Rudi's View | Jun 12 2008
This story was originally published three days ago in the form of an email to paying subscribers.
By Rudi Filapek-Vandyck, editor FNArena
I have a story to tell. A story that is likely to broaden your view but also to challenge your beliefs and convictions. It is for this reason that I have to assume not everybody will like my story.
I think it is best to be upfront about this: if you are a true believer in the concept of a Commodities Super Cycle and you do not wish your personal belief to be shaken, stirred or in any manner weakened by the insights I am about to offer, please stop reading now. Knowledge can enlighten, but it can also poison your spirit; once you’ve digested it, there’s no way back.
It still is not too late to reconsider your decision.
I guess you are ready to continue.
Allow me to take you back to Germany in the 1930s. I am not doing this to create a shock effect, nor am I seeking to alienate you. There is a purpose that will become clear as this story unfolds. Please bear with me.
Contrary to popular belief, the German electorate never voted Adolf Hitler in power. However, once he did find his way into government, there was no stopping the inner nature of the beast. Hitler cannily used the system to obtain full control over it. By doing so, he changed the course of millions of lives and of the future.
Political elections in Anglo countries are designed to come up with a ruling government. The German system focuses on representing the outcome of the population’s vote: if you only manage to obtain 40% of all votes, why would you be entitled to a larger representation in parliament?
At the time, Germany was socially in complete disarray and elections simply divided parliament into a multitude of political forces who could not find sufficient common ground to establish solid government. Political establishment decided to invite Hitler into the task, with the aim of seeing him fall on his own sword. Instead, Hitler solidified his grip over the system. The rest, as they say, is now history.
There is one clear parallel in all this with developments in commodities markets that has remained completely absent in public discussions thus far. From Sky Business to CNBC, from newspapers to stockbroker research reports, from blogs to financial websites: the hot discussion these days is whether market fundamentals or hyped-up investors and speculators are responsible for significant price spikes for agricultural products and oil.
What if the answer is: both play a vital role?
Market fundamentals do not double the price of assets within a year. You need investors taking control over the process to achieve that. But those investors need a system and market fundamentals that allow them the opportunity to take control. Once in control, however, there’s no predicting how high the price of an asset can reach as investor greed and confidence will become the driving forces.
Similar to the experience in the 1930s, this inner beast will not be able to contain itself. Similar to what happened back then, billions of lives will be affected, the future irreversibly changed.
It is one thing when investors push up the price of copper or gold, it is a completely different matter when they do the same with rice, grains and oil. As one TV commentator put it the other day: about a billion people are living in absolute poverty today, this number could potentially double overnight.
The majority of these people live in countries that do not have much political clout in today’s global affairs. However, the combination of higher food prices and ever higher prices for oil, and oil products, will soon be threatening household budgets, and thus economic growth, in the larger developed economies as well as in the fast growing new global economic engines of Asia and the BRIC countries.
Changing market fundamentals have pushed crude oil to above US$100 per barrel, but investors are threatening to take it to US$150, and far, far beyond.
The past few years have generated plenty of examples of assets appreciating very quickly over a short time span. Often all it took was a slight change in market dynamics (or the perception thereof) to trigger price falls in the order of 40%, and more.
Of course, there is a genuine possibility that changes in market dynamics, caused by the excess in product pricing, or in investor confidence, will ultimately initiate a self-regulating process for crude oil as well. It is my best guess, however, that policy makers will come to the conclusion that a new Hitler has been allowed to use the system to his own benefit, with devastating consequences for billions of other people.
Already, law makers in the US are talking about an estimated premium of US$30-40 per barrel of oil priced in by greedy speculators; this was before an Israeli threat of attacking Iran sent crude oil to US$138 per barrel on Friday.
It seems but a logical assumption that action is forthcoming. The speed and the depth of those actions will be determined by how far and for how long financial investors will continue pushing up the price of crude oil. Considering the inner nature of the beast, I’d say anything is possible, anything but self-regulation. Unless, of course, investor confidence is shaken, or market dynamics are perceived to be changing.
