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To: Goose94 who wrote (15553)	1/18/2016 8:50:49 AM
From: Goose94	Read Replies (1) \| Respond to of 203329

What will happen if commodity prices remain low for the next 15 years? Following our analysis of the super commodity cycle* and the conclusion that commodity prices should stay low or continue to fall for the next 15 years, this article looks at the future.* It looks likely that the recent fall in commodity prices may be one of the biggest ever on record. The fall may even match the 66% implosion experienced between 1917 and 1931. One fact in every supper commodity cycle is that every rise in commodity prices is followed by oversupply. This oversupply continues for years as companies battle it out in a dangerous game of survival to cut production and costs. Remember the oil crisis in the 1970s? The current oil price is lower than it was in 1981 as there is just too much oil production. Oil producers are still pumping like crazy to maintain “market share” and their biggest enemy is other oil producers, not their customers. Witness the warm feeling Iran has towards the West and Saudi Arabia proxy wars on Iran. Do you remember the shortages of steel, iron ore and a host of other materials such as lumber and rubber? Neither does the rest of the world. In the case of steel, depressed prices flow from massive overproduction of the magnitude that the world can rebuild its infrastructure over the next decade with the current iron ore supply. Steel prices have also not hit rock bottom yet as more supply is on the way and iron ore prices have fallen by two thirds. Consumers, on the other hand, have fat years ahead of them as the prices of wheat, corn, oats and meat are at their lowest levels ever in real terms – the cheapest in real terms. We have more than 750 years of wheat price data and it shows that wheat prices at the end of 2015 were in fact 6% cheaper than at the end of 1973 in nominal dollar terms. Simply put, the world has too much food such as maize and wheat. Beef and chicken prices are dropping in USD terms too. I guess that by the end of the low commodity cycle consumers in advanced countries will spend less than 5% of income on food and in some cases more on eating out. The effects on emerging market economies like South Africa will be huge if history repeats itself and the world enters a period of another 15 years of low prices for our commodity exports. That takes us back to when we had to watch the current account balance like hawks. I will stick my neck out and make the prediction that most of the falls are behind us, but commodity prices have another 30% to fall from in real terms but it could be that prices must fall another 20% before we hit rock bottom. The world changes in this part of the cycle. Remember the hyper or high inflation in Germany in the 1920s and ’30s and the depressed prices in places such as the US and the UK at the time? Something similar is happening today. Brazil and Russia have double-digit inflation and Venezuela may have inflation higher than 100%. Growth in Europe and the US is picking up but many have deflation such as Switzerland or very low inflation such as the Eurozone and the US. Japan too has very low inflation. The realignment of currencies is probably the biggest difference between the Great Depression world and current weak growth. Currencies are acting as buffers for commodity exports and as further deflationary anchors for the developed world and China. Rising unemployment in Brazil, Russia, Saudi Arabia and of course Africa will also have significant political implications. Add the lower growth outlook to the Middle East and Africa and those two continents will again start falling back along with much of Latin America. This in turn will allow increased inequality between rich and poor countries. Not only will these countries suffer lower income from commodities but their interest rates and inflation will be higher. The impact will also be visible in their current account and government fiscal balances will remain under pressure. Just like any perfect storm these countries will also see ratings downgrades. Generally these are the parts of the world where population growth is still higher than the average and that also indicates that the richer world will see migration from these countries continue. This will not be a once off situation but will continue well into the first part of the next commodity upswing so expect Europe and North America to continue to see high numbers of refugees and migrants. Perhaps Japan, China and Thailand will also see migration to their countries. This will continue well into the 2030s and will have big impacts on housing; religion and social cohesion in the receiving countries. The brain drain of the developing world will unfortunately continue but over time tourism and remittances will grow strongly as well as some exports of local favourites (Mrs Balls Chutney comes to mind.) The big man syndrome along with Dutch disease will be off the radar for the next two decades and poor countries will get out of mining and other services to mining. We will see privatisation make a very big comeback in most African and Middle Eastern countries as budget holes enforce sales. Africa will become much more of a friendly investment destination as countries implore companies to invest. The rich world will evolve into the next evolution in economic terms with renewable energy, energy storage and new services. Countries who are dependant on commodity exports will have to find new ways to attract wealth and to create jobs. It will have to change to allow for the delivery of more value-added services such as tourism, call centres and probably even high-end personal services to the richer world. Commodity companies will change Importantly however is that another 15 years of low commodity prices would also ensure the metamorphoses of commodity and agriculture companies. These companies will employ fewer workers and will become much more mechanised and automated. The companies will grow larger and larger to make use of economies of scale and they will innovate to develop new mining methods and concentrate their effort in countries where barriers to operations are lower. They will become more important for commodity countries to attract and that will be their main strength for the next two decades. The bigger companies will take over state-owned companies and increase productivity and bring modern management methods to play. Agriculture will also go big and in contrast to the mining sector, there will be room for small niche farms such as the production of organic produce. The small farmer will be the specialist, the generalist will be massive! Mike Schüssler

To: Goose94 who wrote (15553)	1/18/2016 10:26:34 AM
From: Goose94	Read Replies (1) \| Respond to of 203329

