Why Commodities Stay Low While Growth Continues

| About: PowerShares DB (DBC)


The commodity pits are aghast. The economy keeps growing while commodity prices remain depressed.

Inconceivable does mean what they think it means. Efficiency is the decade's watchword.

Public good demand will come, from somewhere, next year.

I am not a fan of Freeport-McMoRan (NYSE:FCX). I don't own it, and don't intend to. But I watch it closely.

In 2016, FCX has become a sort of hope index for the broader market. Since the start of the year, it's up nearly 80%, although the Dow has been flat, and there haven't been any profits to speak of.

The rise is all based on hope for commodities, especially for things like copper and gold. Copper is up over the last month, gold over the last three. This has spurred regular rallies in FCX's stock, although when the hope turns out to be misplaced, the stock goes back down. It's down again today, after losing another penny per share and disappointing on the revenue side.

The point is that industrial commodities like copper and oil, and precious metals like gold, have been controlling this market all year. As oil prices have fallen since April, the stock market's rally has lost steam, and it is once again becalmed, with oil fighting to hold $43/barrel.

There is a false assumption underlying this, namely that economic growth depends entirely on building demand for commodities. It doesn't have to be that way. It's not that way now.

Efficiency has been the hallmark of the U.S. recovery since 2010, and efficiency remains what works. Efficiency is the cheapest form of renewable energy we have. As cars have become more efficient, as appliances have become more efficient, as insulation has increased, LED bulbs have taken over the lighting market, and as data centers like those of Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) have learned to use artificial intelligence to cut energy use, the economy has continued to grow without increasing commodity demand.

There is an assumption in the commodity pits that this can't possibly continue, but in fact it is accelerating. Machines last longer when intelligence lets us fix them before they break. Capital is allocated with increasing efficiency. Marketplace friction continues to disappear to the consternation of those whose middle management and sales jobs that once dealt with it exclusively have been replaced by apps.

There remain growth opportunities in Asia, Africa and Latin America, where hunger may be dissipating but the desire for consumer goods remains strong. But these opportunities are going only to the most efficient producers, those with the most efficient supply chains. The drive for efficiency, in other words, continues to grow.

Real commodity demand will come only when demand for public goods increases until business models are created to sustain the repair of bridges, roads, and the other infrastructure which is crumbling due to lack of capital. That will happen, but whether it will come in the form of a demand for guns or butter, with the capital allocated to public or private parties, is an answer that has to wait until next year.

Until the answer to funding public goods comes from the political sphere, demand for commodities will remain muted, but economic growth will continue, because that's what technology does in our time, it creates efficiency everywhere.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.