Thanks for the article.
There's a new bubble in town
Oil at $70 a barrel. Gold topping $700. Copper through the roof. Where will it end? Morgan Stanley's Stephen Roach takes a look at the commodities boom today, and flat out calls it a bubble. As evidence, he points out that in comparison to the last four periods of strong global growth, commodity prices have disproportionately skyrocketed.
That's because China didn't weigh into the global picture until this latest period of global growth. There is huge demand coming out of China which is fueling these bubblish prices. And that demand is likely to remain in place at least for another year IMO.
Roach isn't alone in wondering whether the laws of supply and demand have gotten out of whack in commodities. But his most interesting point is rhetorical. Drawing on Robert Shiller's "Irrational Exuberance," he notes that bubbles are usually accompanied by a "new story": a compelling explanation of why current trends are likely to continue ... so get in now and buy! In this case, the "new story" that has commodity investors and traders all excited is China. China is gobbling up all the cement, oil, steel, copper and chromium the world has to offer -- and shows no signs of slowing down. So all over the world, traders are betting that commodity prices will continue to go up.
Roach demurs. China's new five-year plan, he says, indicates that China's leaders are intent on "rebalancing" the economy, and moving toward lower growth.
I am unclear how Roach comes to that conclusion. China does from time to time redirect growth but I have not heard them say they are lowering growth.
Betting that China's next 27 years will be like the last 27 is a loser's proposition. And higher prices for commodities will also, all by themselves, result in lowered demand -- something that already appears to be happening in oil markets.
Its my understanding that the Chinese economy did not 'wake up' until the last 1990s.
Oil usage is fairly inelastic. Higher prices may force some people to use another energy source such as coal but in most cases, its fairly difficult for most users to substitute one energy source for another.
Roach's analyses veer toward the dour (although he did shock his regular readers recently by declaring that the global economy wasn't due for a horrible implosion). He appears to enjoy the contrarian path -- and predicting that China's impact on global commodity prices will not persist is a pretty sharp detour from conventional wisdom. Given how much pent-up demand for the "good life" there still is in China (and let's not forget India), it still seems possible that we are witnessing a fundamental event in global history -- the reemergence of two great civilizations, India and China, as major global economic powers.
While I think the latter comment is true......that the BRIC nations are experiencing unprecedented growth.....I do believe that eventually there will be "a bursting of the bubble". However, I don't see it happening in the immediate future......next 9 months.........mainly because the US economy has just started to show some strength. When the US economy weakens which the way the stock market is behaving in the past two weeks could be as soon as 6-9 months away, then I think we'll see commodity prices start to fall.
I think the important thing to remember about commodities like gold and oil is that for decades their prices have remained in a very slow growth mode and that the current move is playing catchup. And I also think the concern about Peak Oil is not some scifi scare theory. I do think we are reaching the limits of oil production based on current technology.
Here's an article about the gold market:
"Thus, we were not at all surprised to see the spot future Gold price come back to those September 1980 highs by the close of the week's trading on May 12. Even though Gold hasn't been this high in almost 26 years in US Dollar terms, there are always people around who want to "get out even" no matter how long they've waited to do it. Sadly, anybody who bought Gold at $US 710 in September 1980 is not REALLY getting out even by selling it at $US 710 in May 2006. In 2006, $US 710 buys a LOT less than it did in 1980.
That, of course, is the problem. The reason why Gold has been going up so precipitously over the past month and has accelerated its bull market so much since last last year is that the problem has begun to be realised by many more people, both inside and especially OUTSIDE the US. In nominal terms, about the only prices which are still below where they were in 1980 in $US terms are Gold and Silver prices. They are only now BEGINNING to "catch up" with everything else."
the-privateer.com |
