The Unassuming Economist

By Bob Samuelson [The Washington Post]:

First was the dot-com bubble, then the housing bubble. Now comes the commodities bubble. We don’t fully understand the stock market’s current turmoil, but we know it’s driven at least in part by a bubble of raw material prices. Their collapse weighs on world stock markets through fears of slower economic growth and large financial losses.

All bubbles share similar characteristics. There’s a strong, enthusiastic demand for some object (whether stocks, homes, oil or tulips). High demand pushes up prices, which inspires more demand. Prices ultimately reach unsustainable levels so that when spending slows, the bubble implodes. Commodities have now traced this familiar path.

As the Economist reminds us, raw material prices respond to different influences. Weather affects crops; technology (a.k.a. “fracking”) affects oil recovery. Still, despite these variations, prices of many commodities — not just oil — have followed roughly similar trajectories in recent years. They have dropped steeply, according to figures from the International Monetary Fund.

Here are declines for five commodities from 2012 through July 2015: oil, down 48 percent; iron ore, 60 percent; copper, 31 percent; palm oil, 39 percent; and wheat, 37 percent. Many commodity prices have continued to fall.

The bubble formed on hopes that China’s rapid growth would feed an ever-expanding appetite for raw materials, says economist John Mothersole of the consulting firm IHS Global Insight. Demand and prices would remain high indefinitely. Although prices fell after the 2008-09 financial crisis, China’s huge “stimulus” package — intended to offset the crisis’s drag — sent them up again, says Mothersole. China’s demand seemed destined to stay strong, as economic growth would stabilize at a high level.

It didn’t. In 2010, China’s economy grew 10 percent; the IMF expects 6.8 percent in 2015 and 6.3 percent in 2016. Other economists think growth could be lower. As a result, much of the added production capacity — mines and the like — to supply China isn’t needed. “There’s a new commodities era,” says economist Rabah Arezki, head of the IMF’s commodities research. “Everyone was rushing to invest. Now they have to adjust to a new lower level of demand.”

Continue reading here.

Workers carry pipes to install an irrigation line in a coffee farm in Santo Antonio do Jardim, Brazil, last year. (Paulo Whitaker/Reuters)

Chile’s housing market developments in six charts (from the IMF’s latest report):

The Spanish housing sector appears to have bottomed out, says the IMF’s new report on Spain. The report notes that the construction activity has started to recover, mostly driven by the non-residential sector. Moreover, construction permits have stopped falling and house sales are picking up. And housing prices started to increase slightly, albeit unevenly across regions.

“China’s housing market has softened visibly since 2014, reflecting oversupply in most cities. More adjustment is likely”, says the IMF’s latest report.

How big is the risk of a real estate slowdown? The report says:

At an event at Cato, Norberg said that “India is waking up because the government is starting to take a nap every now and then (imposing fewer regulations)”.

“What you can do and at what price matters more than who you are or what caste,” said Norberg.

“It’s morning in India but that is when the work day begins.”

India has set the goal of being in the top 50 countries in the World Bank’s Doing Business Index. Today it is at number 142 out of 189 countries.

A lesser known fact about Norberg is that he helped me inaugurate the IMF’s Book Forum: the topic was “Capitalism and its Critics”. The transcript makes for very interesting and prescient reading today – all the speakers (Jerry Muller, Ann Florini and Norberg) brought their ‘A’ game. For a short summary of the event click here.