Posted
Mar 06 2008, 09:56 AM
by
Richard Schwartz
THE COMMODITY “BUBBLE” PARSED
Yep, BUBBLE is the new buzz word on Wall Street. Makes sense as CNBC has to keep people interested somehow as stocks lose ground and investors lose money. The show, after all, has to keep their ratings up, has to get all pumped up about something. (I just wonder how Cramer’s MAD MONEY ratings are doing now with stocks dropping, no matter his wild man, amusing in today’s crude, rude in fashion way. Doubt if we’ll hear any negative news if his ratings are down with or without a “freedom of information” request.) “Bubblelicous” does have some basis as the money the Fed is now flooding the marketplace with has to go someplace, right? I mean we first had the “irrational exuberance” dot.com boom and bust. Then the Fed’s cheap money, along with Wall Street’s always financial innovation and greed, led to the real estate boom getting totally out of hand as super juicy fees caused packagers to demand more and more mortgages to securitize and out on Main Street the term “flippers” became common language. But then came the real estate bust as supply overwhelmed demand and out of reach prices suddenly started backfiring on all of us alike. Now along comes the recent dramatic, rapid and sizable Fed interest rate cuts, the Fed again revving up the printing presses and dropping dollars out of helicopters, the greenbacks has to go someplace, right? What’s left? Hey, why not into commodities? Thus it’s not strange to see CNBC bringing on guests, with these two bubbles fresh in their minds, who see the latest commodity surge as the latest bubble. Like most things which become popular, there’s always some truth in the tale … or no one would believe it. Commodities have been rising in price for years now and from time to time the commodity bull market gets ahead of itself, like possibly now. So we’ll see a pullback now or later this year, just like we saw over the previous couple of years. But I have to agree with Jim Rogers, who is sort of an expert on commodities and also on long term investing. He called the very beginning of this commodity bull market to a tee, starting up a new set of commodity indices back in 1999 at the last commodity bear market bottom, and projects this bull market has a very long way to run yet based on the fundamentals of supply and demand. Supply & Demand. That’s where this commodity bull differs from the dot.com and real estate booms, so far. Supply overwhelmed both the Internet boom and the real estate boom. That still is yet to happen with the commodity boom. Yes, a US and possibly global economic downer will put a big hitch in the commodity run but shouldn’t derail it completely since supply is still way behind demand and even behind any temporary reduced demand which will come with an economic slowdown. Commodities as an asset class were underinvested in for many, many years and commodities are not a market whereby new supply can come to the market rapidly. Almost the direct opposite of how the stock market works, where when bad news hits, we all expect it be over, factored in, discounted, almost over night. In mining for gold, drilling for oil or gas, companies first have to come to the belief that investing in new capacity is a good move. This didn’t happen back in 1999, in the gold market for example, this just happened in recent years. Than take oil. It’s just not that easy to find new oil now even when companies decide to look for it. And then when a new discovery is made, like recently the big find in Brazil, it takes years to bring it to market. And how about over in the soft commodity sector? Rogers says the same process applies and there is only so much land to plant crops on. When corn became popular in the ridiculous ethanol push, other crops were cut back. So additional supplies are just now starting to work their way into the marketplace. Plus there’s been a huge new demand for supplies of everything! Oil, minerals, foodstuffs, everything. Because of globalization. Think China, India, Brazil, Eastern Europe, the Middle East. As millions upon millions move up the economic scale, into the middle class, a very wonderful thing, they now want and need what America has. Cars, coffee, meat, oil, steel, etc., etc., etc. Schwartz View: Summing up, demand has risen quickly and exponentially while supply is rising much more slowly. I’ll believe Rogers when he says it will take another ten plus years to get this equation back in sync again. So, as I see things, we could have big drops in commodity prices, say as much as 50% or more as Rogers commonly predicts, but that shouldn’t be the end of the commodity bull market. His studies, and he’s done a ton of work, from (1) being the demand/supply analyst for the fabulously successful Quantum Hedge Fund team in the 1970s, where now renowned George Soros was the trader, to (2) hitting the ground, driving around globe twice, crossing borders and using currency black markets and setting Guinness Book world records in the bargain, to (3) teaching finance classes which forced graduate students to unearth past history of bubbles, crashes, bull markets etc. Net, net, the commodity bull market should last through an economic downturn and run its normal length of about 18 years as Rodgers says.