Zoltan the Magnificent gonged commodity top

There is no hotter name in market economics right now than Zoltan Poszar. FTAlphaville singles him out for hagiography:

There are financiers whose names adorn gallery wings and university dormitories. The world of money has even yielded a few who can be identified by first name only — at least to insiders. But there is only one that boasts their own hashtag. Whenever Credit Suisse’s Zoltan Pozsar publishes research, the financial corners of Twitter will light up with comments on the latest from #Zoltan. (Even the WSJ has noticed the phenomenon.) Not everyone is a fan of his often complex explorations of the most recondite recesses of the financial system, or his far-ranging discussions on its future. But no one denies Pozsar’s influence, which is why FT Alphaville hit him up on a recent visit to New York.

Yada, yada, yada. There are plenty of other examples of punditry worship around the joint.

Readers will know that Zoltan’s immediate claim to fame is having declared the end of Bretton Woods II. He argued from mid-March that:

  • the Ukraine war would drive Russian commodities into China’s arms;
  • this would result in a kind of maritime reserve of Chinese commods to underpin the yuan;
  • leading to the creation of a Eurorenminbi system to rival Eurodollar, and
  • the rise of a dualistic reserve currency system with one autocratic underpinned by commods and the other democratic with an endemic inflation problem.

This was a marvelous piece of analysis and I agreed with its thrust as the world bifurcates into autocratic and democratic blocs.

However, I disagreed with the scope of the implications and noted that in cyclical terms, commods were a very bad bet indeed:

This is precisely the right time to be short commodities as the global economy is rocked by a European war and energy shock. A Chinese property and OMICRON shock. Plus a US inflation and rates shock.

More to the point, this is pointing to precisely why commodities will not deliver Zoltan Pozsar’s Bretton Woods III.

Look at the Australian dollar and other commodity currencies falling out of bed today. These are the most volatile currencies on earth because so are their underlying commodity cash flows.

To make this into a reserve currency underpinning the yuan would wreck the Chinese economy. It would turn into a giant Australia complete with a massively hollowed-out industrial base but without the commodity producer offset, given the argument is more about the development of a Eurorenminbi market around Russia than it is a domestic CNY.

This is not to say that the geopolitical dimensions of commodity supply are not material. They may well be. But that is not Bretton Woods III. It is slightly higher prices over the cycle than otherwise. Even that will induce its own supply response in accelerated alternatives, especially in energy. Nor is there any material commodity shortage for this transition. That story is fabricated by Wall Street.

In short, I fear that commodities are going to crash even more steeply than usual as this cycle ends because the mania behind sky-high prices will end with it.

Zoltan Poszar beautifully described the evolving monetary Cold War but he also called the top in the commodity mania:

Looking forward, I still don’t agree with Zoltan’s outlook:

  • he underestimates the supply-side flexibility of eminently fungible global commods;
  • he does not factor in the accelerated decarbonisation trend that will peak oil demand soon (on a geopolitical timescale);
  • he does not factor in the structure of the Chinese economy;
  • nor does he allow for the market implications of the clear geopolitical risk emanating from China.

This leads me to reckon that any alternative reserve currency system based around the renminbi will be small.

That said, it is going to be a rough transition for a few years as the global economy unhooks itself from Russian energy supply so I am expecting some pretty volatile commods for a few years.

Houses and Holes

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