{"id":47418,"date":"2009-11-23T17:34:00","date_gmt":"2009-11-23T22:34:00","guid":{"rendered":"http:\/\/www.businessinsider.com\/citi-heres-the-nightmare-scenario-for-commodity-bulls-2009-11"},"modified":"2009-11-23T17:34:00","modified_gmt":"2009-11-23T22:34:00","slug":"citi-the-commodity-collapse-could-be-subprime-part-ii","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/47418","title":{"rendered":"Citi: The Commodity Collapse Could Be “Subprime Part II”"},"content":{"rendered":"

In the bank’s latest edition of its Monday Mining Minutes, Citi lays out a scenario which it calls the “Nightmare on Commodity Street.” (via FT Energy Source<\/a>)<\/p>\n

So here’s the nightmare scenario, which we hope will not happen:
Thousands of very smart speculators have accumulated the biggest ever
speculative physical raw material positions ever witnessed in the belief that
either the dollar will collapse or an ongoing global ‘Supercycle’ will shake off
the effects of the credit crunch and resume business as usual. They are
funded in this venture by some of the lowest interest rates on record. What are
the threats to their thesis?. They are as follows :<\/p>\n

1. Governments, having pumped huge amounts of money into the global
system, find they are running our of fire-power even while economies are
still at the incubation-stage of recovery (i.e. the kind of stage we saw
displayed last week in the poor USA housing starts data). Some
governments find that suddenly their bonds are considered to be ‘toxic’
and a far higher interest rate is demanded for ongoing participation.<\/p>\n

2. The global economy not only experiences a slower upturn than the
consensus view, but after the recent inventory-restocking phase is over, it
relapses into a W-shaped recession. More jobs are lost and people who
have been unemployed but still able to keep up their mortgage payments
(because of near-zero interest rates) are suddenly defaulting. Banks finally
have to write down the value of these assets and housing markets around
the world are flooded with new inventory. New-build is out of the question.
Orders for new fridges, washing machines, stoves, taps and other items
that metals so depend on for demand, simply freeze.<\/p>\n

3. The global commercial property market finally grinds to a halt. High-rise
buildings that began to be built 18 months ago, before the credit crisis, are
finally completed. Their last copper wiring and plumbing has been
installed (always the last phase), their aluminium windows all in place. Few
new high-rise buildings are started, awaiting the glut of space to be used
up<\/p>\n

4. China. A real conundrum. This is either a really vibrant economy that will
keep going from strength to strength or it is an economy in which over-
investment was constantly rewarded because underlying demand was
always growing at a pace that subsequently justified that investment. There
has been substantial over-investment in recent times and the question now
is whether domestic demand and export demand will step up to the plate
to belatedly justify that over-investment. Demand has done this with
monotonous regularity in the past 10 years. The question is whether the
global credit crisis has changed that demand profile forever such that
over-investment results in ongoing medium-term overcapacity and sends a
shock wave that freezes new investment. We will have to wait patiently to
see if this threat comes to the fore.<\/p>\n

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If these threats come to pass, we will truly have a ‘Nightmare on Commodity
Street’. The commodity space could resemble ‘Sub-Prime II’ and would
demonstrate that investors never learned anything from the shock waves that
descended on global investment in 2H 08. This is not a new feature of human
nature. There’s a simple principle that operates at times like this: investors
experience a huge bull market that takes asset classes from a value of 100 to
say 300. A crash comes and investors find those assets trading at 150 and
simply by virtue of the 50% fall, the assets are deemed to be cheap. Investors
pile in and the inevitable funds-flow-fuelled price rise to 230 justifies the
optimism, even while the fundamentals are not playing ball and supporting that
230 level.  <\/p>\n

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