I am in the dollar! Get me out of here! Macro Economic misadventures, signs of recovery and the mother of all budget deficits created lust for commodities that made the month of May live up to its lusty reputation.
It was the lusty month of May as the lust for commodities grew at an incredible pace. Commodities went on a month long adventure. Commodities as a whole had their biggest monthly rise since 1974 as a confluence of factors, especially stronger demand hopes, against the backdrop of a deteriorating dollar. The yield curve between the two- and 10-year notes which widened to the largest spread in history seen last month and seems to suggest that the either the economy is going take off like a rocket or just a lack of confidence that the Obama Administration will ever be able to get the budget deficit under control. The buying of General Motors and another $30 Billion dollars to finance GM’s bankruptcy is just the latest in nonstop spending that is shaking the confidence in the fate of the US credit rating.
This increase fear of hyper inflation is leading to historic moves in commodities. Oil for one had the biggest monthly rise in a decade and silver the biggest monthly run since 1987. And the dollar hit a five-month low and had the biggest monthly drop against a basket of currencies since 1985.
This is leading to angst in China where they hold billions of dollars of our debt and tons of dollars and we are looking to them to buy more. At the same time demand for commodities in China seems to continue to grow. The Chinese are buying commodities because they are looking for an alternative to the dollar and they are buying them because it appears that the massive government stimulus spending in China is starting to work. For the third month in a row the Chinese manufacturing sector improved and expanded hitting 53.1 in May following up on a strong April of 53.5 as measured by the official Chinese Purchasing Manager index.
Meanwhile as Bloomberg News, Reuters and Dow Jones reports the Fed is puzzled by what all of this means. The Fed is studying why the yield curve looks wider than the Snake River Canyon and what the implications are on for central banks strategy for quantitative easing. The Fed is wondering if the steepening yield curve means the economy is going to recover faster and therefore it's time to stop stimulating it or is it because the market thinks that the dollar is going to be worthless because it feels the amount of economic growth that the plan will generate will not justify the cost sending the dollar tanking. That would mean the Fed would need a lot more stimulus of some sort going forward. The Fed is stumped by the yield curve conundrum and if they guess wrong either way it could cause problems for the U.S. and global economies for years. Or it may be that we may see a real decoupling of the global economies away from the U.S. for a period unless we get our twin deficits under control.
In the meantime investment in traditional forms of energy is being discouraged by the Obama administration. The president will visit Saudi Arabia and bow not so much in a sign of respect but so the King can kiss the President's backside. On the one side Obama needs Saudi Arabia as a mediator if his Mid-East peace initiative is going to bear any fruit and on the other hand he has said, according to Reuters News, that Obama would discuss oil costs when he meets with Saudi Arabia's King Abdullah next week and plans to say that big price rises are not in Riyadh's interests. How can he ask for the Saudis to drill more when he desires to drill less? How can he say he is concerned about the impact of energy on the global economy when he supports an expensive cap and trade agenda? How can he tell the King to invest in oil and pump more when he says that he wants to raise lease and royalty rates to discourage domestic production? Saudi imports to the U.S. fell to a 20-year low so I am sure the King is not all that concerned about losing this customer.
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com .
