In late May news pages were filled with stories that the runup in commodities prices was just a “bubble,” and it shouldn’t last long as some prices were already coming down. Curious, we put a call into our friend Jim Rogers to see what he had to say about this. He wanted us to name names, so we did: top gurus from the likes of Morgan Stanley and Merrill Lynch were stating that gold, oil, commodities in general, were just in the middle of a “commodity bubble.” Their words, not ours. After some teeth gnashing, Rogers gave us his thoughts on this so-called “bubble.” We spotlight some comments in our “Chartview,” page 12, however a fuller account can be found at our new and improved Web site, www.futuresmag.com.
But it’s not just commodities in a volatile mode. Today I opened the Financial Times (FT) to the headline “US is ‘not ready’ for Chavez oil ban threat.” The piece discussed the Venezuelan president’s threat of an embargo on oil exports to the United States, which gets about 11% of its crude imports from the South American country. A Government Accountability Office report the FT saw reportedly stated that a loss of “2.2 m barrels a day of crude oil for six months” would basically cause an $11 per barrel jump in the price of crude. Furthermore, the report said, that would cut U.S. economic output by $23 billion.
Meantime on Wall Street, Goldman Sachs reported a doubling in net revenue and earnings in the second quarter. The investment bank, whose chairman was just nominated to be U.S. Treasury secretary, earned $2.3 billion in the second quarter, double the previous period. Pretty damn good, right? Well, no. Shares on Goldman fell for the day.
Overall, the stock market had a rough May. The Dow Jones Industrial Average, just a step away from its all time high, fell and kept falling into June. This largely was blamed on new Federal Reserve Chairman Ben Bernanke, who hasn’t yet learned how to calm Wall Street’s nerves. He started his term by saying one thing, then re-explaining his comment when the Street freaked, which did not help his credibility. At least with former Fed Chairman Alan Greenspan, by the time the Street interpreted what he said, any reaction seemed to be muted. Now the real question seems to be: if the Fed does keep raising rates, which seems to be a given by traders, could that be overshooting and thus chill the economy, which is particularly sensitive to higher interest rate increases?
But that question already could be moot with the latest Consumer Price Index showing a bump up, portending the likelihood that higher inflation is here. In mid June the CPI rose 0.3%, bringing the annual rate to 2.4%. Realize though, the CPI doesn't include energy prices, which is like leaving the bed out of the bedroom. If indeed Mr. Chavez takes his hatred of America out on America’s oil supply, it will be Americans who suffer. And as the key engine to the world’s economy, that would undermine global growth.
Even though, as my financial advisor told me the other day “inflation is relatively low,” we’ve been living in a world where it barely has existed. But it’s time to wake up. Today’s families are being squeezed across the board, not only by energy prices, but all expenses. As one analyst noted in our mid-year economic outlook, “Is there a chill in the air?” page 20, the administration’s policies are “coming home to roost.” In a speech to the Economic Club of Chicago, Bernanke noted that recent inflation moves “bear watching.” Well, yes...and as the decider in the White House said, that’s your job.