Goodbye to rate cuts

Commodities are rising, and consumer inflation will as well. The common factor is declining purchasing powers for fiat currencies. Forget rate cuts, unless there is a major credit crisis.

The commonest error in the investment industry is to assume that all price changes come from whatever is being priced. Given that all portfolio accounting, relative performance, and taxes assume that the currency’s value never varies, this is understandable. But in these times it is also a fatal error.

Never has this mattered more than today. We sit on the summit of the largest credit bubble in history. President Trump is shaking up its delicate underpinnings, with his erratic behaviour over tariffs and his threats to sack or replace the Fed chairman for not reducing interest rates and devaluing the dollar.

Someone ought to warn him that the quid pro quo for Americans living beyond their means for decades is that nationally they owe foreigners some $40 trillion, invested in bank deposits, short-term government and agency debt, corporate bonds, government debt, and equities. They don’t like what they see in Trump and have only just begun to sell dollars for gold and other fiat currencies.

A consequence of the dollar’s recent weakness is that commodity prices are beginning to rise. Since the beginning of the year, the dollar’s trade weighted index has declined by 10.4%, and the commodities which have outperformed the dollar’s decline are shown in the snapshot below from Finviz:

There is an emphasis on precious metals and bitcoin, which are regarded as inflation hedges pointing the way to other commodity prices rising as well. WTI crude has been a saving grace so far, but after a sharp selloff in April even that has rallied by 8%.