The biggest hint that lower commodity prices are history! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The biggest hint that lower commodity prices are history! 

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In this issue:
» RBI doing a great job, feels Deepak Parekh
» China looking to drastically cut US dollar holdings
» Indians not as hardworking as percieved
» Have silver prices peaked?
» ...and more!

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200 years. Indeed, a very long time from the point of view of a human being. Long enough to fit in a few generations. However, it is nothing but a small speck of sand if looked from the vantage point of evolution. Yet, the amount of progress that mankind has made in the last 200 years is nothing short of breathtaking. It absolutely mocks the progress made by civilisation in the period leading up to that point. Human population, which sort of ebbed and flowed based on availability of food up until the year 1800, is on its way to going up a massive 10-fold and reach 8 billion shortly. Increase in wealth has not been far behind either, growing at a scorching pace in developed countries in the past and now in developing countries.

Certainly, growth of this magnitude in population and wealth, really unprecedented in the entire human history, has not come out of thin air. It has come at the expense of extensive use of earth's finite resources viz. hydrocarbons and metals, fertilizer, available land, and water. But here comes a shocking statistic. Jeremy Grantham, widely acclaimed as one of the most successful proponents of mean reversion, has found out that despite enormous pressures on demand, prices of all commodities except oil declined for 100 years until 2002, falling by 70% in real terms! And it is this fall in prices that made much of human progress possible.

So far, so good you would say. However, our luck with respect to higher productivity leading to lower prices of commodities began to run out in 2002 it seems. Because since then, a price surge so big has happened that it has erased the entire decline of the 100 years prior to 2002. In other words, Mr Market is giving us the mother of all price signals as per Grantham. It is telling us that the long rope given by mother earth has come to an end. From now on, if we increase our population too much and focus too much on economic growth, then we are very likely to run out of everything and may be, even crash. What is more certain though is the fact that prices of commodities are so far from their long term trend, that they are unlikely to touch those levels again. Thus, it would be better to seriously start preparing plans for managing our resources well. There is very little time to waste especially for a developing country like India.

What do you think? Do you think we are finally running out of resources or panicking unnecessarily? Share your views. You can also comment on our facebook page.

01:22  Chart of the day
Indians are perceived to be quite hard working. This may well be true on a standalone basis. But when it comes to comparison with other countries, we can perhaps do with sweating it out a bit more! As today's chart of the day shows, Mexicans emerge on top when it comes to spending no of hours at work per day (both paid as well as unpaid) amongst a group of 29 nations surveyed by the OECD. The survey further pointed out that personal care, including sleeping and eating, took up most of people's time, accounting for 46% of a 24-hour day on average.

Source: OECD

Is silver in a bubble territory? Over the past year, this white metal has outperformed most other assets classes, including its wealthier cousin gold. But, the question on everyone's mind is whether silver prices have peaked. Let's go back in time for the answer.

If you think that silver's current rally is going at breakneck speed, in the 1980s silver prices were increasing 5.5 times faster than they are right now. In 1980, silver prices were increasing at a rate of around 400% per 100 trading days. Compare this with the current rate of increase of only 73% per 100 trading days. This makes current returns look modest. However, this does not take into account the fact that the Hunt Brothers were trying to corner the silver market in the 80s. They were artificially increasing silver prices for personal gains. At that time, the duo was estimated to hold one-third of the entire silver supply in the world. This scenario is a far cry from what is happening now. This rise is based on more fundamental reasons.

Commodity guru, Jim Rogers explains that too rapid an upward movement which he calls a 'parabolic' move, would certainly be a precursor to sharp falls. Silver has not gone parabolic yet, he says. Only if it hits US$ 100 per ounce by 2011, he may think of selling his significant silver holdings. This would lead us to believe that there still is upside potential for silver from current levels.

