And the Commodities super cycle


And the Commodities super cycle

In the previous newsletter THE JENGA OF REPO,

we have seen in depth how the REPO market works and the role that this complex market has in the determination of the global economy, focusing the spotlight on how certain choices and economic and political impositions , mature as a direct consequence of what happens in the REPO market. We have seen how a danger signal that started right from there was used by the Bank of International Settlements, to coordinate a global economic operation of monetary creation of gigantic dimensions and a simultaneous freezing of the economy of the globalized world, to freeze money velocity and therefore try to slow down the inflation explosion, as well as that of the stock and debt markets.

What has happened is now visible to all. Several trillions of newly printed money have been created by central banks. This new currency has not left the system if not in a minimal way. The aim was to plug liquidity gaps in the counterparty risk of derivative markets and REPOs. The lockdowns served to reset money velocity which impacts on inflation. All the newly created money is still frozen inside the stock exchanges, inside the shadow banking system, and in various virtual currency schemes that are not used for investments or to create jobs, work and serenity, but which are there, inside computers or smart phones , in the form of bits, without turning into any kind of benefit except to create a euphoric feeling of virtual wealth on the part of those who hold these electronic bits.

I have explained these things very accurately in my previous newsletters. Now I would rather point out that the problem of the REPO market is by no means over and that it is once again the protagonist of new alarm signals. This great article

 puts us once  again in front of an  "outbreak" of new problems that are manifesting themselves within the same market whose difficulties have led to the extremely drastic measures of the current economic situation and the Great Reset.

Public opinion is skillfully distracted by the game of the extras. It is easier to follow the events of the visible subjects, Draghi, Trump vs Biden, Macron, etc. that TV shows us. People are passionate about these subjects, as in the plot of a film, of the visible protagonists. It is human nature. The effort to understand the economic dynamics behind the scene is reserved for a few people. So, before proceeding further, let's forget for a moment the more or less irrelevant strollers that are shown to us. The real protagonist of this whole damn story is the American dollar and as a direct consequence, the entire global monetary system that revolves around it, being the dollar the global reserve currency, the currency in which trade and almost all markets are expressed. The so-called "heads of state" are just readers of communications written by others, containing decisions made by others. Decisions are made in the elite circles of bankers and large economic groups. Having clarified this, let's move on to see what is happening now in the economic markets.

In September 2019 there was a problem in the REPO market that gave rise to all the economic maneuvers which were later called the Great Reset. The REPO "variant", in the case of the current problematic situation, is no longer caused by interbank rates that skyrocketed, as in the previous situation in September 2019. Now, according to the author of the article, the problem lies in the interest rates tendency to become negative.

I will try to summarize the gist of the article which is written in a complicated way. I hope to make it understandable

Leaving aside the purely technical part, on how interest rate curves are formed in the interest rate market, this article aims to underline how the tsunami of liquidity, thrown with the hose on the fire of the REPO house of cards, has achieved the desired effect: that is to bring rates down again. Why do rates have to go down? Because if they rise, the margin call is triggered on the counterparty risk of the government bond market in the world of hyper speculative derivatives. These are astronomical figures held up by a debt counterparty and a very thin thread of trust. If mutual trust is lacking, as we have seen, the central bank must intervene and stop the chain reaction of margin calls, throwing in shovelfuls of money on demand. By now, after the 2008 crisis, the mechanism has been oiled up, and there have been no more systemic crises. At every hint of collapse, the Federal Reserve's Plunge Protection Team intervenes to plug the leaks with money created out of thin air and distributed in profusion. But the problem has never been radically solved. And it reappears in new forms that require new tools. In this case, the trillions of dollars placed in the REPO market have lowered rates, but they are lowering them too much, creating the conditions for the same problem of September 2019, but in reverse. Indeed, rates, squeezed under a blanket of dollars, are sinking into negative territory, and that is equally a problem, just like when rates rise too high.

This is what the  REPO guru Zoltan Pozsar wrote:

"What is happening now is the exact opposite of what happened in September 2019, but to a much greater extent, because around 1 trillion reserves are being injected into the system by withdrawing cash from deposit accounts, that the Treasury has at the Federal Reserve.

During September 2019, we argued that the system was running out of reserves – too much Treasury collateral was entering the system and we needed a fixed-price, full allotment o/n repo facility to absorb all the excess collateral. Banks’ binding constraint was intraday liquidity, which constrained their ability to lend into the o/n repo market. When their lending stopped, repo popped…

Today, the banking system is running out of balance sheet, and money funds are running out of collateral. Soon there will be too much cash in the system; TGA balances will decline from $1.6 trillion to $500 billion by the end of June.

