The numbers are truly ugly.
Markets saw a nice little bounce on Thursday, but after Wednesday's sell-off, various estimates put the value destruction among global equities at an astounding $15-trillion (U.S.). Surely the rout signals that worldwide economic growth is about to swirl down the toilet. Investors are usually right, right?
This time, maybe not – though you can't fault them for their pessimism, given the wholesale slaughter in the commodities markets in recent weeks.
In European trading on Thursday, Brent crude, the international benchmark, rose more than 5 per cent to $29.50 a barrel. Still, the price is down 39 per cent in the past year and 73 per cent since mid-2014, when the relentless slide began. The FTSE 100 and the S&P500 rose too, but it was all small consolation to investors. The horrific first three weeks of 2016 pretty much wiped out all the global stock market gains made in 2014 and 2015.
All other commodities – nickel, zinc, copper, aluminum, iron ore – have joined oil on its submarine run. In the past 12 months alone, the Bloomberg Commodity Index is down 28 per cent. Glencore, the world's biggest commodities trader and one of the world's biggest mining companies, is a good proxy for the health, or lack thereof, in commodities land: Its shares have fallen 68 per cent in the past year.
Broadly speaking, commodities lose value when demand falls. Demand falls when economies lose growth momentum or go into reverse. Surely, the commodities markets are saying the end is nigh for growth, so sell, sell, sell.
Not so fast. Yes, growth in some big economies, notably China, has become weaker (even if China is still expanding at rates that Europe and North America would kill for), but the commodities plunge does not necessarily mean it's time to load the F-150 with survival gear and head for the hills. Commodities are falling because one of the biggest commodities bubbles since the Second World War, perhaps the biggest, is deflating at an alarming rate.
The bubble formed when the world's biggest mining companies, from Glencore and Rio Tinto to Anglo American and Vale, bought into the "stronger-for-longer" cycle on the assumption that China would devour everything that was gouged out of the ground in ever greater quantities for decades to come. It appears they miscalculated – big time: China's growth rates have fallen to 6 to 7 per cent a year in recent years from 10 to 11 per cent. As undisciplined CEOs casually tossed fortunes into mine development everywhere, supply surged to the point that it exceeded demand growth.
As for oil, global demand is not actually falling. There's simply too much of it around, thanks to the U.S. shale revolution, the expansion of the Alberta oil sands, the return of Iran to the export markets and relentless pumping by OPEC, which is bent on regaining market share lost to the Americans, the Canadians and the Russians.
In that sense, OPEC is no longer a cartel; it is just another player, albeit a big one, in the global oil free-for-all. For the first time since the Organization of Petroleum Exporting Countries was formed in 1960, the global oil markets are truly competitive, and robust competition tends to drive prices down. Cynical geopolitics is helping: Saudi Arabia is unlikely to reward its enemy Iran by curtailing its own oil production to prop up prices.
Students of oil and economics will realize that crude prices are a reliable predictor of economic trends, but only in the contrary sense. Historically, rising oil prices have preceded recessions, as they did before the 2008 Great Recession, when oil reached $147 a barrel and Americans were paying $4 a gallon for gasoline (it's now half that price). At the same time, falling oil prices have preceded rising economic growth. When oil prices fell sharply between 1992 and 1993 and between 2001 and 2002, for instance, global growth took off.
The oil price plunge is unambiguously good news for the global economy. It transfers trillions of dollars of wealth from oil-exporting countries to oil-consuming countries. Since there are a lot more of the latter, the net effect is positive – even if it causes enormous pain to the likes of Saudi Arabia, Russia, Nigeria and Venezuela. When fuel prices fall, consumers' buying power increases, especially in regions that are clogged with cars, such as Europe and North America; a cheaper fill-up is the equivalent of a tax cut.
To be sure, the markets may be selling off for reasons beyond fears of a global recession. Some investors are unnerved by the new rate-hiking agenda of the U.S. Federal Reserve. Some fear the commodities rout could trigger a massive bankruptcy or two among the big commodities companies, delivering another bank crisis. The deflation threat has not gone away; quite the opposite with oil prices so low. There is a legitimate concern that China's growth rates are tumbling faster than the official figures indicate.
But falling oil prices, coupled with low interest rates and stimulus measures here and there, could also signal a return to rising global growth rates. If that were to happen, the markets could lose their fear factor. On Thursday, Capital Economics delivered a rather bullish signal. In a new forecast, it said that "despite the prevailing gloom about the world economy, we think global growth will pick up from around 2.5 per cent last year to 3 per cent in both 2016 and 2017."
Take a deep breath. The end may not be nigh after all. Cheap commodities might do the trick.