Now that deflation worries are upon us, even the mainstream media is taking note of the reversal of the commodities price surge of earlier this year. Below are some excerpts from a New York Times article, “Commodity Prices Tumble.”
But first, this tidbit, courtesy reader Michael, from an Oppenheimer report, dated October 13, “Surviving Lower Oil Prices” by Fadel Gheit and Daniel Katzenberg:
The investment banks that hyped oil prices using voodoo economics have suddenly reversed their position and now expect much lower oil prices. They helped cause excessive speculation, create the oil bubble, and contributed to the global financial crisis. They have changed their tune in exchange for a government bailout, not because of changes in market fundamentals.
Well, at least someone isn’t mincing words.
From the New York Times:
The global financial panic and the economic slowdown have put at least a temporary end to the commodity bull market of the last seven years, sending prices tumbling for many of the raw ingredients of the world economy….
The swift turnaround is the brightest economic news on the horizon for consumers, putting money into their pockets at a time they need it badly. Gasoline prices in the United States are falling precipitously — by about 24 cents over the last five days, to a national average of $3.21 a gallon on Monday — and analysts said they could go below $3 a gallon nationally this fall, down from a high of $4.11 a gallon in July….
The rapid commodity decline has eased fears of inflation, a reason central banks were able to lower interest rates around the world last week in an effort to salvage economic growth. It also represents a fundamental shift of view that is driving markets these days.
A scant few months ago, Americans were seen as participants in a bidding war with the emerging Chinese, Indian, Russian and Brazilian middle classes for a basket full of products. But that was before an extreme slowdown in demand for things as diverse as gasoline and aluminum and the retreat of investment money from commodity futures into safer havens like government bonds….
“Commodities followed the euphoria cycle that we had along with housing,” said Robert J. Shiller, an economist at Yale who specializes in market bubbles. “We had the idea that the world is growing very fast, people are getting very rich and, by the way, we are running out of everything. That theory doesn’t seem so good when the economy is collapsing.”
Some analysts, while welcoming the recent declines, say they believe that prices are likely to remain above long-term norms. Food, in particular, could be a continuing problem: today’s prices are still too high to allow many people in developing countries to afford adequate diets. Nor have the recent declines been passed along in American grocery stores, at least as of yet. The United Nations has projected that global food prices will remain elevated for years….
Americans, the world’s largest fuel consumers, have been cutting back on gasoline all year, and the decline is approaching double digits. Motorists pumped 9.5 percent less gasoline for the week ended Oct. 3 compared with the same week a year earlier, according to MasterCard Advisors, which tracks spending. In a report on Friday, the International Energy Agency cut its forecast for global oil consumption yet again, projecting that 2008 would end with the slowest demand growth in 15 years.
Big increases in world wheat production because of increased acreage in the United States, Canada, Russia and much of Europe have brought wheat prices to less than $6 a bushel today from nearly $13 in March.
Soybean prices have dropped to $9 a bushel from $16 since July, in part because of a record crop in China and a slowdown in Chinese imports. Corn prices are also easing amid expanded supply…
“When you have a seven-year bull run, you are going to have more than a four-month correction, and we are just beginning our fourth month,” said Richard Feltes, senior vice president and director of commodity research at MF Global Research. “We have got more deflation coming in the housing sector, in capital assets, and it’s going to continue in commodities as well.”
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My dollars-to-donuts call for $100 by end 2009 still stands – can someone explain to me how the collapse of TIPs prices augurs lower oil? Is no one but me concerned about the zillions of Paulson zlotys sloshing around? Do we all believe a $3 Trillion (worldwide – maybe $5 Trillion when done) printing press can be sterilized that easily?
I dont know how to leave a link but did you read this.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a0DqEDw4VVzE&refer=home
Treasury Said to Invest $125 Billion in U.S. Banks (Update1)
By Robert Schmidt and Peter Cook
Oct. 14 (Bloomberg) — The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government's latest attempt to shore up confidence in the financial system.
I understand currently everything is pointing to deflation.
But what about all the money being pumped into the markets by central banks all over the world.
Will this not cause Inflation in future ???
Even with the slowdown in finances, the BRIC is supposed to grow by 7-9% this year. There is a support for the price of oil, for now.
Russia is contracting (they have no underlying demographic growth either), Dunno how much Brazil adds, but China + India = only 1/4 of Europe + US oil consumption. The NYT article reports double digit declines in gas consumption in the US. Reports out of the UK and Europe show similar declines. Even 10% growth from the emerging markets won’t lead to a net increase in consumption.
Russia is not contracting – projected growth for 2008 is 7%.
buzzp Do we all believe a $3 Trillion (worldwide – maybe $5 Trillion when done) printing press can be sterilized that easily?
Very simple answer given by Irving Fisher in the 1920s.
