limerickman said:
I agree - it would appear that demand is inelastic given that as the price of oil increases, demand has not fallen.
This might be explained by the fact that historically demand for oil was centred on markets like USA/Europe/Australia etc.
Today we have two huge new demand sectors, India and China : therefore whatever fall off in demand has resulted in the traditional regions, the newer regions demand for oil, offsets those drops in demand in traditional sectors.
Yes.. I agree with you.
What has contributed to oil's inelasticity in demand sensitivity IMO is that there are huge barriers to entry with regard oil/petroleum alternatives. As gas/petrol prices rise... people cannot easily switch to coal-powered vehicles.
The economic growth in China and India (with increased demand) easily cancels any reduction in demand in first world countries (the underlying long term trend in first world countries is increasing demand in any case).
limerickman said:
I see.
You're a lot more au fait with this stuff than I would be.
Can I ask, is the speculators rush in to minerals (gold, copper, grain etc) the result of nervousness about other asset bubbles such as property?
or is the increase in commodity prices just down to some cyclical event that happens every couple of decades (gold rocketted in the 1970's, then subsided in the 1980's/90's).?
Thanks for the spelling of "au fait".
Having some experience in commodity markets doesn't make one have any real edge in predicting market moves. Maybe some appreciation of risk... and avoidance of classical psychological errors. But the minute you think you know something in markets... is when you get farked usually. It's psychologically easy and tempting to claim good fortune in predicting markets as some innate ability... when in fact it is often luck. If the markets were as easy to predict as netting out some supply/demand sums... then there would be a lot of rich economists.
I think that the move into commodities is not a refuge from property deflation. These commodity markets have been moving up since at least 2001. The property market has only blipped down in the US over the last 12 months. And property, as a real asset, has traditionally been viewed as an inflation hedge in the past, somewhat mirroring commodity price moves in inflationary times. The trend of rising inflation... a US government not willing to defend it's currency (in fact encouraging dollar weakness), the indications of a global softening in economic activity... all create a circular (self-reinforcing) move into real assets as opposed to financial assets (stocks, bonds, CD's etc)... so the move itself (switching to real assets) feeds it's own raison d'etre as markets move up and inflation increases. There are a lot of brokers at the moment spouting the virtues to clients of a portfolio allocation in commodities and getting a positive reaction. This would have been a very difficult idea to sell in the nineties. Don't forget that you actually have to pay money (in storage costs) to hold most commodities as an asset (there is a price premium spread in forward futures positions that eventually converges with the spot price at the expiry of the contract)... You don't get any cash investment return other than price appreciation (hopefully!) after netting off these ongoing costs.
The perfect storm that would temporarily kill the US economy IMO (pretty obviously) would be a combination of severe: commodity inflation... financial asset deflation (concomitant with rising interest rates)... wage stagnation... and the killer... a significant deflation (say greater than 30% across the board) in property prices. This is the real fear of the Fed. It's already happening to some extent (in varying degrees depending on the region). But if there is a further 20% decline in property values across the nation... who knows what that is going to do to the balance sheet and cash flows of the average American maxed out on a mortgage with rising interest repayments, fuel and food costs?
The one piece of bright news is, that despite all the negative news in the last 9 months regarding the stock market.... it is only down (the S&P) about 10% from late August last year... when we were discussing it in the Bloody Soap Box. That to me shows resilience and strength... but new negative information in the near future could change that picture quickly.
The best historical analogy in the US that I can remember that approximates this situation is in 1988-89 after the 87 crash. You had a weak dollar, rising interest rates, a large budget and current account deficit, and the financial stress/crisis of the Savings and Loans debacle. Many pundits were bearish then. But the indexes just wavered around in a 10% band. Some savvy investors saw this as a bullish sign. In hindsight it was... as the market almost quadrupled in the ensuing ten years. The mitigating difference then though was that US property values were relatively solid (ironically not in the UK, Japan and Australia though)... and inflation (esp. the price of oil) was in check.
Apologise for the length of the post.