Everything that I’m writing in
today’s column could turn out to be completely off
the mark. Indeed, I would fervently pray to be wrong
by miles. Yet, I have a deep concern that the world
may be looking at yet another oil-commodity-food
products inflation in 2011, which may plague us for
three to six months. Let me share with you why it
may well be so.
The US budget deficit is a good place to start.
According to the data from the US Office of Budget
and Management, the federal government’s budgetary
outlay at current prices between 2007 and 2010 was
$14.2 trillion. That’s a very large amount of money.
And while much of it has genuinely gone into putting
the US economy back on the rails after the
post-Lehman global crash, the fact is that there is
a huge stash of money sloshing around thanks to the
federal government’s largesse. Ditto the European
Community. There is little doubt that the universal
and coordinated Keynesian response to the crisis
saved the developed world; but it has also created a
massive pool of global funds that are seeking
returns wherever possible.
During the period, there have been several punts.
The first was the sharp spike in crude oil prices
peaking at $145 per barrel in July 2008. In all
fairness, this was not funded by government bailout
money. But the flaring up of crude prices coincided
with a general commodity price boom — with food,
metals and minerals prices rising in tandem. That
severe hydrocarbons, metals, minerals and food
inflation subsided by October 2008. By January 2009,
crude was down to under $40 per barrel.
That set the stage for a second global bet — this
time on emerging market equities. Let’s take the BSE
Sensex as an example. In mid-February 2009, it was
at 8,800. A year later it was at 17,500 and rising.
After peaking at around 21,000 in November 2010, it
has started declining. Today, the Sensex stands at
around 18,400. The pattern is fairly similar for the
US equity market. The S&P 500 was at a low of 735 in
end-February 2009, having steadily fallen from over
1,500 in September 2007. It rebounded — peaking at
around 1,340 during mid-February 2011.
I believe it now the turn of oil, commodities and
food. As I write this piece, crude oil prices are at
$110 per barrel — way above the $40 levels it had
eased off to in January 2009. Prices were rising
steadily. Then came the Libyan crisis. While Libya
doesn’t account for much of global crude output and,
arguably, the Saudis can easily open their spigots
to calm prices down, it hasn’t happened yet.
In any event, I believe that the rise in crude oil
prices, if it continues for the next few months,
will have less to do with Libya, and much more so
with the devastating tsunami in Japan. Why? Because
of what the crisis has done to the nuclear power
complex in the Fukushima prefecture. It is now
acknowledged that three reactors of the Fukushima
Dai-ichi nuclear plant have had explosions and
significant radiation leaks. On 15 March, the
Japanese prime minister Naoto Kan not only confirmed
the third reactor building explosion, but also
acknowledged that the damaged reactors are facing
much higher risk of releasing radiation into the
This will inevitably raise concerns about nuclear
power not only in seismic hot-spots like Japan but
also elsewhere in the world. I suspect that, given
the country’s tragic history of Hiroshima and
Nagasaki, Japan may be politically forced to change
its energy mix in favour of using more liquefied
natural gas. If this were to happen — or if global
speculators believed it to be so — the stage would
be set for a serious and sustained spike in both
crude oil and natural gas prices.
With it could come a correlated rise in all manner
of prices. Urea, because it is an obvious upshot of
a rise in crude oil and natural gas prices.
Foodgrains because of what might be expected to
happen to fertilisers. Metals and minerals because
these generally rise in tandem with hydrocarbon
prices. And gold and silver, because these exist to
ride such fears.
So, here is the scenario. Waiting at the sidelines
are thousands of traders with trillions of dollars
of funds itching for a big punt. The triggers have
been squeezed, first by good old Muammar Gaddafi and
then more significantly by the tsunami. This could
well be the time for global punters to unwind from
equity and have a long crap shoot at commodities. If
it were to happen, you can be sure of another
terrible bout of inflation, with its attendant
economic and political consequences. I really hope
to be wrong on this one. For our sake.
Published: Business World, March 2011