Is the cycle ready to turn?



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.



Whether it’s due to demand [unlikely] or inflation, copper might be signalling that the slide in commodities is reaching a bottoming process and prices will look higher into the future.



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.


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.


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.


Trying to buy shares of JO again today.



Commodities are unloved. Their prices reflect just how much they are unloved. To make money in the market you have to buy your assets cheap, and then allow them to become more expensive.

Commodities are low in price because global growth is slowing. It could [and likely will] slow even further, however, there remains a base demand for all goods and services, and for that reason commodities will retain value and even gain value as marginal producers leave/liquidate, thereby reducing total supply.

There is a lot of talk about stocks and bonds. Not so much about commodities currently. I am in the process of opening [trying to] in coffee [JO] which is in a horrible bear market currently. Will coffee prices always remain this depressed? Unlikely.

Further, using my system, even if prices fluctuate in a range, I can still make money. I don’t really need a substantial bull market to make money…just some price volatility over time.


>Much to the chagrin of Jim Rogers and his bow tie (pictured above, on the right) the DBA, ETF for some of the more popular soft and agricultural commodities, has been in a clear downtrend since 2011, if not early-2008. On the monthly timeframe, below, note the potential for a massive descending triangle breakdown as price is currently struggling to hold the 2012 lows.

If those lows are lost, a retest of the 2008 crash lows figures to be on deck. I would extrapolate such a breakdown out to many segments of the materials complex in equities as well. In other words, lagging sectors like steel, coal, ags, etc. are being viewed as inevitable rotation beneficiaries by bulls, not unlike what we saw in the late-stages of the 2003-2007 bull market as speculation reinforced itself to the upside.

As I noted last week, I am watching major industrial/materials complex firms Caterpillar and Freeport McMoRan closely to see if they roll back over after recent oversold rallies, or instead can display a significant change of character to follow-through to the upside in such a way that would smack of serious capital rotation.

Contrary to ChessNwine of iBC, I take the view that commodities, particularly some of those that form part of the DBA portfolio, are currently buys. Sugar, live cattle and coffee being three of the standouts.

I would buy the individual components rather than an ETF that holds all of them as the individual components will fluctuate to different catalysts. Holding them individually allows you to rebalance yourself. DBA tends to have lower volatility [as you would expect] than the individual components.



This post certainly sits with my commodities thesis currently:





Commodities [look at the highs/lows] over long periods of time provide ample buy low, sell high opportunities and every now and then, a huge bull market comes along. Apart from their lack of cash-flow in the form of dividends, although this can be corrected, they do provide a trading opportunity for the right strategy.

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