The Reuter's CRB index reached record levels in 2010 – why?
“Super cycles are extended periods of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation, characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world.
The world economy may now enjoy its third super cycle, after the first 1870-1913 and the second 1946 – 1972. Note that the first super cycle which coincided with America’s industrialisation and Germany’s Gründerjahre was stopped in the tracks on the eve of World War I. Note also the end to the second cycle which followed the World War II and coincided with Japan’s and the Asian NIEs rapid convergence was stopped by the oil price shock.” Helmut Reisen shiftingwealthblogspot.com
Bull markets climb a wall of worry and there has been a sudden reversal in commodity prices because of:
- Ending of the US’s Quantitative Easing caused markets to fall
- Sovereign debt risks created uncertainty
Speculators, who were already “dancing close to the exits” because of Chinese slowdown fears, left the space in a rush and caused prices to drop. Is it a permanent price correction, a temporary slowdown, or do we risk total derailment of the commodities super-cycle?
The shaded areas are QE1 and QE2. The red line is the S&P 500.
On the 25th of November 2008, QE1 was announced. On the 18th of March 2009 QE1 was extended.
There’s no doubt Ben Bernanke's quantitative easing pumped up the stock market.
As soon as the QE program, part’s 1 & 2, ended in June of this year, the markets had to get by on a lot less money and liquidity. Today the dollar is up because the EU, and the world, have an acute shortage of dollars for the necessary bailouts and needed liquidity. A rising dollar is noninflationary so the rising dollar produces lower commodity prices. Lower commodity prices lead to lower interest rates and higher bond prices. Higher bond prices are bullish for stocks.
It’s this author’s belief the US will return to Quantitative Easing (QE) early in 2012. A falling weaker dollar pushes up the price of commodities, rising commodity prices tend to push bond prices lower. A falling dollar is bearish for bonds and stocks because it is inflationary.
European Union Sovereign Debt Crisis
As previously stated, the dollar is up because there is an acute shortage of dollars for the necessary bailouts and needed liquidity.
The EU will use its bailout fund, the European Financial Stability Facility (EFSF), to purchase bonds and recapitalize banks. They are open to using “leverage” to expand the scope of the €440-billion ($611-billion) EFSF. Germany and France will propose a massive stimulus package similar to the US’s QE’s.
The US Federal Reserve, Bank of England, Bank of Japan, the Swiss National Bank and China are all going to provide dollars to European banks. The sheer size of the European bailouts would be inflationary and a market return to “normal” would be perceived as the double threats of a systemic breakdown and a return to the 2008 global crisis significantly receding.
A Dow Jones Newswire poll put the median expectation for third-quarter growth at 9.2%, growth was 9.5% in the second quarter and 9.7% in the first quarter. Slower growth is the result of the Chinese government attempts to cool down its economy and contain inflation, especially in the food sector.
Growth in sales to the European Union, China's biggest export market, have slowed. China's currency has strengthened against the euro since the Greece debt crisis - this makes Chinese goods more expensive and therefore less competitive - trade also slowed between China and the US in September, yet overall Chinese exports still increased in September by 17 per cent from a year earlier, this after a 25 per cent increase in August.
Chinese domestic demand is still strong - imports rose to $155.2 billion in September, after a record August, and purchases of copper climbed to the highest level in 16 months as restocking of inventories occurred taking advantage of lower prices.
“In terms of long-term structural trends, demand is now driven by an urbanization process that is far more structural than consensus generally believes. On our analysis, China is only 20 to 25 per cent along the path towards being a mature materials market and it may take at least six to nine years before demand intensity peaks.” Andrew Keen, Thorsten Zimmermann and Lourina Pretorius, analysts at HSBC
Gus Gunn, of the British Geological Survey, has identified three main factors behind the steep rise in commodities demand:
- Urbanization that is accompanied by a rise in the standard of living
- Population increase
- Development of new technologies whose components and gadgets are based on an ever broader base of elements
By 2025, nearly 2.5 billion Asians will live in cities, accounting for almost 54 percent of the world’s urban population. India and China alone will account for more than 62 percent of Asian urban population growth and 40 percent of global urban population growth from 2005 to 2025.
China had 172 million urban residents in 1978 when Deng Xiaoping started his economic reform program. By 2006 there were 577 million Chinese urbanites.
China set a goal of 65 percent urbanization by 2050. Over the coming 39 years that means 20 percentage points of urban growth per year which translates into 300 million rural residents becoming urban residents. By 2015, China’s urban population is expected to exceed 700 million and China’s urban population will surpass its rural population. China's current urbanization rate of 46 percent is much lower than the average level of 85 percent in developed countries and is lower than the world average of 55 percent.
By 2025 China's urban population is expected to rise to 926 million. By 2030 that number will increase to a billion.
BCG Consulting’s November 2010 Report: “Big Prizes in Small Places: China’s Rapidly Multiplying Pockets of Growth” says China is expected to become the world's second largest consumer market by 2015 and by 2020 China’s consumer consumption nation-wide will amount to 22 percent of total global consumption, behind only the U.S. at 35 percent. The expected transition from an investment led economy to a more consumer focused model will bring about continued growth. The McKinsey Global Institute projects China's middle class will increase from 43% of the population to 76% by 2025.
"The shift from investment to increasing consumption overall - and as a share of GDP - is very important to sustainable growth in the long-term. China has maxed out on the input model." Diana Farrell Director, McKinsey Global Institute.
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