Last week we made a few predictions about the rest of this year and those predictions would have to be considered unconventional, to say the least. We predicted that the U.S. recession would spread abroad and move through the euro-zone and eventually Asia. The short explanation of this process was also touched on in the last comment, "the end of the insatiable appetite for foreign goods and services by the U.S. consumer will have a major negative effect on foreign economies".
Now that the U.S. consumer has "hit a wall" the rest of the world will have to suffer. Remember, the U.S. has about 3 times more GDP than the next largest economy. The U.S. with a GDP of $14 trillion dwarfs Japan at about $5 trillion, China at $3.3 trillion, Germany at $3 trillion, France at $2.2 trillion, the UK at $2 trillion and India at $1 trillion. How can a consumer led recession in this country not have an extremely negative impact on the economies that are exporting most of their goods and services to us? To make the global recession even worse, many of our trading partners have copied our housing model, and now we have housing depressions spreading throughout the globe.
We also predicted that "the global recession would produce a destruction of demand which will break the back of the commodity bull market including energy."
Comstock believes that the rising price of anything (and any commodity), but especially necessities, is inflationary as they are going up, but once the commodities have risen in price enough to cause cut-backs in other purchases the process becomes deflationary. The price that causes the consumers to run out of liquidity and reduce consumption on the commodity in question or in other goods and services is called the "clearing price". This is where conservation comes into play in the energy complex or a change in eating habits occurs when it comes to food.
We understand the complex situation in energy could be an exception to the break in commodities we expect because of the strong demand from emerging economies such as China and India, coupled with the scarcity and expense of increased drilling. Demand for sophisticated rigs is going through the roof and there is no spare capacity. However, we believe the clearing price is a worldwide process and when the energy subsidies are removed from many of these emerging countries, demand destruction and the clearing price will still bring the prices down in energy along with the other commodities.
Many investors believe that the stock market has been going down for the past 8 months because the rising price of energy and food. We believe that the market will continue down with the decline in the U.S. economy along with the decline in the global economies. And even if the energy complex as well as other commodities weakens, we think the stock market will continue down until it reaches reasonable valuations (see the special report on left side of home page "What is the Real P/E?"
We also understand that the price of most commodities rose due to the inflationary policies of the Fed. Most investors believe the Fed actually prints money from a printing press to increase the money supply. Here's how it actually works. When the Federal Open Market Committee (FOMC) buys Treasury Bonds, Notes, and Bills they pay the dealers with whom they bought the Treasuries with a check from the U.S. Treasury. This is "new money" (called high powered dollars) that is going into the fractional banking system where it can be loaned out in multiples of the total amount of the check. This excess money goes into the system and results in the phenomenon we all have heard of called "more money chasing the same amount of goods and services". The inflation is exacerbated by the "new money" lowering the value of the U.S. dollar, and since most commodities are dollar based, the commodities rise even further.
However, this phenomenon only takes the system so far with inflation and eventually becomes deflationary once the system runs out of liquidity. So essentially, we are saying that when the price of anything rises so high that destruction of demand occurs, it causes the "clearing price" effect. That is when the price breaks down. We believe that we have reached that point now and the commodity bubble will break during the second half of this year.
