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Bad News For World Economy That No One Wants To Hear

Bad News For World Economy That No One Wants To Hear

Reading the general run of financial headlines might lead one to believe that price declines in those commodities which are highly sensitive to economic conditions such as iron ore, copper, oil, natural gas, coal, and lumber are good on their face.

Obviously, the declines aren't good for those who sell these commodities. But, those of us who buy these commodities in the form of cars, houses, utility bills and other products and services ought to be helping the world economy as we buy more stuff with the freed up income.

As true as that may be, these commodity price declines also signal something else: exceptional weakness in the world economy. It is no secret that economic growth in Europe has been stalled for some time and is now receding. The European Union's confrontation with Russia over the Ukraine conflict and the resulting tit-for-tat economic sanctions levied by both sides are only worsening the economic climate.

Russia has been hit by the double whammy of oil price declines and sanctions which are probably sending the country into recession. And now the new anti-austerity government in Greece seems to be pushing Europe headlong into another Euro crisis as worries about Greek debt default spread. Related: Winners And Losers Of Low Gasoline Prices

Chinese economic growth appears to be faltering. And, that seems to be one of the direct causes of the broad-based commodities price decline. A fast growing China has previously created enormous demand for basic commodities needed to build out its infrastructure--commodities such as copper, iron ore and the petroleum products needed to run all the vehicles and machines essential to that build-out. Chinese demand for basic commodities has also increased as China's expanding wealth has allowed many more people there to own private automobiles and to enjoy other fruits of a spreading consumer society.

Economic distress for China seems to come when its hypercaffeinated annual growth rate falls below 7 percent where it seems to be heading now. Official Chinese statistics have long been suspect, so growth may already be below 7 percent. Lower growth makes it difficult for the country to provide work for all those who are leaving the countryside and streaming into the cities as China industrializes.

Commodity-exporting nations such as Canada, Brazil and Australia have taken a big hit on declining Chinese and world demand. But, their bourses seem surprisingly buoyant given the extent of the damage.

The commodity price declines aren't just confined to the industrial and energy commodities mentioned above. Food commodities have been swooning as well recently. Of course, food prices swing based on farm yields which have no necessary relation to the economy at a particular time. What is especially telling about the decline in the prices of foodstuffs is how broad-based it is.

Price declines affected wheat, corn, soybeans, and oats in part due to record harvests. Prices for cocoa declined due to rising harvests and falling demand. But, not every food commodity is experiencing increased harvests. Sugar production has actually declined in the last growing cycle. Yet, sugar prices fell. At the margin, it seems, people are buying less of what are essentially discretionary food commodities such as cocoa and sugar. Does that seem right if consumer buying power is being buoyed by cheaper industrial and energy commodities?

Stock and bond markets across the world are being levitated by central banks which have telegraphed to investors that the banks will react to practically any weakness in stocks or bonds. Of course, central banks don't much concern themselves with the prices of commodities because they cannot control them directly in the way they manipulate money and credit. That's why commodity prices right now are a much better barometer of the global economy than the world's stock markets.

One could say that the stock markets of the world disagree with the global commodity markets about the direction of the world economy. One could also say that the world's bond markets agree with the commodity markets. Low bond yields typically mean that investors expect inflation and economic growth to be low or even negative. High inflation and/or economic growth tend to cause investors to demand higher yields as credit availability tightens and as concern about inflation eroding bond returns rises.

It is especially telling that in the United States, where the U.S. Federal Reserve Bank ceased its government bond buying program last year (known as quantitative easing), that long-term government bonds returned almost 39 percent, much better than the U.S. stock market which registered a 12 percent gain in the S&P 500 index. With waning support from the U.S. central bank, government bonds were supposed to decline (and yields go up). Just the opposite happened--big time!

And as 2015 began, the consensus was that U.S. (and Canadian) interest rates would rise and thus bond prices would decline. Instead, long-dated U.S. governments--which are very sensitive to interest rate changes--spurted upward another 12 percent in January alone as yields plunged to record lows. This was in perfect concert with the continuing commodity rout suggesting that investors in these markets expect low or no economic growth in the year ahead. Related: Russian Stimulus Plan ‘Just Talk’

Practically the entire investor class across the world believes that central banks now guarantee stock prices, and that the stock market therefore is a sure thing. Commodities and bonds, however, are telling a contrarian story. The obvious questions are: If central banks are omnipotent, then why didn't they prevent stock market crashes in 2001 and 2008? If it's different this time, what exactly will central banks do to prevent another crash? Can they really effectively lower interest rates which are already at zero in much of the world (and below zero in a few instances)? If central bank policy is so powerful, why haven't six years of the lowest interest rates in memory--and in the case of Great Britain since the beginning of central banking there in 1694--resulted in booming growth across the world?

