NY cotton futures continue to advance

01 May '09

5 min read

The Fed has effectively given the market a 'put option' by guaranteeing that it would be there to print as much money as necessary to prevent any further collapse in asset prices. The strategy of the Fed and the government is to engineer a rise in asset prices and then to carefully siphon off the excess liquidity as the economy comes off life support.

It is an interesting concept, but if history is any guide, it is doomed to fail. But the failure will not manifest itself in another collapse of asset values, but rather via a meteoric rise of inflation and a collapse of the US dollar. We believe that the market is slowly but surely starting to clue in on such a scenario. It may still be months or even years away, but in our opinion it is inevitable.

Solving a massive debt problem by going even deeper into debt has never worked and it is like trying to put out a fire by throwing gasoline on it. Last century alone there were a total of 45 countries that saw their currencies get wiped out as the result of similar monetary actions. The fact that the US dollar has been the world's reserve currency may buy it some time, but it won't change the outcome in our opinion.

There are already signs that foreign creditors have begun to divest out of the dollar and this doesn't bode well for the ever growing mountain of debt the US needs to finance. At some point there will only be the printing press left. Luckily all this money 'printing' can be done electronically nowadays. As a thought exercise, imagine that a printing press could put out ten 100 dollar bills every second. At a speed of 1000 dollars per second, how long do you think it would take to print a trillion dollars? Almost 32 years!

So where do we go from here? The market reminds us of a sporty looking car with a nearly empty gas tank. The chart looks great, but the market has been advancing mostly on short-covering and it now needs some refueling by having spec funds come in on the long side in a stronger way. If that were to happen, we could easily see an accelerating rally as many of these trade shorts would find it hard to keep coming up with margin money.

On the other hand, if buyers stay away, it will sooner or later create a void under the market into which it could collapse, although we would expect any such setback to be short-lived and well supported. The path of least resistance continues to be up and shorts without deep pockets would be well-advised to seek some upside protection.

Plexus Cotton Limited

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