Another Commodities Supercycle?

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Yun Li of CNBC reports stocks inch higher Friday, closing out a positive week:

U.S. stocks finished marginally higher on Friday to set another round of record closes.

The Dow Jones Industrial Average added 27.7 points, or 0.1%, for a new all-time high. The S&P 500 and the Nasdaq Composite both rose 0.5%.

The major averages finished with modest gains for the week, as the strong rally to begin February has taken a slight breather. The blue-chip Dow posted two little changed days this week, while the S&P 500 fluctuated within 0.2% for three days in a row.

The S&P 500 finished the week with a gain of 1.2%, while the Dow added 1%. The tech-heavy Nasdaq rose 1.7%.

“Is the path to much higher equities becoming smaller ... to put it differently, are the bulls attempting to thread a needle? Seems that way near term,” Dennis De Busschere, macro research analyst at Evercore ISI, said in a note.

Shares of Disney erased earlier gains and closed 1.7% lower even after the company reported strong growth in paid streaming subscribers and crushed expectations in its earnings report for its fiscal first quarter of 2021. Disney said it now has almost 95 million paid subscribers on its Disney+ streaming service.

The market ground higher to notch records this month as investors remained hopeful for a smooth economic reopening as well as additional Covid stimulus. The Dow has gained 4.9% in February, while the S&P 500 and the Nasdaq have rallied 5.9% and 7.8%, respectively. The S&P 500 has raked in ten record closes in 2021.

Cyclical sectors, those most sensitive to an economic rebound, led the rally in February. Energy is up more than 13% month to date, with financials and materials also among the leading sectors.

President Joe Biden said Thursday his administration has secured deals for another 200 million doses of Covid-19 vaccine from Moderna and Pfizer, bringing the U.S. total to 600 million. He added the U.S. will have enough supply for 300 million Americans by end of July.

“Between the ongoing medical and economic improvements, markets continue to expect a much better 2021 and that has supported prices,” Brad McMillan, chief investment officer at Commonwealth Financial Network, said in a note. “Fourth-quarter earnings are coming in well ahead of expectations, and analysts are now adjusting their 2021 earnings estimates upwards.”

It was another very busy week and there is a lot to cover.

First, late Friday afternoon, CNBC reports that the House advances $1,400 payments, unemployment boost as part of Covid relief plan

  • House Democrats advanced the portion of their coronavirus relief bill that includes $1,400 direct payments, an extension of unemployment programs and payments to families with children.
  • Several committees have now advanced parts of the proposal, which the House hopes to combine into one bill and pass before the end of the month.
  • Democrats still need to overcome hurdles to get the legislation through the Senate, as budget reconciliation rules and skepticism about some provisions pose challenges.
I'm pretty sure this bill will pass over the next month, perhaps a lot earlier.

This will provide much needed relief to many Americans struggling but to be honest, many Americans who do not need relief will use that money to day trade in the stock market.

What else happened today? Treasury Secretary Janet Yellen stressed the need for the Group of Seven countries to “go big” with fiscal stimulus to support economic recovery from the global pandemic:

In her first call with foreign counterparts and central bankers from the G7, Yellen said that “the time to go big is now” and that the group should focus on how to help the economy, the U.S. Treasury Department said in a statement after the virtual meeting held on Friday.

The online gathering of finance chiefs from the world’s top industrial economies addressed a proposed expansion in the International Monetary Fund’s lending firepower along with digital taxation and climate change.

The U.S. is leaning toward backing an increase in the IMF’s special drawing rights, or SDRs, by as much as $500 billion, Bloomberg News reported earlier this month. The fund has been lobbying for more help to support developing nations against the COVID-19 crisis.

The G7 discussed increasing the IMF’s resources during Friday’s call, and the group expects a decision to be announced later this month on the back of a Group of 20 discussion, according to one person familiar with the matter. The finance ministers’ goal in Friday’s talks was to build momentum around helping developing nations, the person said on the condition of anonymity.

Change in Washington

U.K. Chancellor of the Exchequer Rishi Sunak, who hosted the virtual meeting, also stressed the importance of the G7 “shaping support for vulnerable countries,” according to a statement from his office.

