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MERRY CHRISTMAS: Be A Pig And Make It Big... With Commodities!
The pork cycle is to economics what the law of gravity is to physics. You can count on it. Every single time. The only thing that makes economics the trickier science, is timing. Because you never know when the market hits peak or bottom. But economics is not an exact science. Investors don't need to get the cycle exactly right to make money. About right cuts it.
The key to understanding the broad commodity cycle, which functions just like the pork cycle, is the time lag between the investment decision and the creation of new supply. What would happen in case there wouldn't be a time lag? An uptick in demand causes a price increase. The price increase causes additional investment. And the surplus demand would immediately be filled by new supply. Same thing on the downside: demand drops, price drops, investment falls, and production would be cut instantaneously. Our hypothetical result: steady prices.
Of course, reality is different. Breeding the hog takes time. When the price of oil or copper rises, companies can probably squeeze out some extra output. But to substantially increase production to fill the new demand, they need to increase exploration budgets. That means hiring new geologists, given that companies probably fired those when prices were low - if they are still around. The geologists need time to search for the treasure. When they find something, engineers need time to figure out how to drill the well or build the mine. Permits need to be arranged. The company might also need to raise capital. And only then, construction would commence.
By the time the whole new enterprise is up and running, demand starts to drop. Due to the price mechanism, users increased efficiency or switched to substitutes. Or a recession hits. At that point, the commodity producers will be holding the bag. And anyone who invested in commodities lately will know exactly what that means.
Our current cycle started in December 2001, when China joined the WTO. That event marked the beginning of the greatest commodity boom the world ever witnessed. The hungry Chinese giant craved commodities. Commodity producers were throwing everything at it, but it never seemed saturated. Then the global financial crisis hit in 2008. After a commodity collapse, prices bounced quickly and forcefully. This strengthened the China hypothesis even further. We were now in a new era.
Except we were not, of course. Multi-billion dollar mines with long lead times came online just as China started slowing down. The law of gravity took commodity prices down to levels not seen since 1974. Continuing our science metaphor, we are witnessing Newton's Third Law applied to economics: the large upward force caused a force equal in magnitude, but opposite in direction. After the Great Boom, we're now in the Great Collapse.
There even seems to be another new paradigm, which is sort of the mirror image of the boom: China switches its economy from industry to services. With the flip of a switch, every factory worker becomes an app developer. Nobody needs stuff anymore, as everything is now 'in the cloud'. China's pace of growth will continue to fall. Commodity prices will extend their tailspin.
Well, maybe the pundits are right. We don't have a crystal ball. But just allow us to add some balancing facts to the China discussion. China is ramping up government spending, just as it did after the financial crisis.
It has also just opened a whole new local government bond market:
We're not sure how this will end, but the business cycle is also a cycle. China has been slowing down for four years already. No matter what, these measures will provide additional Chinese demand.
Now, more importantly, back to the commodity supply side. The table below shows an extract from a recent Americas Metals & Mining report by Deutsche Bank. Commodity producers are cutting their CAPEX in a huge way. Globally, we see the same picture across the board. That's your pork cycle at work right there. We are once again setting ourselves up for future commodity shortages.
What will cause commodity prices to turn? Well, increased demand and reduced supply of course - nothing new here. But the specifics will be hard to predict. For example, in 2011, nobody was yet aware of fracking. We now know this new technology turned the oil market upside down. There will probably again be some factor we're currently not expecting. An example could be rapidly accelerating growth in India, which is now where China was decades ago. China has 1.36 billion inhabitants. India has 1.25 billion.
It's just a guess. But the commodity cycle will turn. We will know what made it turn only after the fact. But that's not even relevant to you as a shrewd investor. The only thing that matters is that you need to act now if you're serious about making serious money. And gradually expand your exposure to commodities. As the legendary trader Stan Druckenmiller noted:
"The first thing I heard when I got in the business....was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig."
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Hey, Secular.... That isn't Newton's 3rd Law, it's the 2nd. But all three are a single law of the same thing, anyway. Next time, lose the physics decorations in yer shmata paradigm. :-)
Got some good points, but ...
a) Quantum Mechanics trumps Newtonian Mechanics (things don't appear to work the way we used to think they work)
b) "The only thing that matters is that you need to act now"
Well, as an example, folks who have been the buying the [heavily sold off] miners NOW the past couple of years are in pain. We seem to have arrived at an age when NOW is painted with a pretty wide brush. Having said, I must admit that I have been buying NOW for a while now, with the strategy of dollar cost averaging and crossing my fingers.
Merry Christmas, and may all of you be forced to visit a near-sighted proctologist next year.
Yeah baby. I hear Schopenhauer (the philosopher) died of hemorrhoids. Cuz his doctor couldn't see 'em.
