patrick.net

Not all commodities are created equal.

Industrial commodities are heading for crash landing soon right around when Chinese economy takes a nosedive, copper, zinc, mineral ore and all that good stuff. These minerals are not in real shortage once the world economy contracts and the building boom is over, and one can always recycle them.

The only hard commodity that can substitute currency is oil. 60% of the world's transportation is reliant on oil, and the cheap oil is gone. It is the basis of our lifestyle. Sure, oil will crash, but that will not be due to a contracting world economy, but a reasonable alternative, which is at least 20 years away.

Agricultural commodities are just riding on the back of oil and natural gas. Corn will crash when the US reverses its stupid "burn food for fuel policy", but there are some staple foods like soybeans that are facing true shortage, temporarily of course.

I think it is important to put commodities into several bins and rank them in terms of demand-and-supply situations.

OO, you are right about the fundamentals w.r.t. various commodities.

But in a secular deflationary scenario (which is what the quoted article seems to suggest), won't all the fundamentals be rendered moot until the markets adjust to dramatically lower liquidity levels?

On a related note, now that Buffett is open to providing a backstop for Muni ratings (and only Munis), I am thinking we will see monoline downgrades this week.

Monolines get downgraded. They declare bankruptcy. Buffett steps in and scoops up the Munis so they maintain AAA ratings. Monolines choke on the remaining toxic stuff. Buffett is the only game in town for AAA rating - so he gets *all* their future business. Brilliant. The man is a Genius.

Fed is not at its wit's end to drown the market with more liquidity. The current situation is like, the Fed lacks a tool to sprinkle money directly to the market because the primaries are hoarding the cash they just got. When Fed needs to bail out some financial institutions directly, that's one way of injecting liquidity. It also still has 3% to go for rate cutting. And the best tool of all is, increased government spending just like what we did in FDR time and what Japan did in the last 16 years, building roads to nowhere while taking down dams. Japan's Yen debt was something like 180% of its GDP, but it was all raised in Yen and that was sort of like our dollar debt situation. There is also no indication that Fed won't ramp up its open market operations again.

In the real world, we won't get straight inflation or straight deflation, we get a mix of both in different categories of things.

In a fiat world, lack of liquidity just doesn't exist. However, the government cannot *direct* where the liquidity goes. So even if it tries to reflate, the excess liquidity it injects into the system (which they will do so in an unprecedented way) has its own will, and most likely will not end up in categories that the government is trying to rescue.

Interesting that Adler points to SOMA funds reduced on evidence they were merely feeding further speculation. And the advent of TAF to get monies distributed broadly (repair of B/S, available to lend in the real economy).

Have we been mischaracterizing Mr. Bernanke? That chart says we have.

What are the implications of deflationary recession (on the evidence) for the various asset classes? Certainly Wall Street looks like a deer in the headlights.

Any time a new acronym is introduced my "pucker factor" increases. Such was the case with the introduction of TAF (Term Auction Facility) So are we to understand when they Fed opened up the window and nobody showed these latest brain farts were rolled out?

"We didn't think about the fact that removing reserves from the Primary Dealer accounts would trigger a mass liquidation in stocks. Next time we'll know."

Notice (as the article points out) these actions last July also seem to have coincided with the end of the bull market.