The making of another bubble?

Commodities (in US$) and short-term interest rates have the same cyclical turning points (see above graphs).

Their historical relationship says the Fed is too easy. In 2002-2004 commodities were rising and the Fed was pushing short-term interest rates down to 1%. The housing bubble and a strong equity market were born!

Now, we have the same situation. Commodities are soaring (click on the graph to enlarge) and the Fed is keeping short-term interest at 5.25%. The trend in commodities is saying (as in 2002-2004) that the Fed is too easy and creating excesses in hard assets and equities. It is no surprise the money supply in the US is expanding at an above average pace (see blog below).

You can rest assured the markets always win. Let's enjoy the current financial feast as long as it lasts. But the markets will respond the way they always do. Short-term interest rates will eventually have to rise to keep commodities and money supply at bay.

More on http://www.peterdag.com/.

George Dagnino, PhD, Editor The Peter Dag Portfolio

Since 1977