Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?

Financial Crisis - Public DomainIt isn’t just the price of oil that is collapsing.  The last time commodity prices were this low was during the immediate aftermath of the last financial crisis.  The Bloomberg Commodity Index fell to 110.4571 on Monday – the lowest that it has been since April 2009.  Just like junk bonds, industrial commodities are a very reliable leading indicator.  In other words, prices for industrial commodities usually start to move in a particular direction before the overall economy does.  We witnessed this in the summer of 2008 when a crash in commodity prices preceded the financial crisis in the fall by a couple of months.  And right now, we are witnessing what may be another major collapse in commodity prices.  In recent weeks, the price of copper has declined substantially.  So has the price of iron ore.  So has the price of nickel.  So has the price of aluminum.  You get the idea.  So this isn’t just about oil.  This is a broad-based commodity decline, and if it continues it is really bad news for the U.S. economy.

Of course most Americans would much rather read news stories about Kim Kardashian, but what is happening to the prices of these industrial metals at the moment is actually far more important to their daily lives.  For example, when the price of iron ore goes down that is a strong indication that economic activity is slowing down.  And that is why it is so troubling that the price of iron ore has almost sunk to a five year low.  The following comes from an Australian news source

The price of iron ore has held below $US70 a tonne in overnight trade, leaving its five-year low within reach.

At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US69.40 a tonne, down 0.4 per cent from its previous close of $US69.70 a tonne and only 2 per cent above the five-year low of $US68 reached a fortnight ago.

This week’s dip back under $US70 a tonne has followed revised forecasts from JPMorgan that suggest the commodity will average just $US67 a tonne next year, about $US20 below the investment bank’s previous expectation.

Copper is probably an even better economic indicator than iron ore is.  Economists commonly refer to it as “Dr. Copper”, and there is a really good reason for that.  Looking back over history, the price of copper often makes a significant move in one direction or the other before the economy does.  And now that the price of copper just hit the lowest level that we have seen since the last financial crash, alarm bells are going off.  The following comes from an article by CNBC contributor Ron Insana

Copper prices are now below $3 a pound and there’s an expression that “the economy is topped with a copper roof.” More simply put, copper tends to top out in price, before it becomes obvious that, in this case, the global economy is about to weaken.

So is the global economy heading for rough waters?

Could 2015 be a very rough year economically?

According to Insana, the signs are all around us…

We already have evidence that the commodity crash has ominous portents for the rest of the world:

* Japan’s recession is deeper than previously thought.

* China’s demand for basic materials, amid a glut of uneconomic construction projects, appears to be plummeting.

* Russia’s ruble has collapsed and the country is on the brink, if not already in, a recession.

* India’s economic recovery is beginning to look shaky.

* Europe’s growth rate and inflation rate, for the next two years, were just revised downward by the European Central Bank, suggesting that Europe’s economic crisis is far from over. In fact, at least one former European leader with whom I recently spoke, believes the crisis in Europe may just be in its early stages.

* Brazil and other emerging market nations are struggling with a variety of issues, from recessions at home, to the rising value of the dollar, which is complicating how emerging markets conduct economic policies at home, given how closely their currencies are tied to the greenback.

In addition, the Baltic Dry Index is now at the lowest point that we have seen at this time of the year since 2008

Simply put, with collapsing commodity prices (iron ore for instance) and massive fleets of credit-driven mal-investment-based vessels, it should surprise no one that the shipping index just plunged back below 1000, now at its lowest for this time of year since 2008. Furthermore, the seasonal bounce always seen in Q3 was among the weakest ever.

What does all of this mean?

It is commonly said that those that do not learn from history are doomed to repeat it.

So many of the exact same patterns that we witnessed leading up to the financial crash of 2008 are happening again.

Unfortunately, very few people saw the last crash coming, and this next crash will take most Americans by surprise as well.

I have written more than 1,200 articles about the economy on my website since 2009, and right now our financial system is more primed for a crash than at any other time since I started The Economic Collapse Blog.

Hopefully we have at least a couple more months of relative stability, but without a doubt 2015 is shaping up to be the most “interesting” year that we have seen in the financial world in a very long time.

All of the signs are there.  But most people choose to believe that everything is going to be okay somehow.  When the next crash comes, those people are going to be absolutely blindsided by it.

When you see storm clouds on the horizon, the logical thing to do is to prepare.  And the number one thing that most people should be working on is an emergency fund.  So don’t be frittering your money away on frivolous things.  In the early stages of this next crisis, you are going to need money to pay the mortgage, to put food on the table and to take care of your family.

Just remember what happened back in 2008.  A lot of middle class families were living on the financial edge every month, and because they didn’t have any cushion to fall back on, millions of those families ended up losing their homes when their jobs disappeared.

You need to have an emergency fund that can cover at least six months of expenses.  You don’t want a job loss or a major emergency to put you into a situation where your family could be put out into the street.

And for those that still have lots of money invested in the stock market – I really hope that you know what you are doing.

The market giveth, and the market taketh away.

And when the market taketh away, the consequences can often be exceedingly cruel.

Disclosure: None.

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Ferdinand E. Banks 9 years ago Contributor's comment

My first book was on copper, and perhaps my next on bauxite/aluminum. Perhaps because as compared with oil those items are a side issue. I began doing a Little econometrics with the oil market in the late 1990s, and I dont Think that there was one occasion when I looked at Another resource again, because I knew what was going to happen. It started happening about late 2006 or early 2007, and while I was lecturing at the Ecole Normale Superieure (Paris) the oil price was going into orbit,

That could happen again if the US shale market has lost its steam, which some people say has happened. And by the way, just as I call myself the leading academic energy Economist in the World, James Hamilton is the leading oil Economist in the U.S., and if you look at his work (and perhaps mine) you will see that if the oil price goes into orbit again - which it might - then somebody is in serious trouble, and that somebody might be you.