This Is Not 2008: It's Actually Worse The S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street apologists to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008. Nor do they want investors to believe this environment is commensurate with the Dot.Com Bubble that caused the NASDAQ to plummet 78% and the S&P 500 to shed 35% of its value. In fact, they claim the current turmoil in China is not even comparable to the 1997 Asian Debt Crisis: when dollar-denominated debt loads couldn't be repaid and the Thai baht lost half its value, and the stock market dropped 75%. Indeed, the unscrupulous individuals that dominate financial institutions and governments seldom predict a down-tick on Wall Street, so don't expect them to warn of the impending global recession and market mayhem. But a recession has occurred in the U.S. about every five years on average since the end of WWII; and it has been seven years since the last one -- we are overdue. Most importantly, the average market drop during the peak to trough of the last 6 recessions has been 37%. That would take the S&P 500 down to about 1,300; if this next recession were to be just of the average variety. But this one will be worse. A major contributor for this imminent recession is the fallout from a faltering Chinese economy. The megalomaniac communist government has increased debt 28 times since the year 2000. Taking that total north of 300% of GDP in a very short period of time for the primary purpose of building a massive unproductive fixed asset bubble. Now that this debt bubble is unwinding, growth in China is going offline. The renminbi's falling value, cascading Shanghai equity prices (down 40% since June 2014) and plummeting rail freight volumes (down 10.5% y/y), all clearly illustrate that China is not growing at the promulgated 7%, but rather isn't growing at all. The problem is China accounted for 34% of global growth, and the nation's multiplier effect on emerging markets takes that number to over 50%. Therefore, expect more stress on multinational corporate earnings as global growth continues to slow. But the debt debacle in China is not the primary catalyst for the next recession in the United States. It is the fact that equity prices and real estate values can no longer be supported by incomes and GDP. And now that QE and ZIRP have ended, these asset prices are succumbing to the gravitational forces of deflation. The median home price to income ratio is currently 4.1; whereas the average ratio is just 2.6. Therefore, despite record low mortgage rates, first-time home buyers can no longer afford to make the down payment. And without first-time home buyers, existing home owners can't move up. Likewise, the total value of stocks has now become dangerously detached from the anemic state of the underlying economy. The long-term average of the market cap to GDP ratio is around 75, but it is currently 110. The rebound in GDP coming out of the Great Recession was artificially engendered by the Fed's wealth effect. Now, the re-engineered bubble in stocks and real estate is reversing and should cause a severe contraction in consumer spending. Nevertheless, the solace offered by Wall Street is that another 2008 style deflation and depression is impossible because banks are now better capitalized. However, banks may find they are less capitalized than regulators now believe because much of their assets lie in Treasury debt and consumer loans that should be significantly underwater after the next recession brings unprecedented fiscal strain to both the public and private sectors. But most importantly, even if one were to concede financial institutions are less leveraged; the startling truth is that Businesses, the Federal Government and the Federal Reserve have taken on a humongous amount of additional debt since 2007. Even Household debt has increased back to a its 2007 record of $14.1 trillion. Specifically, Business debt during that timeframe has grown from $10.1 trillion, to $12.6 trillion; the Total National Debt boomed from $9.2 trillion, to $18.9 trillion; and the Fed's balance sheet has exploded from $880 billion, to $4.5 trillion. Banks may be better off today than they were leading up to the great recession but the government and Fed's balance sheets have become insolvent in the wake of their inane effort to borrow and print the economy back to health. As a result, the Federal Government's debt has now soared to nearly 600% of total revenue. And the Fed has spent the last eight years leveraging up its balance sheet 77:1, in its goal to peg short-term interest rates at zero percent. Therefore, this inevitable, and by all accounts brutal upcoming recession, will coincide with two unprecedented and extremely dangerous conditions that should make the next downturn worse than 2008. First off, the Fed will not be able to lower interest rates and provide any debt service relief for the economy. In the wake of the Great Recession Former Fed Chair, Ben Bernanke, took the overnight interbank lending rate down to zero percent, from 5.25%, and printed $3.7 trillion and bought longer-term debt in order to push mortgages and nearly every other form of debt to record lows. The best the Fed can do now is to take away its 0.25% rate hike made in December. Secondly, the Federal Government increased the amount of publicly traded debt by $8.5 trillion (an increase of 170%), and ran $1.5 trillion deficits to try to boost consumption through transfer payments. Another such ramp up in deficits and debt -- which are a normal function of recessions after revenue collapses--would cause an interest rate spike that would turn this next recession into a devastating depression. It is my belief that in order to avoid the surging cost of debt service payments on both the public and private sector level, the Fed will feel compelled to launch a massive and unlimited round of bond purchases. However, not only are interest rates already at historic lows, but faith in the ability of central banks to provide sustainable GDP growth will have already been destroyed given their failed eight-year experiment in ZIRP and QE. And adding $1.5 trillion dollars per year to the $19 trillion U.S. debt won't be taken well by the bond market either. Therefore, the ability of government to save the markets and the economy this time around will be extremely difficult, if not impossible. Look for chaos in currency, bond and equity markets on an international scale throughout 2016. Indeed, it already has begun. Michael Pento