Market McGuffin!

Alfred Hitchcock created the McGuffin: A plot device designed to catch the viewer’s attention, and drive the storyline. Every character was concerned with the McGuffin, yet they were just an artificial mechanism, lacking any real relevance. McGuffins were the excuse around which the plot would unfold.

In late August, the Market has its own McGuffins. With so many traders on vacation, these low volume days are lacking in substantive elements to drive trading action. To stem the tide of boredom, the WSJ has identified at least 2 market McGuffins: the strengthening Dollar, and a rise in Commodity prices. The Journal identifies both as possibly derailing the recovery; I believe they are wrong in both cases.

During an economic recovery, commodity prices should increase in response to improving demand. The WSJ’s observation that constrained supply is increasing prices, rather than an increase in demand, is at best misleading. They note Lumber has run into supply problems due to Canadian wildfires, while tight Saudi inventories is keeping Crude over $30 barrel.

I must respectfully disagree. New housing starts have been at record levels for several quarters now; SO have refinancings (altohugh refis are finally slowing). Anecdotally, half the homes in my neighborhood have had recent additions or renovations done – building and renovating homes don’t use legos, they use lumber — and lots of it.

As to Oil, energy demand should pick up as any economy recovers; Given the geopolitical situations in Venezuela, Nigeria and Iraq, Crude at $30/barrel really is not all that bad. Perhaps it’s a side benefit of our mild recovery that Crude has not spiked to closer to $36.

Gold, described by the WSJ as a “traditional sign of nervousness by investors,” is also up. But this is due to the reflation of the economy, thanks to massive Fed stimulus, and a steep yield curve – not supply constraints or fear.

As to the Dollar increasing versus the Euro, its worth noting that the stronger U.S. currency suggests that foreign investors are placing their bets in U.S. dollar assets – and that helps to keep our markets rising. When the dollar was weakening prior to the war, it was due in part to lots of repatriation of overseas assets. That process seems to be reversing, as overseas money pours into the US markets.

We would expect Commodities, Interest Rates, and the Dollar to gradually rise in a healthy, reflating economy. What continues to disturb us is the lack of Job creation, despite record stimulus and other economic improvements. Until the economy stops losing jobs, and starts creating them, we will continue to view this recovery as only “mild.”

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Quote: “”The wealth of nations literally rests upon their ability to sell into the U.S. market, and they guard that jealously. Countries like Japan, Germany and China find it in their national interests that U.S. purchasing power remains strong. Their national prosperity is tied to that, so it should be no surprise that when the dollar gets too low, policy engages to bring the buck back up again.” –Mike Norman “The Dollar Rebound

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  1. Yasser commented on Aug 23

    It’s equally likely that gold is rallying because of geopolitical worries (ie, terrorism, Iraq, etc.). Besides, why should gold prices be correlated with cyclical reflation anyway? Fiat money is here to stay and the gold standard is but a distant memory.

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