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Commodity traders have seen QE (the greatest monetary non-event) as a free ticket to speculate.  Due to sheer misinformation these traders are placing leveraged commodity bets with the idea that QE2 will soon flood the US economy with freshly printed dollars and cause rampant and destructive inflation.  Of course, that’s not even close to remotely true, but the speculative fervor has taken hold regardless.  Making matters worse is that this speculative ramp in commodities is occurring at a time when the economy remains fragile.  David Rosenberg elaborates:

“The first time oil went to $90/bbl in October 2007, the net speculative long position barely exceeded 130,000, and today it is over 200,000.  So if you think that this runup in crude prices reflects a booming global economy, with all deference to China’s backdrop, think again.  As in the case of most other commodities, the Fed has unleashed the floodgates of investor speculation on the commodity complex and while absolutely terrific windfall news for resource companies, this is going to represent the mother of all margin squeezes for businesses that actually have to deploy raw material in their production process.”

“Now, how can this possibly be constructive for the 90% of the U.S. earnings outlook that is not hooked to the basic commodity sector?  We don’t see where this is addressed anywhere in “Street” research, but maybe we’re just not looking hard enough.  But how will the surging energy costs fit in with expectations of record earnings and double-digit profit growth for 2011, or what this means for consumer discretionary spending as the surging price deflator depresses real incomes and expenditures.  Lest we remind you, when oil first tested the $90/bbl level back in October 2007, the U.S. economy slipped into recession, without anyone knowing it, including the Fed, including the long list of Wall Street economists, many of whom are still in their seats today.      But here is the difference.  Back in October 2007:

  • The trailing trend in U.S. real final sales was 2.5%, not 1.2%.
  • The unemployment rate was 4.7%, not 9.6%.
  • Core inflation (which removes the effects of food and energy) was running at 2.2%, not 0.8%.
  • Manufacturing capacity utilization rates were 79%, not 72%.
  • Consumer confidence was at 95 (the Conference Board’s measure), not 50.

In other words, the economy is much more vulnerable to an energy shock now than it was back then.  Indeed, did we hear right that John Chambers had the temerity to challenge consensus views and describe the macro background as being “a challenging environment”?”

Source: Gluskin Sheff

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