Interest Rate Roundup

Wednesday, April 16, 2008

"Where will the next bubble be" mystery solved?

This is getting out of control -- oil prices got within a nickel of $115 a barrel on the futures market recently in the wake of some bullish inventory figures. Steel prices are rising fast. Gold is on the move again (+$18 and change) after a recent pullback. And the euro is setting a marginal new high against the buck.

Looking at an intraday chart, you can see buyers stepping in every time EUR trades to about 1.5950-1.5970 against the dollar. I wouldn't be surprised in the least if that was the ECB trying to hold the line here, because a break of 1.60 could really open the floodgates for a move higher. For more on what's going on in currencies, see my recent post on the G-7.

The bottom line: When does the Fed say "Enough is enough" and decide commodity inflation is worse than housing deflation? Because clearly, attempting to thread the needle (cutting rates and liquefying the mortgage market to support housing and jawboning -- but taking no real action -- to tamp down commodity inflation) isn't working. The housing market continues to stagnate, while pipeline inflation and inflation expectations are surging.

This goes back to my long-held view that trying to reflate/protect against an asset bust by pumping money into the system only inflates a fresh bubble somewhere else. When the dot-com bubble burst, the Fed slashed rates and threw money at the market. That helped create a housing bubble. Now, the housing bubble has popped and the Fed has responded in the same way. Lo and behold, we're now seeing a rapidly inflating bubble in commodities. When does it all end?

UPDATE: There go the bonds. That uptrend line I mentioned earlier has given way, with the long bond futures recently off 1 13/32 in price.


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