Financial markets
Boomtime prices without boomtime conditions
Jan 13th 2011, 13:40 by Buttonwood
THE Economist's commodities index has notched up an all-time high in early 2011, and most analysts attribute the surge to demand strength. Our index excludes oil, but crude is now causing concern, briefly pushing past $98 a barrel yesterday. Throw in the recent strength of equities, and things would seem to be pointing to a very robust recovery.
But not every signal is flashing green. Take the Baltic dry index, often seen as a proxy for demand for commodities and thus economic growth. It has halved since October as the FT points out today. The Baltic may be distorted by a surplus of shipping, and the recent bad weather. There is better news from the Association of American Railroads, which recorded a 7.3% increase in carloads last year; however, that took tonnage back to 11.3 million, well down of the 12 million plus recorded in 2006. Similarly, the American Trucking Association, while announcing a 5.9% annual increase in November, is still reporting business that is down from 2006.
This combination of still-subdued activity and high raw material prices illustrates a wider truth; that America is no longer the price-setter for these products. Now it is Asia. One of the side-benefits of past US slowdowns was that commodity prices would fall, acting as a tax cut for consumers. But now consumer budgets are being squeezed at a time when unemployment is still high and wage rises are hard to come by. At least the US still produces commodities; Europe is in an even worse position, as this week's column argues.
Anyway it is one more thing for westerners to get used to as power shifts to the developing world. One can have boomtime prices without boomtime conditions.
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The great con by Robert Redford and Paul Newman in their movie years ago should explain how PR and Spin and duplicity can sway minds and ideas. Create the perception of positive news and economic growth even though it fundamentally does not exist. The result: Vendors buy it, increase prices, inflation results. And then, as in this article, ask why?
Warmest, Richard Michael Abraham, Founder The REDI Foundation Since 1973, the leaders in Real Estate Development Education http://www.redii.org
one of the functions of quantitative easing is to increase domestic consumption by making imports dearer. It is often overlooked that commodities, which are priced in dollars, are frequently imported. While it's fashionable to decry the increase in gold prices, consumers can avoid this buy putting off jewelry purchases. Oil on the other hand is far more necessary.
Yeah, but deficits don't matter, right?
They are only boom prices if one buys those items.
I patiently waited for the housing bubble and the commodities bubble to bust in '07-'08. I can do the same now.
Regards
The author forgot to mention the devaluation of US currency. "America is no longer the price setter...", & American denominated commodity prices no longer tell the real story.
Richard Abraham, inflation does not necessarily happen. Decreased expectations of wages and increased expectations for future consumables drives up the need for savings. Money flooding treasuries and equities far earlier than it reaches the common man makes investment unattractive. Higher operating cost do the same and stifle entrepreneurship. All slow money down. On top of that, as the cost of the basics rise, people substitute away from superior goods and big ticket items. This could result in deflation.
Of course, exaggerated commodities price movements have nothing to do with the vogue for "alternative investments".
That's right, HFG, just wait, "and it must follow as the night the day", that bust will follow bubble.
In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them.
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