Your fortune in a coffee cup
While reading the future in the bottom of coffee cups is a well established middle eastern tradition, John Authers has a analysis piece on the commodities run in which he tries to devise the future of the economy from the price of coffee. In "Investors should pick up a reason for commodities run" he muses:
If the "consumer demand" explanation is right, then you should not necessarily sell commodities, as the emerging markets may "decouple". But it also suggests inflation is a real threat to the emerging markets' growth, so this still is not a safe investment for the long term.
If the "investor demand" explanation is right, then commodities are a bubble. You should get out now.
If the "supply" explanation is right, then the economy is in deep trouble and pace the 1970s, commodities offer almost the only protection against what is going to hit us.
He argues factually for consumer demand explaining that emerging economies are consuming more raw material. A US slowdown in GDP growth would not dampen demand. That is the basis of "decoupling". This is probably true of metals. Oil is suffering from a tanking dollar, so may be financial, but reflected in "demand". Corn is definitely the result of the "ethanol" fiasco.
He argues factually for supply, with numbers that are so detailed they put me to sleep like Homer Simpson in front the TV with a loud snore and long saliva string on my shirt. I believe it, supply is not moving much.
So the difference has got to be investor driven? He explain the "investor" demand. Essentially amid the credit market and equities market meltdowns, commodities offer the last inflation protected (since they drive inflation) asset class, at least in theory and we got a lot of investment momentum in there.
Comments
I agree with you, the commodity rise is probably more investor driven (80%) then demand or supply driven (20%.) Is there a bubble? Yes. The question is, is the investor momentum beginning or ending? I say beginning and here's my logic.
The financial markets are frozen by the question of whether we're facing a liquidity problem or a solvency problem.
If poor lending practices and a lack of transparency are the root cause of the problem, then it will take two to three years to get the loans through the system to resolve the liquidity/solvency question.
If there is a liquidity problem, that means banks just don't have enough cash to cover people asking for their money. My favorite way to think about this is the Jimmy Steward, "It's a Wonderful Life" example. There's a rumor that the bank made a bad loan and a run on the bank could actually bankrupt the bank, even though the bank never made the bad loan.
The FED is addressing this issue by by ensuring that liquidity issues don't cause banks to fail.
But, what if we have a solvency problem? What if the bank really made a bad loan or a lot of bad loans? Then, all the liquidity in the world doesn't matter, eventually, the bank maybe swimming in cash and still bankrupt.
Then add in a fact like you pointed out in a previous post, that there are funds like Carlyle that are 28X leveraged.
So the financial markets are grinding to a halt debating whether there's a liquidity problem or a solvency problem. There's plenty of economic measures to support either view depending upon you're temperament or (probably more importantly) investments.
So now we have a FED that is making sure there isn't a liquidity problem. A bond market that's seized up. A stock market that's down 10%. A Housing market in decline. A dollar that's depreciating. Unemployment that's rising. And inflation that's increasing.
And then there are a couple of commodities rising like shining promises for gain. Is there a bubble? Yes. Now, is the investor momentum creating it beginning or ending? I say beginning.
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thank you for the well argumented comment.
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Rosario
New York City