Wednesday, November 23, 2011

JPM -- Sell Commodities!

Ok so its not like they get it right all the time, Goldman told investors that the Euro was going back up to 1.41 to the USD, instead it has dropped like a stone (now 1.34:1).  But JPM's missive does point to a real issue for investors that have been using commodities as a store of wealth.  The world is bulging with inventory, and once the infamous "Chinese Pig Farmers" start selling their copper -- all bets are off for commodities.

This has a dramatic impact on Canada, already the flight to the USD is "hurting" the loonie -- not so long ago the CAD was above parity against the USD, now it trades around 0.94: 1 against a very strong USD (its strong against all currency -- back to 1997 level actually).  Which is another reason for commodity weakness since a vast majority of commodities are priced in USD.

The impact on Canada is certain to be hard; first exports will drop (as will productivity -- since the price is part of the equation).  Already I was tempted to "predict" that the CAD could drop as low as 0.92:1 from the 0.96:1 level today.  Things could change, China could decide that 5.5% inflation is not that bad after all (unlikely) and that what they want is even more industrial production -- just don't have enough idle capacity yet (and more empty apartments).  I don't buy it, China will not ride to the rescue, simply because Chinese are students of history, and through the ages Chinese governments have fallen because of high inflation -- moreover, the Chinese authority know they have one of the world's most unbalanced economy --more industrial production is not the solution.

So back to Canada, the health of our economy is driven by the health of the rest of the word -- its not doing so great right now.


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