COMMODITY INSITE

by: Jerry Welch

April 8, 2011 -- Sustainable or Unsustainable

Associate Publisher and Editor, Greg Henderson, writing for the Drovers Cattle Network recently stated a view that I have secretly harbored and struggled with the past few months. He wrote, “More people working should indicate increasing consumer spending power for foods such as beef and pork. Yet analysts are justifiably concerned that food prices are increasing at rates much faster than consumer buying power. Throw in the fact that gasoline prices continue spiking higher and you have legitimate concerns the bull market for commodities may not be sustainable.”

Mr. Henderson has a point. Can the U.S. economy, that has eight million fewer jobs than a few years ago, support crude oil prices that are now well above $114 a barrel? Can today's economy support record high prices for beef and pork when consumers are or soon will be paying $4 a gallon for gas at the pump? Can the United States economy sustain a bull market for commodities amid so many uncertainties?

The Recession of 2007/09, that brought forth the worst economic conditions for the United States since 1929 and drove stock and commodity values to dramatically lower levels was caused by the sub-prime housing and credit crisis. Leading up to those two problems and arguably the, “straw that broke the camels back” was $145 a barrel crude oil and gasoline at the pump far north of $4 a gallon. That was the disastrous trio that brought the U.S. economy as well as the stock and commodity markets to their knees.

The media today, however, joyously touts the fact the Dow Jones is at a new three year high. The media is equally quick to cheer the news that gold keeps establishing a new all time high, that silver prices are at their best levels in 31 years and higher crude oil is justified as it is a certain sign the economy is on the mend.

The media most interested in the agricultural markets is just as fast mentioning that corn and cotton prices are the highest in history along with livestock prices. The ag-media continues to shout the need for more acres this growing season just to maintain existing stockpiles of grain that grow smaller each month. The media, regardless of their area of interest, has little bearish to say about either stocks or commodities.

Though both markets are in the midst of a near vertical rally, and improving daily, it does not necessarily mean that Main Street or the economy is doing equally as well. Paper and hard assets have been on the rise because the Fed implanted a series of stimulus packages that encouraged the hot money funds to throw huge sums of capital at the board as a whole and indiscriminately and irrespective of any fundamental reality to buy anything and everything. And that is why, everything and anything keeps on moving upward.

The Fed has indeed done a marvelous job of pushing the stock and commodity markets upward. But it remains to be seen if Main Street has shown enough improvement to support current values for paper and hard assets. That is the big question to be answered. Can the economy sustain such lofty values?

Think of it this way. Those long the stock or commodity markets have done well the past three years. Those not involved in either market now spend more of their hard earned money for food and gasoline than any time over the past three years. The Fed stimulus packages may have been a boon to Wall Street but a case can be made that those same policies actually hampered Main Street.     

Two commodities that tend to be leading indicator markets for the health and well being of Main Street are lumber and copper. In recent weeks, copper prices fell to a four month low but rebounded. Lumber, however, fell to a five month low this week and remains woefully depressed.

Copper prices generally reflect building activity and factory production. Lumber is exclusively a mirror of building activity. Copper prices can attract an international following and rise in value even if the U.S. economy is sluggish. Lumber prices almost perfectly reflect the state of the American economy.

It is easy to rationalize the recent bounce with copper prices and blame it on international buying. But with lumber values resting on a five month low, it hints that Main Street is struggling. If that proves to be the case, Mr. Greg Henderson, writing for the Drovers Cattle Network may have been among the very first to sound the alarm, suggesting today's economy cannot sustain the current bull move now underwasy with commodities. Or, for that matter, the Dow Jones.

(The information in this article is the opinion of the author and is subject to change without notice. www.commodityinsitebyjerrywelch.com)







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