There has been a strengthening price cycle in hard assets over the past 8 years. In the past couple of years, as prices have doubled and tripled, many have been salivating over the double digit growth of China and India as the fundamental argument for endless demand and boundless prices.
Too often overlooked though is the fact that China's economy has already been growing at a double digit clip for the past 30 years. How can this long standing growth justify increases of 500 and 600% in many commodity prices over just the past couple of years? The answer that commodity fans hate to hear is that a speculative bubble has been driving commodity prices to recent heights.
Notwithstanding the developing country demand story, money flows into commodities have recently been driven primarily by a falling US dollar and sub-par investment opportunities in more conventional assets like real estate, stocks and bonds. “Hot funds” flowing from hedge funds and pensions desperate for yield are driving prices to a fevered pitch posing greater and greater risk to capital and world stability.
Ironically many pension funds today are facing daunting deficits because of their double or nothing speculation in stocks in the late 90's tech bubble. Rather than face the need to admit mistakes and increase funding, many are now grovelling ‘round the commodities craps table for one more hopeful toss against mounting odds.
John Hussman's piece this week is on point “Watching ringside for round two:”
“As a rule, once a market becomes overvalued and speculation becomes over-extended, it becomes wise to panic before everyone else does even at the risk of being early.”
“As for agricultural commodities, what we are observing is probably not a Malthusian breakpoint, but what I'd call “speculative hoarding.”
As the benchmark currency (U$) weakens there is a tendency for developing nations to save in the form of real goods.
As Joe Stiglitz notes one of the underlying forces behind rising oil prices is that producers are already drowning in US assets, and to sell them more oil (or other hard assets) is simply to accumulate more low-returning assets. In this sense their best investment then is to leave raw materials in the ground, warehouses, or silos.
Also watch Graeme Maxton, chief economist at The Insight Bureau as he points out that the recent rise in commodity prices is due to speculation, not fundamental shortage.
Meanwhile some people’s speculation is other people’s starvation as all around the world poor people are now rioting and dying from lack of basic food staples. see Avaaz.org. “>”The world in crisis.”
The greed inspired hope that emerging economies will now be ravenous for consumer goods to replace the demand of faltering western consumers, misses a fundamental level of Maslow’s hierarchy: without basic biological necessities like FOOD, no one lives to buy “stuff”.
I think the shock of coming months will be the velocity of correction in commodity prices.
Cory’s Chart Corner
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