for quite a long time now not to be aware that
something has been going on in the world of
commodities. Oil increased in price sevenfold between
1999 and 2006. Copper did almost the same in 4 1/2
years from its low at the end of 2001. The precious
metals have also soared in this new decade. Now it's
the turn of the grains, where wheat and particularly
corn have exploded higher on the US futures exchanges.
This has all given rise to much loose talk in
investment circles of a commodities super cycle which
will stretch several years into the future. But what do
people mean by a super cycle? Over the years some
economists have observed that there are phases of
economic activity, where waves of expansion and growth
are followed by slowdown and recession, and that these
phases can be quantified in terms of duration.
Kondratieff was probably the most famous exponent of
this approach in the 1920s, while in the US Dewey and
Dakin took up the theme in their book "Cycles – The
Science of Predictions" published in 1947. In both
cases, a long wave (or super cycle) is posited as
lasting between fifty and sixty years in which we move
from trough to peak to trough again. Within the long
wave there are deemed to be smaller waves, in which
activity ebbs and flows in briefer time periods. All of
these studies focused as much on the historical
analysis of commodity prices as on interest rates,
trade, inflation and the rest of the available
economic data.
The equivalent in the technical analysis of markets is
to be found in the wave theory of R.N. Elliott, in
which he breaks down the trends in bull and bear moves
into cycles that last from minutes through to decades.
Of course, the value of all these cycle studies lies in
their supposed predictive power. And here is where the
problems begin. Even as convinced a believer in the
commodity bull cycle as Jim Rogers points out that the
shortest boom lasted 15 years, while the longest lasted
23 years. His conclusion is that we have much further
to go, but don't expect a great deal more precision
than that. Oh, and don't forget that we'll endure some
huge corrections along the way.
The Chancellor, Gordon Brown, has of course famously
had his own problems in this area: he laid great stress
on balancing the books over the course of the economic
cycle only to be forced to change the starting point of
the current cycle from 1999 to 1997 in order to meet
this "golden rule".
In reality, all economic cycles and wave patterns are
best identified with the benefit of hindsight and
forcing current circumstances into some pre-ordained
mould will usually prove to be a pretty unrewarding
activity, and a dangerous forecasting mechanism.
What we can say is that there clearly are long-term
cycles and that they are driven by fundamental changes
in the world around us. Global wars, the industrial
revolution, major innovations in transport and
communications are just some of the factors that can
instigate long-lasting shifts in economic growth, that
in turn stimulate demand for commodities. Increased
demand drives prices higher while producers struggle to
increase the capacity to meet that demand. Ultimately,
prices peak when excess capacity has been developed –
the cycle is then completed when demand abates and
general surpluses force prices lower.
The big event of the moment is clearly China. I could
run through endless statistics indicating the dramatic
nature of the new industrial revolution that is taking
place there – its double digit annual growth rates, its
spectacular leap up the league tables to become the
world's fourth largest economy and so on. In focusing
on China, we shouldn't forget about India – it is the
second fastest growing major economy in the world, with
GDP growth up just under 10% - or Korea (up 5%) or
countless other booming countries. It's just that the
sheer size and scale of everything Chinese makes it
stand out and suits it to the role of representing the
emerging market economic boom as a whole.
The staggering numbers on Chinese economic growth are
matched by equally impressive figures in relation to
its consumption of commodities. The International
Monetary Fund reports that its share of the overall
growth in global consumption of industrial commodities
between 2002 and 2005 was massive – 51% for copper, 48%
for aluminium, 110% for lead, 87% for nickel, 54% for
steel, 86% for tin, 113% for zinc, and 30% for crude
oil. On the subject of oil, the Energy Information
Administration (the US government's provider of
official energy statistics) envisages a 47% increase in
global demand from 2003 to 2030, and that non-OECD Asia
(including China and India) will account for 43% of
that increase.
