Tags: dollar | inflation

All Signs Point to Stronger Dollar, Low Inflation

By Hans Parisis
Friday, 10 Jul 2009 12:01 PM Current | Bio | Archive

Are we seeing warning signs that we could have, as far as the dollar and inflation are concerned, a 2008 all over again?

When we look at the sharp slowdown in the worldwide shipping industry we see a similar development to the one we saw in the spring-to-summer period of 2008. Of course, at that time it was from much higher shipping prices to start from.

Last year, the Baltic Dry Index, which measures the worldwide shipping costs for commodities, had fallen in the beginning of July about 25 percent from its late peak in May 2008. This year, the Baltic Dry Index is down about 30 percent from its June 3 high.

It is also noticeable that gold is also down from that same June 3, but to a lesser extent. For now at least, from its high of $990.27, at the moment of this writing, a spot price of $908.75.

Yes, the same pattern happened in 2008 when gold tumbled in just one month from its high of $988.85 in the second week of July to hit a first low of $773.12 in the second week of August 2008.

Besides that, there are more notable parallels to the price developments in the summer of 2008. U.S. wheat futures were down 38 percent from the high seen in February 2008. U.S. corn futures were down 9 percent from the record high hit on June 27, while soybean futures were off 5 percent in less than a week.

This time around, wheat futures are off 27 percent from their June 2009 high, corn futures have fallen 25 percent, while soya futures have dropped 14 percent in the space of a week.

Take care, all this should matter to any investor. No doubt the world is a radically different place than what it was a year ago. That said, we all know the key debate over the course of the second quarter 2009 has been whether the dramatic spending programs coupled with quantitative easing would feed through into serious concerns about inflation and an imminent debasement of the dollar.

The recent moves seen in shipping costs, metals, energy, and soft commodity prices to me are a sign that the inflationary pressures that started moving somewhat during second quarter 2009 are dissipating rapidly in exactly the same way as they did 12 months ago and proved to be an accurate indicator that inflationary pressures were about to abate.

Also, keep in mind that on June 29 China announced officially that it had completed its stockpiling of metals.

In this context we saw an interesting story recently that explained that an Australian cargo with coal was reportedly being offered out to the market after the Chinese buyer cancelled the contract. There are already rumors that Chinese buyers are trying to escape from contracts because of high stockpiles and slower end-user consumption in China.

Similarly, we learned that rates on container ships from Asia to North America have been dropped for the first time in three years thereby taking them to 6-year lows. Shippers have agreed to reduce rates by 20 percent to 40 percent for the fiscal year ending May 2010.

What then could all this mean?

Twelve months ago we were looking for a signal that the dollar downtrend was coming to an end and the EUR/USD hit its final high just seven days later at USD $1.6040 per euro.

Thereafter, the euro started its downward path and had already lost 20 cents by the time the Lehman story began to emerge in September.

So, could the actual signals from the commodity and shipping markets be telling us the same for the dollar (stronger!) and inflation (very low!) as they did a year ago? In my opinion, they will probably do just that.

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Are we seeing warning signs that we could have, as far as the dollar and inflation are concerned, a 2008 all over again?When we look at the sharp slowdown in the worldwide shipping industry we see a similar development to the one we saw in the spring-to-summer period of...
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2009-01-10
 

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