Because They’re
Worth It
WHEN THE PRICE of assets falls there is Hundreds of billions of dollars have been injected into the global sys-
normally an explanation and a fallout. tem to stave-off a downward spiralling of prices and liquidity.
The latest crisis engulfing financial However, as Avinash Persaud recently wrote in the Financial Times,
markets has been the subprime debacle “Can lower interest rates temper investor losses? Yes, if the problem is
precipitating a massive slump (and in caused by a temporary lack of liquidity; no if it is caused by a ‘de-rat-
some cases a complete secession) of ing’ of asset quality, as is occurring today.”
1
liquidity in the money markets, gyra- Indeed, the efforts of central banks to stave off recession in the
tions in stock valuations, the end of the aftermath of 9/11 and the Tech Bubble are, for many, the very seeds
carry trade business, the stalling of the that sprouted into the housing bubble and bad lending more gener-
asset backed commercial paper market, ally, thus helping to sustain global growth and the massive ‘Made in
and a flight to government paper – to China’ consumption boom that has followed. This, some say, has
name a few. served to stretch the natural economic cycle further than normal (and
Funds have been closed, bank lines also commodity prices).
reduced, and bad debt provisions set Current events have inevitably – and rightly – led to a re-appraisal
aside. New issue markets have dried-up of markets, not least the current bull run in the commodities sector.
in more esoteric products, and algorith- When markets burn money, no sector is immune from a fall-out in
mic trading models sidelined. Some prices, particularly those where many managers can liquidate posi-
hedge funds and private equity groups tions and book profits!
are no longer counterparty material. Whilst the prices of many commodities have fallen (e.g. oil, nickel)
Lenders and borrowers everywhere are others remain in strong territory. A number have even continued to
now undertaking a complete reassess- reach new cyclical highs. More confident analysts believe that com-
ment of their business relationships, modity prices (those that have fallen) are likely to rebound, under-
risk management systems and portfo- pinned by emerging market demand. This is all, of course, predicat-
lio holdings. ed on the current credit squeeze and asset valuation downgrades
Everyone it seems has been affected, being contained, leading to the avoidance of a developed world
directly or at least consequentially. recession (particularly in the US).
During the holiday season, beached
Blackberry users were put on an eco-
... beached Blackberry users were put
nomic Category 5 alert as heads of
on an economic Category 5 alert
desks and departments attempted to
keep up with events – perhaps waiting Many remain sanguine on commodity market prospects.
for any of their own skeletons to come Announcing its results in late August, BHP Billiton said that its discus-
out of the closet. sions with customers indicated that they do not expect the volatility
As banks and fund managers contin- in the US and European credit markets to have a material impact on
ue to sift through the wreckage of raw material demand. “In particular, our customers in China and
some of their less well thought-out India believe domestic supply and demand criteria are much more
investments and lending criteria, some important factors in their markets,” said BHP.
investors are already instructing At the same time, the cost of shipping – as exemplified in the Baltic
lawyers to act. Dry Index – reached a new all-time high as we went to press; an
The warning signs for the current situ- indicative belief of the real underlying truth that the commodities
ation have been around for some time. complex remains strong and that demand and global trade will
The problem: opaque risk dispersion, remain so in the medium-term.
heavily leveraged, and spread across
global markets. Dispersing risk is how World Growth Solid Amid Market Fears
the catastrophic failures of the past We are now in the fifth year of strong global economic expansion.
were meant to be prevented. Not sur- It remains intact, driven by solid activity in Asia, Latin America and
prisingly, worried central bankers have Europe. The IMF upgraded its world growth forecast in early August
responded in typical fashion. Perhaps, by 0.3 percentage points to 5.2%, saying stronger growth in big
more worryingly, they had no choice. emerging market countries (China, India and Russia) had brightened
6 SEPTEMBER 2007 COMMODITIES NOW
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