Commodities Get Smoked, Europe Key to Economic Reboot

Commodities Get SmokedJPEGI heard a new one the other day.  I was listening to CBC business host Amanda Lang talk to Kevin O’Leary about his new book.  Somehow they got on the topic of commodities.  Kevin O’Leary said he doesn’t touch them and he added that when commodities go down they don’t touch the sides.  In other words, they go down fast without holding on.  It was a cute way of describing the meltdown in commodities over the last few weeks.  Last Thursday and Friday’s meltdown in global commodities turned into a rout.

For Canadians you could not go through last week without feeling it.  For instance one of the biggest losses of the week in the currency markets was the Canadian dollar currently trading at .9725 US versus the lofty heights of the $1.06 in July.  Oil actually dipped under $80 a barrel currently trading at $81.06 a barrel.  Gold had its worst looses in 30 years.  Local agricultural commodities like corn wheat and soybeans had huge losses.  So, as Kevin O’Leary said, there was no hanging on as they went down the chute.

It was a funny thing how commodities lost so much value in the period of a few days.  It all started back at the end of August when commodity value started to leak.  However last Wednesday the US Federal Reserve chairman Ben Bernanke said that the US economy was in significant danger.  The word “significant” seemed to spell doom for commodity prices.  Now, it is going to take quite some time to get them back.  However, it would do us a world of good if we could fix the global economy first.

Of course one of the biggest problems to fixing the global economy starts and ends in Europe. That is like a festering sore thumb to a healthy global economy.  What you have is several countries with Greece being the chief culprit, badly in debt.  These sovereign debt problems are so acute that even a whole nation cannot pay them back.  The problem is exasperated because European banks have lent these countries money which they have no hope for repayment.  These European banks are interconnected with North American banks and you can see the sorry mess that we have.

A monetary union complicates it where the people of Greece use the Euro as well as the people of Germany and all the other countries in the EU.  So the people of Germany in theory could bail out the people in Greece but Europe does not have a history of that going over very well.  Needless to say, politics gets in the way of fixing the problem.  So the uncertainty continues and global stock and commodity markets feel the pressure.  It’s untenable and it must be changed soon or we can only look forward to more market uncertainty.

It surely will be a tough sell.  I say that because despite the intentions of many good people in the financial regulatory business, bankers don’t like taking direction from anybody.  If you’ve ever sat across from a banker asking for money, you will know what that’s like.  So you could just imagine some rogue bankers getting the word from regulators to run a tighter ship.  It’s a tough culture change and it surely must be going on in Europe.

Bank of Canada governor Mark Carney supposedly got an earful the other day when he suggested that banks should increase the capital of their balance sheet from 3% to 7% of the money invested or loaned.  He was widely criticized reportedly by J.P. Morgan Chase CEO Jamie Dimon in a heated exchange in Washington last week.  It sort of makes you wonder if some of our Wall Street bankers still don’t get it.  They almost brought the world to their knees in 2008 and regulators don’t want the same thing to happen in 2011 and 12.

This is getting to the tipping point.  It’s getting there for obvious reasons but it’s also getting there because it’s costing so many jobs.  You cannot have economic uncertainty that we’ve had over the last 3 weeks and beyond without there being a cost in jobs.  So in many ways it is like a vicious cycle.  We don’t have the job growth because we have economic uncertainty.  Within our global financial world we don’t seem to have the political world to cure the economic uncertainty and jobs continue to be lost.

So let’s get it done.  First off, let’s get Europe fixed.  Without that, this thing will just keep festering on.