Wednesday, June 10, 2009

Chinese stockpiling and US Senators hate freemarkets

I've been following the story of Chinese commodity buying with some interest lately. There are two reasons for this buying --- 1) The Chinese are expecting a rapid turnaround in the global economy and wish to be well positioned with adequate inventories for that turnaround or 2) The Chinese see an inflation train barrelling down the tracks at 150mph and wish to buy commodities while they can still afford them. I tend to think it's the a combination of factors - some inflation hedge, some support for domestic industries and some absorption of global supply.

"Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil."

This article in the NY Times tonight skirts around the issues and talks about the bubble in commodity prices that is building. These bubbles can continue to grow beyond sustainable levels as traders pile in behind stockpiling nations. Oil is north of $70 while gas is screaming toward $3/gallon again. Maybe it's time for a little green shoot stir fry?

There appears to be almost no end to the lengths the Congress will go to get you break out your checkbook. After some modest success with the $8,000 1st time home buyer credit (that has hit numerous potholes because of all of the qualifying factors), a bill was introduced today in the Senate that will increase the tax credit to $15,000, include multifamily units and eliminate income restrictions.

This is real money, particularly in an area like upstate NY where the median home price is in the low $120's. It's like putting a big 10% off sign on every house. Unfortunately, it's just another transfer of funds in an effort to stabilize a failed enterprise. Housing needs to correct and placing artificial price supports under these housing market is not a way to help the market heal itself. When home prices return to levels that appeal to investors, cash will flow to that asset class.

Unfortunately, all of the credits in the world won't make up for the fact that US Treasuries seem to be in trouble and that's forced a 10% + jump in mortgage rates in a week to their highest levels in 6 months. The move in mortgage rates is going to cool the heals of any housing rebound in most normal markets (certain distressed markets - CA, AZ, FL - may continue to see activity).

Oh, and it sounds like they are going to push through the $4,500 gas guzzler credit. I half expect a check in my mailbox tomorrow for $100 because I used less than my Federal allotment of oxygen yesterday :)


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