Holding a massive chunk of US Treasury holdings is getting a bit too much for China. That is why it is seriously considering cutting two thirds of its US$ 3 trillion in US$ holdings. It must be noted that China's foreign exchange reserves increased by US$ 197.4 bn the first three months of this year to US$ 3 trillion by the end of March. The Chinese government seems to be okay with a scenario of having around US$ 1 trillion in US holdings and use the balance in making strategic investments. This would be to acquire resources and technology for the real economy. While US' loose monetary policies have certainly played their part in swelling China's forex reserves, part of the blame also lies on China's policy of keeping the Yuan pegged to the US dollar. And therein lay the key. If China indeed decides to do away with its peg, it will have no qualms in dumping US Treasuries for a more profitable opportunity. If that happens, it will indeed pose a huge problem for the US Fed, which will be stuck with being the only buyer of US debt. And that will only lead to hyperinflation and problems galore for the US economy.

The global economy is close to a major inflection point. We are soon going to witness the end of the "Age of America". If IMF is to be believed that day could be as soon as 2016. Yes, the international organisation expects the Chinese economy to overtake that of the US. But you may wonder how that can happen so soon. Can China GDP escalate that fast? Well, it is important to note that the GDP is calculated using current exchange rates. According to the IMF, that's where all the misrepresentation is happening. On one hand, the US dollar is losing its value because of the loose monetary policy of the US central bank. On the other hand, China's currency has been artificially kept undervalued.

So the IMF has analysed the two economies in real terms using purchasing power parities (PPP). Simply put, that means a real comparison between what people can earn and spend in their domestic economies.

According to the PPP approach, China's economy will expand from US$ 11.2 trillion in the current year to US$ 19 trillion in 2016. Meanwhile, US economy will expand from US$ 15.2 trillion in the current year to US$ 18.8 trillion in 2016. So now you see what the IMF is trying to hint at. And remember, just 10 years ago, the US economy was thrice as big as China's economy.

America's hegemony over the world economy and political stage is definitely on the wane.

The Indian central bank has been known for its conservative approach to risk taking. But when it comes to inflation control the RBI has found critics lamenting the slow paced interest rate hikes. In fact some have even called it 'behind the curve'. This is in reference to the steady rises that some other central banks in Asia undertook to contain asset bubbles. The RBI too has raised interest hikes 8 times in 2010. The only difference being that the later had a measured approach. It chose to hike rates by only a quarter percentage (0.25%) each time. This gave some the impression that the RBI was taking the inflation threat too lightly. But in its position the central bank was justified in ensuring that the rate hikes do not have a negative impact on growth rates.

Interestingly, Mr Deepak Parekh, chairman of the HDFC group, too turns out to be a supporter of RBI's calibrated policy. In fact in his opinion the RBI has never lagged in policy decisions. So when it comes to inflation control, Mr Parekh believes that the RBI has little to be blamed. We would certainly second Mr Parekh's opinion. For the fact that not just the RBI but even the government is responsible for controlling price rises. And also because so far the Indian central bank has been very proactive in spotting and controlling asset bubbles even with its measured approach.

Meanwhile, indices in the Indian stock market nosedived into the red after opening the day on a positive note. At the time of writing, BSE-Sensex was trading lower by around 90 points. Heavyweights like RIL and ICICI Bank were seen causing the maximum damage. Indices across Asia closed mixed today whereas Europe too has opened on a mixed note.

04:55  Today's investing mantra
"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." - Paul Samuelson
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9 Responses to "The biggest hint that lower commodity prices are history!"

Cdr. S S kumar

Apr 28, 2011

This is the highest consumption time in the history of mankind. This shortage of everything is rubbish.Soon in a yr. or two the world will have excess of eveything except the manpower. The golden period for the world has started.
Look at the demographic figures, for instance we added only 18 cr. to our population in a decade. Last years addition ie 2010 was about 1.2 cr. At this rate we shall become population neutral by 2014 or latest by 2015, contrary to UN estimates and the max. population India will have no more than 126 cr.After that we shall keep reducing for ever like Chinese now. Excess of everything. For details contact me.



