Me and Jimmy.

You know the man – he is unrelenting in his quest to harness the power of the commodities “bull” and clearly passionate in his market predictions, not to mention ruggedly good-looking and charming.

And then there is Jimmy Rogers.

Ok. Maybe my time in the commodities realm pales in comparison to the hours Jimmy has logged. And maybe I have the conviction of school girl compared to the zeal Jimmy exudes every time he lands in front of a TV camera. But at least I have charm, no?

In his latest landing, Jimmy was classic. To paraphrase:

Being invested in commodities is going to make you money regardless of whether:

A) The global economy will sustain its growth stride and the demand for commodities, coupled with fluctuations in the supply situation, will keep prices driving higher.

Or …

B) Global growth will not be sustained and will thus necessitate further monetary accommodation (a.k.a. money supply growth) which will provide the necessary liquidity to support commodity prices anyway

I suppose, in other words, Jimmy has said we will experience either self-sustaining or artificially buoyed economic growth – either will succeed in driving commodity prices higher.

Kind of reminds me of some of the nuttier gold-bug analysis I have seen – i.e. gold will go higher if we see any of the following:

1) Inflation.
2) Deflation.
3) Risk Aversion.
4) Risk Appetite.
5) Other: __________
6) Opposite of Other: ___________

Back to Jimmy … it is hard to argue against his former point that global growth will support commodity demand and prices. But although his latter point seems to have been a real boon for asset markets over the last year, the evolution of economies and markets over that time may mean things will be different this time. (Yes, I said it.)

The Federal Reserve assumedly cannot do much on the interest rate front; the Fed Funds Rate is pretty much anchored to the floor. Its option of increasing, extending or initiating new bond purchases might be considered the fall-back strategy for keeping growth supported since it has seemed to work thus far. We must assume this is what Jimmy meant by ‘money supply growth.’

But rising commodity prices, due to this money supply growth, are at a point where consumers are feeling pressure on their wallets. Will not more money supply growth simply create greater pressures which will then require more “money supply” growth … and on and on and on? It has become a vicious cycle.

Maybe this is why Dallas Fed President Richard Fisher said yesterday he would vote against bond purchases if they prove counterproductive:

“I remain doubtful enough as to its efficacy that if at any time between now and June, it should prove demonstrably counterproductive, I will vote to curtail or perhaps discontinue it …”

“What is needed now is for business to be incentivized to commit that liquidity to creating American jobs. This is the task of the fiscal authorities, not the Federal Reserve …”

This all goes back to the second part of an excerpt Jack used in yesterday’s Currency Currents Professional:

The piece Mr. King penned for the Financial Times effectively said: central banks are ahead of themselves and shouldn’t be so concerned about rising prices that:

1) Effectively represent a tax on the developed world via emerging market growth (when domestic income and wage rates are relatively stable)
2) An inflation in prices central banks can’t control anyway through standard monetary policy without likely doing more harm than good

Point number 2 assumes central banks don’t wish to use recession as a way to control inflation—al la the Paul Volcker scenario in the early 1980’s which proved so effective.

More harm than good, huh?

So tell me, Jimmy, how long can commodity prices remain supported by Federal Reserve-driven liquidity? Here are some comments from Miyanville on the topic:

According to TrimTabs, the level of the S&P 500 and the size of the Fed’s balance sheet have exhibited a positive correlation of 88.4% since the start of QE1 in March 2009. Meaning, ever since our policymakers employed these non-traditional monetary maneuvers two years ago, the “500” has generally tended to rise as a flood of money hits the market.

So let us check out the correlation between the S&P 500 and the Reuters Jeffries CRB commodity index:

Will there be a QE3? What if there is not?

It seems to me that maybe we’ve reached the “pushing on a string” scenario that frequents economic discussion. Pushing on that string any more may make things worse for economic growth … and subsequently worse for commodity prices … by pushing up costs companies must pass down thereby suffocating a recovering consumer.

I am not so sure the market is ready to accept this result from Fed interventionist policy and jettison what has worked so well for the last year or two. If the juice is being given out for free, why not take a drink? We could at least be drinking through May or June when QE2 wraps up. But the economy needs to show some self-sustaining potential or else investors might begin to worry that the punchbowl won’t be there one morning when they fire up their investment accounts.

Just keep that in mind when you say commodity prices will reach an “absurd level by the end of the decade, the end of the bull market.”

Jimmy also said he was long the US dollar at the present time. Maybe it is his hedge for the risk all wrapped up in what I just discussed.