Frankly, all future projections are no more than
sophisticated guesswork, but what we can assume is that
unless the world economy really hits the buffers and we
are plunged into a global depression, the relentless
demand for industrial materials of all kinds from the
likes of China is set to continue.
We are still at the stage where supply is struggling to
match this huge increase in demand. If we take the
example of copper, only 12% of supply is generated by
recycling scrap, which means that 88% has to be mined
from the ground. Commissioning new mining production
inevitably takes years not months and in the lag we see
copper stockpiles around the world run down. Total
exchange inventories have fallen to under a quarter of
what they were four years ago, although this is above
the alarmingly low levels they reached in 2005. In
fact, the inventories held on the London Metal Exchange
and New York's Comex market are as good a guide to
ongoing tightness as you are likely to get, and
until they rise significantly the current phase
will not be over.
Although we are in a generally fundamentally benign
environment for the base metals markets right now and
will remain so for the next 3-4 years in all
probability, this doesn't of course mean that the
prices of these commodities will inexorably rise from
here. The dramatic rallies witnessed on futures markets
over the past few years have already discounted much of
the story. The news is well and truly in the price in
the case of copper: the steep parabolic rise,
culminating in the final doubling in price in the six
months to May 2006, has all the appearance of a
speculative bubble. We have already fallen from over
$4.00 per lb to a recent low of $2.40 on the Comex
exchange. That said, what had previously been a multi-
year price ceiling at around $1.60 per lb is still a
long way off and will probably prove a floor for the
foreseeable future.
As for the other base metals, aluminium peaked around
the same time as copper last year, and zinc has also
stalled for the time being; only lead, nickel and tin
are continuing the immediate surge higher.
Because it began its recent long-term rally at the same
time as copper and also peaked (for the moment) in May
of last year, it is tempting to put gold in the same
category as the base metal. Certainly the supply/demand
picture is similarly tight: mining produces around
2,500 tonnes per annum, while demand is running at
around 3,500 tonnes per annum. Scrap and central bank
sales make up the shortfall. However, there is one
crucial difference between the two metals, as the CEO
of the World Gold Council reminded us in the Financial
Times in early February: only 11% of gold demand comes
from the industrial and dental sector. This means that
89% of gold demand represents discretionary spending.
The jewellery business accounts for the lion's share of
this, general investment demand the rest. Not
surprisingly, the appetite for gold jewellery is
strongest in those traditional regions – India, the
Middle East and East Asia – which are currently
booming. It shows no sign of abating and underpins the
market. What will put the icing on the cake and push
gold prices on through last year's highs is the general
investment demand side of things. Low real interest
rates, persistent US dollar feebleness and the need for
asset diversification will continue to create an
attractive environment for speculation in the yellow
metal, while new mechanisms such as ETFs will make it
ever easier for the less sophisticated investor to
access the market.
Although gold has enjoyed a very good rally, nearly
trebling in price off its 1999 lows, it has not matched
the sevenfold move in copper, and the thing about these
major cycles is that they always overshoot in value
terms and end with a climactic bang, not a whimper.
In sum, unless the global economy hits the skids
dramatically, it is likely to take another 3-4 years
for supply to catch up with demand for industrial
commodities. This should put a floor under the price of
base metals and maintain a secular bullish environment,
even if some - like copper - may have discounted much
of this positive outlook already. Right now, the best
opportunities are in the precious metals, where gold
could easily top $1000 an ounce, and would need to
reach around $1700 an ounce to match the recent
performance of copper.
Regards
David Guthrie
For The Daily Reckoning ---------------------
Bill Bonner in Paris:
What gives?
After the mini-crash two weeks ago, we expected some hot action in the
financial markets.
Instead, investors – who had been shaken out of their torpor by plunging
stock prices worldwide – hit the snooze button again, rolled over, and went
back into dreamland.
Why not? The news at the end of the week was soothing enough. Employment was
up. Payrolls were up. A report from the Feds said that the trade deficit was
supposed to have narrowed January.
