In April we discussed the IMF report that showed many commodities and world economies in a boom phase, and said that a correction is overdue. It would appear that the correction has arrived. Metals, agricultural products, and oil and natural gas have turned sharply downwards in recent times from their heady days of just a few months ago, as illustrated on the chart above. Of greatest interest, perhaps, is that the duration of the boom part of the cycle was 2-4x longer than usual this time around; that means it is possible, maybe even likely, that the deflationary part of this cycle could get very protracted and nasty indeed. (For example, who would have thought, a year ago, that the US Government would be bailing out its GSEs Fannie Mae and Freddie Mac a mere 12 months later?)

We have speculated that growth in the boomingest of boom countries, such as China, could be particularly hard hit. China’s stock market, which is more likely to see Shanghai 2000 than the Shanghai 6000 of just a few months ago, isn’t telling us anything different. It is in this downward part of the cycle that the chickens come home to roost — the nepotism and corruption, the cooked books and bad loans that were ignored by everyone during a period of hyper-growth suddenly seem to matter a lot more. We find the counter-theories to show the BRICs as exceptions in a slowdown — high infrastructure spending and trade among developing countries — unpersuasive. We could be wrong of course, since prediction can be a fool’s game and no one really knows what will happen. We were a couple of months early in calling a top in the oil market after all; perhaps we’re early in this case. But it’s hard to deny that there are signs that this century’s version of the roaring twenties is in big trouble.

This entry was posted on Sunday, September 7th, 2008 at 12:34 am and is filed under China, Democrats, General, Republicans, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.