Post QE3, there has been a great deal of talk surrounding the unintended consequences of higher commodity prices post QE1 and QE2. The talk has centered around the negative wealth affect associated with the resultant higher commodity prices, particularly as it relates to crude oil. The argument behind QE2 was that Central Bank action would incite ” Animal Spirits” which in turn would juice the Capital Markets, which in turn would spur capital spending thus promoting hiring. While it is clear that this action did make Capital Markets hyperventilate, the real economy continues to sputter. Some critics of QE2 and QE3 condemn the Fed actions because they incite the wrong “Animal Spirits”, namely commodity speculators. These critics state that these actions work to drive up the prices of the most critical commodities, and in the process they damage those that can most ill afford such price increases. While some may choose to focus on what the unintended consequences of Fed action has brought, we choose instead to focus on what affect these actions have had on real economic activity.
We think that the real efficacy of Fed action is illustrated by looking at the prices of non-exchange traded vs exchange traded commodities in a post QE world. The logic behind our analysis is that exchange traded commodities are driven primarily by capital flows, which are driven by speculative sentiment. The prices of non-exchange traded commodities however are driven by real commercial transactions which are driven by real economic activity. If you look at the accompanying chart, one can see that the moves post QE2 in exchange traded commodities were more than twice as large as the moves experienced in the non-exchange traded world. The implications for such disparate moves in price would appear to be obvious. The Fed’s ability to alter real economic behavior ends at the computer keystroke. Thus, the promised wealth affect so talked about by our Fed chairman reverberates no further than the trading pits and trading floors worldwide.