NY cotton futures continues to trade sideways

As a point of reference, in 2008 the Fed balance sheet amounted to just 0.8 trillion dollars! The Fed is obviously still engaged in fighting deflationary forces with inflation, and this time around it may actually succeed.

There is a lot of money parked in so-called ‘safe harbors’, from mattresses to the bond market, but with the 10-year Treasury note yielding about 1.9 percent, which is less than the rate of inflation, an increasing number of investors are encouraged to look for higher-yielding assets.

In other words, the ‘risk on’ trade seems to be back in play, which means that assets like stocks, real estate, emerging markets and commodities are likely going to see an inflow of money and therefore higher nominal prices.

Even though some members of the Fed apparently object to this perpetual money printing, we don’t expect a policy shift anytime soon, for a lack of viable alternatives. If the Fed were to stop printing the money necessary to buy all these deficit-financing treasuries, then who would be there to take its place? Japan, Europe and China are all running Ponzi schemes of their own and there are simply not enough savings around the globe to mop up these trillions of dollars in shortfalls year after year.

In other words, we shall remain confronted with a choice of two potential outcomes – a deflationary implosion if central banks were to cease the printing of money, or stagflation. Unfortunately the time for a third option, namely for economies to grow their way out of trouble, has long since passed! We therefore expect a continuous debasement of the world’s major currencies, which will translate into higher nominal prices of just about everything!

So where do we go from here? The market has been deadlocked for several weeks now and is looking for an excuse to break out. Will tomorrow’s USDA report be able to resolve the stalemate? China’s crop size will likely increase, but that’s not really material to international prices at the moment for the same reason Chinese ending stocks have little bearing on a 75 cents futures market. What we need to watch out for as potential movers are US exports and Chinese imports, both of which should be slightly higher, and may be an increase in mill use outside China.

A bearish report may send the market back towards 70-72 cents, while a neutral to friendly report may spark some new spec buying and trade short-covering, which could challenge the 78 cents resistance level. While we are undecided about the market’s fate in the near term, we remain friendly on prices in the longer run.

Plexus Cotton Limited