Commodity Bubble by Morgan Stanley
“In the midst of a slightly subpar upturn in global growth, a low-inflation world is experiencing the sharpest run-up in commodity prices in modern history”
What’s new
Asset bubbles have dominated financial market experience over the past six years. The world is now in the midst of another bubble -- this one in commodities. It, too, will burst. The only question is when.
Conclusions
In the midst of a slightly subpar upturn in global growth, a low-inflation world is experiencing the sharpest run-up in commodity prices in modern history. (1) World GDP growth is likely to average 4.2% over the 2002-06 period -- fractionally below the average 4.4% pace of the four earlier global expansions. (2) Over the past four years, the Journal of Commerce gauge of industrial commodities has increased by 53% -- a sharper rise than that which occurred in any of the previous four global expansions. (3) In real terms, the JOC is up 42% over the past four years -- nearly double the 23% average gains that occurred in the two commodity booms of the 1970s. (4) All bubbles are based on plausible stories of a “new era.”
Market implications
The super-cycle theory of ever-rising commodity prices is based on the false premise that
Risks
Contagion is rapidly spreading into the far corners of commodity markets -- including precious metals. Moreover, signs of psychological excess are building -- in an era of globalization, tales of the “new era” are as convincing as ever. Price increases are begetting more price increases -- indicative of a speculative blow-out that can only end badly.
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