Monday, March 17, 2014

The Real Commodity Super Cycle Killer

The following chart shows the 12 month moving average of the industrial production index for mining.

Click to enlarge.

Mining production certainly seems to love ZIRP and high commodity prices these days. I doubt very much that "sure thing" 6.1% growth rate is sustainable for much longer though. Exponential trends of that magnitude rarely are. If I am right (might not be of course), then we're setting ourselves up for a seriously disinflationary environment (at best). Hello Japan?

And on that note:

58 of 70 people found the following 1 star review of "Gold Bubble: Profiting From Gold's Impending Collapse (Hardcover)" helpful. The book was published on April 24, 2012 (the same day as the review). For what it is worth, gold's price on that day was $1638.75.

The world's central banks, the smartest people in the world when it comes to money, are the big buyers. This would be the first bubble in history that the dumb money was selling into and the smartest money on the planet was buying. Do you really think that the people with the least knowledge about money are getting this right?

Emphasis added.

Sale of UK gold reserves, 1999–2002

The sale of UK gold reserves was a policy pursued by HM Treasury over the period between 1999 and 2002, when gold prices were at their lowest in 20 years, following an extended bear market. The period itself has been dubbed by some commentators as the Brown Bottom or Brown's Bottom.

Smartest people in the world? Seriously?

February 21, 2014
Mish: Hilarious Transcripts of Fed Minutes from 2008 Reveal Completely Clueless Fed

January 29–30, 2008: Meeting of the Federal Open Market Committee

Vice Chairman Geithner: The world still seems likely to be a source of strength.

Mr. Mishkin: My view on the economy is that we are going to have quite a weak first part of 2008 , in which we’re going to skirt recession.

Chairman Bernanke: Certainly by this point there must be some pent-up demand for housing.

Smartest people in the world? Seriously?

Keep in mind that we were already in the Great Recession. It started back in December of 2007. The "smartest people in the world" just didn't realize it yet, nor did they have any idea of its magnitude.

They say never fight the Fed ("smartest people in the world"). I say hogwash. Stick them in a wet paper bag with a butter knife and 67.3% of the time they will fail to find a way out. I can't prove it of course. It's just a theory!

"Can't we just go out the bag's opening?"
"Maybe, but why have we been given a butter knife?"
"It must be here for a reason!"
"Yes, we should definitely use all tools at our disposal."
"It's the only way to rescue ourselves from this conundrum!"
"When should we use the knife?"
"Before or after we go out the bag's opening?"
"Let's plan multiple meetings before deciding."
"Agreed. None of us is as smart as all of us!"

I am not endorsing the gold bubble book by the way. I have not read it. I have little desire to read it. I will more than likely never read it. I just find the reviews of it fascinating. Here's a bonus 1 star review that 16 of 27 found helpful.

You don't lose money on physical gold until you sell it

You don't lose until you sell it? WTF! I think "Spazz" needs a few lessons from David Lereah on the proper wording of motivational commentary, but hey, what do I know?

"You Don't Lose Money on Real Estate Until You Sell It!"

Think how that book would have sold, lol. Sigh.

I don't mean to pick on those who own gold for the long-term. I just have a really bad feeling about commodities and China in general right now (and to me, gold is a commodity, not money). I think ZIRP has misallocated capital in ways that will soon be painfully counterintuitive to most. I could be wrong to think this way. Your opinions may vary.

This is definitely not investment advice.

Source Data:
St. Louis Fed: Industrial Production: Mining


mab said...

Stick them in a wet paper bag with a butter knife and 67.3% of the time they will fail to find a way out.

My calculations showed 33.33%, repeating of course.

smartest people in the world

No doubt! That said, I'd rather put my money on LEEEEEEROY JENNNKINNNNSSSSS!

mab said...

Joking aside, I think our fracking boom accounts for the recent growth in mining.

And based on what I've seen in PA & NY, it's nowhere near over.

Mr Slippery said...

I have a couple of thoughts.

Some commodities are scarce, some are finite. I lump oil and gold in those categories. Softs, like corn are renewable (as long as the sun burns). The expensive fracing boom and deep offshore drilling prove that oil is getting harder to recover. The low hanging gold fruit is also disappearing. Just some wrinkles in the commodity calculus. All are not equal.

I think ZIRP has misallocated capital in ways that will soon be painfully counterintuitive to most.

Completely agree. But, misallocation does not necessarily force reversion to the mean. The Fed has mighty powers to keep misallocation going for a long time, perhaps past my lifetime. How long has Japan been at ZIRP with associated misallocations? A very long time. You can be right and lose money at the same time thanks to Fed interventions.

Stagflationary Mark said...


Yes! Leroy Jenkins is the only truly safe store of value! ;)

Stagflationary Mark said...

Mr Slippery,

I am generally in agreement with you.

My biggest concern is that so many think ZIRP will lead to higher inflation. We're told that repeatedly on CNBC. As in Japan, that seems like a risky belief.

They can't seem to make any sense over why the 10-year treasury isn't well over 3% right now.

1. The CPI is struggling to go higher.
2. Real yields tend to match real growth.
3. Banks are flooded with deposits, especially when compared to loan growth.

Doesn't seem like rocket science to me.

Speaking of which, just how many more centuries is it going to take before we mine the asteroid belt and/or invent Mr. Fusion? We seem to be spending way too much effort cranking out MBAs and inventing explosive structured investment vehicles instead, lol. Sigh.