The Dow lifted slightly. Gold held over $650. The dollar stayed about where
it was and where it has been for a long, long time – at $1.31 per euro.
And so another week ticked by...the National Debt crowded up against the $9
trillion mark...and approximately another $2 billion of U.S. assets slipped
into foreign hands.
As to the former number, we were tempted to put a capital T on the trillion
but decided against it. It needs no additional emphasis. The biggest pile of
money ever put together in the history of the planet is now owned by people
who call themselves communists. It is just a little more than $1 trillion –
most of it in the form of claims against U.S. assets (dollars). But the U.S.
federal government owes 9 times that amount, about half to the public...of
which more than half the owners are foreigners.
The interest on the part in public hands alone comes to $240 billion per
year – or 11% of tax receipts. It is expected to double in the next 10
years...in 33 years it would take 100% of the entire federal budget.
Obviously, that can't happen. The U.S. government would be out of business.
Instead, something's gotta give.
But even though something's gotta give it doesn't mean that something's
gotta give right now...and it doesn't mean that the majority of investors
will not act like nothing's ever gotta give...right up to moment when all
Hell breaks loose.
Take the U.S. mortgage market...please. Something had to give there too, but
that didn't prevent a lot of very smart people from lending money right up
to the moment when they heard the subprime bumpers crunching up against the
foreclosure concrete.
And even then...the experts rushed to tell us that the damage would be
minor. We have our seat belts, our air bags, they said – go back to sleep.
Less than two weeks ago, Scott Coren, an analyst with Bear Stearns, wrote
clients that New Century Financial was not a bad buy at $15, since the
lowest it could go was about $10 in "a rescue-sale scenario."
But what's this? The stock traded last week down to $3.21. When something
finally did give at New Century, where were the rescuers?
The entire U.S. mortgage market is worth $6.5 trillion
- more than the US. Treasury market. Something seems to be giving in spades,
but where are the rescuers?
"Already, more than two dozen mortgage lenders have failed or closed their
doors," reports Gretchen Morgenson in the International Herald Tribune, "and
shares of big companies in the mortgage industry have declined
significantly. Delinquencies on loans made to less creditworthy borrowers –
known as subprime mortgages - recently reached 12.6%. Some banks have
reported rising problems among borrowers who were
deemed more creditworthy as well."
About a third of all mortgages written last year were 'subprime' – a share
that has tripled in the last 3 years.
When you make so many loans to so many people who can't pay you back,
something's gotta give sooner or later.
Now is as good a time as any.
More news...
------------------------
Adrian Ash, on another cloudless day in Hammersmith:
- Government meddling and crack cocaine have so much in common. It's a
wonder New Labour doesn't claim credit for the booming market in celebrity
rehab!
- Both are just one step away from what's already accepted and practiced –
running the country for government, snorting cocaine amongst middle-class
party goers. A little of either sounds like fun at first too.
- But the real cost of both meddling and crack always turns out to be far
greater than anyone dares to guess at the start. And once you've begun –
meddling or toking alike – it's just so hard to stop. Take the UK housing
market, for instance.
- By 2006, average house prices in Britain had more than trebled inside 10
years. The buzz felt so good, no one worried about who'd pay for the next
hit. All the cash unleashed by mortgage-equity withdrawal helped avoid
recession in 2001. The bubble also made for great slogans at election time.
What a rush!
- Even New Labour, however, could spy the problem with runaway inflation in
the nation's right to own the upkeep costs of bricks-and-mortar. First-time
buyers couldn't afford to buy. Like sunken eyes and an outbreak of acne, it
gave the game away.
- Worse still, nurses and firemen kept popping up on the telly, complaining
that they'd been disenfranchised by New Labour's home-owning democracy. They
had to live in Swansea and commute if they wanted to work in London!
