If there is one thing that has been a truism of the last two years, it is that a macro investment in a single country index no longer works as it used to. The virus of recession now infects the whole world. In fact, we have become so interdependent that a bad loan in Missouri can lead to job losses in Beijing.
The 'Butterfly Effect' of chaos theory states that small variations of the initial condition of a dynamical system may produce large variations in the long term behaviour of that system. This may have been proved as reality recently, because of the interconnectivity of the global financial infrastructure. The bad loans in the US and UK have flapped their gossamer wings and sent a destructive tornado throughout the global economy.
Therefore I do not believe that a particular country, generic market or indices will bring the world back from the brink. I believe that the days have gone when we waited for AT&T's quarterly results with baited breath. In 2008, we are more focused on what will create the global recovery than who.
In my opinion, it will not be the four horseman of the Nasdaq but four commodities; gold, copper, coal and oil.
As we know, gold can signify a weakness in the US dollar and investing in the yellow metal during volatile times is considered a flight to quality. The recent drenching of the markets with federal liquidity will lead to inflation and a substantial firming of the gold price price per troy ounce. However, whilst inflation is a characteristic of a recession, it can also be a precursor of GDP growth.
Copper prices are presently slumping as the global recession deepens. As demand for housing and infrastructure return to more normal levels, copper will retrace its price.
Most of the worlds power stations that power the worlds factories are coal based not nuclear. A significant increase in the demand for coal will be the most important signal of a global turnaround.
The oil price will rise as the dollar inevitably weakens, so therefore that is not necessarily the key to a recovery signal. The tell-tale sign will be OPEC increasing output by over a million barrels per day.
Each will make a contribution at different times. The first stage will have gold being utilised to fight inflation, followed by coal and then probably copper and oil.
I no longer believe in the primacy of the western economies. As mentioned before, GE and Ford no longer build the engines that power Western corporate domination. The behemoths of Wall Street, Madison Avenue and in Detroit, no longer rule the world. Since globalisation, Canadian oil, Chilean copper, Polish coal and Chinese gold have come to the fore. We haven't yet mentioned Ukrainian wheat or Congolese uranium.
Thomas Malthus in an 'An Essay on the Principle of Population' published in 1798, said that agricultural output increases arithmatically and population, geometrically. If you tried to apply the same principle to hard commodities, it may be that their availability decreases arithmatically, whilst their demand increases geometrically.
Another similar example of this has been the credit crunch, where real incomes actually dropped over time, whilst levels of credit increased exponentially.
Investing in commodities is not for the faint of heart nor for the short of term. But the finite supply of hard commodities, set against their ever increasing demand will lead to a crunch more dangerous than we are presently experiencing for housing loans.
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