NY cotton futures came under pressure this week

No matter how bearish one wants to be based on cotton’s statistical situation, we cannot lose sight of what is happening on the monetary front. This week both Europe and the US wrote another important chapter in the seemingly never-ending saga of money printing.

First it was the German High Court ruling in favor of the ESM (European Stability Mechanism) fund, which means that within a month there will be US$ 650 billion of additional firepower available to aid troubled European states.

Today it was the Federal Reserve’s turn, announcing an array of measures in an effort to reflate ailing asset bubbles. Apart from extending “Operation Twist” (selling short-term bonds and buying long-term bonds) until the end of this year and prolonging its zero interest policy until 2015, the Fed also announced the open-ended purchase of US$ 40 billion a month in mortgage-backed securities to prop up the depressed housing market.

And if that’s not enough, Mr. Bernanke stated that the Fed would be ready to engage in additional asset purchases. Like the ECB, the Fed is now operating under the “whatever it takes” mantra.

Today’s Fed action is tantamount to a declaration of war on short sellers. We have repeatedly written about how dangerous it is to short assets in an environment where fiat money is being printed by the trillions. With central banks being as determined as they are, we have no doubt that they will succeed in inflating asset values back up to pre-crash levels and beyond.

The stock market is almost there, the CRB is not far behind and the real estate market will follow suit as well. We once again need to remind ourselves of the difference between real and nominal values. While cotton priced in real terms (gold, or even crude oil for that matter) is at a historic low, it is still relatively well sustained in nominal terms and we believe that it could rise significantly over the coming years.

There may still be some room to the downside when harvest pressure sets in, but going short at current levels is like trying to squeeze the last few drops out of a lemon, and the cotton market definitely qualifies as a lemon after having dropped 150 cents over the last 18 months.

So where do we go from here? We still see the possibility for the market to fall back into the 65-70 cents range when new supplies hit the market over the next couple of months, but with all the money printing that is going on, short sellers need to be quick on their feet, because eventually this tide of money is going to lift all the boats, even cotton.

Plexus Cotton Limited