Oil at $70 a barrel. Gold topping $700. Copper through the roof. Where will it end? Morgan Stanley's Stephen Roach takes a look at the commodities boom today, and flat out calls it a bubble. As evidence, he points out that in comparison to the last four periods of strong global growth, commodity prices have disproportionately skyrocketed.
Roach isn't alone in wondering whether the laws of supply and demand have gotten out of whack in commodities. But his most interesting point is rhetorical. Drawing on Robert Shiller's "Irrational Exuberance," he notes that bubbles are usually accompanied by a "new story": a compelling explanation of why current trends are likely to continue ... so get in now and buy! In this case, the "new story" that has commodity investors and traders all excited is China. China is gobbling up all the cement, oil, steel, copper and chromium the world has to offer -- and shows no signs of slowing down. So all over the world, traders are betting that commodity prices will continue to go up.
Roach demurs. China's new five-year plan, he says, indicates that China's leaders are intent on "rebalancing" the economy, and moving toward lower growth. Betting that China's next 27 years will be like the last 27 is a loser's proposition. And higher prices for commodities will also, all by themselves, result in lowered demand -- something that already appears to be happening in oil markets.
Roach's analyses veer toward the dour (although he did shock his regular readers recently by declaring that the global economy wasn't due for a horrible implosion). He appears to enjoy the contrarian path -- and predicting that China's impact on global commodity prices will not persist is a pretty sharp detour from conventional wisdom. Given how much pent-up demand for the "good life" there still is in China (and let's not forget India), it still seems possible that we are witnessing a fundamental event in global history -- the reemergence of two great civilizations, India and China, as major global economic powers.
But his point about looking askance at "new stories" is well taken, especially here at How the World Works, where we love new narratives that appear to wrap up contemporary reality in nice, neat packages. Oil prices are spiking? It must be peak oil! New Orleans gets stomped by a hurricane? Gotta be global warming. It's very, very tempting to view every zig and zag as part of the big picture, when, honesty compels us to admit, a lot of it is probably just noise.