Recently, commodities bulls have been aided by the Federal Reserve keeping rates low and banks' short-term funding flowing. This facilitates commodities trading and stokes fears of inflation. As cash flows into oil futures, their prices rise relative to spot prices. That makes it profitable to buy physical oil, store it and sell it forward.
Energy economist Phil Verleger demonstrates how lucrative this can be. On March 1, the cash price of light, sweet crude was $40.15 a barrel, while the 12-month forward contract sold for $50.26. Assume an investor bought the physical barrel borrowing 80% of the money at a rate of 3%, sold it forward, and paid 50 cents a month for storage. The resulting profit of $3.15 a barrel equates to a 39% return on investment.
So our central bank has once again created excellent times for market participants... prices for commodities no longer need to rely on supply/demand. They can rely simply on a central bank willing to make money nearly free, and banks willing to lend to hedgies (and use that money themselves) for strategic asset exploitation. We're all winners here - and oh yes, let's use that asset exploitation as a "sign post" of the soon to be flush global economy.
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Unfortunately, said exploitation of assets of the commodity type actually impacts the real economy. Look here, EZCORP (EZPW) which is one of the best operated pawn shops/cash advance companies in the country just lowered guidance saying this
Commenting on the revised earnings expectations, President and Chief Executive Officer, Joe Rotunda, stated, "As we have moved through our June quarter, we have seen lower than anticipated levels of demand in our U.S. operations for our loan products and previously owned merchandise. The continuing depressed economic environment is having an effect on our business that is not consistent with traditional or expected patterns. The revenue impact of these lower levels of demand has caused us to be more conservative in our earnings expectations for the June quarter and the balance of the year. We are fortunate that during these economic times we continue to have earnings growth, strong cash flows and a sound balance sheet."
When pawn shops are suffering, either (a) the economy is accelerating into a green shoot nirvana to such a degree their services are no longer needed.... or (b) things are deteriorating to the point that even these guys - who should benefit from hard times - are stagnating. I am sure you can determine where I stand... but I talk from Main Street. If it was just the cash advance business I'd say, less people are employed so less people have checks to advance... but since it's both business lines, it takes on a darker tone.
The ivory tower set will continue to use commodity inflation (created by Western central banks gone hog wild) and Chinese economic reports (with a banking system willing to disperse loans to anyone and everyone because their export partners are moribund) to dictate the "prosperity" they see coming over the horizon. "They" have been "right" for 3 months inso far as stock & commodity prices at least, so let's respect it. But please don't believe the propaganda about any of it as a signal of the soon to be joyous US consumer - the world's driver the past 2+ decades. We've had a multitude of these head fakes in latter 2007 and throughout 2008. This one is only longer in duration and has the turbo charging of quantitative easing behind it to inflate asset values. We are going to create selected bubbles - again, and those will burst - again, causing more emergencies in the future. Not only do we not learn from mistakes (tech stock bubbles, real estate bubbles, commodities explosion) via earlier easy money policies, we are copying and making them even bigger on each iteration as we desperately try to hide reality. Great for speculators... irrelevant for most of the peasantry (other than they will be on the hook for the next round of clean up as well).
As gas prices churn upward, and interest rates percolate ... the sickly US consumer will become very abundant when we look back in 4-6 months I believe. But it only matters when it matters. Until then... Kool Aid. And as speculators, we appear to "the chosen" since we can benefit from the next bubbles. Boo and Yah.
No position
