Commodities Are Crashing Like It's 2008 All Over Again

http://www.bloomberg.com/news/articles/2015-08-05/commodities-meltdown-hits-2008-levels-of-bearishness

by cryptoz • 11 years ago

65 64 11 years ago

bloomberg.com

evanpw2• 11 years ago

Main Street headline: "Raw materials are getting cheaper"

Wall Street headline: "Market crash: next global catastrophe?"

meatysnapper• 11 years ago

In all fairness, Canada and Australia are more or less commodity extraction economies with catastrophically inflated real estate markets. Lower commodity prices could prick that situation and cause some jumbled jonathans.

sterl• 11 years ago

I would love to see a huge correction in Vancouver but many people have been born and died waiting for it to happen.

georgeecollins• 11 years ago

That is a huge generalization about the Canadian economy. Mining and oil is 8% of the economy. Less than manufacturing and less than services.

https://en.wikipedia.org/wiki/Economy_of_Canada

lambdasquirrel• 11 years ago

Well it could be indicative of a crisis fomenting overseas. The two obvious trouble spots are China and Europe. The Chinese have questionable economic statistics (gathering accurate statistics was never easy to begin with), and who knows what's happening in Europe. One way to get a gauge on things is to measure the inputs, i.e. consumption.

The billion dollar question for those of us living in the U.S. is, if there is a problem, will it spread?

cryoshon3• 11 years ago

Consumption is still pretty weak in the US as a result of late-capitalism income inequality-- in my opinion, the US will continue with the gradual stagnation we've seen since the crash. This stagnation has been going on for years now, and it constitutes a serious crisis of its own, but the sky isn't falling like in 2008. Until there's another crash, that is. Then, there will be another "recovery" with another large slice of the wealth going to the oligarchs. My completely uneducated and totally invented prognostication for this crash is mid Q4 2015 or early Q1 2016. The biggest indications that a crash is coming are the record high stock values we've seen recently. Relatedly, the SV bubble is going to pop when investors realize that there isn't really that much "disruptiveness" in a lot of the software startups they've been funding.

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.

jwp729• 11 years ago

It could also be indicative of future market moves in other markets too, even if these moves are not crises. The large moves in commodities has been anomalously _uncorrelated_ with equity markets, though historically over long enough windows the two move together. This raises the question of whether this trend has broken or if one (commodities markets or equities) will budge in the direction of the other soon. My crystal ball is too smudgy to know this myself...

jayess2• 11 years ago

Brazil is running into big problems too: http://www.businessinsider.com/brazil-indicators-look-like-2...

lmm• 11 years ago

Even on Main Street, when an upscale boutique gets replaced by a dollar store that's not a good sign.

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.

branchless3• 11 years ago

Due to our banking model in the West when times are "good" it's actually making life worse for our kids as the primary outcome is land price inflation which makes people fell richer but is not for most monetizable.

cletus2• 11 years ago

The big one here is oil.

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.

Cshelton• 11 years ago

Gas stations and airline fuel charges have always been first to rise, last to fall. It is confusing when you see oil drop like it has then see the price across the street go up 5 cents tomorrow. Could it be fixed, yes, do they have much incentive to do it...no.

im3w1l• 11 years ago

You have to ask yourself: are they going down because of increased supply, or because of decreased demand?

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?

nulltype• 11 years ago

Why does decreased demand indicate that something is wrong? Maybe people don't want those particular goods anymore.

Hermel• 11 years ago

That's the right question to ask. As far as I can tell, the answer is: both - depending on the comnodity. For oil, it is mainly increased supply. For steel, coal, copper and co. it is probably rather a lack of demand.

evanpw2• 11 years ago

I actually agree with you; I was just poking fun at the "high price good, low price bad" tone of the article. Notice the author's apparent relief that a few commodities have "managed to stay out of the bear market" because of bad weather and supply problems.

tomp• 11 years ago

There's a third option - there's less speculation now that there was before. AFAIK, most commodities can be paper-traded as well - meaning that traders can buy and sell futures that are not physically settled, but only pay out the current spot price. - i.e. pure speculation. Is it possible that speculators stopped betting on the ever increasing prices of raw materials?

janesvilleseo3• 11 years ago

Not trying to time the market, but this seems like a good time to buy? http://www.kitco.com/charts/popup/au1825nyb.html

tinco2• 11 years ago

How is that not trying to time the market? Anyway, it's a good time to buy if you expect a downturn similar to what happened in 2008, and belief others are not more pessimistic than you. If you are confident in that then yeah, bet your life savings on it ;)

janesvilleseo3• 11 years ago

Cool!!! I just mortgage the house, my life savings, and my kids college fund. Off to sell all my hard assets to muster up some more cash to invest. It can only go up ;)

tinco2• 11 years ago

Why don't they give a graph of the commodity prices over the past ten years? Surely commodities like gold are bullish in bear markets? Here gold is a leader at -40%

What am I missing? (Not an economist)

pyre• 11 years ago

Surely commodities like gold are bullish in bear markets?

Maybe everyone is pouring their money into Bitcoin to ride out the downturn? /s

walshemj• 11 years ago

Well some contrarian investors are buying back into commodities as they have been over sold.

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.

daveloyall• 11 years ago

Is this what you are looking for? https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...

edit: now correct graph.

pjlegato3• 11 years ago

The US Fed has been signaling that they are planning to raise interest rates late this year or early next year.

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.

sbt• 11 years ago

oh BuzzBorg, always with the clickbait

boeing_boing• 11 years ago

Remember around 2008-9, when the next big markets were commodities and futures.

vegabook• 11 years ago

G3 central banks started the printing presses, China (and many others) got the heebie jeebies about hyperinflation (and their ownership of trillions of US Treasuries), so they stockpiled commos.

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.

notNow3• 11 years ago

To give perspective to people here, the movements in the commodities market before 2000 were very tepid but post the dot com bubble burst and the ensuing recession that commodities started to experience upward pressure and then come the 2003 Iraq War oil shock and then commodities just took off till the crash in 2008.

For more info, check this Wikipedia entry on the commodities super cycle https://en.wikipedia.org/wiki/2000s_commodities_boom

nosuchthing4• 11 years ago

Amazing how the stock market 'investor' language and mindset thinks of increases in costs of commodities as a positive thing.

pjlegato3• 11 years ago

If you think about it, it makes a lot of sense. It is not the case that investors are simply greedy and want higher prices so they can make more money. Economies are not a zero-sum game where people can only make money when someone else loses it.

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.

tosseraccount• 11 years ago

"Are Crashing"? Actually commodity market flat today. The commodities already "crashed" 45% or so: http://finance.yahoo.com/echarts?s=DBC+Interactive#{%22range...

cletus2• 11 years ago

"Are crashing" is appropriate IMHO. Today might be flat but the trend is down and there's no indication that's halted or reversed yet.

SovietDissident2• 11 years ago

From The Economist:

"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...

jim_greco• 11 years ago

Is it that surprising? What's the bull case for commodities exactly? Europe continues to slide in and out of recession. China is slowly significantly and is structurally trying to change it's economy to be more consumption based. LatAm is a mess.

Commodities Are Crashing Like It's 2008 All Over Again

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