Commodities Are Crashing Like It's 2008 All Over Again
bloomberg.com
bloomberg.com
What am I missing? (Not an economist)
Maybe everyone is pouring their money into Bitcoin to ride out the downturn? /s
I even brought British Gas as a play on the Takeover by Shell a net 8% yield is tasty.
I did very well (300%) buying commercial property in the last down turn.
edit: now correct graph.
Not only does owning gold not pay any interest, it actually incurs ongoing cost for secure storage and insurance. Its main investment use is as a sort of insurance policy against the large-scale collapse of fiat financial systems.
Market participants evidently view the possibility of a financial collapse as remote enough that they are trading out of gold and into fiat currency, so they can receive interest rather than pay storage costs.
Little did they realise that their own massive structural population shifts were going to continue to keep global inflation subdued, and so now we're seeing a wholesale dump of the stockpiles.
This thing was already telegraphed by the tankfest in copper last year. It was one of the favourite stockpiles and was used as cascading collateral for many times more than its value in loans (speaking to the equity bubble too). The old "metal with a PhD". The whole thing is now unravelling.
A conspiracy theorist might argue that "the authorities" (read: the Fed) have an interest in keeping commodities down, as this allows them to continue to print. Hence easy money for shale, and, including the convenient side effect of scr*wing the Saudis, allowing Iranian oil back into the market.
BTW: next stop is western property prices. That's where hundreds of billions in emerging markets money chasing safety has also gone.
Wall Street headline: "Market crash: next global catastrophe?"
History may not repeat itself but it definitely rhymes.
Have you seen the pictures?
Vancouver is actually one of the poorest large cities in Canada. Average income in Vancouver proper in 2009 was $43,911. https://www.biv.com/article/2014/9/trick-or-treating-planner...
All this means that Vancouver is the 2nd most unaffordable housing market in the world (after Hong Kong) http://www.theglobeandmail.com/news/british-columbia/only-ho....
Accordingly a housing is already so inflated that a 10% drop means nothing. Even a 20% drop wouldn't make things affordable.
The billion dollar question for those of us living in the U.S. is, if there is a problem, will it spread?
China's consumption is strong as a result of it being in early to middle stage capitalism, which drastically reduces income inequality, which takes the form of a new middle class(perhaps temporarily). The problem with China involves their middle class's population-level involvement with the stock market. Everyone and their mom is invested into the market, meaning that the commoners are currently losing vast amounts of wealth as a result of the implosion. Whether this ultimately will hurt consumption isn't clear.
Europe might be okay in the medium or long term, but a small crisis is already playing out right now. Greece, while somewhat ameliorated by recent talks, is still a ticking time bomb.
An interesting third case is Japan, which is now having its second "lost generation" in a row as a result of long-term stagnation and demographic issues. Japan is a neglected back-door to the world economy. The coming months could be a much-delayed ultimate collapse or resurgence from the sleeping economic giant, though after decades of horizontal movement it's hard to envision what either would look like.
Interesting times ahead.
We don't have capitalism, we have the joining of government and corporations and they are becoming ever more entwined.
People get all ornery when you call it fascism.
So, this is not a product of "late-capitalism income inequality"; it is a product of central banking in the U.S. and around the world, and their artificial tinkering with interest rates/the money supply for political expediency.
Collusion of big business and the state.
The SV scene isn't like the dotcom days without a business plan. There's a lot of startups now that have revenue from day one, and are cashflow positive. The value is tangible in many cases (not all).
Second, I wonder what impact the tanking China economy will have on the US real estate market. Wealthy Chinese have been parking their dollars in real estate here for a while, and with the stock market seen as more risky now, I wonder if that trend will increase and drive up home prices further.
As far as the US real estate market goes, I'd say it's possible that people parking their money here in even greater numbers will accelerate the current drive for luxury real estate while causing a shrinking of the middle value real estate market. You also see this in London right now, with tons of new luxury buildings being built and sold off, only to sit empty and used as a value bank. The general effect is that real estate values in general rise sharply and people are forced out of middle-value areas so that they can be redeveloped into ultra-high value areas. These are geographically centered effects, though. I'm really not sure how much it could drive the larger real estate market, which is already as hot as it's been since the crash.
Conversely, if it were investments in infrastructure, businesses, and tangible productive goods that create real world value, we could rest a bit easier.
When times are good it doesn't feel like stuff's getting cheaper, it feels like people have more money. A crash in raw materials is a bad sign - it likely means companies have stopped buying because they've stopped innovating, or because they think pretty soon people aren't going to be buying stuff.
The markets go down on tumbling oil prices. I mean I see why oil companies go down. It's lower profits and, worse, as oil becomes harder to find the technical cost of extraction goes up. There are I'm sure many fields where the technical extraction cost is pushing if not exceeding $50/barrel.
Yet this is actually good for pretty much everyone else. Oil is one of those things that's an input cost into almost everything.
So why aren't the markets talking about how this is going to be better for particularly high oil consumption industries? Airlines spring to mind.
Actually, side rant: the so-called "fuel surcharge" airlines charge is such a joke. I wish it were illegal. There is no "fuel surcharge". It just costs more than it used to. Put it into the ticket price and be done with it.
Because you know the fuel surcharge isn't going away when oil prices drop.
Gas stations usually operate with the gas almost as a loss leader for the attached convenience store.
