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Market Plus: Nov 27, 2009: Alan Brugler

posted on November 25, 2009

Market Plus: Nov 27, 2009: Alan Brugler Pearson: This is the Wednesday, November 25, 2009 version of Market Plus. Glad you've joined us. The holiday shortened week, we had to tape the show on Wednesday afternoon but I think the insights are good for the entire week. Alan Brugler joins us. Good to have you with us, Alan. A couple of things I wanted to get to on the discussion segment and we didn't get a chance to -- one of those is gold. It just continues to kind of go higher and it consolidates and then it goes higher again and it consolidates and you see it go up. Where is gold headed? What is driving this gold demand? Is there that much concern out there for value or is this a speculative play? Is this another bubble coming at us? What do you see, Alan?

Brugler: Well, I think it's all a big buck. It ties in, first of all, to the weak dollar discussion that we had at the beginning of the show. Any commodity that is priced in dollars, if the dollar is weakening, will go up in dollar terms. So, that is part of it. Part of it is quality or -- store value but there is a speculative component to it and I think what it is, is that we've got a big pool of money built up, the fed's efforts and some of the other central banks around the world's efforts to increase liquidity and increase lending have resulted in a pool of money. But the lenders are not very keen on loaning it for housing or for commercial loans for businesses. They are loaning but they're very particular about their standards. So, as a result you have this big pool of money piled up that is looking for a place to go because treasury bill rates are lousy, some of it is going into the equity market and the stock market where it can pick up a four, five, six percent dividend payment perhaps but some of it is also looking ahead and saying, gee, with all this pile of money we're probably going to have some kind of inflation down the road when the economy does really start to pick up and everybody wants this stuff and we can't make any more of it. Well, gold is a classic example of something you can't make more of in a hurry. So, the money is flowing in there, it is going up fairly steadily price wise, we hit all time highs again this week in nominal dollars, in inflated dollars we're still not back to where we were in the 1980s. It's symptomatic of what is also being seen in crude oil to a degree and the grains. The money wants to own some of commodities because coming out of a recession commodities are one of the things that leads the rally.

Pearson: You mentioned this pool of money and I've heard people tell me the amount of money in money market accounts, savings accounts is staggering, just staggering amounts of cash all around, the banks seem to be stuffed full of cash and so you're saying at some point -- right now it's just moving into gold as a place to go or maybe that explains the rally we've had in the stock market, money wanting to go somewhere for a little bit better return which is what money is supposed to do. The movement over to commodities, again, as a store value, has kind of you think helped drive this thing more than anything else? You talked about corn on the show and exports have been flat and there is some concern about feed demand and yet the corn market has been going up in kind of a contraseasonal fashion. Typically in harvest we expect corn to go lower so almost cycles back to those same fundamentals then.

Brugler: In some ways it's similar to what we had two years ago where you've got the money feeding on itself, you've got a ratchet effect, corn with its ethanol production is an energy product and if crude oil goes up then that brings up ethanol and then the corn is worth more so corn goes up and now the portfolio or balancing people say corn is too big of a percentage of portfolios so they go buy some more crude oil or some more gold and it just spirals up. We're getting a repeat of that cycle from a couple of years ago. The difference is that we're not playing 30 to 1 leverage this time around. They have kind of put a halt to that game. But we've got this big pool of money that doesn't want to go into commercial or residentail real estate or business lending at the moment, even the corporations are accumulating cash. They are saying we tried to borrow money back in March and we couldn't get it so before we do any big expansions the next time around or acquisitions we're going to build our own horde of cash. But you've got to invest that cash in the meantime. While most of it is going into nice, safe financial instruments a portion of it is trying to get a yield and that is going into the commodities and the equities and the other instruments.

Pearson: What kind of inflation scenario do you see, Alan?

Brugler: Well, I tend to be not that excited about it. I'm one of the ones that thinks that _____ showed us how to stop inflation, the fed just has to raise rates by drying up supply. Now, the problem with that is it is very much a political decision. The fed may decide they want to but not want to take the political heat to do it until they are very, very sure that the economy is rolling. We spent a lot of bullets to get this thing out of the ditch. We've got a lot of gas -- another analogy -- we have muddled our way out of the bottom, we're still climbing up the hill and we don't want to stop before we get over the top of the hill. If we start sliding backwards we've got a big problem. So, there will be a tendency to let the inflation go a little too far in order to make sure that we make it over the hill.

Pearson: Because the other thing they tell us they do not want to ever see is deflation.

Brugler: Yes, and particularly now that we have used up a lot of our good will, if you will, with the international community and borrowing money from us. A second effort would be a lot more difficult to pull off than the first one.

Pearson: There are a lot of stimulus efforts going on, government stimulus efforts -- China, Europe, elsewhere. Are those working? Are we seeing these international markets, these countries outside of the United States -- are they picking up steam?

Brugler: Yes, I think in general -- again, I spend more time on commodities than I do on the global market -- but my reading is that the commodity markets are symptomatic, that the general economies are picking up. Some of your leading indicators, your manufacturing indicators are picking up. I think we're all pulling out of the recession both in the U.S. and globally. Some countries have been able to do it a little faster because of the structure of their particular economy. Others, EU being a good example, are lagging a little behind. But even there you're starting to see some improvement.

Pearson: Just real quick, South America, your thoughts there? Big crop, yes or no?

Brugler: Looks like a big crop, soybeans of course is the one everybody is focused on but Brazil 63 million tons probably. Argentina is a question mark. The ag secretary saying a 2.8% increase in acreage but then you've got the traders at the Buenos Aires exchange saying the crop might be five or six million tons smaller than what USDA has got it dialed in at. So, it's going to be much more than last year but whether it's record large we don't know yet.

Pearson: We got the last of these corn and beans and that's where the focus is going to come now is going to be on what is happening in South America starting in January?

Brugler: Yes, it becomes -- world trade, how we're getting rid of ours and that is affected by what is coming after us which is South America.

Pearson: Alan Brugler, as usual we appreciate your insights. Thank you so very much. That is going to wrap up this edition of Market Plus. We're glad you've joined us here at Market to Market and our Web site. Tell your friends and neighbors. For all of us on Market to Market, I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news