Seasons of the Bernanke
As we embark on QE3 and prepare for the 4th quarter of 2012 it seems worth taking a renewed look at Central Bank policy and its effect on asset prices in the commodity complex. This is the third summer in a row that we have watched commodity specific sectors make a mid-summer bet that a Central Bank somewhere would intervene to attempt a “jump start” to the world economy. Dan Alpert, Robert Hockett and Nouriel Roubini showed the transitory effects of this kind of policy in a brief but useful section of their paper last year The Way Forward. We are simply taking this space to remind readers AND investors that this is happening again.
This past summer has had some immediate exceptions. Drought in the middle west of the US coupled with poor harvest yields in South America combined to push dollar denominated grain prices to new record highs. Those highs, while reached some six weeks ago are fundamentally based on assumed supply shortages. The proportionality for grain prices to stay high, however, is rather low as both export markets and global pricing regimes work in tandem to either 1) lower demand or 2) add supply. Again – its worth noting the transitory nature of price rises in this corner of the commodity complex and to adjust expectations accordingly.
The broader market segments shown above illustrate neatly the move we have seen in anticipation of further easing. The rather lackluster nature of this years move to previous years suggests that the Rule of 3 seem to be peeking its head over the wall. Peter Tchir recently wrote a well timed piece on this idea that ostensibly says “once even your mother knows what’s going on everyone does” and so the effect end of the “cause effect” may be significantly diminished.
Might this now be the case? How much effect will a weak US Dollar have on commodity prices? How strong is the final demand picture? Inquiring minds want to know.
Perhaps this is most readily seen in the crude oil chart. External factors seem to be driving the price of crude more than monetary policy and to that end final demand. It is clear that global energy demand is down and with it crude from last spring’s highs.
To that end you will note that Gold should be well through $2500 by now if we are easing for 3x and have now asked Mario Monti and his band to open the concert with their version. (Mind you sterilized anything just doesn’t seem so sexy.)
The conclusion of all this is two fold but have implications that cast a very wide net indeed.
a) Monetary policy takes time to work
b) Monetary policy has limits
No one really likes either of these conclusions, especially in an election year.
And so we are now left to sit and ponder which way the complex will go. So far the law of diminishing returns seem very much at play.
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