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Is the "Commodity Super Cycle" Dead or Alive?Gary Dorsch "Those who had been riding the upward wave decide now is the time to get out. Those who thought the rally would last forever, find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality, by selling or trying to sell. And thus the rule, supported by the experience of centuries, - the speculative episode always ends not with a whimper, but with a bang," so wrote John Kenneth Galbraith in his book "A Short History of Financial Euphoria." Tens of thousands of traders piled into the commodities markets in recent years, attracting nearly $280 billion, bidding-up everything for crude oil to corn, coal to soybeans, and silver to sugar. The speculative boom was most evident in the agricultural and energy sectors, where commodities doubled and tripled from a year ago, and sending official inflation rates to multi-decade highs around the world. Central bankers in Canada, England, and the United States whetted the speculative appetite of commodity speculators, by slashing their interest rates, and increasing their money supplies. "The truth is that liquidity is the only significant weapon in the central bank's arsenal, but it will not necessarily go where you want it to go, when you need it to go there," Martin Meyer wrote in his book "The Fed." "Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end and consequently, the prices of all commodities will not cease to rise, everybody becomes eager to buy as much as possible and restrict his cash holdings to minimum size. If the credit expansion is not stopped in time, the boom turns to crack-up boom, the flight into real values begins, and the whole monetary system founders," Ludwig von Mises prophesized in 1949. Such was the case in the 12-months leading up to July 2nd, when the speculative frenzy in the commodities markets, suddenly began to turn into a bust. Within the span of four-weeks, kingpins of the commodities markets had plunged 20% or more from their July peaks, and dumped into bear market territory. When the parabolic booms were followed by wicked corrections, the eternal skeptics of the "Commodity Super Cycle" began to wake-up from seven-years of hibernation.
While the Fed, the British, and Canadian central bankers were stoking the mania in the commodities markets, a coalition of six influential central banks, from Brazil, China, Europe, India, Korea, and Russia, were working collectively in the opposite direction. The Group-of-Six, led by ECB chief Jean Claude Trichet, tightened their monetary policies, in the hope of derailing the powerful "Commodity Super Cycle," which was wrecking havoc across the global economic landscape. "Global monetary policy must tackle inflation, even if it is driven by rising food and energy prices," said China's central bank chief Zhou Xiaochuan, after meeting European and other east Asian central bankers in Rome on June 27th. "We are trying to use some monetary instruments to tighten monetary supply. But which instruments to use, it is not convenient to say," he said. Over the past 18-months, the People's Bank of China (PBoC) soaked up vast amounts of yuan by repeatedly increasing banks' reserve requirement ratio to a record 17.5%, selling huge blocks of government securities, and letting the Chinese yuan strengthen 12% against the dollar. Finally, the PBOC's last tightening move appeared to hit the bulls-eye, and gotten ahead of the inflation curve. The Dow Jones Commodity Index plunged 20% versus the yuan, in six weeks.
However, the PBoC's tightening campaign produced some brutal side-effects, most notably, the bursting of the Shanghai red-chip bubble, which had soared five-fold in less than two-years, to a record 6,150 in October 2007. Chinese investors had opened 46-million new trading accounts in 2007, nine times the amount of the previous year, and poured $2.2 trillion of their savings into equities. The frenzied demand pushed up valuations of China's stocks to the highest in the world. On October 24, 2007, Billionaire Warren Buffett warned investors to be cautious about Chinese stocks. "We never buy stocks when we see prices soaring. We buy stocks because we're confident of the company's growth. People should be cautious when they see prices rising," he said. Since then, Shanghai's main stock index has tumbled 62%, amid worries that China will feel the pinch of a synchronized economic recession in Europe, Japan, and the US, its three biggest overseas customers. A year-ago, few investors could have envisioned that Beijing would engineer the bursting of the Shanghai red-chip bubble ahead of the Olympics. But now traders expect Chinese corporate profit growth to grind to a halt by next year, after slowing to +20% in the first half of this year, because of a slowing global economy, andsqueezed by sharply higher raw-material and fuel costs. Shift in Market Psychology, Brazil Tackles Inflation Psychology in the commodities markets has swung from the "fear of inflation" and the mad scramble for natural resources, to the theme of "Demand Destruction," or worries that a global economic downturn will weaken demand for commodities. China consumes more commodities than any other country, except for crude oil, so the prospect of a sharp slowdown in the juggernaut Chinese economy has knocked the commodities markets off their bullish stride. "When the facts change, I change my mind. What do you do, sir?" asked John Maynard Keynes. The Bank of Brazil (BoB) has earned the respect of investors worldwide, for its tough stance in the battle against inflation this year. Brazil's central bank hiked its benchmark Selic lending rate on July 23rd by 75-basis points to 13%, and has lifted borrowing rates by 175-basis points in four months, to tackle commodity inflation. Brazil's consumer price index rose above 6% in July, triggering an immediate rate hike by the central bank. Within days, the year-over-year change in the Dow Jones Commodity Index went negative when measured in Brazilian reals.
"There are indications that monetary policy has started to affect inflation expectations," said BoB chief Henrique Meirelles on August 18th. "The recent drop in current and expected inflation shows not only that it is feasible, but also reinforces the BoB's commitment to bring inflation back to the center of the 4.5% target in 2009," he added. Still, futures trades in Sao Paulo expect another 50-basis point BoB rate hike to 13.50%, to drive another nail into the coffin of inflation expectations. Much like China's central bankers, Meirelles has been willing to pay the price of a sharp slide in Brazil's stock market to tackle inflation. The international respect for the Bank of Brazil stands in sharp contrast to the disgrace that was heaped upon the Bank of England last week, which for all practical purposes abandoned its long discarded 2% inflation target. Global flight from the British pound quickly ensued, knocking its trade-weighted value to a 12-year low, since foreign investors don't trust the Bank of England to keep inflation pressures under control. US Dollar Looks a Little less Ugly The debate over whether the "Commodity Super Cycle" is dead or alive, also revolves on whether the US-dollar has hit rock bottom against the Euro and other foreign currencies. A stronger US-dollar creates a virtuous circle of knocking commodity markets lower, easing inflation pressures, and gives central banks more wiggle room to lower interest rate and expand the money supply. To read the rest of this article, click on the link below: http://www.sirchartsalot.com/article.php?id=93 Aug 20, 2008 321gold Ltd |
