What Could Stop the Presses?

After last week's dovish guidance from the Fed in the face of rising commodity prices, it is now very hard to imagine what would drive policy makers to stop the monetary printing presses, or even to slow them down. Of course, it is precisely these types of situations that require investors to make sure they see the other side of the trade.

Markets are seemingly looking thru every crisis (e.g., EU) and discounting the government bailouts that would likely follow.

Still, I can conjure a couple of situations, in my view not well discounted by markets, that might give policymakers cause for pause. Both of them are scenarios in which commodity prices experience a dramatic increase in prices--perhaps extreme enough that policymakers are forced to rethink their approach.

One scenario is a significant upward revaluation of the yuan. US bureaucrats have been hounding Chinese officials to quit 'manipulating' their currency (obviously US officials are not against the pot calling the kettle black). There was some chatter on trading desks last Friday that China may in fact be preparing for a yuan revaluation.

Washington should be careful for what it wishes. Revaluation would mean that the yuan would strengthen against the dollar, which would of course would hammer USD purchasing power. The Dollar Index is already approaching all time lows. Lower dollar means higher commodity prices.

The other scenario relates specifically to oil. This weekend, prices at the pump here in Ohio are said to average $4.11/gallon--an all time high that surpasses the summer oil 2008 spike.

It's hard not to look at the above chart of oil and think 'bullish.'

Should oil prices continue their upward march, and particularly if prices head into a parabolic frolic like gold/silver, there is likely some level where the economy cries uncle.

Higher oil prices is the situation I currently find most likely to force the Fed's hand.

position oil, gold, silver