Writing in Thursday’s FT, Tim Bond of BarCap picks up on commodity price rises. The subject of a growing debate on these pages, and in print.
For all the current focus on banking, mortgages and structured finance, has the potential for a broader economic crisis – facing commodities – been overlooked?
Writes Bond:
The global economy is facing twin shocks. Natural resource markets are delivering a supply shock of 1970s dimensions, while the financial system is delivering a shock comparable to the bank and thrift crises of the 1988-1993 period. The magnitude of each shock is very different.
The financial markets require a recapitalisation of the banking system, with estimates ranging from $300bn to $1,000bn. By contrast, prospective capital requirements in the resource markets dwarf the current needs of the banking system.
Global grain inventories at 40-year lows, equivalent to just 15-20 per cent of annual demand. Ditto metals, with inventories in a 30-year trough relative to consumption. Runaway oil prices and a welter of hungry, rapidly industrialising middling economies demanding more goods.
The US governmental response has ignored this crisis, writes Bond, nay made it worse, by pursuing a reflationary strategy in response to a crisis in the banking sector.
It’s a policy which is sending a strong signal in support of current price levels, and with it, the expectation that prices have only one way to go… up.
On cue, since Washington started to ease policy, investor flows into commodities and other real assets have soared. Meanwhile, in spite of the slide into near-recession, forward inflation expectations in the bond market have risen to match the highest levels seen this century.
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