Well, that's it. Apparently the commodities boom is over. The folks at Deutsche Bank (NYSE: DB) told clients to get out of commodities. They say China is slowing. The whole world is slowing. Oil will return to its "marginal cost of production," somewhere between US$60 and $80 and gold will settle around $650.
Of course it's possible they're right. You have to take each one of these predictions from the investment banks for what they're worth, though. Sometimes they're late to the party (Goldman Sachs calling for an oil 'super spike' to $200 in March). Sometimes they miss the part altogether. And most of the time they're just morons who are making it up as they go along.
That said, it's pretty clear the institutional infatuation with commodities as an asset class is over. It's not at all clear the case for resources has been defeated. Remember, the up-trend in resource prices that started in 2003 came at the end of a period where resource prices declined in real terms...for nearly two hundred years.
Two-hundred year down-trend...three year up-trend...resumption of down-trend? Does that make sense to you?
Remember, the world's population has doubled since 1960, from three billion to well over six billion. The first two great periods of industrialisation in Europe and North America brought more resources on-stream, and thus, lower prices for tangible goods.
There was a lot of coal in Newcastle and West Virginia, and a lot of farmland in Kansas. But now, the latest period of industrialisation begins with more people than ever chasing scarce resources. China is not Kansas.
It could be that demand for resources will fall (as it appears to be doing simultaneously all over the planet). It could also be that in some sectors, supply will finally catch up (this appears to be what's happened with base metals). But what's really changed in the last month is that investors are simply demanding fewer resource shares. That's it. It's important to distinguish investment demand from real demand.
The trendy investors who want to own the latest "It" sector will be back. Let them go trawl for beaten down financials and retail stocks. If you missed out on the first phase of the boom, this will be your next best chance to get into long-term positions at much lower prices. Those prices may not go anywhere for a year, mind you. But at least it won't be so crowded in the aisles while you browse through firms, projects, and management.
What we have in the commodity and credit markets now is what the geopolitical crowd calls a kind of "durable disorder." Things can remain disorganised a lot longer than a neat freak would prefer. Replacing one global currency regime with another isn't easy, is it? Yet we still believe that's what you're witnessing and living through: a grand changing of the economic guard.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Dan on 9 August 2008:
Now the folks at Deutsche bank are morons. Along with every reserve banker in the world. And anybody ever elected to public office. And, I suppose, a whole bunch of other people who appear on the surface to be much more successful than Dan Denning. Fair enough.
Comment by Kev on 11 August 2008:
Let's not forget that Deutsche Bank, like the rest of the so-called investment banks, has a commodities trading group.
So, even if safely ensconced behind a 'Chinese Wall', despite their analysts calling the commodities market 'DOWN' for the DB clients - if their traders have correctly hedged the markets with derivatives - why lo-and-behold, the bonuses of the DB traders are nicely cushioned as the esteemed clients take a big hit as they scramble for the exits !
The question then is - what positions was DB set in before they called the rout ?
Comment by kayle on 12 August 2008:
"The folks at Deutsche Bank (NYSE: DB) told clients to get out of commodities. They say China is slowing. The whole world is slowing. Oil will return to its "marginal cost of production," somewhere between US$60 and $80 and gold will settle around $650."
BWAHAHAHAHA!!!!
Oil will return to $60-$80 per barrel. Riiiiiggght.
So, let me get this straight. Basically this is the exact same "crisis" we went through in the '70s...right? We pull back our demand and oil prices fall. Too easy! In the words of the wise man, "Mission accomplished." This is strictly about resource supply-and-demand; an unfolding (and inflationary) global currency battle has nothing to do with it.
No, Dan on 9th August, the Deutsche investment bankers aren't morons at all. They're frickin geniuses.
Comment by fungusfitzJuggler on 12 August 2008:
DB will be lucky to be still organized at all in a few years. These DB gang members bought sub-prime mortgages. Then Alt-A, then ARM. They are not allowed by courts in individual states in the USA to foreclose. They still get jingle mail. Their entire "investment" in the USA is now garbage. All they can do is churn fees for as long as possible. Morons? Geniuses? History will report in a few years!
Do you believe them or not when they say to sell this and buy that? Guess that will tell us all we need to know of your intellect!
Comment by Dan on 12 August 2008:
Gold at $813 today. USD poised to take back the years losses. Trend following hedge funds must be bailing out of long and short positions (respectively) as we speak. I think we'll see that $70 oil and $700 gold before too long.
A bit of inflation and a commodities bubble does not mean the world is going to change overnight. I'm feeling pretty optimistic about the future right now.
Comment by dominique de Bailleul on 12 August 2008:
What happens when the U.S. Fed runs out of reserves? The newly acquired swap of treasuries for junk paper taken onto their balance sheet will need to be monetized. This my friends is hyper-inflationary.
Von Mises said inflation is a monetary event. And Wall Street lies when their back is up against the wall. These recent events are a coordinated effort to desperately save a system as important as fighting WWII, except for the human casualties, of course.
Dollar cost average into precious metals.
Comment by kayle on 13 August 2008:
@ dominique de Bailleul
100% agreed. I think inflation is pretty much going to govern the next few years - Bill B's set up a pretty good inflation/deflation "war" scenario, but to my mind there is not much contest. What the hell, blog would be boring if there wasn't some conflict even if it's a bit of a dubious one.
Put simply, the American and European governments will try / are now trying to inflate their way out of trouble. (So will Australia I think...judging from the RBA's recent ponderings favouring a rate cut - the first of many I'm sure. Check out Steve Keen's Oz Debtwatch blog to see why.) IMO what we are witnessing is no less than a transfer of wealth, and political power, from the east to the west.
In any case, the only reason the USD is looking "good" (or not so bad?) these days is because other "western" currencies are following on that same decline. The USD is just a little further along the path.
Wall Street most definitely lies. Why anyone would believe a word from them is beyond my understanding, after the results they've had over the last financial year. (Results, not optimistic rhetoric.) Deutsche seems to be trying to stampede the herd, based on no evident fundamentals, and to some degree it seems to have worked. No reason not to agree it's to generate fees churn, seems as good a rational as any.
I'm long in the precious these days...I bought cheap enough that I don't care much about day-to-day trading noise, but currency inflation is something I watch pretty carefully. At the beginning of a highly inflationary cycle, you'd be frikkin insane to leave your capital prey to any "Western" currency.
Have you heard about the FDIC (US) talk of lifting premiums for next quarter, after its reserves have been depleted by just this year's bank failures? Strong dollar, my ass.
(PS: @ fungusfitz - Hope it was clear I was being sarcastic when I said "geniuses"...)
Comment by kayle on 13 August 2008:
Damn, can't edit. I meant, "from the west to the east" (above).