Oil stocks and commodities have soared with help from none other than our friends at the Federal Reserve. The historic steps the Fed has taken, especially quantitative easing, has set the stage for the incredible stock and commodity rally that we have seen this year. You see the Fed with its unlimited almost magical powers to print money, reduce the value of the dollar, export inflation to the developing world, forcing investment funds into commodities by creating negative real interest rates in passive investments and allow banks to make back billions of dollars of lost assts by exploiting the carry trade creating one of the most exciting commodity bull runs of all time. Yet now with recent Fed statement signaling the quantitative easing is coming to either a premature or timely end, is it possible that the party is over; or has it really just begun?
First it was Chicago Federal Reserve President Charles Evans who said that the Fed should continue following through on its $600 billion bond buying spree that recent strong economic data might suggest that perhaps no more QE will be needed. Then Federal Reserve Bank of Dallas President Richard W. Fisher said essentially the same thing. Philadelphia Federal Reserve Bank President Charles Plosser seemed to take it a step further almost suggesting that the completion of QE2 might not be needed. Now it is St Louis Fed President James Bullard shaking up the bond market and the dollar saying that the economy is strong enough for the Fed to stop $100 billion short of its planned $600 billion Treasury purchase program.
Yet despite those words and some momentary pullbacks in some commodities it seemed that the markets were unmoved especially the stock market. Even with the possibility that the Federal Reserve’s training wheels are starting to come off, the market seems to believe that the Fed won’t act swiftly enough to get ahead of the commodity and stock inflation curve. In other words instead of being bearish for stocks and commodities the market sees the economy recovering as bullish for commodities. The market is saying the Fed by raising interest rates will not produce more corn or even oil. The market has seen the steps that the Chinese government has taken to slow their own inflationary bubble have only had a modest impact on commodity demand. The market is saying quite simply that it believes the Fed, just by thinking about an exit strategy, is bullish because the economy must be getting better yet at the same time is warning that the Fed has already let inflation for food and energy to get out of control. The Fed’s tunnel vision focus on the core rate of inflation won’t serve them well this time because the market seems to be suggesting that by the time the inflation shows up in the core rate the damage from food and energy inflation will already be done.
The Fed keeps talking about slack but with events in the Middle-East and challenging weather conditions around the globe and the incredible demand for ethanol slack is now slaking I guess you could say. At some point the Fed removal of stimuli will weigh on prices and if the Members of the Fed are listening to the market it is telling them quite clearly that you better act decisively or inflation will get out of control. In the mean time commodities and the stock market may challenge Fed assumption and taunt them with another rally. Still light spring break volume and people shying away from the market because of continued uncertainty surrounding Japan’s nuclear nightmare may cause some crazy moves.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.