The ongoing furor over Quantitative Easing – sans any meaningful easing itself – has frothed the asset liquidity traps for more than four months. Where the cash is coming from (or margin for that matter) is hard to say. That is, where the cash/margin that is in excess of what already existed within the ‘system before all the QE noise came from. This is not a ‘flush’ world except for the Chinese, Indians and a handful of others. Chinese cash flow/foreign exchange has certainly held up commodities and have set the medium- term trend. The dollar has declined as well but not so much against petroleum as the decline vs. other commodities would suggest.
Keep in mind F/X, interest rate(s) and asset prices are all linked together. Changes in one effect the others. In finance none of this matters since ‘value’ shifts are profit opportunities. It costs money to shift money from one trap to another.
The liquidity traps that matter here on planet Earth are the ones that price goods that people use on a day- to- day basis: grains, petroleum, industrial metals, lumber and food oils. Here are some chartz from excellent TFC Charts dot com:
Live hogs represent a large export market of pork and pork products, particularly to China. With billions and billions of Chinese getting hungry every day, the pork market should be surging. The last six months of trading marks a secular change from a long- running bull market in hogs. What’s up with this, less pork fried rice and more Big Macs? Maybe food price inflation in China is rationing pork consumption. If I can live on rice and beans so can the average Chinese. To hell with the pork!
Here’s Chicago rice. Rice is not a big US food crop but is a staple overseas. Rice shortages mean political unrest and trading bans which amplify rice shortages and political unrest. This is an index and does not represent spot world prices but does show the price trend. Current rice price inflation is not dangerous. Another month or so of steady increases will bring the index to a resistance level that has held since the food price debacle of 2008. At that point the price of rice will be dangerous.
All prices basis long grain per mt bagged FOB vessel, All prices basis per mt, bagged FOB vessel except Brown and Paddy — Bulk FOB vessel California -Bagged 30 KG preslung FOB vessel
These are spot rice prices in various countries from Rice Online dot com. If the chart doesn’t appear, click anywhere on the chart or on the link.
Prices are for local varieties per Metric Ton (2,205 lbs.) Vietnam is a big rice exporter to China and Japan. Rice prices are moderate even with inflation in Vietnam. Unlike petroleum which is a ‘status’ item, rice is an absolute necessity. No eatee ricee or a substitute and you die! The price pressure of either surplus country inflation or central bank monetary policy has not adversely effected rice prices … so far!
This is NYMEX crude. The very slight increase in open interest is more noteworthy than the deterioration in price. I don’t see anything to push oil prices higher except for a geostrategic event such as a hurricane or war between oil producers.
I disagree with analysts such as Jeff Rubin who insist on unqualified triple- digit crude prices. By this I mean prices that are over $100/bbl. on a sustained basis. The 2008 average price of $99 was a child of the Great Price Spike that saw pushed prices to $147 but not sustained. A triple digit price move in crude would solve itself:
“The cure for ten dollar corn is ten dollar corn” (old futures market proverb)
If the China bubble deflates there will be fewer funds available to bid up petroleum (deflation). If the China bubble is supported by PBOC yuan- printing there will be fewer Chinese with funds (hyperinflation). If the US erects trade barriers between China and itself the international flows of dollar funds will be ‘diverted’ in unpredictable ways. China may ‘dump’ treasuries and more dollars would flow toward China. Would they spend these dollars and bid up petrol prices and adversely effect the US economy? It’s impossible to conjecture.
Would the Chinese hold their dollars and wait until the Fed burns itself out? At some point political uncertainty – both in the US and China – will make price predictions impossible to make. A Republican ‘Regime Change’ would more likely be deflationary either because of reasoned (Austerian) policy or because of grandstanding leading to an ‘inadvertent’ default.
In China a new regime is likely to be less accommodating of US interests and more ambitious. New leadership is likely to be more confrontational. China can afford to play both a money game and a geopolitical game. In any event it is likely to be inclined to print money. China is the epicenter of world inflation just as the US is the epicenter of world deflation. Right now the forces are more or less evenly balanced. Tomorrow?
At the same time, both political entities are shills for their respective versions of ‘The American Way of (Car) Life’. Whatever is needed to keep the carz clogging highways built for the purpose will be done. The issue is whether the shills and their so- called policies have sufficient force to keep events from spiraling out of control.
Keep in mind, the ‘Johnny Come- Lately’ analysts are all over the China inflation phenomenon. Where Shedlock misses the boat is that real estate in China is a liquidity currency trap. Chinese who bought apartments in order to sell them in the distant future for a profit may find they cannot sell them at all at any price! It is not the abundance of humans that causes prices to rise but the abundance of humans with money!. What will be needed is humans with disposable cash or a lending environment that can provide the cash for them at a rate that allows returns.
That kind of environment exists the real estate now. ‘Investors’ (suckers) feel no need to sell.
When they so desire to in the future they may be of a multitude. If there is excess of buyers, prices will plummet. The bubble is a massive gamble! It’s also a country- wide consumer bet on hyperinflation. If money inflates the real estate will be a hedge. Property developers who borrowed massively to put up buildings will see the value of their debts vanish. Savers who hold cash will be ruined as their cash loses value. At the same time the loss of money value won’t make Chinese real estate investors richer. They will not be able to extract money value from their hedges because there will be no value to the money! If someone sells their flat in Guangzhou for a billion- gazillion yuan, what does that billion- gazillion represent? At such a time the Chinese might have a US dollar economy.
What irony!
If hyperinflation is in China’s future those who hold gold and can change it without being ruined will do well at the expense of other ‘asset investors’. What to look for here is the circulation of dollars in China. Foreign currency black markets are a characteristic of hyperinflation regimes. If the Chinese government allows dollar circulation it would be a green light for a flood of new yuan.
Still the best indicator of money value is the price of crude. Commodities are at a ‘break’ point where they can go up or down. Crude looks to be @ a breaking point where declining discretionary funds cannot support the current price.