Commodities Super-Cycle Near Its End

The commodities super-cycle has been a major bonanza for a lot of people, especially for economies rich in natural resources. These cycles happen ever so often; and when they last, they typically last for a long time. We’ve been in one for 13 years since 1999 and it’s been a gold rush ever since, but according to technical experts we are near the end of this bullish cycle.

All good things must come to an end; in this case 2013 may just be the end of the commodities super-cycle. Of course on a fundamental note it could continue, considering exogenous factors such as China’s growth and other supply constraints. But already major mining corporations are scaling back their capital expenditures on mining exploration due to the sharp correction experienced in precious metals.

As reported by the Wall Street Journal, “Last week BHP Billiton, the world's largest diversified miner by market value, said it will adjust its $80 billion, five-year capital-expenditure program while taking into account its cash-flow generation expectations.” A recent Yahoo! Finance article also confirms the trend for China’s slowing growth rate. In it they cite Credit Suisse analysts predicting 7-8% growth over the coming decade. That’s still well above the average for the developed western world, which will most likely be no more than 2-3% growth over the coming decade.

So far the overall commodities index tracked by UBS is up a breathtaking 78% since 1999, the beginning of the super-cycle. However, we could be very close to end of this cycle.

When commodities go up it usually cuts into corporate profits and causes massive price inflation. The only reason we haven’t experienced this is due to the special circumstances of business and finance in an economy on steroids. A lot of off-balance sheet items and quixotic accounting makes net income a very fuzzy number to follow. What is apparent is the food and gas inflation. That’s the inflation we have been feeling the most, a lot of it is due to this commodities super-cycle. When the price of corn, wheat and other staple commodities goes up, eventually the price of food using those components goes up as well to keep up its profit margins. If anything the end of this commodities boom will be a major relief to the everyday layman. 

Euro Pricing In More Drama, Less About the Drachma

‘Grexit’, ‘Acropalypse’, ‘Geuro’, whatever silly name has been added to our lexicon still doesn’t describe what is really lurking in Europe. The fate of the European Union rests in the hands of those strong diplomats who still are winning against the rest of Europe.

France was reluctant to join the European Union and adopt the Euro due to national pride, if that sentiment becomes contagious—which it is among countries who feel they give up more than they gain—the fate of the EU will be a lot grimmer.

The Wall Street Journal notes the price of the Euro, which is staggeringly below a key level near 1.2575, is the direct result of market participants pricing in an inevitable exit by Greece from the Euro. Essentially Greek government printing presses are ready to re-circulate the Drachma, one of the oldest currencies in the world.

Yet the way the Euro is tanking, it most likely is pricing exits from other countries, including the PIIGS nations. Portugal, Ireland, Italy and Spain have all fallen short due to bad bonds and nearly all countries have the same problem that France has, which is an unwillingness to compromise itself for the rest of Europe. What this means is they may not want to fight to stay in the EU. If they feel they can heal their wounds and become stronger and more independent in the near future they will opt to stay out of the EU.

If the Euro can not muster up enough international cohesion like there is the United States, the entire European Union could fall by the wayside. Would the EU open itself up to the possibility of annexing countries that would gladly open their arms to the opportunity of joining the EU but for the most part have been denied?

For example, would champions of a beleaguered EU annex Turkey, a country that believes its sentiments are in line with that of modern Europe? Turkey can only be considered indo-European at best, annexing them would clearly be a compromise or else their acceptance would have been with open arms by now. Turkey would be able to aid the EU economically and militarily, yet they are the gateway to the Middle East.  That implies that just about any country could become a candidate for the EU so long as they have a strong enough economy.