2008 Has Been an Incredible Year for Commodities

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Many of us out there who have been involved in commodities trading and analysis have been warning, watching and waiting for the last two-three decades. So it comes as little shock to us that we are in this “crisis” now.

One of my favorite writers and lecturers (and Byron’s, too) is James Howard Kunstler. The Long Emergency is the title of one of Kunstler’s books, as well as one of his catchphrases, and, boy, is it dead on.

This commodities frenzy, and the related dash by nations to snatch up and secure all sorts of resources, has been a long time coming. It certainly didn’t happen overnight. I can safely say that for the vast majority of my career, commodities have been the poor red-headed stepchildren of the investment world. Two decades ago, when I walked onto the trading floor of the New York Cotton Exchange at the old World Trade Center, the climate was very different from today’s.

Back then, most “mainstream” investment houses looked at the commodity markets as a subculture. Commodities were, basically, another branch of Las Vegas, just without the free buffets, dancing girls and booze. Actually, maybe some of that stuff was available on a daily basis, but it was a lot different then.

I compare it to how Times Square was back in the 1970s and early ’80s. If you ever visited the Big Apple back then, you know that Times Square was the worst of all things. It was a seedy, grimy, crime center filled with many colorful characters. Let’s just say Times Square was not a place tourists went, unless, of course, they were sex tourists.

Beneath it all, though, was an unpolished gem. The same is true with the resources market.

Fast-forward to today.

Imagine you’re Rip Van Winkle and you go to sleep on 42nd Street back in, say, 1975 (let’s call you “Rip Van Wino”). You wake up in 2008 and see all the porno houses gone, bars shut down, strip clubs a distant memory… and then, suddenly, you are escorted to a homeless shelter because of New York policies on street people near 42nd Street…

Welcome to the new world.

In some ways, this is true of the commodity markets, too. When I got involved with commodities in 1988, the exchanges were the low men on the totem pole. The members held all the exchanges privately, and none were traded on the stock exchange. It was a secretive world, and the only way to get a job on the floor was to know somebody. I got my job because my best friend’s brothers owned seats on the floor and gave me a job as a clerk.

Everyone on the trading floor was either related to or knew someone in the biz; it was a very incestuous market. The basic reason was that there was so much money to be made in the market nobody wanted outsiders coming in. It was a shortsighted approach, but it was the rule of law down there. The problem was that the markets stayed small and took only a small percentage of the global investment pie.

As the early 1990s set in, commodities, basically, fell and/or stayed stagnant for much of the decade, except for during the occasional war, such as we had in 1990 and 1991 (oil went wild when Saddam Hussein invaded Kuwait).

The general public focused on stocks and still pooh-poohed commodities. Nobody talked about corn or soybeans at any cocktail parties I went to in 1991. Now it’s different. I must get 15 calls a week inviting me to speak about corn and soybeans at events or on TV. It’s been a paradigm shift from 1989 to 2009.

Question: If a bubble pops on Wall Street and all the traders are in the Hamptons, does it make a sound?

The most common question I have gotten on a weekly basis for the last 18 months is “When will the bubble pop?”

My answer is pretty standard: “There is no bubble!”

I am not usually invited back to those cocktail parties, as it scares the guests. The truth is we are not in a bubble. We are in an upward correction propelled by years of denial, stupidity, underinvestment and neglect. The blame falls squarely on several parties.

Wall Street is guilty for not embracing the commodity markets earlier. Wall Street should have allowed commodity prices to reflect the true nature of pent-up demand by making those markets available to its clients. Instead, Wall Street discounted commodities as some form of gambling.

The commodities exchanges and traders are also to blame for not making their markets more transparent, and for also projecting an image of secrecy and mystery.

And both Byron and I could tell you stories about the underinvestment in basic production over the past couple of decades. Really, what were people thinking? That prices were low, and would stay low forever? Did it ever occur to anyone that all those babies born in the 1970s and 1980s might some day grow up and want food, energy and manufactured goods?

No, this is not a bubble. It’s a coming of age, a big, hard reality check that has been decades in the making. I have seen more activity by Wall Street in the resource markets in the last three years than in the previous 17. And I do not expect that it will ever go back to the way it was. I also don’t expect to see 42nd Street filled with porno and hookers again, either.

Change is often hard to accept. $140 oil, $1,000 gold, $8 corn… this is all the new reality. None of these new price trends are a figment of some rogue speculator’s imagination or the products of evil activity. This is a wake-up call that our growing world is hungry for the limited resources it still has.

The most important thing to remember is that markets, even parabolic bull markets, always correct. Those corrections can be painful if one is overextended or married to one side of the market – in this case, the bull market.

So ride the wave of change, of course. Be flexible, buy on the corrections, sell for profits on the overdone rallies and vice versa. Go short when clear tops have been made (although I grant it can be hard to determine the exact top).

There is no trail of breadcrumbs to follow on Wall Street, but that’s why you have Byron and me to help guide you. As long as grains don’t go up too much more, we should be able to supply you with a good trail to follow for many years to come, whether commodities are in rally mode or consolidation.

Kevin Kerr
for The Daily Reckoning Australia

Kevin Kerr
Kevin Kerr's unparalleled expertise in futures and commodities has made him a regular contributor to news outlets like CNN fn, CNBC and CBS Marketwatch, where he's been quoted in over 500 articles. Now, as a contributing editor to Outstanding Investments, he uses his extensive knowledge and connections to uncover blockbuster natural resource investments.
Kevin Kerr

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Comments

  1. But Kevin what do we do with a collapsing global grain distribution system?

    Two things have changed the paradigm :

    1. Input costs (oil/fertiliser)
    2. Finance cost

    In distribution everyone has been wacked on the curve with not enough supply to cover forward sales, if they could get a hold of the cash to self-finance sky high priced inventory they get wacked by interest on sky high debt spreads.

    Ag has always been a gamble but the buyers are having it all their way and will do so buying forward on your exchange all the way until fundamental supply side reform. Until US and EU farmers get stripped of their subsidies free market capital won’t reach a better class of broad acre producer (than the US & EU rapacious barons), and the small block farmers from the US mid west to france to Thailand and Japan won’t be forced to consolidate to equivalent productivity and their countries get on with rural-to-urbanisation social reform.

    If we don’t do what the Chinese have been doing domestically then prices will skyrocket and globally people are going to starve.

    I’ll tell you what farmers are doing (it’s payback time), they are going back to old fashion on-farm storage and recycling seed. If they can front the fuel, spray, seed and fertiliser and get past the point of risk they can afford to sell a little to cover cost but then they can sit and sit and sit.

    That is going to see prices go sky high and poor people all over the world are going to be starving. The exchanges have supported the political crap that has set this up mate so you are on the hook.

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  2. Commodities are up and up, but like the Chinese aphorism, what goes up like a rocket comes down like a rocket. Here is how it will happen:

    Global oil production is now declining, from 85 million barrels per day to 60 million barrels per day by 2015. During the same time demand will increase 14%. This is like a 45% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted.

    Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.

    We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from “outside,” and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.

    This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: http://www.peakoilassociates.com/POAnalysis.html

    I used to live in NH, but moved to a safer place. Anyone interested in relocating to a nice, pretty, sustainable area, good climate with much rain and good soil?

    Reply

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