Interesting article that I suggest you ignore. If you follow ZH you have been killed. Even two weeks ago ZH predicted a calamity when the capital markets were going to get killed when the Fed increased rates and a lot of liquidity was removed from the market. This never happened. What this article misses is that as worldwide artificial demand created by 0 interst rates the glut of increased capacity created without real long term demand caused a commidity price crash. What we are seeing is not cyclical, rather its structural created by unwarranted capacity creation by quants who only saw upward demand and 0 based rates. ZH is wrong. The facts I see them are that a commidity price drop of 80% are just the real market coming. The excess liquidity will soon drive equity prices into the tank the same way that they did to commidity prices. ZH micro manages things to fill a web site to sell advertisers. Its a simple as this.
So you agree with ZH postings in general that an equity crash is about to happen?
So, according to you, Safeway, which currently sells hams at about $4 a pound, will soon be selling them at 80 cents a pound. According to you the price of an ounce of gold will fall from 1076 per ounce to 215, a fraction of what it costs any mine in the world to pull it out of the ground. According to you producers of commodities will produce their products at a loss in order to essentially give them away out of the goodness of their hearts.
According to the rest of the world they'll simply stop producing when prices equal their production costs as they always have. Production costs form a natural floor under commodities. Many aren't far from that level now.
When the whole world is an idiot it's usually not the world.
Let me guess, two years ago you thought there is no supply & demand rationalization imaginable that could justify crude oil's fall below $80/barrel? You only question the "insanity" of price collapse, but blindly accept the legitimacy of the historic hyperbolic increases in prices. Wall St makes money hand over fist by making fools of retail invertors by the herd.
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iow.... real deflation will never take place......
My main disagreement with this is the fact the China demand cycle was not in any way market driven. Only a centrally planned regime could come up with the monumental level of malinvestments that took place. It will take years to unwind that, and they will be tearing down ghost cities as scrap long before they ever again bid up prices to the stratosphere.
Sweet, my Gold Miners have been languishing since 2011 or so - I'll "let it ride".
Better than F.A.N.G. for sure.
Everything runs in cycles. Each commodity, even houses, have their cycles. The recent cycles have been disrupted by the Fed intervention but eventually will do their thing.
RE will correct down 60-70%....gold, plt, etc will rise again maybe to $3,000 range next time and oil will go to $150.
The trick is to be liquid enough to hold long enough unless you are an insider and can play the short term swings.
"RE will correct down 60-70%" ... I hope. But this event will mean the utter vaporization of the banks, something the Fed simply will not permit. They will destroy everything before allowing that.
You are correct. And the only way to destroy assets without destroying banks is war. That's what scares me the most.
JMHO ... maybe 2019
Best time to buy is when things are cheap and on one sees an upside. This link on my blog site graphs the cheapness of 48 different commodities. http://thecommoditystrategist.blogspot.com/p/ten-year-forward-graphs.html. Some really are cheap.
Just don't get schlonged...
Schlong and wrong
See Some Schlongs Right Some Wrongs
No Schlong left behind!
The Pork Cycle is broken, has been for years. Almost all pork is factory farm produced. Large Corps don't re-act to supply and demand like individuals do. Demand down? You lower prices, dump overseas, merge and buy smaller competitors, find a why to sell the squeal. You do anything but slow down production, because that is death . I would assume other commodities follow suit. The World has changed and the old rules and ways are no more
I can see you ain't been to Texas, where feral hog problems are all the rage. All 254 counties there have reported some degree of problem. Now in Oklahoma, I understand all 77 of their counties have reported wild hogs too. Texas has in place a "pork chopper" law where you, as a hunter, can hire a helicopter pilot and have him fly you around while you mow them piggys down! The farmers and ranchers are more than happy to rid their properties of them. In fact, hunters must kill at least 60% of the pigs to keep their numbers STEADY! They breed faster than Sub Saharan Africans and tear up things way faster than the latter can muster.
Pork Cycle. Sounds like a marital aid.
Long sausages : )
From the article:
"For example, in 2011, nobody was yet aware of fracking. We now know this new technology turned the oil market upside down."
From Wikipedia:
"Hydraulic fracturing began as an experiment in 1947, and the first commercially successful application followed in 1950. As of 2012, 2.5 million "frac jobs" had been performed worldwide on oil and gas wells; over one million of those within the U.S.[2][3] Such treatment is generally necessary to achieve adequate flow rates in shale gas, tight gas, tight oil, and coal seam gas wells.[4] Some hydraulic fractures can form naturally in certain veins or dikes.[5]"
From a novel by Orson Scott Card, written in 1987:
"'You can bet they're making gasoline out of shale oil,' Tina said."
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It was the combination of affordable horizontal drilling along with the improved fracking techniques that made the shale boom possible. Sure, fracking has been used for many years but the effect was still fairly limited to stimulating near the vertical borehole. Being able to make a sharp 90 degree turn at 6,000 ft down hole and then drill a 5,000 ft lateral, keeping the bit within the pay zone, was a big deal.
The local gas company fracked a well on my neighbor's farm, and now my bath water has a rainbow.