The only way is DOWN for commodity prices

I do enjoy a good stink with a commodity supercycle fanboi. Today’s example is Tom Stevenson at Fidelity International who writes under the title “the only way is up for commodity prices” that:

  • Inflation is everywhere and always a fiscal phenomenon.
  • The Biden administration has embarked on a war against inequality and this will be inflationary.
  • There’ll be endless fiscal building, green new deals etc.
  • This is all very bullish for commodities.

So, let’s unpack this a little. Why is it so very bullish for commodities? So the argument goes:

  • Fiscal stimulus will keep fundamental demand high.
  • The broader stimulus will devalue the US dollar keeping financial flows to commodities high.
  • Both of those will generate inflation meaning hard assets like commodities will be in even higher demand.

According to Stevenson then “almost certainly that the divergence hinted at in the first three months of 2021 is just getting started. Shares and commodities will continue to outperform.”

Hmm, well, I don’t think so. Stevenson let slip that he’s been reading too much Goldman Sachs commodity supercycle claptrap which is never too good for one’s health. The devil is in the detail.

  • Given the US doing the bulk of the fiscal spending, it is going to lead the cycle with inflation, yields and output. That is the opposite of the past few cycles in which the US was the global centre of the latest market crisis and the laggard coming out of it. The US dollar is going to rise on this exceptionalism which is very bad for global inflation and commodity prices.
  • Making matters worse, the US infrastructure package is two-thirds human development, not roads and bridges, so it is not even commodity-intensive.
  • Moreover, China has already begun to lead the global tightening as its export sectors boom and will keep doing so. Also contrary to past cycles, it needs to tighten faster to address its structural debt woes.  The early signals are all there for a major commodity demand correction from the only source of demand growth that matters for all dirt:

In short, both the fundamental and financial drivers of commodity demand are already peaking and are about to fall materially with sky-high prices very soon to follow.

From here, the only way is DOWN for commodity prices.

David Llewellyn-Smith
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  1. DouglasMEMBER

    The other view is that the combined fiscal and monetary deficits in the USA are about 22% of GDP and relies on the kindness of foreign savers for capital flows. Without these the US dollar falls and commodities should rise. A slight downturn in Chinese M3 does not just reverse commodity strength unless the M3 downturn is protracted. I would go for the Stephen Roach view that US dollar falls for some time. US exceptionalism is based on multinational tax cheating!

  2. Surprised they didn’t roll out the chart of the Chinese credit impulse or M1, both of which lead commodity prices over the past decade.

    I think commodities are topping out too, although there are some I like, notably platinum.

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