Article published by José Alberto León Alonso in Diario de Avisos on 12/21/14.
commented a little over a year ago that, when we had not yet emerged from the crisis caused by the last financial bubble, the bursting of others was already on the horizon. The reaction of the authorities to the outbreak of the crisis, “watering” the markets with cheap and abundant money with which something had to be done, laid the foundations for a new one. When asked which one would be the next to explode, after analyzing the stock market; housing and finance in China; or raw materials, ended up betting on the latter, and look where the predictions sometimes come true. And my record of prophecies was not very brilliant. I predicted the end of the real estate bubble in Spain for 2002/2003 and it ended up detonating in 2007, and I predicted the end of the Chinese economic boom for 2009, and it “still” continues to grow at high rates. Keynes said that “the market can remain irrational longer than you can remain solvent,” so the irrationality latent in bubbles often extends them beyond all logic, but they eventually burst.
My personal bet was based on an economic foundation, David Jacks' theory of commodity super-cycles, reinforced by personal experience. The theory of commodity super-cycles was formulated by Jacks in his study “From boom to bust: a typology of real commodity prices in the long run”, where he analyzed the behavior of commodities in a time series adjusted for inflation that spanned from 1900 to the present. In general terms, raw materials have doubled in price since 1950 and have tripled since 1900. Jacks concluded that, in the long term, raw materials move in super-cycles or very long period cycles, in which price fluctuations are very high and last about forty years. If the last bullish cycle in raw materials began in the early 1970s (in 1973 the price of oil multiplied, generating a world crisis), the end of the cycle was about to fall, and a long bearish cycle for oil would now begin. As for other raw materials, such as natural gas, gold, steel, nickel or lead, they also had to begin their downward cycle, since, after reaching the peak, a downward phase began in which bad investment decisions were purged.
He said that to this economic foundation he added personal experience, which is no less important, at least for one. Before the stock market crash that caused the Great Depression of 1929, Rockefeller was sitting in front of his shoeshine boy one day when he began to tell him, with great ease and underlining the strength of his values, the investments he had in the stock market. And it just so happened that these investments (although not their amount) substantially coincided with theirs. At that time the industrialist made the decision to withdraw his funds from the stock market and avoided ruin. The moral is that when everyone is speculating in the same assets as you, it's time to get out. This is relevant because a year ago a person with whom I had a superficial relationship, upon finding out that he was an economist, told me about the considerable investment he planned to make in the purchase of rare minerals, whose demand and price “was going to multiply without a doubt” in the coming years. I flee as if from the burning of investments supported by this type of comments. Also years ago they tried to convince me of the wonders of investing in Fórum (now bankrupt) and how “safe” it was to invest in stamps, whose value was growing non-stop. Let's not say anything about investment in housing. So he then advised following Rockefeller's example and moving away from raw materials markets and countries whose economies were based on them.
Well, what had to happen has happened and the current collapse in raw materials is putting the world economy in check. The price of oil has fallen 40% in the last year; but cotton, natural gas, soybeans, sugar, copper, corn and wheat have fallen between 10% and 25% over the last twelve months. This is a general collapse. Why now?, they ask me. Well, sometime common sense had to find a place in the minds of speculators. The abundance of cheap and abundant money had taken the prices of many products to exorbitant levels, and the simple suggestion of a possible rise in interest rates in the US and the end of monetary stimuli is causing less pressure on the price of raw materials as liquidity with which to speculate is withdrawn. Capital returns home with the promise of greater profitability in safe assets and abandons emerging countries whose imbalances seem about to explode, so the dollar strengthens at the same time that emerging currencies weaken and investment in raw materials (which are bought and sold in dollars) loses profitability, which further accentuates the outflow of capital from these markets. To this, in oil there are supply factors, such as the entry into the market of production derived from American fracking or the Saudi decision to maintain production to sink prices and ruin the profitability of new technologies, so oil leads the fall in prices of raw materials, although the others accompany it in its fall.
For countries that consume raw materials, the news could not be more positive. Not only is the cost of our imports reduced, increasing our competitiveness and disposable income, but investing in our countries now becomes more profitable, which will favor our growth in the medium and long term, which we need. But, if it is so positive, why does the stock market fall then? Well, because the abrupt fall in raw material prices and the collapse of emerging currencies has caught many speculative investors in these products and currencies with commitments that they must face, and that is why they sell assets halfway around the world. To be able to meet your payment promises. It would not be surprising if, despite everything, some speculative funds went bankrupt in the coming months. But in the long run, don't doubt it, it will be positive for our economy. The bubble that really scares me is the china.