Apr 28, 2011

Faster the growth without increase in efficiency, faster depletion of natural resources is natural.



Apr 27, 2011

In all humility I offer my comments
(in all ignorance/innocence)!
Decades ago I had read that COMPOUNDING is the estimation of FUTURE value of " PRESENT MONEY" Money and DISCOUNTING is the estimation of " PRESENT VALUE " of " FUTURE MONEY " !!

I had even foreseen that a day may(not very far off in the near future??) when the so called elite/whte collar moneyed rich may be forced to go and beg of the real agriculurists who really toil and produce the grains for feeding the millions(rather a BILLION Plus popultion??) and would be prepared to shell out tons of money to get a few morsels of grains to



Apr 27, 2011

In all humility I offer my comments
(in all ignorance/innocence)!
Decades ago I had read that COMPOUNDING is the estimation of FUTURE value of " PRESENT MONEY" Money and DISCOUNTING is the estimation of " PRESENT VALUE " of " FUTURE MONEY " !!

I had even foreseen that a day may(not very far off in the near future??) when the so called elite/whte collar moneyed rich may be forced to go and beg of the real agriculurists who really toil and produce the grains for feeding the millions(rather a BILLION Plus popultion??) and would be prepared to shell out tons of money to get a few morsels of grains to



Apr 27, 2011

The rise in prices is a viscious circle

If the price of agri products go up temporarily the prices of finished products are hiked up, but once the prices of such commodities come down the prices of finished products dont come down

example if price of rice wheat sugar etc go up the finished goods like Dosas Idlis Coffee etc go up and are never reduced once the prices go down.

This is due to Government interfering with the Pricing of various products and restrictions in allowing freedom in farm and agri production like restriction on transfer of land etc.

I agree certain products are scarce so monitorin consumption of such is important whereas causes due to inefficiencies and corrupt practices by Leaders for personal gain is the root cause specially in case of Agri Products and illegal scavanging of rich mineral resources has led to such shortages and price increases



Apr 27, 2011

In near future, that is over next 30 - 40 years, the prices of commodities can go no other way than UP. Commodity Prices are under pressure from both demand and supply sides. Demand for resources is growing at a rate higher than that of population growth. Incerasing population of nova rich in emerging markets mimic the consumption pattern of their western counterparts. Supply of resources is not growing proportionately as the technology is no longer keeping pace with safe generation and efficient utilization. It would require a miracle to reduce population (and thus demand), unlikely in near future... I agree, commodity prices will get into rising spiral.



Apr 27, 2011

it is unnecessary panic.commodity prices have gone up due to pure speculation from the commodity bourses.ban futures,options etc in commodities and prices will fall down hard.



Apr 27, 2011

As has been rightly pointed out by Gandhiji...Nature can satisfy everyone's needs but not greed!!! True to that philosophy India needs to curb the diversion of precious resources from want-based to need-based. A country like India can't afford to divert natural resources for satisfying the LUXURIES of few people at the cost of NEEDS of majority of the population!!!We Indians are blindly aping the consumerism model of Western Countries at the cost of our precious natural resources!!! This has not only resulted in greediness among the population but also collaus attitude towards the natural resources!!! The greed has led to more depression, more psychological diseases, more comparisons, extremely high corruption and widened the gap between the rich and the poor!!!20 yrs back a family of 5 were happy and were satisfied, contended lot with an annual income of Rs 20,000!!! Today with Rs 20,000 per month person isn't satisfied nor contended!!!It's high time we realised that we have come empty handed and will leave empty handed and that we have some responsibility towards future generations to give them healthy, stable lifestyle.


Nadir Godrej

Apr 27, 2011

The RBI caused the Indian slowdown in late 2008 by raising interest rates as commodity prices were falling.
It is doing the same now and we could risk growth by being obsessed with the WPI which is a poor measure of inflation as it does not include services. The new CPI has been at the same level in March as in January. The RBI should wait for true signs of inflation before raising interest rates.

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