As the Credit Suisse plumbing experts writes next, "this roughly $1 trillion decline will occur either through waves of fiscal spending, which will expand deposits and reserves at large banks...

or, if spending is too slow to meet the $500 billion target, through bill paydowns. Coupon issuance will be $1.4 trillion over the first half, and depending on whether the spending or paydowns scenario dominates, coupons will be bought mostly by banks, or shadow banks."

Which brings us to the key part: why we are about to see another burst of fireworks in the repo market where rates are about to go negative”.

Banks do not have adequate balance sheet characteristics at operating subsidiaries to support the addition of an additional $ 1 trillion in deposits, reserves and Treasuries.

We are facing the same REPO market that was in difficulty due to lack of liquidity, which is now in difficulty again because there is too much liquidity and the risk is now that of having negative rates that create new imbalances in the interbank market. Could it all break out this time?

The solution seems to be once again the Federal Reserve, which will allow the deposit of excess liquidity with specific accounting items. An excess of liquidity in the trillions that cannot be used without pushing rates below zero is a very alarming problem at a time when all major equity indices are at historic highs and the real economy at the retail level in many cases is practically zeroed.

They are dynamics to keep under control. We will see if the Federal Reserve will be able to manage this umpteenth difficulty due to the complicated functioning of an economic system supported by increasingly difficult and complex containment measures. A real Jenga, where if you move a piece, you risk making everything collapse in an instant. Faced with this worrying economic double edged sword, many people are wondering how best to position themselves to protect their savings.

The world of crypto currencies, with Bitcoin as a benchmark, is enjoying a moment of great success, especially among young people and certainly deserves consideration. For those who prefer tangible things, like myself, there are interesting opportunities in the world of commodities like gold and silver and in the residential real estate sector. I really like the idea of the "Luxury Bunkers". That is super safe places in super safe areas, like private islands in the tropics or in places particularly popular with the super rich, let's remember, this category of people now sit on mountains of cash. But this is my bias, because my wife is from the Bahamas and in the Bahamas, I have observed the growth of these trends with my own eyes. The super rich want super exclusive places and there are very few super exclusive places left in the world.

Everyone follows their instincts, their preferences, their entourage and above all their qualified consultants to turn to before making any investment choice. This is just a newsletter that aims to reason together on certain topics. Disclaimer: I do not earn money or offer financial advice with this newsletter.

At this point, let me ask you something: is gold at $ 1,800 an ounce a bargain? What about oil at $ 60?

Absolutely yes!

In fact, I think that the price of many commodities such as gold, crude oil, wheat, soy, copper, and silver will continue to rise for the next two years ... and will already be much higher in the next 18 months, starting now.

What we are going through is a Super Commodities Cycle!

There are distinct cycles in the commodities market, and the last of them started about 10 years ago with gold. But don't worry, you haven't missed the train. The boom in these markets lasts from 18 to 21 years! But there is more. I don't think this is a common positive trend. I think this is a commodities "super cycle" that will last longer and will drive commodity prices up.

This is a rare and quite powerful event. In fact, there have only been 2 previous super cycles in the history of the last 150 years.

1. during the Industrial Revolution where the demand for raw materials grew steadily from 1885 to 1918

2. After World War II for 29 years between 1946 and 1975 with the reconstruction of Europe and Japan.

But what is the commodities super cycle n. 3?

An insatiable demand from emerging markets for raw materials such as copper, aluminum, steel, coal, uranium and many others. China, Russia, the  Middle East, India, Brazil etc. they devour these materials to build their own national economies. Especially for infrastructures relating to water, the environment, transport and energy. But there is more. There are two other forces at work here:

1. The ocean of money from central banks (Fed-ECB-PBoC etc.), issued in an attempt to keep their respective faltering economies afloat, is causing the prices of the so-called Hard Assets (commodities) to rise.

2. All the easily accessible surface deposits have already been discovered and used extensively. Sure, we can find more oil. But to extract it, cutting-edge technologies are needed, as in the Bakken field or in wells in the open sea, with drills as long as  Everest. When it comes to the green and ecological transition, we are still far behind.