M.V = P.Q
A $5T increase in money supply M gets fully sterilized in a $65T real world GDP P when the velocity V takes a 7.7% shave, assuming Q constant (no deflation, no inflation).
And believe me, a 7.7% shave to V right now is a pretty low estimate, meaning that, in reality, apparent world GDP P.Q is going down quite a bit with, to things make more fun, Q < 1 if commodities are any indication.
In other words, deflationary recession.
“Russia’s economy is almost totally dependent on the price of oil” and other fun facts:
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/03/AR2008100301976.html
Businessweek
October 20, 2008
Credit Crisis: The Risk Hits Russia
Investors are fleeing fragile financial markets, oil prices are falling, and the global credit crisis threatens the economy
RUSSIA Take a stroll through central Moscow, and you’d be hard-pressed to find evidence of the global economic turmoil. Shiny new malls are packed with shoppers. The streets are filled with Mercedes, BMWs, and Land Rovers. On the Presnenskaya Embankment, overlooking the Moskva River, a half-dozen skyscrapers are nearing completion at the Moscow International Business Centre, a $12 billion development intended to become the city’s new financial hub. The world credit crisis “doesn’t affect us at all,” says Tatiana Ilyinishna, a pensioner hauling bags of groceries outside a supermarket near the city’s Kiev Railway Station. “Everything here is splendid.”
But scratch the surface a bit, and things are less splendid than they appear. As the financial crisis spreads, Russians are suddenly discovering that their economy is shakier than many had cared to believe. Credit is increasingly tight, economic growth is slowing, and Russia’s fragile financial markets have taken a beating. On Oct. 6 the benchmark RTS index plunged 19%, to its lowest level since August 2005. “The current situation is very serious,” says Evgeny Nadorshin, chief economist at Trust Investment Bank in Moscow. “A few months ago we thought that we could look forward to a calm life, but now we’ve lost our advantage and are in the same boat as everybody else.”
Full article
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And speaking of commodities, then there is gold…
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Forbes.com
Crankonomics
Good As Gold?
Susan Lee 10.10.08, 12:01 AM ET
So what’s up with gold?
The last few weeks ought to have been stellar in the gold market. And, sure, as of yesterday, gold was decisively up from the mid-$700s a troy ounce, where it had been trading when the black days began. But that increase hides some weird goings-on.
Back on Black Monday, when Lehman filed for bankruptcy and shares of AIG dropped like a stone, gold hardly budged. On Black Tuesday, when the Reserve Primary Fund broke the buck, gold only managed a medium-tepid rally. Finally, on Really Black Wednesday, as the SEC shot the messenger by cracking down on the shorts, gold zipped up 10%.
But then on Utterly Black Monday, Sept. 29, when market skidded 7%, gold closed barely above $900. On Oct. 6, with a huge global washout in stocks, gold traded in the $870s. And now, three weeks after the crisis started, gold is still weakly flirting with the low $900s.
Need I say it? Shouldn’t gold–during the greatest financial crisis since the Great Depression–be performing better? Jeesh, it hasn’t even gotten close to this year’s high of $1,000. Gold has a history of being safe-haven investment, but rather than a safe haven, it’s looking suspiciously like an afterthought.
OK, maybe this isn’t totally persuasive. But how about gold’s other chief function in life–as an inflation hedge. Strange doings here, too.
….
All of this suggests it is retail demand that controls the price of gold, not investment demand. Unless, of course, there are tons of people who want to wear their safe-haven inflation hedges on their wrists.
Full article
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Anon, gold started 2005 at $500, 2006 at $600, 2007 at $700 and 2008 at $850. Meanwhile, the DOW started the year at 13,000 so GOLD as an “afterthought” is fine by me.
It was odd though that the NYT piece did not mention Gold at all. The word was just not there.
It was interesting that the cause of the commodity price bubble in 2008 was not blamed on “greedy speculators”. The role of “speculators” is not mentioned. Apparently, when prices are rising, “greedy speculators” are blamed and Congressional hearings convened and Oil executives made to defend their paycheck and Presidential candidates stump for windfall profits taxes, but when prices are falling, it is attributed to “an extreme slowdown in demand”.
One has to wonder though, that if OIL had not gone to $150 first, whether $80 would be considered a “commodity bust”.
It is hard to be convinced of “deflation” until a string of negative CPI prints unfolds. Until that happens, inflation is still the reality.
http://data.bls.gov/cgi-bin/cpicalc.pl
I thinkw the commodity bull must resume at some point. We are not experiencing destruction of material wealth, we are experiencing an economic coordination problem peculiar to a system based on vast pyramids of debt. But back in the real world, people still want to eat, they want material convenience, and there are hundreds of millions more people arriving on Earth in every decade. They are not going to sit around poor and starving forever, just because G-7 high finance seized up.