The U.S. has a de-facto veto in the IMF on the decision, and former Treasury Secretary Steven Mnuchin had previously blocked the fund’s requests to boost its special drawing rights.

Yellen highlighted in the call that there’s a new tone out of Washington. The U.S. “places a high priority on deepening our international engagement and strengthening our alliances,” she said, according to the Treasury’s statement.

On fiscal policy, the U.S. is among the most aggressive, with the Biden administration pursuing a $1.9 trillion package in Congress. French Finance Minister Bruno Le Maire said the world’s biggest economies must coordinate stimulus plans and policies in an effort to reduce key risks including trade tensions and inequality.

While the Biden administration doesn’t need Congressional approval to support a $500 billion boost to the IMF’s resources, GOP lawmakers have been vocal about their opposition.

French Hill, an Arkansas Republican on the House Financial Services Committee, has called it a “giveaway to wealthy countries and rogue regimes” such as China, Russia and Iran.

There is no doubt in my mind the Biden administration will get the approval to support a $500 billion boost to the IMF’s resources.

All this fiscal stimulus has the inflationistas thumping their chest, and the truth is the bond market is taking notice:

But as I keep warning my readers, don't confuse cyclical inflation pressure which comes from a drop in the US dollar and rising oil prices with secular inflation pressure which can only happen when real wages are rising over many years.

The yield on the 10-year US Treasury note stands at 1.2%, still well off the 5-year high but also well above the low of July of last year when it hit 0.398%:

The back up in long bond yields is due to a few things:

  • Vaccination rollout in the US is going well, with the country breaching 1.6 million shots a day:
    • At 1.6 million shots a day, the US would reach herd immunity by mid-December.
    • At 2 million shots a day, the US would reach herd immunity by mid-October.
    • At 3 million shots a day, the US would reach herd immunity by the end of July.
  • Global growth is picking up and it remains strong in Asia where the Chinese economy expanded by 2.3% in 2020, roaring back from a historic contraction in the early months of the year to become the only major world economy to grow in what was a pandemic-ravaged year. 
  • The next major catalyst that could push yields above their recent highs will be US fiscal stimulus.

But here is the thing, the fiscal stimulus isn't a permanent change to wealth, it's a one time change which will take time to work its way into the economy.

That tells me long bond yields will slowly creep up to 1.5%-1.6% by the summer if they pass the fiscal stimulus soon and if the vaccine rollout keeps picking up its pace.

For all these reasons, cyclical stocks -- Energy (XLE), Industrials (XLI), Financials (XLF) and Materials (XME) -- have been doing a lot better recently, registering solid gains this week: 

Interestingly, after getting clobbered over the last two years, Energy (XLE) is leading the pack this year, up over 17% (price not total return), trouncing the rest of the sectors:

Will energy stocks continue to post big gains going forward? I doubt it, they need to consolidate and digest global economic news before continuing to head higher:


Notice how the XLE is on its 100-week moving average? Don't get me wrong, the weekly chart is bullish but we might see consolidation here (around the 100-week moving average) before we reach the 200-week moving average (a breakout above this level would be extremely bullish for energy stocks).

Will oil prices continue to climb higher? It sure looks that way. Interestingly, JPMorgan thinks commodities may have just begun a new supercycle:

With agricultural prices soaring, metal prices hitting the highest in years and oil well above $50 a barrel, JPMorgan Chase & Co. is calling it: Commodities appear to have begun a new supercycle of years-long gains. 

A long-term boom across the commodities complex appears likely with Wall Street betting on a strong economic recovery from the pandemic and hedging against inflation, JPMorgan analysts led by Marko Kolanovic said in a report on Wednesday. Prices may also jump as an “unintended consequence” of the fight against climate change, which threatens to constrain oil supplies while boosting demand for metals needed to build renewable energy infrastructure, batteries and electric vehicles, the bank said.


Everyone from Goldman Sachs Group Inc. to Bank of America Corp. to Ospraie Management LLC are calling for a commodities bull market as government stimulus kicks in and vaccines are deployed around the world to fight the coronavirus. The optimism has already driven hedge funds’ bullish wagers on commodities to the highest in a decade, representing a dramatic turnaround from last year when oil fell below zero for the first time ever and farmers were dumping produce amid snarled supply chains and plummeting demand.

