More sunflowers than tulips

Hoy son activos “refugio” cases. This paradox comes with primary materials: ignored during years of abundance, they are harvested when the system is overloaded.

And it is that one of the most repeated questions that could be reversed in recent weeks is that the current revaluation of primary materials still continues; In other words, whether the nature of its price dynamics is secular or merely cyclical.

It is not easy to predict an important movement, whether cyclical or secular and therefore any diagnosis inevitably involves a high degree of sensitivity. However, the main conditions of Largo Plazo have been changing in recent years in the direction of commodity prices, instead of doing so in the opposite direction. In other words, the secular thesis seems to impose itself.

Primary materials change over centuries, which typically span a decade or more. Over the past 100 years, four raw material supercycles can be identified, After starting the last of the four in 1996, this technology was produced in 2008 (after 12 years of expansion) and was introduced in 2020 (after 12 years of expansion).

What was the impetus for the latest commodity supercycle? In the view, the most important driver was the economic growth of China (and emerging economies in general). The current dollar (USD) has been weakening and asset managers have been increasingly exposed to commodities to diversify their assets.

over time, global overview in 2008, with the emergence of the Great Financial Crisis and a significant slowdown in Europe (2011) and China (2015) I learned that Bajaran raw materials. In particular, the last phase of the oil decline cycle was marked by commercial “wars” and the subsequent recession of global producers after the pandemic, which sent oil prices quickly into negative territory for the first time in history in April 2020.

We can draw some interesting conclusions from the above graph:

• First, the secular oscillations of primary materials have been heavily associated with major considerations of economic history. The two world wars, the Great Depression of the 1930s, the dismantling of the Bretton Woods architecture, the Arab-Israeli wars, the industrialization of China, and the Great Depression were all led by the financial sector, in all cases by sudden and large swings in commodity disputes.

  In addition, secular markets are well-connected to war conflicts due to the increase in demand for raw materials as well as the destruction of supply. Two global wars, for example, “triggered” commodity markets of similar magnitude. The Arab-Israeli war of 1973 and the Iranian revolution of 1979 led to another important revaluation of commodities in the 1970s, although the desmoronamiento of the USD led to a sudden generalization of the prices of all assets.

• Second, the dramatic commodity market in the 2000s was unique because it was fundamentally driven by China’s new position in the global sphere with its entry into the World Trade Organization in 2001. The acceleration of China’s industrialization acted as a catapult of demand.

• Third, the fluctuations in commodity prices in the big square seem to follow a certain rhythm: high markets tend to expand rapidly, and the supply extends to 10 years. These secular markets are always followed by “endless” bear markets that last 15 to 20 years on average. It is not clear why there is an asymmetry in the golf and golf market. The increase in production may be the reason why the bass in commodity prices is lower in real terms over time, and why bullish phases last longer than bullish ones.

• Finally, secular momentum when considering primary materials can significantly exceed previous secular highs, while a secular low phase normally falls within the high of the previous secular cycle to support the key. In other words, in a secular oscillation, the price series usually maintains an ascending scale maximum and minimum.

In reality, all of the above are not a golden rule, but they are useful tools to identify inflection points as well as to calibrate an athlete’s potential from a secular perspective as much as possible.

From various factors, we can conclude that we are currently immersed in the oil portion of the new commodity supercycle.

In summary: (i) the end of the pandemic and the full reopening of the economy; (ii) a critique of global demand for consumption and turnover (with patterns similar to those of the 1920s); (iii) extraordinary feedback loop derived from artificial intelligence; iv) more tolerated inflation than in the past by monetary and fiscal authorities; (v) additional weakening potential of the USD; vi) global development of infrastructure plans; (vii) possible hemorrhaging growth in China; (viii) flow support as a hedge against inflation and good correlation; (ix) frivolous questions about offers arising from current geopolitical conflicts; and (x) ESG parameters (among others, the necessity of metals for new infrastructures/batteries and the general acceleration of the energy transition process).

I say this, the secular dynamics of primary materials always includes various shorter cycles between three and five years, called Kitchin cycles. These cycles are believed to be caused by changes in the flow of information that affect the number of decisions made by economic entities.

These shorter cycles essentially reflect inventory adjustment flows, the state of monetary policy at any point in time and fluctuations in business activity over the cycle, but generally does not change the secular tendency.

As we saw earlier, cyclical price oscillations in a secular bear market must follow a pattern of lows and highs, while the opposite would prevail in a secular bear market. As for the reversal strategy, a “buy dip” execution would be correct in a secular bull market and a “sell rally” would be appropriate in a very large position trader.

As Van Gogh himself said: “Normality is a tiled fireplace; if it is comfortable to walk in, but no flowers grow.” Gathering resources never happens normally. Overvoltage when the balance is broken.

And clearly something would break (or at best matizando) in the global geo-economic order. Long, Lejos from burbuja, we are ahead of the sustainable trend in the discussion of primary materials.

*** Alfonso García Yubero is Director of Investment Strategy at Santander Private Banking.