NY cotton futures trends lower this week

As more and more people catch on to the fact that the purchasing power of currencies is being diluted, they start chasing real assets in an effort to preserve wealth. Even though asset prices may fall in real terms, they keep rising in nominal terms!

The latest quarterly ‘Flow of Funds’ numbers as reported by the Fed paint an interesting picture in that regard. The balance sheet of ‘Households’ has seen a vast improvement, as total net worth has jumped by around USD 9.2 trillion to USD 62.7 trillion since 2008 and is now just around USD 3.3 trillion below its all-time high of 2007.

Assets have increased by USD 8.5 trillion thanks to an increase in financial assets (stocks, bonds etc), while liabilities were lowered by USD 0.7 trillion, mainly due to a USD 900 billion drop in mortgage debt, as households were able to refinance into lower rates.

This in turn has freed up some spending power to buy other stuff, as evidenced by the USD 200 billion increase in consumer credit, with the last two quarters showing growth rates of around 6 percent each. In other words, the Fed’s ‘reflation’ effort seems to be working and we expect this trend towards higher asset prices to continue, with the real estate market likely to provide the next boost.

The above mentioned jump in consumer credit and the fact that US retail sales at clothing stores are 17% higher for the first seven months of 2012 compared to the same period in 2009, leads us to question the very pessimistic outlook on global mill use by some prominent institutions.

We believe that the sharp reduction in Chinese mill consumption, with which we agree, may have thrown off some analysts, because it is difficult to detect improvements in other markets. We are not suggesting that global mill use hasn’t suffered over the last couple of seasons, but not to the degree it is portrayed in the most recent statistics. Are we really 14 million bales lower than in 2009/10 and nearly 20 million bales below 2006/07?

So where do we go from here? The near-term trend is lower and we would not be surprised to see the market slip towards the mid-60s over the next couple of months. In the longer term we remain more optimistic due to the expected acreage shift to food crops, money printing by central banks and a potentially positive surprise in mill consumption.

Plexus Cotton Limited