What’s hot and what’s not
The gulf between the make-believe world of stock markets and the real world where real people live and work has never been clearer than over this last week. On the one hand, a Chinese internet retailer succeeded in becoming the largest IPO (initial public offering) in the history of Wall Street. On the other hand, the prices of many basic commodities continued to fall — they have been going down for months, in some cases for years, and recently their rate of decline has increased.
What is one to make of these coincident, but fundamentally contradictory developments?
The Alibaba IPO requires few words. Even by the standards of the dot.com mania of 1999/2000, this is an epic rip-off and will be remembered as such. Not only is the company valued at astronomic levels, but that valuation rests ultimately on data from China, whose accuracy and validity must be taken with the proverbial pinch of salt. To make matters far worse, the buyers of the Alibaba flotation are not getting shares in the actual operating company, but in a holding company. Every serious analyst has, at the least, raised serious doubts about why this company should be worth more than Amazon and e-Bay combined — and many have raised more existential issues about its past profits and revenues and, especially, its future outlook.
Yet millions of investor sheep fought for the honor of being sheared at prices up to fifty percent above the flotation price, even as insiders (such as Yahoo) were able to unload their holdings from the very first day of trading — an almost unheard-of procedure on Wall Street and certainly one to instill concern, if not outright fear, into any but the most deluded buyer.
Meanwhile, back in the real world, the price of wheat, corn, soybeans — key foodstuffs for humans and animals alike — continued to sink, so that all of them are now available at prices dozens of percent lower than their most recent peaks of a few months ago, when the threat of poor US harvests sent them soaring briefly. Base metal prices, which have no weather-related issues to contend with, are also locked into downtrends stretching back, in most cases, to 2011.
The same can be said for gold and silver, which dance to a different tune than do base metals, and are supposed to be in great demand in China, India and elsewhere — but you wouldn’t know that from their prices.
Yet perhaps most surprising of all is the state of the most important commodity — oil. Despite the upheavals in producing countries (Libya, Iraq), despite the tension with Russia and troubles in almost every major oil producer, prices have fallen through the summer. Brent crude, which is the European benchmark, is now comfortably below $100 a barrel and only six dollars or so more expensive than West Texas Intermediate, the US benchmark crude — compared to ten and twelve dollar premiums earlier in the year.
Every commodity has its own story and its own peculiarities, but when almost all of them move in tandem, it becomes obvious that they are all responding to some more general force — and one of exceptional power. This force is none other than the global deflation discussed here last week, with the persistent weakness of commodity prices providing one of the most telling pieces of evidence proving that deflation is not a vague or distant threat, but a reality already present and growing in strength.
Perhaps even stronger proof comes from the money and bond markets, where the cost of money is at or near zero and the yield on bonds is at unprecedentedly low levels. What does it mean if money is available at virtually no cost but prices of basic items keep falling? Why is no-one aggressively buying oil, silver, wheat or sugar and why does no-one seem to want to borrow money?
Perhaps — probably — because there is no underlying demand growth. If you read the quarterly reports of Walmart, you know that Main Street America has no money, even for basics. If you read even the official Chinese data, let alone what is really happening there, you know that the emerging Chinese middle class, on which the entire Alibaba myth rests, is in deep trouble as the rate of growth falls and prospects worsen.
There are borrowers for money, but these are, firstly, big corporations which use it not for investment in new factories and jobs, but to buy their own shares and thereby enrich their senior management and directors, and secondly big financial institutions which use the money to engage in financial speculation. That’s in the private sector; the public sector, of course, continues to borrow just to keep itself going and meet its obligations to citizens.
You could argue that all of this was the case last year too, so what’s news. Whilst that’s true the unfortunate fact remains that there has been a serious further deterioration almost everywhere. The difference between now and a year or two ago is about the same as the difference between Alibaba and Facebook.