Commodities and Inflation

Earlier I mentioned commodities seems to be acting strangely today, even though they are roughly in line with the dollar's action (there's a largely inverse relationship there), the dollar hasn't had the same correlation it once had and certainly not to the degree.

A whole host of strange events have taken place over the holiday weekend from the Obama move to curb speculation in the oil market, to China warning about the US protecting creditors, followed a few days later by a seeming threat to unload 2/3rds of their US debt holdings and now we have Benanke giving an open interview after this week's FOMC policy meeting, that hasn't been done by a Fed chairman EVER! As mentioned in a WSJ article this weekend, Greenspan conducted an on air TV interview and shortly thereafter we had the 1987 crash. Greenspan never did that again and became known for "Greenspeak" which is to say, he'd say a lot, but at the end you'd take away nothing from it, he wouldn't let on to what his intentions and opinions were. Bernanke is about to change all of that which is a very risky move for a Fed Chairman , especially in a live-mic interview when you don't know what questions are coming. Bernanke has asked his overseas Central Bank counterparts how they handle these situations and there are rumors that he's been conducting dress rehearsals with staffers to prepare. The question is why is he taking this risk now and right after the FOMC policy is announced?

These latest insights about the FOMC meeting came after I said what I said about commodity behavior today, so I'm thinking there's some linkage.

The Dallas Fed Production Index released today, moved down from 24 to 8. Shipments were down, the average employee workweek was down while wages increased, prices paid is still elevated. In the comments section, here were a few choice excerpts: "commodity prices continue to increase with a negative impact, we are taking price increases to the market (think NKE ), Sales are up, margins are at record lows,rapidly increasing costs and fuel costs have SHOCKED consumers away from non-mandatory spending"

The net result, the Bernanke Chinese Finger Trap. I think the market is not comfortable with this interview Bernanke will conduct, not because he might slip up, but because it seems very drastic.

I can't render judgement with regard to the Fed's plan moving forward, whether they'll keep rates low and let inflation rise or raise rates and kill off any green shoots.  Congress is a big part of the problem and a hike in rates would force Congress to act to impose some fiscal discipline. That may be the best outcome as it may restore some faith with our creditors so the Fed doesn't spend the foreseeable future propping up our debt markets while the rest of the world runs away from them. Do I think it's likely? Not really, but a I said in 2007 before the bubble burst in a 5 part video series on bubbles and the real estate bubble (pundits were still preaching Dow 20k), "The economy is much like when you have food poisoning, the last thing you want to do is be nauseous, but until we go through that and take our lumps, this economy can't get better". The Fed's managed to kick the can down the road ever since 2009, but Congress isn't willing to act, our debt buyers and even worse, debt holders are telling us, "This is the end of the road, no more kicking the can". So this FOMC meeting seems to be shaping up as a major event. It seems most analysts think that the Fed feels it's too soon to raise rates and that Bernanke will use the press conference to be the first voice heard out of the Fed justifying the reasons why. For others in the Fed, it's not too soon, it's too late and their voices will be heard in short order.

Thus commodities I believe are acting a bit strange and I think it has more to do with the FOMC then the dollar.