Kiplinger Connection
Soaring Prices • In Congress • The Economy

Soaring Prices: Overpriced-commodity bubble will burst soon.
In Congress: A $15 billion housing relief bill.
The Economy: March job losses mean another rate cut.

Soaring Prices
Another bubble will burst soon.
But this time, it’s all for the better.
Commodities are unsustainably high ... way out of whack with supply/demand dynamics. And the day of reckoning isn’t far off.
The froth in oil ... about one-quarter of its current $105 a barrel price on the futures market. Copper is a good 35% above logical levels; platinum, 30%; tin, 50%; nickel, 25%; zinc, 20%; and corn, 15%-20%.

What’s behind the commodity bubble?
Mainly investors chasing high returns. They’re pouring cash into commodity futures because other choices seem less attractive. The S&P 500 lost 10% in the first quarter, its worst quarterly performance since 2002. Interest rates keep falling, and the dollar is hitting record lows. And no one can guess when home prices might hit bottom and rebound.
Commodity gains add to herd behavior. With every price spike, more investors jump in, afraid they’ll miss the score of a lifetime.
Hedge funds and other big investors do most of the speculating.
But more little guys are also getting in on the act by buying exchange-traded funds. ETFs trim the risk some by diversifying, are easy to get into and out of, and have a much lower admission price.

Our best estimate is that the balloon will deflate by midsummer. A number of factors could do it in: A cut in worldwide commodity demand, big stock market gains, a more stable dollar, or tame inflation signals.
Prices will drop by about 30% if all these factors come into play at once, but declines will be smaller and gradual if signals are mixed.
Oil will slide to $85 a barrel, with a smaller reduction at the pump, because risk is still a factor.
In any case, the bottom isn’t going to fall out of the commodities market. Supplies are tight, and demand for many products will remain high, particularly with growth in China and elsewhere.

The bubble’s pop will be good for businesses and for other regular buyers of commodities.
So put off major purchases if you can.
The pain will be limited to big speculators and small investors who failed to diversify. Plus producers who’ll lose outsize profits.

One glaring exception to the commodity bubble: Natural gas. Industrial, heating and other demand is sure to remain strong, and prices, currently around $9 per million British thermal units, may top $10/MBtu next winter. Natural gas supplies are roughly adequate for normal weather, but harsh conditions are likely to cause real stress. Fading quickly: Hopes that liquefied natural gas will increase supplies. LNG is going to Asian and European buyers, who are outbidding U.S. ones.

In Congress
The window for legislative action will close early this year. Incumbents want to spend time campaigning instead of legislating, so most of the substantive work on Capitol Hill will be over by August.
Housing relief may be Congress’ biggest achievement in 2008. Look for lawmakers to swiftly pass a $15-billion assistance package.
Among its key provisions: $4 billion for local governments to buy up vacant foreclosed properties that are blighting neighborhoods. An increase in the size of Federal Housing Administration-backed loans to $550,000 or more, intended to stimulate home sales in pricier areas. Plus a $6-billion tax break for home builders to keep smaller ones from going under and larger ones from selling homes at fire-sale prices.
The move to help homeowners will soothe financial markets, but the impact on the rising tide of foreclosures will be limited.

A second financial stimulus plan remains a possibility, especially if clouds over the economy don’t lighten up much. The aid may include additional bond authority for refinancing subprime mortgages. But Congress will wait to gauge the effects of the first stimulus.

Also on tap: Stronger product safety measures. Consumer advocates and retailers want a beefed up Consumer Product Safety Commission, and they’ll get their wish. That spells more inspectors and higher fines for companies convicted of knowingly selling defective merchandise.
A generous new farm bill is a good bet in a month or so, bringing higher crop subsidy levels plus more money for conservation and public nutrition programs as well as for renewable energy research.
A short-term patch for the alternative minimum tax ... an extension of current AMT protections to keep several million more taxpayers from shelling out heftier taxes. A permanent fix is one to two years away.
Plus an OK for continued electronic surveillance by Uncle Sam, with some retroactive legal immunity for telecommunications companies facing lawsuits for participating in warrantless wiretapping since 9/11.

The Economy
The loss of 80,000 jobs in March spells another interest rate cut by the Federal Reserve this month. With the unemployment rate now at its highest level in two and a half years and March’s payroll drop bringing total job losses since December to 232,000, the Fed is sure to act.
Hardest hit industries: Construction, manufacturing, and temporary employment services. Retailing also shed jobs in March. But there was some growth in health care, restaurants, and mining. As the economy revives in the second half, more firms will hire again.
Fewer jobs are sure to make consumers tighten spending more, further hurting an economy that we believe is already in recession. Consumer spending accounts for the largest segment of economic output.
Tax rebate checks in May will help loosen purse strings, though we expect consumer spending to increase only 2% this year, following a 2.9% rise in 2007. Overall, U.S. GDP will expand about 1% this year, compared with 2.2% last year. Next year ... around 2%.