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Carney: This time it’s different

‘Even though all booms are finite, this one could go on for some time’


 

In a recent magazine story and blog post, we highlighted the tremendous benefits Canada has enjoyed thanks to the commodity boom, but warned that if you think this will go on forever, you’re basically saying “this time it’s different.” That type of thinking has coincided with every bubble we’ve ever witnessed, and was invariably followed by a loud POP!!.

Well, Bank of Canada Governor Mark Carney disagrees.

In a speech in Calgary earlier today Carney said the rise of the middle class in India and China does mean this boom is different than all the others that have come before it. “Even though history teaches that all booms are finite, this one could go on for some time,” he said. (Here’s the full text of his speech.)

If Carney is proven right, here again is a chart we put together that shows how unbelievably, astoundingly history-defying his prediction would be:

Yes, that’s 200 years of booms and busts. Whenever 10-year average rates of return climb above 10 per cent, you’re into the danger zone, and as of a few weeks ago, we’d hit 12 per cent, according to Hackett Financial Advisors.

But Carney says this is a Supercycle, so the old rules don’t apply. His analysis seems to stand in contrast to his colleague at the Bank, Deputy Governor John Murray. Last year Murray warned against expecting commodity prices to keep going up forever: “If history is any guide, continuous rapid upward movement in real prices – oil or otherwise – is unlikely, as is a large permanent increase in the real price level.”

So who’s right—Carney or Murray?

 

P.S. someone will undoubtedly complain again that the chart doesn’t state which currency commodities were priced in. The chart measures 10-year trailing rates of return, priced in US$ terms.


 

Carney: This time it’s different

  1. Sigh It's always going to be different 'this time'.

    I don't think a lot of economists actually understand the capitalist system they're promoting.

  2. Carney is wrong. Ultimately the mistake that people like Carney always make is the same. They see the evidence of rising demand. In this case, Carney sees the demand building in China and the other BRIC countries. But they fail to realize that supply will rise to meet the demand. It always does. Demand cannot rise exponentially forever, and eventually supply will catch up. Often times, this is sped upby new players entering the market. You can bet your bottom dollar that there are many new players in commodities that will eventually see an end to the boom. Carney ignores this half of the equation because he cannot see it happening. Nobody could see companies like Google, Facebook and Walmart coming either. Does Carney seriously believe there are not a ton of new commodities companies spring up in India and China to meet the demand coming from India and China?

    This is the same thing that happened in the internet boom. The big telecom companies like Nortel believed the huge surge in demand for telecommunications spurred chiefly by the internet meant that "this time it was different". They laid miles upon miles of fibre optic cable, they handed out loans to customers to buy new high-powered routers, they built more and more capacity year after year. Well, funny enough, they managed to make supply outstrip the demand. There really was a limit to how much capacity was needed. Next thing you know, companies like Nortel and Lucent imploded because they were too greedy and too over-stetched to properly prepare themselves for the down-turn.

    All booms are like this. Carney could not be more wrong. This somewhat shatters my confidence in Carney, he's showing himself to be just one more of the sheep economists out there that don't have a clue.

  3. I would have never taken Carney for a Kondratiev-wave believer. Fascinating.

  4. While I agree that Carney is wrong–your argument that supply will rise to meet it ignores running up against the wall of hard commodities (oil, metals,etc.) scarcity. With scarcity, prices rise. Rising prices lead (among other effects) to demand reduction — or if demand remains high, resource wars. Without rambling on, what I'm trying to say is this: even if Carney is right, he will soon enough be wrong.

    {Hope this isn't double or triple posted–some kind of lag issue.]

  5. There is no scarcity of most commodities… silver and gold excepted. And silver and gold are not used to build anything.

    There is plenty of room for new players and increased production of pretty well almost all commodities, even if a few of them (such as rare earth metals) are geographically isolated to a few places.

  6. So the oil sands is not about scarcity? Burning natural gas to extract oil is rational for an abundant commodity? It's a scarce commodity, hence the price increases over time–oh and the wars in the middle east and North Africa.

  7. s_c_f: While there may not be a scarcity of oil in the world, there is indeed a scarcity of accurate and trustworthy information about oil reserves, especially in OPEC countries. And the current unsettled nature of the reason is not going to lead to greater information about those reserves for fear of further upsetting the social balance.

    Without accurate information, the market cannot accurate price the value of those commodities. If the market is not accurately pricing that commodity, then appropriate investment may not be occurring.

  8. Well, the peak oil theory has been around a long time. There are new fields opening up next to Brazil, in the US midwest, and elsewhere. Also, there is plentiful natural gas that can easily serve as an alternative to oil. Same goes for coal. So no, oil is nothing like a scarcity, nothing at all.

    Also, the article is not just about oil, it's about all commodities.

