Jim Rogers Vs Nouriel Roubini, Can The Commodities Boom Survive?
Commodities / Investing 2009 Nov 06, 2009 - 09:46 AMBy: Andrew_McKillop
Battle Of The Titans - The debate is now open. Commodities, like equities have enjoyed fantastic and fantastically volatile
price growth since around March 2009, growing about 60%, like equities, to date. The global 'real economy' trails far behind, with perhaps 2% or 3% growth in the same period, and much less inside the OECD. Is a sharp correction in view, and if it comes, will it be commodities or equites that shrink fastest ? Roubini tends to think both will drop.
On this question, Jim Rogers and Nouriel Roubini are now officially slugging it out. Roubini has
reacted fast, on November 4th, to the claim or forecast made by Rogers earlier the same day on
Bloomberg TV that "gold could reach $ 2000 an ounce". Speaking at the Inside Commodities
conference in New York, Roubini laid on the scorn, saying: "If a severe depression came to pass,
with investors buying canned goods and hiding out in log cabins, maybe you want some gold in that
scenario,” adding that he thinks gold prices could or might reach $1,100 or so, "but $1,500 or
$2,000 is nonsense”. To be sure, also on November 4th, gold was trading near $ 1,090 an ounce and
WTI futures around $ 80 a barrel. This is a relatively low gold/oil ratio, but nothing extraordinary.
In a Singapore interview with the UK Daily Telegraph on 8 October, Rogers forecast a commodities boom able to last 20 years. He said: "Commodities are the best place to be, if you ask me, based on supply and demand". "The supply of everything continues to decline," he said, adding: "If the world economy recovers, commodities will do the best, because supply is being restricted. If the world economy does not recover, commodities will still be the best place to be, because governments are printing huge amounts of money." As I have said in previous articles, this is twostage reasoning with a big faith-based gap between the two halves.
FAITH BASED REASONING
Rogers, and plenty of other commodity boomers like to ignore what happened through the 2004-2007 'Petro Keynesian growth' interlude. Driven by oil price growth, and limited supply growth of other commodities levering non-oil commodity prices up almost across the board, commodities clawed back a lot but certainly not all of the territory they lost, versus equities, through the late 1980s and all through the 1990s. This was the Clinton boom, for equities only.
But this already ignores an essential basic component of the process. What is called the 'financiarization' and interconnection of all tradable assets on 24/7 electronic trading platfoms, with cheap credit helping drive the volume yet higher. Many, in fact most of the "new tradable assets" are almost imaginary, like the fuzzy jungle of structured and derived products, and deliver surprising (to some) zero sum game total loss outturns, when confidence slips.
Oil, and the other commodities, have been surely and certainly drawn into this process. Extricating real oil oil from paper oil is not going to happen overnight. The same applies to soybeans, copper or anything else. In fact, for both fundamental reasons and due to financiarization, now spurred by incredibly ambitious plans to make a switch to green energy, the energy markets will get a lot more reactive, segmented and volatile in the next 3 to 5 years. Tradable assets, in the energy sector, are set to grow mightily, and this can itself give Rogers his peak prices - and Roubini his price crashes.
Global climate mitigation effort and green energy expansion with feed-in tariffs, carbon taxes and other carbon finance trimmings, twinned with peak oil supply shrinkage impacts on world export offer will also rather surely raise energy prices. Higher energy prices is not good news for a limping, slow growing, slowly reviving OECD economy, still generating over 50% of world GDP.
On the other hand, the rapid growth in natural gas supplies, lowering gas prices, perhaps making electricity cheaper, will add more energy market confusion. Uranium prices, however look set to grow to extreme highs, unless supply can be cranked up. In several countries already, when the wind blows there is too much electricity, from windmills, leading to huge spot price swings and shedding of unsold, untransportable power. The ruined biofuels sector could or might revive, during the decade, perhaps capping oil price rises.
Thiss is not the stuff which generates a long, solid and sustained commodity price boom, à la Jim Rogers. We are set to have a confused and volatile "global energy adjustment" period able to last right through the coming decade. Both related and unrelated, global macroeconomic volatility also promises to be at vintage level.
TRADING UP AND TRADING DOWN
The result of massive financiarization of oil and commodities, in 2008, was shockingly clear. Exactly the same way that a 2% growth of the economy since March 2009 drove a 60% growth in most equity and commodity prices (over 90% for oil), the 3.5% fall in world oil demand through 2008-2009, now bottoming, drove a 75% fall in day traded oil prices.
With this kind of reactivity, where is the long commodity boom Rogers promises ? A small demand fall (which Rogers can call a pause) generates a price wipeout. Put another way, what kind of production limiting agreements would be needed to stop oil price erosion, when this kind of financiarized leverage operates ? To be sure, oil has big-bad OPEC to supposedly limit oversupply anytime demand weakens, ignoring exports from Russia, Norway, Canada, Mexico, African producers, world biofuels, and gas-related hydrocarbon liquids supply growth. While oil could or might be "supply limited" the other commodities, for example natural gas and the metals, and the soft commodities, have no effective mechanisms in place to rapidly trim supplies or stop it growing, when prices crash.
Through 2009 we have almost daily proof that governments printing huge amounts of money has only one impact on tradable financial assets, apart from golden boys getting bonuses again: asset value inflation and volatility, chronic low visibility, and little or no trickle down to the 'real economy'. In this poor and distant cousin to 24/7 financial markets, as Roubini says the current problem is deflation, unemployment, remaining high debt levels, overpriced assets, and so on.
