Commodities, Energy, and Housing

So over the past couple months we've finally been hearing about the meltdown in the housing market. Finally, all those crazy loans hocked by hopped up phone jockeys, with mediocre college educations, their own bad debt problems, and their perverted views of what is a normal way of living life are finally coming back to haunt these banks that wrote these loans. HSBC declared that they were taking a $10 billion write down to their exposure to sub prime loans. Other banks have fallen suit as other banks and financial companies have gone belly up crushed under their bad debts. But don't worry this is a small segment of the broader giant housing market, it will make a dent, but risk is spread better than you think. Thankfully, financial derivatives have both increased our risk preference and spread that risk as well.

It seems like worse news that it really is. I can rail on about how the fabric of responsible America society is crumbling under Chinese fueled consumerism. DVD players for $49, wow, I'll take six, now I can watch DVDs in every room in the house, let's see the AMEX is maxed, MBNA, Capital One, wait let's try that new one from Bank of Iowa Savings. I'll just refinance the house when the rates go down again. But that's meaningless because that's not the issue and that's not what's affecting the market in the US. The slow and determined shift of economic power away from the United States and to the Far East is happening, and will continue to do so. It's actually great that the standard of living is going up and more products are available to more people. Whether this is creating a higher standard of life is a matter for philosophical discussion that I don't care to talk about now.

Mainly, all this means is our desire for refinancing and consumer goods has been fueling a global boom. Our low interest rates and housing refinancing and subsequent appetite for goods and services has fueled the rise of emerging markets. We are not the only ones to blame, but the Irish, English, Spanish, and various other overheated housing markets. However this has kept the world economy churning for the past five years. Here's the problem, when you have low interest rates, assets become cheaper and building and growth is stimulated. Hey that's a good thing, right, right. But here's what happens, China and India and other emerging economies grow off this boom and become an engine all their own. So when before emerging economies are taking advantage of their labor cost advantage to supply the developed world, their people gain wealth and now must spend on their own, but what do they buy? Goods from the developed world, but also goods from their own country.

These nouveau riche or (middle class really) has grown into a large market all its own, and they want cars, apartments, and DVD players too. Now as demand grows, so does the demand for the basic ingredients and components of all this demand. What are these basic ingredients?

Copper, Oil, Gold, Silver, Natural Gas, Water, etc....

What does this mean for the rest of us? That even as the American economy slows due to our over-extension in housing the price of commodities and energy will continue to be high. Worse, the American economy will have less and less of an impact on the movement of these prices, and further, the American government and the Federal Reserve will become increasingly weaker in controlling its own destiny. Therefore, as China, Brazil, India, and the other emerging markets grow, American influence will temper and we will have to get used to higher prices for energy and commodities. Even as the current prices shake out, they will only moderate slightly as we enter a period of higher costs making energy and commodity efficiency more important.