BreakingBad News 9 years ago Member's comment

Enjoyed reading both the article and the comments, thanks.

Gyan Mitra 9 years ago Member's comment

M. TROMBLY offered great insight " Everything is cyclic, unless of course the "cycle" is broken by doing business a different way, say with a goal other than personal profit;" Some new possibilities have emerged from INDIA, with inputs from many nations. The Human being has needs and sometimes greed too. The present money model makes basic needs rare notably water, food, health and energy. Ordinary people today struggle to pay bills for these four realms. The modern money model of the U.S.A. consists of printing currency notes which have the confidence but not inherent value. It is the same in INDIA where it is called 'Deficit Financing' When the government has to pay someone, and there usually is a shortfall in collections, currency notes are simply printed. Citizens have become like rats in a wheel, running to create material comforts for the wealthy, with little time for recreation and to nurture their own families. Urban centres suck water, food, fuel and material resources to produce a lot of waste and pollute the air, water and soil, undermining their very existence. Speaking about India, because I understand it better, we have two types of economic systems. They are popularly called WHITE and BLACK, legal and illegal. The G.D.P. model here is driven by construction of houses and infrastructure and value driven by demand. Interest rates are relatively high and a non resident Indian can get a return of 10.5% annually for a fixed deposit in a bank. The G.D.P. model which is also based on debt is a balancing act to keep inflation slightly ahead always else high interest rates are impossible. After all, its the same money which is recycled by banks. The two world wars WW I & WW II which we know of coincided with recession. Wars destroy property and then rebuilding stimulates growth all over again. Do we have a third option? I believe so, and its called ' Have your cake and eat it too " Introducing the GREEN MONEY model can ensure that the basic needs for safe water, healing nutritious non toxic food, wellness and some reasonable decentralised energy is available to poor and ordinary people. Let me share a fact about satiation. The human being is never satisfied, wants more. But when he is fed at a wedding feast, a time comes when he says ENOUGH. Of course, the Romans were exceptions to this rule and there are good reasons, which need not be discussed here. The laws of Ecology and Economy are actually the very same. Only agriculture produces real wealth because only the PROSPERITY reaction of Nature transforms pollution into resources such as Food, Fuel and Fibre. Now imagine what can happen if this reaction of transformation is sped up like a LASER. This is a game changer for the whole world. The Toxic Chemical Paradigm is challenging this beleaguered world and only a shift to the Nature Paradigm can put this world we have forced to stand on its head, the right way. Change is inevitable and the choice before us is simple. Does it have to be painful and disruptive or seamless and painless? Make friends with my mother, also your mother, her name is Mother Nature.

Frank J. Williams 9 years ago Member's comment

Great article, I've become quite a fan of your work here.

Cliff Claven 9 years ago Member's comment

The drop in oil price is good not bad – for the USA. The great recession was associated with and exacerbated by a spike in energy prices. That is the opposite of what we have now. Every fiscal economy is built upon an underpinning energy economy. Cheaper energy invigorates an economy by freeing up consumer and industry cash for discretionary spending and investment. Because only the US is fracking, and because of our private land and mineral rights ownership and still somewhat free market economy, and because we do not depend on energy exports to sustain our economy, we are now blessed with a localized energy price trough compared to the rest of the world, and are suddenly a resurgent economic superpower. Meanwhile, the petro states (Russia, Venezuela, KSA, Kuwait, Iran, Iraq, Qatar, Nigeria, etc), are watching their cash cow die and facing the possible collapse of their fragile political rentier economies. And Europe and Asia, including China, linger in recession and stagnation, unable to drive the price up by increasing consumption. The value of each nation’s fiat currency is ultimately also linked to its genuine net contribution to the world’s economy, and as a net generator of energy and finished fuels and consumer products, the US dollar is also increasing in value with respect to other nation’s currencies. This good fortune is purely a product of private ingenuity and investment, and is happening despite the Obama administration doing everything possible to drive up the debt and encourage unemployment and destroy America's credibility abroad and slow the economic recovery. Cheer and applaud the fall of the price of oil. It is good for your wallets and good for America.

Erick E. 9 years ago Member's comment

What a fine parrot, dutifully repeating idiotic teabilly talking points. A Zesta for our friend Cliff!

John Fitch 9 years ago Member's comment

Yes it is often said that those that do not learn from history are doomed to repeat it, but sometimes time is better spent looking forward than toward the past. So goes the story of the ancient civilization that was wiped out by a flood. The survivors then rebuilt the civilization, this time with parameters in place to safeguard against a flood. Only this time they were wiped out by a tornado, and so on. If you spend too much time looking for patterns of the past, you might be ill prepared for what's coming your way in the present.

Mike Nolan 9 years ago Member's comment

John, I didn't know you were so philosophical!

M. Trombly 9 years ago Member's comment

Hmmm...sounds like you are advocating learning from history but not wanting to admit it.... js. Everything is cyclic, unless of course the "cycle" is broken by doing business a different way, say with a goal other than personal profit; but Greed and Competition don't allow for that, and until those two components are erased from economic practice, current cycles, the cycles of history, will continue and will be predictable of the future... except THIS time WILL be different. This time all the gauges will be reset to "zero",... what does that tell you about the "pattern" now in play? What happens when the value / worth of everything hits zero...? What patterns of history come into play then,... 1930's prior to WWII??? Except WWII already took place.... what could possibly be next in line? Hmmm...