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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: John Hunt who wrote (16294)	8/29/1998 6:55:00 AM
From: Link Lady	Read Replies (1) \| Respond to of 18056

Tanking Prices Hurt U.S. Economy, Too By Cheryl Strauss Einhorn Last week, the Bridge-CRB Index fell to its lowest level in 21 years, amid skidding energy, grain and metals prices. Unfortunately, its slump is not over yet. While commodity prices in the U.S. account for a small part of the overall cost of production, the same isn't true in much of the rest of the world, and that may make commodity price deflation a bigger issue for the U.S. than it has been in the past. Economic growth today depends on the continued health of our major trading partners: Canada, Mexico and Japan. Since Japan's economy has been run down by its banking crisis and general Asian turmoil, Canada and Mexico have become that much more important to us. Now their growth is in jeopardy. The Canadian and Mexican currencies have followed commodity prices lower, even though commodities are largely priced in U.S. dollars. A cheaper Canadian dollar and Mexican peso hurt our ability to export to them. This problem has worsened since Russia devalued the ruble two weeks ago causing investors to pull back from other economically weak countries, and the Mexican peso has become more closely linked to commodities prices. In fact, since Russia's devaluation, the charts of the peso and of the Bridge-CRB index look almost identical. Mexico has the most freely traded Latin American currency. All, though, are very important commodity producers. Chile is the world's largest producer of copper. Brazil is the world's largest producer of coffee and sugar. Also, Brazil, like Argentina, is a major source of corn and soybeans. Venezuela is the largest exporter of oil to the U.S. The list goes on. Fire-sale prices of commodities are now depressing export growth in Canada to the point that it is likely offsetting any currency-fueled surge in export demand that might have materialized. Over 40% of Canada's export revenues come from lumber, minerals and the like. Hence, its currency has lost 10% of its value since January and 3.3% since Russia devalued on August 17. The Canadian "Loonie" is now trading at an all-time low against the U.S. greenback at C$1.55 despite repeated attempts by the Bank of Canada to bolster it and on Thursday to raise interest rates one percentage point, from 5% to 6%. In Mexico, the situation is similar -- and accelerating. Mexico is a major oil exporter. Not only are crude oil prices down 23% for the year, to $13.36 a barrel, but the peso itself is down 24% at 9.99 to the dollar, 9% since Russia devalued. This new link between Mexico and commodity prices is a shift from the past year, when commodity prices closely followed the relationship between the U.S. dollar and the Japanese yen. A strengthening dollar against the yen implied a negative outlook for Asian demand. Asia has been the largest engine of growth for the commodities markets. Hence, any worsening outlook for Asia's revival sent prices lower, especially since commodities are mostly priced in U.S. dollars. However, just this month, the dollar/yen-CRB relationship broke down. Asia is no longer the main factor for commodities. Much of the problem in places like Japan is now known, although how long it will last is unknown. And while some hope that cheaper commodity exports might stimulate demand, the problem with this thinking is that commodity consuming nations are those most ill-equipped to afford them now. Just look at Russia. It has been dumping commodities to raise cash. Last week Russia was said to have loaned about 3.5 million of its 12 million ounces of official gold reserves to banks around the world. Since that is such a large amount of gold and gold prices have been weak, hitting a 19 -year low Friday at $271.60 an ounce, Jeff Christian at CPM Group thinks that Russia received only about $230 an ounce for its gold. Further, Russia sold stocks of platinum and palladium late last week. Russia controls 15% and 41% of those markets, respectively. The metal flowed from London and from unusual spots like Hungary, Israel, Turkey and Austria, meaning Russia was selling as much as possible not only from traditional channels, but also from anyone able to provide them with cash. This problem is hitting home. U.S. exports are slowing in almost every major category: capital goods, consumer goods, industrial supplies, auto exports, food. Thus, while commodities may not be a large portion of our total cost of goods sold, because of their impact elsewhere they may end up with a disproportionate impact on the goods we can sell into an increasingly unstable world economy. -- - KEY COMMODITY INDEXES CRB Group Indexes 8/28 8/21 Yr. Ago CRB Futures 195.35 200.54 240.45 Industrials 208.59 213.26 244.86 Grain/Oils 157.89 165.60 214.86 Livestock 188.34 192.21 258.19 Energy 147.92 150.40 206.72 Precious Metals 222.99 237.18 246.01