A steadily growing drumbeat is sounding throughout financial mediadom; a major commodities blowout is in the cards. The most widely quoted reason is a U.S. recession that will sympathetically pop the commodity bubble.
It seems to me that these views are intertwined with a changed perception of how the economy works. A new paradigm if you will.
People used to pay homage to the notion of a business cycle, a somewhat predictable and even stately progression of economic growth leading to excess, followed by a corrective recession. After which the cycle would begin anew.
In today’s bold new world, however, most investment observers overlay onto the business cycle a shifting series of rapidly rising – and falling -- sector-focused bubbles.
Because of their noticeable size and influence, it seems to me that the bubbles can mask the underlying business cycle to some extent. Case in point, we all easily recall the dot.com bubble but have a harder time recalling what the prevailing economic times were in the late 1990s. What came after the dot.com bust? Why, the housing bubble, of course.
Of course, bubbles have always occurred. But they appeared only periodically, every generation or so. Prior to the dot.com bubble that heralded in this new era, economic activity was more broadly distributed. When times were good, the sectors that normally benefited, all benefited in something of a range.
Today, however, while most remain somewhat range bound, a single sector appears, Godzilla-like, to cast a shadow over the broader financial landscape. It is that sector that then receives the lion’s share of the focus and the investment flows, quickly becoming a self-fulfilling prophecy.
Of late it has been the turn of the commodities to stalk the land. And, if you believe the pundits, it is time for the monster to be brought low. If not by Mr. Market alone, then with the help of the regulators with all their many WMDs (Weapons of Market Disruption).
Before commenting on whether or not I believe they may succeed, a brief observation on the origin of this new bubble era.
In my view, it is largely due to the massive amount of money in various forms sloshing around the globe, most of which emanates from the Quicky Print Fiat Money Machines which have been reliably chugging away at central banks around the globe for decades now.
One of the primary outcomes of this odd chapter in monetary history is that the notion of the value of money has been pretty much thrown out of the window... though not one person in a thousand understands that the game has changed.
For example, the Chinese are correct in thinking their reserves include 1.4 trillion foreign currency units, but that fact is increasingly disconnected from any reliable measure of future value.
Underscoring the point, 1 trillion U.S.