Last week analyst Doug Noland of Credit Bubble Bulletin fame, summarized the situation this way:

To this point, mounting risks – financial, economic, geopolitical and the like – have been viewed as guaranteeing only greater injections of central bank liquidity.

The assumption has been that if markets falter, central bank liquidity can and will always hurl them higher than before. It seems there is no crisis too big that ever greater liquidity injections cannot solve it. That assumption is already being tested this year, and there are likely to be many more tests coming.

The rather precipitous, alarming and lockstep trends in bond yields and commodity prices in the last year suggest that we are likely to get some clarifying answers in 2015 to the questions listed above.

By Kurt Cobb

Source - http://resourceinsights.blogspot.mx/ 

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  • steve from virginia on February 02 2015 said:
    Great article by Kurt Cobb that tells the truth about our suddenly uncertain world.

    You know you are in trouble when the first impulse of 'investors' is to lend money to the US government at negligible rates of return. Then again, these minuscule rates are better than returns on 'consumption' which is nothing more than energy-resource squander.
  • John Scior on February 03 2015 said:
    The stock market crashes of 2001 I believe was caused by sept 11, while the crash of 2008 was based upon lending criterea for home loans being loosened to the point of "no doc " loans . Speculation in real estate which caused a bubble. In essence each of these crashes eliminates wealth and in effect destroys money. Afterwards, people rush to safety by putting their money into Government bonds. SInce the Fed cant lower rates below zero , their only tool left to increase the money supply is QE. In essence they are swapping future money ( bonds ) for current money ( cash) to stimulate the economy. Banks as a result of the Great recession have been hesitant to lend money out to anyone other than high quality borrowers ( low credit risk ) which means people who are already wealthy find it easier and cheaper to borrow money. Since they already have homes, cars, consumer goods, they speculate in commodity markets which drives those prices higher. As we see QE has ended, the money returns to equity markets out of commodities thus the shift away from all classes of commodities. Whenever you see geoplitical worry ( such as Greek economic issues, russia/ Ukraine crisis, or threats from ISIS/ Al-quaeda) you see a certain flight to safety in Government Bonds ( resulting in lower yields ) or the tried and tru Gold ( resulting in an uptick of that particular commodity's price. What we may see in the coming future as an economic crisis is a worldwide deflationary spiral without necessarily a decrease in consumer consumption. This prospect lowers the probabilty of Fed actions to raise interest rates. These are some of the undelying factors which lead me to believe the FED will hold off on raising rates before SEPt 2015.
  • Parag Brahmbhatt on December 03 2015 said:
    We are not serious and sensitive about our World Economy.

    As a citizen of World I realise that last ten years we nothing to do for take healthy required steps for our world economy.
    We achieve a lot in space technology, Telecommunications technology, Internet Technology but We forgetting our world economy.
    Last ten years, We never apply good n bold n new ideas for our world economy n we still ignoring it.
    As a citizen, I think we really missed economic development programme n there was no new bold researchers in economic area from last ten years.
    We also loose basics of economics and still ignoring it.
    we also loose our moral values in all area. For good health of economy large expectations means high possibilities of failure of economy and If we as a citizen of this beautiful world prepare ourselves matured than we can solve lot off difficuties of our Nation's Economy.
    Now time comes to think about world economy and Try to solve together this current world economy problems.
    World want bold dicisions making honest Economist.
    The key of healthy economy is
    Simple Living with High Thinking and super moral values.
    Our Dearest Former Prime Minister of India Mr. Manmohansinhji is God of Indian Economy. We miss you.
  • Spartacusstoo on January 28 2016 said:
    The commodities price decline is symptomatic. As we all know commodities are the base line for productivity.

    The harbinger here is that commodity price declines are the first wave of the world economic decline. Goods shipments, both rail and oceanic are falling off a cliff and this pertains to trucking as well as today I find out the new truck sales are falling precipitously. In short the world is slipping into depression. This is different from recession, a slowing Depression then is across the board price declines brought on by the inability to purchase....lack of funds.

    How strange, when central banks world wide have opted for ZIRP and on top of that have directly infused funds to bolster markets world wide and it has not worked. It is fundament economic theory proposed first by John Maynard Keynes the 19th century eminent economist that stimulus was to be and forever adhered to by central banks. This based upon a monitory system based upon debt; that is all new money was to be created out of debt.....essentially...nothing but vapors.

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