I'm not the only one on this horse ride, so in no way am I claiming exclusivity on the theme (in fact 2 of my favorites who agree with me are cited in this article), but after such strong moves in commodities I always like to forewarn readers or investors new to the thesis, since they are usually the first to throw in the towel at exactly the wrong time, usually at the tail end of a very healthy 20,30,40% correction. Knowing these ebbs and flows will happen, we'll try to be nimble to avoid the worst of the inevitable pullbacks. (I'm looking at you coal) But these are long term bull markets, plain and simple.
- Back in 2001, the executives running Australian mining giant BHP Billiton (BHP) sensed that China's economic growth was gaining critical mass. So they commissioned a study on how the country's rapid industrialization might affect the global markets for copper, coal, iron ore, oil - all the stuff that the company pulls out of the earth and sells.
- "The results were quite - well, 'outrageous' is probably the right word," CFO Alex Vanselow told me. "Because we didn't believe it. We thought something must be wrong. If our models were right, the pressure China would put on the world would be tremendous."
- But the more they tinkered with their models, the more unbelievable the results became. The fast-growing per-capita income of China's billion-plus people pointed toward a massive thirst for raw materials. When the researchers added India's potential for growth - and its own billion-plus population - the numbers got even more extraordinary. (keep in mind, by mid century - or earlier - India will pass China in population due to the "1 child" rule in China)
- And when they factored in the industry's inadequate investment in new production capacity, they concluded that over the next two decades there would be a historic demand-driven boom in the resources world.
- You see it every day in the $100-plus it now costs to fill up your SUV. Or the 39% increase in the cost of electricity over the past eight years. Or the fact that you're paying 20% more for that box of pasta than you were a year ago.
- Isn't it too late? Aren't these markets way too volatile for investors planning for retirement anyway? And isn't investing in commodities too complicated for average investors? In short, the answers to those questions are: probably not, no, and no.
- Let's start with the biggest, scariest question: Is the commodities boom now like Cisco stock in 2000 or Miami Beach condos in 2006 - i.e., a bubble?
- Some of Wall Street's big brains seem to think so. In recent weeks strategists at Lehman Brothers, Citigroup, and Brown Brothers Harriman, among others, have volunteered the B-word and warned of a painful sell-off. The surging price of oil has prompted particular handwringing.
- One enlightened observer who's not worried about a commodities collapse is Jim Rogers. The maverick investor, author, and one-time partner of George Soros famously predicted the bull market in hard assets back in the late 1990s and began putting his money in resources when most of us were still enthralled by the dot-coms. According to Rogers, the current highs may represent a market top, but hardly the peak.
- "The bull market still has a long way to go," says Rogers. "Is it time for a short-term correction? I have no idea. And even if we are due for a pullback, that's not necessarily true for all commodities. Oil might be ready for a shock, but that doesn't mean that zinc is." (The price of zinc has, in fact, fallen by half over the past year because of a glut. Rogers says he's monitoring industrial metals for the right moment to buy more.)
- History is on Rogers's side. As he likes to point out, research shows that over the past 140 years the typical commodities bull market has lasted about 18 years. Rogers calculates that the current boom kicked off in early 1999, which means that if it conforms to precedent, we have almost another decade left.
- A second important reason to add commodities to your investment mix - one that's especially relevant to those approaching retirement age - is to offset inflation. Via Don Coxe "If you own agriculture and oil, then you put in a built-in hedge for yourself because you're now somewhat independent of rising food and fuel prices."
- If you're looking for a more specific commodities bet with big upside, the best place to invest right now, say many observers, is agriculture. While the prices of corn, rice, and wheat have spiked recently - and food shortages have sparked rioting in Egypt and other countries - they have only just begun to catch up with the rest of the resources world. (Boooyaaaah - ahem)
- But grain reserves worldwide are at lows not seen for decades. And new strain is causing increased volatility. Earlier this year the price of wheat shot up 61% before correcting. Again, the main driver is Asia's economic growth. "Billions of people are changing the way they eat, adding protein and calories to their diets," says analyst Sean Brodrick of Weiss Research. (nothing new for blog readers, we've been repeating these theories for a long time)
- For those struggling to deal with record gasoline and soaring food prices, there's bad news and more bad news. Economists think inflation is here to stay. And it's likely to get worse.
- A weak dollar and growing economies in emerging markets have conspired to send commodity prices higher. Those factors are unlikely to change anytime soon.
- "We're more open to influences from the rest of the world than we were before," said Jay Bryson, international economist with Wachovia. "That does make it more challenging to keep inflation under control."
- What's more, the Federal Reserve is relatively powerless to deal with many of these pressures. "The Fed can't control prices of commodities determined in a global market," said Rich Yamarone, director of economic research at Argus Research. "If it could, it would have done so already."
- But it's not just oil and food that are leading to higher prices for consumers. A separate inflation reading reported Thursday showed the price of imports, excluding oil, were up 6.6% in the 12 months ending in May. That's the highest increase in that measure in 20 years. (yes I remember one blogger talking about this. Did CNBC mention it? Probably for 20 seconds, after all retail sales were "better than expected" - have to focus on that)
- Rapid growth of manufacturing and services overseas has workers in developing economies such as China and India winning healthy wage increases. That also raises prices of those countries' exports. (long predicted on these virtual "pages" - hence why one day multinationals will be moving out of China and into places they can exploit cheap labor next - Africa, Vietnam, Indonesia - wherever) [Feb 28: China Raising Minimum Wage] & [Feb 21: Rising Factory Costs Erode China's Edge] & [Jan 28: India Facing a Shortage of... Workers?] & [Aug 19: Interesting China Article]
- Much of the weakness in the dollar has been laid at the feet of the Fed, which has slashed interest rates seven times since September. At the same time, central banks elsewhere have made only small cuts to their interest rates.
- Oil analyst Peter Beutel, president of Cameron Hanover, said he believes 90% of the rise in oil prices since last August was due to the Fed's rate cuts and the expectations of rate hikes in Europe. (if you plot the price of oil explosion its a direct correlation with the Federal reserve cuts, and flooding of liquidity - hmm, all starting in August 07 - what a coincidence - let's blame greedy oil executives instead of looking in the mirror!) "If the dollar was where it was last August, there's a very good chance we might never have seen $100 a barrel oil, maybe not even $90," he said.
- And with the unemployment rate registering its biggest spike in 22 years in May, the Fed is not likely to push rates higher soon, economists said.
- "I think you'll see the Fed talk up a storm about the caustic nature of inflation, because that's all they can do now, at least until the election is over," said Yamarone. (agree)
- "The Fed is painted into a corner," said Barry Ritholtz, CEO and director of equity research for Fusion IQ. "They don't dare raise rates. The credit crisis is not even remotely behind us. So the Fed has limited options and there's only so much they can do." (agree)
[Apr 8: More Jim Rogers]
[Feb 13: Jim Rogers on Commodities]
