Dave Nadig, an associate editor at Hardassetsinvestor.com and a former portfolio manager attended the Inside Commodities conference, held at the New York Stock Exchange on Monday, Nov. 3, which gathered many of the world's leading thinkers in the commodities space into one room to discuss the state of the economy, the commodities market and the world.
HardAssetsInvestor.com [HAI]: What was the overall feeling at the conference on Monday?
Dave Nadig, associate editor, HardAssetsInvestor.com [Nadig]: I think the overall feeling at the conference was that the global economic climate is pretty dire, but that the situation actually bodes well for the long-term fundamentals of commodities. In a world facing an economic crisis, the only thing that is a certainty is that there is not a lot of new supply coming online for commodities. Demand may be slowing, but it isn't disappearing, so the long-term position of commodities is solid.
HAI: What exactly do you mean about the economy? What is the fallout there for the commodities market?
Nadig: The stumbling economy has impacts on multiple levels. The ability of companies to get financing for new projects is in doubt, baseline growth for China is in question. Those kinds of things obviously impact both supply and demand for all goods and services. The question is, which gets hurt worse: supply or demand?
A related question is, how does that play out in the market? We're seeing massive de-leveraging and disinvestment in multiple sectors, but eventually, that should end in commodities. I think it's pretty easy to argue that there's no one out there who needs to own Microsoft stock, but there are plenty of people out there who need corn. And that's not going to change.
HAI: How far are we along in that de-leveraging?
Nadig: The sense from the panelists at the conference - many of whom are institutional investors or commodity traders - is that a lot of the speculative money is already out. It's been sold to deal with liquidations.
If you believe that, if you believe the hot money has already gone, it's probably appropriate to start talking about some sort of baseline: a nominal "right price" for commodities. In oil, for example, there seems to be a near-consensus that the "right" price is probably around $100/barrel. That was reinforced yesterday by a leaked draft of the new IEA Report, which said that oil will rebound to $100/barrel as soon as the global economy recovers.
That idea of a "right price" for commodities is somewhat unique, because commodities really do live under an umbrella of textbook microeconomic supply and demand. But given all that's happened in the market recently, people have started to talk about it in a serious way.
HAI: Any specific commodities that jumped out at you?
Nadig: Jim Rogers had some opinions - no surprise there. There were a few panels that were broad in scope, and in those discussions, I think quite a few people were interested in softs and the base metals. Those are two commodities that are seemingly driven less by psychology and more consistently by fundamentals.
HAI: What did Jim Rogers in particular tell the audience?
Nadig: He said we should all be teaching our children Mandarin.
HAI: So have you started?
Nadig: No I haven't. But he did talk a lot about how he sees China as the dominant economic force in the world, not just in the next couple of years, but in the next 20 years. He clearly thinks that any investment strategy - commodities or otherwise - has to be driven by the belief that China is the dominant economy for the foreseeable future. And commodities are the easiest way to participate in that.
HAI: He actually said he had bought some Chinese equities recently, too.
Nadig: Yes, he did, although I don't think he was specific about which companies he was buying. In fact, I think he was talking about buying water treatment companies and water infrastructure companies. I don't think those are commodity companies by most investors' normal definition of the word, but they are in the same ballpark - dealing with finite natural resources.
HAI: Here's the real question: Leaving the conference, did you rush home and up your commodities allocation?
Nadig: I left the conference feeling a little depressed about the state of the world. I certainly had not been scared off by the recent downturn in the commodity prices. I think like many commodity investors, my concern has been looking and waiting for the bottom, not trying to figure out where to get out. If you're invested in commodities for the right reasons, I think those reasons still hold.
HAI: One theme I heard was a feeling that the current dip in prices is just that - a dip, driven by a temporary bout of deflation and falling economic growth. But on the flip side, these same forces, as you suggest, are going to increase pressure on commodities long term.
Nadig: Right, a temporary dip. If you're a believer in the commodity bull market story, you have to ask yourself if any big new supply is coming on line in any of the major commodities, and the answer is simply "no." In this environment, even less supply is coming on line, and that's half of the equation for a commodities bull market to resume.
The other half, of course, is whether you think demand is going away because GDP slows down, whether it's in China or somewhere else. And while I think you can make the case that in some situations, demand may slow - there is less demand for corn for ethanol or for copper in China right now - but overall, the world is not going to stop.
Jim Rogers gave an example of the amount of oil some major economies use on a per capita basis. China uses about one-tenth as much oil per capita as we do in the U.S.; they eat far less meat as well. As those numbers converge, that is going to drive up the price of oil and corn and everything else, even if Chinese economic growth is "only" 5% a year.
HAI: Any final thoughts from the conference?
Nadig: I think the overarching theme is this issue of project financing, whether it's from keeping a small pork operation going or farmers getting financing for their truckloads of fertilizer or discovering and building new zinc mines. In each case, panelists mentioned that there are new supply constraints because of the fallout from the credit crisis; any efforts to increase production are shelved, and even maintaining production is in doubt. All of which is bullish for commodities prices long term.