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DAVID KRUSE

By Staff | Jun 30, 2013

The gold market took seeing the end of quantitative easing in the distant horizon like getting hit by a truck on June 20.

The investment crowd now sees commodities as being in a secular bear market, but considers that to be a good thing for the economy as a whole.

While I have never owned gold, I own its near investment equivalent – farmland. The investment value of farmland will track that of the gold market in general terms.

The reason owning gold has never interested me is that owning farmland is like owning gold except that farmland generates income while gold pays no dividends.

The end of the trend of QE and higher long-term interest rates will eventually weigh on farmland values.

There is a difference between a bubble bursting and fundamentals turning negative. There is no bubble in farmland values, but the fundamentals are turning negative and the market will reflect those fundamentals.

A stronger dollar, declining net farm income, and an investment outflow from the commodity sector are all negative fundamentals for farmland values.

The fundamentals may not fall off a cliff but if they are not improving the incentive to bid up disappears.

The declining trend of China’s PMI feeds through negatively to commodity values. I think that industrial commodities will be hurt more directly than food commodities, but if the ship is sinking, everyone will eventually get wet.

China’s economy is slowing and there is likely some degree of bubble to all the infrastructure that they have built that quickly that becomes excess capacity when growth slows so that it is underutilized.

One analogy that I heard that makes sense is that when they built the western railroad system here in the U.S., building the railroads caused a boom, but there was a lag in the developing growth that followed, producing a four-year recession.

The economy eventually benefited greatly from the westward transportation expansion, but not before the banks that financed it went broke.

China may well be into a period of a similar shakeout that will test the management skills of their new leaders. China does have resources and frankly owns the banks that financed the expansion so that moderates the bearish potential.

China is being hurt by the slowdown in Europe and emerging economies along with the devaluation of the Yen. When China still pegs its currency to the dollar and the dollar goes up that will add to their problems.

The political unrest being generated by the slowing global economy as seen this week in Brazil will likely lead to more desperate measures that carry risk of currency and trade wars.

A weakening global economy will be a drag on the U.S. as well, but the domestic U.S. economy may prove more insulated from the global slowdown than was thought.

The corn market which has become primarily more domestic will be at less risk than soybeans that are dependent on exports. The ethanol industry will again prove to be a godsend to the general ag economy in a global economic slowdown.

Yet look at the Republicans still trying to kill ethanol to protect the petroleum market share of motor fuels for the oil companies. The U.S. economy’s biggest risk is its own political leaders, some of which have argued for economic policies that would have never produced the economic recovery that has occurred from the Great Recession.

They stubbornly advocate austerity that would end growth in this country.

China helped sustain the global economy during the initial financial meltdown and now the U.S. is in position to hold the global economy together as they have to lean on us.

The Fed has done a remarkable job regardless of the Santellis,’ Santorums’ or Pauls’ howling at the moon. If the economic policy was turned over to the Taliban wing of the GOP you would bury both the U.S. and global economies 6 foot under, while they blamed it all on Bernanke.

The economic recovery seen from the Great Recession was bad-mouthed for political advantage while one party even pushed past the edge of undermining it for political gain.

Bernanke correctly observed what the markets have been reflecting, that the U.S. economy is making a strengthening recovery despite the politicians in Washington.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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