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.