Irrational exuberance in some areas of markets

Many now acknowledge that stock markets in the previous decade were beset, in the words of the Federal Reserve Board’s Alan Greenspan, by “irrational exuberance.”

Shares in some newly formed companies, notably in the high-tech sector, were selling at absurd ratios to basic fundamentals or to often non-existent earnings.

At the present time a similar criticism could be levelled at commodities, whose prices appear to be unaffected by large inventories and weakening demand.

Elementary economics will testify that generally speculators do not really manipulate the market; they are not the villains in the prices of some commodities that have dominated the economic scene in recent months.

Nevertheless despite the above reality check, speculators have been responsible for pushing commodity prices to unwarranted levels.

One example, of course, has been the Canadian dollar that reached parity with its U. S. counterpart. The superficial “explanation” was that our currency was a “petro-do1lar” pushed higher by oil exports. That rationalization falls apart when one can note that we now are running large deficits in our external trading account, despite soaring exports of oil.

Food commodities, even milk, have more than tripled within the past year, many blaming a poor growing season so crop failures led to possible shortages. All but forgotten is that this year’s growing season could erase all those gains in wheat, corn or soybeans. The extended drought in Australia has ended, so grain harvests there in all likelihood will return to normal.

The speculative froth about the North American and world economy is starting to fade, entailing declines in the prices of copper, lead and other mining products, all having doubled or tripled in the past twelve months.

This risk-taking fervour will cool as soon as it becomes more evident that the North American economy is mired in a near-recession, one that government countermeasures can do little to mitigate.

Speculators wreaking havoc with commodity prices, based in part on extreme levels of enthusiasm about a strong economic recovery, are certain to evaporate before long. This is one time when speculators must shoulder much of the blame for high prices of commodities.

The laws of supply and demand soon will catch up with those who have been too willing to be risk-takers.



Bruce Whitestone