Commodity Supercycle
I have been very bearish on the long term viability of commodities as an investment since commodities became an investment courtesy of your favorite Wall Street personality. I became seriously bearish after we had what I believe was a clearly identifiable fifth wave count in metals which peaked in the May time frame. Time and again I have referenced the likes of Titanium Metals, Valero, Phelps Dodge, Inco and other ridiculously priced commodity stocks. I have to laugh every time I see someone on Wall Street trot out this concept of commodities as an asset class. Supercycle. Fifteen to twenty years of a commodity bull. Now, I believe even savvy Wall Street types are fooled with this one because most don't have access to historical data, most don't know anything about commodities and it is plausible to believe when stocks are range bound, commodities run wild.
In May I wrote the following in my investment journal. I've dusted it off as a reminder never to believe anything anyone tells you about your investments:
Commodities have ten to twenty year bull runs? Ah, yeah right. The Wall Street pumpers are out in force to dupe you out of your money just like they did in 2000. And, that's exactly the reason I don't trust anyone with my investments. Here's a question? Why would even the most skeptical on Wall Street believe something without doing their own research to prove it? Because it supports their biased thinking. We are all prone to a bias and need to be diligent in questioning everything we believe. There is nothing more compelling than an "expert" passionately extolling their opinion. But, the reality is the 80-20 rule applies to everything. That includes Wall Street being wrong. Unless we are rewriting history, they are wrong again.
I'll start by stating that this commodity superbull people are talking about and using contrarian thinking to support defeats the argument of a housing bubble too. Because everyone is talking about a housing bubble. So, we can expect housing prices to be fine in Phoenix as they go from 4,000 units to 45,000 units for sale. Or Boston where a condo project recently dropped their price from 1,000,000 to 600,000 to not be caught holding the bag. Or Miami where 3,500 new condo units are typically sold annually and there are soon to be fifteen times that coming on line. Or even the Midwest where housing prices have decreased the most so far yet were the most mild in appreciation. Or, I guess the IMF commentary that China is in the middle of a potential real estate crisis should be taken as a contrary indicator. Maybe, except for the fact that prices have already increased astronically and home prices are at multi-decade lows in affordability calculations. So, supply and demand don't drive price dynamics anymore? The only way we will see housing prices hold up is through a big dose of wage inflation. Being a contrarian for contrarian's sake is wrong because the herd is sometimes right. So, one really needs to create a reasonable thesis as to why they are a contrarian and must be able to formulate arguments on both sides of the fence. And using historical perspective is the way we attempt to divine the future. Yet, that doesn't appear to happen with regards to the supercycle commodities argument.
It is hardly logical that you can have a housing bubble, ie, hard asset, and not have a commodities bubble, hard asset. What happens to commodities if housing demand cools off as more and more supply is brought online by the producers to meet the "increased demand" or because commodity prices now pass the hurdle rate for new mining projects and investments? And, might I add Robert Schiller and Warren Buffett have both publicly stated the commodities markets are not working off of fundamentals but speculation. But, that in itself is hardly a reason to assume commodities are a bubble. They can be wrong just as anyone else. Although Warren Buffett did sell is silver holdings for a cool billionish in profit this month after he picked them in in 1998 for a song.
And, the discussions of the CRB up only 50% is nicely selective. Again, supporting a biased mindset. So I guess metals that are up 300-1000%, which are contained in the CRB, should just be passed off as normal? Yet, these runs are greater than the tech run into 2000 in percentage terms. Historical precedence including the inflationary 1970s that commodities are going up for 10-20 years? Might someone actually prove that to me with hard data? Maybe a copper or zinc or platinum or paladium chart that shows sometime like a 10-20 bull run? Maybe even a gold chart? If someone could actually produce that, and they can't because it doesn't exist as I have 100 year metal charts in front of me, then metals would, by definition, not be commodities. To the contrary, they would have long term pricing power. I guess that means they aren't commodities. Maybe they are semi-precious or precious metals?
So to support their manipulation, Wall Street types are out espousing these studies how commodities have outperformed stocks since 1970. And how they are noncorrelated with equities so they are a good hedge. Now, your retirement funds, yes you reading this, are investing around this ridiculous notion since more and more pension funds are succumbing to this line of bull Wall Street is feeding us. Ibbotson has some crock of shit study to show that commodities have returned 70 to 1 since 1970 while equities are only a little more than half of that. I guess spinmeisters can and do say anything they want to get your money.
Ok, so comparing this cycle to the "massively" inflationary 1970s, An era which produced the highest interest rates in the entire 1900s through today. A period of over 100 years. The absolutely best time for commodities as it was the inflationary period of the last 100+ years. Correct? Well, let's look at the facts.
