Update On Commodities
I recently watched a Bloomberg video profiling the commodities "supercycle". One of the highlighted guests was Jim Rogers. I don't know Jim Rogers from Adam but I feel a sense of insincerity and lack of forthright nature in many of his statements. I'm going to break down that video with a post some time in the next week or so including many statements I believe are highly misleading.
In the mean time, I believe it is important to make a few notes here. Commodities have the potential to hit a free fall at some point. That said, the true believer will not give up so easily. I expect this market to become extremely volatile. If you are a trader, you are likely in for a treat soon enough if you can stay on the right side of the trade. There exists a potential for a rapid snap back in many of these stocks and commodities. Coal and oil service in particular have been decimated recently. Some stocks are down 30-50%. Fording, Valero and Peabody, which I've highlighted recently, will rebound if even temporarily at some point.
The premise for a commodity supercycle lies in a buildout of China and to a lesser extent, India. The reality is drastically more complicated and includes low demand for capital, overvalued equities and traders looking for a positive return. If you watched the Bloomberg video with Stephen Roach I highlighted this week, you heard him say that in his decades of experience, he has never come close to seeing such an imbalanced economy as China with 85% of investment focused outside of the consumer sector. Heed the warning. If there is one thing I value above all else, it is wisdom. Wisdom only comes with experience. Experience only comes with age. Legacy cultures value their grey-haired while we toss them aside in the US in favor of a twenty five year old Harvard MBA who is armed to the teeth with book knowledge but little else. I have the utmost respect for Stephen Roach, Richard Russell, Walter Deemer, Justin Mamis, John Templeton and the grumpy old men and women who've been there and done that. They may not always be right but the times they are may save you substantial pain. If you are under fifty, you may be as smart as a whip, but unless you've studied history or those who've lived through history, you likely don't have alot to say with regards to markets that I care to listen to. The Chinese proverb "A single conversation across a table with a wise man is worth a month's study of books" isn't highlighted on my blog site for nothing.
One of my first posts was to highlight the global buildout to service the American consumer. I believe the title was "Never Have So Many Relied On So Few" if you want to go back and read it. With so much overbuilding, especially in Asia, we have a tremendous global capacity glut and no significant market reforms in these same societies to create consumer driven wealth needed to offset the overindustrialization's inevitable slow down. Thus, all of this overcapacity was built to serve the American consumer at a time when the American consumer will likely need to take a break from so much overconsumption. One must realize this overbuilding and overindustrialization means an artificially and unsustainable demand for oil and commodities. At least until the excesses are purged. This is happening just as tremendous monies are being spent to bring on new supplies of these resources. Overbuilding even if the American consumer would continue spending is still one of the most significant global dislocations we've seen this century. If just 3% of global demand were to disappear, commodities including oil, would be routed. The investment funds alone are now accounting for more than 3% of demand. Should China and or India have any type of economic crisis, and the probabilities are they will, we could see decimation on a scale seldom seen in these asset prices and the equity markets fueled by their demand. That means Brazil, Mexico, Russia, the Middle East, Venezuela, Canada, Australia and other commodity driven markets could see unprecedented collapses. There was a report within the last six months that Russia could lose thousands of banks in a slow down because of poor banking oversight and lack of robust regulations. A commodities crisis could bring about such an event. Putin realizes this and these attempted banking reforms are the reason the Russian equivalent of Ben Bernanke was just assassinated. So, was the 30% decline of the Russian equity market in May just a normal correction? What kind of liquidation can take a market down 30% in a month? Something that has only happened once as I can tell in one hundred years of American equity markets. Major players were very likely leaving Russia's market.
If there was ever any time in the last one hundred years to be cautious and defensive in the developing market, basic materials and commodities sectors, it is now. So, just as the perma-bears are calling for the end of American society, where do you think all of this money will go should this come to pass at some point? And whose currency will likely benefit as confidence in other countries wanes? And, what would that mean for dollar denominated commodities?
In closing, I don't know if we will have a gradual decline in commodities or if we will have another rise or if we will see a collapse. And, I cannot say if it will be tomorrow, next week or next year. But, others are only speculating with their commentary as well. One thing I can say is that history is on my side of the argument and risk is elevated. I tend to think a reflating Fed, when it happens, may add support for these commodities at some point but again no one knows exactly how this will play out. One thing is certain. I'd rather own P&G than Phelps Dodge.
