Global Agenda: Choppy waters

The financial markets have never been friendly to the unwary, but currently they are in an especially user-unfriendly state.

By PINCHAS LANDAU
February 26, 2009 23:07
3 minute read.
Global Agenda: Choppy waters

global agenda 88. (photo credit: )

The financial markets have never been friendly to the unwary, but currently they are in an especially user-unfriendly state. Various trends that had seemed clear-cut have quite suddenly lost that status. The result, inevitably, is confusion - among both experts and laymen. Take the commodities markets. The dominant trend in most commodities since last summer has been one of sharp price falls, as the speculative boom turned into spectacular bust. The obvious and best-known example is crude oil, whose price had soared to almost $150 a barrel and was widely predicted to go much higher. "Peak oil" and other buzzwords emerged to express the new common wisdom: that the Earth was running out of oil and that those who had it - mainly the Middle East Arab states - would hoard it to maximize their long-term revenues. In fact, the huge price rises of last summer were driven by speculative forces; not a conspiracy, as some would have had us believe, just another buying mania on the part of crazy kids fooling around with other people's money via hedge funds. But in the real world, many people decided that they couldn't afford such expensive oil, so they cut their consumption by driving and flying less. The fall in demand did the trick and the bubble burst. But then the bottom fell out of the global economy in the fourth quarter of last year, and demand really plunged: not only were households driving less, companies were now shipping and trucking MUCH less. The floor caved in, and, within weeks, the price of oil halved again; after falling from its $147 peak to the $70 level, it crashed to the mid-$30s. The Arab and other OPEC members, now supported by chastened non-OPEC producers such as Russia, came together to repeatedly announce supply cuts - which they actually stuck to. These efforts now seem to have brought the level of supply into rough equilibrium with reduced global demand. And, hey presto again, the market works and what they teach you in Economics 101 is valid: At the new equilibrium level the price bottomed out and has now started rising again. Will it go back to $150, or even $100, any time soon? Not unless you believe that the world economy is about to turn on a dime and swing back from deep recession to rapid growth. But could oil reach $50 or $60? Certainly, and maybe higher too. Another obvious fact that everybody knew, as recently as last year, was that the prices of oil and gold generally moved in the same direction. The rationale was also well-understood: If oil prices went up, that caused inflation, and when inflationary fears increased, people moved into gold - and conversely in the other direction. Last year that worked well: In the commodity boom of the first half of the year, gold ran ahead, hitting a record high of $1,033 an ounce in March. Oil, as noted, hit its own record in July. In the second half, both fell - although gold prices fell from their peak by a much smaller margin (about one-third) than oil (about three-quarters). But more recently, even this logical relationship stopped functioning: While oil was falling and struggling to find a bottom, gold marched steadily higher, finally regaining the $1,000 level last week. It then turned around and began to fall sharply - just as oil has begun to post significant rises. The technical-analysis guys expect gold to now fall a long way, after investor sentiment regarding both gold and silver reached extraordinarily high positive levels. The reasoning in cases like these is that if over 95 percent of investors are convinced something is going to go in one direction, it is almost certain to do the opposite - because everyone is now on the same side of the market, so there is indeed only one way left to go, namely the other way. The same syndrome is at work elsewhere. There was a 99% positive sentiment (!) toward US Treasury bonds a few weeks ago: everyone wanted to buy them and, despite the fact that their prices were at all-time record highs (and their yields therefore at record low levels), everyone was convinced they would keep rising. In fact, they fell sharply and continue to do so. Going one stage further, we can note that Treasury bonds and gold usually go in opposite directions, because gold feeds off inflationary fears - which are poison for fixed-income bonds. Yet here we are, with both bonds and gold falling in tandem. It could be just a coincidence - or it could be something more sinister. Some analysts think that the tried and trusted relationships that proved themselves over decades will no longer work in the new environment of deflationary recession. landaup@netvision.net.il


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