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Although an imminent financial crisis is arguably off the table, the U.S. economy still faces immense enemies --- rising food and gas prices pinched more pennies, even dollars, from the already shallow pockets of consumers. The picture is rather scary as consumers contribute to more than 70% of U.S. GDP. Should the surging prices nudge the economy into a recession, “short and shallow” won’t be an appropriate description, because the underlying global commodity booming will be, as argued by many commodity investors, long and profound.
Commodity market simply has much steadier trend than stock market. In his famous book “Hot Commodities”, Mr. Rogers articulated that for commodity, additional supply usually takes years before arriving at the market, where the excessive demand would have had already pushed the price skyrocketing. Take base metal as an example. Just consider how many years it takes to discover a new mining site, dig the hole, pave the road, and transport out the minerals. Yes, minerals, still far away from the metal.
Yet not all imbalances between demand and supply are hard to deal with. The real hardness stems from the so called disruptive structural change. Disruptive means vast damage, and structural means persistent challenges.
Three reasons for surging food price were recently circulating through the media:
- Richer developing countries improved their diet quality, which drove up demand for more food
- Catastrophic climate in some countries destroyed crops
- U.S. shifted more acres of land to produce biofuel
Developing countries didn’t become rich in one day. They have accumulated wealth for decades. Any additional demand from them should have built up slowly in years and should not outpace too much the growth of the supply. It is a structural change, but less likely to be disruptive.
Catastrophic climate, in the worst case, is nothing more than a one-time event. Disruptive might it be, but hardly a structural one.
The real disruptive structural change is that U.S. shifted from producing food to producing biofuel. Putting it together with the surging gas price, it is obvious that U.S. is not hungry for food, it is twice thirsty for oil.
So, although the bear facing the economy looks as unbeatable as Achilles, it does has the heel --- if for any reason the oil price drops, biofuel will cool down, and food price will ease.
But the strengthening oil price doesn’t look as vulnerable as Achilles’ heel, does it? The global demand for oil never shows any weakness after the world entered the new millennium.
Demand and supply determine price in a free market. Oil price, on the contrary, is largely controlled by a cartel, the OPEC. Having a cartel stand firmly behind the price is beneficial to the members, but it certainly makes the vulnerability more concentrated to a few powerful leaders of the cartel.
Most OPEC members are Arab countries, which don’t have deep domestic economies to stomach the petrodollar that kept pouring in. Even worse, most of their currencies are pegged to dollar, making them defenseless from importing inflation. A recent Economist article estimated that, if the oil price rises 100%, the domestic asset price, meanly real estate price, will inflate by 50%. Reversing the logic, Arabic housing market will drop 1/3 if oil price drops by a half. So far the U.S. housing market sees only a 20% something drop; I don’t even need to mention how disastrous the consequence is.
If for some magic reason the oil price did soften, Arab countries are expected to pump more oil to earn enough for keeping up with the already lifted luxury living standard. This will create a vicious circle and keep lowering oil price.
Exactly how the magic reason looks like is beyond my imagination. All I know is that in Achilles’ world, magic does exist.
With all that said, it is unfair to leave other bearish arguments unattended.
Besides agriculture and oil, industrial metal is another major class of commodity and its price is rising as well. The rising price reflects the robust growth of the global economy, most from the emerging markets. With 40% income of S & P 500 companies coming from international markets, the global growth is actually a positive plus to the U.S. stock market. The same applies to the weakening dollar.
Bears also worry about the foreclosure tsunami that would be triggered by the reset of Alt-A mortgage, which will peak this May and June. A recent survey showed that people with mortgages that will be reset this May and June started to refinance as early as last October, and as of today, about 1/4 of them had already done so. Another report shows that mortgage refinance volume decreased by double digits percentage rates for two consecutive months. All those numbers suggested that the worst part of the tsunami may have already passed.
The weakness of consumer spending also focuses bear’s eyes on the mounting default rate of credit card debt. For sure the economy will feel some pain. But there is no evidence that credit card debt market is as drastically overvalued as the housing market. Thus there is little reason to look forward to a comparably disruptive result.
It seems that bulls need only a little bit magic to stop the strong but not robust Achilles, because he admits, borrowing an engineering term, a single point failure.
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发表于 2008-5-6 12:52 AM
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发表于 2008-5-6 08:01 AM