Gold peaked in 1974 about around $200ish bucks after a nice run similar in return to ours from 2001/2002 till today. 1974 is comparable to late 2006 or 2007 if you follow the cycle thesis. Gold ended that cycle run in 1974 with a rapid blow higher similar to what we saw in the last six months with gold going from $400ish to $700ish. So, what was gold in 1979? About $200. Oh, by the way it took you through a gut wretching decline to $100 before you got back to break even almost six years later in 1979. The run to $850? That lasted the whole 70s? Nah, gold went from $250 to $850 in ONE year. And, supporting it were interest rates at 20+% and inflation through the roof. Want to know what nickel did during that 1980 blow off? How about nothing? Yep. Zilch. Zinc? Well, zinc went through the roof into 1974. Up a mere 700%? Sound familiar? Sounds like 2006. Then what did zinc do? Down a mere 75% in a quick downdraft and it stayed there for the rest of the 70s with a few minor squibbles in between. Want to know when you got your money back? 1989 when zinc finally returned to the 1974 levels. Copper? The new semi-precious metal selling at $4 a pound today? Well, in 1971 copper was at 45 cents. in 1974 it was $1.30. 300% return. In 1976 it was 60 cents. In 1978 it was 60 cents. In 1980 when interest rates were 20+% it went to $1.40. Basically back to the high it had been at six years earlier. Well, then in 1982 it cratered again to 60 cents. Want to know what it was in 1960? Yep, 60 cents. And on and on and on. Till the start of this cycle. Care to guess the price in 2001/2002? Yep 60 cents. In forty five years it was 60 cents with a few blow off peaks lasting a few years. There was no sustained run in the 1970s. Not for any metals. If gold sees another blow off run like 1980ish, inflation would need to build over many business cycles as it did in the 1970s, where we would ultimately see 20+% interest rates or likely something similar. Should that would happen again, the cycle would be approximately in 2012 or 2013. Copper has started each business cycle in the last 50+ years at less than 60 cents a pound. That is the spot price. No games with inflation adjustments or other silly trickery. 60 cents. So, in actuality, copper has really declined drastically as have all metals because of inflation. That's one hell of a winning investment vehicle isn't it? In the 1970s there were many short business cycles when high input costs, ie commodities, shortened the business cycle. Does anyone actually believe commodities could go up for twenty years and demand would not be cut off? Not if you think about it in economic terms of supply and demand. But, if you listen to someone smart tell you that it does, well, then it might be believable.
Ok, so let's look at the commodity stocks. Maybe the equities performed better. They sure did. Not! They cratered when the equity markets cratered in the 70s, which was quite frequently. Oh, well what about their noncorrelation with equities? Well, you don't need to understand a PhD thesis on multigrid methods for time-dependent partial differential equations to determine that's a bunch of bullshit too. What is common sense? In the supply and demand of commodities in the business cycle, what would happen when the cycle ends and general economic demand abates? Uh, economically sensitive natural resources would? Fill in the blank. How about collapse? Yep. In line with equities, commodities collapsed in the 70s. So, noncorrelation huh? Ibbotson must have received their mathematical degrees from the school of new math. That's the same school that taught Wall Street to tell us the technology bubble would last forever as they told you in 2000.
I guess because the 70s is noted as the cycle where we had inflation pressures people equate rising rates and inflationary pressures as meaning commodities keep going up yet commodities cratered every business cycle in the 70s. Gold did as well but gold held up a little better because some speculators think it has some instrinsic value and is an inflationary/deflationary hedge, thus, there is some worthwhile argument it is not a true commodity. But, that said, it too tanked 50% and did nothing for six years. Or put another way, except for a short period of time in the 1970s, gold had one massive run of one year. The 1980-81 blow up from $250-850.
If we are all so convinced this has historical precedence, and can prove it with charts of metals or commodities, which cannot be done, then let's all buy copper here at $4 a pound. I guess that's why the Russian stock market, an exchange dominated by commodities, dumped 30% in a few weeks this month. But that's normal. Or so we are told. Anyone show me where a US exchange dumped 30% in a few weeks? How about one time in 100 years? That is not normal and is typically a sign of topping in any type of financial market.
This is a little bit of outcontrarianing the contrarian with some factless facts. ie, Taking a contrarian position just because its out of vogue yet has no supporting historical perspective. And, historical perspectives matter because human behavior never changes. Care to guess how much money it takes to corner the global lead market? A few billion smackers. A relatively small market. Care to guess how much hedge fund money is chasing commodities? That's right. Alot. Human behavior never changes. That includes those who state there is historical precedence for this commodity bull lasting for decades. Metals will go up until the business cycle is broken because, just as this thesis proves, human behavior is repeated and so are the stories that commodities are going up forever. It's hard to pick the top of a mania so who knows where it ends. I could see oil going to $100 a barrel based on some sentiment work I've done. And, it truly might be different this time. Housing might continue to go up as a new asset class. Metals might continue to go up and have no effect on supply and demand. Yet, if this is so, one cannot use historical perspective to divine the future of equities because hard assets are driving equities. That likely means human behavior has changed. So, in conclusion, we are right back at year 2000. Goldilocks is surely getting alot of action these days. Can anyone set me up with a date? Pax Americana. Yet this time, it's truly Pax Globalia.
