Tag Archives: Inflation Warning

They Call It A Commodity Super-Cycle, What Does That Even Mean?

They Call It A Commodity Super-Cycle, What Does It Mean?

So they have come up with a new name for inflation blowing out producer prices, a commodity super-cycle. This doesn’t have to be destructive as long as you are paying attention to our rapidly changing world. My chief concern in all of this is actually the government. I fear they will come in a wreck the entire economy and control what they don’t destroy.

Commodities have been suppressed for a long time and we have already begun to see the beginning fragments of the super surge. Energy prices recently went insane crush families and small businesses alike and the elite are telling us this was just a prequel of what is to come.

By Variant Perception

There are three big drivers of the commodity supercycle:

  • The long era of monetary-policy dominance is over, leading to a heightening of inflation risks not seen since the 1960s
  • Investors are deeply underweight and will need real assets such as commodities as a hedge against inflation
  • Commodities are generationally cheap, both compared to themselves and to other assets

It is rare in macro-forecasting when the stars align so perfectly. The combination of substantially different inflation risks, capital scarcity across several commodity sectors, and 50 years’ of underperformance compared to financial assets make commodities one of the most compelling long-term investment opportunities at the moment.

Commodity Super Cycle
Chart Source: Bloomberg, Macrobond and Variant Perception

Policy Drivers of Supercycle

The convergence of fiscal and monetary policy represents a profound change to the investment landscape.  Monetary policy, hitting up against zero rates and with central banks’ balance sheets already bloated, it is becoming ever more incumbent on more fiscal policy to boost economies and inflation.

But policymakers should be careful what they wish for.  Large government deficits financed by pliant central banks have preceded every high and hyper-inflationary episode of the 20th century, from Weimar Germany in the 1920s, to Hungary in the 1940s, to Argentina in the early 1990s.  QE has lulled people into a false sense security as it was not inflationary.  QE created a supply of dollars, and relied on the banking system to “transmit” those dollars.  But a private sector still licking its wounds from the financial crisis did not want to borrow, and banks did not want to lend, which meant borrowing and therefore inflation did not sustainably pick up.

Chart Source: Bloomberg, Macrobond and Variant Perception

The pandemic accelerated a trend that was already in place: the increasing impotency of QE.  Now we need QE combined with large government deficits, which is a very different beast to QE on its own as it creates supply of money and a simultaneous demand for that money.  History shows this has much greater inflationary potential.

Changing Inflation Regimes

We are shifting from the “Lake Regime” to the “Ocean Regime”.  In the Lake Regime of the last 20-30 years, cyclical moves in inflation were contained and containable as monetary policy on its own still had teeth.  But in the Ocean Regime, where we are today, the underlying risks to inflation have shifted, and garden-variety moves in inflation have a greater likelihood of becoming unanchored and disorderly.

Source: JMW Turner

This does not mean inflation is imminent, but it does mean any short-term rise in inflation could turn into something longer-lasting and persistent.  However, the nature of inflation is that it does so abruptly and with little warning.  It is just like how Ernest Hemmingway described how one goes bankrupt, “first slowly, and then suddenly”.

What Should You Do?

This is why action must be taken today to make portfolios more inflation-resilient.  Looking to the high-inflation 1970s, commodities were the only major asset class to deliver a positive real (ie inflation adjusted) return.

Chart Source: Bloomberg, Macrobond and Variant Perception

When we combine this structurally positive backdrop for commodities with a capital-cycle analysis the case for commodities becomes more compelling.  In short, sectors suffering from capital scarcity tend to outperform as lack of competition causes returns to fall below the cost of capital.

Source: Capital Returns

Based on our analysis, several sectors in the commodity space, such as gold and silver mining, integrated oil and gas, and copper are among the most capital-scarce sectors globally.  Underinvestment in supply means these sectors will not be able to respond to the strong recovery in demand we should see this year as the world emerges from the pandemic.

When demand meets excess supply of dollars meets an investment community severely underinvested in real assets such as commodities, the only thing that can respond is price.  This is what we have been seeing, with commodities up 43% since April last year.

Commodity Super-Cycle
Chart Source: Bloomberg, Macrobond and Variant Perception

The shorter-term gains may be behind us, but the potent structural backdrop for commodities and real assets we have outlined support a much longer-lasting commodities supercycle that is beginning.

Read https://silverreportuncut.com/prices-paid-surging-historic-copper-shortage-inflation-indicators-are-firing-on-all-cylinders

Prices Paid Surging, Historic Copper Shortage, Inflation Indicators Are Firing On All Cylinders

Prices Paid Surging, Historic Copper Shortage, Inflation Indicators Are Firing On All Cylinders. Copper is the first indicator as it surges toward all-time highs, Base metals are all soaring and silver is lagging. The US PMI data came out and prices paid by producers came in the hottest level ever recorded as manufacturers warn the price increases will be handed to consumers.

Historic Copper Shortage

Supplies have reached a critical stage and prices are already hot

The rumor terminating from Wall Street is base metals led by Dr. Copper are about to break records and wallets for producers. Demand is already outstripping copper supplies and this is a phenomenon underway among most of the base metals.

Inflation Indicators

Inflation Indicators Firing On All Cylinders

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit, said:

“Despite headwinds of COVID-19, extreme weather and record supply chain delays, US businesses reported the fastest output growth for almost six years in February.

“The data add to signs that the economy is enjoying a strong opening quarter to 2021, buoyed by additional stimulus and the partial reopening of the economy as virus related restrictions were eased on average across the country.

“Business sentiment remains buoyant, boosted by hopes of further stimulus and the vaccine roll out, but it’s disappointing to see this not yet translate into stronger jobs growth. Many service sector firms in particular remain reluctant to hire, cautious about adding to overheads.

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“A concern is that firms costs have surged higher, driving selling prices for goods and services up at a survey record pace and hinting at a further increase in inflation.”

That last sentence is a little understating the matter.

  • Input costs across manufacturing and services soared higher as demand outstripped supply, rising at by far the steepest rate since comparable data were first available in 2009.
  • Service providers registered the steepest increase in cost burdens since October 2009, while manufacturers recorded the quickest rise since April 2011.
  • As a result, firms raised their selling prices at the sharpest rate on record (since October 2009), with panellists stating the increase was due to the partial pass-through of greater costs to clients.  
  • Substantial price increases for inputs such as PPE led to the fastest rise in cost burdens since data collection began in October 2009. That said, more encouraging demand conditions allowed firms to pass on a greater proportion of the cost increase to clients through a marked rise in selling prices. The rate of charge inflation was the second-fastest on record (behind only November 2020).