Commodities Supercycle: a Myth or Reality?

Consumer prices in the U.S. continued to accelerate in May, surging 5% from a year ago, the highest annual inflation in nearly 13 years. If inflation spirals out of control, for the Fed and other world’s major central banks there will be little option but to taper their asset purchases and start hiking percentage rates. That will make essential credit resources, vitally needed for post-pandemic economic recovery, much more expensive, which is bad.

Possibility of resumption of the crypto growth is a “thing in itself” that speaks for itself. True, the recent story about partial recovery of bitcoin-wallet transferred ransom for release of the hacked Colonial Pipeline tells us about growing disappointment about owning such wallets by true believers in decentralization. However, there is also the flip side of this, well, Coin. Namely, cryptos are still viewed as one of very few value protection tools against inflation due to their limited supply. For the Feds resumption of the crypto’s glory is, certainly, a big disadvantage meaning bigger and bigger funds will be syphoned out of the system. It’s easy to predict that under this prediction there will be a continuous, mutually exhausting tug of war with no end in sight. Basically, an investor must be prepared for periods of protracted chaotic volatilities in the majority of available asset classes. That. in turn, may revive everyone’s interest in algorithmic trading which, as we know it, is capable of boosting the existing volatility even higher.

Eventually, we arrive at thinking about cons and pros of a possible industrial commodities supercycle. Commodities have seen four supercycles over the past 100 years - with the last one peaking in 2008 after 12 years of expansion. While the last one, which began in around 2000 and lasted until 2014, was driven by the economic rise of China, according to Bloomberg, the present one may be attributed to several drivers including a post-pandemic recovery, “ultra-loose” Fed’s monetary and Congressional fiscal policies, a weak U.S. dollar, stronger inflation and more aggressive environmental policies around the world. In any case, The Bloomberg commodity index, BCOM, is on the rise adding 27% year-to-date from around 75 to current proximities of 95, and it must be referred to as the one single most sustainable market trend over the period.

What first comes to one’s mind is that a rally in commodities does instigate consumer inflation, so at the end of the day we’ll face inevitable austerity. Not quite so. If commodities prices become higher for a longer period, that encourages recycling behaviour which by itself is a big money-making global industry. However, higher commodities help many emerging countries boost their exports (think India and Brazil - not only Russia and China!), something of utter importance concerning their self-reliance in such important issues as post-pandemic economic sustainability and increase of local vaccination rates. Eventually these economies will be able to purchase more of the U.S. debt which is good for Joe Biden’s infrastructure plan and the Fed.

All in all, the unusually bright commodity outlook has already driven hedge funds’ bullish wagers on commodities (yesterday we mentioned the WTI oil options bulls eyeing the commodity at $100/bbl by the end of 2021) to the highest in a decade, representing a dramatic turnaround from last year and potentially setting up favorable environment for the commodities supercycle.