The fact is the rise of commodities recently hit new highs in silver, gold, cotton, and a whole host of others.
In fact it impacted currencies dramatically, which is evidenced by the sky-rocketing Australian dollar.
Everybody is scrambling to control the markets including the rating agencies with their recent downgrades from S&P on the US Credit Rating.
This new trend brought about a series of changes in the position of the Federal Reserve.
They want to end Quantitative Easing 2, which in essence is an end to the US Government buying its own debt because nobody else wants it.
The Federal Reserve wants to stop acting like the Japan model because it is being ridiculed for self-financing the US Government.
Anyway all this growing debt brought down the dollar, which raised currencies and commodities.
Leveraged computerized trading compounded the volatility of currencies and commodities even further.
In response to the aforementioned rise in inflation, the regulators decided to raise the margin requirements in order to curb the volatility.
Suddenly commodity prices began to tumble as the traders could not use their usual margin loan facilities.
The fact is that the more the selling momentum picked up, the worse it became for the commodities.
At this point, we are literally staring right in the face of the solution to the problem of the inequity found in stock market valuations.
The way to cut the volatility of the US Equities market is to cut back on the leverage available for High Frequency Traders (HFT).
They are currently using a minimum of 40 times leverage, which means if you have $1 million then you play with $40 million all day.
We at The KIN Consortium believe that reducing the amount of leverage will initially bring about a correction in the market, much like the correction in the commodities space that we are witnessing today.
Suddenly the valuations of companies will be based on fundamentals, as opposed to rampant speculation for pennies.
This will then lead to companies and analysts lobbying investors for their belief in the story lines of their respective companies, which is better than the arrogance of merely programming numbers into a computerized leverage machine, and saying, “Who cares what real investors believe?”
Once we have eliminated the leverage that creates artificial demand, then we can assume that the prices of the commodities are real market demand.
At that point natural market forces will lead to an alternative way of dealing with rising commodity prices.
Simply by allowing the market to react to the rising prices by increasing the amount of supply of the various commodities or change the location of the manufacturing facilities.
For example, the impact of rising oil costs will naturally impact the cost of transportation of goods.
These rising costs will match or exceed the value proposition found in the cheap Asian labor costs argument.
If you assume importing from Japan will cost more due to the rising cost of transportation, then let’s produce the products closer to the point of sale.
The new local manufacturing plant will hire local employees, which will in turn vitalize the economy.
Suddenly we have resolved the outstanding issues of unemployment and income taxes.
Let’s reiterate the conclusion by saying that rising oil costs leads to a more competitive playing field for manufacturing goods closer to the point of sale.
A live example of this specific market dynamic can be seen today as companies are scrambling to find alternatives to Japanese imports due to the rising YEN and the ongoing Crises in Japan.
The costs of rising Japanese products has companies like Apple Computer (AAPL) looking for alternative suppliers of components in May of 2011.
In the case of commodities like corn and wheat prices escalating due to the weak dollar, we recommend increasing the supply of the affected commodities.
The logical course is to consider solutions like converting deserts into farms and greenhouses.
Increasing the supply of farm products will offset the cost of rising food prices.
The fact of the matter is that Saudi Arabia has been creating oxygen, along with fruits and vegetables out of farms that were converted from deserts.
Controlling market trends through margin requirements, and allowing market forces to create local sources for goods are only two solutions that we recommend here at The KIN Consortium.
The key is to allow for the principles of supply and demand economics to work in a free market environment.
The opportunities will present themselves in the market, without government meddling in the form of G7 summits or other centralized attempts of control.
— Khalid I. Natto, [email protected], is chairman & CEO of The KIN Consortium.