Evercore Pan Asset

In a way the price collapses in commodity markets was just what the world economy needed. China, India, Brazil, and other fast growing economies have been slamming on the monetary brakes all year to try to bring inflation back under control. Despite all their efforts metals, grains and oil have surged in price. Gold and silver have attracted huge speculative demand as investors and investment banks have sought a store of value to offset the inflation in paper currencies. The world was locked into a dangerous battle, with the most productive economies having to restrain their growth at the same time as the economies most damaged by the western credit crunch persevered with money printing and ultra low official interest rates to try to boost their growth. Rising inflation was good for neither.
 
The collapse now of commodity prices is understandable, on the assumption that the USA ends its quantitative easing programme in a few weeks time and does not embark on another. We have long commented on how US dollar creation has spread the money rapidly around the world, and how some of it has buoyed up commodity markets. The rapid decline of prices shows just how much speculative money there was riding in commodities, and how quickly traders these days have to move to cut their positions before they do too much damage.  The sudden plunge by around a third in the silver price shows how extreme these moves can become, and how easy it is for traders to lose a fortune by being on the wrong side of the sudden changes.
 
The problem with the price fall is that is also represents a fundamental reappraisal of just how much growth there is in the world economy over the next couple of years. One of the triggers was disappointing data about the current rates of growth of the US and European economies. We have been forecasting a fall off in the US rate of growth next year, when the full effects of the ending of tax breaks and the end of quantitative easing will be felt. We have been pessimistic about peripheral Euroland growth owing to the deficit crises, and are also concerned about core Europe’s growth rate now the European central Bank has started monetary tightening. We have not understood how people can be optimistic about western growth prospects when they also forecast a sharp slowdown in Asia, as the west needs to export to get itself out of its financial and trade problems. Countries with large debt and deficit problems are in for a long period of adjustment with slow growth. Their stock markets will look cheap by historic standards, but for good reasons.
 
On balance we think the commodity price falls are good news. They cut the inflationary threats and bring forward the day when China and the other emerging market economies can relax their tight monetary squeeze and return to policies which promote growth. We will use any exaggerated weakness to add selectively to equity and commodity investments.