  9. Well, it's true that the pricing of oil has been volatile, but there is no such thing as "perfect" pricing. That is true for any product. But as long as there is any open market (and there is, despite OPEC), pricing could be worse. Also note that the price of oil is also influenced by the price of other energy sources (ie people will turn to electricity or natural gas when oil prices rise). There is a limit to what OPEC can do. Personally, I'm not worried about oil supplies, I think there is plenty for a long time to come. Technology will allow us to find more if it, either in new locations, deeper down, or in locations previously inaccessible (Bakken, for instance). I've never bought into the peak oil theory.

    Anyway, I think we're both in agreement for the most part… you're right, pricing can be a component to any bubble, the believe that prices will always rise, the belief itself causing further rises in price.

    So you agree with me that there is likely a downturn, but you think it's less a result of increased supply and more a result of speculation. I think it's both, but I think supply is the ultimate decider.

  10. Well, I think it will have much more to do with demand destruction than increased supplies, at least for oil. For the rest, you're right, but for oil we don't appear to have a lot of flexibility when it comes to dramatically increasing the level of supply. Copper, gold, etc, are all a matter of investing the capital into known reserve locations and increasing exploration to find new reserves. For oil, I'm of the relatively uninformed opinion that we have some flexibility to use marginal sources but there is much less room for increased exploratory gains, unless we find a more cost-effective way to do extreme deep-water drilling. We've basically explored the entire land-surface of the earth for oil, so it's not particularly likely that we'll find a vast pool that simply hasn't been tapped yet. Perhaps such a pool remains under one of our oceans, currently inaccessible.

    But I'm no expert; I'm merely parroting what I believe to be reasonable arguments when it comes to oil.

    EDIT: And I should probably state that I have no problem whatsoever with speculation, as it's a vital component of any healthy market. The only issue I would raise is to keep a market from becoming a complete speculative casino by ensuring that commercial operators still find it a useful price-discovery mechanism.

  11. Well, let's say he is right. Having read the speech and then overlaid it against current conditions around the world, some interesting possibilities arise. If we are talking about urbanization and growing middle classes, let's not forget that we may very well be seeing a whole new set of people about to enter the middle class. I'm talking about the post-crony-capitalist regions of S W Asia that are now having their Arab Spring. Once the considerable drain to the economy of a ruling family has been removed, they could be in for some serious productivity gains and an increased demand for consumer and industrial goods, which, oddly enough all need commodities, which, oddly enough, Canada has a good supply of .

    Mark Carney isn't saying that this boom is never going to end. He is saying that it isn't going to end over the near term. Big difference. One of market timing. Having said that, there is a considerable amount of irrationality in commodity pricing as a result of such policies as quantitative easing and so forth. The fiat money has had to go somewhere, and one of those places has been to drive up commodity prices, esp. oil. So, where does the future lay? Is your guess better than Mark Carney's?

    Pony up, folks, & place your bets.

  12. Sounds like Carney has been following Don Coxe – he is saying it is different this time as well. We are very fortunate to have so much of what the world needs/wants.

    "In effect what the commodities boom today has done, is reflected real supply and demand without an inflation psychosis. Back in the 70s it was inflation psychosis that took over because there wasn't that much growth in demand, because the billions of people who are now bidding up commodity prices didn't have the money to bid them up back then." http://www.scribd.com/doc/50673145/Don-Coxe-What%

  13. They may both be right.

    If we are going to price commodities in a currency whose guarantor of value has no particular desire to guarantee its value (hello, Uncle Sam), then that curve may well keep rising for a good long while.

    But if we could price it in some other unit of value (an hour's labour, a Big Mac, whatever), then yes, the bubble will one day burst.

    I am not saying we could easily start pricing by some other metric. Only that things will get might wonky when the global reserve currency is finally understood to be a useless and unstable measure of value.

  14. I don't think he's right. But suppose he is.

    Is it really smart to set policy in such a way as to BET that he's right?

    Er, no.

  15. Mark Carney should increase interest rates to at least 2% if not more this year. We need to protect our ability to pay debt as we would have a stronger currency , inflation would not tax our economy further. Canadians carry too much debt.

  16. I agree for the most part but you are incorrect in dismissing the need for gold and silver in high end electronic applications where heat is an issue. Silver also is used in some nuclear reactor designs.
    Both have legitimate high end uses beyond the cosmetic uses that most regulate them to.

  17. Is Carney making a bold prediction or is he using his influence to steer the herd to more modest expectations?

  18. Uhh, perhaps you have not noticed but the supposed height of economic activity in the western nations is the trading of financial instruments. In my opinion it is little more than placing a bet. If you are still holding onto some archaic notions of rational behavior or logical action, hey, that's your right. But don't go expecting anybody else to do that, especially amongst our purported policy makers.

  19. Dear Canadians – Can you please buy Arizona and make us a colony? With the strong Loonie and a non-insane fiscal policy you can buy anything you want.

    Our central government hates us and sues us all of the time anyhow. We want to be Canadians now. If you don't wish to buy Arizona, you may invade and conquer us. If you do not wish to invade, we will attack ourselves and surrender to Canada. If the self-invasion fails, we will erect temples at our airports, and burn offerings so the gods will bring benevolent Canadians to rule us.

