Say uncle: So much for that commodities rally

In my last post, "The inflation hedge of choice", I highlighted the recent run-up in commodity prices, buffeted by OPEC production cuts and speculative capital seeking a hedge against the Fed's big inflationary adventure. While I expressed deep scepticism over the sustainability of such a rally, I did anticipate a speculative run up in prices over the near-term. Perhaps I should have broadened my outlook.

A trip over to Bloomberg.com made me say uncle. Headline: Commodities Head for Worst Slump Since 2001 as Demand Shrinks. D'oh! The Reuters/Jefferies CRB index fell 5.8% in the first quarter, on top of a 50% decline in the second half of 2008. Afshin Nabavi, senior vice president at MKS Finance SA, shot down the idea that speculative capital would contribute to a commodities rally, “For commodities, the main mover is demand and supply and if demand is down, then the price comes down, no matter how many speculators are in the market.”

True, in a perfect market. But speculative capital often drives prices beyond levels justified by supply and demand fundamentals. No one still believes that $150 oil was driven solely on the strength of Chinese demand. Right? Mike Wittner, head of oil-market research at Societe General SA, makes the point that, while we have seen speculative inflows driving certain commodities higher (oil, for instance), the focus will quickly shift away from long-term inflation and back towards "the global recession, weak demand, and still-high stocks." Copper, which I cited as one of the highest-performing commodities, is still expected to decline by over 9% in 2009, in spite of the 30% run-up thus far. This would mean another price collapse is right around the corner.

I draw two important points from these experts. One, this commodities rally is likely to be shortlived. Two, it is misleading, financially speaking, to speak of "commodities" as one monolithic asset-class. As the article notes, while copper and gasoline have experienced a significant recovery this year, it was more than overwhelmed by further declines in natural gas, wheat and nickel. That is the mistake I made in my last post: I took a particular segment of market as indicative of a broader trend.

So beware of false rallies, bet on gold instead and don't take investment advice from me. Or this guy.

(photo from the following photo stream)

How to win the crucial economists' vote

Greg Mankiw, a very well-respected economist and prodigious blogger, had a piece in the New York Times this past weekend about the policies the candidates would adopt if they were courting Economists' votes. I encourage you to read the whole entertaining article, but here's the gist of it:

1. Support free trade
   
2. Oppose farm subsidies
3. Leave oil companies and speculators alone
4. Tax the use of energy
5. Raise the retirement age
6. Invite more skilled immigrants
7. Liberalize drug policy
8. Raise funds for economic research

I'm personally ambivalent/in cautious agreement with number 7, and I imagine number 8 would amount to some heroic pandering to the dismal scientists. That said, I do agree with numbers 1 - 6, and I agree particularly strongly with 1, 2, 4, and 6. There is a lot of material here, but I'll take number 6 right now because it strikes me as the most straightforward case.

Invite more skilled immigrants. Whatever your thoughts on immigration in general, skilled immigrants, particularly younger ones, are a big "get." They generate a lot of economic value. They make a lot of money, a lot of which gets spent in their country of residence, and they pay higher taxes, which go to funding schools, police, Medicare, etc. Like the affluent in general, they are less likely to put a strain on social welfare systems. Finally, there's little worry that they'll take all the jobs away from local workers (don't make me post the South Park clip again.) First, forget the old Lump of Labor Fallacy. Then recall that truly skilled workers tend to be in high demand and have less trouble finding employment. Having more skilled workers in the economy should also increase economic growth, thereby creating more demand for skilled workers overall.

I'll return to some of the other issues in the future, because they're timely and important as the election approaches. Also, I would be interested to see what my esteemed coauthor thinks about some of these issues. And you too, dear reader. Hit up the comments below.

n.b. I do not particularly want to hear from Lou Dobbs, possibly our country's most pompous blowhard. Stick around until about the 2:50 mark, though, because he starts to go on a very angry, hilarious rant: