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The mounting pain from falling commodity prices

Every story has two sides. And that's certainly the case with the ongoing weakness in the prices of crude oil, minerals, metals and other commodities. The PowerShares Commodity Tracking ETF (DBC), which tracks a commodities index tied to assets like crude oil, gasoline, corn, gold, aluminum and soybeans, has has fallen nearly 20 percent since May and has lost half its value since last summer.

That's good news for American consumers, who are enjoying those lower prices, especially at the gas station. Despite September's wild stock market volatility, consumer confidence show a surprising surge last month, with positive sentiment about the current economic situation hitting levels not seen since September 2007 -- the best reading during the recovery to date.

But the commodities tumble is spelling trouble for corporate profits, financial market stability and the economic health of commodity exporters. While prices stabilized in September, renewed concerns about the health of global growth suggests further declines are likely.

Just this week, we had a weaker-than-expected industrial production report out of Japan, a drop in eurozone inflation into negative territory and a slide in the Caixin China Manufacturing activity index to its lowest level since March 2009.

In the U.S., the cumulative result of the nine regional Federal Reserve manufacturing activity surveys point to an economy slipping back into recession.

You can see the way all these eddies and crosscurrents are combining in what's happening to giant commodities trading house Glencore. Its balance sheet has come under pressure amid the protracted decline in energy and metals prices. Its shares (trading in London) lost 30 percent on Monday before recovering some of the losses.

For context, Glencore's stock lost $14.4 billion in market value in September -- that's $4.4 billion more than was lost in Greek banks during the country's August debt crisis.

Glencore's debt has been hit hard as well, focusing attention on the sharp drop in high-yield corporate bonds -- mainly due to rising default risk in the bonds of shale energy companies. The High Yield Bond SPDR (JNK) has fallen to two-year lows. In fact, the JNK is down more than 8 percent from its springtime high, enough to wipe away more than a year-and-a-half of the fund's dividend payouts.

Corporate earnings are also getting hit. Caught in the commodities whirlwind are related companies like mining equipment maker Caterpillar (CAT), which last week announced 10,000 job cuts (roughly 9 percent of its workforce).

According to Factset, S&P 500 third-quarter earnings are on track for a 4.5 percent decline, the first back-to-back decline since 2009. Energy stocks are set to have the largest negative influence on overall profitability, while the materials sector has had the largest decrease in estimated earnings growth since the start of the quarter (to -13.1 percent from -1.5 percent).

Aside from corporate-level implications, much of the world has been dependent on the China-led commodities super-cycle. Just look at Brazil and Australia. The former is a mess, with the Brazil iShares (EWZ) down nearly 70 percent from its 2011 high amid political turmoil, currency volatility, high interest rates and inflation, and an economic recession.

Australia, a developed nation, is an even starker example of the commodities slump impact. It has been the scene of one of the world's largest and most persistent housing bubbles -- prices are up 22 percent over the last three years, and 80 percent since 2003, with prices in Sydney overtaking those in London.

But now, as demand for Australia's iron ore and other minerals diminishes, that bubble is about to burst, according to Alberto Gallo, head of credit research at RBS. Australia has become a "less diversified and commodity dependent economy," with a third of its exports going to China, half of which is iron ore.

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The chart above illustrates the scale of what's happening as Australian mining sector capacity use drops to fresh lows. Profitability will take a hit, leading to layoffs, higher unemployment, mortgage defaults and, eventually, lower home prices.

Stepping back, it looks like American consumers may be one of the only winners in all this -- with investors, global citizens and Wall Street denizens on the losing end. But after years of high gasoline prices and persistent raw material inflation, that may not be such a bad thing.

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