Monday, March 14, 2011

Risks of Bubbles in Soft Commodities

In NaviMap analysis, the Box 1, 2 and 4 is warning that the conditions for creating an asset bubble exist. Let's for a moment remove Box 1 "Economic Growth" from the picture. Then there should develop between Box 2 and Box 4 a  counterbalancing loop. The logic is like the population balance achieve from herds on limited grazing grounds. In reality, unless there is an unemployment problem, a reinforcing loop exist between Box 1 and Box 2.

In a primitive economy, there should a dashed line between Box 4 and Box 1. But in more advanced economies, it is a promoting line. E.g., an advanced economy will make capital investment in agriculture (Box 6) attracted by rising product prices. Furthermore, a developed economy have alternative ends for agricultural produce, i.e., bio-fuels.

Result: Spiralling agricultural commodities prices.

The long term bull case for such commodities is intact, but even in the short term, you could easily over pay for such assets especially Box 3 is an infrastructural support for speculation.

Government hates volatile prices. Under pressure to keep prices stable to pacify voters, it will time releases from strategic stockpiles (Box 5). This only make it doubly hard to invest.

Box 8 is to accomodate the possibility of Black Swans and Box 7 represents generational power that eventually reverse the logic of this NaviMap.

No comments: