Tag Archives: commodity prices

US to Lose AAA Rating?

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Please note that any opinions related to this or other articles on this blog do not constitute financial advice. Any action that you take should be done so only with the advice and support of a financial planner or registered advisor.

The US is about to lose its AAA financial rating .

The thought ‘no shit’ is the first to come to mind.  These people are printing money faster than Bolt might run the 100 metre dash, and they don’t seem to show any concern what-so-ever that the meltdown in the markets is structural and that the cause is the Federal Reserve.  It is not the solution.

I’m sure we can examine the cause for some time.  The root for me is greed, but maybe some of you have other opinions?

For the effect?  The end result of this?

Most analysts will immediately say that the US will have to increase interest rates in order to attract more buyers of their own toxic debt.  As credibility goes down, rates have to go up to reward capital suppliers for greater risk.

Another important impact is that the value of the US dollar (say, compared to a basket of other currencies) will plummet.  It’s had a brief run upwards, largely because of the need for derivatives traders to cover positions over the last 2-6 weeks.

If you’re wondering why the dollar will fall despite the fact that it’s jumped a little in the last few weeks, just think in terms of supply and demand.  The Federal Reserve and the US government have made commitments to possibly double or triple the volume of ‘cash’ in the marketplace.

The simple laws of economics cannot be ignored:  with excessive supply comes a drop in value.  The vast supply that has been created will trickle into the system over the next 2-6 months and the result will be to ‘lubricate’ the US economy.  I don’t think we’ll see a hike in inflation within the US for some time, given that there are so many other structural issues now (no housing market, no auto demand, etc).

As the US dollar drops, remember my term for what will come next:  ‘interflation’.  This is the exporting of inflation to the rest of the world at the benefit of the US as a result of most commodities being priced in US dollars.  Because we’re still stupid enough to tie all of the international prices of commodities to a single currency (ie. the US dollar), the prices of all of these will take the exact opposite turn.  They will increase as the dollar falls.

So … enjoy the cheap gas and low-cost rice and corn while you can because they’ll return to the price levels that they were back in early 2008.

Biofuel’s link to ‘euthanol’

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Full story here.

This story is several weeks old, but the message is still important: biofuels are starving people.

Governments are quickly reassessing their biofuel strategies because they realize the effect that this policy direction has the world’s less-advantaged. I heard a story about how the TTC is going to reduce its purchase of new biofuel buses for this reason and how Dalton McGuinty of the Ontario Liberals was reevaluating their fuel replacement strategy.

Of course, studies like this still fail to account for the impact that the US dollar has on all commodities. Last week, most commodities started to tumble in value. Normally, when one, maybe two products experience a shift in price by more than 10% within a very short time-frame, you’d look for basic fundamentals like supply or demand shocks that would affect those prices.

However, when we’re talking about almost all commodities reversing their upward trend, there must be something else at play. The solution: they’re all priced in US dollars and the US dollar took a jump last week when Bernanke declared that inflation must be kept under control.

I truly believe that this kind of international commodity market hegemony is unprecedented and the world would do itself a favour if we found a different way to evaluate the worth of a product, beyond using the US dollar as a proxy.

Ideally, it would be a basket of currencies that reflected the true worth of international goods and services, but which currencies would those be?

The cost of not acting is obvious. The more the US economy crumbles, the more the rest of the world will be subject to a rash of ‘interflation’, international price shocks that are solely related to the tumbling value of the US dollar.

The bad news: as the value of the dollar decreases (which it will start to do again soon as efforts are made to revive their economy), the changes become exponentially different. For example, when the US dollar was trading on par with the Euro, a $0.05 change might translate to a $2.00 change in the price of oil, other things being equal.

When the dollar tumbles to $0.25 vis-a-vis the Euro (which I predict it will once most of the financial crisis finally comes to light), a $0.05 translates to a 20% change in price. Since oil is currently trading in the $120-$140 range, 20% of this range translates to a $24-$28 change in the price of oil.

is that kind of change in price a severe shock or poorly planned international pricing system?

Iran Drops Dollar – US Prepares to Attack Iran

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The fate of the world economy lies in the hands of the US dollar … and the people who print it.

Iran Dumps Dollar in Favour of Yen, Euro: Full Story Here.

Another story, with a quote:

At a summit last year in Saudi Arabia, Iranian President Mahmoud Ahmadinejad called the depreciating dollar a “worthless piece of paper.”

Eliminating demand for the US dollar will most likely send the dollar further downwards in value compared to other global currencies. This is obvious. What still seems to very obscure to most journalists and business analysts around the world is the continued impact that this will have on global commodity prices. Since most prices are quoted in US funds, expect more drastic increases and inflammatory stories about starvation, shortages and food riots.

In short, we will have international inflation, or ‘interflation’, as a result of poor economic & foreign policies in the US.

Of course, news of Iran’s changing economic strategy does not sit well with the folks in the White House and hawks like McCain and here in Canada with war mongers like Harper.

Is US Preparing for Attack on Iran?

No attacks are imminent and the last thing the Pentagon wants is another war, but Chairman of the Joint Chiefs of Staff Mike Mullen has warned Iran not to assume the U.S. military can’t strike.

“I have reserve capability, in particular our Navy and our Air Force so it would be a mistake to think that we are out of combat capability,” Mullen said.

Targets would include everything from the plants where weapons are made to the headquarters of the organization known as the Quds Force which directs operations in Iraq. Later this week Iraqi Prime Minister Nouri al-Maliki is expected to confront the Iranians with evidence of their meddling and demand a halt.

If that doesn’t produce results, the State Department has begun drafting an ultimatum that would tell the Iranians to knock it off – or else.

Sounds like it.

Commodity Pricing

Full Story Here.

This is an excellent analysis of the state of oil prices around the world, as priced in different currencies.

I would like to know if similar analysis has been done with other commodities, such as corn, rice and soya products.

As we can see, the intentional depreciation of the US dollar by American policy makers is inevitably resulting in extreme inflation, even for Americans. One might even go so far as to suggest that this is a form of economic terrorism, but I’m not quite there yet.

Meltdown of $US as China Sells

Full Story Here.

The continuing decline is taking global health with it. The dropping value of the US dollar is resulting in rapid price increase in global commodity prices, including wheat, gold, oil, rice and corn. All of these increases are creating global food shortages that are unprecedented.

My gut still remains in the same place: is there a way to bypass US dollar pricing for commodities, with the expectation that international pricing, as opposed to American pricing, will smooth the complex tsunami wave of changing prices?