Oct

5

Today I attended a talk by David Hightower. The title was "The Inflation Spiral, Part 2". He's bullish on many commodity markets. In the next 6-12 months, he expects gold to reach $820 per ounce and crude oil to exceed $90 per barrel. He was careful to hedge his forecast by saying he was short-term bearish on energy (because of the end of the hurricane season) and agricultural commodities (because of the harvest).

Other key points from his talk:

- The emergence of China and India creates an increasing demand for natural resources, which will continue to result in cost-push inflation

- The emergence of not only the Euro, but also many formerly neglected currencies such as the Brazilian real, has created many alternatives to the U.S. dollar, which will probably continue to slide

- The Fed crossed an important threshold in September when, for the first time in 30 years, it cut rates despite a clear inflationary threat

- Despite a "shockingly large" corn crop this year, there is no glut

- There will be a "battle for acres" in agricultural markets going into 2008 that will link these markets together and make prices likely to go up

- When sugar exceeded 18 cents per pound last year, the Brazilian government diverted sugar supplies away from energy production in order to ease food inflation

- Stocks are going up in anticipation of an October rate cut. If anything happens to make a rate cut less likely (e.g., a strong employment report), stocks will decline

- The Fed was forced by the subprime crisis into reluctantly cutting the funds rate and will raise the funds rate as soon as the subprime crisis is over.

Roger Arnold replies:

I'm all for forward thinking and looking for where new and divergent patterns and trends begin or become apparent. It's a necessary process to go through so that your brain doesn't atrophy.

But, the number of guys, usually commodities, calling for a dollar crisis, with all of the attendant reflections in foreign flows, commodities, etc. is kind of spooky.

They never seem to provide the caveat that their prognostications for a dollar crisis — not just and end of dollar hegemony but a reversal of that hegemony — are without historical precedent and should be considered very very carefully before placing that bet.

And outside of opaque discussions of the rise of the Euro, the real, and even expectations for the yuan, they never ever take the logical next step in their argument and conclude with what currency or basket of such will replace the dollar.


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