked me if I thought the CABAL could decide to buy back all Treasuries… And just print the money to do so… YIKES! That can’t happen! Let’s hope the CABAL knows that, and doesn’t try it!

Then there was this… Sent to me by a reader from Forbes titled: How Inflation Is Turning Breakfast Into A Luxury Item… Yesterday, one of our young Jedi analysts at Hedgeye, Kevin Kaiser, sent me a highlight from The Grocer (an industry trade rag) that inflating food prices are making ordinary breakfast items like orange and apple juice a “luxury.”

Here are the 6-month price percentage moves in some of the things people need to live with:

  • Cotton = +125.7%
  • Sugar = +82.6%
  • Corn = +59.0%
  • Coffee = +41.4%
  • Rice = +40.5%
  • Oats = +36.6%
  • Copper = +36.1%
  • Lumber = +33.8%
  • Oil = +25.1%

Well… I have to wonder if Big Ben is ready to acknowledge that inflation is already all around us?

To recap… The profit taking in the currencies that we saw yesterday morning ended, but the rebound in most currencies hasn’t happened…yet… The pound sterling is one of the rallying currencies this morning. The markets are pricing in a rate hike for the pound. The BOE meets next week… Will we see a rate hike? The ECB meets today and ECB President Trichet is between a rock and…well, a rock… And commodity indexes are above pre-financial crisis levels… Are they telling us something? Of course they are! That inflation is all around us!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning