Commodities bubble bursting

If the commodities complex proves to have ultimately turned 4 weeks ago, it will be the best timing I have had on any sector short. In late May and June I bought puts on BHP, RIO, TCK, X, NUE, SU, POT, MOS and MON and also some of the SMN 2X materials short fund.

Most of those stocks are down about 20%, but their overvaluations are of true bubble proportions, so I would not be surprised by a return to 2005-level prices (50-80% lower) within 12-18 months. Heck, a lot of these stocks doubled and tripled in the last 12 months and have gone up well over 10X this decade.

Investors seem to have forgotten that you don’t pay premium multiples on cyclicals after the commodities they produce have gone up 3-15 times already, especially not at the brink of a global “slowdown.”

Yes, the China story is real. As Jim Rogers likes to say, China today is like the US in 1908 or UK in 1808. But people forget the periods of war and stagnation and deflation that punctuated those paths to riches.

And yes, crude oil production peaked in 2005 at a bit over 74 million barrels per day.  If we could have produced more since, we would have at these prices. If you don’t believe that, visit Matt Simmons’ site. But just past the peak the rate of drop is still shallow, and with today’s prices and a crumbling economy, demand will fall off a cliff. Once you get a well flowing, you keep it coming, and oil is hard to warehouse, so I would not be surprised to see $40 again (but you can bet I’ll be buying if it happens!).

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