Commodities “super-cycle” turns Wall St ponzi scheme

The post-pandemic environment is deeply irrational. We’ve seen markets crash down and crash up. Autocracies charge into self-defeating abuse of all and sundry. Democracies give up entirely upon accountability. Riots at the Capitol. The “great reset” conspiracy theory. The normalisation of rape in the Australian Parliament House. Entire countries swept by death while others bunker down like there is no tomorrow.

Now we can add another feature of the post-pandemic environment to the list of crazy outcomes: the return of the so-called commodities super-cycle.

I could reiterate my skepticism about it but Karen Maley at the AFR has done that for me (of course without reference or link). She describes me as an anonymous “skeptic” who argues:

  • China is going to slow and without its demand growth, you can forget about commodities.
  • Chinese property will lead the slowing so bulk commodities are in the gun.
  • Supply disruptions are temporary.
  • Fiscal stimulus for decarbonisation delivers only marginal gains to base metals demand.
  • Inflation is just as temporary.

To this, we can the FT which highlights another peculiar dynamic today:

  • Prices are already more than high enough to trigger new supply.
  • The more recent flows into commodities are financial, not fundamental, as investors seek real asset inflation havens.
  • This is now driving up inflation via inflating commodity prices.
  • Onwards and upwards.

In short, the entire commodity super-cycle thesis is now transformed into a self-reinforcing ponzi-scheme as investors lose their heads:

Well and truly:

Don’t get me wrong. There were good reasons for a strong commodity rally coming out of the pandemic this year.

China’s usual supply-side stimulus via empty apartments plus its trade war on itself were always bulk commodity positive. But the stimulus is temporary and China is already returning to economic restructuring. Iron ore supply is springing everywhere quite fast because there is so much idled supply in brownfields mines. Plus, Vale is returning a bomb of supply.

Base metals will get a marginal lift from the stimulus and industrial inventories that are run down owing to huge goods demand and restocking happening in developed economies. But that will pass as services recapture their share of household spending upon reopening and we only need a new mine or two for copper et al for decarbonisation.

Softs are enjoying the temporary disruptions of a La Nina event and some trade war reallocations.

Finally, oil is going through its usual cyclical moment. Crashing prices shut down US shale, production fell 2mb/d and OPEC took 8mb/d offline. That market share struggle is already resuming and every move above $70 will accelerate it.

In short, by 2022, there’ll be plenty of supply in everything, fading demand, and falling inflation on annual base effects as commodities reverse.

This is not the stuff of a commodity super-cyle. It is regular commodities bust and boom recovery cycle. Next up will come the denouement of another bust as the price spike egged on by monochromatic Wall St cheerleading reverses on fundamentals.

David Llewellyn-Smith
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Comments

  1. Everyone is getting out of FAANGS and into commodities – there are literally trillions sloshing around – why not speculate on Rice, Corn, Wheat, Water, Beef, Pork, Chicken and drive the global food supply chain through the roof and hence food prices and cost of living forcing the Fed and Dems to increase aid and support via the hip pocket….result…..inflation…..result……interest rate rises……result /r/wallstbets wins again !

    WTS!¬

    • Yeah… despite all this money printing going on and media hype that ” Everythings great “.

      I dont think people are that dumb. They are starting to feel that ” somethings not right “.

      There seems to be some kind of manipulation going on with Gold currently. Not sure what thats about but somethings going on in that space.

      I see Silver rising this year. In fact, I wouldnt be surprised if it outperforms the ASX.

      https://gyazo.com/3fa64761f991252fd387e5fd24f91a05

      I think when all this money printing gets printed, you’ll see segments of the American / Australian community ( the Bears ) saying, ” Nah… things arent alright here “. Despite it not making any sense, and Gold/Silver being volatile as hell, I think they’ll end the year being more positive then people realise. All this money printing being dumped into markets with peoples waning confidence in the system.

      I dont know the words to explain it but Risk is rising at a tremendous rate. Ordinary people who just want to live Ordinary Lives are starting to realise, ” Hey. They keep telling me everythings just fine but I really dont feel fine. Why does my life feel worse off today then it did last year? “.

      Dont forget, you’ve got all these Speculator Investors who jumped into Trading because Covid wiped them out. They had no jobs so overnight, we saw everyone became a Stock / Forex Trader. If what your seeing is right, then we could be a year away from many business’s going insolvent.

      Whether you agree or disagree isnt the point, what it does add up to is… RISK, Lack of certainty and Lack of any kind of understanding.

      Im not convinced that Biden will magically regrow America in under a year. Your only riding the waves of money now. Its all your doing. The more we print, the more dissatisfied with American Dollars people will become. We had riots and protesting in 2020 so what do you think $1.9 trillion is going to do in 2021? Especially, if we dont see an instant translation into employment… which I doubt.

      Yes… a lot of that money may end up in wall street and people might ride the wave but I think there’s an underlining where people are getting fed up. I think you will find a stream of money entering into Gold / Silver / Platinum as well.

      What Im worried about is that the Boomers are going broke. There seems to be an inclination to move your lifes savings into all these worthless assets, which in a few years could be worth nothing. Im not saying there could be a crash tommorrow but if there is, a huge amount of investors are going to get burnt.

      I think the Aging Population is a real trend. I believe in it strongly. Its why I dont believe this is going to work. Its also why I dont believe, despite all the many attempts and efforts in US and Australia, you’ll see business regrowth happening anytime soon.

      To put it another way, we have all the money printing sloshing around but we destroyed the Labor Force. We might have the money to invest in a Business but I dont think we have the Labor Force to run that business. Despite having all the money in the world, I think ultimately, it’ll be the Labor Force which ends up being the undoing to all these plans. I just dont think its strong and I dont think the underlinings make any sense anymore.

      Who would invest money to start up a Business today? Seriously. Think about this question? What idiot would see all this going on around them and say, ” Hey. I think its a great time to start a business. ” lol. Ultimately, the Aging Population is going to be the nail in the coffin. In the end, I believe its the Labor Force ( Social Society ) that’ll be the undoing.

      Finance is trying to play god. Its saying, ” We can print all the money we like so we can do anything we like “. I believe the Finance Industries are about to learn how weak and powerless that money really is when you dont have the right people or Labor Force to do that job. I dont think this money printing will be as strong as people pretend its going to be.

  2. DLS – what new mine or two are you looking at filling the copper supply gap? Bear in mind that large mines usually take 7-10 years from discovery to production on a best case basis.
    The only question in my mind is construction demand and whether eventual weakness on that front will offset the strength from EV/renewables growth.

    • BINGO !!! Labor Force. Its been destroyed.

      You can start up a new Manufacturing Plant but who’s going to be working in it?

      The Aging Population and the dissatisfaction of todays youth is just going to grow into a huge void. At some point, people are just going to stop giving a sh*t.

      No amount of police is going to stop the young from just walking out on you… and not caring.

      And why should they care? What do they get out of it? Societys falling apart. There’s no incentive to get out of bed anymore because the Boomers have gorged on society so bad now that our Labor Force is falling apart.

  3. Quarantine Madness

    I think the next 12 months are about inflation, infrastructure and commodities. I don’t see China the world’s high tech factory and technology leader in its own right sleep walking into an economic crisis. This rotation of tech money into other sectors is only just starting it has a long way to run.

    • I agree with you. Long-term, every economy including China has serious structural problems.
      Short-term, rotate out of the USA and Tech! YOLO!