Toward a theory of lopsided markets
Indonesia has banned exports of palm oil. US auto dealers hold only half a month’s sales in stock. Oil prices have sawtoothed. Metals prices are high and have spiked even higher. Recently I described this as adjustment at the outside spread: markets are adjusting not with smooth price movements, but through disorganized and jerky discontinuity.
Another way to put it is that we are in a global seller’s market. The term is commonly used in real estate, and intriguingly invoked by Kindleberger in a piece on inflation. But I have been surprised to find that it is not widely used among economists, nor by people who talk about financial markets. In what follows, I sketch my case that the entire global production system is at the moment a seller’s market.
There are two lopsided markets, in market-making terms: in a seller’s market, sales are speedy and prices are high or rising. Dealers can’t keep inventory in stock, so they have to go out and look for new supply. In a buyer’s market, sales are slow and prices are low or falling. Dealers’ inventories are too high, so they have to find a way to unload them.
For example, the US housing market (broadly speaking) in the years before the 2008 crisis was a seller’s market. Homes were sold before they were built. Financing was easy, and buyers were not afraid to borrow because they expected prices would continue to rise. After the crisis, it was a buyer’s market—sales slowed and prices fell as buyers realized that houses could in fact fall in market value. Then they realized that credit had dried up and they couldn’t borrow anyway.
Prices tend to rise in a seller’s market and fall in a buyer’s market, but not necessarily smoothly. When market-making is at its limit for an extended period of time, trading relationships are strained, disrupted or broken. At such moments, the rules of the game are likely to be in flux, because something has to give when prices can’t do the job by themselves any more.
A global seller’s market
The COVID–19 pandemic and the war in Ukraine have left us in a global seller’s market. Around the world, those who are in a position to sell can command favorable terms, whether they are selling copper, wheat, semiconductors or used cars. Broad-based inflation is a strong indicator. The graph below shows contributions to the change in US CPI using the commodities–services breakdown that the BLS provides. It uses a broad set of categories whose conditions of production are likely to be very different from one another—energy commodities vs. shelter, for example.
In words: inflation is everywhere. But a seller’s market is not just rising prices: it also means that sellers are more likely to be able to dictate the terms of sale other than price. Last fall, for example, the London Metal Exchange temporarily changed trading rules to allow sellers of copper to delay delivery at their own discretion. In the US real estate market, bidding wars have come to be an expected part of a negotiation as buyers compete for the chance to spend. Many people are surprised to find that their cars have appreciated and not the reverse. US labor markets have even tightened to the point where workers are able to demand wage increases, though not enough to keep up with prices.
How will this end?
And so on. Sellers everywhere have the upper hand, and market structures are changing to accommodate them. But buyers are being squeezed, and they are not idle: the Indonesian state’s ban on the export of edible palm oil, for example, is a way to rein in the sellers’ power. Perhaps this protectionist model will be replicated on a larger scale. New production capacity, meanwhile, is being brought online, albeit slowly, so maybe sellers’ power will fade away.
Or perhaps a different seller, the seller of the global reserve currency, will find it has sufficient market power of its own to reclaim the initiative.