Finding anything more unrelated, firewalled, or 'segmented' than that is difficult. Rogers however thinks he can square this circle by claiming the supply of everything is shrinking. His main or only supporting argument for this seems to be Asian decoupling.
ASIAN DECOUPLING - LIMITS TO FANTASY
The Asian decoupling theory first surfaced around 2006-2007 as a handy way to explain why commodity prices were growing as fast, or faster than equity prices. To be sure, in the long-term using a 20-year timeframe, decoupled economic growth in Asia would only generate what will be a terminal boom for commodities, and equities also, if Asian 9%-a-year growth was sustained. Back of envelope checks on what happens to the car fleets of China and India after 20 years of growing at perhaps 20%-a-year on average - enabling China and India to attain about one-half the EU27 or Japanese current ownership rate of around 400 cars per 1000 persons, starts proving it wont happen.
Unless these new car fleets are massively 'electrified', or run on home-brew biogas, or have lawn mower sized engines, the world oil supply system will go into vast and permanent supply deficit. And if these new car fleets were 'all electric' by around 2040, the lithium to make their batteries, or neodymium for their motors would not be available.
As we know, about 75% of China's electricity is coal-based, and over 50% of India's, like that of the USA. But per capita electricity consumption in the two emerging countries, if it grew to US or European levels, would demand an expansion of 20-fold or 30-fold in total generation. If their new and massive all-electric car fleets (of the imagination) were built, the power plants needed for their recharging would add more triple zeroes to the GigaWatts of new power plants they have to build, within 20 years.
These kinds of factoids are used by Rogers and other commodity boomers to defend the beguiling idea that, at least in theory, it could be possible to have this Asian growth explosion almost uninterrupted, for a sustained 20-year boom. This rosy outlook however faces strict climate change limits to its growth, that is the OECD's new quest to hunt down CO2, or at least its quest to start cutting oil consumption without destroying consumer confidence. Lower economic growth in the OECD is likely. Asian exports to the OECD are not likely to regain their 2004-2007 rates, perhaps never again.
Plenty of other limits to Asian decoupling exist, ranging through mineral and bioresource supply growth constraints, water and food supply constraints, to its financial implications. Indians and Chinese are being urged, by OECD leaders, to spend more at home, supposedly on almost nonexistent export goods from the OECD. When China spends its trade surplus dollars at home, on its homemade products and services, its purchase of US T-bonds can only drop.
CHANGING PARADIGMS
In the short-term future, probably before 2015 and following the next commodity and equity price slump, other ideas will take the high ground. Likely rejected out of hand by Rogers and other believers in Asian decoupling (the IMF for example), fast domestic, national and internal economic growth of China and India surely levers up commodity prices - but does little or nothing for economic growth in the OECD countries.
The US subprime crisis of 2007 and its Big Brother financial crisis of 2008-2009 are now often described as intensified, or even triggered by oil at $ 145 a barrel. In China and India, these oil prices had much less devastating impacts. Economic growth dropped from double-digit to high single digit. Asian decoupling, from negative oil price impacts was well demonstrated, underlining that 'decoupling' means what it says. Asian decoupling is unrelated to the OECD economy when it concerns growth inside the OECD, but is related when it concerns commodity prices paid by OECD consumers and how the OECD economy reacts. As we know, through 2007-2009, the tilt into deep recession was greased by small but continual consumer price rises for energy and food.
Ironically, therefore, the OECD 'postindustrial' economy is more exposed and less able to weather commodity price hikes, than the much lower income Chinese and Indian economies. When the going gets rough for the Asian decoupled economies, they decouple further. Their potential for playing locomotive to the OECD economies is low, and is likely to get lower. By 2015, for a host of reasons including climate change mitigation and the shift to the green economy, this trend could get so strong that we have a form of 'autarkic' national self reliant growth quest by 'Chindia'.
ROUBINI VERSUS ROGERS
One fatal similarity of their public pronouncements is clear: they like to ignore how fast the US dollar devaluation rout could grow, setting a trap for Bernanke. Perhaps pretexting oil reaching $100 a barrel, he would hold to his 'Bernanke oil price doctrine' spelled out, publicly, at Jackson Hole on August 21. Beyond $ 100 a barrel, he more than hinted, interest rates should move up. This could stem the rout of creeping dollar devaluation if not trim oil prices - until the economy tilted back to deep recession, and stayed there as long as interest rates rolled to a Volker tune.
In his August 21 speech Bernanke said that $145 oil in 2008 was a main driver of the recession meltdown, conveniently ignoring the facts of US financial rout and budgetary insanity. The most recent record high year for US oil trade deficits, 2007 at about $320 billion, is dwarfed by spending on the Afghan and Iraq wars at about $860 bn in 2009. It is reduced to pale and tiny insignificance by 'Keynesian recovery' spending in 2008-2009, at about $ 3750 bn, excluding guarantees and TARP, and related spending engaged for 2010.
Why he focused on Demon Oil is simple: it affects the real economy. High energy prices crank up food prices, and the two reduce household disposable 'discretionary spending' income. Rogers makes another big mistake in imagining that huge amounts of 'Keynesian spending, in any OECD country, has 'trickled down' to the real economy: if that was the case, unemployment would not be rising.
By Andrew McKillop
Project Director, GSO Consulting Associates
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission
© 2009 Copyright Andrew McKillop
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