I have noted many times how hysterical markets have become in the last year. The Amphetamine Cycle, as I’ve labelled it, has proceeded through a decade of typical market phases in one year. An economic shock. Market crash. Massive stimulus. Market crash up. Inventory cycle. US dollar boom then crash. Gold boom and bust. Tech bubble and bust. Deflation then inflation scare. And on it goes.
Amongst all of these the most ridiculous to my mind is the recent development of a market narrative around a new “commodity supercycle”. It first appeared around Q3 last year but really took off in the last month. It was based the idea that:
- Underinvestment in oil will level us short.
- A global new green deal will mean much more copper and other EV inputs is needed.
- Iron ore will be needed everywhere forevermore.
- The falling US dollar will drive financial flows into commodities.
- And, all of this wild inflation in commodities will drive a bid for real assets, read commodities.
Popping this little balloon is pretty easy for the experienced commodities analyst:
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- Points 1 and 2 clearly contradict one another. No to mention the immense amount of oil currently held off-market and the breaking supply discipline yet to come in shale and OPEC.
- Global energy transformation will be bullish but brings with it huge metal recycling inputs as well.
- Iron ore is in structural oversupply when one considers Vale’s problems and slowing Chinese growth.
- Point 4 evaporates the moment the US dollar turns higher, which is now.
- Point 5 is a clear ponzi dynamic that only holds if the other 4 do.
