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The Plunging Prices of Commodities Are Eerily Similar To 2008 Financial Crisis

John Galt

Updated: July 19, 2022

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Editor’s Note:

EDITOR'S NOTE: By now, most of us are aware of the plunge in the prices of commodities. Few of us likely made the comparison between the fall in commodities and the drop in real estate and other asset markets in 2008. Societe Generale draws a similarity between the two, claiming that a deep recession, similar to what resulted in 2008, is what’s to follow in the coming months. Dr. Copper and its industrial counterparts constitute the first leg of this rout. The “big surprise” in the coming months, according to the bank, is a massive and global deflationary wave on top of a cyclical bust. Well, it’s clear that the Fed overshot its inflationary target of 2%. What’s the likelihood that it will also overshoot its deflationary target of 2%? Given its poor aim and the months-long lag time to see whether its policies made an impact or not, we’d wager on the more cautious side, even if that meant taking a pessimistic outlook. Optimistic forecasts toward the economy have been just as “transitory” as the Fed’s inflation narrative. In other words, hedge your wealth and brace for impact.

The “big surprise’’ in coming months will be the collapse of inflationary pressures around the world, says Societe Generale. US CPI food prices will plunge into deflation, just as they did in 2008, it says.

Copper, a bellwether for economic output, is seeing its price plunge

Copper prices, a bellwether for the health of the global economy, are plunging. File photo: Reuters

Plunging prices of commodities are eerily reminiscent of the 2008 global financial crisis and indicate the world is headed for a deep recession, says Societe Generale.

Copper has plummeted 20.6% since its May peak, while aluminium is down almost 18%, and nickel 30.5%. Prices of agricultural commodities, including corn and soybeans, also have fallen steeply.

“This is not so much a canary in the coalmine as a rout,” said Albert Edwards, a global strategist at SocGen in London in a research note. “Just as in mid-2008 I now see the recessionary gorilla charging towards us out of the mist.”

Copper prices in particular are a bellwether of the state of the global economy, he says. In 2008, falling prices of the metal presaged a collapse in inflation from 5.5% to below zero in just a few months, he added.

READ MORE: Inflation Fears Ease on Falling Prices of Copper, Commodities

`Big Surprise’

That’s why he predicts “the big surprise’’ in coming months will be the collapse of inflationary pressures around the world. US CPI food prices will plunge into deflation, just as they did in 2008, he says.

“All these data are consistent with the global economy plunging into a deep recession,” says Edwards. “Soft-landers claim that this is just excess speculative froth being blown off, but the bulls said that too in 2008 and look how that ended up.”

Prices of agricultural commodities have plunged despite the impact of the Ukraine war on supplies, which prompts Edwards to predict more downside for oil, which has fallen almost 14% in the past month.

A “cyclical bust awaits,’’ he concludes, and adds that it ”will feel very much like a full-blown return to deflation.’’

•By Kevin Hamlin

Originally published on Asia Financial.


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