Tuesday, June 26, 2012

Economy: The Stealth Stimulus Program

Doom & glooms rules. The media are focusing on negative news and the stock markets have been under pressure for weeks. But the extremely pessimistic sentiment has a positive flip side: It keeps  commodity speculation at bay.

Bloomberg reports that "speculators increased bets on a rally in commodities for a second consecutive week, just as prices tumbled into a bear market" (bloomberg). A bear market is defined as a situation where market prices are at least 20% below their latest peak.

Bloomberg writes further "hedge funds and other money managers raised net-long positions across 18 U.S. futures and options by 7% to 628,560 contracts in the week ended June 19". For years a lot of hedge funds and specialized commodity funds are betting on climbing commodity prices and are buying futures and options on oil, wheat, corn and other commodities which are traded on the financial markets like stocks. In 2008 the massive purchases by financial institutions caused a commodity  price explosion, for instance oil jumped to $ 147, which worsened the recession then. The falling commodity prices now signal that commodity speculation is less aggressive today, a response to the risk aversion of the markets.

Now commodity prices work inversely to 2008 and to the first half of 2011. The recent commodity price reduction of at least 20% (for instance the global oil future Brent dropped from $126 to around $90) is now a stealth stimulus program for the global economy. Falling commodity prices (bespokeinvest.com) have the same effect like a tax cut because consumers have more money in their wallets which they can spend for other goods and the companies have less costs and therefore higher profits. I reckon that the commodity bear market should help to rekindle the sluggish global economy and stimulate the stock markets.

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