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New Buzzword for Commodities - "Demand Destruction"Gary Dorsch Jesse Livermore, the world's greatest trader used to say, "Remember, the market is designed to fool most of the people most of the time. Sometimes, the market will go contrary to what speculators have predicted. At these times, speculators must abandon their predictions and follow the action of the market. Never argue with the tape. Markets are never wrong, but opinions often are. I only try to react to what the market is telling me by its behavior," he said. After Reuters CRB Index of 19-exchange traded commodities plunged by 10% in July, its biggest monthly decline since March 1980, the five-year bull-run for the "Commodity Super Cycle" appears to have peaked out, and speculators are building net short positions in commodities. "I came to learn that even when one is properly bearish at the very beginning of a bear market, it is not well to begin selling in bulk until there is no danger of the engine back-firing," Livermore warned. "The bull market in crude oil started in 1999, and in the last nine-years the oil market has gone down over 40% three times. Was that the end of the bull market?" asked famed investor Jimmy Rodgers on July 29th. In a world of limited resources, the world's population is expected to double over the next 40-years, with more than 95% of the increase in demand concentrated in developing countries. Still the new buzzword in the trading pits is "demand destruction," a favorite slogan for short-sellers in the commodity markets. After setting an all-time high a month ago on July 2nd, and up 40% from a year earlier, the Dow Jones Commodity Index (DJCI) suddenly finds itself on the brink of bear market territory, after an -20% slide from its peak, and faring no better than the MSCI All-World Stock Index, which has been mutilated by the bear's claws, for the past nine months. "Demand destruction," the new flavor of the month, refers to a sustained reduction in demand for a commodity, following a prolonged period of extra-ordinary high prices. For example, Americans shunned pickups and SUV's in June, with retail gasoline prices moving above $4 per gallon, while sales of many fuel efficient car models went up. Sales of GM's light trucks and SUVs tumbled 16% in June, while Toyota Motor saw a 15% jump in sales of its compact Corolla, and US-demand for gasoline is roughly 3% lower from a year earlier.
Historically, every "Oil Shock" since 1972 has tipped the global economy into a recession, which in turn, has weakened demand for industrial commodities. But the recent declines in industrial commodities were also accompanied by equally sharp slides in agricultural commodities like corn, soybeans, wheat and rice, suggesting a broader exodus by hedge funds and other big speculators is underway. History will show that the July 2nd peak in the "Commodity Super Cycle," coincided with the European Central Bank's courageous move on July 3rd, to lift its repo rate by a quarter-point to 4.25-percent. The ECB hawks refused to be bullied by Euro-zone politicians into a series of rate-cuts, or join the Fed's money printing orgy, even while banks and brokers worldwide had recognized $480 billion of write-offs from toxic-sub-prime mortgages, over the previous 12-months. Instead, the ECB held its repo rate steady at 4% through the first-year of the global banking crisis, then guided German schatz yields to a six-year high. The ECB got the pay-off it was hoping for, when the commodity markets subsequently plunged, led by a $30 /barrel drop in crude oil, and 20% losses in the agricultural sector. The world economy needed a powerful central bank to go against the "Big-Easy" at the US Treasury and the Fed, and the "yen carry" traders at the Bank of Japan, in order to deflate the oil and commodity "bubble" with a classic dose of higher interest rates. The ECB's baby-step rate hike was the tipping point, where market psychology switched from "fears of inflation" to worries about "demand destruction." The ECB hawks received back-up support from central bankers in Brazil, China, India, and Russia, which tightened their monetary policies in July, in order to combat inflation and slow their economies. Later this week, the Bank of Korea is expected to hike its overnight loan rate to 5.25%, to shore-up the value of the Korean-won and rein-in the explosive growth of the money supply. The ECB hawks repudiated the advice of the ultra-inflationist Frederic Mishkin, a top advisor to Benjamin S. Bernanke at the Federal Reserve. "Just as doctors take the Hippocratic Oath to do no harm, central banks should recognize that trying to prick asset-price bubbles using monetary policy is likely to do more harm than good. Interest rates are too blunt a tool for targeting specific asset prices, and attempting to prick an asset price bubble should be avoided," he said on May 15th.
Six weeks later, the ECB hiked its repo rate to 4.25%, and greased the skids under the commodity and global stock markets. The annual rate of change for the DJ Commodity Index has plunged to +14% today, from a record high of +40% a month ago. Government apparatchniks will soon begin to report a significant slowdown in official inflation rates, giving central banks more time to keep interest rates low, or the leeway to ease monetary policy where interest rates are historically high. But the ECB's tonic for curing global inflation was a bitter pill to swallow. Global stock markets lost $3 trillion in value over the past two months, and the "reverse wealth" effect" threatens to grind the Euro-zone economy to a halt in the third quarter. The Euro-zone's manufacturing and services sector composite index fell to seven-year low of 47.8 in July, and Spain's jobless rate jumped to 10.4%, a 10-year high. The UK's PMI tumbled to 44.3, it's lowest since December 1998, from 45.9 in June, and British home prices have tumbled 8% in the past year, a record rate of decline. One in seven British home owners could fall into negative equity over the next year, threatening consumer spending. With commodity markets under siege from "demand destruction," a Bank of England rate cut to 4.75% could be on the table, if commodity and stock markets continue to trend lower in the months ahead.
Japan's industrial production fell for the second straight quarter in April-June, the first such back-to-back decline since 2001, when output fell in all four-quarters. Since 1953, the Japanese economy has never escaped a recession when production falls for two quarters in a row. Exports, a key driver of Japan's economy, fell in June for the first time in nearly five years, as shipments to the United States plunged by 15% from a year ago, and sales to Europe and Asian markets sputtered. Japan's trade surplus was nearly wiped out in June, plunging 90% from a year earlier to 139-billion yen ($1.3 billion), with a soaring oil bill on the one hand, and faltering exports on the other. Household spending fell for a fourth month, slipping 1.8% in June from a year earlier, and Japan's jobless rate rose to 4.1% in June, a two-year high, as factories froze hiring, signaling "demand destruction." To read the rest of this article, click on the link below: http://www.sirchartsalot.com/article.php?id=92 Aug 6 , 2008 321gold Ltd |
