Investors have gone crazy for
commodities, pouring money into
everything from oil to copper. Just like
the world's mania for tech stocks in the
1990s, this boom is headed for a bust.
As playwright Arthur Miller once
observed, "An era can be said to end
when its basic illusions are exhausted."
Most of the illusions that defined the
last decade -- the notion that global
growth had moved to a permanently higher
plane, the hope that the Fed (or any
central bank) could iron out the highs
and lows of the business cycle -- are
indeed spent. Yet one idea still has the
power to capture the imagination of the
markets: that the inexorable rise of
China and other big developing economies
will continue to drive a "commodity
supercycle," a prolonged upward rise in
the prices of commodities ranging from
oil to copper and silver, to textiles,
to corn and soybeans. This conviction is
the main reason for the optimism about
the prospects of the many countries that
live off commodity exports, from Brazil
to Argentina, and Australia to Canada.
I call this illusion commodity.com, for
it is strikingly similar in some ways to
the mania for technology stocks that
gripped the world in the late 1990s. At
the height of the dotcom era, tech
stocks comprised 30 percent of all the
money invested in global markets. When
the bubble finally burst, commodity
stocks -- energy and materials -- rose
to replace tech stocks as the investment
of choice, and by early 2011 they
accounted for 30 percent of the global
stock markets. No bubble is a good
bubble, and all leave some level of
misery in their wakes. But the
commodity.com era has had a larger and
more negative impact on the global
economy than the tech boom did.
The hype has created a new industry that
turns commodities into financial
products that can be traded like stocks.
Oil, wheat, and platinum used to be sold
primarily as raw materials, and now they
are sold largely as speculative
investments. Copper is piling up in
bonded warehouses not because the owners
plan to use it to make wire, but because
speculators are sitting on it, like
gold, figuring that they can sell it one
day for a huge profit. Daily trading in
oil now dwarfs daily consumption of oil,
running up prices. While rising prices
for stocks--tech ones included--
generally boost the economy, high prices
for staples like oil impose unavoidable
costs on businesses and consumers and
act as a profound drag on the economy.
That is how average citizens experience
commodity.com, as an anchor weighing
down their every move, not the exciting
froth of the hot new thing. The dotcom
sensation broke the bounds of the
financial world and seized the popular
imagination, attracting thrilled media
hype around the world and enticing
cubicle jockeys to become day traders.
There was the dream of great riches,
yes, but also a boundless optimism and
faith in human progress, a sense that
the innovations flowing out of Silicon
Valley would soon reshape the world for
the better.
Tech CEOs became rock stars because they
promised a life of rising productivity,
falling prices, and high salaries for
generating ideas in the hip office pods
of the knowledge economy, or for trading
tech stocks from a laptop in the living
room. It was impossible in those days to
get investors interested in anything
that did not involve technology and the
United States, so some of us started
talking up emerging markets as "e-
merging markets," while analysts spent a
lot of time searching for the new
Silicon Valley, which they dutifully but
often implausibly discovered hiding in
loft offices everywhere from Prague to
Kuala Lumpur.
A decade later the chatter was all about
the big emerging markets and oil, but
with a darker mood. Commodity.com is
driven by fear and a total lack of faith
in human progress: fear of a rising
phalanx of emerging nations with an
insatiable demand led by China, of
predictions that the world is running
out of oil and farmland, coupled with a
lack of faith in the human capacity to
devise answers, to find alternatives to
oil or ways to make agricultural land
more productive. It's a Malthusian
vision of struggle and scarcity: of
prices driven up by failing supplies and
wages pushed down by foreign
competition.
Excitement about rising commodity prices
exists only among the investors,
financiers, and speculators who can gain
from it. Commodity.com has inspired many
an Indian and Chinese entrepreneur to go
trekking across Africa in search of coal
mines, yet it has no positive
manifestation in the public mind at all.
At the height of the tech bubble
millions of American high school
students aspired to become Stanford MBAs
bound for Silicon Valley; today the
growing number of oil, gas, and energy-
management programs represents a small
niche inside the MBA world. The only
popular manifestations of commodity.com
are complaints about rising gasoline
prices and outbreaks of unrest over
rising food prices in emerging markets.
It is well-justified unrest. If
anything, the negative impact of sky-
high commodity prices on the larger
economy is underestimated. The price of
oil rose sharply before ten of the
eleven postwar recessions in the United
States, including a spike of nearly 60
percent in the twelve months before the
Great Recession of 2008 and more than 60
percent before the economy lost momentum
in mid-2011. When the price of oil trips
up the United States, it takes emerging
markets down with it. In 2008 and 2009
the average economic growth rate dropped
by 8 percentage points in both the
developed and the emerging world, from
its peak pace to the recession trough.
The strongest common thread connecting
the dotcom and commodity.com eras is the
fundamental driver of all manias: the
invention of "new paradigms" to justify
irrationally high prices. We heard all
sorts of exotic rationales at the height
of the dotcom boom, when analysts
offered gushy explanations for why a
company with no profits, a sketchy
business plan, and a cute name should
trade at astronomical prices. It was all
about the future, about understanding
why prices in a digitally networked
economy "want to be free," while the
"monetization" problem (how to make
money on the Internet) would solve
itself down the line. The dotcom mania,
while it lasted, was powerful enough to
make Bill Clinton -- who campaigned as
the first U.S. president to fully
embrace the "new economy" -- a living
emblem of American revival, just as the
commodity price boom played a role in
making Vladimir Putin a symbol of
Russian resurgence and Inácio Lula da
Silva the face of a Brazilian recovery.
When the rapture is over, the nations
and companies that have been living high
off commodities will also share the
sinking feeling that followed the dotcom
boom.
