Commodity “Supercycle” Over?

The Wall Street Journal is out with a piece today claiming “Investors, Analysts See End of Commodity ‘Supercycle’:

“Institutions and individuals have poured more than $440 billion since 2004 into index funds and exchange-traded funds tracking broad commodity indexes, according to Barclays  That dwarfs the net flow of $25 billion into U.S. stock funds over the same period, according to Morningstar.

Commodity prices as a group nearly doubled between 1998 and 2008 as measured by the Dow Jones-USB Commodity Index, with some index components such as oil and gold rising as much as sevenfold during that time and leading to talk of a commodities “supercycle” among analysts and strategists.

“The {Dow Jones-UBS Commodity Index} slid 10.5% in the first half of the year, with raw materials dearest to China’s growth—industrial metals such as copper, aluminum and nickel—posting declines of as much as 20%.”

Charts Courtesy: WSJ

(Disclaimer: past performance is not necessarily indicative to future results.)

Our thoughts:

  • This looks like a classic contrarian signal, those calling for the end, bottom, top, beginning of anything are usually dead wrong
  • Commodities are notorious for volatile short term swings and longer term boom and bust cycles – what did these investors think they were getting into? Safe mortgage backed securities?
  • Whether you believe the commodity “supercycle” is over or not – commodity ETF’s are a bad choice, with large roll yield problems (see our piece here.)
  • Where will that $400 Billion+ go to find a new home?  Please don’t say stocks. Just because your diversification choice was the wrong one, doesn’t mean your choice to diversify was a poor one. Investors would be better served in our opinion seeking commodity diversification via ‘tactical commodity’ exposure, not dumb long only exposure.
  • Managed futures as a whole likely wouldn’t mind the “supercycle” ending with a bang (large, outlier type trends lower) instead of a wimper (choppy, sideways sliding lower)
  • Will more markets go into backwardation, with future prices expected to be lower?  If so, the commodity ETF roll yield problem becomes a tail wind.

 

What’s your take? Is the commodity “supercycle” over?  Was it ever here? What does it mean for managed futures?

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