Commodities Await the Fed

Rob Mackrill - Wed 30 Apr, 2008

Commodity markets hinge on the Fed’s interest rate decision today.

Consumer mood most downbeat since ’92...

House prices post first annual decline (1%) since ’96, says the Nationwide...

But today we raise our eyes above the parapet for a moment. Above the daily diet of a slowing and, in places, recessionary global economy, self-mutilated banks, runaway commodity prices, house price surveys ad nauseam, and stretched consumers who may be shelling out £84 to fill the car up with petrol next year... Today, we have a brief look at the big picture. The really big picture - courtesy of the man who has reclaimed the words “Big Bang” from the ‘80s deregulation of the London Stock Exchange in the name of physics: Professor Stephen Hawking.

In language we can understand, he’s been talking about the benefits of diversification...of not putting all your humanitarian eggs into one planetary basket. It’s time to spread out, he says. And he’s not talking loft conversions or an extension on the house. It’s time to think about moving... moving to another planet.

A massive investment needs to be made in colonising the Moon and Mars argues Hawking in a speech at a recent 50 th anniversary NASA do. Such progress would serve as an insurance policy should the worst happen. Namely our dysfunctional Earth family finally screws itself completely by pressing the nuclear button in a MAD (mutually assured destruction) moment. Or, alternatively achieve much the same result of collective incineration via the advanced stages of global warming. A further benefit, from a slightly less bleak scenario, might be more space for the relentlessly rising global head count.

Hawking argues for a big increase in funding to achieve it. He calls for ten times the current NASA budget. A sum equivalent to 0.25% of the world’s GDP...which gives us an idea of the considerable scale of the existing NASA budget.

The Moon should be the first port of call and a stepping stone to the more distant Mars, with its abundant supplies of frozen water, and the rest of the solar system. A goal of a base on the Moon by 2020 and a manned landing on Mars by 2025 would “reignite” the space programme argues the scientist famous enough to have once made a cameo appearance on The Simpsons.

Mind expanding stuff. But now where were we...oh yes, house prices have started to tumble...well, now we have the problem in perspective, let’s continue.

Commodities have been a personal area of a fascination for a little while now. The Goldman Sachs Commodity Index is up 238% in the past three years and...well, as we know from painful experience, things don’t go up forever. So it was with interest I spied the Forbes headline: “Metals, copper down ahead of Fed decision. Commodities plunge.” Plunge seems a little over the top on a one year view but the Fed will likely call the shots on where prices go next. It meets again today and one more interest rate cut is expected - which in turn encourages inflation and real asset investing via commodities to hedge against it. If it disappoints and opts to sit tight instead, this logic will be tested, and so may commodity prices.

As we noted recently commodities make up a considerable chunk of the FTSE 100 these days. Almost a third of its market cap, according to the FT’s Neil Hume. So we pulled out a chart (below) of the performance of the mining sector against the FTSE 100 so far this century to see how it’s performed. We threw in the banking sector too for a cheap laugh at the bonus-fuelled greedmeisters...

The simple reasoning that higher commodity prices make mining a good sector to invest in has worked handsomely for the past eight years. The same logic has worked less well for investors in the Oil & Gas sector. In spite of a quadrupling in the price of crude since the so-called Millenium “wall of fire” lit up the Thames, it has been a distant second.

Will commodity price continue going higher? Jim Rogers is sure of it. This super-cycle will last a good few years yet before it’s over, as China et al industrialises. And oil’s going higher too, say the experts. A new report from Canadian bank CIBC claims the International Energy Agency has got its sums wrong and overstated its supply estimate by 9%. Expect $150 in two years time and $225 in four years time as a result, they say. Texas oilman T Boone Pickens reckons we could see $150 as soon as year’s end. When do the petrol riots begin?

Oil is actually a little lower today. Down at $115 for sweet light crude. The airlines are still hurting though and passing the problem on to their customers. British Airways are adding £20-30 fuel surcharge on European flights reports BusinessWeek.

Elsewhere beleaguered fledgling business carrier, Silverjet, which we mentioned yesterday has been thrown a lifeline by an “unidentified” investor from the United Arab Emirates pledging $100m.

In the event any Dear Readers were concerned, we would just like to make it clear that fuel prices don’t have a major impact on the publishing of the Daily Reckoning. If, however, there are any other unidentified investors in the UAE or indeed elsewhere who may be reading and have a spare $100m burning a hole in their pocket then we would be happy to consider the enquiry.

Regards,

Rob Mackrill
The Daily Reckoning