It’s Official – The Commodities Bubble Has Popped!
I heard it on TV so it must be true.
All kidding aside, the last two days have been absolutely brutal for the commodities side of our portfolio and today, the energy stocks also got whacked. And I don’t know about you folks but I haven’t reached that zen, Buffett-like state where falling prices don’t faze me. They faze me. A lot. In my experience, the periods in which my self-doubts peak are honestly the times I should have been buying. Even in the short time since this website/blog has been up (since 01/2007), the market has already tested me many times and I can’t profess to have bought every time at that bottom. I HAVE REGRETTED IT EVERY TIME.
Today, I spent the day asking myself –
- “Should I have sold Agnico-Eagle?” I knew that at $80, it was a bit ahead of itself and if I had held it for over a year, I would have sold it earlier at $72, $75. Doing quick math, taking profits at $80 and paying 30% tax was roughly equivalent to holding to $70 and selling with a 15% tax rate but now it’s at $68.
- “Should I have sold Chesapeake Energy?” It’s at the low-end of my fair value estimate and I’ve held that stock long enough for favorable capital-gains treatment. Am I getting greedy?
- “Did I make a mistake on SK Telecom?” The damn thing is below $20 but I can’t find any news that justifies the pounding it’s taking and then you have the Korean Won going parabolic in the last month.
So yes, I have my doubts. Every day, I question my theses, analysis, picks, etc. Especially on a day like today.
That said, I just can’t buy into this commodities “bubble” story for the following reasons:
- Have the central banks stopped pumping money into the financial systems? No, nor has the Fed given any serious indication of tackling inflation. The FED IS THE ONLY THING PROPPING UP THE MARKETS! It strikes me that the Fed CANNOT RAISE RATES UNTIL THE MARKETS SIGNAL A SUSTAINED “ALL CLEAR.” Otherwise what was the point of all this if the markets are just going to tank again the moment you raise rates? Even a 3/4 point cut (off a 3% base — that’s a huge 25% move) can’t buoy the markets for longer than a day. So I don’t see how the new Goldilocks scenario plays out — that is, the Fed cuts rates, the economy responds after a brief recession & then the Fed raises rates again once we’re in the clear. It all comes back to housing and credit — this will be years in the unwinding. Housing does not bottom in a V — it bottoms in an L. People still can’t afford housing and wages aren’t going up so that means prices will continue to fall.
- Did we discover any giant oil fields in the last week that I didn’t hear about? The long-term supply and demand picture is still overwhelmingly in favor of higher prices. Many people consider supply as the weekly inventory reports. I refer to supply as reserves in the ground. I don’t care if it’s in Cushing or some tanker or floating bitumen in Canada as long as there’s visibility that we’ll have access to energy when needed. The peak for production still remains the summer of 2005, despite record high prices.
- Domestic natural gas production is still running to stand still — more wells drilled just to maintain production. Imports from Canada are dropping and apparently, the rest of the world values natural gas more than the US.
- Despite the drop in agricultural commodities, the FT reports on record high rice prices in Asia. Some of this year’s harvest disappointed and I’m not sure if the issues that have led to countries like Vietnam imposing export restrictions have been resolved in the last week or so.
Obviously, we are in a corrective phase of the commodities bull run but I think any characterization of the run in hard assets as a bubble is absurd. We know what bubbles look like — they leave indices like the NASDAQ or the Nikkei ravaged years/decades after the fact, they devastate whole industries and professions like realtors & Wall Street financiers, they transform thriving municipalities into ghost towns and retirement accounts into part-time work well into your 70′s — basically an awful lot like what’s happening today in real estate and Wall Street. Just study previous oil busts — we are obviously nowhere near that phase with commodities.
If you are a nimble trader, I’m sure there is a lot of money to be made in this correction as well as the run back up. I can’t handle trading so I remain committed to my discipline of long-term investing. I don’t know where the story goes next from here. Maybe, some of the commodities will drop another 20% from here. And I’ll cringe every step of the way. But I know where this story must end — with higher inflation, strained energy supplies and a burgeoning emerging rest of the world who won’t continue to foot the bill for Americans living large. The long-term fundamentals dictate that any major corrections remain buying opportunities for long-term investors. As always, remember to fasten your seatbelt and YMMV.
