“You basically see a commodity supercycle in embryonic form, but it’s going to grow very fast. [If geopolitics gets more complicated] you set the stage for a big bull run.”
Authored by Goldfix; ZH Edit
In Zoltan Pozsar’s most recent interview pursuant to his missive entitled War and Peace, he spoke with Resource Talks in mid March. During this conversation, he laid out rather concisely the main points of that report. So we listened and wrote a follow up to that piece outlining Zoltan’s key interview points, which were tangentially different than War and Peace.
Video: Resource Talks
- The Two Commodity Narratives
- Three Things Governing the Second Narrative
- Rate Hikes in the New Narrative
- G7 Government Spending’s Themes
- There are Two Outcomes from This
- Rate Hike Recession Effect Summarized
- How Long a Supercycle?
Attached is a blow by blow of key concepts broken out, to be used as a follow-along while listening or as a stand alone post. It is Pozsar’s points broken out chronologically in what should be easier to digest.
There are two competing narratives surrounding commodities when rate hikes commence right now.
- High prices combined with rate hikes will crash them, as the Volcker era demonstrated
- Supportive of this was what happened in the 1970s when you also had the market responding to higher prices incentivizing more supply growth.
- 2008 was a similar effect due to supply side growth and liquidity collapse.
First Narrative Summarized:The first narrative sees a decrease in demand from rate hikes in combination with an increase in supply from more production eventually crashing commodity prices.
There is a second narrative. The one that says commodity prices will not drop due to rate hikes.
- That narrative says today is different even though we are raising rates.
- The three things more influential over Commodity prices that may overwhelm the rate hikes during this narrative are…
- Lack of supply side investment, Geopolitical tensions rising, and the EM changing “body language” regarding natural resources.
Supply side investment, Geopolitical tensions rising, and renegotiating EMs
- Production is not increasing for various ideological (ESG) and economic (poor capex investment) reasons governing respectively; firms’ longer term business viability and their short term profitability.
- E.G.- Majors in oil are buying stock back due to uncertainty on if they will even be permitted to drill for oil 10 years down the road.
- Other types have no desire to expand operations to take advantage of higher energy prices, choosing instead to lay back to placate nervous investors’ desire to recoup losses.
- All these things sap future production coming online. (note, our writing colleague Brynne Kelly saw this manifesting in longer dated oil future prices elevating months ago )
This also undermines the traditional concept of “the cure for high prices is high prices” from economics 101. The feedback loop for supply-demand elasticity is broken.
The 1970s was about oil alone. This is about Oil and Gas.. and even other things as well.. Copper, lithium, are effected.
Geopolitics is back on stage.. it is what it is. But it is an upside risk now where as it has a calming effect in the past. In the past, there were no supply shocks from Geopol on supply chains. Now, that’s all they seem to do. The peace dividend is gone
Body language matters. Mercantile practices and tariffs are now being used to protect the value of EM resources.
EMs don’t just want to be a part of the supply chain anymore, they want to be part of the value (added) chain.
E.G.- you cannot export our lithium anymore. But if you build a battery factory here, you can buy it, process it, and export finished products
Next Zoltan addresses the anticipated recession from rate hikes due to demand destruction.
Recessions kill consumer demand, but they usually also kill company investment
This time, in narrative two, governments are doing the capital spending [we would note that during Volcker, government was coming off a spending excess and fiscally pulling in its reins]
They are sinking trillions into 3 themes that will negate the recession effect in commodities, and in certain industries
Companies will be incentivized to match them. They will spend too.
Rearming, Reshoring, Energy transition.
Taken in combination examples of these would be:
Building factories for batteries, Chips, subsidizing energy transitions,
Military expansion in Japan, Europe etc, inventory mgt increases. Onshoring of factories etc
All of these amount spent are government money. It will be matched by company money as well
Comment: Pozsar does not discuss this at all but, what is to say this transition must necessarily result in more efficient energy creation than what we currently have? The Energy transition is ideologically driven, not economically driven. That is risky. That economic/ technological risk to commodity prices is another beyond the geopolitical one he cites in the quote up top. If the energy transition hiccups due to tech or economic reasons, oil soars. For him to not comment on it, is concerning. What happens to oil on a bad news headline if there is a glitch in the new energy rollout? A lot is riding on our confidence in western innovation… h/t Geno-econ
Commodity prices will remain high from constrained supply and increased expenditures
We are at the beginning of a domestic infrastructure investment renaissance
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