Wednesday, June 3, 2009

An Economic Mirage

The recent uptick in commodities really beguiles me.

There is a severe paucity of economic fundamentals to support a recovery. Indeed, the recent momentum of the stock market and data across the board that show a deceleration of the rate of decline have acted in concert to push the U.S. dollar down and commodities, such as gold and oil, up to six-month highs. Quite simply, when investors start to feel that the worst is over, they become less risk averse, resulting in a drop in demand of the U.S. dollar, which is considered low-yielding and, thus, an anti risk taker's sweet tooth. And since most commodities are priced in dollars, their price rises when the dollar is weak to make up for the "artificial" shortfall in value that has occurred (and vice-versa).

Yet this is precisely that: a deceleration in the rate of decline (coupled with a modest rise in consumer sentiment).

Indeed, economies the world over are still declining sharply--from powerhouses such as the U.S. and Japan to smaller countries that have been hit by the credit crunch, notably Iceland and Latvia. Even erstwhile tiger economies, such as those of Ireland and Spain, which have relied on a bullish housing market, are still wobbly, to put it lightly.

It is thus why I can't fathom that such a recovery is long-lasting, much less real. It is, perhaps, a mirage that the fundamentals do not support. Yes, a recovery will be under way eventually--and, yes, Asia is likely to be the first region to emerge from this protracted recession--yet this is not a real recovery by any means of the word. Perhaps just a sign that that this is the beginning of the end--yet things are still very, very bad.

Therefore, I wouldn't be surprised to see another correction (read: drop) in the price of commodities in the very near future, as it seems that investors and speculators have again got ahead of themselves. In the meanwhile, such a rapid rise in the oil price to nearly $70 per barrel--up more than 100% since its $32 per barrel low just as recently as February--suggests quite the opposite: that the recession may be prolonged as a result.

Indeed, when consumers are so strapped for both cash and (particularly) credit, it is hard to believe that rising prices, first and foremost at the pump, will spur them to make more purchases and, hence, pull the world economy out of the gutters.

It is much more likely to have the opposite effect.

1 comment:

Akshay said...

The economic recession just revealed our vulnerability. The economic recession literally brought us to our knees. It put a band aid on one of the most vexing problems in health care. I agree that economic recession came as a real shock.

A large number of countries are reeling under the recession. As this considered as the worst recession after the Great Depression of the 1930s, the unemployment rate increased swiftly. I agree with your views.

I don't think you need my opinion since you're doing fine but yes, a small suggestion would be that please it make it a little more personal.