Stocks were quiet once again today as the market begins to wind down for the holidays. Stocks closed slightly higher. Bonds were down and gold was also down slightly.
I sold some gold today. Many of you may ask why I would turn this holding into worthless US dollars. Don't get me wrong here: I still remain bullish on the metals longer term. However, I haven't liked how gold has acted over the last few weeks especially relative to other commodities. It's feeling toppy to me and I figured I can always buy it back later.
Speaking of commodities I wanted to discuss oil and gas a bit tonight. I am sure many of you have noticed that it has gotten increasingly more expensive to fill your gas tank in recent weeks. In fact, there has been a pretty large spike in gas prices just in the last few days:
Oil also remains stubbornly high despite weak demand:
This is not helping things folks. Oil is used to make pretty much everything in our economy. Gas prices act like a tax on the consumer when it starts to rise substantially. People begin changing their purchasing habits when it rises over $100 a barrel. I think it's already having an effect right now as wages fall and unemployment rises.
The NIKE warning of higher input costs needs to be taken seriously by the markets.
It's not just oil folks: Other commodities like cotton are also rising sharply as the middle class in the emerging markets continue to rise.
Over the longer term I see no reason why this will change. We could see a hiccup in the shorter term as a result of some severe deflationary forces as the westernized world's economies collapse but this will only be temporary.
There are two reasons why I say this: China and India.
The one area where I remain bullish longer term is Asia and India. When I look at China I see late 1800's America. We were a manufacturing powerhouse back then, and our middle class flourished as we produced things like steel for the rest of the world.
As our nation developed into the most powerful economy on earth in the 20th century we slowly morphed into a service/consumption based economy.
As a result, we decided to ship our manufacturing jobs over to China/India. We are now learning that this was a HUGE mistake. This is a shame because it's too late to change things now. These jobs are never coming back unless Americans agree to work for $300 a month.
At any rate, "it is what it is" which means China will eventually replace America as the largest economy on the planet. There will be some growing pains along the way but I don't see how it doesn't eventually happen.
That being said, in the shorter term China is going to have some serious problems to deal with as a result of the westernized world's economic issues. For example, the Fed is essentially destroying our currency as we continue to spend money that we don't have.
This threatens China's treasury holdings and it also creates severe inflation problems in the Far East. China is also facing other inflationary forces from it's people that want higher wages and a better life.
China has no choice but to give in to this pressure in order to avoid social unrest. As a result, their middle class is soaring and their demand for better food and goods is soaring right along with it.
The Bottom Line
China's growth is going to put us in a precarious position because it's going to create inflation for the necessities that we need in order to live at a time when we cannot afford it.
The inflation/deflation debate IMO has been resolved:
We will see inflation in the things that we need for everyday life, and we will see deflation in assets like housing that are not. This is going to be my theme for 2011.
The Fed's trashing of the US dollar will make this problem even worse. They are getting a free pass for now thanks to Europe's troubles but this is a temporary reprieve.
Making matters even worse is the speculative money that continues to fly into commodities as the smart money continues to lose confidence in the equity/bond markets.
This hot money will make the commodity trade increasingly volatile as the economy continues to free fall. I expect too see wild swings in all commodities throughout the year.
None of this will be good for the consumer of course. I could see $3 per gallon swings in gas prices over the next 12 months as oil deals with currency,demand, and speculative forces that will become increasingly more volatile in 2011 as the world suffers through another year of global financial chaos.
Hang on tight folks. It's going to be a bumpy ride.