Food Fights

By: Michael Ashton | Mon, Apr 11, 2011
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A day after oil prices spiked, they turned around and plunged. The net effect was small: +$2.49 on Friday, -$2.87 on Monday (although at this hour oil continues to plunge, down another $1.50). This volatility is still preferable to the inexorable advance of the prior couple of weeks, but by my read unless front Crude comes back to close below $106.50 or so, the uptrend is still in place.

To really deflate energy, or commodities markets in general, the dollar is going to get up off of the mattress. But on Friday it dropped to lows not seen since 2009, and another 1% or so would put the 2008 post-war lows within sight.

For all that people complain - legitimately - about the fact that the steady expansion of the money supply has steadily eroded the value of the dollar against real assets, but the currency has not devalued appreciably relative to the other major currencies over a long period of time because all other central banks have been doing the same thing.

However, if the ECB is actually serious about their hawkish stance, this could be changing. While some Fed officials talk the talk, they're the back benchers: Kocherlakota, Fisher, etc. The votes that matter, however - mainly Bernanke's but seconded by Dudley and Yellen (the Vice-Chair is actually probably less important a voice than the President of the NY Fed, at least historically), continue to sound dovish chirps. Dudley this morning was warning that we shouldn't overreact to rising inflation. Oil's setback today notwithstanding, I suspect we haven't seen the highs of commodities nor the lows of the dollar yet.

That being said, the food fight on Capitol Hill was temporarily suspended on Friday night just barely in time to avert a technical shutdown of the government. I say "temporarily" suspended since the big fights are still ahead with the negotiation over the lifting of the debt cap next month and the 2012 budget yet to come.

So, in the meantime, we can again become amused at the antics on the Continent. Two great headlines today were provided by our friends across the pond. One was "Political Fights, EU Bailout Fatigue Could Unravel Portugal's Massive Bailout Deal" describing how the fact that Portuguese political factions are not in complete agreement about the bailout deal complicates the negotiations. The other, less immediate but more interesting at some level because it breaks the tacit agreement not to talk about how much better off certain countries in the EU might be if they weren't part of the EU, was "Italy Threatens to Quit EU Over Lack of Help on Immigration." That Bloomberg headline isn't available online as far as I can tell, but the important content was confirmed in this New York Times story: Italy's interior minister, Roberto Maroni, uttered the fateful words - "I wonder if it makes sense to stay in the European Union." It isn't Maroni's decision, but it is a good reminder that despite how unified people are in Brussels, there is widespread discontent with the Union among those bearing the consequences of the ministerial decisions.

Now, that doesn't necessarily mean the Euro is doomed. Indeed, if the periphery countries were to exit the Euro then it is in the long run probably good for the Euro. However, in the nearer-term this would create a lot more uncertainty about the unit. Personally, I think the long-run prospects for the EU are dim, but I still favor the uncertain outcome in that currency over the more-certain, but more negative, circumstances of the dollar.

So, we have food fights within the EU, within the U.S. Congress, recently within the energy futures markets, and in the Fed itself between the increasingly-vocal hawks and the still-solid doves. Perhaps these are not as dramatic as the live-fire fights in Libya and those threatened elsewhere, but market-wise these battles are starting to be fought in public and this can be unsettling for markets.

In a way, the economy's success over the last year has been the sire of some of these battles. In a crisis atmosphere, conflicts are submerged; when the crisis recedes the muttering becomes audible again. (This is sort of the flip side of Buffett's maxim that "it's only when the tide goes out that you learn who has been swimming naked." For it's only when the tide comes back in that you learn which of the shipwrecked crew was ticked at the others.) Maybe this is one more reason - to be added to "valuation" and "proximate completion of QE2" that stocks are having problems breaking above February's high.

There is no economic data on Tuesday, but Dudley, Hoenig, and Fisher will be on the tape in that order.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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