Wednesday, April 17, 2013

Stock Market/Economy: Couldn´t Be Better

Today the stock market closed in the red and the media lamented about the slow growth in the U.S. and China. But, being an investor, I am not worried. I believe, the situation couldn´t be better.

1. The price of oil and other commodities is under pressure. It seems that the sluggish growth of the economy and the pessimistic headlines in the media are keeping the commodity speculation at bay.

For years Goldman Sachs and other banks have been drumming the "buy commodities" drum. Many private speculators and funds followed and have been betting on higher commodity prices. Thus they  massively purchased derivatives on the financial markets which are linked to commodity prices. Those purchases worked as a self-fulfilling prophecy: The billions of dollars which flooded into commodities caused high prices for oil and other materials, slowing growth for the global economy since the year 2000. 

If we had much stronger global economic growth then the extensive speculative purchases of commodities would continue and would drive the commodity prices even higher endangering the global economy. It seems now that the weakness of commodities which causes severe losses for owners of commodity derivatives demoralizes commodity speculation. This should lead to lower, or at least stable prices for oil and other materials which would be a huge relief for companies & consumers.

2. Interest rates stay very low as a result of the general economic pessimism. If we had much stronger global economic growth then interest rates would inevitably climb which could hurt company profits.

There is a high chance that a period of tame commodity prices and moderate interest rates has already begun. The economic situation could be comparable to the early 80s when tame commodities and interest rates gave way to a period of economic prosperity and rising stock prices which lasted almost 20 years. 

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