March 19th, 2008 at 9:33 pm
[...] the rest of this great post here [...]
March 21st, 2008 at 7:31 am
I’m with you Homer.
This little rally for the dollar makes me nervous and question myself too. But I don’t think the big picture has changed.
One thing you might consider, don’t check stock prices every day. The guy who wrote The Black Swan was a professional trader but (IIRC) started checking his investments once a week to lower his stress level. (You have read TBS right?)
Enjoying your blog.
Matt
March 22nd, 2008 at 1:26 am
David: the below portion of an article I read yesterday says it all!
Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.
The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.
March 22nd, 2008 at 4:17 pm
Matt, I do have a copy of The Black Swan but have not gotten around to reading it. I’ve been focusing more on books which target the mechanics of investing, i.e. how to value a company, etc.
As for not checking stock prices, I tend to agree with Seth Klarman who said that you need to keep abreast of the markets often or else miss possible opportunities. According to him, if you are overly affected by the volatility, you should probably hire someone else to manage your money.
I think it also helps to be a bit of a masochist!
Jill, I don’t think the US is capable of waging an economic war against China. You give us too much credit! Both countries are extremely codependent on each other economically. The Chinese are smarter than our politicians so they are aware of this codependency whereas our politicians are likely to accidentally cut off our own noses to spite our face.
I think the US is a very sick economy, which is masked by the “excess savings glut” aka cheap debt provided by the rest of the world. What we’re witnessing is an ailing but desperate animal trying to avoid the inevitable. It’s not just China that is suffering — all the countries in the Middle East, Saudi Arabia, Kuwait, UAE, Qatar, along with the Phillipines, Vietnam, you name it, any country that has linked arms explicitly with the US economy — is suffering mightily.
Managing economies is very hard. Just look at the case of the second largest economy in the world, Japan. They aren’t trying to wage economic war on anybody and yet can’t seem to shake out of their malaise.
March 24th, 2008 at 9:45 am
Yes, I agree, and we will not shake off our ‘malaise’ for a while, or maybe never. It’s alarming how many articles I’ve read which compare us to the Roman empire and predict the same outcome/destruction for the USA. I just read a WSJ article about GE and how it is actively diversifying away from the US, which looks like the trend of things to come, at least for now.
March 25th, 2008 at 11:01 am
Its nice to see some well thought out economic analysis. Please keep up the good work!
With oil sliding into the double-digits do you think now is a buying oportunity or will it slip some more before its time to jump in? Its a tough game to call but I’ve been meaning to increase my exposure although not sure when is the right time to jump in…
March 27th, 2008 at 7:29 am
T Boone Pickens, the only oil guru who’s been in the business long enough to understand the relationships between cause and effect suggested on CNBC two weeks ago that oil will drop into the high 80′s in the next couple of weks, but will move back into triple digits by June.
Not much of a correction really. Just a downward blip before the North American air conditioning season gets into full swing.
+++
This past year’s unprecedented Arctic melt is pushing warmer Atlantic waters further south and could create a major warming of the Gulf of Mexico and we all know what happened in 2005 when that happened. Another Katrina is just around the corner and wil oil already over $100, the next target is $150/bbl
My money is 95% in commodities and I’m in for the long haul.
By the way, google the current shortage in silver. A major opportunity is coming to a head.
April 2nd, 2008 at 7:03 pm
I couldn’t understand some parts of this article s Official – The Commodities Bubble Has Popped!, but I guess I just need to check some more resources regarding this, because it sounds interesting.
April 18th, 2008 at 8:20 pm
anybody here know of a good site to find more info on Uae Financial? I’ve got this site bookmarked and im gonna keep checking it out, but i still would like to find a site that covers Uae Financial a little more thoroughly..thanks
May 3rd, 2008 at 5:57 pm
You got master mind on s Official – The Commodities Bubble Has Popped!, that’s why you could able to write a article like this, hats off mate – keep up the good work.
May 12th, 2008 at 2:55 pm
Hi! Found your blog on yahoo – thanks for the article but i still don’t get it, Ronny
September 15th, 2008 at 1:48 am
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