Increased supply should be good for economy as the increased supply of raw mats cause increased production of higher grade goods.
Decreased demand on the other hand indicates that something is wrong. People are not buying anymore. Can't they afford it any longer? Or or they decreasing production due to anticipated lower demand for their higher grade goods?
"So far this year oil-production firms have raised $15 billion of equity and $20 billion of bonds, helped by frothy markets, a near-zero Fed Funds rate and a partial recovery in the oil price. Even Goodrich, the troubled firm in Houston, managed to issue in February $100m of “second-lien” debt, which is secured against assets, at an 8% interest rate...
First, consider the juicing-up of performance. During the quarter to March the industry reported aggregate cashflow from operations of $15 billion—this is the money the business throws off before capital expenditure and financing activity. But this reflects the benefit of derivative hedges taken out in 2014 when oil prices were much higher, and which in most cases will largely run out over the course of the next year or so. Exclude derivatives, and cashflow was 31% lower. Almost half of firms, accounting for 1% of global oil production, relied on transitory gains from derivatives for over half of their cashflow...
Were the industry to have balanced its books (excluding the benefit of hedges), capital investment would have needed to be 70% lower. Capital investment feeds through to production volumes with a lag of 3-9 months. Today’s healthy production figures are no guarantee of future bounty.
The second concern is a deep well of debt. Listed E&P firms owe $235 billion and during the first quarter debt rose, reflecting continued heavy spending. Assume a firm is in trouble if its net debt is more than eight times its annual cashflow from operations (based on the annualised first-quarter figures and excluding the benefit from derivatives). On the basis of this snapshot, 29 of the 62 firms are distressed, owing a total of $84 billion. Listed shale firms with distressed balance-sheets account for 1.1m barrels a day of oil production, or 1.2% of global oil production...
In Texas and North Dakota oil men secretly dream that the global supply of crude will shrink without shale declining. The biggest oil firms, which have vast reserves of cash, are continuing to invest heavily in shale. In May ConocoPhillips, which says it has some of the lowest-cost shale properties in America, committed to invest $3 billion a year and forecast rising production up to 2017. By this account America’s smaller E&P firms are being astute: they are using their derivatives hedges and their mastery at raising capital on Wall Street to bridge a difficult patch. When oil prices pick up later this year they will start investing even more heavily in growth, but with leaner cost bases. In a decade’s time the 2015 oil-price dip will seem as transitory as that in 2009 during the financial crisis.
But there is another, less rosy scenario for America’s shale barons. Oil prices may remain flat. Towards the end of this year their hedges run out; shale-oil production dips markedly as the lagged effect of capital-investment cuts kicks in. (Output has already dipped in the Bakken basin in North Dakota.) With growth evaporating and cashflow faltering it becomes harder to sell shares—the pace of capital-raising has indeed slowed in recent weeks. The junk-bond market becomes jittery and E&P firms start to worry about refinancing the $66 billion of debt and interest that is due in 2016-18. As firms’ oil-reserves estimates are marked down to reflect lower prices, banks cut their loans, which they typically tie to reserves figures."[0]
So if this article is to be believed, these oil companies will probably survive short to mid-term price decreases, and won't cause huge bank losses at least for a while. However, this only tells the tale of one commodity; with Chinese demand for commodities decreasing and the U.S. and European consumers doing mediocre financially-speaking, we may end up with a significant downturn. Not to digress, but I personally think the next crisis will be triggered by subprime student loan debt.
[0] http://www.economist.com/news/business/21656671-americas-sha...
For more info, check this Wikipedia entry on the commodities super cycle https://en.wikipedia.org/wiki/2000s_commodities_boom
Commodities are the basic inputs into other overall economic activity. Glossing over the details, if commodity prices are falling, it means that overall economic activity is faltering. It means fewer commodities are required because fewer higher order things are being produced with them. It means more people are out of work rather than building stuff.
Conversely, high commodities prices means there are lots of people willing to buy them at high prices. This implies that lots of new stuff is being built -- otherwise, nobody would pay those high prices, and prices would fall. It means that lots of people are working productively and lots of new value is being created.
Strains on supplies of commodities, driving prices upward only indicates supply scarcity, not necessarily related to widespread creation of material goods.
Upward prices does not only indicate supply scarcity. It might indicate supply scarcity, or it might indicate increased demand. There are two sides to the market, and either can move the price. Prices are not "driven" upwards by some teleological entity that just wants higher prices; the action of people buying and selling finds a consensus equilibrium based on supply and demand.
If one commodity price is going up, it might be the case that there's a supply shortage. If all are going up, it indicates broad based demand due to a healthy economy that requires more inputs. Broad supply scarcity rarely if ever extends beyond a few specific commodities. Oil might be scarce, but all commodities being scarce almost never happens. Commodities are widely produced in many diverse locations all around the world by groups with widely different goals.
If the average price of all commodities is rising broadly, it's demand-driven, not supply constraint. Barring events like a world war, there will never be a massive simultaneous supply shortage in oil, wheat, corn, soybeans, cattle, hogs, gold, silver, and frozen orange juice. A broad price rise is thus generally a good thing since it means lots of people have jobs producing things and are making money to buy things that require these inputs.
Into what? Hogs or soybean meal? :)
Maybe hedge between the two: that way you have something to feed the hogs.