This long-term chart really drives home how slow to
move the equally-weighted geometrically-averaged CCI truly is. Between 2002 and 2005, the CCI
gradually meandered higher in the early days of this secular commodities
bull. It never once broke below
its support or 200dma. These
oscillations within trend were so consistent that we used them as a secondary indicator to successfully trade commodities stocks.
In mid-2005 the CCI’s uptrend accelerated into
a new higher upslope. This is
typical in secular bulls. As a
bull advances, more investors get interested in it. They deploy capital, which drives it
higher, which attracts in even more capital from an ever-expanding pool of
investors. But even with this
steeper uptrend, note that the CCI again never broke below support or fell
meaningfully below its 200dma.
Its bull was rock-solid.
Also in mid-2005, the name “CCI” came
into existence. The traditional
CRB was “revised” for the tenth time in its long history. But instead of following revision
precedent, its new custodians simply threw out the lessons of decades and
created an entirely new index from scratch. So what is now known as the CRB (red
above) has no relationship at all
to history before mid-2005. The
classic ninth-revision CRB was carried on as the CCI. So the CCI is the true surviving index
with decades of historical continuity, not the radically different new
“CRB”.
Anyway, between 2002 and 2007 the CCI marched higher
gradually, remaining within its
secular uptrends without exception.
But then in early 2008, mainstream speculators suddenly discovered
commodities. Capital flooded in
which drove the CCI up in its biggest and fastest upleg of this entire
bull. The CCI peaked in early
July 2008, and as you remember there was far too much greed in commodities
then. That was when oil was over
$140 and big Wall Street investment banks called for $200 within months!
Since sentiment then was so unbalanced to the greed
side, a correction was necessary.
All bulls witness uplegs where greed gets excessive followed by
corrections which wipe out this greed.
A bull can’t exist without this upleg-correction cycle. And
the bigger the preceding upleg, the bigger the necessary correction. These periodic corrections are healthy
and necessary. They actually
preserve and sustain the secular bull, preventing it from burning itself out
too early.
Since that big upleg dragged the CCI’s 200dma
up sharply in early 2008, I figured it wouldn’t hold in the inevitable
correction. But the CCI’s
support probably should have. In
late summer 2008, as you can see above, the CCI’s support line near 450
was about as far under its 200dma as the preceding upleg’s top was
above it. From early July to
mid-September, the CCI plunged 26.4% in its biggest and meanest correction of
this entire bull by far. It
dragged this index all the way back to its secular support line.
But right then a peculiar thing happened. The first true stock-panic in 101 years erupted, an unbelievably disruptive and devastating
event. The fear bubble
mushrooming in stocks spilled out everywhere, including into
commodities. Traders grew so
terrified that they wanted to close all their risky positions and hide out in
cash. So commodities were aggressively
sold, collateral damage, and the CCI continued plunging below support.
When all the dust settled by early December, the CCI
had plunged 46.7% since early July!
It was a crazy decline, utterly unprecedented. But even though this anomaly was extreme
beyond description, it didn’t erase the secular commodities bull. After a 235% move higher from late
2001 to mid-2008, commodities nearly getting cut in half in the stock panic
merely forced them back to November 2005 levels at worst.
Prices were obliterated in a matter of months, but
did underlying global fundamentals change that fast? No way. Finding and producing new commodities
was no easier in December 2008 than 6 months earlier. The hard-working citizens of the
world’s developing countries like China didn’t suddenly decide to
stop industrializing and striving to increase their families’ standards
of living. Even in the first
world, we kept right on consuming huge amounts of commodities. We simply have to in order to live, no
matter what.
While each individual commodity has its own unique
global supply-and-demand fundamentals, the one I have studied the most since
2000 is gold. In December I
updated my gold fundamentals research in a new essay. Read it if you question the fundamental underpinnings of this secular commodities bull. Many of the general supply/demand
trends in gold apply to other commodities as well, and the stock panic
didn’t materially change them.
On a secular scale, global commodities demand continues to grow
relentlessly while new supplies are getting harder and harder to find.
This is why commodities prices have been recovering
since the panic. The blue-shaded
area above corresponds to the entire first chart. The CCI’s post-panic move
higher, despite looking strong on a short-term scale, has only been modest so
far. Investors remain skeptical,
wary to redeploy in commodities.
But this won’t last.
Commodities producers’ stocks have been one of the
best-performing sectors this year and capital chases performance. Soon some of the trillions on the
sidelines will start bidding on commodities again.
The CCI, still very cheap today, will power
higher. I fully expect it to get
back up within its pre-panic secular uptrend within the next year or so. Today that equates to a CCI level
around 500, 25% higher than the levels we saw this week. And of course as time marches on, the
CCI’s uptrend will continue to plow higher. In fact, I believe we need a 500+ CCI
for the better part of a decade
before this commodities bull gives up its ghost. This next chart shows why.
It zooms out once again to a multi-decade
perspective, the ultra-long term.
And over such great spans of time, the relentlessly declining
purchasing power of the US dollar must be considered. So I inflated the historical CCI by
Consumer Price Index inflation.
Yes, CPI inflation radically understates
true monetary inflation. But it
is very conservative and widely-accepted by mainstreamers. So this real CCI proxy is an
exceedingly tame one. The true
commodities situation is even more bullish than this chart suggests.
