We have all been reading and hearing about the boom in commodities and the spectacular rise in commodity prices. We are all familiar with the case for the endless, secular boom in commodity demand and commodity prices. Certainly, on its face, it is a mighty compelling story.
Our impression, in fact, is that there has been an acceleration in the volume of reportage and what passes for "analysis," in tandem with the rise in price. Indeed, while prices and demand may have risen arithmetically over the past 5 years, the volume of reportage is perhaps increasing GEOMETRICALLY. This is hardly a surprise. As we have pointed out on innumberable occasions, it is the rise in price which constitutes the prime catalyst in raising bullishness. The higher the price, the greater the bullishness. Remember tek stocks in 1999, early 2000? Remember California real estate in 2005? Remember Japan in 1989, when the Nikkei was 39,000, and property prices were 1,000-2,000% ABOVE WHERE THEY ARE TODAY??
In point of fact, we do consider that generally the intensification of the volume and decibel level of "reporting" and "analysis" of the bull run in any asset or asset class is a useful WARNING SIGNAL.
One fact is absolutely unchallengeable and needs to be borne in mind at all time when considering the current manic level of reportage on the commodities boom. (For one of many examples of this excitement, see today's New York Times business section, article entitled: "Chinese and U.S. Demand Drives Commodities Surge.")The first doubling, tripling, or quadrupling -- or whatever -- of the price level of individual commodities is ALREADY BEHIND US. Whether or not it has further to go, we cannot say. However, another septupling of oil prices would take us to $700/bbl. Obviously, this is ludicrous. We feel pretty safe in saying that the risk/reward ratio for purchasing commodities, which have indeed experienced a phenomenol run-up, is vastly worse than it was when the run-up began.
So why all the excitement now? Why the extrapolation ad infinitum of past trends? It would have been useful to know about the PROSPECTIVE RUN-UP in commodity prices when the bull move was in its early stages, not when most of the move is over and the next major move is far more likely to be down than up. Reporting the events of the past, and then CHANGING THE VERB TENSE -- from HAS to WILL, or WILL CONTINUE offers us the opportunity not for financial gain, but rather places us pretty solidly on the ROAD TO A TIN CUP, we think.
