Quote from scriabinop23:
detective is definitely on a 'mission from god' (thanks blues brothers).
1 thing: all of this money supply infusion has merely helped stabilize things, and offset monetary supply destruction. There is a MASSIVE destruction of money supply going on right now. Banks have been kicked in the groin, and this is merely a shot of novacaine and a chair. Banks are lending LESS now than ever (in this cycle). House assets declining 20-40% is MASSIVELY deflationary.
But seriously, while oil demand is inelastic (which he so beautifully brings up), you have to realize that the demand on the margin (ie, demand at 87 mb/d versus an arbitrary base demand of 85 mb/d) has an inordinate effect on price, since supply is relatively difficult to change (lets say 85 mb/d is the base supply and we can not produce any more).
The point is that the extra 2 mb/d of demand against a backdrop of fixed supply has the power to quickly change price not 3% (or whatever increase of demand it actually is), but 100% ! [from $50 to $100 this yr for example]
But that marginal demand of 2 mb/d [and the speculative fantasy associated with hoardes of cash looking for a safe home, not happy with stock markets or bond markets] takes back as quickly as it giveths.
Just do the math. Lets say your hyperinflationary panic happens: $300 crude oil. Imagine. People stop driving (and consuming Chinese goods), because they don't have spare cash for anything. US is 25% of world oil demand. So what happens to oil price when our 20 million barrels a day oil demand falls to 15 million barrels a day, yet. So now world oil demand falls from 87 mb/d to 82 mb/d, leaving a 3 mb/d production margin, and possibly accelerating negative. Now do the math -- what happens when there is much more supply than demand?
And convince me how the EU or the Japanese (largest consumers of crude) are so different from the US in terms of reckless policy (which I agree with you on) ? EU pumped hundreds of billions of cash into their system to help cushion this reigning in of credit (which will continue). You think the Japanese are suffering now? Imagine $300 crude? Their consumption would plummet. They are dependent on their exports to the US for their business to thrive!!! What happens when us poor US buyers can't afford Japanese products? The Japanese have no cash, and definitely none for crude. Take the EU, Japan, and US out, and you are left with no support on commodities demand !! China falls out of bed; Australia (which feeds china the commodities) falls out of bed. ETC ETC. Fill in the blanks.
Dumb money is chasing commodities (as a primary long term investment) at this stage. This is merely a function of money being afraid of other asset classes (bonds, stocks), since 'recession' is all the rage right now. Interestingly enough, this inflation runup and the credit reigning will likely kill the global economy for the next few years, until everyone figures out that demand actually does drop. Your Weimerian hyperinflationary dream won't happen. Deflation is the next game. And bond markets are figuring that out.
Anyone who thinks commodities have a lot of upside here is making this bet: that the developed world can afford much higher prices WITHOUT wiping out demand. If you believe that, then you should be buying stocks and houses as well, because that means people have plenty of discretionary cash for ipods and houses still.
If you want to bet on economic collapse of the US alone, then just short the dollar.
My bold prediction: 10 year asset yields will fall to 2% and even lower over the next 2 years, as commodity demand starts faltering, and people realize the commodity move was nearly another bubble.
So the game goes: Tech stocks -> Houses / Commodities -> Bonds -> Stocks (2012 and beyond), since who knows how long it'll take for the consumer and producer to die and be reborn.
Watch out British; Chinese are coming for you.