It looks to me like Asian commodity funds are in trouble. Considering that they facilitate global trade by acting as intermediaries between producer, shipper and final consumer this could be worrying. Price drops could indicate that these funds are unable to continue to get the funding to facilitate the transport and storage of commodities. Final consumer demand is not falling that much yet, but you have to worrying that shipping agent and wholesaler demand might be falling off. I think in a perverse sense this could see consumer prices rising while commodity prices drop.
Deflation (credit contraction) is certianly more probable than inflation.
$20-30 trillion in assets has just vanished.
Matt Dubuque
“Inflation does not flourish in a recession.”
Matt Dubuque
Matt Dubuque said…
Matt Dubuque
“Inflation does not flourish in a recession.”
Matt Dubuque
—
Har har, Harari. Tell that to Robert Mugabe, he should be able to print more money without risking inflation.
I’m dawning my tin-foil hat and jumping on board with gheit…commodity bull, GS, tanks their oil target to $50 from $200 in mere weeks (yesterday, they finally followed the herd and said $50 low possibility). Tuesday, the treasury annouces direct capital injections into GS and a number of other banks.
imo, the back-room deals with the 5 families on sunday night probably went something like, “lay off the commodities or else.”
I can’t imagine anybody in congress could look themselves in the mirror 6 months down the road, having direct investments in these banks, yet having to hold “excessive speculation” hearings again.
MS and GS already have to divest a lot of their energy assets now that they are BHC’s, but i think they got an extension from previously 2 years to a window of 5 years. Maybe this potentionally fictitious backroom “understanding” is a way to effectively pre-empt this window.
But again, my argument has nothing to do with fundamentals and is strictly conspiratory in nature.
Matt Dubuque said…
Matt Dubuque
“Inflation does not flourish in a recession.”
then why aren’t the airlines taking back their baggage fees, due to falling fuel costs?
why did dominoes pizza recently double their fuel delivery charge?
my bills aren’t deflating at all.
deflation should also lead to lower interest rates, but *all* of them are spiking.
i don’t see whats to argue about. Clearly markets of all sorts are going through a deflationary period. The actions taken by world monetary authorities are inflationary. The time it takes supply and demand forces to push prices higher in most commodities may be a little ways off yet, perhaps 1 to two years down the road. Supply and demand, despite any demand destruction or whatever, will not be able to supply the world with what it needs for decades to come. Ponder this, had commodities or better yet supply and demand fundamentals for most commodities been tight on the supply side going into 2000 and 2001 what would have wheat, gold, beans, etc prices looked liked? Since the beginning of the deflation in 2000 we have been inflation fighting this thing. A period of deflation is fine by me.
a “credit contraction” ? I’ve seen estimates that the federal budget deficit for next year will top 2 trillion.
The response by Governments around the world is to “printfaster”.
The recent action in the 30 Year Treasury Bond is ominous. Pull up a chart of the december future USZ08.
Hard to see the USD buying a bigger basket of goods anytime soon.
from 1930 to 1940 $100 deflated to $83.83. but by 1950 that same $100 had inflated to $144.31.
http://data.bls.gov/cgi-bin/cpicalc.pl
Most investors have bought in to the deflation story as it serves many purposes. When the US dollar starts tanking who will be holding the commodity stocks?
Gold investors / hedgers have not bought into the deflation story.
Any story about inflation and "busted commodity bubbles" that ignores gold is sirenesque.
Deflation is a fear. It is also a media buzz word. Falling housing prices does not mean "deflation". It means an asset is declining in price.
Rents where I live are on the rise as people chose to rent instead of buy. There is inflationary fallout from the housing bust.
Rents -> CPI component.
The deflation enthusiasts should go to their bank, withdraw their cash and fill safe deposit boxes with bricks of hundred dollar bills. Cause those bills are going to get scarcer in the future!! Be worth more!! Will buy more product than they do today!! That would be rational. But, is anyone actually doing that?
Douglas, if we go back to 1998, Matt Simmons ‘blamed’ speculators for what he considered too low oil prices. But dreams magically come true and, driven by new deregulations, IB recommendations, changes in the price formation regime, expanded number/size of commodity funds, new long-only ‘players’, cheap money, stories promoting ideas of unending demand rise and imminent scarcity, etc, away we went into self-fulfilling bubbleville.
Congressional Committees, from I think 2002, did little more than huff and puff — even as some folks at the newly ICE owned IPE knew quite well that price was moving beyond fundamentals, as I would at least expect some on NYMEX also did.
So higher and higher commodity prices, particularly in foodstuffs, drove cost of reproduction of labor power up, up, up, which when placed against nominal wages became an attack on the very foundation of capital, living labor. Under cover of financial spectacle and fictitious profit, the system regressed, moved into contracting reproduction… Markets notice with a sometimes long lag.