We can therefore find new resources, but it will not be cheap. And the further down we dig for new deposits, the higher the costs and, consequently, the prices we will have to pay. Now you see why we are in a commodities super cycle. Furthermore, all the much-hyped transition to an increasingly electric world, will lead to an ever-increasing demand for metals. Mostly copper, silver and aluminum. And if prices have already doubled in some cases, there is no reason why they do not triple and quadruple, especially in the face of the enormous  monetary input that we saw in the first part of this newsletter! Keep in mind that during the other two super cycles, commodity prices have risen on average for 31 years. The growth in demand from emerging countries and the conversion to the green economy sector will only increase the magnitude of the super cycle.

Just a generation ago, most people in China rode bicycles. Today, China is the largest market in the world for the automotive sector and the Chinese jump into their cars and go shopping, buying air conditioning, refrigerators and Western food (Fast Food). They want to eat, drive and live with the same standard of living as Americans. In fact, everyone wants it and there are billions of them. Asia has half the world's population and these people are moving from austerity and rice bowls to mega all you can eat buffets. The restaurants have air conditioning and the electronic gadgets are very modern. For me this means a future paved with steel, aluminum, oil, coal, silver and copper. And their stomachs stuffed with everything that is agriculture and the ever-growing food sector.

Not long ago scientists calculated that if all the inhabitants of the earth had come to have the standard of living of the USA, it would take another 3 Earths to provide the necessary raw materials. This means that the raw materials will rise, up, UP… and UP, because they are naturally scarce and we do not have 3 earths at our disposition.

Silver: the US national mint has sold more silver bars and coins than ever. The sales of physical silver, boosted by the recent silver squeeze contextual to the GameStop operation, made all physical silver stocks run out in an instant. Beware of the virtual silver market, such as ETFs. The silver market is extremely manipulated. The advice is to have it physically available, in the form of coins or bars to be protected from the fluctuations of the paper price often manipulated downwards. Furthermore, paper contracts exponentially exceed the real availability of the actual metal. My new target for silver is at least $ 50 an ounce!

Gold: the sale of Golden Eagles, British Pounds and various coinages is also increasing and concerns about European and US sovereign debt set fire to the yellow metal. The demand for gold is growing with all investors, large and small, including central banks. I expect gold at $ 2,500 an ounce. But looking at the dollar or euro price of gold and silver is wrong. The value is gold and silver, not the monetary unit in which the value is expressed.

Copper: the red metal will be fundamental for the new electronic era of humanity. There can be no electricity without copper. An electric car contains up to 90kg of copper. Tesla alone absorbs 45,000 tons of copper for its production. Copper exports from Chile are under pressure and demand from China is rapidly flaring up more and more. Result: industrial metal, used for plumbing, heating, electrical and telecommunications systems, is certainly to be taken into consideration as the protagonist of the next ten years. To learn more and follow copper trends, I recommend following the excellent Gianni Kovacevic of CopperBank Resources Corp.

Oil: global demand cannot decrease, despite what they tell us. US resources are shrinking as the economy tries to recover, but Chinese demand is insatiable. Is that enough to see the price rise? Yes, but that's not all. In fact, after the strange episode that saw the dollar price of crude oil plunge to zero last spring, its price has started to rise once again. Oil is paid for in dollars and is essential to human life. A high oil price serves to absorb the excess of dollars. Furthermore, oil is the lifeblood of the American military industrial complex. Many companies and investment funds rely on bonds issued by oil companies with very long maturities that can only be solvent with a high oil price. Wall Street will do anything in its power to keep the price of oil high. The sustainability of the whole system is at stake, especially the pension system which is full of bonds issued by oil companies, given the high yield of coupons paid, in a period of government bonds with rates close to zero, if not negative.

Some analysts predict that crude oil will go up to $ 105 a barrel in the coming months, perhaps even by the end of this year, at the cost of bombarding a few oil wells here and there. If oil goes up, so does the cost of everything else. It is not difficult to understand this concept.

Agricultural commodities such as cotton or soy are also exploding rapidly. Just look at the math of the commodities bull market. Add up the enormous new Asian demand that is not bogged down in the absurd events of pandemic restrictions, with resources that are increasingly scarce, and is multiplied by the excess of printed paper money around the world.

The result is that the super cycle will push prices to new highs never reached, then to new highs in relation to the new inflation, and, ... in the end ... even beyond. This is significant, because without an adequate wage policy, even buying food to survive will be increasingly expensive.

What is important to say here is that large expansive cycles like the present one usually do not offer "perfect" entry points. Those who are waiting for the ideal price to enter this commodities super cycle have to resign themselves to a long and unnerving wait. Converting Euros or Dollars into something real is always a good idea not to find yourself with waste paper in your hand. Paper burns in an instant. Gold is eternal.