In May I wrote the following in my investment journal. I've dusted it off as a reminder never to believe anything anyone tells you about your investments:
Commodities have ten to twenty year bull runs? Ah, yeah right. The Wall Street pumpers are out in force to dupe you out of your money just like they did in 2000. And, that's exactly the reason I don't trust anyone with my investments. Here's a question? Why would even the most skeptical on Wall Street believe something without doing their own research to prove it? Because it supports their biased thinking. We are all prone to a bias and need to be diligent in questioning everything we believe. There is nothing more compelling than an "expert" passionately extolling their opinion. But, the reality is the 80-20 rule applies to everything. That includes Wall Street being wrong. Unless we are rewriting history, they are wrong again.
I'll start by stating that this commodity superbull people are talking about and using contrarian thinking to support defeats the argument of a housing bubble too. Because everyone is talking about a housing bubble. So, we can expect housing prices to be fine in Phoenix as they go from 4,000 units to 45,000 units for sale. Or Boston where a condo project recently dropped their price from 1,000,000 to 600,000 to not be caught holding the bag. Or Miami where 3,500 new condo units are typically sold annually and there are soon to be fifteen times that coming on line. Or even the Midwest where housing prices have decreased the most so far yet were the most mild in appreciation. Or, I guess the IMF commentary that China is in the middle of a potential real estate crisis should be taken as a contrary indicator. Maybe, except for the fact that prices have already increased astronically and home prices are at multi-decade lows in affordability calculations. So, supply and demand don't drive price dynamics anymore? The only way we will see housing prices hold up is through a big dose of wage inflation. Being a contrarian for contrarian's sake is wrong because the herd is sometimes right. So, one really needs to create a reasonable thesis as to why they are a contrarian and must be able to formulate arguments on both sides of the fence. And using historical perspective is the way we attempt to divine the future. Yet, that doesn't appear to happen with regards to the supercycle commodities argument.
It is hardly logical that you can have a housing bubble, ie, hard asset, and not have a commodities bubble, hard asset. What happens to commodities if housing demand cools off as more and more supply is brought online by the producers to meet the "increased demand" or because commodity prices now pass the hurdle rate for new mining projects and investments? And, might I add Robert Schiller and Warren Buffett have both publicly stated the commodities markets are not working off of fundamentals but speculation. But, that in itself is hardly a reason to assume commodities are a bubble. They can be wrong just as anyone else. Although Warren Buffett did sell is silver holdings for a cool billionish in profit this month after he picked them in in 1998 for a song.
And, the discussions of the CRB up only 50% is nicely selective. Again, supporting a biased mindset. So I guess metals that are up 300-1000%, which are contained in the CRB, should just be passed off as normal? Yet, these runs are greater than the tech run into 2000 in percentage terms. Historical precedence including the inflationary 1970s that commodities are going up for 10-20 years? Might someone actually prove that to me with hard data? Maybe a copper or zinc or platinum or paladium chart that shows sometime like a 10-20 bull run? Maybe even a gold chart? If someone could actually produce that, and they can't because it doesn't exist as I have 100 year metal charts in front of me, then metals would, by definition, not be commodities. To the contrary, they would have long term pricing power. I guess that means they aren't commodities. Maybe they are semi-precious or precious metals?
So to support their manipulation, Wall Street types are out espousing these studies how commodities have outperformed stocks since 1970. And how they are noncorrelated with equities so they are a good hedge. Now, your retirement funds, yes you reading this, are investing around this ridiculous notion since more and more pension funds are succumbing to this line of bull Wall Street is feeding us. Ibbotson has some crock of shit study to show that commodities have returned 70 to 1 since 1970 while equities are only a little more than half of that. I guess spinmeisters can and do say anything they want to get your money.
Ok, so comparing this cycle to the "massively" inflationary 1970s, An era which produced the highest interest rates in the entire 1900s through today. A period of over 100 years. The absolutely best time for commodities as it was the inflationary period of the last 100+ years. Correct? Well, let's look at the facts.
