Author Topic: What do you think?  (Read 2689 times)

legacyoneup

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What do you think?
« on: October 14, 2014, 03:01:20 PM »
Came across this piece :

Two worrying trends have emerged on the global scene. One is a crash in commodity prices. The other is an imminent rise in global interest rates.

Historically, crashing commodity prices and rising interest rates have often combined to create a global recession. Commodity prices have plunged 20% in the last six months. If this reflects a surge in global production after years of insufficient output, that can be a good trend that satisfies demand, lowers input prices for manufacturers, raises profits and tames inflation.

However, falling commodity prices can also signal a coming recession.

They may indicate an economic slowdown for reasons poorly understood by policymakers, and so not countered. The current commodity crash is definitely linked to an unexpected slowing of global growth. China, Japan and Europe are growing more slowly than expected at the start of the year. Chinese growth might actually dip below 7%, half its peak rate in the 2000s.

Hence, the IMF is revising its global growth projections (in PPP terms) for 2014 down from 3.6% to 3.1%.

Note that a fall below 3% is widely accepted as a sign of recession.

Latin America, Russia and Africa grew fast between 2003 and 2010. As commodity producers, they benefited from the huge surge in Chinese demand.

Today, they are all feeling the heat of China’s slowdown. Brazil, Russia and South Africa all face the danger of zero or negative growth.

World food prices used to be depressed by the dumping of surpluses by Western nations. But after 2005, food prices skyrocketed. Bad harvests coincided with the huge diversion of agricultural land to producing biofuels: ethanol from maize and synthetic diesel from vegetable oils. Back in 2005, the Chicago market price of maize was $2 a bushel and of wheat was $3 a bushel. After 2008, wheat prices briefly went into double digits and maize reached $8 a bushel.

However, prices have since trended down, and after ups and downs, they have suddenly fallen steeply since May 2014. Maize is now down to just $3.25 a bushel and wheat to $4.75 a bushel. World cereal production this year is estimated to be 20% more than demand, so the surplus will keep prices down for some time to come. Soybeans and cotton are down one-third from their rates a couple of years ago. Edible oil prices have crashed.

Oil was just $25 a barrel in 2003 but soared to almost $148 in 2008. In recent times, the price of Brent crude has been around $110 a barrel. But this has now fallen to $96 a barrel, despite troubles in Ukraine and West Asia that would normally have sent prices spiralling. Iron ore has halved from a peak of $180 a tonne. Coal and metals are down to their lowest levels for five years.

The second source of worry is the coming rise of interest rates in rich countries.

The US has for years indulged in quantitative easing, unleashing trillions of dollars on the world economy.

This has created froth, if not actual bubbles, in all asset markets.

The Eurozone looks like getting into quantitative easing, and Japan is neck-deep in it too. The tidal wave of cheap currency from rich countries has boosted property and stock prices globally, including in emerging markets.

But the US is about to end quantitative easing next month, and will start raising interest rates next year. Maybe the rich countries will sense the danger, and ease money again to stave off a recession. Yet, as former adviser to Ronald Reagan, David Stockman, puts it, the trillions pumped by central banks of rich countries into the global economy have created asset bubbles that have to burst some time.

Discuss!!

marty998

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Re: What do you think?
« Reply #1 on: October 14, 2014, 03:26:54 PM »
The world is so big that there is always something bad happening somewhere.

So many "experts" are predicting financial armageddon when interest rates rise from 0% to 1%.

HELLO!!!! WTF LOL

If people survived when rates were 15-20%, they will survive perfectly fine when rates go up to 1%.

IMHO.

Sid Hoffman

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Re: What do you think?
« Reply #2 on: October 14, 2014, 03:44:26 PM »
I'm sorry, you left off the last two lines of your post.  I believe you meant to add:

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At least that's what I see on every other post like this.  ;)

In seriousness, what marty998 said.  There's always something happening somewhere.  Interest rates are at historic lows, and have been for a record-making period of time now.  I categorically disagree with the notion of falling commodity prices causing recession.  The USA, as well as most developed nations, run large trade deficits because they take in far more goods than they sell off.  In other words, USA is buying a boatload of stuff, while selling only a dinghy-load of stuff.  This means cheap commodities are a great thing, because we get to buy stuff for less money, which costs US businesses and consumers less of their budget.

I would not expect any massive and rapid increase in interest rates announced by the fed however, because the fed is merely a puppet of the government.  Who stands to benefit the most from low interest rates?  The US government.  Nobody owes more money than the federal government and that debt gets more and more expensive as interest rates go up, especially since the debt went up 50% since 2008.  Interest rates absolutely will not skyrocket because our own government has to pay more if rates were to skyrocket.

The sky is not falling, I am personally still happy to dollar-cost average purchase my way into the broad indexes today as much as I was 1, 2, 5, or 10 years ago.

legacyoneup

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Re: What do you think?
« Reply #3 on: October 14, 2014, 04:09:38 PM »
Not "falling commodity prices causing recession"; falling commodity prices indicating weakening global demand. Additionally, the weak prices would negatively impact economies dependent on exporting raw materials.. which further weakens global demand.

QE has been injecting liquidity into the US economy for some time now. Where did all this money go? Shouldn't it have grown the middle class significantly? Or did the middle class grow and I just haven't noticed it?

legacyoneup

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Re: What do you think?
« Reply #4 on: October 14, 2014, 04:24:01 PM »
I'm sorry, you left off the last two lines of your post.  I believe you meant to add:

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I did cut out several lines from the source but not either of those two lines. In all honesty, there is a "Share this Article" link.

Its from this site :

http://articles.economictimes.indiatimes.com/2014-10-01/news/54517091_1_wheat-prices-world-food-prices-maize

The writer is a journalist / editor who's articles I have been reading since high school. Don't recall him ever giving out buy/sell recommendations.

Never been a fan of gold. I did buy properties in 2009 though.

sirdoug007

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Re: What do you think?
« Reply #5 on: October 14, 2014, 04:25:35 PM »
Where are those imminently rising interest rates you mentioned?

The 10 year treasury is down to 2.2%.  Spain is cheaper than the US at 2.08%.  German 10 year is 0.8%.  Japan is 0.5%. 

Yup, any minute now.  They've been saying for the last five years...