The Fed's most recent machination, purportedly to stem evil corporations from raising prices too quickly, is not what it appears. It is true that prices are rising, but it is not from businesses being able to charge what the market will bear in an expanding economy. Prices are rising because the dollar is falling, making imported goods more expensive, and because the cost of raw materials is going up on very high demand coming out of Asia. And, on that subject, this is not your father's commodities boom. Nor is this a rising interest rate environment like we've ever experienced.

Still, there is some familiarity in this leg of the so-called business cycle. That is, the swings in interest rates continue in extremes, and are more compressed time-wise, as our experiment in fiat money continues. This time, however, perhaps for the first time in our history, interest rates have to rise, not because of domestic fundamentals, but from foreign perceptions of the value of the dollar, and our comparative lack of expanding productivity.

However, while the Fed is trying to engineer higher overall interest rates, long term investors in money instruments are not, so far, buying the inflation scare the Fed is selling. The Fed, you see, has no direct influence over long term rates. Back when they came into being, they never realized they would be in a situation like this of being almost powerless in regards to long term rates. Perhaps this is among the reasons Treasury stopped issuing 30-year notes - to give the Fed more leverage - but, there is still a large private market for long term obligations, like mortgages.

If you find this lack of Fed control hard to believe, consider the following. One year ago, 30-year bonds yielded 4.7 percent. Today the yield is 4.85 percent. Meanwhile, 13-week rates are now 2.77 percent, when one year ago they were .92 percent. Short rates, then, have escalated 200 percent, when long rates have moved up only about 3 percent. So, while the Fed has been effective in making short rates move higher overall, the long market has hardly responded. Eventually, though, I expect them to also rise, but that may take a while.

In the meantime, just what might happen to change the current sentiment among long term investors, giving the Fed what it wants? A sudden shock, perhaps? Certainly it is not going to come from any abrupt news about our economy overheating.

Speaking of a sudden shock, and lest you believe U.S. real estate is not in a manic bubble phase, read this. Then consider that some of the figures used in the story are already grossly out of date compared to more recent information. For instance, the Arizona Republic newspaper last month reported that one in three house sales in the Phoenix market area during the month of January was to investors. And, this in a market where already one dollar in three generated by the local economy comes from the real estate sector.

Oh, and for dessert... Honey, I Shrunk The Net Worth

Now, should housing prices begin to fail, or some other shock hit the system, investors will be sent stampeding into "the next big thing." Our system has been experiencing waves like this with increasing frequency for decades as the masses move from one sector to the next. A few years ago, it was tech. Now it's real estate. It, or even the whole country, can go down the drain, but money will still move into "the next big thing." It always does.

Given the fundamentals of the commodities market, my guess is it will be "the next big thing" (or the next "balloon," if you will), particularly the base metals and energy components. Should such a thing begin to unfold, I think we will witness a boom in this sector to put the 70's to shame. After all, that hysteria was driven by monetary policy. The boom I see beginning now is based on real demand for real applications to supply real goods to real and growing markets. Monetary events may play a role here, but this time they take a back seat to fundamentals coming from China and India. Those countries today are to the world economy as was the U.S. from roughly 1860 to 1960, but with at least EIGHT TIMES times the potential impact , based on current populations, and maybe multiples of that given the smaller starting population in this country.

And, while I believe things are beginning to unfold as I expect, most market observers in this country and money managers are still playing by the old rules. The old rules, based on U.S. fundamentals, no longer apply. The proof of that is in what happened to base metals prices in the wake of the Fed announcement just several days ago. That announcement came late in the day. In overseas trading, then, the base metals market moved down marginally. The American expectation of damages to the sector, however, became evident and rapidly escalated with the opening in New York the following day. After the close in New York, base metals made up a lot of those losses in overseas trading. With the next opening in New York, the U.S. domestic market in base metals went with the flow, when it saw that the rest of the world cares little for what comes from the Fed these days. In other words, U.S. money managers are playing by the old rules that tell us increasing interest rates are bad for raw materials prices, as if what happens in this country is still all that matters to world markets. World markets outside of New York, however, know the truth and play by the new rules, which revolve around different and newly emerging centers of economic power.

In the most extreme example from the boom in base metals prices, we will look again at selenium. Selenium has applications in ceramics and in electronics. It is used in copy machines, in photographic toner, and as an additive in the making of stainless steel. Recently many new use have been found, including in a whole new generation of solar cells.

I last reported on the price of selenium on March 8. It had then closed the previous week's trading at an average price of US$53.00 per pound. [That's mine concentrate, not the highly refined stuff ready for end users, and costing hundreds of dollars per pound.] Last week, however, the average price was US$58.50 per pound, with the high during the week having reached US$65. But just 22 months ago, selenium was $3.75 per pound. This is a change in the average weekly price of 1,460 percent over 22 months, or very nearly 800 percent per year.

Now, for those who may be interested in a way to capitalize on the selenium market, I will break with my routine of not mentioning specific issues in these writings. My favorite speculation in this regard is Yukon Zinc Corporation (YZCCF.PK, YZC.V), a pre production junior mining company with an asset holding 15 percent of the known world reserves of selenium (plus highly commercial grades of zinc, lead, copper, silver, and gold), but their Web site hardly mentions selenium. http://www.expatriateresources.com/index.php For more information, call them at 1-877-682-5474, or e-mail.

One should consider, however, that the selenium market has a volatile history. And, while new applications are currently supporting the market, the current price surge is unprecedented. While I don't see it falling back, or falling back strongly, I am not in a position to project it's future course. Having said that, the price of selenium could just keep pushing higher as the relatively small amounts needed in manufacturing likely do not add much to the cost of finished goods.

Now, here are a few related stories to further emphasize the current fact of a commodities boom.

• Big time money managers/funds get hot on commodities.

• Copper miner sees profits up 400 percent.

• Nickel supplies running short.

THE CHINA SYNDROME:
(News related to Asian influences on commodity and other international markets)

15/03/2005 - Chinese government enters the global market to buy copper reserves.

16/03/2005 - "Super Cycle Anyone?" Bank lending, metals demand, and growth rebound. The chill is off in China.

16/03/2005 - China and funds push copper prices to new levels.

23/03/2005 - Copper demand turns around the economy of Chile, posts stunning growth.

24/03/2005 - Resources boom seen continuing on Chinese demand.

24/03/2005 - Another examination of the Asian-driven commodities boom.

Some thoughts:
In the long run, escalating trade deficits always result in severe economic adjustments.
In the long run, unrestrained fractional reserve banking always results in a full fiat money system and later disaster.
In the long run, legal tender laws always end in economic crisis.
"In the long run, we are all dead."  John Maynard Keynes, the 20th Century's most influential economist/monetarist (and leading socialist).

End legal tender laws.  End government debt as an "asset"  for reserve banking.  End the Federal Reserve System. 
The cost of such adjustments will be quite painful, but no where nearly as disabling as the eventual cost of doing nothing.

"The study of money, above all other fields in economics, is one in which
complexity is used to disguise the truth or to evade truth, not to reveal it."
John Kenneth Galbraith

© 2005 Larry S. Levy
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