- Something, as ever, had to be done. So New Labour rolled up its sleeves
and stuck its fist into the market, right up to the elbow. Grabbing the bull
by the horns, they pulled out a radical answer – use taxpayers' money to
prop up the lower-end of the market!
- "HomeBuy helps people who wish to buy a property but cannot afford to,"
explains the eponymous website. It also helps "those who wish to rent but
cannot afford to pay market rents". Letting the market set going rates is
such an old-fashioned idea, after all. Why leave first-time buyers to wait
for a pullback in prices?
Invite lower-income families to buy only half the flat they fancied. Get
taxpayers to stump up for the rest. Simple!
- Half the mortgage meant half the mortgage repayments, creating twice the
purchasing power. It also meant twice the upwards pressure on prices, too.
But market dynamics are beyond New Labour, remember. If Gordon Brown ever
thinks about market forces, it must be to proudly smile at the fact he's
abolished them – along with the boom-bust cycle in the economy.
- Open Market HomeBuy...New Build HomeBuy...New Build discounted
rent...Social HomeBuy...First Time Buyers Initiative – all such lovely,
friendly names. Trouble is, the scheme's advantage to new buyers has already
been parsed to nothing. The extra buying power that HomeBuy pumped into the
property market evaporated in the steamy heat of Britain's lust for bricks
and mortar.
- Now public-sector workers in shared ownership schemes say their rents are
rising at twice the rate of their salaries, according to Radio 4. Nurses in
one London development have seen their rent – tied to the old Retail Price
Index (RPI) – rise by 5.5% year on year.
Their salaries, on the other hand, are pegged to the Consumer Price Index
(CPI). So wages are only rising by 1.9%.
- "I'm paid by the government and this is also a government funded scheme,"
said one South London nurse to MoneyBox on Saturday. "My rent continues to
rise but my salary doesn't reflect that."
- Welcome back to the free market, in other words. For the scheme to keep
bringing fresh meat into the market, the government will have to increase
the proportion of purchase-price that it's willing to cover. The equity
owned by wannabee buyers, therefore, will have to shrink. It's already
happened to Social HomeBuy, for instance. The government will now buy 90% of
a council house from...ummm...well, from itself...leaving the tenant to buy
just one tenth of the roof over their head. You might wonder why they'd
bother.
- Meantime, the cost of buying your own home just keeps on soaring, up 10.9%
year-on-year in January, according to the government's own data today, up
from 9.9% in December. The average British pile now costs £205,286.
- Something should be done, right? "I think housing is probably as important
an issue now as it was in 1945,"
says Labour chair Hazel Blears. "Ordinary families are quite aspirational.
They want to own their own home and it is becoming more difficult."
- Her answer, of course, is more meddling...just like a crack addict whose
answer to suffering withdrawal is to buy yet more rocks.
- "Being more imaginative about shared equity, shared ownership, and staying
on the side of those people who want to do well, is where the Labour Party
has got to completely anchor itself," says Blears, lashing herself to the
mast instead.
- Dabbling with socialism, kids, puts you on a slippery slope. Just say no.
And more views:
*** Subprime may be suffering, but speculators still think they can make
good money buying and selling houses.
Our colleague Lila Rajiva sent us this item from the net. Apparently, a
group of investors has made a tour of Jackson, Mississippi, buying up
distress properties:
"On February 16 & 17th we made history with the first ever TWO-DAY
Mississippi Magic Bus Tour. During those two days more than 28 houses were
sold to investors from all corners of the United States. The prices were so
low that most participants bought 2 or 3 houses.
Unfortunately, snow storms and bad weather kept about 10 of our buyers from
making the trip in February.
"Our estimates are that the buyers of these houses picked up in excess of
$829,000 in EQUITY in just TWO DAYS!
"This could be you!
"Here's one example. There was stiff competition for a great corner house
that bidding started at $9,900. It sold for $25,000 and has a retail value
of $59,000. The amazing thing about this property is that it only needed
about $3,500 in repairs and it's ready to go!