Gold peaked in 1974 about around $200ish bucks after a nice run similar in return to ours from 2001/2002 till today. 1974 is comparable to late 2006 or 2007 if you follow the cycle thesis. Gold ended that cycle run in 1974 with a rapid blow higher similar to what we saw in the last six months with gold going from $400ish to $700ish. So, what was gold in 1979? About $200. Oh, by the way it took you through a gut wretching decline to $100 before you got back to break even almost six years later in 1979. The run to $850? That lasted the whole 70s? Nah, gold went from $250 to $850 in ONE year. And, supporting it were interest rates at 20+% and inflation through the roof. Want to know what nickel did during that 1980 blow off? How about nothing? Yep. Zilch. Zinc? Well, zinc went through the roof into 1974. Up a mere 700%? Sound familiar? Sounds like 2006. Then what did zinc do? Down a mere 75% in a quick downdraft and it stayed there for the rest of the 70s with a few minor squibbles in between. Want to know when you got your money back? 1989 when zinc finally returned to the 1974 levels. Copper? The new semi-precious metal selling at $4 a pound today? Well, in 1971 copper was at 45 cents. in 1974 it was $1.30. 300% return. In 1976 it was 60 cents. In 1978 it was 60 cents. In 1980 when interest rates were 20+% it went to $1.40. Basically back to the high it had been at six years earlier. Well, then in 1982 it cratered again to 60 cents. Want to know what it was in 1960? Yep, 60 cents. And on and on and on. Till the start of this cycle. Care to guess the price in 2001/2002? Yep 60 cents. In forty five years it was 60 cents with a few blow off peaks lasting a few years. There was no sustained run in the 1970s. Not for any metals. If gold sees another blow off run like 1980ish, inflation would need to build over many business cycles as it did in the 1970s, where we would ultimately see 20+% interest rates or likely something similar. Should that would happen again, the cycle would be approximately in 2012 or 2013. Copper has started each business cycle in the last 50+ years at less than 60 cents a pound. That is the spot price. No games with inflation adjustments or other silly trickery. 60 cents. So, in actuality, copper has really declined drastically as have all metals because of inflation. That's one hell of a winning investment vehicle isn't it? In the 1970s there were many short business cycles when high input costs, ie commodities, shortened the business cycle. Does anyone actually believe commodities could go up for twenty years and demand would not be cut off? Not if you think about it in economic terms of supply and demand. But, if you listen to someone smart tell you that it does, well, then it might be believable.
Ok, so let's look at the commodity stocks. Maybe the equities performed better. They sure did. Not! They cratered when the equity markets cratered in the 70s, which was quite frequently. Oh, well what about their noncorrelation with equities? Well, you don't need to understand a PhD thesis on multigrid methods for time-dependent partial differential equations to determine that's a bunch of bullshit too. What is common sense? In the supply and demand of commodities in the business cycle, what would happen when the cycle ends and general economic demand abates? Uh, economically sensitive natural resources would? Fill in the blank. How about collapse? Yep. In line with equities, commodities collapsed in the 70s. So, noncorrelation huh? Ibbotson must have received their mathematical degrees from the school of new math. That's the same school that taught Wall Street to tell us the technology bubble would last forever as they told you in 2000.
I guess because the 70s is noted as the cycle where we had inflation pressures people equate rising rates and inflationary pressures as meaning commodities keep going up yet commodities cratered every business cycle in the 70s. Gold did as well but gold held up a little better because some speculators think it has some instrinsic value and is an inflationary/deflationary hedge, thus, there is some worthwhile argument it is not a true commodity. But, that said, it too tanked 50% and did nothing for six years. Or put another way, except for a short period of time in the 1970s, gold had one massive run of one year. The 1980-81 blow up from $250-850.
If we are all so convinced this has historical precedence, and can prove it with charts of metals or commodities, which cannot be done, then let's all buy copper here at $4 a pound. I guess that's why the Russian stock market, an exchange dominated by commodities, dumped 30% in a few weeks this month. But that's normal. Or so we are told. Anyone show me where a US exchange dumped 30% in a few weeks? How about one time in 100 years? That is not normal and is typically a sign of topping in any type of financial market.
This is a little bit of outcontrarianing the contrarian with some factless facts. ie, Taking a contrarian position just because its out of vogue yet has no supporting historical perspective. And, historical perspectives matter because human behavior never changes. Care to guess how much money it takes to corner the global lead market? A few billion smackers. A relatively small market. Care to guess how much hedge fund money is chasing commodities? That's right. Alot. Human behavior never changes. That includes those who state there is historical precedence for this commodity bull lasting for decades. Metals will go up until the business cycle is broken because, just as this thesis proves, human behavior is repeated and so are the stories that commodities are going up forever. It's hard to pick the top of a mania so who knows where it ends. I could see oil going to $100 a barrel based on some sentiment work I've done. And, it truly might be different this time. Housing might continue to go up as a new asset class. Metals might continue to go up and have no effect on supply and demand. Yet, if this is so, one cannot use historical perspective to divine the future of equities because hard assets are driving equities. That likely means human behavior has changed. So, in conclusion, we are right back at year 2000. Goldilocks is surely getting alot of action these days. Can anyone set me up with a date? Pax Americana. Yet this time, it's truly Pax Globalia.
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