‘The Only Way Is Up’: Commodity Surge Makes History
I'm not sure how many people had "World War III catalyst" on their commodities supercycle bingo card, but starting last year, there were no shortage of calls for a historic and sustained rally in raw materials.
In November, for example, SocGen suggested, the world should "expect significant energy storms ahead [with] prices much higher at times, and prone to turbulence pretty much all of the time."
As early as January 2021, JPMorgan cautioned that a "full-blown energy crisis" could be in the o
Interesting that Real Estate improved significantly during stagflation ’73. I expect it will perform in the opposite direction, by a much larger magnitude this time around.
The commodity bubble bursting in fall 2022 will be the next “big event”. The demand side of the commodity bubble is all about re-adjusting supply chains and ordering 2x-10x more than you need just to guarantee supply. Consumption is driving demand of durable and non-durable goods, but end demand is only up a little and no where near the spike up in commodities would indicate. Let us also not forget the buying of stuff was financed by stimulus. And… the supply side of the equation is the real issue at present due to pandemic and the violence in Ukraine.
These dynamics will get resolved over the summer when the confluence of lowered demand (less buying of goods, more buying of services, no stimulus, falling real incomes) and smoothed supply delivery will lead to an oversupply of inputs in inventory and input (aka commodities) demand will fall off a cliff.
This is all assuming the FED gets more dovish than they are presently. If they don’t gauge this shift the problem will be compounded and the contagion to all risk assets will be significant.
Also- 2s-10s split just above 30 bps? The economic dashboard warning light is on.
To clarify, I was referring to the demand and supply dynamics as a whole will get resolved by summer. As for Ukraine, I hope the violence stops tomorrow/immediately. I’m not optimistic is will get resolved any time soon.
Drought and rising temperatures aren’t the only issues for agricultural commodities. It now appears that the very way we farm has been destroying soil. Just as clearcutting forests is bad for forests, the way we farm has been “killing” soil.
https://www.scientificamerican.com/article/only-60-years-of-farming-left-if-soil-degradation-continues/
https://www.usda.gov/media/press-releases/2022/02/08/climate-smart-commodities-expanding-markets-hear-what-theyre-saying
https://www.bbc.com/future/bespoke/follow-the-food/why-soil-is-disappearing-from-farms/
Absolutely correct.
I just saw this scrawled on a bingo card:
“Novokmet et al. estimate that in 2015 the hidden foreign wealth of rich Russians amounted to around 85 percent of Russia’s G.D.P. To give you some perspective, this is as if a U.S. president’s cronies had managed to hide $20 trillion in overseas accounts.”
That’s a fair chunk of change that hopefully will be locked up and not available for geopolitical instability. It’s hidden wealth like this that needs to be contained and not made available to friendly banks in India, as an example.
If Zaporizhzhia nuclear plant goes Chernobyl after shelling by Russian forces, odds of NATO entering the war, with a “no-fly zone” or more, go up. Setting off a Chernobyl in the heart of Europe is Article 5 stuff. Domestic approval might suffer too, since winds sometimes go from Ukraine east to Russia.
Screened out Century Aluminum some time ago and bought, good timing for me. I prefer it trade w/o a war.
Time to open up Keystone and encourage fracking in US.
The US needs to stop buying oil from Russia. Last I read, we are still buying 650,000 barrels/day- equating to 4% of our oil usage.