Roubini Warns Low Commodity Prices Signal Economic Disease

Nouriel Roubini aka “Dr. Doom” has been in the headlines a fair amount as of late, as he has predicted a perfect storm that will culminate sometime in the next year. Roubini figured that sluggish U.S. growth, Europe debts, emerging market slowdowns, and a possible military conflict in Iran will come together to drag the economy back down to 2008 levels if not even lower. But of course, there are others who have equal reasons to prove that the economy is improving. Leave it to the doctor to squash a number of these reasons with his vast economic experience and knowledge [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].

One such reasoning for global growth bulls was that low commodity prices have boosted real disposable income allowing for a bounce back in other segments like auto sales in housing. Roubini combats this statement, arguing that low commodity prices are a symptom of a much bigger disease, not a cure for one. “He pointed to predictions from the Fed that rising commodity prices could have a deflationary effect on the economy via a negative terms-of-trade shock” writes Katie Holliday.

Of course, we can safely assume that the “low commodity” prices that are being referenced have not priced in the most recent drought and the rapid surge of assets like Corn and Wheat. Natural gas is another commodity that has been on a tear as of late, which if Roubini is correct, may put the economy at risk of deflation. In fact, 2012 has been relatively kind to a fair amount of commodities as a number have been able to reverse their poor performances from 2011 [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].

Whether you take Dr. Doom’s diagnosis at face value, it is still important to have a broad macro understanding of the entire commodity industry. A number of traders tend to master one commodity and hone in on all of the different ways to profit from the asset. But taking a step back every once in a while and looking at the asset class as a whole can give key signals to future price movements.

It would seem that Roubini has indirectly implied that commodity prices will be heading much lower in the coming months, as the global economy enters another recessionary period. Still, the summer months have been relatively encouraging for some commodities and it may be that a recovery in prices is a good thing, after all, anyone who has been to a grocery store in the last six months will have a hard time believing that commodity prices are actually low. For now, your best bet is to tread lightly as we seem to be at a tipping point for the majority of financial asset classes [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].

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Disclosure: No positions at time of writing.

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