    For your act of kindness, you will get an above average hockey team that used to be called the Jets. Plus, Arizona offers year-round golf with green fees payable in worthless US Dollars. And, a former federal employee, that you select, will be assigned to rub sun tan lotion on you to assure an even tan. See alternative methods to acquire Arizona at <a href="http://www.disunderstand.com” target=”_blank”>www.disunderstand.com . Thank you in advance for your wise purchase of Arizona.

  20. Canada demands a land corridor if it is going to expand. If you can convince Idaho and Utah to revolt in unison things could be arranged. You guys all speak French, right?

    Sincerely,
    Canada

  21. …there is a considerable amount of irrationality in commodity pricing as a result of such policies as quantitative easing and so forth. The fiat money has had to go somewhere, and one of those places has been to drive up commodity prices, esp. oil.

    Do your fellow graduates of the Robert Mugabe School of Monetary Policy know that you are blaspheming in this way?

    I take it then that you have recanted your "money is just a token", let's print our way out, prescriptions for economic health. I'm glad to see it.

  22. Thank you for considering the purchase of Arizona. Utah and Idaho will gladly provide free passage since the traffic will enhance the marketability of their states. Or, you can use the existing tunnel we have prepared for you.

    BTW, Vous pouvez jouer au golf toute l'année en Arizona.

  23. Fantastic. Our intention is to populate the sub-arctic belt with French-speaking American frontiers people to mine for rock and water. This will make Canada a "super power".

    Le Canada est un pays avancé où les citoyens peuvent jouer au golf toute l'année dans des dômes de golf.

    Kind regards,
    Canada

  24. Weren’t people saying the same thing just THREE years ago about the price of oil. The collective amnesia is mind-boggling. It’s always different this time, isn’t it. I suppose it has to be for anyone to make any money.

  25. We're sorry, but you will be a super power. Wilfred Laurier was just ahead of his time when he claimed "that it is Canada that shall fill the 20th century". He said that eight years before Arizona was supressed into statehood in 1912. Ironically, that was a hundred years after Canada gave Detroit back to the US a hundred years early.

    Also, we don't pretend to be advanced. But what curling may take place is done in enclosures (kinda by necessity). Sadly, Arizonans engage in a cruel and primitive form of curling that allows aggressive physical contact between players, including one's own team mates. Without proper governance, the carnage will only continue. Please buy us soon, or attack, or accept our surrender.

  26. People were also saying much the same thing in the 1970's, or so I've been told.

    I wouldn't know; I wasn't saying or listening to much at that time.

  27. Sorry, but Turks and Caicos will likely be the next Province of Canada. See, it's a matter of paperwork. We started the paperwork, about 96 years ago, and it's been in progress ever since. And, as of this month, our police are already running the island anyway. http://www.suntci.com/index.php?p=story&id=13

    There are some other spots in the running too, like Alaska, and Vermont.

    If you really want to get the ball rolling, Arizon should be added to the list here:
    http://en.wikipedia.org/wiki/Proposals_for_new_Ca

    The list is reviewed everytime there is a Canadian election, so we should get Arizona processed within the next few years, cause we'll probably have half a dozen elections before 2015.

  28. s_c_f:

    Gold isn’t used to build anything?!? Really? I usually try not to mean spirited when posting here – but are you stupid? Try looking up all the industrial and commercial uses of gold – and I don’t mean in jewelry. Try electronics as a starting point.

  29. Thx for the link on the Turks and Caicos, lol!!

  30. Yes, in fact this very publication had a front page during that summer before the collapse of oil from 138 to 68 bucks, screaming that 200 a bbl. oil was enevitable….you life will never be the same….you will never be able to afford to drive a car…buy and airline ticket…blaaa….blaaa…blaaa…and of course we all remember what happened three months later…or at least some of us do….seems the "smart" people don't. Oh yes, and Al Gore was saying the Arctic ice cap would be completely gone by now…yawn…here we go again.

  31. Amusing. You misconstrue in a most useful way. Cheers.

    PS: Robert says hi.

    PPS: Is it possible for me to disagree with the current gong show and also to disagree with your school's perscriptions?

  32. Look at the chart again. This is about growth and it hasn't been negatives since the early 1940s. If it were real dollars, I suspect you would see why the actual boom is longer than you would expect historically.

  33. Whenever something gets too expensive, people switch to a cheaper alternative. A basic law of economics…and capitalism.

    Anyone who counts on a boom lasting….is a fool.

  34. The Turks and Caicos solution, while quite valid, is mildly disturbing. We thought that was a done deal. Arizona has already been a state for nearly 100 years (or, "with our boot on their neck", as they prefer to describe it in DC). So, the election scenario is more attractive. Can non-citizen foreigners vote by mail in Canadian elections, like in Arizona?

  35. Did you say surrender? I suggest you look South, hombre…

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