“We believe that the new commodity upswing, and in particular oil up cycle, has started,” the JPMorgan analysts said in their note. “The tide on yields and inflation is turning.” Commodities have seen four supercycles over the past 100 years -- with the last one peaking in 2008 after 12 years of expansion.

Commodities have seen four supercycles over the past 100 years -- with the last one peaking in 2008 after 12 years of expansion.

While that one was driven by the economic rise of China, JPMorgan attributed the latest cycle to several drivers including a post-pandemic recovery, “ultra-loose” monetary and fiscal policies, a weak U.S. dollar, stronger inflation and more aggressive environmental policies around the world.

Hedge funds similarly haven’t been this bullish on commodities since the mid-2000s, when China was stockpiling everything from copper to cotton while crop failures and export bans around the world boosted food prices, eventually toppling governments during the Arab Spring. The backdrop is now starting to look similar, with a broad gauge of commodity prices hitting its highest in six years.

Corn and soybean prices have soared as China loads up on American crops. Copper hit an eight-year high amid growing optimism over a broader economic recovery. And oil has staged a strong recovery from the depths of the Covid-19 pandemic as a worldwide supply glut eases.

So, are we on the cusp of another commodities supercycle? I remain skeptical for now, and unless I see massive infrastructure spending across the world, I strongly doubt this is a "supercycle".

Also, too many USD bears out there for my taste and as I keep warning people, the US dollar will snap back this year as US growth picks up and wanes around the world.

Having said this, Materials (XME) came back very strong after hitting a low last March and the weekly chart remains very bullish:


I'm just not buying the bullishness yet, I prefer to wait and see if this is a solid breakout.

The same thing with Industrials (XLI), they are making new highs on the weekly chart and look great, but I remain somewhat unconvinced:


Who knows, all these deep cyclical plays are reliant on emerging markets (EEM) which are clearly in a solid bull market:

But emerging markets make me nervous, if the US economy picks up in the second half, long bond yields start climbing, the US dollar starts strengthening, RISK OFF will creep back into global stocks and emerging markets will get clobbered.

Clearly that isn't the case now but these stocks seem extended even if they are likely to keep gaining in the short run.

Lastly, it was really a crazy week in some small biotech and pot stocks as big hedge funds played the pump and dump game once more:



Most of the pumping occurred on Wednesday and the dumping on Thursday and Friday.

Please be very careful trading stocks (any stock) that are up massively on abnormally huge volume, it's almost always a coordinated attack from a few large hedge funds pumping and dumping stocks, making a killing in the process.

Earlier today, Bloomberg's Lisa Abramowicz tweeted this: Federal prosecutors are investigating whether criminal misconduct fueled the rapid rise in GameStop & AMC stocks. “It sounds like the retail guys were a smokescreen for real professionals doing the professional hardball warfare that has always existed"

I replied: 

Big hedge funds have been pumping and dumping stocks forever with impunity. The reason they get away with this and other shady activity, like naked short selling and gamma squeezing, is they pay big fees to big banks. Time to take a sledgehammer to Wall Street but good luck!" (the game is rigged in their favor, that will never change). 

The game is rigged, don't kid yourselves. YOLOers of the world uniting is all nonsense! Wall Street has already tamed the rebellion but these big hedge funds still operate with impunity, they have infiltrated stock chat boards and are spreading all sorts of nonsense (both ways), so be careful trying to outsmart them, most of the time, you'll lose your shirt.

Alright, let me wrap it up. Hope you enjoyed this and other comments and please remember to donate to this blog using the PayPal options under my picture on the top left-hand side. I thank all of you who take the time to support this blog, it's greatly appreciated!

Below, CNBC's Brian Sullivan discusses commodities possibly entering a "supercycle" as prices rise in tandem with Francisco Blanch of Bank of America Securities

And "Bloomberg Commodities Edge" talks to the smartest voices in the commodity world about the companies, the physical assets and the trading behind the hottest commodities. This week Bloomberg's Alix Steel digs into a potential supercycle for commodities, oil earnings and Trafigura's push to cut emissions.

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