That's just one of the many, many great deals we had on the Mississippi
Magic Bus Tour.
"These are the GREAT kind of deals you can get in Jackson Mississippi when
you attend a Mississippi Magic Bus Tour!
"Some of these houses make great rentals. Some of them are ideal for a
buy/fix/sell strategy. Either way, they are ALL Super Cheap Houses!
"If you're sick and tired of trying to find a good deal in your own
backyard, maybe it's time to look someplace else. We've found all the BEST
deals in Jackson so you don't have to spend a fortune on marketing or making
trips back and forth.
"We've got the deals. We've got the contractors lined up and ready to fix
your purchases. We've got property managers ready with tenants. So it's an
easy decision.
"Join us on April 6th and 7th for another fun and profitable TWO-DAY
Mississippi Magic Bus Tour. We'll have at least 26 - 28 houses available for
you! You can be sure we'll throw in a surprise or two....
"There's no other opportunity available like this anywhere!
"The prices are so low, you'll probably want to buy 2 or 3 houses, maybe
more. These Super Cheap Houses deals are the BEST DEALS we're ever had on
ANY Magic Bus.
"To get on the Magic Bus, go to:
http://www.SuperCheapHouses.com/magicbus
"DO IT NOW!
"There's only room for 30 buyers on the Mississippi Magic Bus and it WILL
sell out quickly
"You can get on the TWO-DAY Mississippi Magic Bus Tours for one low
registration fee of $500. The fee will be applied towards the first house
you buy. If you don't buy anything, $400 of your money will be refunded.
"If you're not coming to buy, don't bother coming! We want serious buyers
who can make a quick decision.
"We will have appraisals on each property. We have contractors standing by
ready to do any work that needs to be done. We have property managers ready
to fill them up with good tenants. And... we've got financing available if
you need it for each property!
"Making money with real estate just does not get any easier than this!
"Sign up for the Mississippi Magic Bus NOW at
http://www.SuperCheapHouses.com/magicbus
"To Your Extreme Success,
"Jackie Lange
"p.s. A new rule for this Mississippi Magic Bus Tour.
We will no longer be able to allow flipping of contracts during the Bus
Tour. You will need to close on your purchases before you can sell to anyone
else. We're sorry for the inconvenience but we had some problems with this
on a previous Bus Tour and had to put a stop to it."
Editor's Note: Yes, dear reader, we are all on a magic bus ride now.
*** We enjoyed some early spring weather in France over
the weekend. Henry had to stay in Paris to study for
exams, but the rest of us got in the car and drove out
to the country.
Plum trees are already ready to burst into flower.
Forsythia bushes are yellow, though not fully in bloom.
Other fruit trees and flowering bushes are budded out.
"What's that awful smell," Elizabeth wanted to know. It
smelled like something dead in the kitchen. Sniffing
around, we realised that it came from the home-cured
ham hanging from the ceiling. It turned out the ham was
not as cured as we thought.
The rot was around the bone, where the meat had turned
gray, green and putrid.
"I left the bone in," our gardener explained. "Because
it gives it more flavour. But it's true that most
people take the bone out, because it often makes the
meat go bad."
We aired out the house...and it was so warm and sunny
we were able to eat lunch outside.
"Springtime in Europe is nicer than it is in America,"
Elizabeth remarked. "It is a longer season. It happens
more slowly, more grandly...and you have more of an
opportunity to appreciate it. In Maryland, it would get
hot so soon after the daffodils bloomed. The spring
plants didn't last long in the heat.
"But autumn is prettier in the U.S. The fall is crisper
in the U.S...especially up in New England. The leaves
turn more vivid colours.
"Maybe – after the boys are out of school – we should
spend spring in Europe and fall in America?"
Editor's note: David Guthrie is an investment analyst
with specialist interest in commodities, currencies and
interest rates. It first appeared in The Zurich Club
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