Tuesday, March 11, 2008

Will the US Oil bill lead to commodities bubble?

From Commodities Online:

"Too much money chasing too few commodities" might be the best way to explain the historic rally now underway in the global commodity markets.

Who's been blowing such bubbles in the commodity markets? Central bankers in eighteen of the top 20 economies in the world have been expanding their money supplies at double-digit rates for the past several years, trying to prevent their currencies from rising too quickly against the sickly US Dollar.

Nowadays, fund managers are pouring billions of dollars into commodities such as crude oil, wheat, base metals, Gold Bullion and silver as a hedge against the explosive growth of the world's money supply, competitive currency devaluations, and the negative interest rates engineered by central banks. To the chagrin of central bankers, however, much of the new money pumped into the global markets is going into commodities instead of the stock market....

...So in trying to put a floor under the housing and stock markets, the Bernanke Fed has cranked up the growth of the MZM money supply to an explosive 15.4% annual rate, which is also depressing the US Dollar and pumping up the commodities markets to astronomical heights. The Fed has unleashed a speculative frenzy in commodities, and traders have lost faith in the central bank's credibility.

The Bernanke Fed's aggressive rate cuts have doing more harm than good for the US economy, by leaving the US consumer with slumping home prices on the one hand, and soaring food and energy prices on the other hand, otherwise known as the "Stagflation" trap. According to Bill Gross, chief investment officer at Pimco, the Fed's rate cuts of 2.25% since September have not brought mortgage rates lower, with the Fannie Mae 30-year mortgage rate stuck at 5.75% percent.

"Here is the startling point – the markets that the Fed is trying to affect haven't changed," says Gross. He thinks the housing downturn is still in its early stages, and expects a 20% decline in total.

"A 20% decline in housing prices is confidence destabilizing, it's credit imploding."