The whole world is slowing down. Bad data out of Europe and China in the aftermath of a terrible jobs report in the United States, has the market living and dying on stimulative hopes. With rising gasoline prices and other issues, the Fed is going to be the carrier of the world’s economic burden this week when the Federal Open Market Committee meets and the world once again will be watching.
There was nothing to say about Friday’s jobs report except for the fact that it gave commodity bulls a great day. Yippee!! Hey, I have to play the hand they deal me. US payrolls increased a pathetic 96,000, a far cry from what is needed to keep the economy growing and another month with employment over 8.1 %. The number of under-employed is more than 23 million people. This is the type of number that will force the Fed to act if they are going to live up to their jobs creation mandate.
In China, August Imports declined 2.6% from a year earlier, below expectations. China’s factory output also fell to a three-year low.
Trilby Lundberg, of the highly respected and anticipated Lundberg Survey report, found that gas prices rose 8 cents a gallon over the past two weeks, and are approaching the high for the year. Lundberg says that the average price of regular is now $3.84 a gallon, just 13 cents below the peak that was reached this year in April.
The rise in gas prices was caused by Hurricane Isaac but also by the hopes for easing.
I thought the debate over the impact of Fed policy and easing was over but apparently I was wrong. Bonnie Kavoussi of the Huffington Post unfairly attacked CNN’s Erin Burnett saying that Erin made a “false claim” by saying that, "Easy money has also sent commodity prices higher.” While I know some economists are biased, you can’t ignore reality. The market moves on Friday prove, without a shadow of a doubt, that what Ms. Burnett says is absolutely true.
Yet despite clear evidence to the contrary Ms. Kavoussi incorrectly claims, "There has been no correlation between the Federal Reserve's quantitative easing and commodity prices. The Federal Reserve started its first round of quantitative easing, or asset purchases aimed at stimulating the economy, in November 2008 and its second round in November 2010; there was no resulting, lasting spike in commodity prices. Commodity prices actually peaked in the summer of 2008 before quantitative easing began.”
That's just not true. Take oil for example. When the Fed put in QE, prices were in the $40 handle after falling from approximately $147 at the peak. Now oil prices are near $96 a barrel. Prices peaked because the world was falling apart. We stared to realize that the price spike in oil was caused by the different rate policies in Europe and the United States.
You see you can’t have it both ways. If QE indeed stimulates the economy, it has to in turn stimulate demand driving prices higher. It is simple supply and demand. In other words, any economist who says that Fed easing does not impact commodity prices is either deficient or intellectually dishonest.
In fact when I wrote the day after the first Quantitative Easing that the Fed had just printed a floor under commodity prices, it was not a popular view. I was blasted on TV and in news articles. My concept of the historic impact of quantitative easing on prices was not commonly accepted. Yet now anyone who follows the moves in the markets knows that Fed Policy and EU bank policy does impact price. If that were not true then why did copper soar after weak data out of the US ad China? If not pricing in Fed policy then there is no reason to rally.
"This is nonsense," Dean Baker, co-director of the Center for Economic and Policy Research, wrote in an e-mail. "These prices have been moving largely in response to real conditions of supply and demand (e.g. the Libyan civil war raised oil prices by taking supply off line, the summer drought in the U.S. has raised corn prices) often amplified by speculation."
That is nonsense as well. While prices have indeed been moved by the Libyan conflict and the summer drought in the U.S., to ignore the fact that the rising euro moved markets means you are failing to look at the obvious.
“Nobel Prize-winning economist Paul Krugman also has repeatedly debunked the claim that the Federal Reserve's asset purchases have caused commodity prices to rise. Instead, he writes, food and oil prices have risen because more people around the world need more food and gas, but the supply of oil remains limited and more extreme weather has hurt food production. What the commodity markets are telling us is that we're living in a finite world," Krugman wrote in the New York Times in December 2010. "As more and more people in formerly poor nations are entering the global middle class, they're beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies. And those supplies aren't keeping pace."
So Mr. Krugman, do you also believe that stimulus does not impact demand? If that is what you are saying then your belief that massive government spending is the answer to our economic crises is wrong as well. If stimulation does not increase demand, or if increased demand does not increase price, then you had better give back your Nobel Prize because you have just debunked your own economic philosophy.
Ms. Kavoussi said that, “Burnett also made misleading claims about the Federal Reserve on her show Aug. 31, when she compared the Federal Reserve's asset purchases to government spending. But the Federal Reserve actually has created new money to buy bonds.”
So Ms. Kavoussi, if what you are saying that the, “Federal Reserve actually has created new money to buy bonds” by creating “new money” don’t you lower the value or purchasing power of the dollar? So if commodities are priced in dollars, it will take more dollars to buy something that is priced in dollars. It is economics 101.
Yes, we have had other reasons for oil and gas to rally, but to dismiss the impact of Fed policy on commodity price, it cannot be denied and Ms. Burnett is absolutely right. It can impact demand and the value of the currency that the commodity priced in. If it does not impact underlying supply and demand for commodities, then why is the Fed doing QE in the first place. If the economy collapses, prices will go down and so will demand. If demand falls, so will prices. We saw that when the world fell apart. The Fed feared deflation so they printed money to stimulate economic activity, aka known as demand, to stop prices from falling. If the cure for deflation is QE, then it stands to reason that Fed policy impacts commodity prices. If not then what was the point?