Sunday, March 23, 2008

Sound of the Next Bubble Bursting?


Friday’s New York Times and Wall Street Journal carried stories of last week’s commodity-price retreat.

The Times article (, “Oil and Gold Prices Continue to Slide,” began with the paragraph:

“Oil, gold and other major commodities fell sharply on Thursday, capping their steepest weekly drop in a half-century, as investors fled what many had believed to be the last safe haven in turbulent markets.”

The story also said:

“Seeking to make sense of the sharp declines, some analysts on Thursday saw a bubble bursting….In their view, investors are growing increasingly worried that a recession will cause a worldwide drop-off in demand for raw materials.

“But other analysts said growth in China, India and developing economies would likely keep prices elevated for energy, metals and food…..”

The Wall Street Journal’s (, “Red-Hot Commodities Cool As Investors Scurry for Cash,” reported:

“Analysts point out that some regular consumers of commodities -- jewelry buyers, food companies and factory owners -- have slowed their purchases on the belief that prices have risen too fast. Copper buyers in China, for example, have backed away from purchasing the metal and are waiting for cheaper prices, Mr. O'Neill says.

“Others see more price rises ahead. "This is a strong cyclical pullback" amid "a structural rally driven by the rising costs of adding new production capacity," says David Greely, senior energy economist at Goldman Sachs. He agrees that some investors have exited commodity trades to raise cash for other areas.”

There’s obviously disagreement between those analysts who see a bubble bursting and those who merely see price volatility in a week of general market turmoil. The former say the boom is over. The latter say this is merely a pause in a continuing upward spiral.

What if the pessimists are correct? The real-estate bubble burst and the stock market has fallen. Is this the latest pop in a series of bursting bubbles? Is this one more sign of impending worldwide recession?

The commodity-price inflation derived from the global boom. All those manufactures required iron ore, coal, copper, petroleum and a host of other inputs for their production. Now that the world economy is beginning to cool, a bursting of the commodity bubble should not surprise us.

Residential real estate and the stock market paved the way. If commodities begin to sag, it could be the latest sign of impending global gloom.

Stay tuned.

© 2008 Michael B. Lehmann

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