The End Of The Commodity Super Cycle?

Includes: CRB, DJP
by: Cullen Roche

It seems like most analysis these days is extreme in some fashion or another. We're either falling off a fiscal cliff, going into a recession or we're at the end of some particular type of era where the world will never be the same. In short, analysts and pundits seem to be making an increasing number of "this time is different" predictions. The reality is that the economy is usually pretty boring. I like to view the economic machine as a big, boring, lumbering entity that is really pretty slow moving and unsexy. We aren't normally reverting to the mean in either direction. But we have a tendency to believe everything occurring in the now is more important or impactful than it really is.

Anyhow, that was the first thought that came to mind when I read this report from Citigroup analysts calling for an end to the commodity super cycle (via Business Insider):

Going forward, Citi forecasts that China's overall real GDP growth might steadily fall from +9.2% in 2011 to +5.5% by 2020. Furthermore, overall investmentgrowth, which averaged +13.6% from 2001 to 2009, would decline to only an average of +6.2% from 2013 to 2020, a slowing by a factor of roughly a half.

…Both the overall slowing and the restructuring of the Chinese growth model should mark a watershed in global commodity markets, if only because China had played such an outsized role in global commodity markets in the past decade. For many industrial metals, China in fact was responsible for all of net global demand growth after 1995, and also is one of the largest global consumers of energy, grain, and soft commodities.

Now, I'm not a big commodity bull. In fact, I've been pretty critical about investing in commodities because the real returns over the long-term are terrible. But there really isn't anything that sexy occurring in commodities at present. I've seen a lot of bubbles and predicted quite a few. I've even discussed many supposed bubbles that I said weren't bubbles (like the "bond bubble" everyone was talking about in 2009/10). So I like to think I have a decent eye for "bubbles".

I'm not going to run any fancy analysis like the analysts at Citi have probably done. Then again, I don't really think you need to. Sometimes, just taking a 30,000 foot view is enough to put things in the proper perspective to avoid making extreme predictions. It's one thing when prices go parabolic like we saw in 2008 in oil prices, but there's really nothing that unusual occurring in broader commodities. If you look at the 20 year price action, we're only slightly above the 20 year mean in the CRB Index. So, are commodities overpriced? Maybe. Bubble, or end of an era? That sounds extreme to me….