In financial markets a not understood pattern of behavior is often dismissed as a product of other operators’ foolishness. Why do people like penny stocks? They’re naive. Why do people think stock splits increase the value of a company? They can’t do basic math. Why do people buy gold? They don’t understand asset valuation; and so on.
This is to make the military error of underestimating opponents. There are no fools, or at least the ones present tend to have short careers, in financial markets. If something is happening that you don’t ‘get’ it’s usually a good idea to find out what’s behind it.
Earlier this year I was surprised by how acutely sensitive financial markets were (and remain to an extent) to problems in the commodity complex. Surely, I reasoned, ninnies were missing the benefits of wealth transfer to places where windfalls would be better invested; right?
The paper this week, from the IMF, was written in February and is the first according to it’s authors that looks specifically at the effect on the financial systems of producer countries in light of previous commodity price falls; and, it turns out, ninnies were (and are) vexing with good cause.
The paper shows, unequivocally, how rapid falls in commodity prices lead to the increased possibility of systemic banking crisis. Countries most at risk are those not in some sort of IMF program, without sovereign wealth funds and suffering from poor governance and high levels of debt, according to the team.
They don’t point explicit fingers but it’s clear from their work, given how fast commodity prices have fallen in the last two years (most halving or more in this period), there are going to be stresses in the system that have yet to reach the surface.
Most pain will likely occur in smaller economies and therefore not end up being a big headache. Only complete ninnies though would say, categorically, there isn’t an issue here that doesn’t require close monitoring for the next couple of years.
Ahem; now I get it.
You can access the paper in full via the following link [Author’s summary bottom of P.28] Commodity Price Shocks
Happy Sunday.