“The slenderest knowledge that may be obtained of the highest things is more desirable than the most certain knowledge obtained of lesser things.”
Saint Thomas Aquinas
Commentary & Analysis
Some rationales for a deeper commodities correction
There seems to be a scramble afoot to define exactly why commodities plunged across the board the other day. Some blame a big trader, others the six-planet alignment, and many point to concern China is slowing. I think Jim Rogers said it best to Reuters, and I am paraphrasing … markets correct for all kinds of reasons and it doesn’t mean the bull market [in commodities] is over; it has years to run on all kinds of supply/demand concerns.
Granted, Jim’s answer was the safe answer, but also the wise one. And it goes to the point that at any one time in the market there are all kinds of forces and rationales, explicit and implicit, which drive prices in directions that are different from our very flawed expectations. Of course, after the fact, key rationales are defined by those who “know,” I guess we call them the consensus-maker hierarchy. It is then we see conversion flow of expectations, a shift in our previous flawed expectations, to ride yet another horse because is all sounds so “rational” now.
Here is a very brief attempt at why the little accident in commodities may have been a precursor to much more:
- China IS decelerating. The only question is to what GDP level–is it 8-9% as the optimists expect, or will it be 6-7% as the glass half-empty crowd expects?
- Seeds of growth destruction are already sown in emerging/developing markets thanks to the weight of all the money and credit landing there. The policy choices for those markets are:
- Do nothing and let the bad Genie of inflation run rampant and pay the price big time down the road
- Raise interest rates and slow the very growth you so desire
- Let your currency appreciate faster to help blunt inflation but there is no guarantee here, plus there is a lag, and you subject your industry to competitive pressures your other competitors may not be feeling
- Systemic risk and austerity flowing from Europe will blunt growth not only on the continent for major euro members, but it will also spread to central European states and blunt their growth accordingly.
- US liquidity cycle has likely peaked; it is unconscionable I think for even Ben to consider playing the QE game again. US fiscal sugar high will also subside.
Now, this doesn’t mean the secular march higher in commodities prices is over. That assumes Jim Rogers is right and there is a secular bull market in commodities and it wasn’t just a liquidity-driven bubble thanks to Ben, most of all, and every other major bank and government around the world throwing money and credit into this trend. It might mean that a much deeper correction is due–which if you think of it positively, would be cleansing and beneficial to sustained growth if interest rates start to normalize.
As the Dos Equis man says, “Stay thirsty, my friends.”