Fascinating chart, via Jeff Saut:
Reuters/CRB Futures Index
Jeff notes the combined impact of Liquidity and Risk Appetite on the markets:
"Lastly, we believe liquidity certainly plays a role and currently the U.S.
monetary base is exploding. Moreover, it is not just our money supply that is
surging but Australia’s (+13% year-over-year), England’s (+13%), the Euro Zone’s
(+9.3%), Korea’s (+10.3%), China’s (+16.9%), etc.
Yet as we have suggested, while liquidity is unquestionably a driver of asset
classes, if investors are unwilling to take that liquidity and buy something
with it asset classes go nowhere. Manifestly, you can throw all the liquidity
you want at the markets and if investors have no “risk appetite” they will
merely take said liquidity and stuff it in a money market fund.
have argued that investors’ risk appetite is the ultimate driver of asset prices
and after the nearly unprecedented rally from July 2006 to February 2007,
participants’ risk appetites are currently high. When this will change is
unknowable, but change it will. Yet as Charlie concludes, “While we are in
uncharted waters in this regard, no one can foresee a financial accident, much
less know its timing.”
Interesting. Here’s a hypothesis for you though – if you look at oil which has been a primary driver of the overall commodity rise it’s almost showing an ‘S-curve’ like shift from one steady-state to another. That shift appears to coincide with China’s serious entry into the WTO. Courtesy of the STL Fed and FRED one can see the graph here:
I wonder if it would be possible to look at commodities for a longer timeframe ? My guess is that while we’ll see a continued growth in worldwide demand with the BRICs we’ve gone thru the state-shift and will now by oscillating around an upward trends. Give or take a war, civil insurrection or five.
Did you notice the comments about housing market from the same Raymond James web site. I am not sure you inadvertantly or advertantly excluded the comments.
I will include them here for you.
As for real estate, historically real estate has been an “effect” and not a “cause.” In fact, we can find no instance in which real estate has pulled the economy into a recession. Therefore, to think it is going to happen here, one must believe that real estate has become so entwined in the economic fabric of the U.S. economy that it has morphed from an “effect into a “cause” . . . and we’re just not there. We do believe, however, that if indeed real estate has bottomed the recovery will NOT be “V-shaped” in nature, but rather an “L” recovery, or a long, drawn-out affair. Yet it is worth noting that the real housing story may not be in the recent 14.3% housing “starts” collapse, but in the housing “completions” figures, for as David Rosenberg notes:
“Keep in mind that starts are only footings in the ground – they only represent the first 10% of the housing process. So while housing starts have collapsed to 1.4 million units, in that same report we saw on Friday, housing completions barely declined, and are running at just under a 1.9 million rate, or 33% above the current level of starts. And so the most important takeaway is that construction cycles, in the aggregate, don’t end until completions converge on the level of starts, and that usually happens 9 to 12 months after the housing starts number hits a trough. With completions running at a near-record pace relative to starts, the worst of the decline in overall residential construction, employment and housing-related manufacturing output is arguably still ahead of us.”
Hypothesis: The capacity of market players large and small to create money through credit is now large and beyond the direct control of central banks. Therefore, the liquidity we are seeing now is the result and the risk appetite the cause, much more than visa versa.
And yet this index doesn’t look so hot. Who to go with?
I made a very similar point in the piece I did for John Mauldin at the end of 2006 (and I didn’t want to seem like I was quoting myself!)
Its here: Real Estate and the Post-Crash Economy
Go to the section called “An Unusual Post-Crash Recovery: The Backwards Cycle”
That commodity chart looks a bit toppy to me….getting crowded at the top.
Case in point (that liquidity cannot force asset prices higher): Japan 1990-2004/5. I’m still trying to figure out why modern economists think otherwise (or that depreciating currency (buying power) is acceptable). Can we start listening to the sage, Dr. Faber: http://www.dailyreckoning.co.uk/article/100120072.html
China pouring all of their excess dollars into commodity futures?
Ok, dumb questions from a college student…
1) How do these guys know the rate at which monetary bases are increasing, or know them to be any different from stated measures of inflation?
2) How much does the yen have to do with all of this? My impression was that Japan glutted the market with yen, and carry-traders transferred that glut over to other currencies.
3) Why is this alleged asset price bubble not spilling over into common prices? Or is the hypothesis that inflation is at blowout proportions in certain very rich areas (where there’s lots of hedge fund money) and very close to stated Fed levels in most of the country.
That Faber link was tremendous.
Influentials/Elites making the most of the chaos of the asset-inflation endgame is a factor I did not contemplate, but it cleaves together nicely with the notion that national security motives are unduly influenced by the military industrial complex. No matter what the outcome, the influentials win & the economy loses.
Thanks for sharing. Owen
Given the money supply of ” Australia’s (+13% year-over-year), England’s (+13%), the Euro Zone’s (+9.3%), Korea’s (+10.3%), China’s (+16.9%)”, etc., doesn’t this seem about right? Look at the slope and measure the Y over Y increases. If the money isn’t worth what it used to be, goods and commodities rise in price.
If they are all inflating their currencies, then the risk of a disaster would seem to be very much reduced. If there was a super large difference between countries, don’t you think it would be arbitraged away or end quickly due to currency flight, and not be allowed to build much over time, toward cataclysm?
The risk of a monster bad event seems more to do with the structuring of financial instruments and their respective risk ratings, compounded by the error investors are making by WILLINGLY accepting yields much lower than the dangers these investment vehicles warrant. Risk premiums, or the lack there of, for certain investments and mortgage backed securities scare the hell out of me more than the rate of world inflation.
Mom and pop can hedge against monetary inflation through the purchase of gold or other commodities. They can’t hedge against bubble mentality which may permeate the financial sectors, resulting in very serious mis-pricing
Check out the price of gold, particularly against the Yen, and the other currencies listed above. The hedge is available and people are using it.
It is worth noting that Greenspan is now predicting a “possible” recession:
Mr. Greenspan said the U.S. economy has been expanding since 2001 and that there are signs the current economic cycle is coming to an end. “When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign, for example in the U.S., profit margins … have begun to stabilize, which is an early sign we are in the later stages of a cycle,” he said. “While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown.”
Given his past predictions, I’m not sure what it means.
Really? You don’t say!
How the hell did I miss that one???
We’re approaching an important top in Gold.
I believe we’re about to enter a period of relative currency stability. That’s a contrarian stance, eh?
Tech is way under owned…do the math.