By Stuart Burns
John Authers of the Financial Times is one of our favorite commentators on the business scene. His highly successful Short View, now taken over by James Macintosh, continues to be one of the best short commentaries on current business trends, and Authers himself continues to write for the FT with insight and provides -- dare we say it -- entertainment in what can be the dry world of economics commentary. So his recent article makes interesting reading as we have come to expect and deserves review for the implications it suggests may be in store for global metal markets.
There has been much talk of a shift from bonds to commodities under way since the middle of 2012, and indeed Authers produced a review on the topic with Barclays' head of research just this week. Yields on bonds and even debt have become so low that investors are said to be switching into equities for better returns. Of course, the move would not take place without an improvement in sentiment. Twelve months ago, only the very brave would have invested in European equities, but today sentiment is more confident and the risks perceived to be lower.
But Authers sees the rise in equities and the stagnation in commodity prices in the context of a longer-term trend. He suggests that what we could be seeing is the end of the so-called super-cycle and explains why. The "longest established" commodities index, the Commodity Research Bureau index of commodities, has not shared in the rally by equities. The article observes that it is down some 15% from a peak almost two years ago. In the decade before that it had almost tripled. But in the two decades before it took off in 2001, the index actually declined (following the explosive rises for commodities during the inflation-racked 1970s).
More importantly, for our metal focus, industrial metals prices have endured sharper falls after much greater rises; the exception currently being crude oil, which rose sharply this year for political reasons, but is still well below highs. It is widely accepted that commodity markets move in long-term cycles. The article points back to Nicolai Kondratieff, a Marxist economist who identified a series of waves in which commodity prices would rise for one or two decades, interspersed with equally long periods when they stagnated. The pattern he saw in the 1920s has continued since, but with the cycles shortening.
Furthermore, Longview Economics showed that throughout the 20th century, stocks were flat when commodities were in their "up" cycle and made all their gains when commodities were quiet. The surge in materials prices during the past decade coincides with a "lost decade" for stocks. Some would argue that is in large part due to the credit crisis, but Authers points out there is also an intuitive case for these arguments. Why no super-cycle conversation should happen without China will be explored in Part 2.