Is the cycle ready to turn?
January 26, 2014
August 22, 2013
China’s urbanization will continue and gradually their economy will develop as Western economies have into increased services. All of this will take time. Currently estimates run at a 70% urbanization figure. I have no idea if this is accurate, but just supposing it is, and say that they are already at about 50%, then that’s another 200 million people +/- that need to move to urban areas.
That is a lot of people and a lot of infrastructure. China I’m sure, like England, like America, will have periods of booms and busts, railway, canal and land bubbles dotted the histories. They came and went. The correct bet was on the outcome of the continuing trend.
China no doubt will have its booms/busts and may well be in one now. However the correct bet, the one with the better probability, is that the trend that started in the early 70’s continues.
If that is so, commodities will remain in a bull market along with the trend in China towards a developing and modernising economy. Commodities can currently be bought at relatively cheap prices. The trade may take a little time to develop, but that’s investing for you.
August 9, 2013
July 24, 2013
Commodity prices don’t actually need global economic growth, although, should that occur, then an increased tailwind would push prices higher and faster.
Simply reduced supply and inflation can and will push nominal prices higher. This combination is already present and it is only a matter of time before commodities bottom, base, and break higher.
Higher commodity prices are bad for stocks like taxes are bad for stocks, it reduces margins. With US stocks at nominal highs, this will pose a risk, not today, but moving into 2015.
There are lots of individual commodities that are probably near their lows. Coffee is one example, but there are others. Building positions in select commodities, while the global growth story is in tatters, is a value trade, it’s only that calculating the value in commodities is not straightforward if even possible.
July 22, 2013
Earlier in the year or late last year Dalio introduced the idea of the great rotation from Bonds to stocks, this idea is currently well underway and anyone looking to jump on the train is way, way too late.
Bonds initially soaked up the QE money and liquidity that the Federal Reserve pumped into the markets and the re-building of bank balance sheets. The excess money soon flowed into equities and their earnings.
Today the stock market is at nominal highs and money is leaving the bond market. This should be good for equities and it probably will be for a period of time going forward.
But money and liquidity rotate, and at some point the hot money follows the smart money. The smart money looks for value. Value is not without risk and smart money usually also means early money. Early money can have to endure some rough moments.
Commodities are now appearing all over blogoland. Some are positive, some are negative.
This is just one example. It doesn’t even talk about whether investing in commodities is a good/bad idea, simply the effect of commodity prices on earnings, which are currently good, and a % of these good earnings are due to low commodity prices which have been falling due to a contraction in demand.
Eventually, when the rotation from Bonds to stocks starts to slow, the leak from stocks to commodities will create higher commodity prices and commodities become hot again. Should economies improve, this effect will be magnified [not that I expect that] and commodities will really catch fire.
July 15, 2013
As the following article from the Economist indicates, coffee as a commodity is in a bear market. There is a coffee ETF, CAFE which can be used to trade coffee.
Bear markets are the best time to initiate new positions. I am talking more about an investment time frame of 10yrs+. Cash is being destroyed worldwide through Central Bank inflation. It needs to go somewhere.
Currently commodities are hated because growth everywhere is slow, slowing or non-existent. Once the excesses of the system are burned away, which they will be, things will gradually improve.
Start investing, nibbling, in existing bear markets. Avoid the bull markets for the moment, as, will they sustain in the face of the end of liquidity? Although it has to be said that the liquidity has been pledged for some time to come.
NOT everyone appreciates the pungent smell of roasting coffee. Just ask the authorities in Brazil, who have been faced with farmers burning bags of beans and chanting slogans borrowed from recent nationwide protests to demand fatter state subsidies. The farmers are upset by falling prices: their beans now fetch around $106 a 60kg bag, a four-year low and less than half what they could get a couple of years ago. A reversal looks unlikely soon.
A third of the world’s coffee is grown in Brazil. Along with other countries that mainly cultivate the tastier and pricier arabica-bean variety, it faces two problems. First, the traditional markets for their wares are saturated. Growth in Europe, America and Japan, which between them glug over half the world’s coffee, is flat. Second, in places like China, Indonesia and Brazil itself, where coffee is an affordable luxury for the middle class, the market is growing by around 5% a year. But these drinkers are filling their pots with cheaper robusta beans—what Kona Haque of Macquarie dubs the “emerging-market coffee”.
Strong demand for entry-level coffee—40% of the world’s coffee crop is now robusta beans—has enabled Vietnam to go from almost nothing a decade ago to producing 25m bags today (see chart). Worse still for arabica producers, the recession in Europe has hit demand and squeezed profits for roasters. These processors, including big food firms such as Nestlé and Kraft, have responded by blending cheaper robusta with arabica. As a result robusta prices have not fallen as fast as arabica. Even so, the narrowing gap between them has not yet prompted beancounters to reintroduce the costlier variety.
June 20, 2013