In the mean time, I believe it is important to make a few notes here. Commodities have the potential to hit a free fall at some point. That said, the true believer will not give up so easily. I expect this market to become extremely volatile. If you are a trader, you are likely in for a treat soon enough if you can stay on the right side of the trade. There exists a potential for a rapid snap back in many of these stocks and commodities. Coal and oil service in particular have been decimated recently. Some stocks are down 30-50%. Fording, Valero and Peabody, which I've highlighted recently, will rebound if even temporarily at some point.
The premise for a commodity supercycle lies in a buildout of China and to a lesser extent, India. The reality is drastically more complicated and includes low demand for capital, overvalued equities and traders looking for a positive return. If you watched the Bloomberg video with Stephen Roach I highlighted this week, you heard him say that in his decades of experience, he has never come close to seeing such an imbalanced economy as China with 85% of investment focused outside of the consumer sector. Heed the warning. If there is one thing I value above all else, it is wisdom. Wisdom only comes with experience. Experience only comes with age. Legacy cultures value their grey-haired while we toss them aside in the US in favor of a twenty five year old Harvard MBA who is armed to the teeth with book knowledge but little else. I have the utmost respect for Stephen Roach, Richard Russell, Walter Deemer, Justin Mamis, John Templeton and the grumpy old men and women who've been there and done that. They may not always be right but the times they are may save you substantial pain. If you are under fifty, you may be as smart as a whip, but unless you've studied history or those who've lived through history, you likely don't have alot to say with regards to markets that I care to listen to. The Chinese proverb "A single conversation across a table with a wise man is worth a month's study of books" isn't highlighted on my blog site for nothing.
One of my first posts was to highlight the global buildout to service the American consumer. I believe the title was "Never Have So Many Relied On So Few" if you want to go back and read it. With so much overbuilding, especially in Asia, we have a tremendous global capacity glut and no significant market reforms in these same societies to create consumer driven wealth needed to offset the overindustrialization's inevitable slow down. Thus, all of this overcapacity was built to serve the American consumer at a time when the American consumer will likely need to take a break from so much overconsumption. One must realize this overbuilding and overindustrialization means an artificially and unsustainable demand for oil and commodities. At least until the excesses are purged. This is happening just as tremendous monies are being spent to bring on new supplies of these resources. Overbuilding even if the American consumer would continue spending is still one of the most significant global dislocations we've seen this century. If just 3% of global demand were to disappear, commodities including oil, would be routed. The investment funds alone are now accounting for more than 3% of demand. Should China and or India have any type of economic crisis, and the probabilities are they will, we could see decimation on a scale seldom seen in these asset prices and the equity markets fueled by their demand. That means Brazil, Mexico, Russia, the Middle East, Venezuela, Canada, Australia and other commodity driven markets could see unprecedented collapses. There was a report within the last six months that Russia could lose thousands of banks in a slow down because of poor banking oversight and lack of robust regulations. A commodities crisis could bring about such an event. Putin realizes this and these attempted banking reforms are the reason the Russian equivalent of Ben Bernanke was just assassinated. So, was the 30% decline of the Russian equity market in May just a normal correction? What kind of liquidation can take a market down 30% in a month? Something that has only happened once as I can tell in one hundred years of American equity markets. Major players were very likely leaving Russia's market.
If there was ever any time in the last one hundred years to be cautious and defensive in the developing market, basic materials and commodities sectors, it is now. So, just as the perma-bears are calling for the end of American society, where do you think all of this money will go should this come to pass at some point? And whose currency will likely benefit as confidence in other countries wanes? And, what would that mean for dollar denominated commodities?
In closing, I don't know if we will have a gradual decline in commodities or if we will have another rise or if we will see a collapse. And, I cannot say if it will be tomorrow, next week or next year. But, others are only speculating with their commentary as well. One thing I can say is that history is on my side of the argument and risk is elevated. I tend to think a reflating Fed, when it happens, may add support for these commodities at some point but again no one knows exactly how this will play out. One thing is certain. I'd rather own P&G than Phelps Dodge.
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