"AS WE WERE SAYING BEFORE WE WERE SO rudely interrupted by a man dressed in a white smock and wielding a scalpel (thank heavens he left his box-cutter at home), the stock market looks a bit worse for the wear."
So says Barron’s Alan Abelson, usually one of Wall Street’s most visible Bears. Just his luck — or was it the Trading Gods having some fun? — that he managed to be out of service for the most bearish period in 3 years. Traders, being a superstitious lot, will soon be begging Abelson to "let us know the next time you go in for a procedure" — so they can get short.
Regardless, whatever the man dressed in a white smock removed, it wasn’t his arch sense of humor or acid tinged tongue:
"The impact of the massive disturbance was global in every sense: Not only were its terrible tremors felt far beyond the narrow canyon of capitalism in lower Manhattan, but they commanded notice in quarters much loftier than trading floors or commodity pits. We’ve not the slightest doubt, for example, that what prompted the famed cosmologist Stephen Hawking early last week to urge earthlings to create settlements in space was, pure and simple, fear of the effect of crashing markets on the human race."
But the key to Abelson’s return is his clear eyed take on inflation, which comports squarely with our own views:
"FOR OPENERS, OUR HUNCH IS THAT MR. BERNANKE’S concerns about inflation, despite his mucking up the message with all that rubbish about inflationary expectations, have more than a modicum of merit. And our conviction on this score is only strengthened, of course, by the fact that so many pundits pooh-pooh inflation as a problem. Indeed, if anything, we fault the chairman for his evident sympathy with the argument that the fearsome upward spiral in the price of crude, so far, anyway, hasn’t been exerting all that much impact in the economy at large.
Apparently, Mr. Bernanke, like his critics, needs to get out more. Oil is a very sneaky commodity. Our old friend and revered Barron’s contributor, Abe Briloff, likes to describe certain stealth accounting practices as comparable to a bikini: what they reveal is interesting, what they conceal is vital. Oil is something like that: Its uses are readily manifest, but it plays a far bigger and more critical role in our lives than is easily perceived.
Food is a good example. Farmers are unusually dependent
on oil and its by-products, which go into everything from fertilizer to
the gas tanks of their huge guzzling combines. OPEC’s shenanigans thus
have a pronounced effect on the price of victuals, the only evidence of
which confronts the consumer at the supermarket checkout counter. And
the fact is, whatever the official tally shows, anyone who isn’t
clinically anorexic can attest that eats continue to cost a heck of a
lot more these days, whether you’re dining in or out.
The rich price of petroleum is affecting agricultural commodities in
a less visible but increasingly ponderable fashion as well. The highly,
perhaps overly, publicized virtues of ethanol, to illustrate, has
prompted a bit of a run on corn and prices of the stuff have responded
accordingly. This kind of thing can be contagious. So it’s at least
conceivable that grains, which generally have not enjoyed the kind of
whirl given to metals, say, will prove to be late speculative bloomers
in this big commodities bull market. Not exactly a cheerful prospect
for those like Mr. Bernanke who are paid to fret about mounting prices
. . .
The principal engine of the global inflationary surge is, it’s no
secret, China. And the latest data from that monstrously growing
economic dragon shows it’s still breathing fire at a fantastic rate.
Last month, the country’s industrial production rose an astonishing
17.9% and in the first quarter of this year, GDP sprinted ahead a
blazing 10.3%. Besides an unshakeable thirst for oil, China has been
bolting down industrial commodities at a truly awesome pace. According
to Morgan Stanley’s Steve Roach, in ’05, it accounted for 50% of the
growth in aluminum consumption, 84% of the rise in demand for iron ore,
108% of the increase in consumption of steel, and 115%, 120% and 307%
in the growth of worldwide demand for cement, zinc and copper,
respectively. How do you say "wow!" in Chinese?
And despite Beijing’s solemn vow to cool it, the 19% jump in the
money supply in May suggests otherwise. We remain skeptical that the
folks in charge of China’s so-called command economy have all that much
interest in cooling it and all that might portend for a huge restive
and grossly underemployed population. The only thing that will truly
cool the red-hot Sino economy, we fear, is implosion. That’ll happen,
but not tomorrow or the day after. Which means the odds strongly favor
a fresh lease on life for the boom in commodities…and their prices.
So ask not why Ben’s antsy about inflation. He should be."
When Ben Burped
UP AND DOWN WALL STREET
Barron’s Monday, June 19, 2006