BY FRANK HEMSLEY
Since this whole credit crunch began, investors pretty much everywhere have been hit. It doesn’t matter what sector a company is in, its share price is less now than what it was in July.
But there are a couple of sectors that have really outperformed the rest of the market. And I mean “outperformed to the downside”. In other words, they’ve fallen further and faster than other sectors.
The first is no surprise. It’s the banks and other financials. It’s no surprise, because that’s where it all started.
This chart shows how financials have fallen further than the Dow Jones.
But an even more alarming sell-off has occurred in another sector: commodities. This chart of the Reuters/Jefferies CRB Index demonstrates how commodities fell out of favour in July and have lost almost half their value since.
It’s worth stepping back a little to see what happened before this. Colleague, Justice Litle, in Baltimore notes:
“When the commodity bull really hit stride, it was largely based on a strong outlook for global growth. With so many emerging market countries coming of age, resource after resource was projected to be in short supply as far as the eye could see. Investors of all stripes and sizes, from institutional on down, wanted a piece of the action.”
And so we had one of the biggest bull runs in recent history.
But then, the credit crunch really hit home. As we’ve seen, it started in the financial sector… but pretty soon spread to commodities.
“The mortgage bubble popped, trust and liquidity evaporated, and credit and commerce fell off a cliff,” continues Justice Litle. “Not wanting to be left out, commodity prices jumped off a cliff too.”
As investors scrambled to cover losing positions in the financial sector, they closed out winning trades in other positions. Where were their biggest winning trades? Commodities punts were certainly well up there.
As this hot money has been taken off the table, sky-high commodity prices came back to earth with a bump.
“Now, though, things have come full circle,” explains Justice. “Commodities fell so violently and so quickly, we’ve been rudely transported backwards (or perhaps forwards) to the “low prices cure low prices” part of the cycle again!”
What he means by the “low price” cure is that when a commodity gets cheap enough, producers tighten their belts. They stop going after new projects and cut back existing production. Some producers even give up altogether.
Eventually reduced supply matches up with newly reduced demand. Then things stabilize, prices fall and demand shifts upwards, and the cycle begins again.
And there’s some news just out that could set off the next leg up in the great commodities bull run.
On Sunday, China announced a huge $586 billion package to sustain its economic growth in the next two years. The 10-point plan allocates money for, among other things, affordable housing, rural infrastructure, railways, power grids and rebuilding after the devastating earthquake in May.
Expect to see further stimulus packages from other G20 nations following their scheduled meeting on 14 – 15 November.
And when all this spending to boost world economic growth starts happening over the next year or so, we could well start to see a rebound in demand for metals and grains.
Regards,
Frank Hemsley
For Fleet Street Daily
P.S. Sterling is crashing today, just as we have been predicting. Theo Casey of The Fleet Street Letter explains why it’s about to get worse – and how you can take advantage… below.
Week Ahead – More Trouble For Sterling
BY THEO CASEY
This week’s key indicator will be the inflation report due tomorrow.
The last report revealed a massive 5.2 per cent inflation level on the back of record food and fuel prices. However, we appear to be in a disinflationary spiral that could become fully deflationary.
At least that is what Mervyn King, Governor of The Bank of England, will be hoping.
They made a big bet with a big rate cut last week. Should inflation be higher than expected, it inhibits the likelihood of further big cuts, which would kill sentiment.
In the meantime, our sterling hedge is well-placed for any eventuality.
This is the most important investment you can make right now. Protect your self as the pound tanks against euro. Click here for details.
The Daily Reckoning – Something Always Comes Next
BY BILL BONNER Today, on the 11th day of the 11th month at precisely 11am London fell silent. We were asked to remember our war dead.
This moment marks the time 90 years ago when the guns ceased firing on the Western Front. Soldiers on both sides hesitated... wondering if it were really true. After 4 years of trying to kill each other – leaving 40 million dead – all of a sudden, the heads of state decided they’d had enough.
Slowly, cautiously, the French “poilus”... the English “tommies”... the American “doughboys”... and the German “fritzes... huns... krauts” crawled out of their trenches. They walked across no man’s land and greeted their opponents. They shook hands. They traded tobacco. It was over.
“What was that all about,” asked colleague Simon Nixon last night. “I’ve been reading about the war, trying to understand it. But no one seems to understand it at all. What caused the war? Who wanted war? No one can tell you.”
Before the war began, Europe and America enjoyed the greatest burst of prosperity in human history. Thanks largely to the British Empire, trade had been globalized. A man of means, in London, Paris or New York, could order his shoes from a cobbler in Italy, his tea from India, his plates from China, his watch from Geneva, his whiskey from Scotland and his hunting rifle from Germany.
This trade meant that a war was in no one’s commercial interest. A popular author and lecturer told audiences that war was a thing of the past; that it was impossible for modern countries to go to war with each other since they depended so much on each other’s production.
But there’s always more to the story...
You can read the Daily Reckoning in full here.
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