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Cotton market loses 65 percent ground since March

21
Nov '08

NY futures continued to head south this week, with December losing another 166 points to close at 39.64 cents, while March dropped 195 points to close at 41.86 cents.

The cotton market is suffering through its steepest decline in history, having lost around 65% of its value since making a synthetic high of around 109 cents in early March. Cotton has prominent company though, as pretty much everything except the government bond market continues to collapse.

The stock market, as measured by the S&P 500 index, is down 53% from its high in October 2007 and the CRB index has lost 51% since early July this year.

The problem is global, as nearly 30 trillion dollars of paper wealth have been destroyed in stock markets worldwide since May 2008, when global market capitalization measured 57.5 trillion dollars. On top of that, investors and homeowners have suffered additional wealth destruction from collapsing real estate markets. With the old adage "wealth is transitory - debt is permanent" living up to its ugly truth, economic activity has ground to a halt as governments, companies and consumers alike have no more means to deal with crushing debt levels.

The only way out of this dilemma seems to be unprecedented government and central bank intervention and money printing, and we have already seen the beginning of this "inflate or die" process.

Unfortunately these re-flating efforts have been much too tepid so far to effectively oppose the brutal force of deleveraging and wealth destruction, which has taken on a life of its own and it will take much bigger guns (speak "printing presses") to overcome the problem. However, as President-Elect Obama stated in an interview last week, the government will take every necessary step to pump this economy back up, with budget considerations taking a backseat for at least the next couple of years. This means that we can expect the government to become much more aggressive in the months ahead, as it will increasingly act as a buyer of last resort instead of just being the lender of last resort.

In the meantime we will likely see further pressure in equity and commodity markets, as a deteriorating economy will claim more casualties, crimp corporate profits and lead to higher unemployment.

Amid all this doom and gloom there are some bright spots, such as the nearly 100 dollar drop in crude oil from its all-time high this summer, which provides consumers with a much needed shot in the arm. Energy and credit are two of the most important lubricants to this economy and at least one of them is now facilitating growth again.

Also, we should not forget that well over 90% of the workforce is still drawing more or less the same paycheck they did six months ago, and thanks to a general price implosion they are actually able to buy a lot more for their money. However, whether consumers continue to spend or whether they choose to save their money for a rainyday remains to be seen. At the moment we have to assume the latter.

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