Dancing with Myself

God I love Billy Idol.

And as I write this, you should be able to guess which song I’m listening to right now. It’s giving me some good market-beating analysis, I must say.

I’ve determined that I’m staying invested in all the big bull runs. You know commodities, ag, video games, and now I’m adding health care to the list.

Baby boomers. What a freaking trend, right?

I’m also looking at some refiners. Reason being, once oil prices come back to earth, refiners are going to mint some coin.

This is going to be a freaky week. We have the Feds rate announcement right around the corner. Looks like the markets expect a quarter point cut. I personally think that Bernanke should put an altar of Paul Volcker up inside his room.

Maybe then he’ll get the massive cohones needed to actually fight inflation.

But there’s something I realize. It’s about stagflation.

Last time we had it, it wasn’t only the U.S. fault that prices skyrocketed here. The truth is, growth all over the world was ticking higher.

Today we’re in the same situation. If the U.S. kills demand, it won’t matter so long as emerging economies continue to, erm, emerge.

As long as demand continues to grow there, it will be more than enough to offset any decline in U.S. demand. All of this means that if the U.S. is truly serious about fighting inflation, it has to completely destroy economic growth.

Let me explain by use of circular logic.

Today’s inflation is driven mainly by food and energy. Granted, there are some contributing factors, but the main reason why prices are inflation have to do with growing global demand thanks to emerging economies.

Considering global economies are still ‘baby’s‘ and have to grow, expecting a slowdown in demand would be like wishing for the winning lotto tickets to be found under your pillow tonight.

So, the number one reason for inflation – commodities due to global demand – isn’t set to slow down anytime soon.

It doesn’t matter if the U.S. raises interest rates a little. Not at all. All that matters is that so long as global demand keeps growing the way it is, inflation will persist.

Follow me so far? OK good.

As it appears, the cure to solving inflation would be to slow down global demand.

So how do you slow down global demand? Obviously, if the U.S. economy contracts one or two quarters, it won’t have too bad of an affect on the global economy. After all, China’s economy still grew by nearly 10% last quarter, U.S. slowdown and all.

But what happens if the U.S. goes all ‘Volcker’ on the worlds A$$e$ and instead raises interest rates to over ten percent? you’d see a huge contraction in U.S. demand for foreign goods. The dollar would rocket higher, spurring more investment in dollars.

Wait, that’s not all…

As U.S. demand shrinks, emerging economies take a huge hit. China takes the biggest hit since they are a huge exporter. As emerging economies take the hits, you see demand for commodities start to taper off or even shrink.

As that happens commodity prices fall and the world begins to see deflation.

Oh yeah, and as these emerging economies start taking the hits, you see money flow out of emerging currencies and back into the dollar. Foreign investors get spooked and foreign investments drop dramatically.

Suddenly the dollar is on top, commodity prices are back to normal, and inflation is no longer a threat.

Is this a dream? Well considering Bernanke is no Volcker, yes it is a dream. A scary dream, but a dream nonetheless.

With that said, I’m a commodities bull. And that’s a big reason why.