World Bank warns of ‘extremely rare’ decline in all 9 commodity sectors this year
Here’s the summary of the World Bank’s Outlook:In oil markets, a “perfect storm” of conditions has led to a plunge in prices since mid-2014: growth in unconventional oil production, decline in demand, appreciation of the U.S. dollar, receding geopolitical risks, and a major redirection toward maintaining market share rather than targeting prices by the world’s oil cartel, Organization of the Petroleum Exporting Countries (OPEC). Oil prices have dropped 55 percent in seven months, from the most recent high of $108 per barrel in mid-June 2014 to $47 two days ago. Should the current slide continue, it could surpass the previous records of a 7-month decline of 67 percent, set in 1985/86, and a 75 percent drop in 2008.
In addition, the World Bank’s three industrial commodity price indices – energy, metals and minerals, and agricultural raw materials – experienced near identical declines between early 2011 and the end of 2014, of more than 35 percent each, and will continue to contract this year. Prices of precious metals are also expected to decline by 3 percent in 2015, on top of the 12 percent decline seen in 2014. Again, ample supplies, weak demand, and a strengthening U.S. dollar have weighed on prices of these commodities as well.
Food commodity prices, which have declined by 20 percent since 2011, are projected to drop by a further 4 percent in 2015, given that current good crop prospects for grains, edible oils and meals, and beverages (led by coffee) in the 2014/15 season.
John P. Hussman, Ph.D.
It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we're seeing an abundance of what we call "leveraged mismatches" - a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch..DYI Comments: The U.S. market measured in price to dividends is now 126% greater than its average price to dividend ratio going back to 1871. The market would have to drop 63% to simply go back to its average price to dividend ratio of 23 or dividend yield of 4.41%. This market has "lost it's mind" due to Central Banks massive QE programs. First it was the Bank of England, then the U.S. Federal Reserve; the very day QE ended the Bank of Japan took over and now the European Central Bank begins. Normalization of asset prices will occur the easy way or the hard way and it has become self evident that it will be the hard road with a deflationary smash of asset prices. A soft landing is out of the question. King copper has been sliding in price since the 1st quarter of 2011.
This signifies the slowing of the world economy and eventually the U.S. as well. The probability of world wide recession is increasing by the day.
DYI's model portfolio still stands with a modest investment in precious metals mining companies and the remainder in short term bonds. All other asset categories (except oil/gas/service companies) have been "jacked up" due to the Fed's sub atomic low interest rates and QE.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/15
DYI
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