BERNSTEIN: SELL COMMODITIES
Few people are more bullish about US equities than Richard Bernstein. The former Merrill Lynch Chief Equity Strategist is taking a fairly contrarian perspective on the global economy when he says that the bigger risks lie in emerging markets and not in the USA. In particular, Bernstein says that commodities are currently a sell due to their correlation with emerging market strength. In a recent note he wrote: (Via RBA):
“In an April commentary in the Financial Times (http://www.rballc.com/pdf/EMCentralBanksDoingFedDirtyWork.pdf), we argued that non-US central banks were effectively doing the Fed’s dirty work, and that non-US central banks’ tightening of their monetary policies would lead to lower commodity prices. We still feel that this is one of the dominant themes in markets today.
The Fed’s policies were not to blame for this year’s increase in commodity prices. The emerging markets have been the incremental demanders of commodities for many years, and their on-going credit bubbles (monetary growth in the BRIC nations is between 15% and 30%) fueled the surge in the demand for commodities. Commodity prices rose as a result during the first half of the year.
However, emerging market monetary policies have decidedly changed from promoting growth to constraining growth. As their monetary policies take hold, and we have no reason to believe that those policies won’t be effective, the probability should increase that commodity prices will fall.
In fact, this seems to already be happening. Chart 2 shows that all the major commodity indices were down between 4% and 8% during the second quarter.”
Source: RBA
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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13 Comments
Yeah, that’s the ticket. This whole commodities thing is a fad. China will be the #1 country in terms of GDP by 2016 without ever having to build a bridge, tunnel, or skyscraper. The world will just stop demanding “things”, nobody will want Big Macs, and all those commodity producers can just stop producing.
I got news for you. If for some reason we have a global slowdown and BHP turns its machines off, when the recovery occurs, do you think they’ll just be able to flip a switch and turn those machines back on?
If it goes down, back up the truck.
Two indicators let me believe he is right.
1.) Less USD will up its value.
2.) Consume contraction in Western countries let only the Emergency countries as consumers, and prices must adapt to new customers.
Just a reminder – the debt agreement only reduces the growth of the deficit – the deficit will still be large, meaning there will be more dollars out there, meaning they should be worth less (except possibly compared to other currencies, if they go down more!).
he’s right they’ll stumble except for PM’s which are currency surrogates…..but
when we ever get thru all this, and it’ll take alot more changes than most here realize to do it, they’ll be worth more than a fistfull of dollars.
However, emerging market monetary policies have decidedly changed from promoting growth to constraining growth. Slower growth is good for equities how?
How can one have both these views (up on US Equities and down on Commodities)?
As Gary Shilling has so accurately pointed out, all the big traders are on the same side of the same table. So if commodities drop – they are forced en mass to raise cash and they do it by selling everything. In fact they will sell their stronger issues even more than their weaker ones to raise the cash needed to meet redemptions. (Sorry Cullen – I know your sponsors don’t like comments such as this one)
Why did solid blue chips drop so dramatically in 2008/2009? It was housing prices that needed to come down. Same reason.
Oh, that’s right. It IS different this time.
He fails to acknowledge the principal correlation here, which is not with EMs, but with the USD. He is in effect saying that EM currencies will weaken. If that is the case, then the USD and EUR will strengthen, unemployment will remain high(er) and our balance sheet issues will remain mired in stagflationary purgatory.
This is like a “value investor” screaming bloody murder because the “market” won’t validate his deep, fundamental research into a company that has no market because some irrational macro event just knee-capped it (e.g. skilled nursing facilities).
Agreeing with previous posters, I don’t see how commodities drop without EM equities dropping and then US equities dropping as well. Unless you still believe in decoupling.
Decoupling only occurs in a ‘normal’ market. Haven’t you heard, this is the ‘new normal’.
I do vaguely remember a TV interview with a nobel prize winning economist about Asset Classes moving together and predicting a recession. I tried to find it online, but you know how many nobel prize winning economists there are.
Yes, and the main problem with most “analysts” is (a) they can’t not talk their book, and (b) haven’t actually been to most places they pontificate on. The problem with the China-is-going-to-implode alarmists, is they fail to grasp the powerful combination of an autocratic state with an unarmed populace. China will always practice an extreme version of the carrot & the stick; rewarding the impoverished by subsidizing them outright and inhumanely silencing anyone who veers out of line. And the US/world will do absolutely nothing about it, lest Domino’s and AAPL and Ford risk losing market share.
Sell commodities because the world economy has rolled over. Not the emerging markets only. But this doesn’t bode well for the US as well. So, Bernstein being bullish on US stocks is merely a matter of talking his own book. Did the Wall Street firms circle the wagons in order to talk up US stocks ?
If EM’s slow down, commodities will be affected severly. China can’t continue to build at this pace…
from a guy in the know IN CHINA:
The biggest correction in history is about to happen. I’ve lived in China for the last 6 years and we all know everything is a facade. Can’t even begin to describe on inefficient, how herd mentality this place can be. China will be having major problems the next few years, starting from economics that will trigger social unrest. Things are so disproportionate here that people don’t realize that the true fundamental reasons why an economy exist, is slowly eroding. Houses and office buildings are not for living, or running a business, but purely speculation that the next guy is going to buy the asset for a higher price. This arrogance will end badly for them.