The real CCI (then the classic CRB) peaked at 1085
in today’s dollars in February 1974. Of course real gold and real oil didn’t crest until January 1980 and April 1980
respectively. But realize each of
these popular commodities only has a 1/17th weight in the CCI. The balance of the 15 other commodities that make up 15/17ths of this index’s weight
peaked much earlier in real terms.
Between February 1974 and October 2001
(commodities’ secular bottom), the real CCI fell by 79.5%. This epic secular bear lasted 27.7
years! In other words, for nearly
28 years the real prices of commodities declined on balance. Naturally this wreaked havoc on global
supplies. Companies and investors
didn’t invest in new production capacity because profit incentives were
waning. Global production
infrastructure rusted while exploration for new deposits dwindled away for
decades.
Luckily for the world, all the commodities
investment in the 1970s and early 1980s when prices were high created enough
capacity to absorb the early expansion of China, India, and the rest of the
developing world. For decades we
coasted along, depleting existing deposits, to meet gradual yet relentless
growth in world commodities demand.
In the 1990s, commodities fell even deeper out of favor as capital
chased after the tech-stock bubble.
But by late 2001, the secular tipping point was
reached. Existing production
infrastructure and investment could no longer meet demand. The only solution was rising
prices. Higher commodities prices
simultaneously retard demand and boost supply. On the demand side, people consume
less when prices are higher.
Think of your own gasoline demand at $4 compared to $2. On the supply side, higher prices offer
higher potential profits which spur exploration and investment in new
production infrastructure.
Between that critical 2001 inflection point and
mid-2008, commodities enjoyed a 6.7-year secular bull. But again what looked so big on the
second chart is really not too impressive at this longer time scale. Can the dampening effects on supply of
a 28-year secular bear be completely unwound in a little 7-year secular
bull? Probably not even if the
developing world, 2/3rds of the world’s population, stopped
developing. And with the great
additional developing-world demand, 7 years isn’t anywhere near long
enough to close the structural supply gap.
It is not that people in developing nations will
consume as much on a per-capita basis as we do in the States. That will never happen, the world just
doesn’t have enough natural resources. But with around 13x more people in the
developing world than in the US, they don’t have to consume as
much. Small increases in
per-capita commodities consumption, inevitable as standards of living
improve, translate into huge
absolute increases in commodities demand when spread across such a vast
population.
There is some commodities price level above which
the incentive for investors and companies to find and produce new supplies is
strong. Looking at this chart
above, I’d say 500 on the CCI is as good of guess as any for this
new-supplies incentive zone. For over 13 years ending in 1985, the real
CCI remained above this 500 mark.
And indeed supplies were abundant, as evidenced by the declining
prices. So many new supplies were
brought online that they lasted for nearly two decades after this production
boom abated.
You may remember spring 2008’s big rush to
expand global commodities supplies on the high commodities prices. Investors and companies realized the
world would need far more raw materials over the coming decades than the
existing production pipelines could produce. So for the first half of 2008 when the
CCI was over 500, it looked like big capital was starting to take the secular shortfall in global commodities
supply/demand seriously.
Then the stock panic happened, and the price
incentives to bring new supplies online collapsed. And indeed we have seen an incredibly
rapid and drastic curtailing of new investment and plans for new commodities
infrastructure worldwide. This is
a big problem though. We are not
done consuming in the first world, and the developing world is not done
growing, just because a fear bubble temporarily screwed up the pricing
signals in commodities.
I suspect the CCI needs to stay above 500 for the better part of a decade, maybe longer,
before enough new supplies are brought online to meet global demand over the
next couple decades. And remember
this is the first secular commodities bull in history where half the world
(Asia) is simultaneously and rapidly industrializing. The sheer quantities of raw materials
the world is going to need are staggering. This particular secular bull will
probably be the biggest and longest ever witnessed. It will surely extend for 17 years like stock bulls, and could easily persist even longer.
Commodities are way too cheap today. 28 years of real declines in
commodities prices wrought tremendous damage to the future supply pipeline
that can’t be undone in just 7 years. While these concepts are relatively
new to most investors, at Zeal we have been aggressively long this secular
commodities bull since the very beginning in 2001.
We and our subscribers have made fortunes investing and speculating in
elite high-potential commodities stocks as this bull powered higher.
And the opportunities I’ve seen since the
stock panic utterly dwarf anything witnessed since the early 2000s. Because of the fear anomaly,
commodities and commodities-stock prices remain far below where global
supply/demand fundamentals suggest they should be. If you want to ride this coming upleg
higher in the best stocks, and deepen your understanding of this incredible
ongoing bull, subscribe today to our acclaimed monthly newsletter. Buy
now ahead of the crowd instead of later (and higher) with it!
The bottom line is commodities are cheap today. They are cheap relative to this
secular bull and even cheaper relative to decades of real price history. Yet world demand will only continue to
rise in the coming decades, necessitating massive investment in production
infrastructure. The only thing
that can drive this is much higher prices. And rest assured they are coming,
commodities’ secular bull is less than half over.
Sadly, not many investors are capitalizing on these
vast opportunities. The stock
panic devastated everyone, and most investors remain too shell-shocked to
overcome the tyranny of the present on their perspectives. So they are wrongly assuming a
multi-week pullback is more important than a multi-year secular bull or the
multi-decade secular bear preceding it.
Only
contrarians are getting deployed today.
Adam Hamilton, CPA
Zealllc.com
July 17, 2009
Read
all articles published by Adam Hamilton
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