Mar 7th 2011, 14:04 by Buttonwood
WHEN investors think about asset classes that benefit from global growth, two obvious examples spring to mind - emerging market equities and commodity prices. There is a problem in distinguishing cause and effect; does emerging market demand force up commodity prices? Or do high commodity prices boost the GDP of those developing countries (Brazil) that are commodity producers?
The graph shows that, for much of the last five years, the two assets moved very closely together. But the latest burst of commodity price inflation has been accompanied by a (modest) sell-off in emerging markets.
Two factors may be at work. The first is that inflation is more of a problem for developing countries. As a result, central banks are tightening monetary policy while central banks in the developed world are still dithering over whether to do so. This doesn't look like a repeat of the 1970s' inflationary spiral in the west because wages are not rising; but in the developing world, a 1970s-style outcome is not impossible. Indeed, that leads to the second problem; political risk. High food prices allied to high unemployment is a stagflationary combination that may lie behind the unrest that is sweeping through North Africa and the Middle East.
That leads to another question. Will the problems in the developing world lead to a fall in demand that will lead to commodity prices falling back into line. Or has there been a parting of the ways?
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Are the gamblers in the emerging markets allowed to buy stocks on margin as we are in the US? Higher short-term rates might effect that.
Lack of higher wages in the West still doesn't mean we can't have increaseing inflation. As wages rise in China and areas of high growth in emerging markets, those workers will spend more, affecting the global prices of commodities.
When gasoline in the US hits $4.00/gallon, then the largest consumption nation might reduce its consumption, reducing demand on oil and other produucts,easing the pressure on commodity prices. This occurred in 2008.
http://gasbuddy.com/gb_retail_price_chart.aspx
Regards
Isn't 56% of your commodity price index food, with something like 16% being wheat? Since crop failure isn't related to increasing demand, that would cause inflation without growth, would cause developing nation stocks to fall (if only because food price matters more there*).
*And there because it tends to be less processed and thus less value added (and many would say less value subtracted). In the US, the rise in wheat cost barely ticks the meter.
I just read that the Atlanta Fed Prsident Dennis Lockhart said if oil prices keep going up, we might need QE3.
Aren't many if not most commodities traded in dollars?
More fuel for that fire?
Regards
I think that the increased size and speed of commodity price changes have a lot to do with the fashion for "alternative investments". I don't know if emerging markets and commodity prices will continue to track, but I'll be watching with great interest.
About Buttonwood's notebook
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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