People are again thinking stocks, as well as having visions of sugarplums dancing in their heads. I don’t want to think about them, except as an academic exercise, until they’ve vanished from the public consciousness. As you may know, my guess for the next investment sector to get people’s attention is raw materials, which have been in a bear market since the early ’80s, and last had their heyday during the ’70s. Most people who were really involved in them back then are either dead or retired. A good sign, from a speculator’s point of view.
Of course, the most obvious commodity plays are gold and silver. And they’re the easiest and safest as well, since you can take physical delivery of coins. I don’t generally suggest people get involved in futures contracts because, frankly, 95 percent of the public that do lose money. And, especially in the years ahead, just keeping what you have will be a full-time job.
Playing commodities in the futures markets is something only for those who are well capitalized, experienced and psychologically cool. That said, I think it’s worth drawing a few things to your attention. Some commodities are not only very cheap by any measure, but there’s a good rationale why that’s going to change.
Three considerations …
Why are raw materials so cheap? And what factors could change that condition?
One factor which isn’t adequately considered, in my view, is that the whole world now manages with “just-in-time” planning. This means everyone keeps the lowest conceivable amounts of fuel, raw materials, inventory and what-have-you on hand, counting on computerization and today’s exquisitely linked communication-transportation networks to assure things are ready when needed. This results in considerable savings, particularly from lower storage and financing costs.
Just-in-time is not only an intelligent and economically sound way of maximizing returns on capital, but it allows companies to change direction and adapt more quickly, because they’re burdened with relatively less dead inventory and property, and have more liquid cash. The problem arises when a force majeure, such as a war or other government action, interrupts the seamless flow of resources. At that point, instead of having the necessaries to stay in operation for some weeks, or even months, things grind to a halt in days. And the disruption spreads quickly downstream. I think we should anticipate that type of thing in the future – which implies a lot of anticipatory commodity buying at some point.
A second factor is a likely sea change in the monetary climate. Just-in-time makes the most sense in deflationary times, when prices are dropping. Even though the CPI has risen 78 percent since 1982, when the long boom began, commodity prices (using the CRB as a proxy) have actually fallen from 335 then to 198 now. It was smart to hold inventory during the inflationary ’70s. Even though the rise in the value of inventory generated illusory profits (but very real taxes on those profits), it was still better than having to go out and buy more at inflated prices.
I hate to make near-term predictions on macro events, but it seems to me that we’re most likely to see a replay of the ’70s environment over this decade: Rapidly rising commodity prices, combined with retail prices that are relatively stagnant, will result in lower corporate profits, ugly stock and bond markets, and high unemployment. All in an environment of economic turbulence. If I’m right, commodities will be a good thing to own. Producers will be forced to inventory them out of self defense.
The third – and biggest – macroeconomic influence I see, however, is the value of the dollar. I’ve made many arguments in the recent past for this unit topping out, and when the descent starts in earnest, commodities priced in dollars should rise proportionately.
The main risk at this point is that bad economic times will cut back consumption of commodities, taking prices even lower – that’s certainly what happened during the ’30s. But my guess is that this recession/depression will be closer to the experience of the ’70s. In any event, with commodities already at historic lows, a lot of the risk is wrung out, even if I’m wrong.
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