Normally, this would trigger inflation, and we believe that is the ultimate result. But, why now? US interest rates are higher than the rest of the developed world, the US economy is strong, and unemployment is 4.3%. All of these factors typically strengthen a currency.
The US Trade Deficit has improved from the prior decade, and stands to improve more as we export more oil and natural gas.
The US Budget Deficit is down from the financial crisis, but the deficit in June 2017 was an astounding $90 billion! Could this be signaling that something perverse is coming?
After the failure of the Senate to repeal/replace or make Obamacare more efficient, Senator Mike Lee from Utah was interviewed. His comments were truly unsettling.
The Senator pointed out that the unfunded liability for Social Security, Medicare and Medicaid are estimated to be $109 trillion. Further, that there is no political appetite to do anything about this impending disaster. While the anti-reform advocates claim to be deeply concerned about the sick and the elderly, they are unconcerned about the financial health of the rest of the country…or world for that matter. What happens here in the US is likely to reverberate throughout the world.
If nothing is done to fix these problems, and it should be clear that nothing will be done, our Federal Debt will metastasize to proportions not seen since the Weimer Republic in the 1920’s.
Deficit spending should be simulative to the real economy as should QE (quantitative easing), but even with $7.2 trillion in deficits spending, and $6 trillion in QE since 2008, the economy has stagnated. The economy has waned because the government chose to buy bonds instead of putting the money into building infrastructure, job training, and public works. The stimulus therefore flowed into the hands of the institutions and wealthy individuals – the evidence lies in the huge gains in the stock market. For a long time, wages stagnated and the economy limped along. Notional evidence of this lies in the gap between the performance of stocks and global commodities.
The problem for investors remains not the “if” but the “when.” Timing is hugely important. If investors are unfocused on a situation, they do not move their money to protect themselves from it, and prices do not rise. Right now, the lack of investors focused on this situation is evident in the relatively low prices of inflation-sensitive issues.
But there are indications that this may be about to change. First, in the last nine months, the growth in global industrial production has increased to the highest level since the financial crisis. The advance in the global PMI (purchasing managers index) has reached pre-crisis highs. So, the global economy is stirring.
The BDI (Baltic Dry Index) is an economic indicator that reflects the cost of shipping dry bulk cargo around the world. This index stood at 632 one year ago. Last week, it was at 1032. One can only infer that there is increased shipping of raw materials around the world. This is a reliable indicator of future economic activity. It is also priced in US Dollars so it may be reflective of the decline in the trade weighted index of the Dollar.
In the last few market sessions, the Dollar broke down to a new 2 ½ year low and is within 11% of a new all-time low. Oil price briefly broached $50 bbl. and the Bloomberg Commodity Index broke its near-term downtrend. Russian sanctions have been increased, further stressing their imploding energy industry. And North Korean coal is now blocked by UN sanctions. Further, there is crop stress in the Corn Belt, unemployment dipped to 4.3% to a new 16-year low. Year over year wage gains are now back to where they were in 2007.
These are all precursors to inflation.
The natural investor reflex might be to buy gold, but if we have a broad global economic recovery, gold which is most often stimulated by crisis may not respond. We have had great weather for crops in the world for several years – that will change. If there is a drought in the US Midwest, commodity prices will rise globally, and gold may not move at all. So, why take a chance on gold. One can buy the Bloomberg Commodity Index itself in the form of an ETN, which is a first cousin to the ETF concept. Investors who believe in the concept we have presented, AND are suitable for an investment that some uneducated compliance professionals might call high risk, might want to consider this ETN. The symbol is DJP.
After nine years of decline, the index has begun to move sideways. It is called basing. It is about 12% away from finally breaking the recent six years down trend. Further weakness in the Dollar, which is already in a long term down trend, should reverse the downtrend in commodities. We believe it is eminent. For those who are also concerned, we think small positions in DJP and in one of the oil EFT’s are advisable with the commitment to expanding those positions as the trends finally confirm our suspicions.