Commodity Inflation Causes Consumers to Cut Back on Spending

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Stocks are out. Bonds are out. Real estate is out.

Commodities? That’s where the money has been made lately. Commodities have just had their best 6 months in 35 years. But our guess is that many are in bubble mode and will continue to rise as the U.S. Fed pumps more liquidity into the system. But betting on commodities is not a one-way wager. Tony Jackson tells us that in the 1970s, commodity prices, adjusted for inflation, were flat in the United States and down in the United Kingdom. Besides, remember that high prices cure high prices. As commodity inflation bubbles over to retail price inflation, consumers cut back. Demand falls. The economy slows. Commodity prices drop.

It may be true that commodity prices will continue to rise for a few years more. It may even be true that real commodity prices will be higher 10 years from now than they are today. But at today’s prices, looking for safety in the commodities market is like protecting your son from bicycle mishaps by buying him a motorcycle. You’re simply trading a slow risk for a fast one.

How about emerging markets? Same problem. They’re risky anyway. Inflation doesn’t make them safer. It just makes alternatives to them less safe too.

So, what does that leave? Nowhere? Nah… the FT is wrong. There’s no such place as “nowhere.”

More about where your money should be…tomorrow…

Until then,

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. But gold is not just a commodity: gold is set to soar. I’ve had that feeling more and more since the middle of May: there’s been a fragility, a brittleness about trading banter and trading activity recently. Nervousness, worry… Doubts about heretofore presumed easy retirements and the mutual funds supporting same. Stocks and bonds have bounced around in price erratically while on an ever-earthward trajectory. Yet, apart from what appear to be orchestrated takedowns, gold has behaved in a remarkably stable way.

    I’m not quite convinced that commodities WILL drop much. The world is more than just the US consumer now and “demand destruction” will be limited in nature. Additionally, the fact remains that this commodity “bull run” – which it really isn’t – is NOT being driven by speculation, no matter what our governments spout. It is being propelled by scarcity of supply and by increased demand. Don’t look for much more than a very temporary ten or 20% fall in the price of oil or crucial foodstuffs.

    TaxHaven
    July 2, 2008
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