Economic Crisis Killing the Commodity Supercycle?
With the recent break of oil back below $50.00 a barrel, the commodity supercycle driven by the superlative rise of the emerging markets looks like it’s dissipated…and we could be facing an economic crisis.
The Thomson Reuters/CoreCommodity CRB Index fell to a 52-week and six-year low, adding to the reality that demand for commodities is fading. This index covers 17 commodities, including the highly watched gold, silver, oil, copper, and natural gas.
Down 32% from its 52-week high, the basket of commodities reflects what’s happening and what and could materialize in the months ahead.
Chart courtesy of www.StockCharts.com
The superlative growth in emerging markets such as Asia, Latin America, and Eastern Europe, to some degree, may have seen its best years already. Of course, we could see a re-emergence of demand from these regions in a few years that could drive up commodities. But for now, a sustainable rally may not be in store for commodities.
Global Stalling Driving Economic Crisis
If you think the global economy is faring well, you may want to take another look—beginning in our own backyard.
The United States economy is stalling and I feel it could fail to meet the current expectations of 2.5% to three percent growth by the fourth quarter. Based on what we have seen so far in the second-quarter earnings season, I simply cannot see how things can improve that quickly.
It may be true that jobs are being created and home prices are rising, but there are also hundreds of million of Americans struggling to make ends meet. The top five percent may be doing well, but that’s simply not enough to drive the country’s economic renewal. Without the middle class on board, it’s going to be a rough ride to achieve higher economic growth.
I don’t believe the country will fall back to how things were during the Great Recession in 2008, but there could be some hurting on the horizon. Especially if the global economy doesn’t pick up. This would further hinder the demand for commodities and drive prices lower.
Of course, a key region to monitor for U.S. companies will continue to be China. We are seeing continued economic shocks behind the Great Wall. There was weakness in industrial profits and contraction in the manufacturing purchasing manager’s index (PMI) to below 50.0, suggesting economic contraction.
In China, we are already seeing declining demand for oil, copper, and other commodities that rise when an economy is strong. The soft demand out of China is in turn hurting the emerging markets in the rest of Asia, impacting Europe and Latin America.
Latin American countries like Brazil are showing some stalling after years of staggering economic growth. And just like the U.S., millions of Brazilians are struggling to survive.
The fact that the commodities index is at a low point clearly suggests there could be more weakness to come. If China continues to falter, the global economy will be more vulnerable to a crisis.
