That
is a big price surge indeed, and the date Grantham picks for the
shift just happens to be a year after an event other commentators
have already cited as a watershed for commodities: 2001 was when
China, with its massive appetite for food and metals and other
higher-living-standards stuff, joined the World Trade Organization
(see chart).
Grantham
notes that this is no coincidence. China, he points out, accounts
for more than half the world's consumption of cement, and nearly
half its use of iron, coal, lead, zinc, aluminum and, oink oink,
pigs.
That
voracious demand relentlessly pushes up prices – and Grantham
emphasizes that supply and demand, rather than evil speculators or
feckless central bankers, are the driving forces here, whatever
posture our president might choose to take.
The
Monetary Maniacs may ascribe the entire move to low interest rates.
Now, even I know that low rates can have a large effect, at least
when combined with moral hazard, on the movement of stocks, but in
the short term, there is no real world check on stock prices and
they can be, often are, psychologically flakey. But commodities are
made and bought by serious professionals for whom today's price is
life and death. Realistic supply and demand really is the main
influence.
That
is mostly bad news for American families, which as I may have
mentioned once or twice have seen their wages fall some 5% since
2000. This means the less money to pay an ever-rising food and gas
bill.
Or,
at least mostly rising. Markets that have gone parabolic, as the
ones for many commodities have, are apt to, um, consolidate every
once in a while at lower levels. Grantham ventures that the
commodity markets' surging prices – and these markets' dependence
on Chinese demand – are likely set us up for a huge price plunge at
some time over the next year when if the weather turns less
Armageddonish in 2011 or if Chinese growth starts to flag.
If
China stumbles or if the weather is better than expected, a
probability I would put at, say, 80%, then commodity prices will
decline a lot. But if both events occur together, it will very
probably break the commodity markets en masse. Not unlike the
financial collapse.
So
those who are now betting the ranch in commodity futures markets
are likely to lose their shirts. Big surprise there.
But
afterward prices will resume their upward march, assuming we aren't
all eating bugs by then, and we will all resume complaining about
high gas prices -- at least till our politicians get their act
together and devise some policies that will reduce our energy use
and push us toward more enlightened sources.
"We
all need to adjust our behavior to this new environment," Grantham
writes. "It would help if we did it quickly."
Think
that's happening any time soon with the current group in
Washington? Expecting to hear a lot of sensible energy policies out
of John Boehner, are you?
No,
because even after a decade that has bankrupted whole swaths of
America, we still put our faith in the markets. Some day, we will
learn that the outcome there is everyone but the odd John Paulson
character ends up broke and utterly exasperated. But not any time
soon.