Surging commodity prices could crush this recovery – MoneyWeek

Surging commodity prices could crush this recovery – MoneyWeek

Everyonecheeredthereturnofbankingprofitsandbankingbonuses,asmoneyfloodedoutof“safehaven”assetsandintoriskierplayssuchascommoditiesandemergingmarkets。

We’veseenthisbefore。

Anditdidn’thaveahappyendinglasttime

Whywearesobearishabouttherecoveryrally

Whyarewesobearishaboutthecurrentrally?

It’saquestionthatwasputtomeinanemailyesterdayandit’sagoodone。

Soletmeexplain。

Theglobaleconomywasalwaysgoingtoreboundatsomepoint。

Thisrecessionhasalreadybeenmassive,althoughitmaynotfeellikethattoanyonewhohasmanagedtoholdontotheirjob。

IntheUS,it’seasilybeentheworstsincetheGreatDepression。

ButeventheDepressionwasn’tabottomlesspit–youhadrecoveryandrelapseallthewaythroughthat。

However,wehaven’tfixedanyoftheproblemsthatledtothefinancialpile-upinthefirstplace。

Ourrouteoutoftroublehasbeenexactlythesameasit’salwaysbeen。

Pourmorecheapmoneyontheproblemandrewardthebanksforfailure。

Quantitativeeasing,ormoneyprinting,orwhateveryouwanttocallit,isjustaturbo-chargedversionofthe“Greenspanput”。

Let’sremindourselvesofwhythiscollapsehappenedinthefirstplace。

It’sreallynotcomplicated,thoughmanywouldhaveyouthinkitis。

Bankswereallowedtooperatewithimpunityinaconsequence-freeenvironment。

Ontheonehand,theyweren’teffectivelyregulated。

Thatwouldbefine,butforonething。

Therewasanimplicitpromisethattheycouldn’tfaileither。

AlanGreenspanhadalreadyamplydemonstratedthroughouthistimeasheadoftheFederalReservethathewoulddoanythinginhispowertobailoutWallStreet。

It’sexactlylikebeingtakentoacasino,givenanever-endingsupplyofchips,andbeingtoldthatyoucankeeptheprofitsandthehousewilltakecareofthelosses。

Theresultwasthatbankstookthebiggestbetstheycould,andwiththeaidofthecreditratingsagencies,madealotofmoneybysellingtheirclientshigh-riskproductsmasqueradingaslow-riskones。

Noneofthathaschanged。

BankreformisbecomingboggeddowninthemudofreportsandcommitteesonbothsidesoftheAtlanticandmeanwhile,thechampagneisflowingandtheguaranteedbonuses(anoxymoronifevertherewasone)areback。

Sowhat,youmightsay。

That’sthewaythesystemworks。

Bankspayplentyoftaxes,andweallbenefitfromthetrickle-downeffect,everyonefromcelebritychefstoPolishnannies。

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Thecurrentsystemdoesntwork

That’dbefine–ifitdidwork。

Ourproblemisthatitdoesn’twork。

Allcheapmoneydoesisblowupfreshbubbles,whichthenexplodeandcauseterribledamage。

Thetechbubblewasbad,andthepropertybubblewasfar,farworse。

Remember,atonepointlastyearpeopleweregenuinelyafraidthatcash-pointswouldstoppayingoutandwe’dhaveriotsinthestreets。

Ifwedon’tdealwiththis–anditlookslikewe’renotgoingto–thenit’llhappenagain。

Onlythistime,oureconomiesareevenmorefragilethantheywerethen。

Ifbanksaretooimportanttobeallowedtofail,thenwehavetosplitoutthefunctionthatmakesthemtooimportanttofail–theretailbankingfunction,basically–andregulateittowithinaninchofitslife,liketheutilitycompanies。

Andthisisn’tjustaboutthebanks。

Ifcentralbanksaregoingtopersistwiththenotionthattheycansomehowcontroltheeconomy,thenthey’regoingtohavetostartpayingattentiontoassetbubblestoo,ratherthanwashingtheirhandsofallresponsibilityforthemastheGreenspanFeddid。

Butit’sunlikelythatanyofthiswillhappennow。

Asthe‘recovery’continues,anyimpetusforreformwillvanish。

Andpoliticianswillbetooscaredofwithdrawingsupportfromthefinancialsectorincaseitupsetstheapplecartandruinstheirchancesofgettingvotedbackin。

Sowe’llstickwiththecurrentsystemuntilitblowsupinourfacesagain。

Risingcommoditypricesarebadnewsfortheeconomy

Alreadywe’reseeinga“recovery”bubblebuilding。

Isaidyesterdaythatthecurrentmarketsfeltuncomfortablylikeearly2007,wheneverythingwasrisingandnoonecouldfindanyreasonforittostop。

Intoday’sFinancialTimes,JohnAutherscomparesittoadifferenttimeperiod–lastsummer。

“Therallyinriskyassetsispainfullyreminiscentofthebehaviourthatprecededlastyear’scrash。

Then,asnow,commodities,emergingmarketequitiesandhigh-yieldingcurrenciesvalidatedandsupportedeachotherhigher。



Meanwhile,thedollarhasbeentakingakickingasinvestorsabandon“safehaven”assets。

Infact,thegreenbackhas“nowgivenuphalfofitsgainssinceithitbottomlastJuly,justasthebubbleofcommoditiesandemergingmarketswasabouttoburst。

Then,asnow,theadvanceofrelativelyriskyassetshasbeenuniform,andundiscriminating。



Whateverthereasonbehindrisingcommodityprices–cheapmoney,“stimulus”packages,ordemandfromChinaandIndia–theyarebadnewsforafragileglobaleconomy。

Higherrawmaterialspriceshitprofitsandraisecostsforconsumersjustastheyneedthemoneymost。

Buttheyalsoputpressureoncentralbankstoraiseinterestratestocombatinflation。

Withcheapmoneythemainthingkeepingtheglobaleconomyafloatrightnow,anyhintoftighteningcouldbringtherallytoaveryrapidendindeed。

Ourrecommendedarticlefortoday

GetreadytobuyintoEurope

ThoseexpectingaV-shapedrecoveryaregoingtobedisappointed,saysMerrynSomersetWebb。

Butwhenmarketsfallback,onewidely-dismissedregion–Europelooksasthoughitcouldoffergoodvaluetosmartinvestors。

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