Words from the (Investment) Wise for the Week That Was (March 31 - April 6, 2008) Part II
Richard Cookson (HSBC): Commodity slide has further to go
"Whether commodity prices continue their slide depends on the reasons behind the fall, says Richard Cookson, global head of asset allocation at HSBC.
"He says the weakness of the dollar provides some explanation for the strength of commodities over the past few years, and last week's turnaround in the US currency would point to a reversal of that trend. However, he notes that commodity prices have also gone up in currencies that have risen a lot, such as the euro, and adds that the dollar's recent rally has been limited.
"Mr Cookson also says commodities have risen in spite of the US economy's having slowed sharply and the eurozone, the UK and Japan are probably on the verge of doing so.
"'Previous commodity rallies would have been brought to a sticky end by such a slowdown. The reason for continued strength this time is that demand from China - and from emerging economies in general - were thought to compensate for a shortfall from the developed world.'
"But Mr Cookson says the emerging world is unlikely entirely to escape a slowdown in the developed world. He adds that many investors fear that, worried about rising inflation, the Chinese authorities need to slow growth.
"'All this is unlikely to be anything other than bad for commodity prices. How bad depends on how much growth does, in fact, slow. It also depends on how much speculative excess there is in commodities."
Source: Richard Cookson, HSBC (via Financial Times), March 25, 2008.
Financial Times: Industrial demand behind boom for metals
"As speculators and investors attract blame for driving up commodity costs, new research shows demand from industrial users has spurred a price boom in a range of metals.
"Prices of metals such as iron ore and cobalt that are bought and sold privately between producers and customers have risen faster than others such as copper that are traded on exchanges, says Lehman Brothers. The investment bank says this lends weight to the argument that supply and demand factors rather than just financial flows are behind the boom in prices.
"Its new index of non-exchange traded metals rose by 598% from January 2002 to early this year. During the same time, an index of exchange traded metals rose 246%. The diverging trend has gained pace in the past year with non-exchange traded metals rising 94% and exchange traded metals gaining 26%.
"Michael Widmer of Lehman Brothers said speculators had difficulty gaining access to non-exchanged metals, meaning their price surge should reflect fundamentals more closely. 'Keeping in mind the price gains in non-exchange traded metals, we believe that the recent appreciation of base metals is not entirely driven by speculators ... but by fundamentals,' Mr Widmer said."
Source: Javier Blas, Financial Times, March 25, 2008.
MoneyNews: Food prices rising sharply
"... consumers worldwide face rising food prices in what analysts call a perfect storm of conditions. Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.
"The world's poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke out in Burkina Faso and Cameroon this month. But food protests now crop up even in Italy.
"What's rare is that the spikes are hitting all major foods in most countries at once. Food prices rose 4% in the US last year, the highest rise since 1990, and are expected to climb as much again this year, according to the US Department of Agriculture.
"As of December, 37 countries faced food crises, and 20 had imposed some sort of food-price controls.
"For many, it's a disaster. The UN's World Food Program says it's facing a $500 million shortfall in funding this year to feed 89 million needy people. On Monday, it appealed to donor countries to step up contributions, saying its efforts otherwise have to be scaled back."
Source: MoneyNews, March 24, 2008.
Financial Times: Jump in rice price fuels fears of unrest
"Rice prices jumped 30% to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5 billion people.
"The increase came after Egypt, a leading exporter, imposed a formal ban on selling rice abroad to keep local prices down, and the Philippines announced plans for a major purchase of the grain in the international market to boost supplies. Global rice stocks are at their lowest since 1976.
"On Friday the Indian government imposed further restrictions on the exports of rice to combat rising local inflation, with traders warning that the new regime would de facto stop all India's non-basmati rice sales.
"While prices of wheat, corn and other agricultural commodities have surged since late 2006, the increase in rice prices only started in January.
"... foreign sales restrictions have removed about a third of the rice traded in the international market. 'I have no idea how importing countries will get rice,' said Chookiat Ophaswongse, president of the Thai Rice Exporters Association. He forecast that prices would rise further."
Source: Javier Blas and Daniel Ten Kate, Financial Times, March 27, 2008.
David Fuller (Fullermoney): Agricultural commodities in medium-term correction
"Fullermoney has been a vociferous advocate of the commodity supercycle hypothesis over the last six years. However, our technical discipline causes us to be very cautious following dramatic upward accelerations in prices.
"These are invariably unsustainable because prices run ahead of events on a wave of frenzied, climactic and speculative buying. Even within secular bull markets, medium-term corrections follow dramatic price spikes. These can last from several months to a couple of years, and occasionally longer.
"I maintain that most agricultural commodities are currently in medium-term corrections, as indicated by the DJ Agricultural Index, and will be joined in this process by those that are still accelerating, such as rough rice.
"Consequently, investors should expect a period of underperformance by agricultural commodities and shares, which have run ahead of their current potential. Medium-term corrections will provide renewed buying opportunities within these secular bull markets."
Source: David Fuller, Fullermoney, March 28, 2008.
Ambrose Evans-Pritchard (Telegraph): Iceland contagion may spread far and
"As Iceland goes, so go the Baltics, the Balkans, Hungary, Turkey, and perhaps South Africa. All are living far beyond their means, plugging the gaping holes in their accounts with fickle flows of foreign finance. All have let credit grow far above the safe 'speed limit', some exceeding 50% a year.
"For Iceland, the high-wire act of the last five years may have finally reached its limits. The central bank was forced to raise interest rates to 15% this week in an emergency move to halt the collapse of krona, which has fallen 18% since mid-March.
"The country's all-conquering banks - led by Kaupthing, Glitnir, and Landsbanki - have pushed the asset base of the Icelandic banking system to a world record of eight times GDP, tapping the global capital markets to launch Viking raids across Britain, Scandinavia and beyond.
"This spigot of easy credit has now been turned off. The spreads on Icelandic bank debt have risen above 800 basis points, near levels seen in Bear Stearns' debt before the Federal Reserve's rescue. Which raises a thorny question: Is the Icelandic government - which presides over an economy the size of Bristol - big enough to underpin its encephalitic banks if push ever comes to shove?
"'There are clearly limits to what the government can do,' said Paul Rawkins, an Iceland expert at Fitch Ratings. 'If the government tried to raise billions in the markets it would damage its own credit worthiness. In any case, these debts are in foreign currencies. The central bank has just $2 billion in reserves,' he said.
"The banks insist they are well capitalised, with enough liquidity to tide them through to 2009. If the credit crunch subsides, the issue will never be put the test.
"But Iceland is more than just a Nordic hedge fund masquerading as a country. It is also the first of the deficit states to succumb to investor flight, sending an early warning signal of potential troubles across a great swathe of Eastern Europe and the Mediterranean."
Source: Ambrose Evans-Pritchard, Telegraph, March 27, 2008.
Moody's Economy.com: Inflation on the rise in Japan
"Consumer price inflation - as measured by the core CPI measure which excludes volatile food prices - reached a decade high 1.0% y/y in February, as a result of higher fuel prices. This is the fifth consecutive month of positive year-on-year inflation, after a decade of deflation."
Source: Moody's Economy.com, March 28, 2008.
Minyanville: From Russia with Boo
"Join Boo live from Russia with a report on the country's growing economy as he experiences the good and bad of the former Soviet state ..."