Tuesday, December 16, 2014

The "Commodity Supercycle", Once A "Well Known Fact", Is Over

Important essay, "Where Did The New Middle Class Citizens Go?":

"The 'well known fact' with regards to oil over the last decade read like this: because of huge GDP growth in emerging markets like China, there were going to be 400 million new middle class citizens born of uninterrupted prosperity; they were going to want all the autos, consumer goods, $10,000 watches and food that Americans have. The demand for commodities was going to be endless because capitalism practiced under authoritarian control was going to be better than the 'invisible hand' of the free market. No recessions or depressions required. [...]

Part of the job of the long-term contrarian investor is to identify a body of economic information which is not only known to all market participants, but has been acted upon by anyone in the marketplace who wishes to participate. We call this the 'well known fact.' [...]

Nearly every major institutional and high-net-worth individual investor had to adjust their portfolio to this particular 'fact' about China and the emerging markets over the last decade. The most successful money managers of the prior decade, who had successfully participated early in the 'well known fact,' were validated and received adulation for promoting it (think BRIC-trade). As Warren Buffett likes to say, 'What the wise man does at the beginning, fools do at the end.'."
Think Jim Rogers. Think Grantham and his commodity scarcity essays. Here's what I was saying a year ago about commodities:
"[The China] construction bubble would explain why commodities prices have been bid up so much. That would mean that Grantham and the inflationists are wrong; that we are at the end of a commodity upcycle not the beginning of one. It would mean that you wouldn't be able to give copper or iron ore away. You'd see true commodity price collapses as in the Great Depression. The effects would spread around the world: Chile and Australia with their mineral exports."
Young Money came up with a theory to explain the commodity supercycle:
"[T]he mining industry is heading for a perfect storm in which: 1) Chinese demand will fall as they stop building empty cities, 2) there will be a supply glut as the industry finishes bringing enormous amounts of new capacity online, and 3) financial demand will disappear and metals stocks that have been hoarded will flood the market as prices fall. There will be a huge sell-off that pushes prices below the marginal cost of production and keeps them there for years, and that will put the commodity supercycle theory to rest."
Just as so many of the leveraged solar panel and renewable energy companies went under in 2012 and 2013, I think we will see many, many resource extraction companies go bankrupt over the next two years: coal, iron ore, oil, and some of the big diversified mining companies.

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