Waking A Sleeping Giant

The news flow this week has been breathtaking.  We’re finally getting real dialogue about deficits, monetary policy, and interest rates.  Unfortunately, it is playing out mostly overseas rather than in our own country.  Choice words from German Chancellor Angela Merkel regarding central bank policy going too far, along with commentary from Chinese officials such as Yu Yongding that the U.S. must find a way to protect China’s assets, are forcing capital out of the dollar and into hard assets.

Merkel is on the tape with the following:

“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe.  Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds.  We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”

To top it off, U.S. Federal Reserve Chairman Ben Bernanke told Congress it needs to cut spending and/or raise taxes and audaciously suggested the Fed will not monetize the federal debt.  Oil and gold sloughed off a one-day pullback and marched even higher on Thursday before retreating again today.  Treasury yields are soaring.

Commodity bulls should probably thank Merkel for pointing out the obvious and short-circuiting Wednesday’s commodity sell-off.  All that is forgotten now, as the uptrend for energy, ags, and metals is still generally intact.  The unemployment report is causing the dollar to catch a bid, but any pullback in the commodity space should be used as a buying opportunity. At the end of the day, the capital markets are the final judge, not any politician or elected official.