I heard some good comments from Goldman’s Jeff Currie yesterday regarding the current commodity headwinds and “negative feedback loop” that’s occurring. He boiled it down to the three D’s of macro which I have listed below…

  • Deflationary Commodity Prices – This is caused by the excess capacity and production that was created during the decade long commodity bull run. In simple terms a response by producers to meet demand and capture higher prices.
  • Divergence in Currency & Monetary Policy – The Fed diverging from the rest of the world banks for the first time in a decade is creating major uncertainty and wakes in the currency markets.
  • Deleveraging of Debt in the Emerging Markets – During the commodity bull run many emerging markets such as China have amassed huge macro imbalances and massive debt burdens, now that decade long trend is becoming more apparent and glaring the markets are re-pricing the associated risk. Similar to the U.S. housing market bust, as long as the U.S. home builder was able to keep building more homes nobody seemed to care or notice the debt burden they were amassing. Once the music stopped and the new homes were no longer selling it became very clear and apparent that most U.S. home builders had amassed too much debt as they expanded production.

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