Funny how close to reality this article
maybe is? Good read.
commodities, pouring money into
everything from oil to copper. Just like
the world's mania for tech stocks in the
1990s, this boom is headed for a bust.
As playwright Arthur Miller once
observed, "An era can be said to end
when its basic illusions are exhausted."
Most of the illusions that defined the
last decade -- the notion that global
growth had moved to a permanently higher
plane, the hope that the Fed (or any
central bank) could iron out the highs
and lows of the business cycle -- are
indeed spent. Yet one idea still has the
power to capture the imagination of the
markets: that the inexorable rise of
China and other big developing economies
will continue to drive a "commodity
supercycle," a prolonged upward rise in
the prices of commodities ranging from
oil to copper and silver, to textiles,
to corn and soybeans. This conviction is
the main reason for the optimism about
the prospects of the many countries that
live off commodity exports, from Brazil
to Argentina, and Australia to Canada.
I call this illusion commodity.com, for
it is strikingly similar in some ways to
the mania for technology stocks that
gripped the world in the late 1990s. At
the height of the dotcom era, tech
stocks comprised 30 percent of all the
money invested in global markets. When
the bubble finally burst, commodity
stocks -- energy and materials -- rose
to replace tech stocks as the investment
of choice, and by early 2011 they
accounted for 30 percent of the global
stock markets. No bubble is a good
bubble, and all leave some level of
misery in their wakes. But the
commodity.com era has had a larger and
more negative impact on the global
economy than the tech boom did.
The hype has created a new industry that
turns commodities into financial
products that can be traded like stocks.
Oil, wheat, and platinum used to be sold
primarily as raw materials, and now they
are sold largely as speculative
investments. Copper is piling up in
bonded warehouses not because the owners
plan to use it to make wire, but because
speculators are sitting on it, like
gold, figuring that they can sell it one
day for a huge profit. Daily trading in
oil now dwarfs daily consumption of oil,
running up prices. While rising prices
for stocks--tech ones included--
generally boost the economy, high prices
for staples like oil impose unavoidable
costs on businesses and consumers and
act as a profound drag on the economy.
That is how average citizens experience
commodity.com, as an anchor weighing
down their every move, not the exciting
froth of the hot new thing. The dotcom
sensation broke the bounds of the
financial world and seized the popular
imagination, attracting thrilled media
hype around the world and enticing
cubicle jockeys to become day traders.
There was the dream of great riches,
yes, but also a boundless optimism and
faith in human progress, a sense that
the innovations flowing out of Silicon
Valley would soon reshape the world for
the better.
Tech CEOs became rock stars because they
promised a life of rising productivity,
falling prices, and high salaries for
generating ideas in the hip office pods
of the knowledge economy, or for trading
tech stocks from a laptop in the living
room. It was impossible in those days to
get investors interested in anything
that did not involve technology and the
United States, so some of us started
talking up emerging markets as "e-
merging markets," while analysts spent a
lot of time searching for the new
Silicon Valley, which they dutifully but
often implausibly discovered hiding in
loft offices everywhere from Prague to
Kuala Lumpur.
A decade later the chatter was all about
the big emerging markets and oil, but
with a darker mood. Commodity.com is
driven by fear and a total lack of faith
in human progress: fear of a rising
phalanx of emerging nations with an
insatiable demand led by China, of
predictions that the world is running
out of oil and farmland, coupled with a
lack of faith in the human capacity to
devise answers, to find alternatives to
oil or ways to make agricultural land
more productive. It's a Malthusian
vision of struggle and scarcity: of
prices driven up by failing supplies and
wages pushed down by foreign
competition.
Excitement about rising commodity prices
exists only among the investors,
financiers, and speculators who can gain
from it. Commodity.com has inspired many
an Indian and Chinese entrepreneur to go
trekking across Africa in search of coal
mines, yet it has no positive
manifestation in the public mind at all.
At the height of the tech bubble
millions of American high school
students aspired to become Stanford MBAs
bound for Silicon Valley; today the
growing number of oil, gas, and energy-
management programs represents a small
niche inside the MBA world. The only
popular manifestations of commodity.com
are complaints about rising gasoline
prices and outbreaks of unrest over
rising food prices in emerging markets.
It is well-justified unrest. If
anything, the negative impact of sky-
high commodity prices on the larger
economy is underestimated. The price of
oil rose sharply before ten of the
eleven postwar recessions in the United
States, including a spike of nearly 60
percent in the twelve months before the
Great Recession of 2008 and more than 60
percent before the economy lost momentum
in mid-2011. When the price of oil trips
up the United States, it takes emerging
markets down with it. In 2008 and 2009
the average economic growth rate dropped
by 8 percentage points in both the
developed and the emerging world, from
its peak pace to the recession trough.
The strongest common thread connecting
the dotcom and commodity.com eras is the
fundamental driver of all manias: the
invention of "new paradigms" to justify
irrationally high prices. We heard all
sorts of exotic rationales at the height
of the dotcom boom, when analysts
offered gushy explanations for why a
company with no profits, a sketchy
business plan, and a cute name should
trade at astronomical prices. It was all
about the future, about understanding
why prices in a digitally networked
economy "want to be free," while the
"monetization" problem (how to make
money on the Internet) would solve
itself down the line. The dotcom mania,
while it lasted, was powerful enough to
make Bill Clinton -- who campaigned as
the first U.S. president to fully
embrace the "new economy" -- a living
emblem of American revival, just as the
commodity price boom played a role in
making Vladimir Putin a symbol of
Russian resurgence and Inácio Lula da
Silva the face of a Brazilian recovery.
When the rapture is over, the nations
and companies that have been living high
off commodities will also share the
sinking feeling that followed the dotcom
boom.
Funny how close to reality this article
maybe is? Good read.
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