PARIS () -- Is it really time to be getting out of commodities? The general wisdom coming from the mass media says it is. We have seen a definite twitch in the long-term trend of the bond markets and this has prompted all kinds of fluctuations across equity markets, leading to fears of a recession. This in turn will damage the price of oil and gas, energy in general, and send it lower goes the thought process.
The trend in the bond market does at first sight appear to be a real one. The long-term trend in bonds has been up for so long that the fiscal community appear to have forgotten the possibility that yields can rise and prices can get stuffed. Instead bonds are now issuing a signal that is quite clear, inflation is going to stay relatively high, maybe making 7%.
The general rule is that in an inflationary period the heights are reached quickly, pain is inflicted, demand falls and the price of energy - amongst others - falls like a stone through air. But is this time going to be different?
This is what Don Coxe from the Bank of Montreal is saying about the bond market. He compares it to the somewhat pre-digital Tower of Babel model.
"Each decade seems to produce its own form of collective financial hubris that leads to a meltdown. In the 70s it was Third World bank loans; in the 80s it was portfolio insurance; in the 90s it was Collateralized Mortgage Obligations and Long-Term Capital Management. In this decade it is collateralized debt products that seek to make Risk disappear from cash markets into a tower inhabited by investment banks and hedge funds in which the shared language is algorithms. Like all past Babels, this one will, at some point, self-destruct."
This columnist shares the view that something is up. Coxe is saying, like many others, that 200 basis points, or 2%, could be added to the inflation rate. But the energy complex may be more resistant than the average householder.
For a start the U.S. genuinely is addicted to oil and gas, it has to have it. The weakened dollar means more and more American people are staying in their own country using the resources that abound there. This includes all forms of energy.
Secondly the price of energy is still relatively cheap. We have never reached that mystical $100 barrel so predicted by Arjun Murti at Goldman Sachs in his 'superspike' report. This means in the major markets people are using it like there is no tomorrow. Thirdly unemployment is remaining stubbornly low, albeit around eight to ten per cent, even in the doctored figures of the U.S. and U.K.
But one of the main factors in maintaining high energy prices is the fact that high costs are already delaying new production coming onstream. There is a choking point in the energy complex that may be further exacerbated by any fear of a recession. A combination of high current costs, delayed projects and fear of investment due to uncertainty will only bolster prices. All of this is backed up by the fact that the cheap and easy to access oil and gas has gone.
In order to avoid the double disaster of a recession coupled with high energy prices - something genuinely too painful to think about - central banks may be forced to do what the current economic wisdom tells them to do, cut interest rates, fuelling another debt laden mess. If that occurs we will embark on another shorter, repeat lurch between dreams and disaster.
