It’s all just a little bit of catch-up growth. Not that you’d know it from the hysteria that’s now grabbing commodity markets. Recall that when discussing rising commodity prices in recent months, we produced this chart:
Notice the steep acceleration in activity and inflation from the bottom owing to “catch-up growth”. This can even overshoot trend for a short time before falling back.
There are 1497 words left in this subscriber-only article.
Start your free 14-day trial today!
During “catch-up growth” demand is double-juiced because much of the spending that was idled and missed during the pandemic returns just as new spending joins the party. Basically, you get two years’ worth of growth in one.
Obviously, this is a brief and cyclical flourish. Once policy support begins to normalise, then there is a snapback down to trend once more. Indeed, there can be a quite sharp slowdown because once exhausted the catch-up spending then weighs on the rate of change for growth for a year.
This is important for commodities markets. Without this wisdom, you can make crazed extrapolations from a temporary catch-up phenomenon into the future. Bear Traps Report is an excellent example:
There is a colossal ESG inflation risk brewing across the metals and commodities space. The side effects are emerging. Traditional capital markets financing is not available to many metals, oil, gas, and coal companies.In the end, the middle-class working family will suffer at the hands of a higher cost of living, a populist rebellion is at risk. A number of small investment banks we speak to are doing deals rejected by large investment banks.“We haven’t done a deal like this in 5 years.”This is HIGHLY bullish commodities as NON-Traditional arresting forces to capex now litter the landscape. Exploration capital is just NOT there in the same way it was in the last cycle, so the response time to bring back exploration is PUSHED OUT.
Inflation forces are running through Lumber, Corn, Metals, Oil, and Gas. They are ALL MORE expensive to the little guy, a toxic ESG overdose is raising the cost of capital, crushing supply. Our Planet is in a Massive Commodity Deficit-Backwardation is at 15 Year Highs per CME and CE data-the probability of an inflation shock is the highest in 20 years. Now put new demand for sexy EV metals-green, into the mix. This is the “Cobra Effect” on stage.
In May 2021 inflation is not just pressing, it’s raging. An ESG rebellion, populism risk on the rise (ESG inflation is a large tax on the middle class). Active labor organization is surging (White House has been supportive publicly). Fiscal stimmy checks are crowding out private sector employers forcing wages MUCH higher (U6 unemployment is near 11%, why go back to work? Private sector employers have to pay up now to bring people back). Refunding(treasury issuance surge comes back in May, more supply means upward pressure on Treasury yields). Supply chains are a disaster. Agriculture pressure on inflation is at ten-year highs (think profit margins-company after company making noise). Citi has said it will stop financing coal, last year it walked away from 11 deals. Shale (oil and gas financing) deals have collapsed as well, dozens more have been denied, putting UPWARD pressure on natural gas prices. As a result, this increases the cost of coal and natural gas electricity-makes nuclear power far more competitive. We have a HIGH conviction longs positions in the uranium sector (CCJ Cameco, URA ETF). The follow-on unintended consequences are piling up! We see 20-30% downside for the Nasdaq in an inflation shock, stay overweight commodities.
This is peak commodity hysteria. The world has an enormous gas glut. Oil is very manipulated but it too is in enormous surplus. Coal is plentiful and still cheap.
Recent price rises in all three are either manipulated, seasonal or cyclical. None are structural.
Let’s hope ESG does limit them in the future but there is little evidence of it now. On the contrary.
As for base metals, bulks and softs, all are enjoying a strong ride now on a combination of catch-up growth and COVID supply disruptions but those will fade as well as global reopening and catch-up growth run their course and stimulus is wound back.
Moreover, China is at the head of the pack in this process. It was first into the pandemic. First to stimulate out of it. And, now, it is first to remove extraordinary support:
There is a decent bull case for some ESG commodities related to new energy frontiers such as battery inputs. But even these need to be sifted carefully.
As for the wider commodity complex, it’s simply recovering post-COVID. This relatively short period of catch-up growth is running headlong up the back of a slowing China as it leads the post-COVID normalisation.
With the world to follow.