Are we in the midst of "over stimulating" the economy?
Fundamentals
It seems all we hear from the news media is the continued "gloom and doom" facing the world economy. On Friday, the larger than expected rise in the unemployment rate to 7.6% and the loss of nearly 600,000 jobs in January gave President Obama further ammunition to propel Congress to pass an economic stimulus bill estimated at around $900 billion. The U.S. is not alone in trying to pull out all the stops to contain the worldwide economic malaise, with major economic powers lowering interest rates, propping-up troubled banks, or coming up with economic "stimulus" plans of their own. Though it appears that current actions put in place by our elected officials have been ineffective so far, let us take a step back and remember that there can be a lagging effect for any stimulus to filter its way through the economy. So what could happen if all this major intervention ends up "over stimulating" the economy? One word-Inflation! You remember inflation, that buzz word the media was infatuated with less that 1 year earlier when Oil was sure to head to $200 and commodity investing was all the rage. Just like the Fed was blamed by some market pundits for sparking the housing bubble by lowering interest rates to 1% following 9/11, it will be interesting to see what transpires once the "credit crunch" abates and the full effect of lower interest rates and huge sums of liquidity starts to work its way through. Since markets tend to be forward looking, it is interesting to note that members of the "precious metals" sector are all trading well off their recent lows, with even the more industrial of these, such as Platinum, once again hovering near the $1000 level, despite the continued decline in auto production due to weak sales. The Lumber market has also staged a bit of a recovery after falling to 20-plus year lows on the back of a continued decline in new housing starts. Some of the recent price gains could be tied to decreased production, as weak demand has forced many companies to shut-down or curtail production. But we should remember that once production is cut, it usually cannot be re-started quickly, and the potential for shortages in many commodities is quite possible once demand begins to build. Though it is hard to fault the efforts being taken to improve the current economic climate, one has to keep in the back of their minds if the current treatment of an ailing economy may lead to more serious complications down the line!
Technicals
Though there are many charts to focus on today, I would like to look at the daily chart for March Copper. Since Copper is one of the most widely watched of the base metals complex, movement in Copper prices could be a harbinger of things to come. Notice how the market approached the upper band of the recent trading range on Friday. Volume was extremely heavy, as prices rose to multi-month highs on the same day that the horrid employment figures were released. The 14-day RSI made a multi-high reading as well on Friday. The Commitment of Traders report shows speculators are still holding a net-short position in COMEX Copper, and should prices stage a break-out above the recent trading range, we may see quite a bit of short-covering buying emerge. It will be interesting to see how the commodity markets, including Copper, react should a stimulus package agreement be announced this week, especially given the recent recovery in prices. The next major resistance point for March Copper is seen at 1.7335, with support at the lows of 2009 at 1.3715.
Mike Zarembski, Senior Commodity Analyst
