The Outside Markets and Their "Domino" Effect on Grains
Nov 22, 2011
I continue to field questions in regard to the recent strength of the US Dollar and in particular, how I see it playing out in the months ahead. As most in the agricultural world know, a stronger US Dollar ultimately weighs on the commodity markets and pulls livestock and crop prices lower. Therefore, this is why all traders have their eyes so intently focused on the European Debt Crisis and the contagion affects it could have on the commodity markets. As I was always taught by my grandparents, "Prepare for the worst, and hope for the best..." For argument sake, let's just assume the worst and throw ourselves down that slippery slope. In the event of a complete European melt-down, break-up, split, falling-out, default or whatever other term you want to use, the "Euro" currency would essentially fall to pieces and the US Dollar would soar. Any of the European countries left standing would more than likely fall into a deep recession, possibly even a deep depression. In turn, Chinese manufacturing and exports to Europe would slow and China's growth would start grinding to a halt. We have to assume the European banks would drop like flies, as their debt to GDP ratios would race out-of-control. Obviously banks would be pulling in their working capital and lines of credit as they try to limit any and all downside risk and ride out the storm. In a nutshel,l the commodity bull run would be over! World growth would be put on hold indefinitely, as it could take years for an aging European work force to pull themselves out of a mountain of debt.
Let's throttle back a bit, and assume some more creative accounting can be applied, and the books can be cooked a little longer in the world's most debt ridden countries. If this is the case, we will need to assume Germany and France will be asked to pick up the tab again and again. From where I sit, I am just not sure either one is looking forward or will be capable of pulling this off. Both leaders seem adamant about getting the ECB and the IMF more committed to the cause, as we have to suspect both Germany and France deep down inside know they can NOT continue to pick up the bill at each and every party. They understand that before long their credit rating will be in jeopardy just like the others, their cost to borrow will begin to skyrocket just like the others, and they will end up in the same pile of quicksand...just like the others. To avoid this mess, I am thinking the only solution (in the short-term) will be to print more Euro's. We all know that printing more Euro's, leads back to the same ending mentioned above...a stronger US Dollar! Keep in mind the French "AAA" credit rating is now on the radar screen, as Moody's Investors Services issued a stark warning yesterday, that because of the elevated rates being paid on the sovereign’s debt as well as weaker economic growth prospects, the country’s rating may soon be slashed. As I have mentioned for weeks, France is critically important. If traders start to see this "domino" waver or look as if it might fall, they will be extremely quick to reduce risk and overall exposure.
If we are back up to the most optimistic of views, we are left to hope that somehow, someway the European countries in question (Greece, Ireland, Italy, Portugal, Spain, etc...) will be able to drastically reduce their budgets and get their deficits under control before all other options are exhausted. If in some form or fashion this task could be collectively accomplished, the catastrophe could possibly be averted. Personally, I can't imagine this just all of a sudden happening, but if your looking to make a wish or happen to see a falling star, this gives you something to consider.
We could talk for hours about problems in the US, but until politicians want to do what is best for the country, rather than what is best for their respective party or campaign we will continue to spin our wheels. From where I sit it seems as if Obama and the Democrats could care less if the "Super Committee" fails so they can lay the blame on Congress. On the flip side, the Republicans would love nothing more than to see the "Super Committee" fail so they can continue to point out Obama's failures and hopefully urge American's to elect a Republican President. As the two parties continue to jockey and play for political positioning the US is falling into a deeper and deeper hole. Here is the equation of the day... Republican Gamesmanship + Democratic Gamesmanship = A Giant Looser For The American People!
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